Asia’s Refashioned Frontier Frame

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Anticipating index provider Morgan Stanley Capital International’s June review that may hint at future Asia frontier index entrants after Panama and Bosnia were added from other regions, foreign investors have pinpointed a fluid Indochina and Central Asia candidate mix, with no clear immediate prospect. Cambodia and Myanmar are under international trade sanctions threat for political and human rights practice; Mongolia is in limbo under its International Monetary Fund program awaiting bank restructuring; and Uzbekistan after stock market opening and an inaugural sovereign bond is too small and tentative to qualify. Pakistan’s demotion from the core universe may be the first to make the list, as the rupee’s plunge leaves companies under the minimum $1.5 billion capitalization threshold. Sri Lanka’s frontier status in turn could be on notice should trading be suspended in the wake of terror attacks and subsequent security steps, with the blow also calling into question the specific elements of recent IMF agreement extension.

Myanmar has faded with uncertain foreign investor stock market access, and “depressed sentiment” from the Rakhine state refugee crisis highlighted in the IMF’s February Article IV report. Despite a 2018 agreement with Bangladesh over possible repatriation of the over 700,000 Rohingya fleeing, the military has refused to grant freedom of movement and continues to rule out citizenship as it faces United Nations accusations of “war crimes” during the expulsion. Aid partners are “closely watching” the humanitarian and economic aspects of the displaced population emergency, as Myanmar finalized a medium-term Sustainable Development Plan the last six months. It will be implemented through a top-level coordinating body under civilian leader Aung San Suu Kyi, ahead of the next national elections in 2020.

Gross domestic product growth slowed to the 6% range with manufacturing, consumer goods and tourism activity down. Business confidence slipped also with higher inflation and currency depreciation, with the fiscal and current account deficits near 3% and 5% of output, respectively. Central bank financing is still steep to close the former, and foreign direct investment to offset the latter “moderated,” with international reserves below the minimum recommended five months imports level. Annual credit expansion fell 15% to 20% under new prudential rules that strain private and state bank capital and profitability. Directed lending to agricultural borrowers was reduced, and foreign banks stepped in with recent licenses to support exporters, but the eventual cost of system restructuring could surpass natural disasters that historically have claimed several percentage points of GDP, the analysis suggests.

 Exchange rate flexibility and interest rate liberalization timetables could be faster in view of global “downside risks,” including potential European Union cutoff of duty-free garment imports, accounting for half the total and an estimated 500,000 jobs. The Fund reflected foreign fund manager views in urging a second generation reform wave focused on improved governance and infrastructure, privatization and skills training. Banking system fragility in particular must be “addressed quickly” with comprehensive balance sheet overhaul to facilitate capital markets launch, they concur.

Cambodia’s handful of listed stocks drew initial attention against a comparable high-growth and low-budget deficit and inflation background, and infusion of Chinese project and visitor money Resorts and casinos fueled a construction boom, with approvals over $10 billion the past two years, as extreme poverty defined by lees than a dollar a day income fell to around 10%. However the Hun Sen regime in power almost 35 years ranks 160 out of 180 on Transparency International’s corruption register. Political repression with regular arrests of opposition figures may trigger revocation under a one-year deadline of garment trade preferences to Europe, representing two-thirds of the $5 billion market.

Uzbekistan in contrast has been a darling since President Shaviat Mirziyoyev took the post in  2016 and vowed to dismantle his predecessor’s authoritarian legacy. In February its first external sovereign bond with a BB rating was oversubscribed, and in March currency convertibility and capital repatriation restrictions were eased. The $50 billion economy is projected to grow 5% annually over the near term, and single-digit inflation-targeting will begin after widespread food and energy subsidies are phased out. Natural resources including cotton, gold and uranium are lures and the government intends to unload non-strategic state company stakes through the Tashkent Stock Exchange. Current capitalization is $2 billion on price-earnings ratios under five times, with frontier acceptance despite aspirations and hype still on the distant horizon.