No More Learning

The tougher commodities climate may likewise prompt a rethink of the higher copper royalty regime in SADC neighbor Zambia, where the incumbent Patriotic Front eked out a victory over a newcomer challenge. Finance Minister Chikwanda was retained and may restart IMF program talks as the fiscal deficit remains at 5 percent of GDP and reserves cover less than three months imports. The Chamber of Mines warned that doubling taxes would lose thousands of jobs and deter FDI needed also to support the currency. The presidential contest will be repeated next year which would have been the end of the deceased Sata’s original term. Poll risk took another form in Nigeria, as the Buhari-Jonathan match was postponed until the last week of March due to security concerns in the North according to the formal explanation. Stocks shed another 10 percent on the MSCI Frontier with the delay as the naira broke 200/dollar which may force the central bank to devalue before balloting occurs. Ratings agencies have imposed negative sovereign outlooks as the GBI-EM suspension is still pending despite moves to improve local bond liquidity. A Buhari win could roil the mix with the former general’s hard line against Boko Haram expected to sharply boost military outlays.

Francophone neighbors Cameroon, Chad and Niger have joined in cross-border counterattacks against the terrorist group as Cote d’Ivoire enters its own election cycle with plans to issue a $1 billion Eurobond. President Ouattara is favored for another mandate despite ailing health as post-war GDP growth is set at 7 percent this year. However the budget deficit continues at 3 percent of GDP with contractor and pension arrears outstanding as the army went on strike for overdue salaries heading into the loaded historic juncture of smooth civilian transfer.

Malaysia’s Errant Swing Swagger
2015 February 23 by admin

Posted in: Asia
Malaysian stocks slipped further after a soft 2014 as Prime Minster Najib’s popularity crumpled with an overseas golf outing during record flooding at home and his budget deficit aim of 3 percent of GDP was endangered by the price slump in hydrocarbons providing one-third of revenue. Splinter wings in the ruling UNMO party continued to urge his departure, but were briefly mollified by an appeals court decision upholding another jail sentence for opposition leader Anwar for alleged personal offenses despite international outcry. The saga of state development board 1MDB has also drawn criticism after $12 billion in debt was accumulated for land and power acquisitions and repayments were missed. Najib is on its board in his Finance Minister capacity and the government guaranteed obligations while representatives engaged in questionable transactions such as the purchase of luxury New York apartments. The growth forecast was trimmed to 4 percent this year as the current account may move to deficit. Short-term external borrowing is equal to $110 billion in reserves, household debt is 85 percent of output, and non-residents hold 40 percent of local debt. The central bank has paused with the ringitt down 10 percent in recent months, as lower inflation may offer relief to overextended consumers who have begun to feel food and fuel subsidy reductions. The banking sector tie-up between two dominant players has been shelved which would have consolidated their Islamic finance strength. From a valuation perspective analysts argue correction was overdue with the p/e ratio at 15 above the emerging market average, but the available float is limited with official and family ownership. The airline was once a heavyweight but has been fully nationalized after last year’s jet disappearance which was finally labeled an accident for legal reasons with no signs of the wreckage.

Thailand on the other hand has extended a double-digit gain despite the junta’s prosecution of former Prime Minister Yingluck for reported abuses in the rice support scheme and indefinite postponement of new elections. Her brother Thaksin will continue his Dubai exile as the military shows no hint of a compromise return and the crown prince was sidelined as an ally amid family squabbles and member implication in shady dealings. The King has been too sick to reconcile the sides as in the past, and growth remains marginal with poor business and consumer sentiment despite a slight last quarter manufacturing uptick. Rubber exports have slumped and tourism now struggles with baht firming against the dollar virtually alone in the region. Infrastructure stimulus amounting to 1 percent of GDP will assist domestic demand as Japanese carmakers continue to ponder alternative locations as the political deadlock persists. Commercial bank credit advanced at only a 5 percent pace in 2014, off two thirds from the previous annual norm as the personal portion of NPLs reached one-third with coup plotters besieged by forgiveness pleas they may no longer sink with the worsening public mood.

Egypt’s Rounded Peg Polish
2015 February 23 by admin

Posted in: MENA
Egyptian shares were up another 5 percent in January after 2014’s 30 percent MSCI advance as officials prepared for a March donor conference and scheduled parliamentary elections despite court decisions condemning Muslim Brotherhood members to death and keeping journalists in jail in defiance of foreign criticism. Former President Mubarak and his sons and supporters were also cleared of corruption and murder charges, as President Al-Sisi pressed Gulf allies to maintain aid and loans under military control as gross reserves stabilized around $15 billion after a $2. 5 billion Qatar repayment. The central bank in turn raised pressure on the informal market by easing the pound to 7. 5/dollar from the longstanding 7. 15 after 2014 15 percent appreciation in real terms against a currency basket. The devaluation should not affect 10 percent inflation with offset from lower oil import costs, and with band widening the level may approach 8 by year end. The move was designed to divert parallel exchange use as well as respond to IMF calls for more flexibility ahead of possible new program talks at the upcoming development meeting. In Morocco with a current arrangement trade and travel exchange restrictions were recently relaxed but capital account opening is not envisioned over the medium-term with the high current account gap. Tight limits remain on property purchases abroad and the future regime would likely be a heavily managed float. Iraq is also slated to borrow a combined $6 billion from the Fund and World Bank in its updated budget with a $55/barrel oil price assumption. The projected deficit is 8 percent of GDP and will rely on domestic Treasury bond issuance and commercial loans for coverage as independent Kurdistan retains more revenue. Baghdad has requested additional US military equipment and training for the battle against ISIS as Prime Minister Abadi’s fragile coalition continues to disagree over strategy and in particular Iran’s role in confronting the threat. Jordan and the UAE have been active in the air strike campaign and the former deployed combat troops to the Syrian border following execution of a captured Jordanian pilot. Emirates’ officials have not voiced concern about the outlays amid falling oil prices and Dubai real estate cooling which have dictated flat MSCI stock market performance.

Israel’s Prime Minister Netanyahu in fighting for reelection has underscored Iran’s nuclear weapons desire as international negotiations over a halt in exchange for sanctions relief are deadlocked. Shares lack direction awaiting the outcome of the race and recovery from the Gaza conflict which contracted the economy for several quarters. GDP growth is forecast at 2-3 percent this year on inflation under 1 percent following months of deflation. The benchmark interest rate is at rock-bottom 0. 25 percent but housing’s affordability and availability is a core campaign issue and is due to be further stretched with a large French immigrant influx in the wake of Paris attacks along with poor employment conditions pegging a harsh future.

Venezuela’s Remanded Retail Appeal
2015 February 17 by admin

Posted in: Latin America/Caribbean
Venezuelan bonds extended their last place results on the EMBI index as President Maduro reacted to staple shortages by arresting executives of a leading retail chain and introduced another currency trading channel mainly to benefit state oil company PDVSA, as the sovereign rating was further downgraded to CCC-minus implying a 50 percent default chance this year. Reported reserves are $20 billion, but only $5 billion is liquid and the same amount may be held in off-balance sheet official accounts, but recent transactions indicate a cash scramble. Petrocaribe claims on the Dominican Republic were sold at a discount for $2 billion, and Citgo’s parent company in the US raised that sum from banks using a complicated legal structure to avoid jeopardy. The President returned from a trip to China with $20 billion in stated investments without specific details or timetable, as oil shipment terms under previous borrowing was relaxed in recognition of Caracas’ predicament, with $50/barrel oil creating a $30-40 billion annual balance of payments hole. Recession and hyperinflation linger to aggravate capital flight and budget deficit coverage through domestic debt placement at negative real rates threatens the banking sector. PDVSA’s latest $3 billion bond was issued directly to the central bank in these circumstances as maturities over that level approach in the last quarter. National assembly elections are due by then and the President’s party has spawned infighting with his unpopularity, but opposition leaders in jail or in exile have been unable to unify. Ties with Cuba may be more precarious with the diplomatic opening to the US, but Washington’s imposition of sanctions against Venezuelan government individuals for anti-democratic practice may offer a rallying cry for hard-core supporters. The trade embargo against Havana cannot be lifted without congressional action as the 2016 presidential election cycle begins with the potential to freeze relationships in place.

The Dominican Republic buyback reduced obligations by 3 percent of GDP and generated a NEXGEM rally after growth spurted to 7 percent last year on mining, tourism and remittances. In addition to the 50 percent discount maturities were doubled to 20 years, representing a liability management coup. The Medina administration used proceeds from last year’s global bond issuance for the operation and investors are looking for other candidates to mount similar transactions. Jamaica floated an $800 million external bond six months ago as it has exceeded IMF program targets with a 3. 5 percent of GDP primary surplus and rough budget balance. However public debt is still above 125 percent of output and growth is barely positive on the heels of a major drought. Visitor numbers are up and the trade deficit may fall on lower oil imports as Jamaican stocks climbed almost 10 percent in January on the MSCI Frontier index. Fund permission needed for a Petrocaribe deal may not however be forthcoming after two debt re-profilings in 2010 and 2013 have yet to sketch a new picture.

FDI’s Sullied Solid Course
2015 February 17 by admin

Posted in: General Emerging Markets
The UN’s initial 2014 global FDI reading was down almost 10 percent to $1. 25 trillion on 15 percent advanced and 50 percent transition economy drops with future solid performance “distant” according to the January report. However the developing market total of $700 billion was a new record at 55 percent of inflows as China’s rose 3 percent to $125 billion to bump the US as lead destination. The EU’s grab was up 15 percent to almost $275 billion, one-quarter to the UK, while France and Germany had $10 combined in outflows mainly due to intra-company loan movements. Emerging Asia took close to $500 billion, with India increasing 25 percent to $35 billion and Myanmar doubling while Vietnam fell. Turkey as part of West Asia dipped to $12 billion on financial sector weakness, while North Africa was off 15 percent and the Sub-Sahara was flat despite cross-border consumer-related M&A growth in Nigeria and elsewhere, UNCTAD commented. Latin America reversed a 4-year climb with a 20 percent slip to $150 billion, as lower commodity prices hit extractive industries. In Mexico AT&T divested its stake in America Movil, and Argentina and Venezuela plummeted on parent company earnings repatriation. In Chile mining interest softened and together Colombia and Peru experienced $25 billion shrinkage. In Central Europe and the CIS the Russia-Ukraine conflict and sanctions halved the sum to $45 billion, although Azerbaijan and Kazakhstan hydrocarbon participation advanced. International mergers improved 20 percent to $385 billion, one-third in finance, including an intra-African deal with Nedbank of South Africa’s stake purchase in Togo-based Ecobank. Greenfield projects were ahead marginally to over $600 billion with transition economies excluded from the trend and negative geo-political and GDP growth prospects for emerging markets generally likely to be near-term deterrents, the review concludes.

The FDI lethargy was in contrast to 2014’s 15 percent private equity fund-raising rise to $45 billion across all regions with Latin America and Sub-Sahara Africa getting one-quarter, according to industry association EMPEA, as emerging markets were also 15 percent of the global total. Capital deployment in turn was a record $35 billion, a 25 percent annual spurt. Asia was the focus for two-thirds of funds, and China had two $1 billion-plus deals for oil distributor Sinopec Marketing and tech firm Xiaomi. Larger regional vehicles dominated, with a dozen funds mobilizing $1 billion each including Carlyle, Advent International and Helios. The mean fund size was $450 million and a few first-time entrants were successful, according to the study. Venture capital allocation was unprecedented at $7 billion for 700 transactions, with China leading the pack. Southeast Asia’s volume doubled and India garnered $200 million for e-commerce provider Flipkart. Brazil, Lithuania, South Africa and the UAE were host to other major investments, and consumer services remain the most popular sector. Retail, media and travel companies accounted for one-third of stakes and private versus public equity may be the most solid route with the FTSE Emerging Markets Index at only 10 percent consumer listings, EMPEA notes.

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Austrian Banks’ Dangling Swiss Sword
2015 February 13 by admin

Posted in: Europe
Austrian banks with large Swiss Franc portfolios at home and in transition economies absorbed debt and equity blows from the end of the appreciation limit, as ratings agencies warned of pressure on the prime sovereign rating on further possible rescues as post-2008 lines come due. The four main lenders—Erste, RBI, Unicredit and Volksbank—have EUR 30 billion in exposure with household CHF borrowing at one-fifth the total. They also have EUR 40 billion in outstanding loans to Russia and Ukraine at risk with recession and war and a EUR 5 billion injection so far into Hypo-Alpe-Adria could not stave off bankruptcy. RBI’s credit default swaps on junior instruments that will take losses under new EU bail-in rules show 70 percent event odds over 5 years. Its Polish mortgages are one-third Swiss Franc-denominated, as conversion has entered the thick of political campaigning on imminent parliamentary and presidential elections. The opposition Law and Justice party favors a forced Hungary-type switch at the previous exchange rate which could cost banks almost $3 billion, the central bank estimates. A compromise which would only partially preserve the original level may involve half that sum but would still exact a balance sheet toll even if the economic outlook stays positive, according to Moody’s. Erste and Raiffeisen are big in Croatia where mostly retail CHF credit amounts to 7. 5 percent of GDP. The outgoing parliament voted to freeze rates for individuals along with small businesses, and poor customers can apply under a separate program for cancellation. Volksbank Romania has volunteered to hold the CHF/leu trade constant for three months as officials there aided by an IMF precautionary facility reject sweeping solutions. Lawmakers may however extend relief to the poorest by raising the income threshold as monetary authorities fear write-downs will endanger system capital. Serbia has EUR 1 billion in CHF-linked mortgages and just revived its Fund arrangement, but with the 25 percent NPL ratio further bank losses would be unsustainable and the draconian budget plan affords no forgiveness room. In Bosnia Hypo-Alpe-Adria dominated personal foreign currency activity and agreed to work out viable terms with over 5000 clients. The group is in the process of final sale to private equity firm Advent and the EBRD winding up decades of operation and Austria’s contingent liability with debt/GDP already at 85 percent.

Denmark with its 30-year currency peg also felt backlash from the Swiss National Bank’s jettisoned ceiling and sold a record $15 billion equivalent to preserve the 7. 5/euro relationship within a narrow fluctuation band. Bond auctions were suspended and the benchmark deposit rate went further negative to –0. 75 percent. Despite the cursory speculative inflow invitation, the krone could depreciate in the long run with high household and financial sector leverage if the structure collapsed according to analysts. Other Scandinavian banks suffered in the maelstrom with their huge Baltics footprint reflected in capped stock market performance.

The IMF’s Sustainable Solutions Snub
2015 February 13 by admin

Posted in: IFIs
The IMF put the US Congress on notice that the 2010 quota reform agreed by all other members may be renegotiated by mid-year with continued lack of ratification, potentially endangering Washington’s 15 percent plus controlling share. The move followed a fiery speech by Managing Director Lagarde urging overdue “political action” on this issue and climate change and income inequality challenges. The original deal would keep the US allotment at 17 percent and advance China, Brazil and India several places mainly at the expense of Europe relinquishing 3 percent. After passage of the previous end-2014 deadline country representatives have begun to explore alternatives to change voting power and double the Fund’s firepower which could involve another G-20 summit or interim Treasury Department endorsement pending later legislative approval. The delicate diplomacy comes amid the task of expanding and possibly doubling last year’s $15 billion plus rescue package for Ukraine, with a mission and Treasury Secretary Lew just visiting Kiev. This version will be the first test of guidelines circulated last year, incorporating lesson from Greece, on exceptional access and “reprofiling” private debt through automatic maturity extension or stipulating outright reduction if the burden is no longer sustainable. The new Finance Minister, a US-trained investment banker, introduced the restructuring option at the World Economic Forum in Davos and appointed Lazard as an adviser. The sovereign rating had been sliced to CCC- in December with both near-term bonds and CDS trading in deep distress with double-digit spreads. Optimistic scenarios calculate the recovery value at 60 cents/dollar, with Franklin Templeton the biggest international holder loser alongside Pimco and BlackRock. Local bond issuance has continued with $2 billion equivalent placed in January for gas payment, as official figures will soon establish public debt/GDP over 60 percent entitling Russia to call in its 2013 $3 billion buy triggering other Eurobond cross-default clauses. Reserves are down to $7. 5 billion by the last tally and industrial output fell 10 percent in 2014. Corporate borrowers have already defaulted and several banks have been liquidated amid large-scale system recapitalization needs, with Russia’s VTB already moving to support its local unit. The EBRD predicts financial collapse in months without tangible actions in banking, energy, investment and anti-corruption despite the new government’s enactment of legal and policy changes on paper.

The Fund’s updated approach recognizes that re-profiling would be defined as a credit event by ISDA and trigger swap payouts as the sovereign rating temporarily enters “selective default. ” The later swap could end that designation and enable eventual market return but will depend on creditor acceptance of the staff debt sustainability analysis. Fund operations in Cyprus and Jamaica in 2013 involved maturity extensions, and the framework would first establish commercial exclusion by assessing a series of bond primary and secondary, ownership, duration and rollover indicators. Contagion cases could entail special circumstances but this finding could engender panic if asset managers are not consulted and believe in the stakes as well as the unserviceable stock, the document asserts.

The World Bank’s Compounded Commodity Commiserations
2015 February 9 by admin

Posted in: General Emerging Markets
The World Bank’s quarterly commodities outlook predicted “broad-based weakness” into 2015 as energy, metals and agricultural prices are all down 35 percent from 2011 peaks. It expects “rare” uniform drops in the nine classes tracked, assuming no further global economic slide or an OPEC shift toward oil supply management. Natural gas and coal will also fall and for food and grain only beef should increase. Biofuels will collapse with governments unable to justify subsidies with oil at $45/barrel and fertilizers’ value decline should moderate to single digits. Precious metals face dual risks from lower demand in China and India as well as from institutional investor “safe haven” withdrawal, according to the report. It points out that International Energy Agency forecasting revisions are common and that the US shale oil boom and reduced world appetite by themselves do not explain the sudden 50 percent reversal as much as OPEC’s new strategy to maintain capacity, static geopolitical confrontation in Eastern Europe and the Middle East, and dollar appreciation. In the past three decades similar volatility was noted on several occasions, most recently during the 2008 financial crisis when all asset classes were correlated unlike the case today. Then global growth and liquidity concerns were main drivers in contrast with current sector-specific influence. The traditional oil price divergence between West Texas Intermediate and Brent has disappeared and non-OPEC producers continue to supply 750,000 barrels/day. International demand will be flat at 95 million barrels and 2015’s average will be $53 and rise only modestly in 2016, the Bank believes. In metals, iron ore, nickel, tin, lead, copper, aluminum and zinc have all suffered from the arrival of cut-rate producers like Australia and Brazil and negative Chinese imports. Warehouse and exchange inventories have shrunk but prices will retreat another 5 percent this year. In precious metals ETF outflows slashed holdings 10 percent in 2014 on incremental Federal Reserve tightening as gold miners in South Africa and elsewhere otherwise merge and consolidate operations. Fertilizer will show mixed direction and India and China may add pressure with subsidy cuts. Wheat and maize are “well-supplied” and rice output will taper to 475 million tons in part due to Thailand’s huge stockpile accumulated under the Yingluck Administration’s support program, with the former premier now charged with negligence by the military-controlled parliament. Soybean crops are at a record, and in beverages coffee recently spiked on Brazilian drought but cocoa and tea lagged in good African and Asian harvests. Cotton and rubber are in a multi-year correction and timber will be off 3 percent this year, according to the early estimate.

Reflecting the commodity crash the IIF’s last quarter 2014 emerging market lending conditions survey still registered below 50 with all regions reporting domestic and international line cutbacks especially in trade finance. The 125 banks polled cited Russian and oil crisis contagion as the main drags, with a slight NPL improvement in Europe among the scarce future recovery seeds.

Argentina’s Twisting Conspiracy Plots
2015 February 9 by admin

Posted in: Latin America/Caribbean
Argentine stocks and bonds stalled in January as literally hobbled President Fernandez after an ankle injury blasted the findings and suspicious death of a prosecutor investigating an alleged Iranian bombing a decade ago, while relinquishing no new holdout ground after expiration of the original swap same terms clause. The Nisman report had implicated leaders in a deal with Tehran authorities to avoid blame and before formal presentation he was either murdered or committed suicide in his Buenos Aires high-rise. The President ordered an intelligence service shakeup in the aftermath and denied any previous absolution for the synagogue attack for oil and loans. Her polemic followed a New Year message emphasizing the return of gross international reserves to $30 billion with $5 billion in Q4 2014 agricultural exports, an initial $2. 5 billion Chinese currency swap installment, and continued exchange controls which should allow management of 2015 hard currency debt service at half that sum. Oil import savings should add another $2 billion and could forestall further devaluation heading into the October presidential succession. Finance Minister Kiciloff has hinted at resumed negotiations in New York after other non-participating claims were joined to the plaintiff vulture funds bringing the total to $18 billion, but a breakthrough is unlikely before the transition and the next government may insist on its own review. The trade surplus may shrink to $4 billion this year on lower world soybean prices and farmer hording to escape taxes and peso weakness. Recession is due to repeat with 1. 5 percent output fall although inflation may moderate to 25 percent barring overly generous pre-election union wage hikes. The IMF granted another delay to improve statistics citing progress, but GDP warrants needing 3 percent GDP growth will not pay off again as the feature is considered for a possible future private creditor comprehensive deal to complement the recent Paris Club workout.

In Ecuador, President Correa may face no such term limit as he maneuvers through his party’s two-thirds parliamentary majority to serve indefinitely with constitutional revision. Oil provides one third of budget revenue and the deficit was already at 5 percent of GDP before the price collapse which will pare growth to 1 percent. China has offered $7. 5 billion in project loans and another external bond may be attempted as the December 2015 $650 million maturity comes due. A $1. 7 billion arbitration award to Occidental Petroleum is also pending which officials refuse to recognize, and the current account deficit could reappear as agricultural exports equally slump. De-dollarization could be in the cards with a revised banking and monetary code enshrining electronic currency but financial institutions remain unsure of its intent and impact in view of Bitcoin’s prominent troubles. This option has not been contemplated for ally Venezuela, as President Maduro announced $20 billion in long-term Chinese support along with a tweaked currency trading mechanism that will re-invite private brokers as the informal bolivar rate nears 200/dollar in a nonstop panic pattern graphic plot.

China’s Marauding Margin Creep
2015 February 6 by admin

Posted in: Asia
Chinese shares seesawed as regulators extended a crackdown on retail investor marginal loans beyond the biggest brokers after the amount reportedly ballooned to Yuan 1 trillion, following factory profits barely up in 2014 with an 8 percent drop in December. The central bank continued to inject liquidity ahead of the New Year break and sell dollars to support the currency, as reserves shrink on capital outflows at an estimated $120 billion in the last quarter. The trend may stabilize with the US Fed on hold and the ECB final launching outright QE, although outward momentum should persist with the Hong Kong dim sum bond market up to $70 billion and the government pledging additional support for overseas direct investment increasing 15 percent to $105 billion last year. With the external linkage the interbank network SWIFT ranked the RMB as the fifth most used payment unit at 2 percent of the total, with large trade and swap programs as in Venezuela where $20 billion in exposure remains. The latest PMI reading was almost 50, but the sub-index for inputs was at the lowest since the global financial crisis reflecting wholesale deflation and lagging import demand. Bank NPLs official rose to 1. 3 percent as local government and property developer concerns heighten. The IMF puts the former debt at 35 percent of GDP with half of new borrowing for rollover purposes. A Jiangsu province vehicle defaulted on notes as a major private construction firm sued authorities for payment delays. According to Bloomberg one-third of publically-traded real estate groups have more debt than equity as domestic bank loans jumped 25 percent to $900 billion in 2014 despite falling home prices. The past two years sponsors issued $20 billion annually in junk bonds and giants Agile and Country Garden get half of funding offshore. Hong Kong stayed in the spotlight after mass protests ended as the currency peg was briefly tested after the Swiss Franc’s euro ceiling abandonment. The thirty year commitment is in contrast to Switzerland’s temporary move and the monetary authority fended off immediate speculation with the aid of Russian capital flight as the related Exchange Fund acknowledged both foreign exchange and equity losses in its portfolio.

The Swiss pain was instantly felt in Central Europe, with Austria’s Raiffeisen Bank experiencing stock and bond selloff in light of its subsidiary presence adding to Russian credit woes where equity could be wiped out. Poland, Romania and Croatia have proposed relief for mortgage borrowers reverting to previous or compromise exchange rates, but will avoid Hungary’s stronger measures including punitive taxes to enforce compliance. Greek banks are in an even tougher spot as a foreclosure moratorium will likely be reinforced by the left-wing Syriza government whose candidates advocated nationalization. A Troika split would sever ECB emergency lines as deposit exodus and double-digit bond yields have resumed with a thin margin for further error.

Brazil’s Account Delay Aches
2015 February 6 by admin

Posted in: Latin America/Caribbean
Brazilian debt and equity retreated after early year gains as Petrobras continued to suspend formal financial statement release pending write-downs from the Laundry investigation and current and future investments no longer viable with the world oil price swing. The new budget introduced by Finance Minister Levy also levies taxes that will be passed on to consumers potentially reinforcing above-target 7 percent inflation as he aims to restore the primary surplus which vanished last year. The 2015 forecast is barely positive GDP growth as monetary policy is likewise tightened with the benchmark Selic already close to 12 percent. The energy cost hike could worsen with drought with widespread shortages reported around Sao Paolo. The 2014 current account gap over 4 percent of GDP was covered by portfolio and direct inflows aided by heavy central bank real intervention which will be halved to $100 million daily though the next quarter which could set the unit on a path toward 3/dollar. Another sovereign ratings downgrade has likely been avoided with President Rousseff’s second term adjustments, but banks are preparing for flat credit expansion and poor earnings as both corporate and consumer business sours without a ready macroeconomic policy fix. Mexico has fallen from earlier euphoria over structural reforms as scandals there take their toll and energy opening in particular is complicated by industry lethargy and mid-year state elections. Growth driven by infrastructure spending will again be 3 percent on the same inflation number with pass-through from the softer peso in the 14/dollar range. The central bank may have to follow the US Fed as it lifts rates and a minimum wage increase may exert pressure in the meantime. Shallow-water blocks are to be auctioned in the coming months but tenders may be shelved until global conditions settle. The government may once more have hedged against continued collapse in the derivatives market but will soon confront a budget hole with Pemex revenue loss under its watershed autonomy, along with huge fund diversions now uncovered by intense contract scrutiny.

Chile stocks are also off to a tepid start with lower oil offsetting mining export decline for a quadrupling of the trade surplus to $8. 5 billion last year. Growth should slightly improve to 2 percent with inflation just above that figure on continued peso depreciation. Copper should stabilize around $250/lb. and the Bachelet administration will proceed with education, labor and public pension expanded coverage and protection to redeem campaign promises to redress income inequality. It already raised the corporate income tax and eliminated loopholes while agreeing to inject capital at state-owned Codelco. Mila exchange partner Colombia has suffered fiscal and current account shocks from the crash in petroleum representing two-thirds of exports, with expected growth down to 3 percent in 2015. Political events will divert the agenda as a guerilla peace pact, with the ELN now expressing interest with the FARC, may be concluded and put to referendum and municipal elections take account of President Santos’ public-private partnership infrastructure success.

Indonesia’s Subsidy Switch Swat
2015 February 4 by admin

Posted in: Asia
Indonesian shares continued their double-digit upswing despite President Jokowi’s fuel subsidy savings transfer to other big social spending and the rupiah slide toward 13,000/ dollar raising offshore corporate debt servicing doubts. However an external sovereign bond was well-received and the long battered hydrocarbons industry may be poised for reconsideration with a makeover of state-owned Pertamina in the works.
The government will cap the budget deficit at 2 percent of GDP as new education, health and infrastructure programs are rolled out, and the current account gap should improve with lower oil imports and ramped up domestic capacity. Energy producers have been prominent in overseas borrowing and officials recently ordered better hedging and collateralization procedures as the $125 billion sum now tops international reserves and only one-fifth of rated companies had booked currency protection according to S&P. Dollar loans have also been taken onshore and may be 5 percent of private debt, and defaulters’ workout record has been checkered since the Asian financial crisis, with the 2013 Bumi Resources saga a case study in bad faith negotiations as UK anchor creditors were shunted. In local bonds non-residents also continue to chop exposure with currency risk and market interference from the central bank’s positions and guidelines. Malaysia has endured similar exodus with $4 billion in monthly outflows as oil exports swoon in tandem with a combined 135 percent of GDP level of corporate and household debt. External borrowing there likewise is greater than reserves and despite subsidy elimination public debt/GDP is over 50 percent. The current account may soon turn to deficit as government-linked companies have been instructed to pare outward investment. A development board credit facility is reportedly under renegotiation after terms proved too onerous and the merger between the two main Islamic banking leaders has hit the skids with the darker economic outlook.

South Korea’s corporate and household debts at respective 100 percent and 80 percent of GDP by BIS statistics also raise flags. The ten leading chaebol account for most of the former as the central bank and financial services regulator urge restructuring of the latter at 1. 5 times annual income as a stability priority. The president’s first budget contained provisions for refinancing but further relief may be forthcoming in a combination of voluntary and compulsory schemes under discussion. Stocks continue to sag with governance and earnings woes at the major conglomerates and lingering won-yen disparity as the latest Abenomics QE round quashes the Japanese unit. The Korean central bank has intervened for “smoothing” purposes, but geopolitics has taken its own toll as Northern blustering and an alleged cyber-attack have offset overtures toward resuming dialogue. Japanese retail and institutional investors remain net sellers of foreign bonds and have shunned Asian paper in Uridashi issuance, which came to a $15 billion total again in 2014, dominated by the Brazilian real, Mexican peso and Turkish lira in the EM space in a partial switch from heavy South African rand and Russian ruble.

Nigeria’s Internecine Index Debate
2015 February 4 by admin

Posted in: Africa
Nigerian shares were off 40 percent at Africa’s MSCI frontier bottom as the central bank rates and intervention were unchanged before the mid-February presidential contest, with the naira at a record low 190 to the dollar and JP Morgan threatening local debt index exclusion with bank position constraints on liquidity. One-fifth of $35 billion in international reserves was lost last year and the revised 2015 budget based on $65/barrel oil projects 20 percent for debt service. The weighting in the GBI-EM is less than 2 percent but disqualification would prompt an estimated $4 billion in outflows and test domestic institutional investor capacity to absorb the slack. Officials argue that prudential measures are temporary and are not capital controls which could justify suspension. Macroeconomic and security policies are in a holding pattern until the election result which still favors another President Jonathan term despite lead narrowing. With negative oil GDP growth this year the overall result will be 5 percent on resumed double-digit inflation. With spending and subsidy cuts the fiscal deficit will be under 1 percent of GDP and $2 billion from the excess crude account may limit future borrowing. Defense outlays to fight Boko Haram are set to increase and a joint anti-insurgent effort with Chad and Cameroon is planned for the coming months amid reports of atrocities and lost towns on shared borders. In Zambia late January polls are close on choosing a successor to complete the remainder of the deceased incumbent’s mandate through 2016. The main two parties are again at odds but a third grouping candidate, a wealthy business executive, has emerged to upset the mix. With plunging copper prices the economy is a major issue with contradictory views on Chinese investment but an IMF program skirted in campaign rhetoric. The winner is unlikely to stress fiscal consolidation in the hope that higher mining royalties will generate revenue to keep the deficit under 5 percent of GDP. Inflation at 7-8 percent on currency depreciation will exceed growth, and despite reserves at just three months imports another Eurobond is not in the cards after last year’s tumultuous attempt.

Ghana’s IMF return is also on hold as the two sides iron out policy and technical differences with no agreement in sight until mid-year. Without Eurobond access domestic borrowing needs have doubled with the cedi still reeling from the 8 percent of GDP current account hole exacerbated by gold and oil price decline. Benchmark interest rates approaching 20 percent have decimated stocks off 30 percent on an annual basis. Kenya has been an exception with a 10 percent equity gain and possible plans to issue another global bond after 2014’s debut. Lower oil prices will aid the balance of payments and the president and vice-president no longer face proceedings at The Hague International Tribunal after the human rights case was dismissed for lack of evidence. Al-Shabab attacks have affected tourism but 5 percent growth and an IMF precautionary facility may offer a counteroffensive.

The Gulf’s Suspended Oil Slump Succession
2015 January 30 by admin

Posted in: MENA
Saudi shares remained in a downtrend with the death of King Abdullah as his half-brother formally took the reins, while the Oil Minister vowed not to cut production even if the barrel price reaches $20 which could then trigger automatic rebound according to the views of OPEC counterparts. The leadership transfer should not affect stock market foreign opening, but currency NDFs moved further in the aftermath on incipient doubt about the dollar peg level, although unlike 2008 when GCC monetary integration was posited as an alternative the basic regime rationale is not under fire. With petroleum exports 85 percent of the total the trade surplus has slipped and SAMA reserves were off $5 billion to bridge 2014’s 2 percent of GDP budget deficit but are estimated at $750 billion for a multi-year cushion. Banks have another $50 billion in foreign assets so the recent spot blip to 3. 76/dollar will likely fade with repatriation of proceeds also to prepare for possible reissuance of domestic debt which once stood at 80 percent of GDP but was paid off entirely. The non-oil economy may shrink 5 percent in 2015 with spending delays and reductions, although previously pledged infrastructure and social outlays will be maintained. The security fallout from the Yemen crisis could deal another blow, with Houti rebels allied with Iran reportedly now in charge after the President resigned. Unmitigated poverty and violence could again fracture the country which is already host to an Al-Qaeda wing, analysts believe. The UAE has increased crude capacity to 3. 5 million barrels/day as 4 percent GDP growth will be flat this year as property lending and sales cooled with prudential rules and price correction. Banks’ loan to deposit ratio reverted to almost 100 percent and private sector credit restraint will be offset by big showcase projects including preparation for the 2020 World Expo. Another Dubai World restructuring was backed by a majority of debt holders and a diminished medium-term load should bolster relative safe haven status versus riskier borrowers like Bahrain, where a $300 million issue just came due. Kuwait’s public debt is under 5 percent of GDP and it has double digit fiscal and current account surpluses, but alone among the Gulf group officials have begun slashing selected fuel subsidies while leaving petrol and electricity support in place. Business will bear the brunt of the adjustment and households and their parliamentary representative have been less combative toward the royal ruling family than with past budget changes.

Qatar stocks have outperformed with a 10 percent annual gain mostly on geopolitics as regional rapprochement was signaled in advance of the annual GCC meeting in Doha, although the Saudi and UAE split over Egypt lingers. President Sisi repaid the $2. 5 billion loan taken during the Muslim Brotherhood’s term as bilateral relations remain tense. However the World Cup’s Ethics Committee cleared officials of wrongdoing paving the way for completion of the first stadium in a succession of 2022 facilities.

Capital Flows’ Cavalry Charge Cave
2015 January 30 by admin

Posted in: Fund Flows
The IIF’s January Capital Flows survey predicted another “rough ride” this year on flat $1. 1 trillion allocation, in a down trend since 2013’s $1. 3 trillion. The last quarter of 2014 saw major portfolio investment exit added to previous bets of risk aversion with the Russia-Ukraine crisis and likely Fed Reserve rate retracement. Macroeconomic fundamentals are mixed with lower oil and commodity prices’ respective fallout on importers and exporters, although current account deficit countries like Brazil, Indonesia, South Africa and Turkey are better positioned than during the earlier “taper tantrum” with policy changes. Geopolitical and political tensions will linger, with the latter in Europe focusing on elections where anti-Euro populists and extremists could hold sway. Partial recovery could come in 2016 to $1. 2 trillion, aided by low valuations and continued global fund diversification, but even then the 4 percent of GDP figure would be only half the peak a decade before. Resident outflows in the thirty economies tracked in turn will dip from $1. 4 trillion to under $1. 3 trillion despite continued Russian flight and $300 billion in reserve recycling as Gulf wealth pools in particular pare commitments. The group estimates with regular official data that inward debt and equity totals were $140 billion and $75 billion as stocks increased from one-fifth to one-third the total. In the fifteen countries with high-frequency reporting institutional rather than retail investors dominate activity and they will hesitate to raise exposure with lackluster 4 percent-plus average GDP growth just two points above advanced economies. Lower inflation will benefit most and allow for rate cutting outside big oil exporters like Nigeria also worried about currency depreciation. According to EPFR mutual fund and ETF emerging market weight at 12 percent of global portfolios is at a post-crisis low, and BRIC selloff has been especially notable with the exception of India’s recent turnaround with the Modi government. Corporate and sovereign spreads at now at a premium to comparable US asset classes and the forward p/e ratio at 11 is at an historic discount to mature markets’ 15 also presenting a valuation case although energy company earnings have further to drop. These plays can be easily accessed by dedicated ETFs routinely employed by 20 percent of long-term insurance and pension funds, statistics show.

Bank lending has also skidded since mid-2014 with Europe off sharpest as Asia’s overseas liabilities, half of the total and concentrated in China more than doubled in five years to $1. 7 trillion. Latin American facilities also jumped for the period, led by Brazil, Colombia and Peru, as Middle East and South African ones languished. Turkey was Europe’s exception with flows rising to over 10 percent of GDP and increasingly from US banks. Frontier market reversal has been prominent into 2015 with the MSCI index negative and bond yields spiking as portfolio and direct investment were unchanged last year at almost $150 billion. Only Asian components are relatively stable while twin deficit and commodity-export countries in EMEA will be “tested” by less adventurous spirits, the study comments.

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The World Bank’s Space Exploration Modules
2015 January 26 by admin

Posted in: General Emerging Markets
The World Bank’s Global Economic Prospects publication predicted another developing region year of below 5 percent GDP growth despite global stimulus and the chance to open “fiscal space” by further reducing endemic fuel subsidies. It postulated tighter external financing conditions which could erode record runs of sovereign issuance increasingly from poorer countries and corporate access from Chinese developers and other borrowers facing domestic credit constraints. East European currencies will continue to be whipsawed by Eurozone and Russia-Ukraine conflict developments and commodity prices in agriculture and metals will also be “soft” through the medium term in part due to the stronger dollar effect. For most oil exporters current values are under budget breakeven levels but large accumulated asset and reserve pools can cushion the blow. World trade continues to increase marginally with new supply chains, import demand compression and export credit scarcity, the Bank believes. “Disappointing” 2014 GDP growth at 4. 5 percent was due to terms of trade, policy confidence and monetary shifts across emerging and frontier economies, with fiscal deficits particularly high in the latter covered by debut bonds as government debt doubled post-crisis from 30 to 60 percent of GDP. Inflation has vacillated and was above target in Brazil and Turkey as Hungary and neighbors entered deflation. Double-digit unemployment has festered in the Middle East/North Africa and big Asian and European markets are experiencing population and productivity slowdown. Low income countries in Africa and elsewhere averaged 6 percent growth but often rely on remittances to aid domestic consumption which fell to CIS recipients from Russia. To cut global poverty as defined by $1. 25 daily income will require sustained 4 percent output expansion as the Millennium Development Goals are reviewed at an upcoming UN conference. Average developing country bond maturity has lengthened since 2008 and approaches 10 years for Latin American corporates but foreign ownership of local government paper is often at 20-30 percent in major markets. “Disorderly unwinding” of China’s debt buildup is a small probability with budget and international reserve capacity and bank and capital controls but 5 percent decline in the 40 percent fixed investment rate would shave half a point from global activity. The Ebola epidemic may cost West Africa from $3-30 billion depending on containment progress but the tax revenue and health system implications will last beyond the outbreak course as cross-border commercial and travel patterns are also interrupted.

The report urges China to continue its campaign against shadow banking and implement other changes from a 2013 blueprint including deposit insurance and municipal bond development. For the emerging world it expects more accommodative monetary steps with attention to foreign currency risks but doubts the ability to conduct countercyclical fiscal policy as in the recent past with primary balances in three-quarters of international capital market-access members below the stability threshold. Structural reform priorities include better licensing, tax, customs and judicial practice as well as bottleneck removal in the infrastructure space, the Bank concludes.

Central Europe’s Mortgage Mortification Moral
2015 January 26 by admin

Posted in: Europe
Central European currencies and stock markets reeled with the Swiss National Bank’s surrender of the multi-year euro-franc ceiling reviving mortgage worry that had faded since the decision. In Poland total CHF debt is over 9 percent of GDP, with household borrowers representing 7. 5 percent, and the opposition Law and Justice Party noting Hungary’s populist schemes has campaigned on a reduction platform which may now be more fully embraced with the sudden consumption and debt-servicing blow to the economy. Domestic demand continues to be the main driver of 3 percent GDP growth and should be helped by lower oil prices and EU projects, but with deflation the central bank was expected to cut rates before the Swiss franc surprise. The fiscal deficit was due to exit Brussels’ excess procedure near-term as public debt dropped to 45 percent of GDP with private pension Treasury bond cancellation. Exports have collapsed to Russia and Ukraine but a small current account surplus is projected and direct and portfolio investment inflows remain positive bolstered by a 2-year $22 billion flexible credit line. The backstop has offered non-residents comfort to retain 40 percent of local debt, but may not be tapped just for mortgage refinancing. Hungary escaped the worst with the recent EUR 15 billion conversion under November market rates allowing a 25 percent external debt drop through 2018, despite EUR 1 billion in continued bank funding retrenchment. The loan/deposit ratio is down to 100 percent and the one-quarter NPL ratio for foreign currency mortgages should ease to foster 2. 5 percent consumption-led growth this year. With negative inflation the central banks should again lower rates as the budget gap meets the 3 percent of GDP Maastricht target. A few big foreign investors like Templeton have held positions but the overseas share of domestic debt has been trimmed with public liabilities still at 80 percent of output and unchanged post-crisis. With the mortgage escape main listed bank OTP was buoyed but it still has losing operations in Russia and Ukraine as the MSCI index crumpled 35 percent on an annual basis. Czech shares also slid double digits as it moved toward a minor current account deficit on 2. 5 percent growth and no inflation, but the euro-koruna cap came under scrutiny with the Swiss ready abandonment. Officials maintain that the regime will last through 2016 unless price raises suddenly attain the 2 percent goal and the hodge-podge ruling coalition without a common monetary view is unlikely to advocate for immediate change, analysts believe.

Romania stocks were caught in the maelstrom with a 30 percent annual loss after the central bank earlier eased reserve requirement for FX liabilities with lending off 10 percent in 2014. President Johannis, an ethnic German from the opposition party, took office with a pledge to press hundreds of corruption cases as EU and IMF missions endorsed the 2015 budget as the latest program tries to avoid repossession after delinquency.

India’s Lashed Lazy Habits
2015 January 20 by admin

Posted in: Asia
Indian stocks after a 2014 20 percent MSCI gain on record $15 billion foreign investor inflows sold off as the parliamentary session ended without passage of tax, land and insurance reforms, although prime minister Modi used his decree power for temporary approval before the body reconvenes in several months. The measures blocked by the upper house where the ruling BJP coalition is a minority would introduce a national VAT levy, lift international life and non-life participation from 25 percent to 49 percent, and ease consent and compensation rules for rural infrastructure development. To build momentum for another push the economic team is pressing initiatives to promote manufacturing and reduce “lazy banking” in Modi’s words though $25 billion in partial state lender divestitures, around half of estimated system recapitalization needs to meet new standards and handle the true 10 percent-plus NPL total. He hinted at senior management changes and promised less government interference in operations to accompany the transactions. In manufacturing the charge is led by a technocrat formerly with consultants McKinsey and aims to double its current 15 percent share of GDP to lift 5 percent growth. The China and East Asia model will be shunned in favor of “bottom-up innovation” for emerging industries like solar. The Power Ministry will support $250 billion in renewable energy projects through end-decade under the plan which also allocates $100 billion for rail and transport to encourage spinoffs and eliminate bottlenecks. Chief economic adviser Subramanian, recruited from the Peterson Institute in Washington, may advocate looser fiscal policy for the drive as the central bank monetary stance may also relax with the latest 5 percent consumer inflation reading. However rupee weakness ,the persistent current account deficit and privatization glitches as with the resumed Coal India attempt facing worker protests may delay such moves as the administration has also been busy with overseas engagement. At the WTO it allowed a trade facilitation pact to proceed after initial scuttling and a high-level dialogue was recently held with the US with Secretary of State Kerry lauding progress in the prime minister’s home state of Gujarat.

Traditional close ties with Sri Lanka may in turn be restored after the surprise 51-49 percent defeat of two-term President Rajapaska by opposition alliance candidate Sirisena, his former Defense Minister who led the final anti-Tamil rebel campaign in the decades-long civil war. The regime had cultivated $5 billion in Chinese loans and commitments post-conflict with a $500 million container port just completed with a nearby $1. 5 billon reclamation project underway. Reconstruction, tourism and agriculture underpin 7 percent growth, and despite high fiscal and current account deficits and the absence of an IMF program consecutive sovereign bond issues were oversubscribed. The incoming President drew backing from an anti-incumbent wave of groups and parties without a common agenda but he vows to reverse the post’s authoritarian bent and investigate the Chinese ventures for possible corruption. After a 15 percent MSCI climb last year the stock market surged on opposition victory, as UN human rights investigators continue to delve into alleged habitual abuses in his old capacity.

Fund Outflows’ Anguished Encore
2015 January 20 by admin

Posted in: Fund Flows
EPFR’s 2014 fund numbers tallied another year of $25 billion equity outflows in almost all regional and thematic categories, while the bond exit was cut two-thirds to $8 billion with hard currency improvement. The poor showing culminated in record December damage according to the IIF’s monthly portfolio tracker. All stock regions—global, Asia, Latin America and EMEA—were negative, with Russian selloff throughout the complex account for over half the total. India had a $4. 5 billion standout gain with China and Greater China together off $9 billion. Mexican losses close to $3 billion were five times Brazil’s, as Europe and Africa were down $3 billion and $250 million respectively. By acronym groups BRICS, CIVETS and MIST were in the red an average $2 billion, while the generic frontier strategy had the lone inflow at $1. 5 billion. Developed market equities took in $185 billion in comparison last year, with $85 billion and $15 billion separately to the US and Japan. By overall sector commodities and precious metals had $15 billion in net redemptions, while energy and healthcare were the big winners at $40 billion between them. In bonds external sovereign and corporate funds managed a $4 billion influx offset by almost $12 billion in local currency flight. By country Brazil China and Russia vehicles suffered the most as Asia-Pacific was the laggard in industrial markets receiving $150 billion in total. The better fixed-income allocation was reflected in benchmark index performance with the EMBI Global Diversified up 7. 5 percent and the CEMBI 3. 5 percent, against the GBI-EM domestic gauge sliding 5. 5 percent in dollar terms. Sell-side houses predict low single-digit advances in 2015 as US Treasury strength wanes and commitments from institutional investors not captured in fund data resume at $20 billion-plus. Combined sovereign and corporate gross issuance should again near $500 billion, as they maintain average investment-grade ratings despite another year of 4 percent GDP growth just 1. 5 percent above advanced economies. With quantitative easing forecast for both the Eurozone and Japan to counter Fed rollback, the yield differential should remain around 6 percent for emerging markets although most will either reduce or keep on hold their own interest rates.

The MSCI core index fell 4. 5 percent for the year and the frontier one rose 3 percent but most countries were down in the two measures. Asia led the main pack with double-digit spurts in India, Indonesia, the Philippines and Thailand while in Latin America just Peru and in Europe Turkey were ahead. Egypt topped the list (+25 percent) but Gulf graduates UAE and Qatar faded in the homestretch for more modest performance. Sub-Sahara Africa plunged 15 percent on its sub-index with Kenya (+20 percent) the outlier. Central Europe’s decline was equal as Estonia’s was double at almost 35 percent. Bangladesh was the pacesetter (+45 percent) and Argentina was up over 15 percent as the lone Latin America representative alongside Trinidad and Tobago’s 9 percent despite the onset of energy export anguish.

China Property Developers’ Foundation Cracks
2015 January 15 by admin

Posted in: Asia
Chinese real estate company Kaisa with $2. 5 billion in offshore debt failed to repay loans and bonds as its Hong Kong stock market listing was suspended and its credit rating placed at selective default. According to Dealogic, the sector issued $40 billion the past two years as the mainstay of the high-yield space where spreads have spurted to 1000 basis points over Treasuries for a loss so far in 2015. The builder’s short-term notes have tumbled to 25 cents on the dollar and follow falls last year by Agile and Glorious Property as executives were accused of mismanagement on below-target sales. Bond prices have held up in contrast for industry leaders Vanke and Wanda despite price declines in almost all the 40 cities tracked as local governments removed curbs and the central bank tweaked reserve requirements to allow more commercial and residential lending. Asia’s projected corporate default rate may be raised from the low single digits with the mainland troubles that may not spare even the state oil giant placing $15 billon abroad since 2009 as it confronts a revenue squeeze. The BIS has noted the outsize presence of both China and Brazil in over $1 trillion in dollar issuance over the period, and pointed to the danger of currency mismatches as the renimbi marginally weakens. It believes the amount may be understated with frequent use of offshore vehicles hiding nationality and misclassifying the investment as direct rather than portfolio as funds are sent to headquarters from affiliates. Emerging market corporates raised $370 billion in 675 deals in 2014 by Dealogic figures with Asia accounting for half. Chinese borrowers with $215 billion are ahead post-crisis, followed by Brazilian ($190 billion) and Russian ($125 billion) ones with economic slowdown and softer currencies in store for the trio. The CEMBI universe must meet $100 billion in maturities and $85 billion in coupons this year, sources estimate, a jump from 2014 when the index returned 3. 5 percent and dedicated fund inflows were resilient unlike sovereign counterparts. Participants cited continued buoyancy in primary markets but noted meager secondary trading without dealing capacity in view of asset class priority and regulatory restrictions through Dodd-Frank and Basel III provisions. The IIF completed a recent study of general EM debt market-maker erosion since 2000 finding an 85 percent volume and 50 percent trade size drop in proportional terms along with wider bid-ask margins.

The World Bank joined the chorus of private sector debt concern in charting a 40 percent recent household and corporate rise in its January Global Economic Prospects update. For sovereigns it offered a series of threshold indicators for caution such as external debt/GDP in the 30-50 percent range and 135 percent for short-term obligations/reserves. Most developing counties were not an imminent risk but often flashed warnings with the measures, which will always be cast within the global market structure on near-term shifting ground, the Bank suggests.

Credit Ratings’ Consoling Convergence Conniptions
2015 January 15 by admin

Posted in: General Emerging Markets
In a mixed ratings gaze, index provider JP Morgan acknowledged emerging-developed market convergence “halt” with corporate and sovereign downgrades again topping upgrades last year, but doubted that heavy weight counties would soon lose their investment-grade position as the average in the main local and external benchmarks. One-quarter of global ratings are now BBB, and developed world upgrades in 2014 were quadruple downgrades while the respective developing economy numbers were 15 and 40 and negative outlooks are twice positive ones. Mexico, Peru, Latvia and Lithuania were among the winners as the EMEA region was most demoted including Ukraine, Ghana and Serbia while Latin America marks fell in Argentina, Venezuela and Costa Rica, and Asia’s only victim was Mongolia. Brazil, South Africa and Turkey are likely to retain prime status in the near-term, but Russia is a “migration risk” as S&P already placed it on negative credit watch implying 50 percent odds of a cut in the next quarter. Commodity exporters and speculative frontier country issuers may also be re-evaluated including Barbados, El Salvador, Nigeria and Zambia, while upgrade candidates are just a handful and not unanimous among the three agency giants. In the Eurozone France has a negative outlook and Italy could go to BBB, but few 2015 actions are expected despite the return of regional stress associated with the Greek elections and its Troika program exit. In the corporate realm the upgrade/downgrade ratio was 0. 6 with Asia and the Middle East-Africa outperforming Eastern Europe and Latin America with an average of 50 reductions in each area. Companies from Colombia, the Philippines and Vietnam went in the other direction, and South Africa had almost 10 downgrades with electricity provider Eskom teetering on junk status despite state budget injections. The high-yield segment has been hit harder including Chinese property and metals, Brazilian infrastructure and Russian consumer goods. In Latin America quasi-sovereign oil and gas names will probably be rerated, along with banks heavily exposed to the industry.

According to the analysis the EMBIG diversified with its one-fifth frontier component could be first to dip below investment grade with ten countries currently on negative outlook/review by Moody’s and S&P. Lebanon is on the list with its 150 percent of GDP debt burden and annual 30 percent public financing needs due to rise with internal and external political instability. Lower energy prices may help selected importers in jeopardy but have triggered broad re-assessment of Gulf credits after regaining their footing after the Arab Spring and Dubai restructuring. Saudi Arabia has an estimated $750 billion in foreign assets but will run a 2015 fiscal deficit and plans to issue domestic debt to bridge it. Dubai World has postponed upcoming maturities with another proposed bank and bondholder deal after the original backstop was extended by Abu Dhabi at peak world oil values. Bahrain which was the worst MSCI equity market in 2014 with a 35 percent loss could see its fortunes diverge further with allies’ diminished support supplementing sectarian splits.



Haiti’s Resigned Rebuilding Retreat
2015 January 13 by admin

Posted in: Latin America/Caribbean
The Prime Minister resigned amid continuing election standoff as the IMF emphasized “downside risks” in its last program installment on the fifth anniversary of Haiti’s epic earthquake. The US and other major donors dispatched envoys to urge holding of long-delayed parliamentary polls before President Martelly’s term expires later this year as he tapped a former mayor as the PM’s interim replacement. The government reshuffling accompanied 2014’s 3. 5 percent GDP growth and 5 percent inflation with slowing clothing exports and 5 percent currency depreciation. Both the fiscal and current account deficits over 5 percent of GDP were mainly funded by Venezuela’s Petrocaribe inflows along with remittances and government bank deposits. The central bank raised the gourde reserve ratio to 37 percent and the benchmark bond rate 200 basis points, but the tightening may have encouraged dollarization as annual lending growth fell to single digits on NPLs at 3 percent. The international oil price drip aids the terms of trade but could curtail Petro Caribe lines at 3 percent of output thus requiring further changes in the loss-making state-run electric company, the Fund cautions. In 2015 growth may slip slightly but the budget gap may narrow on higher tax revenue at 15 percent of GDP. Domestic debt service will increase to clear arrears and Treasury bill issuance will go toward paying a civil servant wage hike. On utilities the fuel subsidy burden should ease with lower global prices but progress has been slow in modernizing the sole hydroelectric plant with Inter-American Development bank support. International reserves just over $1 billion meet fourth months’ imports but future currency intervention should more selective, according to the final program report. Financial intermediation is constrained by the stiff reserve requirements and related party credit is another weakness. Preferential US trade legislation can be better tapped with infrastructure and skills improvement, and investors are also deterred by poor economic statistics which could be a focus of future assistance.