No More Learning

” Brussels has first insisted on tariff as well as political and judicial changes, including the possible jail release of opposition party head Tymoshenko. Recession lingers although the corn harvest is up 35 percent putting the country just behind Argentina and Brazil in the world export ranks, with shifts toward Asian and Middle Eastern buyers. Agri-business multinationals have expanded their local presence, with Monsanto just launching a seed production unit, despite slipping global commodity prices.

The chronic budget and current account deficits have worsened this year as the winter natural gas season and the stretch into the next presidential election cycle approach. The central bank is expected to further stiffen rules on foreign exchange surrender and trading as foreign ownership of domestic debt is barely one percent despite double-digit yields. Croatia recently inked an EU partnership as heavy public debt spurred a negative ratings outlook assessment and unemployment touched 20 percent. It will immediately be placed under the excess deficit procedure, but the Finance Minister looks to privatization rather than outside official rescue to mobilize resources. Serbia on the other hand just completed another cabinet reshuffle hoping to regain IMF program access and enlisted former Managing Director Strauss-Kahn as an adviser as both seek image rehabilitation.

Local Bonds’ Belated Backup Bid
2013 September 24 by admin

Posted in: General Emerging Markets
Although foreign ownership of major local bond markets has doubled the past five years to one-quarter of the total, continued heavy outflows in Malaysia, Mexico, Turkey and elsewhere could shift the burden to domestic insurance and pension funds now with $5. 5 trillion in assets, according to JP Morgan’s latest global guide. Latin America’s private plans were the pioneer catalyst in the former segment, while Asia’s life insurers dominate the latter $3 trillion pool with institutional allocation for both steered mostly to government fixed-income. In Europe, first Hungary’s and recently Poland’s state social security takeover will reverse progress, although Warsaw will cancel one-fifth of outstanding debt during the transition. Corporate bonds represent 20 percent of the $8. 5 trillion local amount, and in the first half $375 billion was issued mainly from China with $200 billion. Brazilian activity was down one-third with higher interest rates, while Korea’s number two position remained intact at $40 billion for the period. The market is double the size of the external one but has no dedicated index like the CEMBI and limited foreign access to primary offerings and scant secondary trading. They lack liquidity and cross-border clearing scope but have fit a post-crisis niche for bank subordinated placement to meet Basle standards. Inflation linkers are worth $550 billion, and 80 percent of Chile’s and 40 percent of Israel’s stock is in that form. Domestic debt otherwise is overwhelmingly fixed-rate and in Russia and Thailand 100 percent is this type. This year the category could again see net outflows as in 2008 with EPFR data negative for the past several months in contrast with occasional equity fund upticks. Bid-offer spreads have recently widened on currency baskets, and quarterly domestic instrument turnover has plateaued at around $1 trillion according to industry association EMTA, partially due to new market-maker rules under the Dodd-Frank law. Capital inflow controls as in Brazil and Indonesia have been lifted or relaxed in the current stress as central banks have mobilized $9 trillion in combined reserves to support currencies, with Asian and Latin American authorities most active.

South Africa has refrained with a limited stockpile after unsuccessful interventions a decade ago, but has not ruled out recourse to an eventual BRICS line that could be established as reaffirmed at the G-20 meeting. Monthly non-resident portfolio accounts shun bonds but are long equities, with non-mining listings preferred as the sector endures trikes and waning world prices. Mexico also spurns interference despite the peso’s drop to 13 to the dollar and structural reform jitters following violent teacher clashes with police. Korea in comparison with 2009 has been lower-profile with reduced foreign currency mismatch and a current account surplus double 2012’s figure as high-tech exports rebound with developed economy improvement. Budget provisions have extended mortgage relief and encouraged renter to owner evolution with loan subsidies but household debt loads over 100 percent of income await further backup plans.

Pakistan’s Muslim League Standing Streak
2013 September 24 by admin

Posted in: Asia
Pakistan shares led Asian markets with a 20 percent advance as Prime Minister Sharif’s resounding July Muslim League party victory was followed by quick renewal of a 3-year IMF program up to $6 billion, which could unlock additional bilateral and multilateral support at that same sum to counter the “critical” net negative international reserve position. GDP growth has been “substandard” at 3 percent the past five years, with half the population in poverty and severe power and security difficulties, according to the Fund. Private investment is only 10 percent of GDP with minimal FDI given poor business climate and governance rankings. Inflation has improved to 5 percent but money supply is up triple that amount due to central bank fiscal deficit financing. The current account gap is only 1 percent of output but external debt service and continued currency intervention leave just enough foreign exchange for a month’s imports. The low 10 percent tax revenue ratio, with barely 1 percent of citizens filing returns, along with higher energy subsidies and provincial transfers have swelled the budget gap to 8 percent of GDP. Electricity outages average 8 hours daily and “circular” debt arrears involving state companies were partially cleared as the new administration took office. Bank assets are 40 percent in government paper and NPLs are 15 percent of the portfolio despite good capital adequacy. Armed threats include the war in next-door Afghanistan, sectarian fighting in Baluchistan and street crime in Karachi, and the balance of payments is further at risk from remittance reductions in Europe and the Gulf. With assistance and reform the economy should grow 5 percent next year as the public debt is set on a medium-term 60 percent of output , sustainability path. The central bank with “inadequate” independence has been pressured to cut rates and legislation should establish a separate monetary policy committee. Bankruptcy and deposit insurance provisions are also needed and inspectors must coordinate with securities counterparts on consolidated oversight, the Fund staff believes.

Corporate bond and sharia-compliant products are underdeveloped and government debt could be listed on the stock exchange for better liquidity. Such practical steps may avoid the fate of the previous 2008 arrangement, which failed on overreach and lack of immediate momentum, according to an internal review. The changes should allow for additional social spending to cover school and health costs, as the commercial framework is overhauled by one-stop foreign investment facilitation and privatization of loss-making state firms. Gulf countries and the Asian Development Bank are on board with early direction and Chinese backers continue to express interest in hydroelectric projects. They recently hailed prospects in nearby Sri Lanka, which has avoided a Fund return and been criticized by the UN for civil war human rights abuses. Growth and the trade deficit have held steady on a “B” sovereign rating as banks plan to float bonds abroad to spice domestic market liberalization.

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Asia’s Irrepressible I-Rate Sentiment
2013 September 20 by admin

Posted in: Asia
Through August India and Indonesia were unshielded by BRIICS protection as they led regional currency and capital market falls with stocks off 20 percent on the MSCI. Lame duck governments could not inspire confidence despite changes in central bank personnel and policy, as corporate leverage and refinancing needs raised anxiety against the tougher external funding and economic growth backdrop. For both countries current account deficit and short-term debt requirements absorb 90 percent of reserves, which in turn are off over 10 percent on regular exchange rate intervention with the rupiah below 10,000 and the rupee, 65 to the dollar for post-crisis bottoms. Government bond auctions have failed on postponed fiscal adjustments and new spending plans, including tax breaks for labor-intensive Indonesian investment and a sweeping Indian food subsidy to fight hunger nationwide although geographic and rural-urban concentrations differ. In Jakarta state pension funds and enterprises were ordered to buy shares and Bank Indonesia has embarked on consecutive 50 basis point rate hikes. Foreigners liquidating fixed-income positions have complained of dollar access delays and official price interference, as backup swap lines are reinforced through the regional Chiang Mai initiative dating to the 1990s Asian crash aftermath. The GDP growth forecast has slipped under 6 percent and inflation may touch double-digits on higher fuel costs and currency depreciation. Scandals have erupted at the oil regulator and anti-corruption commission to underscore the poor governance ranking, as military and business establishment figures are early candidate favorites along with Jakarta’s dynamic provincial head. With company earnings slumping, P/E ratios have descended to the core market average and despite recent rapid consumer credit expansion banks are “resilient” with good capital adequacy and NPL measures, according to Fitch Ratings.

Indian stocks have also lost their typical premium but foreign investors remain net sellers with the big conglomerates owing $20 billion in external debt through year-end, with a total of $170 billion to be repaid by all private and government borrowers by next March. Expatriate deposits will be sought to help bridge the gap and dedicated dollar facilities were established for energy imports to ease rupee tension. In his inaugural speech central bank chief Rajan described the economy as “fundamentally sound” as he promised to revive the original financial services modernization agenda which accompanied Prime Minister Singh’s coalition re-election. As he appeared before parliament to promote long-term infrastructure facilitation and opening his ministerial team acknowledged that both domestic and global factors were to blame for the immediate crisis slashing GDP growth to 4. 5 percent. Dr. Singh predicted exporters could benefit from better competiveness at the same time the vaunted offshore services industry reported record shrinkage. Returning Finance Minister Chidambaram has tried to stay above the fray as he announced multi-point strategies for budget and trade deficit reduction and limited the rice transfer program with popular anger of all varieties raging.

The Middle East’s Suspended Syria Senses
2013 September 20 by admin

Posted in: MENA
Regional capital markets tentatively retraced as a US-threatened military operation against selected Syrian targets was put on hold pending a proposed agreement with ally Russia to relinquish chemical weapons to international control, as political and geo-political tensions continued to simmer. Egyptian stocks trimmed their year to date loss to 15 percent as the army roundup of Muslim Brotherhood leaders intensified following President Morsi’s ouster and the next transition phase considers an outright ban on the group more severe than during the Mubarak era. The constitutional committee will resume work with participation from the Salafi party whose Islamic credo is stricter, and the specific timetable for upcoming elections has yet to be determined with the general in charge of the interim government touted as a potential candidate. Foreign exchange reserves have stabilized at around $18 billion, and the pound at 7 to the dollar, on $12 billion in combined loans, grants and oil shipments from Kuwait, the UAE and Saudi Arabia, where shares are solidly positive paced by the Emirates’ 50 percent gain. However the infusion may be diluted by the potential withdrawal of $5 billion in aid from the EU and $1. 5 billion from the US in response to the violent takeover and opposition crackdown, which also resulted in the resignation of initially-designated prime minister El-Bareidi. Fiscal consolidation slipped from the agenda with the Gulf inflows despite the near 15 percent of GDP deficit the past year as a stimulus package was announced following a July interest rate reduction. Domestic debt/GDP stands at 80 percent and long-term bond yields still approach 15 percent with further bank absorption capacity limited under capital and earnings squeezes. The other MSCI core member Morocco was off by similar magnitude as a centrist party prepared to join the ruling coalition after Islamist exit in protest of lower fuel subsidies under the precautionary $6 billion IMF program. Modest progress was cited in the latest Fund review on curtailing the budget and current account gaps as debt servicing costs rose 10 percent annually. A sovereign Eurobond was issued in late 2012, and Jordan and Tunisia will mobilize bilateral and multilateral guarantees to tap the external market should the global window soon reopen.

Lebanese shares have only shed 10 percent through September despite their front-line Syrian civil war entanglement underscored by a recent GCC-circulated travel warning. Kidnappings and sectarian incidents have jumped as negotiations over new cabinet formation are stalled and complicated by the EU’s branding of Hezbollah, which sides with the Assad regime, as a terrorist movement. Both GDP growth and inflation should end 2013 at 2 percent as tourism and food prices recede. Israeli equity results were better on quarterly output expansion at double that clip as offshore natural gas production began. Consumption is expected to flag into year-end on a higher VAT, as the shekel continues to hold up despite postponement of central bank head succession after several aborted searches.







China’s Liberalized Capital Account Interpretation
2013 September 16 by admin

Posted in: Asia
As Chinese equities regained footing in August, especially against more precipitous neighboring exchange falls, on a PMI reading above 50 preserving the 7 percent GDP growth consensus, investors looking for further support emphasized the prominent but abstract capital account liberalization nod in the latest 5-year plan offered by the new leadership. A recent IMF empirical model based on 40 developing market experiences projects a 3 percent of GDP range medium-term rise in both inflows and outflows. Portfolio allocation remains subject to strict quotas only used to the same regional extent in India. For the main QFII regime the ceiling was hiked to $150 billion in July, and the R-QFII offshore renimbi cap reached RMB 270 billion. The outward QDII channel has also opened but is distorted by domestic interest rate and bond market controls. The regression results estimate a 20 percent of output increase in Chinese assets abroad over time, double the jump in foreign inward capital. Reserve accumulation will drop one-third and the additional stake could come to one-quarter of MSCI emerging market universe size. A $500 billion dollar bond shift in turn would decrease EMBI yields by 250 basis points. The redeployment would drain liquidity from housing speculation and “shadow” wealth management products available from banks and non-banks in the overall interest of financial system modernization, the assessment concludes. Outbound direct investment could likewise outpace the $10 billion/month current FDI figures up 7 percent from 2012 led by the service sector. The strong interest overrode fears of regulatory interference following a crackdown on alleged abuses in the pharmaceutical and consumer goods industries and anti-monopoly investigations. Resident consultants who act as matchmakers and researchers for joint ventures were spooked by the arrest of well-known operators who confessed to the media private data breaches. The moves may also have been designed as indirect retaliation for the slow approval process on a proposed Mainland company takeover of a US major pork producer after Huawei’s high-tech acquisition was rejected by a Treasury Department-headed committee.

The Shanghai exchange recovery was magnified briefly by a trading error at Everbright Securities lifting the local index 5 percent. The firm received harsh official warnings and has otherwise been implicated in a global probe into professional hiring practices which may have involved improper government relationships. JP Morgan has been cited as one institution in the crosshairs as Beijing tries to lure overseas funds and expertise into the four big bad asset management firms preparing for another uncollectible loan buildup. UBS and Standard Chartered participated in Cinda’s 2010 Hong Kong listing and Huarong may be next. Only half the original RMB 1. 5 trillion absorbed has been recovered at around 20 percent cash value. Both state and private banks reported credit deterioration in the last quarter, echoing an S&P alarm on a “large corporate debt hangover” by conservative rendering.

The IIF’s Staggered Structural Reform Strictures
2013 September 16 by admin

Posted in: General Emerging Markets
The IIF’s September Capital Markets Monitor stifled the noise from the Fed’s “taper tantrum” to reiterate a call for structural and growth model changes previously “masked by abundant global liquidity. ” In the near term major emerging markets’ 10-20 currency depreciation should aid exports with industrial economies stabilizing as reflected in PMIs, and equities at a P/E ratio below 10 are cheap historically as EMBI spreads have also widened 100 basis points recently to reset relative bond risk and reward. Combined asset class fund outflows through August at $50 billion were around one-quarter of the past year’s influx. The worst-hit countries depend on external current account and public and private debt finance at the equivalent of 10-25 percent of GDP, including Indonesia, South Africa and Turkey. Exchange rate falls in India and Brazil have increased inflation and central banks have intervened and raised interest benchmarks in response, but a full-scale Asia-type crisis as in the late 1990s is unlikely with greater regime flexibility and reserve positions, the group believes. However commodity-reliant states like Russia and Saudi Arabia must rebalance internally, while China’s approach shifts from net exports and fixed investment as pledged by the new leadership. This agenda has been diverted and distorted by years of double-digit credit growth which now must be unwound with debt/GDP levels above 100 percent in several cases not due to central government but to bank and company borrowing. Non-performing company and household loans are up and future servicing ability is due to worsen, according to the last quarterly survey. In China total social financing including the shadow system rose 30 percent in the first half, and big city housing prices climbed at half that pace, as cooling efforts were offset by the need to preserve 7 percent minimum output expansion. India’s mostly unhedged dollar-denominated corporate debt burden stands over $200 billion with 4 percent economic growth the lowest since the 2009 crash. Brazilian private credit has advanced 20 percent annually over the past decade, and households face a steep servicing/income ratio, 5 percent above US families at the post-Lehman crisis peak, with 50 percent rates on short-maturity loans.

Euro area calm over the summer has sparked global securities appetite for both core and periphery offerings on the assumption that imminent German elections will result in policy continuity regardless of coalition composition, and that the European Parliament will pass single-supervisor legislation for the ECB as it conducts regional stress testing. For banks lacking sufficient capital, the EUR 60 billion set aside in the ESM could be tapped, but regulators seek a larger facility to avoid repeats of the Ireland and Cyprus rescues in particular. The former after nationalizing the largest institutions has yet to allow family mortgage foreclosures to boost asset recovery, and in the latter deposits were off 30 percent in August with capital controls extended indefinitely in the stricken structure.

Kenya’s Public Tribunal Trot
2013 September 12 by admin

Posted in: Africa
As Kenya’s deputy president Ruto goes before The Hague on human rights abuse charges, equities were up 25 percent on the MSCI index through August among Africa’s frontier leadership as the Finance Ministry pushed for a regional record size $1. 5 billion maiden sovereign bond issue. Neighboring Tanzania, which already managed a private placement, also intends to join the public queue in the near future and get a credit rating, and both instruments are expected to yield around 8 percent with the proceeds headed for infrastructure projects. Sub-Saharan external offerings have been over $6 billion this year, with Ghana and Nigeria slipped through a narrow window the past three months. A dozen countries from the continent have debuted since 2007, most recently Rwanda and Zambia with average ratings in the “B” range. Nigerian government paper has been the main domestic play after entering the JP Morgan benchmark as a minute weighting but foreign investors have turned wary as the naira drops from its dollar fluctuation band despite regular central bank intervention. They previously shed Ghanaian holdings on whopping fiscal and balance of payments deficits, and presidential election outcome uncertainty just dispelled with a Supreme Court ruling validating 2012’s squeaker result. Asian and Mideast buyers have joined traditional European and US portfolio inflows to support the securities boom and Chinese officials visiting Nairobi last month emphasized their companies were now the top FDI source. Both GDP growth and inflation are at 5 percent with the central bank’s rate stance on hold following a recent spike in 3-month T-bill yields. Better rains should bolster agriculture, and tourism had begun to revive before the big fire at the Kenyatta air terminal which should not cause lasting damage according to officials. The financial sector contribution has been minimal on slack credit demand as stockbrokers prepare for their own pain with imposition of a 15 percent commission VAT. With natural resource discoveries new legislation has been proposed for oil and mining joint ventures, with employment and revenues to go to surrounding communities and royalties to be placed in a separate sovereign wealth fund.

All MSCI frontier Africa members remained positive into the Q3 close including Zimbabwe which maintained a 10 percent advance after the immediate correction on President Mugabe’s resounding re-election win and judicial refusal to consider opposition party cheating allegations. The incumbent claimed “resurrection” after taking two-thirds of parliament seats and 60 percent of the vote and pledges to forge ahead with full implementation of the “indigenization” policy of majority local control which thus far has relied on voluntary commercial terms. The government expropriated and redistributed farms in the past and foreign banks may be soon pressured further after calls during the campaign to expand business and household credit. The still manually-traded stock exchange has already delisted powerful conglomerates like Cairns which went bankrupt during the state’s long anti-free market crusade.

The US Treasury’s Foreign Portfolio Fixtures
2013 September 10 by admin

Posted in: General Emerging Markets
As continuously tracked fund flight accelerated for a third month into September, the US Treasury published its preliminary annual survey of portfolio investment abroad charting a $1 trillion increase to almost $8 trillion as of end-2012. The breakdown was $5. 3 trillion in equity and $2. 3 trillion in long-term bonds, with the remaining $365 billion in short-term debt. Of the thirty countries itemized Brazil, Korea and Mexico finished in the top half receiving $150-200 billion each and China, India, South Africa and Russia took individually from $70-$120 billion. Stocks dominated for these listings and Brazil’s bond allocation also led at $65 billion. Europe, Japan, Canada and Australia were the chief destinations overall, and offshore centers in the Caribbean included could be tapped for both tax-advantaged developed and emerging market holdings. Israel and Singapore were high-income targets falling between categories, and Taiwan ranked just behind the Mainland with $90 billion entirely in shares due in part to its large MSCI weighting. The core European component is expected to strengthen this year with recession ending and the supranational Stability Fund now able to sell 20-year paper at 3 percent on good demand despite the sustained regional drop in private lending. Among the peripheral members under aid programs Portugal returned to growth in the last quarter as it prepares to rely again on commercial borrowing in 2014, although a precautionary package is widely expected before that date with debt/GDP well over 125 percent. Olive oil exports rebounded as the government coalition scrambled to stay intact with court rulings against the constitutionality of public pension reductions. Iberian neighbor Spain has a large stake in the outcome with major banks’ cross-border debt exposure as they grapple with double-digit NPL ratios. Summer tourism picked up there, and although residential property sales are off over 60 percent since the crisis foreign distressed asset firms are now negotiating to acquire chunks of the centralized disposal agency portfolio.

In Emerging Europe Hungary, Poland and Turkey have yet to appear in the US Treasury tabulation outside the rest of world broad grouping. According to central banks in the first two, foreign investors own 35 percent of local debt and have been unfazed by plans to convert hard-currency mortgages and private pension schemes. Turkey’s benchmark bond yield on the other hand breached 10 percent, and the lira 2 to the dollar, as non-residents shed $1 billion per month paring their position to under 30 percent. The monetary authority refuses to raise interest rates outright and claims a box of “special tools” within reach should regular interventions which have helped drain reserves 15 percent not reverse the tide. Short-term mainly private obligations are greater than the current $40 billion pool, and the damage from global military action against Syria may compound the existing refugee and trade crunches in a more sobering survey.





Commodities’ Crude Cresting Crease
2013 September 10 by admin

Posted in: General Emerging Markets
After a prolonged slide on signs of a “super cycle” peak and China moderation to 7 percent GDP growth, the GSCI commodities index has outperformed standard emerging market benchmarks with oil and gold spiking on the latest Mideast geopolitical confrontations. Mainland PMI readings again over 50 have dispelled chronic “hard landing” fears with natural-resource oriented South-South trade now one-fifth of the total, according to the IMF. In Asia, Indonesia’s current account imbalance swelled on Beijing’s coal import ban, and analysts calculate that three-quarters of recent Latin American economic expansion was due to raw material sales. In Brazil, the US was displaced as the top trading partner, and half a dozen other countries in the region depend heavily on Chinese agricultural and metals demand. Africa is also energy and mining axis with $200 billion in bilateral commerce and the Export-Import Bank is its largest creditor. Gold was down 25 percent in the first half, and India as a huge buyer just announced new curbs including a tax surcharge to limit the balance of payments toll. Central banks have boosted that component in reserves since the 2008 crisis, with Venezuela becoming a top holder when it allocated 70 percent to snub both the dollar and euro. As developing markets move to defend their currencies illiquidity has hobbled ready access although safe haven value has recovered amid continued strife in Egypt and preparation for an international military strike in Syria in response to documented chemical weapons use. The strategic implications have likewise restored oil prices to above $100 /barrel as the assumption often in major exporters’ budget planning. GCC markets nonetheless have been bruised by looming armed action with the UAE trying to maintain its 50 percent frontier gain position before transitioning to the MSCI core index.

Thus far the commodity blip has not revived the food and fuel price panic of five years ago bringing widespread social unrest and IMF emergency aid and reigniting inflation. Bond and equity fund outflows doubled in the week the US and Western allies readied for conflict with Damascus, with the EPFR-tracked universe at $1. 5 trillion. Both traditional and ETF stock vehicles dominate, but the main MSCI benchmark lost over 10 percent through August despite record low valuations. For fixed-income a quarterly Fitch survey of European investors pointed to deterioration for corporate issuers in particular, with one-third citing refinancing risk. Central Europe, especially Hungary and Poland, have escaped the worst of the exodus despite their dual implication in the Eurozone mess as upcoming German elections herald summer’s end. The candidates there already acknowledge Greece needs to cover another EUR 10 billion immediate shortfall and Cyprus will not lift capital controls soon as its recession worsens. In France officials conspicuously cut summer breaks but were less severe with state pensions, where eligibility and benefits under reform will draw from the same essential stockpile

Global Capital Flows’ Forever Fluctuations
2013 September 4 by admin

Posted in: General Emerging Markets
With policy-makers again slamming “hot money” developing market outflows in a possible replay of multi-asset class crisis, the IMF published a paper asserting that capital movements for all economies have been “fickle” over the past three decades. The “roller coaster” has been similar both in gross and net terms since 1980, although the latter have been more stable for advanced countries with emerging market outward investment only accelerating recently by historic comparison. The analysis applies statistical regressions to find standard deviations and persistence in a common range, with EM volatility falling incrementally. FDI is steadier than portfolio allocation, but debt and equity and bank lending directions overlap. Risk aversion and interest rate measures show that volume rises in easy monetary conditions equal to 2 percent of GDP for that group. As domestic residents diversify abroad two-way fluctuations may diminish as a “natural hedge” as traditionally greater foreign funding fades, according to the research. For almost half the 145 countries tracked quarterly data are available and isolate private from official versions. Including the second type would be misleading since that source in Greece compensated for the sharp commercial collapse as its sovereign crash began. Gross developing market flows quintupled over the period to 12 percent of GDP prior to 2008, and bank credit led the swings since although even FDI has reversed. The monograph points out that the figure has dropped in the past five years partially due to the large financial institution share. Pro-cyclicality has been mild with increases associated with higher economic growth and accommodative monetary policy but stress as reflected in sentiment indicators and benchmark instrument spreads can negate the pattern. Risk shifts correlate most closely to bank involvement and co-movement holds as well for industrial country destinations. The examination stops short of classifying institutional versus retail participation, with separate EPFR numbers underscoring triple the fight out of bond funds for individuals as a proportion of original commitments this year. Both local and hard-currency debt has been shed for months with equity barely positive selected weeks.

Stock markets despite average single-digit price-earnings ratios have however lagged in the performance sweepstakes, amid predictions that the sovereign EMBI and corporate CEMBI may end just flat for the year. At mid-August Asian exchanges amplified the previous BRIC swoon as India was in the crossfire for that cohort. As the new central bank chief was poised to press dusty reform recommendations, the rupee descended past 65 to the dollar as capital outflow controls were imposed and big family conglomerates scrambled to handle external borrowing exposures. Indonesia’s shared current account deficit predicament heading into the election cycle drew investor ire, as state pension funds were ordered to buy shares. Former favorites the Philippines and Thailand were shunned as officials denounced “herd” exodus. Bangkok reported a recession for the last quarter, and the Manila bourse was closed for days from typhoon damage accompanying fund manager wreckage.

Australia’s China Luck Longing
2013 September 4 by admin

Posted in: Asia
Australia headed into September elections with Labor under restored Prime Minister Rudd trailing the opposition, as interest rates were cut again with the GDP growth forecast at 2. 5 percent and the local dollar at a 3-year low on iron ore prices off 20 percent on wilting Chinese deliveries. Headline inflation too is at 2. 5 percent on flat credit extension despite rising home values in major cities. Rater S&P recently calculated that 7 percent economic growth on the mainland would have a strong knock on effect on natural resources, mining and housing and that a “hard landing” could result in sovereign downgrade. Bilateral trade accounted for 8 percent of output last year and a business task force recommended that stepped-up infrastructure investment at half that amount could help offset medium-term commodities decline. Services represent three-quarters of national income but the central bank has been on watch for property overheating as banking and tourism struggle to maintain balance. The continent pursues the same hydrocarbon backstop of adjacent Papua New Guinea where a $20 billion Exxon-Mobil natural gas pipeline is due to go on stream in 2014 to sustain 6 percent growth. The Prime Minister there was re-elected in 2012 and has reduced traditional foreign aid reliance to one-tenth of revenue. Metals exports have been the main commercial drivers, and the Chinese and Japanese are the contracted gas buyers. Gold has suffered from market tumbles as Australia’s Newcrest was forced into a $3 billion write-off of its Lihir project. A sovereign wealth fund attempts to manage resource flows and diversify the economy but has stumbled on corruption and poor governance. An estimated 90 percent of the island population is unbanked despite mobile platform strides. Agricultural operator New Britain Palm Oil is dual listed on the London and Port Moresby stock exchanges and recently received a Malaysian competitor takeover offer. Hydropower and consumer goods are nascent sectors and electronic settlement was introduced last year. Government bonds may be added to the bourse as secondary trading develops and ties with leading trade partner Australia may be smoothed with a temporary asylum review agreement for boat-traveling migrants. A double-tax treaty applies with Indonesia as ASEAN outreach continues, but overseas business executives are deterred by the high costs and precarious security of the capital where violent crime ranks with war zones elsewhere.
Pakistan has been the outperforming Asian MSCI frontier member up 25 percent at end-July on the return of economic reformer prime minister Sharif who immediately inked a new $5. 5 billion IMF loan to staunch reserve bleeding. The budget deficit for the latest period was double the 4. 5 percent of GDP target and better tax collection and state enterprise privatization are designed to achieve the goal over three years to also allow for increased energy capacity. The Karachi stock market vaulted initially on fiscal amnesty replacing a bar to ill-gotten fortune.

Haiti’s Ineluctable Election Tremors
2013 August 30 by admin

Posted in: Latin America/Caribbean
As its post-earthquake IMF program ends with a request for a year extension, Haiti is finally gearing up for long-postponed senate and municipal which may further erode the President’s lack of majority support for priority economic legislation with structural reforms already blocked. The fiscal year 2013 GDP growth forecast has been halved to 3 percent on weather-related agricultural drag on inflation double that number. Trade has gone into deficit but aid and remittance inflows pushed reserves to five months import coverage. The currency has depreciated slightly against the dollar and the central bank has raised non-gourde reserve requirements to redress the trend and mounted $100 million in interventions recently. Private credit expanded 25 percent through mid-year from a low base with the average bank capital adequacy ratio at 15 percent. The budget gap is over 5 percent of GDP with government debt kept below a 30 percent ceiling under domestic and external borrowing, including through Treasury bill and Venezuela’s Petrocaribe oil purchase facility. Tax collection has lagged, energy subsidies are costly, and a debt management strategy is absent, according to the Fund’s latest inspection, which also encouraged greater exchange rate flexibility and trading competition. The financial sector still lacks a collateral law, commercial and supervisory regimes for insurance and microfinance, and stock exchange plans which could align with the cross-border Caribbean platform. The Dominican Republic bourse on the same island features corporate fixed-income listings as another possible link, as the sovereign placed a $1 billion external bond in April without IMF arrangement renewal. With the infusion reserves hit $4 billion on the way to the goal of meeting three import months. Economic growth is around 2 percent on solid tourism performance and lower interest rates. Gold finds have boosted exports, but mining rule shifts may alienate foreign companies and undermine the effort to achieve public sector fiscal balance by mid-decade. Electricity shortages remain chronic and the central bank has yet to be recapitalized despite a 2007 enabling law.

Trinidad and Tobago was ahead 15 percent on the MSCI frontier index at end-July on lackluster 1 percent GDP growth and 2 percent inflation, with the hydrocarbon-backed current account surplus conspicuous at 10 percent of output. Government debt is around 40 percent of GDP after the rescue of pan-Caribbean insurance giant CLICO, but banks remain liquid and can readily absorb primary bond issuance. Barbados in contrast was recently downgraded with its 100 percent debt load deterring further overseas taps. Honduras also fell into that category in February as it launched a maiden $500 million issue now yielding about 10 percent. Former President Zelaya’s wife leads in preference polls to succeed him in November and has pledged additional social and security spending. Violent crime there is among the hemisphere’s worst to further rattle the shaky story.

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The Slovak Republic’s Spark Sputters
2013 August 30 by admin

Posted in: Europe
Non-residents owning almost half of Slovak Republic local bonds, three times the corresponding Czech Republic share, turned wary ahead of elections in top trade and auto manufacturing partner Germany to push yields toward 3 percent as the IMF also lamented “lost momentum” in its Article IV update. The net international investment position in negative terms almost equals external debt at 70 percent of GDP, and economic growth will be under 1 percent this year under flat exports and domestic consumption, the latter due to bank and fiscal retrenchment and double-digit unemployment. FDI has tied car production in particular closely to European and global supply chains with plants concentrated in the higher-income western region. Labor mobility is hampered by steep taxes and poor training reflected in low scores relative to other EU members on the World Bank’s Doing Business rankings. The 2013 fiscal deficit target is 2. 9 percent of GDP to escape from the “excess” monitoring procedure as bank and corporate income levies were raised and local authority spending was trimmed. Gross government debt approaches the 57 percent of output which triggers automatic large budget adjustments as with Poland’s constitutional provision. The Fund recommends better VAT and customs collection and pension changes extending the retirement age to avoid this outcome. Foreign bank subsidiaries dominate as elsewhere in the region but are funded from local deposits rather than riskier parent lines. Two-thirds of the ECB’s long term facilities were repaid in Q1 and capital adequacy and nonperforming loan ratios are solid. Household credit continues to expand but corporate portfolios have shrunk as falling real estate values dampen mortgage activity. As the single supervisory mechanism goes into place most of the system will be overseen from Frankfurt but the national regulator still lacks desired intervention powers, according to the annual report. Political controversy dogged the new entrant’s mandatory contribution to the ESM sovereign rescue fund but has paled against the recent government resignations and scandals next door in Prague. Foreign investors with a 15 percent domestic debt stake remain underweight with the constant reshuffling and criminal investigations despite official end to recession.

In Central Europe Romania, after joining the JP Morgan index, has jumped to third place at over 20 percent after Hungary and Poland. Its stock market has been the lone positive performer in the group after a new precautionary standby accord was reached with the IMF. Central bank currency intervention has been more restrained and long-delayed infrastructure and utility privatizations may be imminent. The private pension pillar could be strengthened there at the same time Warsaw intends to follow Budapest in reverting to state social security control and eroding the internal institutional investor base. Money may also be diverted from Turkey as it experiences the worst Emerging Europe securities exit after alleged military coup plotters were next in receiving Erdogan administration wrath with extended jail sentences further choking the allocation engine.



Kazakhstan’s Temperamental Tenge Outbursts
2013 August 29 by admin

Posted in: Europe
Kazakh shares were down 10 percent on the MSCI Frontier index amid a spotty “popular capitalism” push and continued devaluation rumors dismissed as “groundless” by central bank chief Marchenko with the oil price rebound above $100/barrel versus the $90 budget assumption. A 20 percent drop to 200 tenge/dollar was speculated with GDP growth and inflation both around 5 percent, and the Chinese state petroleum company just offering $5 billion for a stake in the huge Kashagan field. The benchmark interest rate held at 5. 5 percent as capital adequacy at almost 20 percent of assets continues as a lone positive banking system indicator with the aid of government support against repeated commercial debt restructuring rounds and an NPL portfolio estimated at one-third the total. In the non-bank category the dozen pension funds managing $20 billion which are key institutional investors will be pooled and placed partially under official control to aid in achieving divestitures of the sovereign wealth fund which began last year with the $400 million listing of the oil pipeline operator. An airline flotation also designed to appeal to the broader public was recently postponed over legal controversy, and many potential individual subscribers remain wary of corporate governance after fraud allegations at London-listed resources giant ENRC. The new head of the unit is a former provincial governor close to septuagenarian President Nazarbaev who celebrated the 15th anniversary in July of the groundbreaking for the political capital Astana. With no designated successor after two decades in power, he has fallen out with family members and Italy agreed to extradite his fugitive son-in-law charged with malfeasance causing BTA’s 2008 collapse. Ukrainian banks are also in trouble reflected in stock market decline and a 30 percent bad loan load, as Fitch downgraded the ratings outlook to negative on standoff with the IMF with big external repayments looming. GDP is barely growing on steep fiscal and current account deficits, and international reserves shrank 20 percent the past year to cover only two months imports as currency restrictions were imposed to maintain the quasi-peg. Winter will again underscore the toll from subsidized gas purchases and Russia’s Gazprombank credit terms could be harsher. State bills and employees have gone unpaid for months sparking protests with opposition leader Timoshenko still in jail and unable to contest 2015 presidential elections.

Slovenia has NPLs at half the level with domestic interest rates the highest in the Eurozone after Greece and Portugal at almost 5 percent. The central bank’s latest stability review warned of excessive external wholesale funding reliance and corporate leverage with little outlet through the “illiquid and shallow capital market” even with the MSCI component up 10 percent. As transfers to a separate bad bank are due to begin pending audit results acceptable to the European Commission, a wealthy Croatian entrepreneur was finally allowed to buy state-run retail chain Mercator after previous privatization tries leaving a bitter aftertaste with longstanding creditors and workers.

Mexico’s Encoded Energy Endurance Marker
2013 August 29 by admin

Posted in: Latin America/Caribbean
Mexican shares teetered on the positive cusp as President Pena Nieto proposed the PRI party’s long awaited constitutional revisions for oil monopoly Pemex’s private joint ventures calling for profit but not production-sharing following the opposition PAN’s tabling of more ambitious departures. Bills will soon be presented and debated in the Congress after July offshore exploration blocks received few bidders with crude output down to 2. 5 million barrels/day on near exhaustion of the current biggest field. Gas is also promising but transport pipelines must be built for internal and external use. The amendments to three articles uphold the historic principle of official control while aiming to boost paltry FDI in the sector at 1 percent of GDP to compensate for budget revenue loss. Fiscal reforms to alter the relationship between the central and state governments in terms of taxing power and automatic transfers have been introduced at the same time which could pare gas subsidies and invite a subnational bond wave. The leftist PRD may break with the post-election multi-party pact to challenge both intentions, as the under 50 PMI reflects lower growth expectations reverting the peso to the 12. 5/dollar bound. It also insists on a wealth tax to address income inequality, which was a prominent issue during the presidential campaign along with unemployment now formally at 5 percent. Inflation in contrast has improved despite currency depreciation and is within target range but after a minor rate cut the central bank’s room is cramped by likely incremental tightening by the Fed in the coming months as reaffirmed in recent pronouncements. Foreign investors have kept their 50 percent ownership position in long-term local bonds with the exchange rate and monetary stability compared with neighbors.

Argentina’s hyperinflation and capital controls mark the opposite extreme, but President Fernandez exhibited a pragmatic streak in signing a $1 billion deal with Chevron on the anniversary of YPF’s expropriation of Repsol’s stake. Currency and tax privileges unavailable to other multinationals were granted on the eve of provincial elections where her coalition was battered with only 25 percent support and lost in Buenos Aires against a likely 2015 presidential candidate. The equity market is up over 10 percent on the MSCI frontier index outpacing core rivals, and sovereign bond spreads above 1000 basis points have begun to tempt underweight fund managers despite the lingering holdout judicial battle which may be considered by the Supreme Court after a New York appeals tribunal verdict. The US and IMF demurred but France has submitted a brief to the highest Washington panel seeking interpretation of the near 40-year old Sovereign Immunities Act in the dispute. The administration continues to earmark reserves which are off 20 percent for external debt repayment, and GDP warrants are also on track to trigger this year with reported growth above 3. 2 percent in the face of Fund censure for slippery statistics.

Myanmar’s Hidden Landmine Laments
2013 August 22 by admin

Posted in: Asia
As the International Red Cross pointed out 5 million Myanmar citizens live in landmine-infested areas where clearance has often not started, the IMF completed its first Article IV consultation under the staff-monitored program through end-2013 bemoaning “stretched capacity” despite political and economic reforms. Separately with upcoming 2015 elections the example of Cambodia’s July poll which extended the three decade rule of strongman Hun Sen received a mixed investor response as opposition leader Raimsy claimed widespread rigging even though his party gained seats. Private equity firms have been active there as the nascent stock exchange adds listings and Chinese aid backs infrastructure projects with 7 percent GDP growth. Agriculture, garments and tourism are mainstays but the campaign focused attention on income inequality benefiting commercial and family elites. Myanmar’s ethnic and religious tensions may further fuel resentment, although external reconciliation with bilateral and multilateral creditors was an overriding theme the past year. Debt restructuring was agreed with Japan and arrears were handled with the World Bank and Asian Development Bank as a Paris Club deal forgave half of outstanding obligations. Natural resource and construction-driven growth was over 6 percent the last fiscal year on 5 percent inflation and a 4 percent of GDP fiscal deficit. Foreign reserves reached $4. 5 billion or 4 months imports as the currency appreciated until a May slide. The current account hole has been covered by FDI, and private sector credit is up double-digits from a low base at 10 percent of output. The central bank has intervened after the exchange rate system was unified but lacks formal independence and standard monetary tools for policy conduct and still must operate through the state bank network. Current account transactions should be fully liberalized in the coming months but capital ledger progress awaits financial services modernization. Foreign bank branches have yet to be approved, and although credit cards and ATMs are available market-determined interest rates and detailed prudential standards are absent. The four government-owned banks have been repositories for Treasury borrowing compelled by inconsistent and weak tax collection especially outside the commodities sector. A VAT and other levies could be applied as revenue from current offshore block oil and gas tenders is better mobilized and channeled into priority anti-poverty spending, the Fund urges.

Basic national and international account statistics are missing which inform business decisions and in capital markets a stock exchange and Treasury auction process have just been launched. Asian neighbors have offered technical assistance but Western advice has also been welcomed reflecting the path of Vietnam’s pioneer Indochina efforts. Its structure now includes a central asset management company for potential securitization of bad bank debt with an initial $500 million endowment. US distressed funds have arrived to bid and present their expertise as the de-mining drive forges deeper.

Venezuela’s Controlled Auction Anger
2013 August 22 by admin

Posted in: Latin America/Caribbean
Venezuela’s decline continued to match the EMBI loss to date as the new dollar auction system repeated its lackluster test without indications that sovereign or oil company PDVSA bonds would be offered again through the mechanism. Both companies and individuals have participated and although the results are not publically reported the clearing level was said to be double the official 6. 3 rate versus the 30/dollar informal exchange. Former presidential contender Capriles who was defeated by a scant margin called the outcome a “new devaluation” as another formal re-pegging may come after December local elections. Capital outflows persist with international reserves largely in illiquid gold at just $25 billion with a 15 percent petroleum export drop in the latest quarter. Chinese and Russian state lenders have signed agreements for hydrocarbon access shunned by traditional multinationals that have joined in voluntary or forced direct investment divestiture. GDP growth is barely positive and hyperinflation may loom on chronic staple goods shortages now tracked by the central bank’s “scarcity index. ” President Maduro has retained Chavez loyalists in key economic and security posts and maintained spending for popular support even with the fiscal deficit at an estimated 15 percent of GDP. S&P has a negative outlook on the “B” credit rating with “political uncertainty weakening policy implementation. ” CDS spreads have reverted to 1000 basis points with the lack of domestic and foreign issue direction other than upholding his mentor’s legacy and “socialist principles. ” A high-level meeting with US representatives aimed at restoring dialogue was shelved at the last minute and Caribbean and Central American neighbors are anxious to learn the fate of the concessional oil sale program promoted by his predecessor.

Initial outreach was cordial with main Andean trade partner Colombia, as President Santos conducts peace negotiations with guerilla rebels and launches a $20 billion public-private rural infrastructure plan as he contemplates a re-election run. Road-building has fallen behind schedule on licensing and environmental bottlenecks and the current account deficit may approach 4 percent of GDP this year on falling oil and mining revenue. Portfolio inflows are softer with the MSCI index off 15 percent through July, as the central bank continues to intervene using a formula for gentle peso depreciation. FDI should cover the balance of payments gap but dividend remittances may further embed it as in Brazil as foreign headquarters demand profit streams. Ecopetrol and Petrobras are now vying for regional petroleum supremacy, as Argentina too has recently attempted a more investor-friendly stance in the energy field after YPF’s nationalization a year ago. Erstwhile owner Respol excoriated a deal with Chevron with its assets offering currency and tax privileges unavailable in other sectors as the President seeks to bolster fuel supplies ahead of October provincial polls. Her opinion approval increased with the move although she has refused to relax commercial and financial controls elsewhere or her fury toward “holdout” creditors awaiting a New York appeals court judgment likely to solidify mutual hatred.

Iceland’s Fishy Capital Control Reel
2013 August 21 by admin

Posted in: Europe
Iceland’s new government elected on a household debt relief platform may also delay capital control lifting to almost a decade after the 2007 crisis prompting developed Europe’s first official rescue, according to the IMF’s August post-program analysis. They were imposed against a “vicious depreciation-inflation spiral” which has since improved with public debt consolidation and bank closure and restructuring as gross international reserves now exceed short-term liabilities. The currency initially plunged 40 percent but may currently be undervalued as output has yet to regain its pre-crash level. GDP growth has been in the 2 percent range despite good tourism, fishery and aluminum exports as domestic consumption remains depressed by deleveraging and unemployment and the slow capital liberalization pace. The two specialized channels involving the Landsbanki compensation bond and liquid offshore krona have yet to be opened before a broader elimination which could bring portfolio rebalancing around 30 percent of GDP, the Fund estimates. Inflation is on target for 2. 5 percent after central bank interest hikes and exchange rate intervention, and the budget shows a small primary surplus. Dollar sovereign bond reentry has come with rating upgrades but household and corporate debts linger respectively at 170 percent and 110 percent of GDP. Judicial rulings on foreign currency-tied contracts have complicated resolution and the state mortgage lender is in poor financial position and additional forgiveness will entail new fiscal transfers. The three reorganized banks have an average 25 percent capital adequacy ratio and NPLs are below double digits, but earnings are thwarted from low demand and steep operating expense. For Emerging Europe as a whole outside Russia and Turkey slumping appetite continues to reduce cross-border funding according to the BIS and Vienna Initiative members with the biggest cumulative drops in Hungary and Slovenia, which has just established a central bad debt disposal unit awaiting the results of stress tests on NLB and its state-run peers. The tally notes that eight countries were in recession last year so that private credit increased only 1 percent in the first quarter. The group warns of further cutbacks following deteriorating securities market sentiment in May for a “double whammy. ”

Cyprus has followed the original insolvent banking system and capital control route, with ratings agencies assigning selected default status after an extended maturity bond exchange and still predicting eventual Eurozone exit. Output may fall 20-25 percent over the medium-term, and the EU rescue has elevated debt/GDP to 85 percent. After a near 50 percent haircut on deposits above EUR 100,000 private accounts continue to decline and officials have resorted to tax amnesty in an attempt to lure back funds as external outflows and daily cash withdrawals remain subject to strict limits. Real estate prices have collapsed with credit only available for rescheduling as an independent investigation blamed “cultural rigidity” for the financial meltdown with a foul odor surrounding all parties.

Seychelles’ Hyped Island Hop
2013 August 21 by admin

Posted in: Africa
The Seychelles joined Mauritius as an African small middle-income island stock exchange with listing of the state-owned Sacos insurance conglomerate in the final phases of its IMF program five years after sovereign default when the public debt-GDP ratio was 150 percent. The abandoned exchange rate peg and big civil service employment reductions subsequently departed from a socialist model and Paris Club and private lender and bond-holder 50 percent haircuts set a path for slashing obligations by two-thirds by end-decade. Mainstay tourism has diversified from traditional European visitors with arrivals up 20 percent through the start of this year. A new fiber-optic cable has aided telecoms business and resort-related construction for Asian and Middle Easter visitors boosted FDI. Medium-term GDP growth and inflation are both put around 3 percent, but additional fiscal and balance of payments drag could result from the government’s full airline takeover. Reserve coverage is below three months imports. The primary budget surplus goal remains 5 percent of output with VAT introduction and electricity tariff adjustments, but private sector credit has been flat and the absence of long-term Treasury paper inhibits monetary policy. A deregulation effort aims to elevate Doing Business rankings from the bottom half but is hindered by professional capacity limits in law and accounting. Small companies could benefit from a planned leasing framework and the African Development Bank is trying to promote housing finance. Banks have passed stress tests but still exhibit high interest and operating costs and maturity mismatches, according to the Fund’s latest Article IV release.

Mauritius was ahead 10 percent on the MSCI frontier index through August as India postponed offshore tax hits but global business corporation formation may indefinitely slide with likely retargeting. GDP growth is 3 percent on inflation double that level and fiscal balance will be upset by a large infrastructure-building campaign, according to a recent IMF analysis. Credit continues to increase at a 10 percent annual clip and the central bank regularly intervenes to smooth currency swings. National savings has dropped 10 percent over the past decade complicating the objective of 50 percent of GDP debt sustainability. Utility subsidy and pension reforms are overdue and the state social security fund should allow more foreign allocation. High youth unemployment persists despite the demand for skilled workers and the two main banks listed on the exchange are healthy by capital, liquidity and earnings measures, the overview concludes. Although the two centers are not prime participants they urge renewal of US AGOA trade preferences expiring in 2015 as the joint annual forum convened in Ethiopia to chart provisions and strategy. A Brookings Institute-UN study issued in advance marshaled empirical data that non-extension would hurt exports and jobs, but urged regional integration and training efforts to fully realize the legislation’s beauty regardless of country and product eligibility ideals.

Asia’s Shrill PMI SOS
2013 August 15 by admin

Posted in: Asia
Asian stocks and bonds were battered in July, with the Philippines alone positive for equities and the Korean won the sole currency gainer against the dollar, as PMIs for major economies hit post-crisis lows well under 50. Dedicated debt funds experienced heavy outflows with foreign ownership of local government paper off around $15 billion led by a 10 percent decline in Malaysia to 40 percent of the total as Indonesia also pared back to 30 percent. Auctions failed in India and Thailand awaiting a new central bank head in the former and passage of an infrastructure project law in the latter complicated by political amnesty provisions, as the region was likewise snagged by China’s liquidity squeeze and capital flight over the period after crackdowns on wealth management products and fake trade documents. Malaysia’s exit must be absorbed by domestic institutional investors previously unimpressed by 3. 5 percent yields, as the halved current account surplus at 2 percent of GDP feeds ringgit weakness. The re-elected prime minister’s ruling party won an important provincial contest but pro-Malay economic preferences and commodity subsidies embedding a structural fiscal gap remain in place. Islamic finance action has increasingly been diverted to the Gulf and North Africa, as sukuks are treated as a safe have and transition Arab states adopt new internal and cross-border issuance regimes. Chinese officials trying to slow monetary growth to the 12 percent target have sent borrowers to the Hong Kong syndicated loan market with other outlets closed as corporate leverage has more than doubled the past five years to 125 percent of output on lower profitability. The latest macro statistics restore fixed investment over consumption as the main driver, helping to further propel commercial and residential property prices despite overcapacity in numerous industries. India’s planning chief Rajan, a well-known academic and author who served at the IMF, will assume the central bank post amid confusing signals over rupee defense and bank bad asset treatment which brought a 25 percent overseas selloff of government debt leaving holdings further under quota at $30 billion. Benchmark interest rates stayed in place as gold import and interbank restrictions were announced, as the parliament entered the final pre-election session with 49 percent insurance and pension sector opening swamped by dozens of other bills awaiting action and a breakaway push to create more states with their companion appropriations.

Despite partial fuel subsidy adjustment and good FDI figures, Indonesia seems stuck in presidential succession mode as the rupiah hovers around the sensitive 10000 to the dollar line and GDP growth flags to under 6 percent. The Bumi Resources fight in London and Jakarta shines a spotlight on poor corporate governance and potential default and a successful external bond placement failed to sway sentiment. Korean bonds have not suffered as much as foreign-dominated stocks with the MSCI Index down 10 percent as Samsung lost a US phone patent dispute with Apple on static-filled connections.

The Euro Area’s Rooted Rot Rotation
2013 August 15 by admin

Posted in: Europe
As the average PMI passed 50 and banks cited better lending conditions in terms of supply, the IMF circulated its annual euro-zone report card assigning a good grade for “tail risk reduction” but otherwise charting deeper crisis permutation. It found that the ECB’s bond support and the EU’s single supervisory programs improved the currency union foundation, but that private borrowing costs in periphery countries remained “too high” with stubborn capital flight Long-term liquidity facilities have been repaid mainly from stronger core member banks, and real GDP is below the pre-crisis level on incipient deflation and 12 percent unemployment. Financial market fragmentation has reduced original cross-border participation and small firms cannot get credit. The upcoming EBA stress test will spotlight lingering capital holes, although deleveraging is apparent through asset sales. All economic sectors are overextended with household and business balance-sheet cleanup stymied by antiquated bankruptcy codes and the absence of securitization techniques. Recession is predicted for the remainder of the year and medium-term stagnation is a likely scenario without a “comprehensive policy response. ” The Fund recommends third-party independent evaluation to add credibility to banking health checks and an ESM window for recapitalization under strict burden-sharing criteria. Legislation must still be approved in the European Parliament for common oversight rules as resolution authority has yet to be decided apart from a general bail-in hierarchy at an 8 percent minimum of total liabilities protecting insured depositors. Although the central bank recently allowed simpler pooling to qualify as collateral for its resources, it could more directly assume small enterprise exposure with pilot efforts. In its monetary stance negative interest rates could be considered alongside the “low for long” forward guidance to preempt a deflationary spiral. On the structural front, labor norms are rigid and globally uncompetitive and single-market services integration and external free trade agreements could go further. An initial round of transatlantic talks was held in Washington and East Asian bilateral and multilateral commercial openings could likewise expand. Internal rebalancing has cut current account deficits but traditional surplus powers like Germany have not switched to domestic demand. The euro’s value has fluctuated to extremes since 2009 but is roughly in equilibrium with a 10-15 percent real decline over the period.

It has rallied over the summer lull both against developed and emerging market currencies as commodity, output and geopolitical drags weigh on the latter group. Their lending conditions have also deteriorated for the first time in years as the IIF’s quarterly indicators went below 50 on souring officer sentiment across all regions. Bad credit increased and trade finance was scarcer as bellwether China revealed poor import and export statistics along with capital account outflows. The renimbi has long been ballyhooed as an eventual euro rival, but the vanguard yuan-denominated dim sum bond market is now shunned and Hong Kong officials had to inject liquidity to stem the decay.

The Caribbean’s Faulty Wiring Weave
2013 August 12 by admin

Posted in: Latin America/Caribbean
Amid a slew of sovereign debt defaults and Jamaica’s conspicuous equity underperformance on the MSCI frontier index the IMF probed pan- Caribbean financial sector reforms and linkages in a working paper revealing bank and non-bank potential for “negative shocks. ” Total onshore assets come to 125 percent of GDP and the Bahamas and Barbados are offshore havens. Foreign banks, mainly Canadian control a majority share, and credit unions and insurance dominated by regional conglomerates are also important. Jamaican securities firms managing $5 billion are key players there, but broker information and numbers are limited elsewhere despite the spread of exchange cross-listings. The biggest cross-border collapse since the crisis was Trinidad and Tobago-based CL Financial with a broad range also of industrial and property interests. Its $15 billion failure hit a dozen CARICOM members and resolution has been “slow and piecemeal. ” The core Colonial Life Insurance portfolio has been split into good and bad portions to partially repay policyholders and creditors and the rescue has entailed “significant” fiscal costs. Canadian units and sub-regional insurer Sagicor are also present in twenty islands. The banks have a local deposit base and offshore and onshore activities are separate in commercial and supervisory terms. Cross-traded stocks are concentrated in Barbados, Jamaica, Trinidad and Tobago and the ECCU at around one-fifth the total. Oversight has often been unified in a single financial services body but prudential, workout and home and host country information-sharing and cooperation procedures should be further elaborated and refined, the document cautions. Jamaica’s $1 billion Fund program approved in May is designed to deal with unsustainable public debt at 150 percent of GDP and related vulnerability through large bank and securities house exposures respectively at 20 percent and 65 percent of assets. The previous 2010 agreement was breached by budget overruns, although it set a precedent of domestic government bond swaps for lower-coupon longer maturities which was repeated in February to full participation and delivered almost 10 percent of GDP in estimated savings through end-decade. To cushion the blow a financial system liquidity and recapitalization support fund was reactivated after going untapped the first round.

The goal to reduce the debt/GDP ratio to 95 percent by 2020 may be complicated by contingent liabilities including guarantees and changes in the concessional oil import borrowing line with Venezuela under its new leadership. The retail repo focus of securities dealers is a prime stability risk as legal title of state paper is on their books in an “adverse scenario” and an alternative model promoting investment advice and underwriting has been slow to develop. The exchange rate has been overvalued and the central bank should move to full inflation-targeting, the Fund recommends. A fiscal rule will lock in a primary surplus and tax and spending overhauls within a competitiveness strategy positioning the island as agriculture and shipping logistics hub despite clogged financial plumbing.

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Private Equity’s Public Pain Pricks
2013 August 12 by admin

Posted in: General Emerging Markets
The Emerging Markets Private Equity Association reported first-half respective 50 percent and 10 percent drops in fundraising and allocation offset by geographic diversification, including the second largest deal for the period in Kenya. $10 billion was mobilized for 60 funds, three-quarters under $100 million, and the same amount went into 350 transactions. One-quarter of the capital was for Latin America ex-Brazil pools, and Sub-Sahara Africa saw the highest annual regional increase at 45 percent. Smaller vehicles may benefit from a wider investor base drawn also from development lenders, family offices and local limited partners, the group believes.