No More Learning

Inflation has dipped below 6 percent on reduced oil and food costs keeping the benchmark rate steady, but local bond yields approached 8 percent on expectations exchange rate pass-through and foreign investor outflows could prompt tightening. President Zuma embroiled in corruption and spending probes has maintained minimal visibility on the first anniversary of Mandela’s death and has not openly endorsed fiscal consolidation at odds with ANC union member wage and social pleas. On the foreign policy front he has also been silent on President Mugabe’s purge of top officials in Zimbabwe after his deputy was accused of coup-plotting. He named a former security minister loyalist almost age 70 as vice president defying rumors of grooming his wife as successor as the MSCI Frontier component fell 10 percent extending Sub-Saharan Africa’s 2014 correction. The intrigue followed preparation of a new IMF staff-monitored program at a “crossroads” as domestic reform and international creditor normalization lagged post-election. Growth will end the year at 3 percent on massive company manufacturing and mining shutdowns despite ample agricultural harvests. Inflation will be near zero on foreign currency use and reserves meet less than a month’s imports on a 20 percent of GDP current account chasm funded by Chinese and private borrowing and chronic arrears buildup. The government wage bill rose 15 percent on campaign promises, and the banking sector continues to contend with a near 20 percent NPL ratio.

The Fund foresees “sluggish” growth in 2015 as fiscal policy aims for primary balance through civil service rationalization. Diamond industry royalties will be revised with the state-run company to publish annual accounts. Over $250 million in securities were issued to cover unpaid bills which declined last year. Central bank recapitalization is in course as the government assumed non-core debt and treasury deposits were transferred from the commercial system. A lender of last resort pool may be established with outside technical help as the number of problem banks was halved. A special purpose vehicle will be launched to centralize and resolve problem assets alongside a credit register as stricter capital standards are phased in by end-decade. External debt distress lingers despite more concessional Chinese borrowing and minimal Bretton Woods institution payments which would still not pave the way for HIPC relief. The indigenization law will be clarified by March with detailed guidelines for foreign direct investors as portfolio players brace for further shocks.

Korea’s Cinematic Stagnation Staging
2015 January 2 by admin

Posted in: Asia
Korea shares continued to decline after brief foreign investor inflows on the North’s reported cyber-attack against Sony Pictures in the US to prevent release of a film comedy about the Great Leader and the Finance Minister’s 2015 economic downgrade with longer-term stagnation warnings. Washington threatened retaliation and China urged a halt to such hacking it is also said to sponsor as nuclear facilities in the South were also recently targeted. The won has tumbled to 1100/dollar in the wake of the yen’s record plunge under additional monetary expansion, with next year’s growth revised to 3 percent on 2 percent inflation and less than 5 percent export increase. To support the currency the central bank has occasionally intervened and relaxed capital inflow controls on derivatives. The benchmark rate has stayed flat on 1 percent November inflation aided by reduced oil import costs. Authorities are wary of further household borrowing with debt approaching $1 trillion, and fiscal stimulus in the latest budget has been relatively ineffective with poor consumer sentiment. The chaebol continue to come under legislative and activist pressure to raise dividends and corporate governance standards although the President has backtracked on her campaign breakup platform and big shareholders were recently stymied by Hyundai Motors $10 billion purchase of Seoul financial district real estate against the wishes of critics like Templeton Funds. Samsung with mixed earnings is facing global investor divestiture demands to boost value as original family owners show little sign of relinquishing control. The business culture of impunity was also tested as sentences were handed down for the ferry sinking claiming hundreds of student lives which families did not consider harsh. The anti-conglomerate thrust has lost momentum as cross-border auto and technology competition intensifies with Japan after Abenomics’ renewed election mandate. The Prime Minister’s ruling coalition shed just a few seats with the weak opposition despite negative Q3 growth and capital spending. The second sales tax rise has now been shelved even with a Moody’s sovereign demotion on the decision, and the 2 percent inflation goal delayed for the medium term. The “third arrow” structural reform elements of the program have leapt to the forefront with the convincing win as the free-trade TPP with the US may gain agricultural and industrial backing after previous negotiation impasse.

China was originally excluded but Washington has revisited the prospect for a bilateral investment treaty as the Republican-led Congress prepares to convene through the remainder of President Obama’s term. The PMI again dipped under 50 as 7 percent GDP growth has surfaced as the official 2015 target despite leaner housing and fixed investment indicators. Producer prices show deflation as the renimbi has slipped 2 percent against the dollar under the wider fluctuation band. Total social financing returned to the RMB 1 trillion monthly mark as the central bank injected liquidity and may further loosen reserve requirements. The Shanghai exchange was buoyed by new retail accounts shifting from shadow wealth products under fire and from bonds subject to tougher disclosure which have choked local government emissions.

Nigeria’s Stretched Band Recoil
2015 January 2 by admin

Posted in: Africa
Nigerian stocks were down 30 percent on the MSCI Frontier Index after the central bank raised the benchmark interest rate and depreciated the currency band almost 10 percent to the dollar, as the Finance Minister scrambled to slash the budget around a $65/barrel oil price. The naira promptly fell through the floor toward 185 to the dollar prompting intervention from $37 billion in reserves or half a year’s imports as overnight borrowing rates touched 45 percent in a bank cash squeeze. Inflation should again reach double-digits on devaluation and food and transport disruption in the North from the Boko Haram siege as GDP growth slides to 5 percent. The budget deficit will stay at 2 percent of GDP but may draw on $4 billion in the excess crude account as lower fuel subsidy cost aids spending. Petroleum production is just over 2 million barrels/day as the Delta region focuses on security challenges and the upcoming February election with the ruling PDP party ahead in opinion surveys. President Jonathan is on track to get the nod in his own right but even business loyalists are clamoring for a shakeup in economic and anti-terror policymaking. As foreign investors have dumped debt and equities local counterparts are hoarding dollars pending new government moves, as the long-delayed petroleum reform bill may be abandoned for a fresh model with the global price slide and alternative energy competition. The continent’s other leading source Angola based the 2015 budget on $80/barrel with a 5 percent of GDP deficit which was to be partially covered by a Eurobond. The $5 billion sovereign wealth fund managed by the president’s son has begun allocation, but that amount already went separately to a bailout of Portuguese bank BES’ local arm as Fitch downgraded the BB- rating outlook to stable. Before the collapse, system NPLs were one-tenth the total, with the Dos Santos administration in arrears to contractors on weak 4 percent growth. The main liquefied natural gas plant suspended operations and exploration for off-shore pre-salt deposits has yet to be completed, as the IMF in post-program monitoring urged greater transparency and infrastructure building within 40 percent public debt/GDP. Gabon is another oil giant with bond jitters despite a $10 billion economic diversification plan as onshore fields are exhausted ahead of 2016 elections. President Bongo may face a stronger run from a new opposition group led by the former chair of the African Union, especially if subsidies and salaries are trimmed and debt placement on the Francophone regional bourse becomes more expensive.

Copper has also been a big commodity loser roiling Zambian paper ahead of January elections to choose a successor after President Sata’s death. His Patriotic Front party will present a candidate to fill the remainder of the term until 2016, and spending will likely worsen the 5 percent of GDP fiscal gap with IMF talks on hold as intervention strings along kwacha correction.

Africa’s Tethered Trade Finance Hub
2014 December 29 by admin

Posted in: Africa
The African Development Bank after approving a $1 billion export credit support program completed a 45-country survey of 275 banks noting unmet demand over $100 billion, or one-third existing lines. Default rates at 4 percent are quadruple the average in other regions, but still lower than the overall NPL ratio as the activity accounts for over 15 percent of earnings. Limited dollar liquidity and confirming bank risk parameters for letters of credit are major constraints, but three-quarters of respondents plan near-term balance sheet and off-balance sheet expansion. Intra-African trade is only 10 percent of the total and during the 2008 global financial crisis facilities were cut with higher costs and shorter terms and stiffer collateral conditions, according to the study. The respondents were a cross-section of local and foreign, and state and privately-owned institutions, with North and Southern African ones the largest. Return on equity was 15 percent as of 2012 and bad assets were 9 percent and concentrated in government-run groups. In the sample 95 percent were involved in export finance, and its income contribution was greater in conflict and oil-importing countries. Guarantee and L/C volume is more from developed-country based sponsors and their amounts typically exceed normal loans and revolving credit. The BIS estimates global trade finance around $7 trillion, half in the Asia-Pacific, which puts the continent’s share at 5 percent. African banks issued an annual 400 L/Cs with median value of $2 million, and the fee was between 0. 5-1 percent, with the upper range in Central and East Africa. The rejection rate was 10 percent, with the absence of central credit registries often cited as an obstacle. Among currencies, 80 percent were in dollars, with the rest in euros and renimbi and Basel III prudential guidelines will further shrink exposure from traditional Western players such as Standard Chartered, Citigroup and HSBC, the review notes. Less-dominant confirming banks are also found in all sub-regions and the Cairo-based Afreximbank has joined as a multilateral agency. With GDP growth expected to average 5 percent according to the AfDB the majority polled expect needs will remain unmet due to foreign exchange, capital and creditworthiness drags, and the Development Bank’s pool can only cover a “fraction. ” In 2009 international financial institutions combined for $4 billion in assistance, but the shortage has since worsened, the paper concludes.

While AfDB headquarters was returned to Abidjan, it chose Casablanca, an aspiring cross-border hub, as the domicile for the $3 billion Africa50 infrastructure fund. Morocco’s BMCE focused on trade is in 15 countries, and the IMF predicts 4-5 percent growth in 2015 with tourism and auto-related FDI improvement. Despite the 5 percent of GDP fiscal deficit and cautious subsidy reform Fund program compliance enabled smooth euro 1 billion bond placement and stock exchange performance has been positive. President Kaberuka praised the vehicle launch as the search intensified for a successor after his two terms colliding with commercial finance mobilization.

Hungary’s Recanted Mass Conversion
2014 December 29 by admin

Posted in: Europe
Hungarian shares were off 25 percent for the worst Central Europe MSCI result as ratings agencies reaffirmed the BB+ sovereign grade but highlighted greater banking system fragility with the latest foreign currency mortgage conversion order. Prime Minister Orban reiterated his goal of asserting domestic lender dominance as Austrian parents prepared for additional write-downs with NPLs already at one-fifth the total. The household redenomination cost will top EUR 10 billion but the exchange rate will be close to market as the central bank offers a reserve backup line. Economic growth is set to slow to 2. 5 percent on lower EU-aided public investment and Eurozone lethargy, but the currency and bonds could rally indirectly with ECB official buying in an expanded quantitative easing program. With reduced food and energy expense deflation has taken hold despite the forint above 300/euro, and benchmark rate cuts could resume. The 2015 budget is designed within the 3 percent of GDP deficit target, but informal sector collection may be overstated and the government has already retreated on an internet levy after popular uprising. Remaining private pension portfolios may be commandeered as a loyal base at home and abroad is sought for debt placement with the ratio frozen at 75 percent of output. Polish equities declined less than 10 percent as Q3 growth over 3 percent was the best in 2014 with the zloty firm against the dollar. After a 50 basis point drop the monetary authority paused as agricultural prices continue to recede with the Russian import ban. Public debt has fallen to 50 percent of GDP with private pension takeover cancellation, and the new prime minister will continue state enterprise stake sales for further revenue. She is considered an able steward in advance of 2015 elections, with the opposition Law and Justice Party currently the opinion favorite. Early predictions point to another coalition and euro entry is unlikely to feature on any platform despite Lithuania’s joining in January as the timetable slips to the next decade. In the Czech Republic the MSCI Index is positive on a balanced current account and record trade surplus with the fixed 27/euro rate due to last into 2016. Consumer sentiment has picked up along with inflation possibly nearing the 2 percent goal next year, although political backlash along income and generation divided in the Slovak Republic has raised border concern and reinforced aversion to near-term single-currency adoption there as well.

The three countries were also cited in a December BIS warning on corporate external borrowing through offshore affiliates estimated at $250 billion or half the five-year post-crisis sum through 2013. When the proceeds flow to headquarters they are classified as FDI in official statistics although they may have speculative effects and purpose more like “hot money,” according to the quarterly review. Overseas funding exposure may be 50 percent above the figure captured in banking and debt categories in balance of payments accounts, as groups acting as “surrogate intermediaries” may find their fertility wane.

The Philippines’ Hemmed Hurricane Resistance
2014 December 22 by admin

Posted in: Asia
Philippines debt and equity maintained double-digit gains as another massive December typhoon lashed the islands, with resident evacuations and property defense carried out pre-emptively with advance warnings. The sovereign investment-grade rating was lifted a notch despite GDP growth leveling to 6 percent on reduced government spending after a unilateral President Aquino scheme was dismissed by the courts. It will be superseded in 2015 by the long-planned public-private partnership regime designed for infrastructure, as lower oil prices also limit inflation to the 2 percent target and aid domestic consumption. However worker remittances from the Gulf could suffer as the peso has buckled below 45/dollar. The central bank has held interest rates but bank deposits have shifted to foreign currency as political drama unfolds over a possible presidential second term bid despite sagging popularity ratings. Business executives have applauded his anti-corruption problem-solving stance but note a lack of common touch in part due to the historic pattern of family dynasties at the helm. An open succession campaign would have front-runners from the main parties but could see independent candidates intent on appealing to an untapped youth vote, according to observers. This base was instrumental in Indonesia’s nod to President Jokowi, who immediately alienated it with a 30-percent fuel subsidy increase saving half a percent in output as he followed through on campaign hints. Angry demonstrations ensued but better food distribution may slash staple costs to offset the blow. The foreign direct investment agency has been recast as a one-stop shop and longer term strategy call for return to net energy exports with hydrocarbon law and royalty overhaul. Growth will again be just 5 percent next year and the rupiah has tumbled toward the 13000/dollar mark as monetary policy has tightened. Officials are closely monitoring global climate negotiations in Peru as China, a major coal customer, has already pledged a 25 percent carbon emission cut over the next decade. The current account gap is projected indefinitely at 2. 5 percent of GDP and foreign bond funds have recently turned cautious with state banks and pension funds exerting more influence.

Malaysia in contrast has experienced across-the-board asset selloff as the region’s sole oil exporter with the ringitt at a post-crisis low as the central bank slams undue “speculation. ” Public debt/GDP may crack the 55 percent statutory limit with the relentless price decline although prior subsidy removal may cushion the budget drag. Value added tax will go into effect the next quarter and fixed investment may soften despite projects in course under the Prime Minister’s Economic Transformation Program. Petronas shares have dragged the MSCI Index to an over 10 percent loss as the government hydrocarbon giant tries to diversify overseas, most recently with an Argentina shale deposit deal. The airlines investigation continued in Ukraine as experts got access to the presumed missile site and authorities may have to contend with additional liability claims as the family storm continues over a missing predecessor.

Honduras’ Asylum Seeking Recognition
2014 December 22 by admin

Posted in: Latin America/Caribbean
Honduran bonds rallied as a Central American overweight with the IMF inking a 3-year $100 million facility as the new government embraced fiscal and monetary discipline despite dubious law and order progress as child immigrants continued to flee violence and an international beauty contest winner was murdered. GDP growth is forecast at 3 percent next year on US remittance and trade upswing on lower inflation at double that level with fuel price relief. The fiscal deficit should come down to 3 percent as public debt is restrained beneath 50 percent of GDP. The current account gap remains steep at 7. 5 percent but an FDI and tourism campaign aims to boost coverage. Guatemala is considered a model with revenue up 5 percent on two million leisure and business arrivals, enabling higher growth through ancillary services and official debt at only 25 percent of output. Panama has kept its status as growth leader but the rate has cooled to 6 percent as public works outlays breach the fiscal responsibility law 2 percent deficit ceiling. Canal earnings rose 5 percent but the expansion is a year behind schedule and larger vessel traffic will not accelerate until 2016. The Dominican Republic’s GDP showing has been similar with remittance and visitor surges and a deal on Petro Caribe debt to Venezuela may be struck at a discount paving the way for further commercial issuance in the absence of an IMF arrangement. Gold exports have provided support after mining rules were clarified and border tensions with Haiti have eased fostering joint ventures. Costa Rica’s new administration has scrambled to regain momentum after a big computer maker closed and a 10 percent currency deppreciation against the dollar, with tax collection and better business climate key priorities. Public debt is in the 60 percent of GDP danger zone and the sovereign rating outlook is stable after investment-grade loss but dedicated buyers await bolder consolidation measures. Negative parallels are drawn with El Salvador with a steeper ratio and party gridlock unable to agree on reforms with the economy operating well under potential. Banks there criticize recent imposition of a transaction tax as upcoming legislative elections are expected to again loosen the purse strings.

In the Caribbean Jamaica’s MSCI index is off 5 percent as it too is in hock to Venezuela’s Petro Caribe within the 130 percent debt/GDP ratio. The IMF program is broadly on target but growth is just over 1 percent on flat tourism performance. International reserves jumped to $2 billion after an $800 million bond placement but the current account gap may again approach 10 percent of output without sizable direct investment gains to cover it. Barbados continues to dodge the Fund’s grip with last-gasp budget adjustments but debt is stuck at 100 percent of GDP on near recession. Local banks, insurers and pension funds must fill the hole as regional players seek other island havens.

The Gulf Trio’s Oil Swing Swipe
2014 December 16 by admin

Posted in: MENA
OPEC powers Saudi Arabia, the UAE and Kuwait sold off shares as cartel production stayed constant despite the 30 percent global oil price slide in recent months. The Saudi minister in charge hinted at a Vienna headquarters meeting that output may be curtailed to just over 9 million barrels/day next year, which would place the onus on infrastructure spending to extend 3 percent GDP growth. The MSCI component had rallied 10 percent before the decision on a popular IPO from National Commercial Bank offsetting the fallout from the resignation of a telecom firm executive for alleged accounting misrepresentation. The US-trained regulator has vowed a harsher stance against abuses in the run-up to broader international opening. With the petroleum export blow the exchange rate peg has come under forward pressure in a repeat of the immediate post-2008 aftermath, although Monetary Authority foreign assets have since soared toward $750 billion and could be liquefied in an emergency. The central bank may decide to hike rates before the Fed, which could choke double-digit private sector credit expansion to support the non-energy economy. The UAE’s Emaar real estate listing hit the daily allowable bottom on new overheating fears as Dubai World moved to extend a 2018 repayment lump another 5 years after comfortably meeting 2015 obligations with asset sales. Its draw as an international education hub also came under scrutiny following attacks on teachers and alleged labor standard violations. Headline inflation has worsened to 4 percent on higher property as well as food and health care costs angering middle-class citizens. Kuwait’s large MSCI frontier weighting is flat with hydrocarbons accounting for 95 percent of revenue, but a 15 percent of GDP budget surplus is still envisioned next year. Relations with Iraq may improve in the fight against ISIS and remaining Iraqi debt may be forgiven as Baghdad tries to marshal military and humanitarian resources for the onslaught.

Middle East oil importers in turn may receive lower Gulf aid and remittance flows, and Egypt after reimbursing a Qatar loan may be preparing for other early demands as it organizes a global donor conference in the coming months, with the IMF prominent after a positive Article IV report. Former president Mubarak was acquitted of murder accusations against Tahrir Square protesters and may soon be freed from jail in failing health. Tourism has revived and the pound has been firm at 7. 15/dollar despite the recent resignation of the central bank deputy governor for alleged policy disputes. Tunisian stocks are stuck awaiting the outcome of the second presidential round run-off which focuses in part on economic issues. Manufacturing has been lackluster and depends on further Eurozone recovery and real interest rates remain negative as state bank recapitalization was delayed. The new government will revisit budget questions including possible mainstream sovereign bond re-entry in a swipe at Maghreb favorite Morocco.

Ukraine’s Frantic Foreign Fund Manager Mandate
2014 December 16 by admin

Posted in: Europe
Ukraine external bond yields stayed at 20 percent for the second greatest EMBI loss as the President and Prime Minister after splitting party dominance in parliamentary elections named foreign-born fund managers as Economy and Finance Ministers as the half-year old IMF program further unraveled on Eastern industrial center bloodshed and energy, banking and fiscal cleanup delays. The respective appointees are private and public equity specialists from the US and Baltics and were granted citizenship upon acceptance. They will try to pass overdue budget changes and access supplementary assistance with the 5 percent output contraction due to last into 2015 with 20 percent inflation, and the hyrvnia at half the pre-revolt 8/dollar level on $7. 5 billion in reserves, not enough to cover next year’s hard currency debt repayments before gas and other imports. The separate Naftogaz bill next year is estimated at $10 billion and to replenish reserves the $15 billion Fund arrangement may have to double revisiting the urgency of commercial restructuring for sustainability with the 60 percent/GDP public debt threshold for Russian acceleration already passed. Under new guidelines creditors would at least have to extend maturities but outright haircuts may now be sought with Templeton reported as the main international fund Eurobond owner. Ukrainian corporates are not widely-held either with defaults in progress, and quasi-sovereigns may offer debt-equity swaps in workouts. Russian banks have been the dominant buyers since 2008 and they are under their own earnings pressure from recession at home and rollover squeeze from sanctions abroad. The central bank has barely intervened in the ruble crash past 50/dollar and predicated annual capital flight over 100 billion and possible double-digit inflation in 2015. With $70/barrel a fiscal deficit will appear and backstop official funds could be exhausted on state spending and company refinancing demands. President Putin has blamed the troubles on Western conspiracy and his opinion approval remains high although neighbors register historic post-communist doubts over geopolitical intentions. In Moldova Moscow’s proxy party was removed from the ballot and elections before in Latvia dented the Harmony grouping’s traditional strong showing. The premier there kept her coalition on a platform of budget discipline and modest growth with minimal inflation despite lower Russian exports.

Serbian shares pared a 15 percent MSCI drop as the cultural Russian ally renegotiated a 3-year IMF standby of up to EUR 1 billion after the Prime Minister slashed official wages and pensions with the budget gap at 8 percent of GDP. Recession is again set for 2015, but inflation should be close to the 5 percent target allowing potential benchmark rate easing. Auto making has picked up followed by oil and gas exports and Croatia could be next to approach the Fund after presidential elections in December with public debt/GDP at 85 percent and the EU excess debt procedure already in operation. Coastal tourism has been diverted to other cheap Southern Europe spots as vacationers await a fresh mandate.

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The IIF’s Broken Globalization Records
2014 December 12 by admin

Posted in: General Emerging Markets
The Institute for International Finance issued a post-crisis retrospective on the “broken” globalization trend in mature and emerging financial markets since the 2007 apex and warned of an indefinite “hiatus” under new banking and securities regulation stifling cross-border flows now averaging $1 trillion annually. It argues that the process should strengthen after deleveraging from the previous decade-long credit boom with developing economies in particular a “powerful engine” despite closed capital accounts in giants China and India. That future is however diluted by uncertain prospects for trade and infrastructure finance and bond and stock market-making, as backlash from national supervisors promotes “balkanization. ” The G-20 and Financial Stability Board have been the focus for harmonizing exchange rate and monetary policies and prudential norms, but the balance between benefits and risks has often strained business models and may inject greater volatility, according to the group. Emerging markets should avoid short-term capital inflow restrictions and focus instead on local activity and institutional development. The IMF may be called in as a backstop and governance tweaks contained in pending US legislation are needed for continued legitimacy. The network of central bank swap lines could be extended as an additional safety net beyond existing mainly G-4 and regional arrangements. Since 2008 better Asia and Latin America flows have compensated for Eastern Europe’s “bust,” but by segment syndicated and project lending “reversed” while portfolio investment has been uneven. As Euro Area banks have retrenched with EM borrowers, US, UK and Japanese competitors entered, and Chinese and Gulf units have become active worldwide. Non-resident equity is closer than fixed-income allocation to the mid-2000s peak, but foreign ownership of government bonds has skyrocketed and prompted notable selloffs as in the 2013 Fed taper episode. FDI in contrast has been stable at an average $1. 5 trillion from 2010-13 increasingly in South-South direction. Financial deepening as measured by the range of assets/GDP at 200 percent is half the mature market level, but the pace slackened prior to the economic slowdown and investor liquidity and protection must become priorities as new technologies expand the product range, the IIF urges.

Capital flows/GDP at 4 percent are half the 2007 proportion and the disparity in equity market size is particularly pronounced at only 12 percent the total versus the almost one-third share of global output. Emerging market derivatives turnover has reached $1 trillion with the majority conducted over the counter, which will be subject to tighter global clearing and reporting guidelines that could delay progress. Ten case studies at the end point to good and lagging practice with Chile and South Africa praised as sophisticated middle-income destinations. China, India and Indonesia are bank-dominated with limited international participation while Russia and Turkey’s capital markets are also “shallow. ” Poland and the UAE have embraced open capital accounts and Brazil has followed an intermediate strategy, and almost all the countries despite mixed integration were “unscathed” by the post-2008 crisis in another historic break.

Iran’s Negotiation Pause Reflection
2014 December 12 by admin

Posted in: MENA
The Tehran Stock Exchange was disappointed with delay in foreign investor opening until at least next July when nuclear weapon negotiations with the West, Russia and China face another deadline after anti-enrichment for sanctions lifting talks were extended. The regime will continue to receive $700 million in monthly easing on oil sales and frozen bank accounts, and President Rouhani expressed optimism an accord would be reached as he tries to restore economic growth and combat inflation which has moderated to 20 percent and relieve youth unemployment estimated at 25 percent. The currency weakened in the parallel market with postponement of the potential investor and visitor flood although delegations will still arrive to probe commodity, consumer and financial market offerings. The President is again expected to participate in the Davos World Economic Forum in January and press his intention to cut subsidies and expand the private sector. Gulf buyers were active in initial state company stake divestitures under the previous government but efforts have since stalled as the Revolutionary Guard and religious foundations continue to control major listings. Banks operate under a no-interest Islamic fixed return and commercial competition has been stifled with new applicant license delays and the absence of bad loan resolution procedures. With declining oil prices and OPEC infighting energy focus has shifted to gas reserves and autos and mining are two other priority sectors for progressive international engagement pending further boycott removal. Europe and Asia are poised to return faster than the US, where stiff Treasury Department prohibitions remain in place that Republicans now in charge of the Senate are due to underscore and try to strengthen. Iran’s budget mix has been further roiled by the rising cost of Islamic State fighting alongside coalition airstrikes although it is still allied with Syria’s Assad. The toll has already depleted neighboring Iraq’s coffers with military and refugee spending forcing austerity including civil servant wage and hiring freezes. The economy will shrink 3 percent according to the IMF and employee in the Kurdish enclave have not been paid for months as Baghdad seeks to strike a fresh provincial relationship as ISIS soldiers surround key cities. Bond yields have tipped toward 7 percent as 2015 envisions a fiscal deficit and continued coalition fragility despite the longtime prime minister’s replacement.

Israeli stocks stayed down with the prolonged dialogue and Palestinian street attacks in Jerusalem and suspension of the Leviathan offshore gas project on regulatory and Jordan bickering. The economy and currency are flat as the Tel Aviv exchange aims to lure high-tech startups shunned by venture capital caution. Egyptian energy shipments have revived after terrorist interruption as stocks up 35 percent continue to top the core universe. The pound slipped to 7. 5 to the dollar on Qatar loan repayment as the central bank vowed to end the black market. Foreign buyers have tiptoed into local bonds with double-digit yield as the Finance Minister reopened the door to IMF assistance after pre-military rule rejection.

South Asia’s Stricken Presidential Stand
2014 December 8 by admin

Posted in: Asia
The Pakistan and Sri Lanka stock markets sold off as prime minister Sharif and President Rajapaska respectively tried to hold on to power in the face of opposition attacks and supporter defections. The former’s state oil company stake offering was further delayed but the IMF is due to release the next $1 billion tranche despite the setbacks and missed central bank deficit financing and foreign reserve targets. GDP growth flagged the past quarter on export and manufacturing weakness but a 50 basis point benchmark interest rate drop and lower oil prices should return it to 4 percent on high single-digit inflation. The budget deficit improved to 5 percent of GDP but tax revenue barely budged as collection overhaul hit administrative and legal roadblocks.
In the balance of payments the small current account gap has been offset by a 15 percent remittance rise and another portfolio inflow from a reopened sovereign bond bringing reserves toward $10 billion as the currency settles at 100/dollar. Clerical critics of the administration have pulled back as party adversary Khan continues his campaign on claims of election fraud and inadequate electricity and security. In next-door Afghanistan the Taliban have resumed suicide bombings against military and aid installations following establishment of the new leadership there with technocrat President Ghani in charge. The former World Bank executive has stressed project implementation and anti-corruption with donors and has promised to punish perpetrators of the Kabul Bank collapse and promote delayed commodity joint ventures. Sri Lanka, which has spurned both the IMF and UN after it claimed civil war human rights abuses was surprised as the President called elections two year ahead of schedule and then was challenged by a former cabinet ally over his family’s far-reaching control. Construction, tourism agriculture and textiles sustain 7. 5 percent growth and inflation has come down to 5 percent as the central bank throttles margin credit. With poll spending the budget gap may again blow out to over 5 percent of GDP as the trade deficit will shrink on declining energy imports. The President’s 60 percent landslide after defeating the Tamil rebels will not be repeated, but legitimate political rivals have been silenced or arrested and the exercise may not be valid in the absence of international observer involvement.

In Mongolia in contrast a no-confidence parliamentary vote sent the prime minister packing to the relief of foreign investors decrying too harsh a line toward the next $5 billion phase of the OT mine, which may now start in the first quarter of 2015. The chief executive of Rio Tinto’s operation running the project also resigned for a clean slate as the pace of economic overheating has dwindled. Credit growth is still above 20 percent but half the early year level on 15 percent inflation and a 10 percent of GDP current account hole. A Chinese swap arrangement intends to keep reserves at the critical three months import minimum in a belated stand.

Venezuela’s Yacht Harbor Reverie
2014 December 8 by admin

Posted in: Latin America/Caribbean
Venezuelan bonds extended double-digit EMBI losses at 20 percent yields as President Maduro spurned default talk with scheduled repayments and tackled fiscal crisis with new luxury goods taxes on yachts and rum as $4 billion in Chinese loans were added to official reserves under $20 billion. Twenty-five other laws were passed under economic emergency powers pending new legislative elections next year that could end ruling party dominance as suggested by the President’s meager 30 percent approval rating. Although only inflation has been reported statistically at 65 percent with a lag, output will contract 3-5 percent on widespread staple shortages without authorized dollars or profits. Consumer giant Proctor & Gamble was the latest to cease operation as price controls pinched further and rigid labor practice prevented worker shedding. With world petroleum value declining OPEC representation has focused on supply restraint as domestic production capacity will be flat through 2015. Beijing will allow minimal shipments of around 300,000 barrels/day to service debt and the Finance Minister has committed to maintaining Citgo US service station ownership even if assets are sold. International cash reserves are just $1 billion with the rest held in gold and an equivalent $15-20 billion stash may be in off-balance sheet accounts according to estimates. To smooth the debt profile the sovereign and state oil company may soon conduct liability management exchanges, but participation could be limited by sustainability doubts and mounting Washington sanctions against the regime for anti-democratic moves including the arrest and jailing of opposition leaders. A small current account deficit will be run this year on falling oil exports and the overvalued multi-tier exchange rate. Currency devaluation and unification remain on the table but reform proponents were purged several months ago and only gradual changes from the progressive 6-50 bolivar/dollar formal levels are expected against the parallel rate above 100, especially with the military benefiting from the preferences. Domestic fuel subsidy adjustment has also been shelved indefinitely for fear of social explosion, although unaddressed crime and health concerns also rank high in public anger.

Border closings with Colombia to squeeze smuggling and normal trading are part of the “economic war” strategy and contributed to negative stock market results there as the FARC peace negotiations temporarily unraveled after a general was captured by the guerillas. President Maduro has not pronounced on the talks which were facilitated by his predecessor, and Colombia’s business community which suffered from extortion and kidnappings is split on the prospects. President Santos in turn inherited the office from now Senator Uribe who has spearheaded opposition to any deal in Havana as sympathy with “Castro-Chavismo. ” The dispute has overshadowed solid 5 percent growth on a mix of domestic and external support as the peso weakens against the dollar without intervention amid a clamor for redenomination dropping zeroes. A $25 billion public-private infrastructure medium term infrastructure program has also been reformulated after early criticism for smoother commercial sailing.

IMF Quota Legislation’s Private Sector Breakout
2014 December 4 by admin

Posted in: IFIs
Four years after initial agreement at a G-20 summit and a year after another IMF quota review was due, the Obama Administration and Congress have yet to pass a bill enshrining minor funding and voting changes as the US, the original architect still with an over 15 percent controlling share, stands alone in refusal. The technical provisions are obscure, but basically enshrine an earlier post-2008 enlargement of Fund capacity to $950 billion and an incremental 5 percent power, and pledge transfer to big emerging economies mainly at the expense of European countries with their separate pre-EU representation. The package was delayed in Capitol Hill submission and House Republicans in particular, whose majority will be reinforced in the next Congress along with Senate takeover, have complained of lack of outreach and rationale and added reservations about lending policies in Europe and elsewhere to the bill’s specifics. The Treasury Department has been the lead agency actor and White House lobbyists have joined the effort, while outside advocacy crested earlier this year on an attempt to insert the clause in emergency Ukraine appropriations with a letter-writing campaign organized by the Bretton Wood Committee. It brought hundreds of signatures from former officials and interested professionals, along with a plea on behalf of former Cabinet heavyweights dating back decades, but the private banking and capital market community was not mobilized distinctly through its national trade associations or local presence in swing congressional districts. These financial sector practitioners have already staked future business and security on developing and frontier economies, and could aid adoption of the US-instigated Fund reforms by placing them in context and acting to monitor progress and broader issues at lawmaker request. Their dedicated participation could help clarify esoteric details and serve as a supplemental policy check for Washington-backed international lender direction.

The 2010 Seoul deal doubled quotas and increased emerging market control to over 40 percent in the immediate aftermath of post-crisis expansion, when representatives were already ascending to senior management ranks and the countries had offered Fund provisional credit lines as global worry centered on the US and Europe. Most directors will now be elected instead of appointed, and the Europeans have relinquished board seats. The proposal drew on previous appropriations and requested no new money, but the Congressional Budget Office assigned a $5 billion and later a $300 million contingent cost without elaboration to meet federal guidelines. Even that modest amount may be overstated since the US’s liquid claim has never been in default and the Fund has over $100 billion in precautionary balances and gold reserves. The higher contributions would enable access to a multiple of the sum as in Ukraine’s recent case promoted by President Obama. More controversially Greece before then obtained exceptional limits angering Washington and developing country shareholders alike, and the waiver has since been revisited with private sector debt reduction a key issue in both instances. As big demands continue from other regions including the Middle East and Africa, BRICS members awaiting action are pursuing their own alternatives for mutual support with the launch this year both of a joint development bank and currency reserve as well as China’s pan-Asia infrastructure lender. Along with the Bretton Woods Committee which was founded to back the international financial institutions on the Hill, the expertise and views of members from the Institute for International Finance, Emerging Market Traders Association, Bankers Association for Foreign Trade, US Chamber of Commerce and similar bodies could assist in improving the reform climate from the basic 2010 commitment through the subsequent range of priority Fund considerations and operations in a next session bid with analysis and events to refresh the stale quota debate.

India’s Jagged Journey Jubilation
2014 December 4 by admin

Posted in: Asia
Indian shares continued to outrun BRIC and Asian peers with an over 25 percent upswing after the ruling BJP triumphed in state elections and the Finance Minister reiterated a “long journey” reform plunge at a World Economic Forum event. Prime Minister Modi ordered fuel subsidy decreases in the aftermath as a stake in Coal India will be sold on the exchange after a previous scotched attempt. The changes should pare the fiscal deficit 1 percent to GDP as growth and inflation are both in the 5 percent range, the latter inviting central bank easing. Bonds have rallied in response and the currency is also firm with over $300 billion in reserves and a smaller current account gap. Price-earnings ratios above 15 exceed the core universe average by 5 points but bank listings remain soft with bad loans expected to reach 10-15 percent of the total under stricter standards. At the November G-20 gathering representatives hinted at greater financial sector opening as a compromise on food protection was struck with the US to enable the WTO facilitation accord to go ahead. India’s Oil and Gas Company also came under scrutiny for a $200 billion long-term expansion plan at home and abroad as Washington and Beijing agreed in principle to carbon emission cuts in the coming decade. According to the International Energy Agency, petroleum appetite will outstrip China’s by 2020 and ventures abroad target Russia and Africa regardless of geopolitical objections. In the post-Modi euphoria traditional business outsourcing has been a disappointment as the services PMI dropped to 50. He has recognized the setback with a push to take global manufacturing share but outdated rules and infrastructure throttle the ambition according to executives still awaiting the outcome of lengthy tax disputes.

Indonesian stocks have also gained 20 percent as the new President there appointed a business friendly cabinet and prepared 30 percent energy subsidy withdrawal and launch of a one-stop foreign investment shop. The rollback can be ordered by presidential action which overcomes slim parliamentary backing and the easier permitting process intends to elevate World Bank rankings above 150th place out of 190 countries. With higher domestic energy cost the central bank raised the benchmark rate 25 basis points to maintain the 3-5 percent inflation target next year as GDP growth dipped to 5 percent on flat fixed investment and lackluster consumption over the election cycle. Following external bond default by the Bakrie family-owned Bumi resources, officials have directed borrowers to hedge their exposures as international buying of local government instruments also wanes on currency risk and regional competition. Vietnam after a sovereign upgrade to BB returned with a $1 billion 10-year issue breaking an extended absence, with almost 500 accounts bidding. The oversubscribed placement preceded a final phase of TPP free trade conclusion with the US as the journey may be promoted by the Senate Republican majority swing.

China’s Sleeper Train Trials
2014 December 2 by admin

Posted in: Asia
Chinese shares stayed positive but were mostly unmoved by the “through train” Hong Kong tie-up which after initial hype barely filled a fraction of daily quotas. Mainland retail investor south bound connect use particularly lagged even as income was tax-exempt and HK authorities lifted previous renimbi access limits. Foreign institutions dabbled in Shanghai with the launch as holders of QFII allocations considered bond shifts, as both clamor for additional entry into Shenzhen’s small-cap market. Renewed street protests against Beijing’s refusal to allow popular elections in the city-state may have quelled enthusiasm as the rationale for “backdoor” capital account opening was also dashed by official insistence on a gradual timetable at the APEC summit. The dollar will be the currency for the new Asian Infrastructure Bank created against Washington’s opposition, as traditional FDI strength was eroded with a year-to-date flat total of $95 billion. The state planning agency has acknowledged growth toward 7 percent in 2015 as retailers report sales declines and the PMI sits at 50. Wholesale prices show deflation and the government has steered its exhausted fixed investment push overseas with a $1. 25 trillion outbound target over the coming decade aided by a new “Silk Road Fund” for neighbors and a proposed pan-Asian free trade pact to match the US Trans-Pacific Partnership. Recent export figures reflect EU weakness and Japan’s latest yen depreciation round will roil both diplomatic and commercial relations despite a handshake between the two leaders at the APEC meeting. October’s total social financing was almost half the previous months as banks reasserted dominance over shadow units where trust activity especially has frozen under tighter rules and property sector exposure. Home prices were down in almost all cities according to the latest survey, and developers are highly leveraged with debt up fivefold post-crisis as they represent one-third of regional speculative external issuance, rater S&P reports. Banks have slashed mortgage loans despite official exhortations and restriction easing as they worry about capital positions in view of domestic asset impairments and global prudential pressures. Bank of China entered the US private placement market with a Basel III structure as the central bank confirmed a $125 billion system liquidity injection this quarter to bolster defenses in the absence of mobilization for stimulus.

Sovereign CDS spreads have widened as big houses grab the trade with Pimco recently selling $7 billion in protection on a bullish Chinese outlook in the waning days of the Gross era. Volume has roughly doubled the past year as a main instrument behind Italy and Brazil according to New York Depository Trust statistics and the International Swaps and Derivatives Association. The emerging market total was $37 billion in Q3 as tracked by EMTA, with Argentina, Russia, Turkey and Venezuela also featuring alongside Brazil’s $70 billion. Quasi-sovereign oil and gas credits were active at the same time, led by Gazprom and Petrobras facing their own train wrecks.

Africa’s Energetic Pocket Protectors
2014 December 2 by admin

Posted in: Africa
As Sub-Saharan capital markets continue to correct, slashing year-end MSCI frontier index improvement to single digits, the IIF issued an upbeat forecast for new energy and financial services capacity to mitigate “turbulence pockets. ” Regional GDP growth should again top 5 percent in 2015 and rebased accounts in Kenya, Nigeria, Tanzania and Zambia will double economic size. For commodity exports, hydrocarbon and metal prices are down but agriculture has diverged with Cote d’Ivoire and Ghana getting cocoa windfalls, although the former may experience worker shortages with the Ebola epidemic. Traditional oil heavyweights Angola and Nigeria have been joined by major East and West African discoveries with “game-changing” potential according to the study. Ghana’s Jubilee field will be fully on line in 2016 and double current 100,000 barrels/day output. In Kenya fifteen exploration wells have been drilled with half hitting deposits. Presumed reserve revenue could offset the current account deficit, and a pipeline to Lamu will facilitate delivery. Mozambique and Tanzania have huge offshore gas availability likely to start production by end-decade and shale is also untapped in South Africa’s Karoo area. Electricity generation aided by bilateral and multilateral public-private partnerships has also increased to reach the two-thirds of the continent without power as regular outages cost another 2 percent of GDP. Nigeria’s sector was privatized and five winning local-foreign bidders modernized plants bringing current scope to 5,000 megawatts with plans to rise almost tenfold by 2020. Ghana and Kenya have invested heavily in alternatives, including wind, hydro and geothermal to add thousands of MW. Clean coal technology is being tapped as aid recipients look to further commitments by the US and China after they reached an outline carbon-emission reduction understanding at the November G-20 summit. Washington offered $3 billion to the UN’s Climate Fund and other members signaled pledges ahead of a global summit next year to extend the original Kyoto treaty. Tanzania, which hosted President Obama when he unveiled the Power Africa scheme, has upgraded transmission lines and will link the domestic grid with neighbors. Government debt in part to finance the effort has crept back to 50 percent of GDP for a half dozen countries, but officials have adopted wage restraint which may be embedded in IMF programs and short term portfolio capital inflows are “relatively low,” the IIF believes, despite occasional dangers as when foreign investors did not rollover Ghana’s Treasury bonds as the Finance Minister reluctantly entered IMF negotiations.

The central bank hiked the benchmark rate above 20 percent with the currency off 30 percent against the dollar and double-digit inflation. In September a $1. 5 billion Eurobond and cocoa board syndicated loan over that amount were raised, so the Fund facility will likely be precautionary to address the “confidence crisis,” the report argues. Templeton continues to buy external bonds as a contrarian play as the stock market is the worst MSCI African performer with bank, consumer and gold listings devoid of earnings energy.

Brazil’s Corrosive Car Wash Streaks
2014 November 28 by admin

Posted in: Latin America/Caribbean
Brazilian securities continued to sell off after the President’s squeaker re- run despite her assent to higher fuel prices and lower state development bank lending converging with the opposition platform as new cabinet speculation focused on Workers Party economic orthodoxy proponents especially Lula Administration veteran Mireilles. The Petrobras corruption scandal exploded further in the aftermath with additional arrests and investigations at home and the launch of US Justice Department and SEC prosecutions. Senior executives and politicians have been implicated in the “car wash” for alleged bribes and money laundering, with construction giant Oderbrecht also named, as the latest quarter financial statements were delayed without auditor signoff pending balance sheet and legal clarifications. The central bank hiked interest rates 25 basis points on depreciation-driven inflation with the real below 2. 5/dollar after resumed swap intervention. GDP growth is barely positive and the primary budget surplus derives mainly from bookkeeping maneuvers as gross debt tips past 60 percent of GDP increasing sovereign downgrade pressure. On the credit front Banco do Brail warned of slowdown and souring consumer and corporate portfolios as normal household borrowing rates hit 45 percent. Petrobras has dragged the MSCI down double-digits and with $50 billion in bond issuance in recent years is the largest CEMBI component as that asset class has continued with good returns and fund inflows versus choppier government segments. Last year’s OGX default has been mired in lawsuits against former billionaire Batista, and smaller firms suspended payments in recent months as S&P warned that downgrades would be twice upgrades in 2015. Energy and water rationing could further damage prospects and deter FDI in particular needed to bridge the 3 percent of GDP current account gap and prepare the 2016 Olympics stage. Mexican stocks were likewise battered by sensational stories as protestors marched on the presidential palace demanding answers on college student disappearance purportedly linked to local drug gangs with official collusion, and a Chinese construction firm was awarded and then lost a contract after reports it owned and had upgraded the first lady’s $7 million private residence. These blows came as a new Finance Ministry hedge was put on against steeper oil price decline, which will hurt budget revenue and potential bidding for Pemex’s first private exploration tracts next year after the Supreme Court dismissed remaining challenges. A trade shift to surplus on auto exports and solid domestic demand readings will sustain 2-3 percent growth as the central bank stays on hold with 4 percent inflation.

On external bonds Mexico as with collective action clauses originally will be the first main issuer to adopt aggregation and pari passu rules suggested by the IMF and private bodies to block future Argentina-like holdout claims. Beyond the initial group, other unpaid funds have joined the New York Court filing for relief as the standoff goes into the year-end expiry of the no better offer legislative clause in Buenos Aires. Minister Kicilof hinted at an improved subsequent negotiating climate as the black market peso exchange steadied with rolling dealer raids.

Turkey’s Explorer Spirit Rediscovery
2014 November 28 by admin

Posted in: Europe
Turkish shares continued to lead Europe with a 15 percent spurt as the Istanbul exchange will soon go public and Prime Minister Davitoglu released a medium-term economic strategy to hoist growth and further curb the current account deficit which has leveled to 5. 5 percent of GDP on lower oil prices and consumer demand. A second sukuk bond was also snapped up after President Erdogan appealed to the investor base with the assertion that Moslems arrived in America before Columbus and that he would build a mosque in Cuba to honor the discovery. Present day geopolitics also proved controversial after attacks on visiting US sailors in the wake of a Treasury Department report on Islamic State fuel smuggling through Turkish intermediaries. Kurdish relations remain delicate after refusal to send troops across the Syrian border to hold Kobani as ill-equipped Peshmerga fighters try to regain ground with support from Western airstrikes. GDP growth is down to 3 percent but inflation with lira depreciation against the dollar touched 9 percent in October. The central bank has maintained multiple rates intact but recently moved to pay interest on reserves and aid export credit. Sales to Iraq and Russia are off but FDI was up 10 percent to $8. 5 billion in the last quarter and record amounts have come in through the errors and omissions column to cover $150 billion in short-term mainly private debt on flat portfolio inflows. Sovereign bonds have been hurt by ratings agency caution over investment-grade status, although Fitch kept its reading and Moody’s delayed action with a negative outlook pending clarification of the surrounding conflicts. Officials have blamed the agencies for meddling in domestic politics and threatened to sever contact, and plan to reexamine their role in global markets as host of the G-20 summit next year. The group agreed in Australia to consider new sovereign debt restructuring approaches at Argentina’s urging, as the IMF formally adopted a preference for early maturity extension in unsustainable cases where Ukraine could soon qualify. According to estimates public debt/GDP is already above the 60 percent that would call in Russia’s emergency $3 billion infusion in the final days of the previous administration, as private issuers with Eastern operations seek relief and court default. In a workout Russian and Western bondholders would be forced to cooperate despite their countries’ strained ties which have sparked additional EU sanctions against rebel military chiefs.

Kazakhstan was the first to insert recommended clauses into bond contracts to avoid later legal complications, and the move allowed for a dual $2. 5 placement after a 15-year absence. The benchmark intended to pave the way for corporate taps as oil price sluggishness and continuing problems at the largest field cut growth to 4 percent. Official have hedged the commodity risk with investment banks and will sell the electricity company and other state holdings on the slumping stock exchange to garner revenue and reprise pioneer popular capitalism from two decades ago.

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Qatar’s Running Cup Caper
2014 November 24 by admin

Posted in: MENA
Qatari shares kept their 20 percent MSCI advance as football governing body FIFA allowed 2022 World Cup preparations to proceed following a corruption inquiry. The host was tentatively cleared of wrongdoing as construction is up 20 percent on an annual basis with groundbreaking for the first stadium and other infrastructure and real estate projects in course. Its reputation was also rescued with stricter Islamic charity rules after concern over ISIS support from international coalition officials, although military backing will be minimal. GDP growth will be close to 6 percent despite the recent hydrocarbon price drop as bank credit jumps 15 percent at home and abroad after a lull on tighter public borrowing controls and the soccer event controversy. Overseas expansion is double that figure with leading banks well-capitalized at 15 percent of assets. Qatar National Bank has been in the forefront and just took a 12 percent stake in pan-African powerhouse Ecobank, whose previous CEO resigned on sweetheart deal allegations. The continent is also a commodities destination as state mining and steel companies head to Kenya, the Democratic Republic of Congo and Sudan and consider gold ventures in Mali and Tanzania. The outward thrust comes as Gulf relations remain sensitive over Qatar’s perceived activism in Middle East disputes and Bahrain complains about luring its professionals with citizenship and compensation packages with the Sunni-Shia tensions there contributing to a 20 percent MSCI loss through November. The ambassador was withdrawn from Doha and many Bahraini families are accused of dual loyalties with fluid geographic ties. A causeway linking the two has been on the drawing board for a dozen years and work still requires billions of dollars in joint financing. The impasse reflects an earlier clash over Arabian Peninsula islands that was referred to the International Court in The Hague. Economic growth is only 3. 5 percent under the political-sectarian stalemate which still spills out into the streets, and ratings agencies point to fiscal fragility with the 5 percent of GDP budget deficit. Onshore banks are shielded by strong retail franchises but offshore players rely on regional diversity for profitability.

The UAE continues as the foreign investor favorite with a near 25 percent MSCI gain on 4. 5 percent property, construction, tourism and re-export growth. Expo 2020 foresees $7 billion in infrastructure outlays with the site to be half solar powered. Airline passengers are up 15 percent and hotel occupancy is almost 85 percent. The Iran thaw has boosted trade and this year’s $30 billion in debt maturities were covered as quasi-sovereign firms can readily access loan and bond refinancing. Kuwait shares have been barely positive despite their larger weight in the revised MSCI frontier index and replacement of the capital markets regulator. The housing squeeze has become another contention point between the parliament and ruling family as oil-driven growth falls below 3 percent with refinery capacity also stretched.

Cyprus’ Foreclosed Recovery Chances
2014 November 24 by admin

Posted in: Europe
Cyprus bond prices firmed after proposed foreclosure laws still favorable to borrowers to handle the 75 percent bad construction loan ratio were overturned by the courts to release the delayed $450 million international rescue installment. The IMF has expressed doubts about reform commitment against “entrenched political interests” although ratings agencies have recently upgraded sovereign readings. Economic contraction will be 3 percent this year and could worsen with the onshore banking collapse and skittish offshore flows reflecting the Russia-Ukraine mess. Nonperforming assets are equivalent to almost 150 percent of GDP and private capital raising can succeed only with buoyant European high-yield conditions and residual appetite from Greek offerings which may fall short of meeting ECB stress-test holes even with $15 billion in leftover official facilities from the original crisis program. The stock market has been the worst MSCI regional performer as the Troika puts the financing gap near EUR 15 billion in 2015 which would be covered commercially under Prime Minister Samaras’ exit timetable. Growth then could be in low single digits for the first time since 2008 on budget balance according to the European Commission, but snap elections could bring the Syriza opposition party to power which has vowed to repudiate the accumulated debt load and reverse austerity steps. In Portugal, another stock market laggard, the IMF and EU have slammed results since the May finish with reform stalls and increased public and private debt at a combined 130 percent of GDP level leaving aside the costs of the BES cleanup and transport support. The duo questioned 2015’s 1. 5 percent growth target as the biggest bank Millenium BCP failed the asset quality review under the supervisors’ adverse scenario. Italy and Spain were the major core member worries but only one small lender was deficient in the former as deflation deepens. Political risks abound as a third party alternative Podemos has emerged to challenge the establishment and an indicative Catalonia referendum showed 80 percent for secession in the industrial bulwark. Italy’s Monte dei Paschi was EUR 2 billion shy of standards and still owes the state from a previous bailout. Recession has lingered under Prime Minister Renzi, who attacked excess deficit procedure rules and then agreed to eliminate planned individual and small business tax relief to come in under 3 percent of GDP. Bank lending has declined since 2012 and labor market changes continue to confront stiff resistance by the populist Five Star movement which also aims to abandon the euro.

France likewise submitted last-minute adjustments to keep within range of the threshold although ruling socialist party lawmakers abstained from budget votes. The far-right National Front is ahead in opinion polls as former President Sarkozy resurfaced to claim the mainstream opposition mantle even though he is under multiple corruption investigations. After speculation that Commerzbank would flunk German banks were also cleared by the stress test as Chinese and Russian weakness hurts machinery exports in particular to possibly later expose gearing.

Myanmar’s Preempted Pagoda Pageantry
2014 November 20 by admin

Posted in: Asia
Myanmar prepared to host its first ASEAN summit since admission fifteen years ago as both financial sector and broader economic and political reforms were “stalled” according to international democracy champion and Nobel laureate Aung San Suu Kyi, as she cited ethnic clashes and military backtracking in the two years since opening loosened commercial and diplomatic sanctions. The Muslim minority Rohingyas have been attacked and threatened with expulsion as the free election timetable for 2016 remains skewed by the army’s automatic one-quarter of seats and a constitutional ban on foreign-citizen presidential contenders excluding her. The government leader Thein Sein recently convened a preparatory session dominated by generals as the National League for Democracy party tries to rebuild its grassroots base and candidate bench beyond the famous dissident. The ASEAN meeting’s focus is strategic issues, in particular island and natural resource disputes in the South China Sea. Beijing and Tokyo at historical odds in the area are vying for FDI leadership and the former has concentrated on energy and built a pipeline to Yunnan province after a hydroelectric dam project was rejected in 2011. Japan’s involvement includes technical assistance in launching a stock exchange which has been dormant with two listings since establishment in the mid-1990s. Five companies will be added by the target end-2015 debut with an optimistic scenario mirroring the tiny initial trading volume achieved in nearby Cambodia and Laos. Only local investors can buy shares under existing law, and a handful of off-exchange offerings have taken place such as from the main state agribusiness operator. A regulator has not yet been created and bonds may slowly evolve with planned Treasury instrument issuance. A 30 percent foreign ownership limit is likely under the preliminary framework developed by Daiwa Securities, but Singapore linkages already available for a few enterprises will still be needed for larger positions.

The IMF’s October Article IV report acknowledged “daunting challenges” to economic transition despite 8 percent GDP growth the past fiscal year and new foreign bank and telecoms licenses. Inflation is around 5 percent and the budget and current account deficits are 5 percent of GDP. The exchange rate has stabilized and reserves cover three months imports. Despite high double digit monetary expansion private sector credit is just 15 percent of output. The central bank was granted legal independence but is still tapped for deficit financing. With poverty at 25 percent of the 50 million population by the last estimate purchasing power is minimal compared with other low-income economies in the region. Future oil and gas revenue could readily be absorbed by critical infrastructure and social spending, and planned decentralization may decrease Yangon’s taxing power. Despite approval of several foreign bank branches convertibility obligations under the Fund’s Article VII will not be assumed in the near term. They can deal only with international customers in hard currency and state policy banks have been expanded at the same time as “political imperatives” that reinforce the old order, according to the staff-monitored program.

Cuba’s Primed Post-Sanctions Postulation
2014 November 20 by admin

Posted in: Latin America/Caribbean
The 60-year US embargo against Cuba featured in Florida elections as bipartisan groups called for a rethink of the approach in view of post-2008 reforms introduced by President Raul Castro which were explored in a lengthy Brookings Institution study in partnership with a Havana think tank. It noted “important progress” since new policies were formalized in 2011 including small-business opening and internet access, bilateral debt renegotiation, and pilot state enterprise restructuring to allow price and operating flexibility. This year the foreign investment code was revamped and currency and monetary adjustment joined the agenda, but the economy has been “in stagnation” for over two decades with annual average growth under 2 percent. Capital formation was 10 percent of GDP, half the hemispheric average, as a chronic housing shortage was worsened by non-functioning financial markets. The 2011 guidelines detail 300 steps to update the development model which still prioritize socialist planning, according to the authors. They point out that exports to Latin American neighbors beyond the scope of Washington sanctions are also low and that multinational firms’ local presence is minimal. Less rigid labor rules could spur a diaspora Cuban influx, and even informal engagement with the Bretton Woods institutions could inject confidence and transparency. The reform process remain at “early stage” and has yet to validate profit and industry-specific supervision or mirror China-Vietnam “socialist market” precedents. Agriculture in particular suffers from undue restrictions which prevent food self-sufficiency and export capacity. Currently 500,000 citizens work in private micro-enterprise, one quarter the initial goal, but lack of credit and heavy taxes are outstanding obstacles. In China and Vietnam bureaucracy is not as intrusive and decisions are decentralized, and Cuba’s free trade zone regime around Mariel differs from nearby practice as in Costa Rica where FDI is systematically welcome and subject to predictable law-based approvals. The dual currency arrangement with the convertible and normal peso creates “huge distortions” and unification is set for 2016 despite the absence of a roadmap. Loss-making firms would be bankrupt under market exchange rates and the shift must be gradual to avert general economic collapse, the report observes. A devalued level has been introduced in the hotel and sugar sectors, but alternatives could still be considered including dollarization and “big bang” realignment which would allow fiscal support as a cushion.