No More Learning

Sovereign gross placement has been only $50 billion through mid-year with Poland, Romania and Turkey in the same geographic bucket. External corporate activity has also flagged at $170 billion over the period with almost no Europe supply, according to JP Morgan figures. Among the CIS group, Georgia spreads widened while Belarus and Ukraine risks declined on commercial restructuring deals in the works. On the latter Finance Minister Jaresko began direct negotiations with the Frankin Templeton-led creditor committee in Washington as parliament passed banking, energy and anti-corruption measures to get the next $1. 7 billion IMF installment. However the opposition party Fatherland founded by jailed democracy campaigner Tymoshenko has backed populist proposals including dollar loan repayments at the old pegged currency value to upset the mix. Although reserves are back to $10 billion with Western assistance and a Chinese swap line, the central bank continues to intervene regularly in the spot market and to enforce capital controls within capacity limits. A delegation to a US Chamber of Commerce conference in July was angered by another large EU rescue for Greece in exchange for long-promised fiscal changes, as they pointed out Kiev’s actions in a short time under a civil war program a fraction of Athens’ scale. Representatives added that private bondholders resist any haircut unlike in the Greek case where an unprecedented 75 percent reduction was accepted.

With the latest lifeline Greek banks will continue to struggle even with resumed ECB liquidity injections, and their four subsidiaries in Bulgaria with a 20 percent market share could require near-term infusions as a new central bank governor was approved. The incumbent resigned over handling of the BCB crisis last year which was initially blamed on a text message conspiracy. Serbia has avoided such fallout as post-flooding mining output revives with the benchmark interest rate steady at 6 percent under its IMF arrangement. Turkish officials have concentrated more on the geopolitical ramifications as Mideast and African migrants pass through porous borders and Cyprus reunification talks are due to restart under fresh Northern leadership. Coalition attempts are now formally underway in Istanbul under a 45-day deadline before rescheduled elections as stubborn 8 percent inflation and a 5 percent of GDP current account gap defy joint management.

Iran’s Un-Bankable Post-Pariah Proposition
2015 July 24 by admin

Posted in: MENA
The Tehran Stock Exchange capped a month-long rally on heavy trading volume as the Vienna nuclear deal left the benchmark index essentially flat for the year, with major sanctions relaxation delayed until early 2016. The UN could then lift banking prohibitions including connection to the SWIFT global payments network, and Chinese and Indian institutions are positioned to be among the first to resume correspondent and local relationships and led delegations calling on business and government representatives in recent months. However their enthusiasm has been muted, as credit and capital markets despite nominal access remain subject to pervasive official control, and banks’ balance sheet hole may already exceed the USD 100 billion frozen in Iran’s international accounts.

President Rouhani convened a conference early this year to debate approaches for the huge bad loan ratio estimated at 20-25 percent of the total if normal accounting standards applied. Oversight and resolution gaps have been regularly cited in IMF reports, and the central bank lacks independence as it is just one voice on the Monetary and Credit Council setting policy. Economic growth was 2 percent in the latest quarter with inflation more than halved to 15 percent from 2014’s 40 percent. With relative currency stability, the difference between the formal and parallel exchange rates narrowed to average 30,000 rial/dollar, and unification is still a near-term goal. “Profit rates” for borrowers, to be followed by all 30 state and private institutions in the no-interest Islamic system, were recently reduced 2 percent to 20 percent, and reserve requirements fell to 13. 5 percent. The government-run giants include Melli, Industry and Mine, Agriculture, Sepah and specialized Housing and other units, while private competitors like Saderat and Pasargad often have official ties as part of wider family business conglomerates. Non-performing assets are concentrated in real estate, where a large buyer subsidy program began under the Ahmedijad administration, while manufacturing is operating at only 60 percent capacity. According to the central bank, most commercial lending is for immediate cash flow rather than longer-term investment.

A list of 600 individual and corporate defaulters has been compiled as an important step in addressing problems and reported in the media including the new English-language Financial Tribune. However they are politically-protected names and workout procedures are undeveloped. Banks have also been ordered to divest non-core activities like property speculation which supported the bottom line amid credit woes. Meanwhile they are locked in to previous high-yield deposits at 30-percent plus rates which prevailed under runaway inflation. A task force is exploring setup of a single disposal agency for overdue debts and recapitalization needs, which together may amount to one-quarter the system’s USD 500 billion size, as earnings for banks listed on the stock market declined 7 percent for the latest period.

The Tehran exchange has been touted by frontier enthusiasts as a longstanding financial sector channel, in contrast with absence in post-embargo Burma and Cuba. Since the 1990s it has been member of the Istanbul-based Federation of Euro-Asian Exchanges, a technical body which works to harmonize infrastructure and regulation and also includes archenemy Israel. Modern brokerage and electronic capacity support trading and settlement, and price-earnings ratios are in low single digits for the hundreds of companies offered at over USD 100 billion in combined capitalization. The biggest weightings are in telecoms and petrochemicals, and IPOs and small stake privatizations have been staples for retail punters. Foreign investors can in principle acquire majority ownership with permission, and Gulf buyers in particular were active before sanctions.

True availability is limited as the free-float is only around USD 30 billion with shareholding dominated by government institutions like pension funds, the Revolutionary Guard, municipalities, and religious foundations. Along with average citizens, they received no-payment transfers in the past under Iranian-style privatization. Despite their preponderance and failure to exercise traditional corporate governance, international fund joint ventures such as between Tehran’s Turquoise Securities and the UK’s Charlemagne Capital have been launched with promises of quick value cultivation. However banking and equity markets remain choked by decades of underbrush that will not be cleared even if anti-nuclear intentions are in the rapprochement’s preliminary operational phase.

Originally published on Asia Times www. atimes. com

Power Africa’s Potent Circuit Breakers
2015 July 24 by admin

Posted in: Africa
President Obama received his Nigerian counterpart Buhari in Washington and will visit Kenya, another initial country target for the 2-year old Power Africa program, as the $7 billion public-private sector funding goal is blocked by conventional and alternative energy project delays, suspension of US Export-Import Bank lending and poor Sub-Sahara financial market performance. The African Development Bank has just launched a specialized infrastructure facility facing similar setbacks, and the UN’s third Financing for Development Conference in Ethiopia offered no aid or investment breakthroughs for comprehensive continental electricity access. At the same juncture last year frontier sovereign bond issuance was a record but the 2015 pipeline has been sparse, with Zambia soon to retest appetite at steeper cost.

Nigerian shares were off 15 percent on the MSCI as the central bank imposed import restrictions with the currency’s parallel rate heading toward 250/dollar versus the official 200. Luxury items were banned along with rice and other food with $30 billion in reserves at the six months coverage level. Local and external debt was $65 billion at end-March as borrowing continued for the 2. 5 percent of GDP budget deficit, on estimated 4 percent economic growth with stunted oil exports and power supplies. President Buhari approved a $5 billion bailout for state governments unable to meet salary and bond payments, to be taken from natural gas revenues apart from the depleted excess crude account. The new administration was quiet about fiscal and monetary policy direction during a US Chamber of Commerce conference but will get World Bank technical assistance on planning and strategy with a medium term inflation-targeting goal. High yields have kept bank foreign bonds attractive but local Treasuries are shunned as GBI-EM exclusion may be imminent with the reinforced exchange controls. From a security standpoint portfolio managers are also increasingly on edge with a spate of Boko Haram guerilla attacks and bombings after swearing allegiance to IS which is already active in the Sahel sub-region. Military commanders were reshuffled but a fresh anti-terror and economic development approach in the frontline north has yet to be unveiled.

Kenya is down the same amount on the MSCI with heavyweight Safaricom vying for position in mobile banking against stiff competition, and Tullow Oil coming up against local environmental opposition in the north as the offshore Jubilee field raised first half output. As President Obama jetted there for a global entrepreneur summit, an international travel warning remained in effect due to rampant crime and the threat of Al-Shabab atrocities as the Westgate Mall re-opened 2 years after mass killings. Despite a $700 million IMF backstop the balance of payments is strained by the chronic current account gap and heavy bank and corporate dollar demand which have sparked a 15 percent shilling depreciation. The new central bank chief hiked interest rated 150 basis points in July and may directly intervene against “disorderly” currency moves as he tries to limit inflation to the 7. 5 percent upper range. Ghana is another laggard with regular “light-offs” under its $1 billion IMF program, with just 4 percent GDP growth projected into elections next year. Zambia’s mining company electricity has been squeezed further after a sovereign ratings downgrade on the near double-digit fiscal deficit as $2 billion in planned Eurobonds may entail at least a 2 percent yield bump.

« OLDER ENTERIESNEWER ENTERIES »


Management
Research
Services
Blog
Contact
Blog
You are here: Home » Blog

img_researchTags:




Africa (106)

Asia (195)

Currency Markets (9)

Europe (167)

Fund Flows (27)

General Emerging Markets (162)

Global Banking (19)

IFIs (33)

Latin America/Caribbean (156)

MENA (112)

The Andeans’ Papal Visit Penance
2015 July 14 by admin

Posted in: Latin America/Caribbean
As the first modern pope from Latin America returned to the continent landing first in Ecuador, Andean stock markets down almost 10 percent in the combined MSCI category in the first half continued to swoon in step with religious fervor. Ecuador’s $750 million additional bond tap in May traded near double-digit yields as oil prices remain below the $80/barrel budget assumption, and President Correa struggles with subsidy cuts and Chinese loan and project negotiations to cover gaps. He has imposed new trade taxes and offered an amnesty for past obligations, but is wary of denting his popularity ahead of another likely 2017 run. Chile stocks have turned negative since President Bachelet retook the post as the official GDP growth forecast slipped to 2. 5 percent on 4 percent inflation. Her approval has dipped to 30 percent after a series of bruising electoral, education and corporate tax reforms against the backdrop of falling copper exports with slack Chinese demand. Family members were implicated in a government loan scandal, and a cabinet reshuffle just named IMF veteran Valdes as Finance Minister in a bid to repair business ties in advance of proposed labor law and constitutional changes. For their part copper producers have complained of opposition from environmental activists at home, with London-listed Antofagasta halting operations at the Caimanes mine after protesters blocked a nearby dam. In external accounts the peso has stabilized and the current account deficit will be minimal, but capital outflows remain worrisome as the continent’s original investment-grade sovereign rating comes under pressure.

Colombia’s almost 20 percent MSCI drop with record currency volatility has been mainly due to the whopping 6 percent of GDP current account deficit and the fiscal shortfall at half that ratio with oil price correction. The state oil company’s Cartegena refinery has not been working and domestic consumption will support less than 3 percent growth this year. Auto sales followed construction into a dive but the central bank has kept the policy rate at 4. 5 percent. President Santos insists that the budget rule on “structural” balance will be observed over the medium term, but foreign investors with light local debt positions await bolder adjustments. The multi-billion dollar public-private infrastructure program has been slow to succeed and negotiations with the FARC guerillas remain stalemated after resumed rural attacks against the military. Security is also in question along the Venezuela border with widespread smuggling and human trafficking, and observers have warned of a mass exodus with economic collapse or a possible military takeover in Caracas.

Peru’s 5 percent equity loss joined a slight EMBI setback as congressional censure claimed another prime minister with President Humala in the waning months of his term before April 2016 elections. He dispatched troops to quell mining violence as $25 billion in ventures remain stalled in community disputes. GDP growth should recover to 4 percent with stimulus tipping the budget clearly into deficit, although the prime sovereign rating is intact with “policy credibility” according to Fitch. International reserves are equal to one-third of output but the central bank has intervened regularly to stem sol depreciation in often shadowy maneuvers, critics charge.

China’s Chain Reaction Share Chastening
2015 July 14 by admin

Posted in: Asia
Asian emerging stock markets, already weakening at mid-year with their own difficulties, shed another one percent in the immediate wake of China’s carnage as foreign investors rethought their 2015 favored region. No country was spared, including post- Modi darling India, traditional safe haven Korea and anti-corruption favorite the Philippines. Malaysia corrected as the Prime Minister was linked to a suspicious bank account, and Vietnam paused as the Communist Party chief visited Washington to advance the final phase of TPP free trade negotiations. They sold off in part to cover Chinese losses, but second half sentiment was due to harden on similar growth and debt patterns, political gridlock and economic management complexity.

Korea was down 2 percent on the MSCI index at end-June as the MERS scare and six consecutive months of export decline slashed expected GDP expansion to 3 percent. The government has reeled from perceived mishandling of the health emergency and the former prime minister’s resignation for illegal funds receipt. The central bank has been under intervention pressure to mirror Japan’s yen depreciation, and cut interest rates to a record 1. 75 percent in March, but is wary of adding to the household debt burden hanging over from the original Asian financial crisis. Fiscal stimulus, which was ineffective when President Park first took power, will again be introduced but domestic borrowing is more expensive as foreign holders have trimmed positions with the lower won and stricter trading rules.

Share price-earnings ratios at 11 times were attractive at a discount to the emerging market average, especially since new laws were adopted to encourage better corporate governance and higher dividend payments by the family-controlled chaebol. However, profits have disappointed across a range of industries from technology to construction and shipbuilding. Samsung has come under investor pressure to divest units, and the well-known US activist fund Elliott led a fight to prevent a controversial conglomerate acquisition as minority shareholder rights are still spurned.

Indian shares were flat before China’s crash as foreign portfolio inflows slowed dramatically from USD 40 billion the last fiscal year. Official revised statistics put growth at 7. 5 percent, but the true reading may be 6 percent. The central bank reduced the benchmark rate slightly as a poor monsoon could reignite double-digit inflation. Agricultural land ownership polices have not changed, and foreign insurers have also encountered regulatory roadblocks despite recent sector opening. State bank non-performing loan ratios are 15 percent, but the government will not relinquish control although it pledges to shake up management. Infrastructure projects cannot proceed until an estimated USD 100 billion in corporate debt is restructured, and investment quotas limit foreign institutional participation in workouts. Frustration about the mixed Modi record has deepened with the endless quest for IPO approval by the stock exchange itself, which is “under r-examination” according to the Finance Ministry.

Malaysia’s further weakness was no surprise as the ringgit tumbled to 3. 8/dollar on reports that USD 700 million from an indebted sovereign wealth fund under investigation went through Prime Minister Najib’s re-election campaign accounts. He denied graft allegations and accused political rivals of fabrication. The ruling party continued to back him since it no longer faces an opposition threat after the coalition splintered. Fitch Ratings held off on a sovereign downgrade, but warned of worsening capital outflows and government and consumer debt loads.

Portfolio investors have also exited the Philippines as exports sputter and President Aquino looks to seek another term with dwindling popularity following botched typhoon cleanups He has also confronted China over disputed sea zones, and a rebel peace deal was sidetracked. Vietnam has struggled this year in the MSCI Frontier index despite 5 percent GDP growth as credit creation remains excessive at 15 percent annually. Foreign investor access was recently raised to 100 percent in select industries but the currency was again devalued. Regardless of China’s inimical share climate, economic and banking sector adversity in the rest of the region will likely erase value on their own terms as the dual drags linger.

Originally published on Asia Times. com, atimes. com



Egypt’s Antagonistic Anniversary Antics
2015 July 8 by admin

Posted in: MENA
Egyptian stocks slid 5 percent on the MSCI index through the first half, despite a successful $1. 5 billion external bond issue after a 5-year absence, as former president Morsi was sentenced to death on the anniversary of his removal and Muslim Brotherhood attackers retaliated against security forces. Parliamentary elections have yet to be scheduled as parties battled over proposed rules, and the capital gains tax was postponed this year but may resurface in the next budget. The fiscal deficit will miss the 10 percent of GDP target with reduced Gulf ally assistance and inflation is again in double digits on subsidy slashes and imminent VAT introduction. The central bank has nudged the currency lower to 7. 75/dollar but has not eliminated the parallel market as the current account hole worsened to 3 percent of GDP despite 50 percent annual tourism pickup. The capital account surplus was 2 percent as $40 billion in FDI from the Sharm-El-Sheikh conference trickles in, with remittances plugging the residual imbalance. Among Western firms Coke and BP expanded commitments, and the Chinese signed a separate $10 billion medium term project deal during a bilateral trade summit. International reserves are still less than three months imports, and Fitch Ratings recently warned that 4 percent economic growth cannot tackle poverty and unemployment as governance indicators continue to slip, as it maintained a “B” positive outlook reading.

Saudi Arabia was the main positive MENA market, up 9 percent on limited direct foreign investor access, as the IMF’s Article IV consultation added to ambivalence about growth and succession prospects. Sluggish oil prices will cap GDP improvement at 2-3 percent as monetary authority holdings continue to be run down to cover spending, at a $15 billion/month rate in the first quarter. The new King announced bonuses for the army and police as military outlays spike for the Yemen air bombing campaign against rebels. A Cabinet reshuffle has put young royal family members in key economic positions as the old guard continues to rule out rapprochement with Iran in the last stages of global negotiation on a nuclear for sanctions moratorium.

The UAE would benefit most from resumed commerce and finance but it was flat on the MSCI index, as bank listings in particular reported single-digit credit expansion with dwindling deposits. Property activity has also tapered as the ambitious airline has come under international scrutiny for alleged backdoor government subsidies. In Dubai the original troubled debtor DW completed another swap which underscored the problem’s tenacity as asset sales run behind schedule. Qatar as the other core universe component was down 10 percent on the World Cup bribery scandal which may imperil 2022 hosting within a massive $150 billion infrastructure program. Before the revelations the Finance Ministry tightened spending controls and projects such as the Sharq bridge crossing have been delayed. Unrelated cultural and museum plans have been shelved altogether, and the state energy monopoly has shed thousands of workers. Oman joined the fundraising queue with a debut domestic sukuk as Invesco’s annual sovereign wealth fund survey pointed to regional retrenchment with Qatar’s pool now undergoing staff and strategic shakeups.

Greece’s Infant Infection Inference
2015 July 8 by admin

Posted in: Europe
Greece’s post-referendum EU rescue and euro adhesion doubts washed over neighbors contending with their own debt and financial sector fractures as securities markets braced for further fallout. Bulgaria, with the largest Greek bank one-quarter external share, got another ECB backstop after the collapse of CCB last year, as foreign bondholders there continue to press claims after the central bank head resigned. That calamity cost $2. 5 billion in depositor payouts and exports to Greece are also over 5 percent of the total and could dent the 2. 5 percent of GDP current account surplus. The system loan-to-deposit ratio has come down to 90 percent as domestic banks turn more cautious and place excess liquidity abroad. A March EUR 3 billion Eurobond went for repayment of a commercial bridge loan for CCB’s shutdown, as net FDI inflows help rebuild reserves to EUR 18 billion or seven months imports. After early elections the new government has implemented fiscal restraint to keep the deficit below 3 percent of GDP, with revenue measures including carbon emission allowance sale. Consumption and fixed-investment have weakened in response as economic growth registers below 2 percent on no inflation. Along with the ECB facility EU cohesion funds in the pipeline have been unblocked on stronger anti-corruption moves, but the MSCI index was stuck at a 25 percent loss through mid-year.

Cyprus shares shed around 10 percent through the period as ratings agency Moody’s predicted another round of asset quality slippage from Athens’ maneuvering, with NPLs still at half of portfolios. A compromise was reached on the foreclosure law and the Limassol port was opened to commercial operation, as the IMF and EU released another bailout installment in the EUR 10 billion program on estimated 1 percent GDP growth. The EBRD unveiled its own privatization assistance push as the new president in the Turkey-controlled north resumed reunification talks. The budget gap continues to exceed the 1. 5 percent of GDP target mainly due to soft real estate prices in 6. 5 percent annual decline. Officials under attack from the opposition party coalition for alleged mismanagement and malfeasance are considering set up of a bad asset disposal agency as they take credit for removing remaining capital controls. They contrast their approach with Greece’s imposition of a more severe EUR 60 withdrawal limit, and reiterate that the depositor haircut applied only to big accounts.

Hungary is trying to preserve double-digit gains as interest rates were again eased, despite skittishness over reduced foreign bondholder positions and retail broker closures implicated in frauds. Franklin Templeton was reported to shrink ownership 20 percent after a longtime overweight as it absorbs likely write-offs from Ukraine’s restructuring. Quaestor, the largest brokerage is accused of illegal bond sale and banks unconnected to the episode will have to contribute to a compensation fund for 30,000 clients. The levy revived anger against the Orban administration after its imposition of special taxes and takeover of foreign-controlled units. It tried to mollify executives by allowing eventual tax offsets for the insurance pool upon Quaestor’s liquidation, which could take a decade beyond patience expectation.

Ukraine’s Clipped Haircut Hurdles
2015 June 30 by admin

Posted in: Europe
Ukraine bonds and stocks showed double-digit losses, as the original end-June deadline passed for a deal with the Templeton-led creditor committee for $15 billion in relief linked to the broader IMF program praised as largely on track. Monthly coupons were paid both on the Eurobond and Russia’s package the Fund places in the official debt category to avoid possible cross-default clause activation The next servicing is in July and Kiev has passed a moratorium law that would trigger CDS upon imposition. Finance Minister Jaresko has pressed for a 40 percent haircut to reach the end-decade 70 percent debt/GDP target, but the four main commercial bondholders prefer maturity extension, equity swaps and economic growth warrants. The contrasting positions are reinforced by the absence of common sustainability data and assumptions as updated work from the latest staff mission awaits release. The exchange rate scenario against the dollar may be further downgraded toward 35-40 heightening fragility, but private funds retort that steep interest and principal reductions will pre-empt medium term market access. They also argue that Russia should not get de facto senior status as the IMF considers its policy for lending into arrears with the current impasse. In September a big $625 million installment is due and negotiations could last until that period with summer vacation and renewed Eastern fighting interruptions. The eventual value recovery could approach prevailing prices around 50 cents/dollar but most sell-side houses view such an outcome as optimistic and remain underweight.

Their caution may be strengthened by the conclusions of two papers on the country’s political and economic futures recently commissioned by the Bertelsmann Foundation. The former concentrates on the US and EU sanctions strategy with a call for balancing “assertiveness and engagement. ” It criticizes the Minsk II ceasefire agreement as favoring Moscow and embedding the Donbass region as another CIS separatist enclave. Business and banking boycotts have not altered the ground situation or President Putin’s behavior with his popularity firm at 80 percent. Reserve and ruble recovery have traced oil prices and the temporary pain according to the Kremlin story could be attributed to the West’s harsh measures amid commodity swings. Central Europe has begun to break ranks with its high bilateral commercial and energy dependence and Italy and France have lamented lost transactions and cooperation on other policy issues like immigration and Islamic extremism. The author warns against Iran-style comprehensive freezes such as ejection from the SWIFT payments system as advocated by US lawmakers, which could “blow back and damage Western economies. ”

Longtime Russia-Ukraine specialist Aslund offers a dismal economic review as he traces the post-2008 descent into crony and state capitalism, and Moscow’s shift from WTO toward developing the Eurasia Union. Financial sanctions have gone beyond the letter after a series of multi-billion dollar global bank penalties as compliance officers prevent all dealings. Capital outflows have continued at $30 billion in Q1, and actual reserves outside earmarked sovereign wealth funds may be just $150 billion. With consumption and investment falls GDP could shrink 10 percent this year, while inflation will stay at 15 percent despite currency rebound. Foreign investor sentiment is “miserable” regardless of sanctions, and unless an integration path can be restored cross-border ambitions will be clipped indefinitely, he concludes.

Argentina’s Rechristened Populist Pomp
2015 June 30 by admin

Posted in: Latin America/Caribbean
Argentina’s pre-election bond and stock rally paused as the candidate slates began to line up, with the ruling Peronists still ahead in early opinion with presidential allies filling the ranks. Their standard-bearer Governor Scioli, picked a current cabinet minister as running mate despite hints from his economic advisers that post-October debt and spending policies will change. The second place opposition representative Macri with around 25 percent approval also completed his ticket and their platform calls for a clear break from populist approaches, but his personal reputation has been dented by a history of sexist remarks. The third main aspirant Massa left the Fernandez administration in a previous dispute over farm taxes and his supporters would overwhelmingly back Scioli in a runoff. The President’s current favorable number has rebounded to 50 percent as the recession has eased with a 1. 5 percent May contraction, and real inflation runs at 25 percent with relative exchange rate stability. The fiscal deficit will probably finish at 3 percent of GDP after an election binge and a good soy harvest with lower oil imports should maintain a $5 billion trade surplus. Foreign reserves are back up to almost $35 billon after a Chinese currency swap line and local-dollar bond issue under scrutiny from litigating holdout creditors for evading a New York judgment.

Other funds and individuals recently joined the original action and these “me-too” claimants lifting the total demanded to over $10 billion. Under the court ruling assets may be seized under a discovery process aimed at state banks and companies considered sovereign “alter egos,” but the government has stymied the effort. Buenos Aires province and oil monopoly YPG have issued external dollar bonds amid the battling, as the latter turns to developing the Vaca Muerta shale deposits with Chevron in a $1 billion venture. The sovereign debt saga added a new twist with the revelation that Cuba still owes $11 billion in unpaid obligations that Argentine lawmakers refused to write off as the US moves otherwise to normalize economic relations after the decades-long embargo.

Venezuela’s stock market, which was dropped from benchmark investable indexes in the 2000s, experienced a 70 percent surge in May into bank and real estate listings in particular as a remaining outlet for savings preservation as the black market peso rate hit 400/dollar. Ratings agencies put default risk close to par with Ukraine as reported reserves dipped to $16 billion in June, despite Chinese loan and Petrocaribe buyback infusions. The actual cash portion may only be $1 billion as deals were struck with investment banks to monetize gold and SDRs were converted from the country’s IMF account. Another concessional oil facility operation with Jamaica for $3 billion in face value debt is in course, and dialogue with Washington has quietly recommenced toward a possible bilateral commercial thaw. The travel currency allowance was slashed three-quarters to $700 per person, and official office hours were changed to cope with chronic power outages. The minimum wage was hiked before elections set for December, but will severely lag 150 percent projected hyperinflation accompanying President Maduro’s rhetorical hyperbole.

Ghana’s Overflowing Spending Spigots
2015 June 25 by admin

Posted in: Africa
Ghanaian bonds and stocks reeled from massive flooding which resulted in deaths from a facility explosion in Accra along with property and infrastructure damage, as the cleanup may imperil the 7. 5 percent of GDP fiscal deficit aim under the IMF program and the World Bank stepped in with a guarantee to go through with a $1 billion Eurobond plan. New revenue has mainly come from central bank profits, and spending restraint from additional arrears accumulation. Public sector salaries and fuel subsidies are due to be cut in the coming months, and the government has returned to commercial bank T-bill issuance for financing although foreign investors continue to stay away. Inflation, stoked by a 30 percent currency drop worst in the world after Venezuela, is above 15 percent and the benchmark interest rate was hoisted in May to 22 percent. The heavy rains will also hurt the cocoa harvest as a key export and collateral for an annual syndicated loan. Cote d’Ivoire as the number one producer is in the final stages of its own Fund arrangement as it heads into December elections, where President Outtara is favored to win another term despite feeble health.
It again hosted the African Development Bank annual meeting amid sparse big convention venues, which should support another year of 7-plus percent GDP growth from the post-conflict base. Former President Gbago has yet to go on trial for alleged war crimes, and the International Court was further undermined with the recent escape of accused Sudanese leader Bashir from an arrest warrant during the World Economic Forum in South Africa. The headline notoriety came on the heels of anti-immigrant attacks and rising inflation due to electricity tariff increases to boost state power company viability. The central bank is expected to raise rates marginally as the 6 percent upper band could be breached and rand softness continues. At the event the ANC’s populist wing advocated stricter currency controls especially on the public pension fund which has extended allocation abroad.

Nearby in Zambia, which also hopes to repeat a Eurobond, the Finance Minister estimated the budget deficit at 10 percent of GDP, double the initial projection, on lower copper earnings and power shortages. Growth should come in around 5 percent as the uneven mining regime and 30 percent corporate tax deter FDI. Mining is 30 percent off the 2011 peak and the current account gap will rise moderately in advance of new elections. Kenya is also on a spending binge which has hit the currency and capital markets, with new railroad and security outlays bringing the deficit/output ratio almost to double digits. The new central bank governor lifted rates 150 basis points with inflation above the 5 percent medium-term target, and also quintupled bank capital requirements to spur consolidation. Tourism earnings are down 25 percent, but a $700 million IMF precautionary facility reinforces close to $7 billion in reserves. The stock exchange was relieved after a 5 percent capital gains tax was cancelled but replaced with a general transaction levy which will spread the pain. In the north incursions by al-Shabab include the slaughter of school children, and President Kenyatta shook up the interior ministry as he vowed to staunch the terrorist flow.

China’s Delayed Graduation Gradients
2015 June 25 by admin

Posted in: Asia
Chinese stocks endured $7 billion in foreign fund outflows with the index still up 25 percent as MSCI decided not to add “A” listings until access and ownership issues were clarified. The China weighting including Hong Kong is already one-quarter the index, and total inclusion could raise the portion to 45 percent. A first incremental phase was foreshadowed which could precede a formal review as the company and Beijing officials established a working group to resolve outstanding constraints. Local retail investors, with an estimated $400 billion in margin loans and two-thirds of the free float, were unperturbed after opening a record 4. 5 million accounts the last week of May. The securities regulator has conducted spot brokerage checks and may limit credit to four times capital, but asserts the practice is “healthy” as the Shenzhen direct HK link will soon join Shanghai. The former has over 1500 companies with a small-cap emphasis and P-E ratios above 100 times. The stock market mania has displaced other non-bank pursuits, as they collectively dropped to 25 percent of RMB 1. 2 trillion in total social financing in May. According to S&P 70 trust companies had $2. 5 trillion in assets in Q1, with CITIC and CCB among the largest. Zhongrong International recently floated a $225 million dollar bond to prepare for losses, as the professional association cited hundreds of products at risk from property and general economic corrections.

The central bank shaved the GDP growth forecast to 7 percent as consumer inflation hovered at 1. 5 percent while the producer version shows another year of deflation. Monthly exports are down but imports shrink even more with the current account surplus projected at 3 percent of output. PMI has stayed over 50, but fixed investment barely up double digits is at a decade low. Foreign car makers lamented the “death” of the luxury market as oil and iron ore sales continue to flag. New airport and rail projects were announced, and following relaxation of previous restrictions home prices rose in 30 cities, although construction and inventory indicators remain decisively negative. Moody’s changed the sector outlook to stable as developers became the biggest Asia high-yield class and a core component of the benchmark CEMBI. Local governments reported a 40 percent drop in Q1 land sales as their bond issuance quota was doubled to RMB 2 trillion to reduce immediate interest burdens. Banks originally shunned the rollovers at low yield but were persuaded to participate with special collateral and loan facilities. With these maneuvers Jilin Province, the riskiest bet according to a Bloomberg analysis, could offer 3-year bonds at the same rate as the central government.

On the currency front officials continued their internationalization campaign with encouragement to foreign central banks to hold Yuan reserves as they anticipate the IMF’s favorable nod for SDR incorporation. Capital inflows were $20 billion net positive through May despite outbound direct investment up 50 percent as the Silk Belt and Road initiatives spread their tracks across the region. The Asian International Infrastructure Bank convened its first meeting as the institution and the CIC sovereign wealth fund recruit executives abroad. Hong Kong’s talent pool faces stiffer competition, with cross-border relations further soured by legislative council rejection of Beijing’s preferred leadership promotion process.

Central America’s Leaden Leadership Protests
2015 June 18 by admin

Posted in: Latin America/Caribbean
Guatemala and Honduras bonds were hit by massive anti-corruption marches calling for their respective Presidents’ resignations on sweetheart government contract deals. Guatemala’s vice president directly implicated departed on her own accord amid doubts she could face criminal prosecution under previous sovereign immunity. Honduras’ wave of child emigrants fleeing poverty and violence to the US had recently ebbed as Washington increased bilateral economic assistance and the IMF inked a structural adjustment program. Both countries under new presidents had vowed business-friendly deficit-cutting policies now sidetracked by scandals, as security forces accused of their own abuses try to fight well-armed drug and kidnapping gangs. Guatemalan GDP growth could be marked down from 4 percent as the protests continue, as inflation inches up to 3 percent on higher oil and food prices. The fiscal balance went negative in Q1 and could slip to a 2 percent gap this election year, to be covered by domestic borrowing at half the 25 percent of GDP public debt, lowest in the region. The trade deficit has narrowed but will still top 10 percent of output and can be bridged by an estimated $6 billion in remittances from over 1 million nationals in the US.

In the Dominican Republic President Medina with an 80 percent approval rating must also decide about re-election next year through constitutional change, and the ruling party with a congressional majority already introduced enabling legislation. The political opposition is weak but the island is wary of long-serving leaders with its strongman history, and this year’s 6 percent growth pace, fastest in Latin America, may not last. Almost all sectors of the economy, especially tourism as arrivals rose 5 percent in Q1, have been humming after a major mining clash was handled in 2014. Inflation has barely registered with falling fuel and food costs and will end 2015 below the 4 percent target. Panama has been a flat EMBI performer after a $1. 25 billion global bond in March brought public debt to 40percent of GDP, despite still vigorous 5 percent growth as the Canal expansion enters its final phase. Free zone activity has sputtered with Venezuela’s collapse and new Colombian tariffs on Chinese garment trans-shipments, but tourism earnings have compensated which account for almost one-fifth of output and employment.

In Costa Rica and El Salvador in contrast the economies are growing around 1 percent on debt/GDP at 60 percent, with fiscal correction stymied by political infighting. The former placed a Q1 external bond following the latter’s last September, and both have experienced deflation which may persist in El Salvador’s case with the strong dollar. Costa Rican officials have travelled to Washington to present modest budget reforms, while Salvadoran counterparts are under fire for private property interference that may jeopardize Millennium Challenge Account aid.

Caribbean neighbors have surprised from near defaults as Jamaica, the MSCI Frontier stock market champion with a 40 percent gain, sticks to its IMF program with strong primary budget surplus and international reserve readings. With multilateral assistance and last year’s $800 million bond reserves will reach $2 billion as the trade deficit dipped marginally. Barbados has avoided Fund resort despite its 100 percent of GDP debt as tourism jumped 10 percent on a current account surplus in Q1, although austerity has not fully established a beachhead.

Brazil’s Nagging Next Century Sale
2015 June 18 by admin

Posted in: Latin America/Caribbean
Brazil’s external debt went negative on the EMBI and stocks were down 15 percent on the MSCI index despite Petrobras’ dramatic market return with a $2. 5 billion 100-year bond yielding 8. 5 percent. The re-entry came on the heels of Chinese funding accompanying a state visit and belated release of 2014 earnings with a $1. 5 billion corruption scandal write-off. The oil monopoly’s new management plans major asset sales this year and also noted in the sale documents “potential material effects” from the raft of investor lawsuits around alleged balance sheet misrepresentation. Construction firms implicated in the affair have filed counterclaims, as they petition the courts for a global settlement that will free operations for next year’s Olympics building program still running behind schedule. President Rousseff, responding to infrastructure criticism and forecast recession that may persist through 2016, has unveiled a $60 billion medium-term public-private partnership scheme for ports and roads on more generous terms than previous concessions. However she froze other budget spending and proposes additional financial transaction taxes in an effort to recoup a small primary surplus and head off junk sovereign rating demotion.

The banking sector otherwise has been under pressure as overdue household debts pass 5 percent of the total with government lender Caixa doubling provisions, and HSBC announcing it will unload its local unit under revised headquarters strategy. Bradesco is a likely buyer but the acquisition would strain capital, as development bank BNDES will stay removed under orders to pare subsidized lines. In other economic indicators unemployment was at its worst since the Workers Party took power over a decade ago, and inflation spurted to 8 percent as the central bank is on track to raise the benchmark rate to 14 percent. The real has settled below 3/dollar as swap contract rollovers will be reduced from the current 80 percent, and depreciation has helped lower the current account deficit toward 4 percent of GDP although FDI has slipped in parallel. Corporate bond spreads narrowed with the Petrobras tap but were jolted by another default by a commodities trader which will constrain second half appetite heading into a telegraphed Federal Reserve rate increase.

Mexico’s MSCI component slid marginally through June after it issued a euro-denominated century bond before at a yield over 4 percent. President Pena Nieto’s popularity continued to dissolve under personal housing deal revelations and meager 2 percent GDP growth after a cascade of energy and educational reforms. The first Pemex private exploration auction winners will be revealed in mid-July, as the powerful teachers union tries to gut the standards package and backed opponents in the recent legislative and governor elections. The ruling PRI saw its number shrink but maintained a majority with Green Party aid, as a breakaway group founded by perennial presidential candidate AMLO made a leftist splash and a no-party independent known as “El Bronco” convincingly won a state race. The other main parties, the PAN and PRD, have experienced erosion since agreeing to the “tripartite pact” with Pena Nieto early in the administration. Bondholders were net sellers in Q1, and slashed their position in short-term Treasury bills from 70 percent to 45 percent of the amount according to the latest figures on reports central bank head Carstens, a respected last century veteran, may not be reappointed

« OLDER ENTERIESNEWER ENTERIES »


Management
Research
Services
Blog
Contact
Blog
You are here: Home » Blog

img_researchTags:




Africa (106)

Asia (195)

Currency Markets (9)

Europe (167)

Fund Flows (27)

General Emerging Markets (162)

Global Banking (19)

IFIs (33)

Latin America/Caribbean (156)

MENA (112)

Poland’s Revved Regional Hub Rivalry
2015 June 12 by admin

Posted in: Europe
Just before Polish opposition Law and Justice Party candidate Duda won the presidency on a populist platform spooking financial markets, the Warsaw stock exchange held its first “Investor Day” in New York where participants questioned direction and longstanding regional hub ambitions in particular. It is still the biggest in Central Europe, with capitalization of EUR 130 billion including an active small-company-tier, and attracted a smattering of cross-listings from neighbors like Ukraine prior to its conflict. However self-inflicted policy wounds, including slow state enterprise divestiture and private pension destruction, have opened the way for challengers through Austria’s cross-border alliance and Romania’s core emerging market push, and Turkey through its overlooked Euro-Asian exchange network could also upend Warsaw’s once commanding status.

At the New York conference representatives downplayed the damage from the Russia-Ukraine trade ban and interruption as first quarter GDP was up 3. 5 percent. Half of exports go the EU and less than one-tenth to the former Soviet Union, and German demand in particular lifted industrial output 9 percent in the period. Retail sales rose over 5 percent on an annual basis with consumption a mainstay in the half a trillion dollar economy. Before the presidential poll, rating agencies affirmed sovereign “A” grades, with the fiscal deficit due to fall under the 3 percent of GDP Brussels monitoring threshold, and public debt now safely under the 50 percent statutory ceiling with government bond cancellation from the pension change.

Poland pioneered private pensions with foreign technical assistance in the 1990s, and they were the core domestic institutional investor base for the hub concept until last year. A mandatory 3 percent of salaries went into the schemes and then into the stock market, but with the controversial reform only workers choosing that option will contribute as the overwhelming majority are now covered by the traditional state social security regime. Private funds in turn closed or slashed operations, and with narrower allocation and trading scope at home moved assets abroad up to a 30 percent of portfolio value cap. Officials pledged in the aftermath to accelerate the pace of state bank and company stake sales on the Warsaw exchange to spur interest, and airline Lot may go on the block soon after years of discussion. Bank reshuffling is another prospect led by giant PKO, but 20-range price-earnings ratios exceed the emerging market average and resolution of $35 billion in Swiss Franc mortgage loans with the currency’s spike against the zloty remains uncertain.

On pensions and mortgage conversion the respective Hungary-style extremes of confiscation and arbitrary redenomination have been avoided, but new President Duda hinted at harsher treatment during the campaign. He disagreed with the central bank preference for voluntary borrower workouts, and vowed to reduce the retirement age by finding additional resources in the system. The Finance Minister, himself an ex-bank executive has dismissed the proposals as political posturing and warned of serious fiscal and financial stability consequences, but the MSCI index has since drifted along in flat to negative performance. Hungary in contrast is at the front of the regional pack with a 25 percent gain, despite similar deflation and growth indicators. Buyers are drawn since Prime Minister Orban may already have completed his draconian financial sector agenda, and the Budapest bourse is now joined with Vienna, Ljubljana, and Prague in a combined EUR 50 billion free float arrangement.

According to the consortium’s annual report one-quarter of outside institutional investors are from the US, 20 percent from the UK, 40 percent from Europe including 3 percent Poland, and 15 percent from other regions mainly Asia and the Persian Gulf. Among the big asset managers taking this route for their ETFs and dedicated funds were Capital Group, Blackrock, Aberdeen, and the China Investment Corporation sovereign wealth pool. They concentrated on larger companies with higher governance standards in seeking diversified exposure, although earnings growth lagged Asia and Latin American markets.

Romania, which is only one-quarter Warsaw’s size and was ahead 2 percent on the MSCI frontier index through June, expressed its own hub goal recently after the EBRD took a 5 percent stake in the Bucharest exchange. It is the biggest in Southeast Europe and aims for core emerging market status the next three years. New President Iohannis, an ethnic German whose victory ended a long record of coalition party infighting, has prioritized expansion and foreign participation. He has pledged to root out corruption previously associated with privatizations, which are proceeding under an IMF program with power firms next in the pipeline. Ironically the original Polish model of second-pillar pension savings will be a main impetus and a former Warsaw Exchange chief executive was recruited to spearhead the effort. The leading listed privatization fund is managed on the state’s behalf by Templeton, and well-known public face Mark Mobius regularly touts capital market progress.

Turkey, which chairs the G-20 this year and established the federation of Eurasian stock exchanges (FEAS) two decades ago, recently reiterated aspirations to become both a conventional and Islamic financial center. Romania is among the two dozen members heavily concentrated in the Balkans and Caucuses, and stretching to Central Asia and the Middle East. Dow Jones has launched a FEAS Titans 50 index of the largest companies, and task forces work to align operating and regulatory standards. Poland now faces multiple competitors in the hub race as it lost investor favor from poor policy decisions and complacency. The lackluster New York reception and presidential election share crash argue for immediate adjustments on privatization, pensions and cross-border alliances to repair the spokes.

Originally published on Business News Europe bne. eu

Nigeria’s Strongman Subsidy Contest
2015 June 12 by admin

Posted in: Africa
Nigeria’s MSCI stock market index pared its loss to 5 percent and Eurobond yields dipped almost 300 basis points to 5. 5 percent as General Buhari returned to the presidency and his opposition party also swept state elections, but the leadership turnover was dogged by continued oil subsidy and supply controversy at the state-owned petroleum company founded during his previous tenure. The Price Waterhouse report commissioned by the Finance Ministry was finally released by the outgoing administration and criticized a management “blank check” leaving billions of dollars in untracked funds, but could not cite an exact figure or attribute leakage to outright fraud as former central bank Sanusi claimed. Just before the inauguration gas stations experienced widespread shortages as refiners pressed for payment of outstanding bills, with the latest budget further cutting subsidies as the excess crude account also neared depletion.

Economic growth may be just 5 percent this year as foreign reserves were down 15 percent to below $30 billion and the current account could go into deficit for the first time in decades. The currency has rebounded from election delay woes, but remains around 200/dollar, and Boko Haram has opted for smaller-scale attacks amid reports that youth kidnapped from northern villages were freed in military operations. As the new president took office petroleum industry reform legislation was taken up in the Senate as movement gathers for maximum selloffs officials estimate could bring in $75 billion. Banks which have lent heavily to the sector may be in trouble according to S&P’s latest risk assessment dropping them on category. Dollar liability mismatches are another threat hurting share prices and the central asset management company is girding for another wave of bad assets after just entering a recovery phase from the 2008 crisis.

The ratings agency’s regional update also pointed to meager credit growth at South African banks as they face an onslaught of oversight and resolution changes with new legislation and the phase-in of Basel III prudential rules. The central bank and financial services board will have different responsibilities and subordinated bondholders could receive haircuts in future liquidations. The system will adopt a version of total loss absorbing capacity designed globally for the biggest most sophisticated institutions. Household debt service to disposable income at 75 percent will dent borrower appetite, and 2 percent GDP growth will maintain a sluggish pace. Unemployment is again over 25 percent, and the rand sank to 12/dollar on chronic power outages and mine worker unrest. Inflation has settled below 6 percent but may be under pressure from civil servant wage increases and negative terms of trade.

The current account gap has improved modestly but still relies on outsize foreign portfolio inflows, as bond ownership has not budged from 35 percent. Finance Minister Nene pushed asset sales at state-run power firm Eskom for an estimated $20 billion in funding needs, as Chinese banks chipped in $2 billion to support telecoms operator Transnet. Riots broke out against expatriate workers from African neighbors as President Zuma was preoccupied by multiple corruption investigations into his own and allies; conduct. The opposition Democratic Alliance strengthened its position with selection of a new party head breaking from the minority white tradition as the business community urgently pressed the ruling ANC for economic policy revisions.

Iran’s Meltdown Alarm Alacrity
2015 June 5 by admin

Posted in: MENA
The Tehran stock exchange zigzagged as the extended June 30 nuclear negotiation deadline with international partners neared, as companies forecast 10 percent profit decline despite reported 2. 5 percent Q1 economic growth and currency firming to around 30,000/dollar average between the official and parallel markets. A $90 million petrochemical listing went ahead in April for the first IPO in a year, as banks and telecoms shares were also actively traded, with market capitalization over $100 billion on a 5 P/E ratio. Producer price inflation fell to single digits according to the government, as the central bank cut the benchmark rate 2 percent to 20 percent. External accounts showed a monthly non-oil trade surplus aided by rial depreciation although import tariffs were also raised to protect domestic miners. The main export destinations are Iraq, the UAE, China and Korea, as Dubai in particular prepares for normalization as a free-zone and financial services hub. An IMF Article IV mission also passed through with praise for consumer subsidy rollbacks to date slashing the program deficit to 1. 5 percent of GDP. Under new rules cash handouts will no longer go to business owners and other higher-income groups. However the discount fixed-rate Bank Maskan mortgage scheme has recently been expanded in an effort to revive real estate activity which plunged 35 percent in the capital as measured by construction permits. The retail loan ceiling for housing-related needs was also increased from the current individual $12,000.

Monetary loosening extended to lower reserve requirements at 13 percent and an 8 percent reduction in the central bank’s window rate from 32 percent, as officials acknowledged losses among the big state lenders and industry NPLs in the 20-25 percent range after years of sanctions and dollar scarcity. Idle industrial capacity is estimated at 30 percent, and over half of commercial credit now goes for immediate cash flow purposes. Authorities trying to brake 30 percent annual money supply growth can ease only gradually and banks are locked in to previous 25-30 percent long-term customer deposits. A list of almost 600 major defaulters has been compiled but political and religious connections will stifle collection. President Rouhani’s team has also decried institutions’ diversification into property and investments and imposed a 40 percent of capital future limit on non-banking pursuits. Private banks like Pasargad and Parsian linked to larger business conglomerates have led the charge, and unregulated units directly established by the Revolutionary Guard may be used for stock market speculation and support experts believe.

The low-cost housing Mehr facility was inaugurated by former President Ahmedijad to spur domestic consumption and consolidate populist credentials to win a second term but came to represent 40 percent of base money expansion, according to the IMF. The household mortgage level was doubled in May to $25,000 at a 15 percent rate to be paid back in 12 years, and the central bank has agreed to move the program off its balance sheet to aid policy conduct and determine the size of potential liabilities to be added to bank cleanup costs. The total burden may already be close to the $100 billion in reserves blocked in foreign accounts under sanctions, as distress greets any end-June deal.

Capital Flows’ Quality Deterioration Qualms
2015 June 5 by admin

Posted in: Fund Flows
The IIF’s May reading of private capital allocation to 30 markets reduced this year’s projection to below $1 trillion for a post-financial crisis low as Q1 economic growth was just 4 percent and inflows/GDP at 3. 5 percent were the worst since 2002. Next year after Fed rate hikes and possible abatement of geopolitical standoffs as in Russia-Ukraine the total should recover to $1. 2 trillion, but a “stress event” can still be envisioned and amplified with the lack of secondary trading and high corporate debt. Portfolio investment has been volatile in recent months and $10-15 billion in outflows accompanied the German bund “mini-tantrum” despite the ECB’s $50 billion buying program. Equity commitments will rise 20 percent from 2014 to $130 billion on discount valuations versus mature markets, while fixed-income stays flat at $170 billion. FDI will decline 10 percent to $530 billion chiefly from China and Russia pullback. China alone will send that amount outward in the form of official reserve recycling, commercial investment and repayment, and capital flight as the other tracked economies send an equal sum abroad for a $1. 2 trillion total. Russian money exit slowed to $25 billion in the last quarter as the ruble firmed and companies covered external obligations with central bank aid.

Global growth may pick up slightly in 2016 under benign assumptions of gradual Fed rate hikes and firmer commodity prices which allow healthy consumption and exports. However sudden US wage pressure with skilled positions hard to fill could be a negative surprise affecting all asset classes with sudden risk aversion, and especially large current account deficit countries like Brazil, South Africa and Turkey. This shock would come against a background of dwindling reserve accumulation, with a wide swathe of Asian, European and Latin American borrowers below the 1-year short-term debt coverage standard. Corporate hard-currency bonds outstanding are over $1 trillion and the previous tendency to issue 70 percent in local currency has eroded over time. Cross-border bank lending also hit $3 trillion in 2014 according to the BIS as non-EU groups replaced weak Eurozone providers with geographic and historic links. With almost $400 billion due in both categories through 2017 consumer and real estate firms without natural hedges are likely most vulnerable, but derivatives markets otherwise are thin with exceptions like Korea and Mexico. Secondary turnover is particularly lacking as US dealers alone slashed foreign bond inventory two-thirds due to post-crisis capital and proprietary dealing changes. Local currency corporate market-making is only $45 billion out of a universe of $5. 5 trillion and many pension and insurance funds that own the paper are locked-in buyers anyway, the survey asserts. ETFs have expanded into the space to attract both retail and institutional investors, and their “herding behavior” and untested liquidity on large scale redemption could pose additional threats.

In Asia China is expected to further open the capital account to gain IMF SDR basket inclusion and foreign fund manager confidence, but Indonesia and Malaysia with 40 percent range overseas ownership of domestic government bonds may be under siege as India’s structural reform rollout leaves the one-year old Modi regime “better placed. ” Greek euro exit could taint the neighborhood, and Latin America is “still in the game” with even Argentina poised for a private capital turnaround with President Fernandez’s departure. The Middle East-Africa will be whipsawed by lower commodity values as Gulf foreign assets drop $100 billion to cap the cross-continent gusher.

Myanmar’s Capsized Investor Opening Optimism
2015 May 29 by admin

Posted in: Asia
The Rohingya refugee crisis, sending thousands of poor persecuted Muslims in Myanmar by boat to neighboring Asian shores, reflects lingering ethnic and religious rivalries as well as economic dysfunction despite headline 8 percent GDP growth. Despite the partial lifting of foreign commercial sanctions and tentative investor forays, the business elite connected to the ruling military remain the dominant force as political, financial and infrastructure systems suffer from a half-century of abuse. Preparation for November elections, which bar Nobel laureate and opposition party head Aung San Suu Kyi from seeking the presidency due to her children’s UK citizenship, are set to further delay policy changes advocated the past two years by development agencies and international companies as they grapple with a mixed recent Indochina track record.

Buddhist-Moslem violence along with rebel conflicts exact heavy costs, and the generals in charge led by Thein Sein, guaranteed one-quarter of parliamentary seats, have never articulated a clear economic platform. Since her release from house arrest 5 years ago National League for Democracy founder Ms. Suu Kyi has stuck a populist tone criticizing Chinese natural resource deals in particular, but has not offered an alternative vision. The upcoming polls will be contested by 70 registered groups in total, with rural ones representing the most impoverished areas. Coca-Cola and Unilever have returned in part to tap the low-end consumer segment of the 50 million population but have so far concentrated on Yangon with $5000-range annual per-capita income. Telecom firms from Qatar and Norway investing billions of dollars have provided broad coverage, but permission to build cell towers is a chronic obstacle.

The IMF in a February visit projected economic growth the current fiscal year will slip below 8 percent on agriculture weakness as inflation picks up to 6 percent. Currency depreciation will continue with the strong dollar and 5 percent of GDP trade deficit, with foreign reserves down to $4. 5 billion at end-2014. The budget gap is at the same level, with proposed public sector salary hikes pre-empting education and health needs as tax collection lags, the Fund admonished. The central bank finances spending directly but has inaugurated Treasury bill issuance, as private sector credit continues to grow at 30 percent annually from a low base.

Financial sector modernization is a main reform priority receiving Asian Development Bank support. In a May paper it noted that half the 25 authorized banks were state-directed with foreign direct investment still barred, although licensed representative offices have been approved to conduct hard currency business with international customers. Lending is collateral-based and must follow strict official allocation mandates. Private banks are part of larger business conglomerates posing contagion risk, and payment system automation has just begun.

Interest rates are determined administratively with a fixed- structure limiting competition. A new central bank law aims to boost supervision capacity and establish formal auditing and deposit insurance frameworks which can aid in consolidating existing players. Capital market development should go in stages with government securities first although they are “years away,” according to the ADB. Stock exchange work has begun with Japanese technical assistance, and preliminary plans impose a 30 percent foreign ownership ceiling on listings. A handful of venture capital funds have launched to target startups, but for now the main company equity channel is through the Singapore bourse which hosts the powerful Yoma conglomerate with interests in real estate, retailing and tourism.

The neighbors’ disappointing experience the past decade with exchange rate and financial sector reforms may help explain premature enthusiasm. An IMF report on Laos at the same time at Burma’s again urged a break from the currency peg and monopoly government banking which put debt in the 60 percent of GDP “distressed” zone. Vietnam’s bank cleanup and stock market state enterprise privatization continue at a glacial pace. Myanmar is trapped by the same history and the next administration can best make up for 50 years’ lost time with a 50-day bold overhaul plan re-opening the lapsed credit and monetary policy agenda to date.

Originally Posted on Asia Times www.