The Balkans’ Lingering Reconciliation Trials

2017 December 11 by

As notorious war criminal Mladic was found guilty on almost all counts and sentenced to life for his ethnic extermination campaign during the 1990s, Serbia and Croatia continue to struggle with post-independence legacies of heavy state ownership and political infighting but insist they have opened fresh economic policy and EU convergence chapters to enter the foreign investor mainstream. In Belgrade, which was bombed by Western coalition forces due to Mladic’s actions, the ruling SNS party led by President Vucic, with a technocrat government and a declared lesbian prime minister, remains popular although it is behind in surveys for the mayor’s race in the capital which may be scheduled simultaneously with parliamentary elections. The IMF program is on track with a 1 percent fiscal surplus set this year although civil servant wages and infrastructure spending will rise in 2018. The central bank is on hold with dinar stability around 125/euro and may hike rates soon reflecting global trends. Growth should pick up from the current 2 percent on further consumption and export recovery and FDI drawn in part from privatization sales. The 3 percent pace in Croatia is slightly higher aided by a tourism boom, with international visitors up 12 percent on an annual basis. The sector provides one-tenth of employment and has diverted arrivals from less secure Southern Europe and North Africa competitors. The collapse of retail conglomerate Agrokor, now under officially-directed restructuring, dampened consumption but EU cohesion funds helped fill the gap. The budget shortfall will be under 1 percent allowing exit from Brussels’ excess deficit procedure, but public debt is 80 percent of GDP and unions expect a 15 percent salary increase. A cabinet reshuffle kept the ruling HDDZ party in charge with a slim majority after the junior partner was ousted, but new elections could be called especially if the Agrokor workout stumbles.

Bulgaria assumes the EU presidency in 2018 after completing a major motorway as an aid recipient as it continues with low absorption and anti-corruption marks. A fiscal deficit is expected on higher pension and social security outlays, without intent to tap sovereign debt markets for financing. The currency board remains sacrosanct and property markets have bounced off the bottom again interesting foreign buyers and tenants. Romania’s breakneck 7 percent expansion has provoked warnings about consumption-driven stimulus, with the 3 percent-plus fiscal hole due to trigger European Commission monitoring. The current account balance has also worsened, and the central bank tweaked the interest rate corridor after 5 percent inflation, and may proceed with benchmark hikes into next year especially if political risks persist. The ruling party head has again been indicted for fraud, and his moves to drop the case through legislative maneuvers invited large street protests. A search for scapegoats has stirred nationalist anti-immigrant sentiment observers fear may drift toward levels in Hungary and Poland. In the former billionaire Soros fired back on the “lie campaign” mounted by the Orban government, and in the latter a “pure Polish blood” march organized with Law and Justice Party backing drew international condemnation for World War II era references. However their stock markets were up over 35 percent into November, with monetary accommodation and solid West Europe export demand redressing the outcry.


Chile’s Elevated Election Rerun Fatigue

2017 December 11 by

Chilean stocks on a 35 percent run on the MSCI Index through October were humbled as repeated rightist presidential election favorite Pinera did not won on the first round as expected, with respective  center and far left contenders Guillier and Diaz finishing close behind. He would succeed outgoing President Bachelet for a second time, after her term was marred by meager growth at 1.5% this year and stagnant fixed investment from tax, labor union and private pension changes. She angered the mining community by refusing projects on environmental grounds, while expanding university access to low-income students. With family members caught in scandal, her popularity rating dipped below 25%, and the ruling coalition could not unite around a candidate leaving the field seemingly set for a Pinera romp although his abrasive character and past allegations of illegal campaign funding continued to alienate voters. In contrast with his initial sweeping free-market platform, the latest version has been cautious to court moderate support but includes easier copper industry permitting and labor rules after export rebound on Chinese demand. As the contest plays out inflation is subdued at under 2 percent aided by a firmer currency, and the central bank after an extended hold may cut rates into 2018 should food prices be unaffected by weather conditions. The business-friendly contender’s lackluster result may be an ominous signal for upcoming polls in Colombia as President Santos, another unpopular incumbent, exits on equally meager growth and a controversial peace deal with the guerilla FARC, which has registered as a political party to offer its own standard-bearer for “economic justice.” Oil export earnings are up, but the current account deficit will still come in around 4% of GDP, and the fate of fiscal reforms to curb that gap is uncertain under the next administration, which may be under public spending pressure to meet infrastructure and social commitments.

Mexico’s mid-year equity rally has petered out as the election cycle there looms alongside NAFTA renegotiation impasse after several rounds. Ratings agencies began to present worst-case scenarios under pact dissolution which would trigger the worst recession in a decade, as officials reject devastating outcomes with the remaining global network of trade relationships. Presidential early poll leader Lopez Obrador has toned down his trademark populism but promises to spurn a bad North America deal and revisit private opening of the state petroleum sector. He directs venom toward President Trump as an “irresponsible neo-fascist” while promising to uproot corruption and drug trafficking at home through new approaches. An independent opponent, the spouse of ex-President Calderon, has emerged with 10 percent backing under a “conciliator” vision appealing to centrist voters after she spurned the conservative National Action Party. The ruling PRI has not yet designated a successor to President Pena Nieto, whose reputation suffered from consecutive insider scandals and economic and law enforcement missteps. Central bank head Carstens steps down in November with annual inflation at 6 percent, triple the growth rate, and rate rises on the horizon to match the US Federal Reserve’s likely trajectory. The peso again dipped toward 20/dollar as sunset clauses and other negative constructs gripped upcoming tripartite talks and runoffs.

Zimbabwe’s Post-Mugabe Crocodile Tears

2017 December 5 by

Zimbabwe stocks as the only savings haven paused after a near 400 percent advance on the MSCI frontier index through October, as the ruling party turned against President Mugabe approaching four decades in office after he cleared the succession path solely for his spouse Grace. The longtime army chief and vice president for the past two years, nicknamed The Crocodile for his alleged patient ruthlessness including violence against the political and tribal opposition, was dismissed for suspected plotting, but military allies sprung to his defense and deployed tanks into the streets and around key government installations to assert control. The President was confined to quarters and stripped of party leadership and subject to impeachment vote, as local and foreign democracy campaigners urged fresh elections. The power struggle had been brewing for months and coincided with a grim Article IV IMF review in July highlighting the depth of continuing economic and financial system collapse and remoteness of official lender reengagement with continuing arrears despite a staff monitoring program. The report traces a sad history since independence when per capita income was higher than neighbors and manufacturing lead output, and points to 1990s farm confiscation and runaway spending triggering hyperinflation as low points. It cited informal private sector resilience as a rare bright spot and praised the decision to replace the domestic currency with the dollar and rand a decade ago despite the “imperfect regime” in view of the undercapitalized central bank and scarce liquidity.  Public sector wage giveaways and an overvalued exchange rate soon endangered the system, and reserves have run out with steep current account deficits and unpaid external debt. New “quasi-currency” instruments were introduced as a half-measure, but so-called bond notes, electronic transfers and Treasury bills are poor substitutes for hard cash in circulation. Additional exchange and deposit withdrawal controls underscore the country’s isolation from mainstream trade and investment as well as diplomacy in light of sanctions over bad governance and human rights, the review commented.


To finance the 10 percent of GDP fiscal deficit above Treasury bill issuance capacity the government borrowed directly from the central bank, as the external position likewise weakened on falling agricultural exports and rand-based remittances. Overdue payment was cleared to the Fund’s concessional poverty facility under the 2015 “Lima process” but other bilateral and multilateral obligations remain outstanding despite attempts to line up commercial sources and to collateralize gold assets for refinancing. One fifth of currency in circulation is now bond notes trading at a sizable discount to dollars, and bank account daily limits are $20 with interest rate ceilings also in place. Foreign exchange priority is essential goods with an Article VIII restriction assigned under the Fund’s rules promoting open capital follows. Both growth and inflation were originally forecast at 2-3 percent this year, and before the official infighting over the post-Mugabe path fiscal consolidation was “urgent” especially with state enterprise losses likely to drain the central asset management company. Financial sector functioning was impaired with heavy bad loans and the severing of 50 correspondent relationships the past two years with increased credit and reputation risks. The business environment may improve from a meager base with recent Special Economic Zones, but the “indigenization” legacy may continue to prey on stock market wading safety, the analysis suggests.


FDI’s Ultimate Purpose Posturing

2017 December 5 by

An IMF working paper, responding to gaps in the benchmark coordinated direct investment survey and bilateral reporting generally, has stripped out offshore special purpose structures for the first time in an attempt to chart ultimate investor relationships and totals. It stipulates “asymmetries” in country inward and outward numbers where one is twice the other in half of cases and small economies have disproportionate shares as purely financial conduits. They do not represent physical ownership at the accepted 10 percent threshold and through “complex chains” can mask the business and geographic source. The analysis uses new OECD data and removes the artificial vehicles to chart actual integration and linkages where tiny global hubs in Europe, Asia, the Caribbean and elsewhere fade in importance among the 115 nations tracked. The average discrepancy in pairs is over $5 billion and may derive from conflicting valuation methods for unlisted equities despite Fund guidance. The proliferation of special purpose entities (SPEs) at multinational firms distorts “real” activity, as they are non-resident domiciles without production or presence and often “pass-throughs” for tax and confidentiality advantages. Offshore frameworks can be readily created in major jurisdictions like the US, where they bring in an estimated $100 billion in annual revenue. They encourage questionable transfer pricing for intragroup sales which are to be at “arms- length,” but violated EU rules through Luxembourg and Ireland-based transactions. Tax-shifting to low-cost or exempt locations is another goal and the British Virgin and Cayman Islands are two examples of places that do not report to outside bodies. The final investor with majority voting control may be unknown, but SPE isolation knocks one-third from the IMF survey results even though regional true FDI ties between neighbors, such as with Hong Kong and China are strong. When excluding these arrangements Cyprus and Mauritius are no longer on the top 40 locations and are replaced by “traditional economies” such as the Czech Republic and Saudi Arabia which do not offer financial engineering and round-tripping possibilities. The publication urges permanent statistical revisions around the concept of actual interconnectedness which could feature in the next comprehensive tabulation due in the coming months, at the same time that the US tax code could be changed to reflect productive rather than paper trail direction according to bipartisan advocates.


The fresh methodology will not improve Turkey’s relative position as its aspirations to better balance international portfolio and direct inflows and bridge the chronic current account deficit clash with visa and aid disputes. US commercial relations have frayed since last year’s aborted coup and subsequent crackdown on hundreds of thousands of alleged sympathizers, including a prominent philanthropist and think-tank head the past month. President Erdogan insists that exiled cleric Gulen be extradited and accused embassy personnel of abetting overthrow , as big state lender Halk Bank is under investigation in Washington for illegal gold trading with Iran. Bilateral visa processing has been suspended as the currency again slipped toward 4/dollar on the tensions, aggravated by a threatened EU aid cutoff for anti-democratic practice. Entry talks are already in the deep freeze, and the Turkish President criticized Brussels for “wasting time” and hinted at quitting both the decades-long negotiations and model FDI makeover.


Jamaica’s Weather Beaten Backstop Boomerang

2017 November 29 by

Jamaican stocks were up almost 75 percent on the MSCI Frontier index and external bonds were reopened at record low 5-6 percent yields, as the IMF praised strong compliance under the second review of the 3-year $1.7 billion program. Fiscal year 2016-17 growth was 1.5 percent on second half mining, weather, and agricultural lag offset by “buoyant” construction and business outsourcing which reduced unemployment to 12 percent. Headline inflation was 4.5% in August, within the target zone, and the central bank dropped the benchmark rate 25 basis points to sustain double-digit credit expansion with bad loans now under 5 percent of the total. The current account gap rose to 2.5% of GDP with car and machinery imports on $2 billion in net international reserves and slight local dollar depreciation in the last quarter. In the financial sector securities dealer oversight tightened and competitive foreign exchange auctions were launched. The budget was roughly in balance with a 7 percent primary surplus amid slow progress on reducing public sector wages and “reshaping” government, according to the Fund’s October report. Pension reform is under preparation with Inter-American Development Bank help, and one-fifth of assets in two big state bodies, the Urban Development and Factories Corporations, could be divested though the stock exchange and direct tenders, with the plan a key trigger for the market rally. While all securities brokers observe a master retail agreement, legislation has not been finalized for a new bank resolution regime and pension fund portfolio guidelines for more domestic and international diversification. The central bank may need recapitalization, and foreign exchange exposure is a “sizable share” of financial institution balance sheets, equal to 10 percent of GDP for non-loan investment. Intermediaries often finance themselves through subsidiaries and are in turn tied to corporate conglomerates threatening wider spillover risks, the analysis cautioned.

A separate IMF piece of work soon to come out as a book examines the broader Caribbean distressed debt legacy over the past decade which peaked at 15-20 percent levels and have only marginally improved with lingering restructuring, sale and write-off obstacles. The highest loads are in the Eastern Caribbean in St. Kitts and Nevis and Dominica, while at the opposite end Trinidad and Tobago, with stocks ahead 7 percent, has less than a 5 percent burden. They contribute to economic drag, and courts take on average three years for insolvency cases. Valuation and registration are inadequate and social customs also weigh against disposal as property foreclosure is shunned. The research asked bank executives and government officials to rank the chief resolution impediments, and the former stressed economic, legal, collateral, and real estate conditions, while the latter cited poor creditor information and underwriting and the absence of formal impaired asset markets. The authors split the difference by urging clearer loss recognition rules and greater credit bureau use as in Jamaica in recent years. Judicial and bankruptcy frameworks should be revamped and beyond the Bahamas a pan-regional NPL market could be set up, building on OECS harmonization efforts in asset management and credit reporting to create “momentum” rather than creative accounting, they suggest.

The Rohingya Crisis’ Regional Doubt Reverberations

2017 November 29 by

While President Trump’s maiden Asia voyage focused on the headline themes of bilateral China relations, North Korea standoff, and trade pacts, the unrelenting Rohingya flight from Myanmar into Bangladesh, with over half the estimated 1 million population exiting so far, was also on the diplomatic and economic agenda as a long-festering regional issue. Washington is reconsidering   easing of commercial and financial sanctions late in the Obama administration as refugee advocacy and human rights groups press the State and Treasury Departments for renewed punishment of documented military abuses under the nominal civilian leadership of Nobel laureate Aunt Sang Sue Kyiv. Natural resources under army-controlled companies remain a taboo area subject to strict reporting requirements, but US investors began to join European and Asian counterparts in exploring consumer and real estate ventures in particular. Private equity firms tentatively moved into position for promised stock exchange expansion and liberalization, after a trio of initial listings sparked new frontier market interest.

Despite another year of expected 6-7% GDP growth, these calculations are now indefinitely sidetracked with continued financial sector policy delay and inconsistency, compounded by international community condemnation of the reported Muslim expulsion campaign by the majority Buddhist population. The massive spillover into Bangladesh, following previous waves there and throughout South and East Asia, has raised investor questions about simmering ethnic and religious divides and long-term handling of the humanitarian turned economic development emergency. They come against the backdrop of MSCI stock market performance reverting to its pre-2008 peak, and preference turning to countries better equipped to sustain gains with inclusive business friendly outreach.

Bangladesh, up 6% on the MSCI frontier benchmark through October, won widespread acclaim for agreeing to host another 500,000 Rohingya crossing the border since August in addition to the 100,000 already in the Kutapalong refugee camp for decades. The move softened Sheikh Hasina’s reputation for intolerance toward the political opposition, as domestic supporters glorified her as the “mother of humanity.” She approached donors in Geneva for pledges to build the world’s biggest refugee facility, and her Finance Minister requested World Bank concessional loans at the October annual meeting, with hundreds of millions of dollars to be mobilized in the first phase. However Dhaka has severely restricted non-government organization education, health and housing provision and the refugees’ freedom of movement, including to work or to enroll in local schools. Food prices have jumped in the vicinity, with the arriving Rohingya denied permission to apply their agricultural skills.

On the subcontinent India and Pakistan have also absorbed large Rohingya communities. Shares in the former have been at the bottom of the MSCI core universe since their return, with a 25% loss through October after Prime Minister Sharif was ousted on corruption charges while staying at the helm of his Muslim League-Nawaz party. The Rohingya integrated into the majority population, but remain economically marginalized and may be at increased risk with the chance of another balance of payments crisis forcing IMF rescue, according to observers. The Chinese Economic Corridor has injected billions of dollars in infrastructure stimulus to prevent recession, but added external debt to the existing heavy load on more expensive commercial terms. India on the other hand recently threatened to expel 50,000 Rohingya on national security grounds, citing a possible repeat of the nascent rebel movement claimed by Myanmar’s military to justify its scorched earth tactics. However the stance also fits with the Hindu fundamentalism promoted by Prime Minister Modi and his allies, which was largely ignored by investors as growth was chugging along at 7%, but may now be seen as stoking communal tensions and swallowing reform oxygen with the slowdown to 5% and portfolio outflows.

Indonesia and Malaysia have been equity market laggards, with advances just above 10%, as the Rohingya question comes into play more prominently in relation to identity politics and economic access. The race for Jakarta governor was plagued by Muslim-Christian friction and Investment Minister Tom Lembong decried “rising tribalism” as religious activists insist President Jokowi take a tough line with Myanmar. In Malaysia officials unveiled a generous pre-election budget with growth exceeding projections at 5.5%, but their treatment of Rohingya refugees in detention centers is believed to be opposite and smother available job prospects key to transforming their plight to productive ends.


Sovereign Debt Restructuring’s Loaded Cases

2017 November 22 by

The Institute for International Finance’s annual survey of  its restructuring principles and investor relations trends, prepared under joint public-private sector senior executive direction, covered a half-dozen country cases and forty active communications programs as the joint tracking begun in the early 2000s reflected this year’s sharp capital flow predicted pick up from $750 billion to $1 trillion.  The group noted that a brief July scare around advanced economy central bank liquidity moderation was a minor repeat of the 2013 Federal Reserve taper tantrum and that rising emerging market foreign currency denominated sovereign and quasi-sovereign obligations posed risks, even as systemic crisis was not flagged. The workouts in the report were relatively minor but could be revisited in the near future and also represent troubling precedents. Belize was back for a third round on its $525 million original “super bond” after natural disaster aggravated fiscal and current account deficits. A creditor committee was formed one week after the government sought relief, and 90 percent of holders agreed to lower coupons and an equal installment amortization schedule from 2030-34. Consent solicitation replaced a formal exchange offer due to collective action clause provisions, and negotiations took less than six months, with financial and legal advisers paid for under the previous agreement. Mozambique defaulted on a Eurobond and two loans and proposed to swap state tuna company-owned for sovereign claims in a “compact timeframe” without full consultation. Exit consents applied in the March 2016 operation which got 100 percent acceptance for extended maturities at a 10.5 percent yield. After the deal officials revealed another $1 billion in outstanding credit, prompting IMF program cutoff and an external audit which found that half the proceeds could not be traced. Parliament and the local courts declared the official guarantees illegal, and international banks leading the syndicate are reportedly under US Justice Department investigation. Informal discussions have been held with creditors, who are pressing for a fresh Fund arrangement and debt sustainability analysis with recognition of existing cash flow help in a “cautionary tale,” according to the IIF.

Venezuela is in full-blown crisis with total foreign debt estimated at $150 billion, or 150 percent of GDP, and liquid reserves at $2 billion following a series of state oil company re-profiling and new finance transactions last year. Chinese debt for petroleum exports has already been restructured, and the central bank sold a $3 billion PDVSA bond at a one-third discount to a US asset manager in May in a controversial placement which catalyzed momentum for Treasury Department sanctions against future debt or equity purchase. President Maduro has delayed almost $4 billion in payments due the last quarter and ordered his Vice President, under previous bilateral curbs as an individual for alleged drug trafficking, to lead comprehensive restructuring talks with all commercial and official creditors with a wide disparity in geopolitical and instrument composition. The IMF may be called in to verify statistics, but Caracas with its dueling parliaments and record inflation and violence will remain at the opposite extreme of the IIF’s data and investor outreach winners. Almost half the countries tracked were in the top quartile with  Indonesia, Mexico Turkey with the highest score followed by Brazil, Russia, South Africa and Poland in need mainly of restructuring  information and network links.

Europe’s Strange State Enterprise Striations

2017 November 22 by

An IMF working paper divides state-owned firms into the “good, bad and ugly” in a dozen European countries with financial, operating and governance indicators benchmarked  against Sweden in an attempt to assess the legacy of “inconsistent privatization” often leaving heavy debt and poor productivity. Efficiency and profitability lag private competitors, particularly in Southeast Europe and the Baltics. Slovenia, Lithuania and Latvia bolstered oversight but Bulgaria is behind on centralizing ownership rather than putting ministries in charge, clarifying dividend policies and professionalizing boards. Over 6000 companies are tracked across eight industries, dominated by health care and utilities. They contribute 1-10 percent of GDP and employment, with differences in the two readings reflecting relative capital and labor intensity. Energy sector output is over half government-controlled in Hungary and Poland, while mining is a main category in Estonia and Sweden. Losses are concentrated in several lines, including electricity in Bulgaria, transport in Croatia, and banking in Latvia. In Sweden by comparison large profits come from gaming and real estate. Debt in a handful of countries stands at 5-7 percent of GDP, and Bulgaria, Romania and Poland are at the bottom in return on equity. Extrapolating from the World Economic Forum’s infrastructure scores, the Baltics provide superior company quality to the Czech Republic and Slovakia. Firm-level difficulties pose macro fiscal and financial stability risks, with high contingent liabilities in Sweden and Slovenia’s two-thirds state-directed banks sparking a crisis five years ago that almost required Brussels rescue. Productivity tends to suffer unless foreign investors are also active, and the record is uneven on following core OECD corporate governance rules, with political interference worst in Bulgaria and Lithuania. EBRD transition measures likewise show gaps on hard budget limits, bankruptcy law enforcement and competition. Ownership guidelines are inconsistent and overlap with policy responsibility, and board member nomination and compensation procedures are opaque and not skills-based. The review urges comprehensive reform with the understanding that even healthy legal regimes fail on implementation.

Europe and Central Asia were again standouts in the World Bank’s latest Doing Business survey with 80 percent of economies taking strides in the dozen areas tracked, and Macedonia and Georgia in the top 20 of 190 nations, with both leading regulation revamp since publication launch fifteen years ago. Latvia and Lithuania are close behind with bankruptcy and tax shifts evaluated by tens of thousands of ground-level professionals as the raw study input. The European Union has commissioned its own sub-national work already profiling the Balkans, and Central Asia members Azerbaijan and Uzbekistan led the reform pack the past year. Kosovo also completed insolvency overhaul, and Belarus and Mongolia passed movable property laws to widen credit access. On minority shareholder rights, Kazakhstan mandated independent directors and an audit committee, and Georgia eased liability lawsuits. Loan reporting was strengthened in Slovenia, but business startup remains the signature catalyst in the region and globally with 2017 steps in the Czech Republic, Serbia and Tajikistan, although it was not highlighted in its maiden external bond prospectus which focused on dam construction for hydropower projects involving other key enterprise pillars on elusive electricity and permits.



Refugee Bonds’ Millions to Billions Chant

2017 November 17 by

At the annual meetings of the IMF and World Bank, the global refugee crisis, which has spread from the Middle East to Asia with the headline escape of hundreds of thousands of Rohingya from Myanmar into Bangladesh after years of flight into the broader region, was in the spotlight. World Bank President Jim Young Kim emphasized the new development lender mantra of “turning billions into trillions” through innovations and risk management tools to better mobilize private capital, as the Institute for International estimated that foreign inflows into emerging debt and equity markets would again reach $500 billion with this year’s stellar index performance.

The poor country IDA window envisions $2 billion in the future for refugee host needs, as Bangladesh’s Finance Minister submitted an initial request for the Rohingya influx which alone may cost $1 billion, according to a local economist. The Bank may issue additional emergency bonds in its own name for on-lending alongside the Global Concessional Financing Facility (GCFF) – created by the Bank, EBRD and the Islamic Development Bank to allow discount borrowing by middle-income frontline states like Jordan and Lebanon – but conventional emerging and frontier market investors could more easily be directly tapped for larger sums through dedicated “refugee bonds” where the Bank instead should emphasize credit enhancement. Jordan’s government has shown interest in a pilot program which, after modest startup and preparation outlays, could raise hundreds of millions to billions in fresh long-term funding the first year.

Sovereign bonds are a logical starting point for refugee capital markets development, but public and private equity participation through investment funds is also feasible, particularly in view of the number of large listed stock exchange companies already providing goods and services to this population in camps and cities. Jordan is just one possibility in the area’s economies overwhelmed by refugee and displaced person waves, including Turkey, Lebanon, Tunisia and Iraq. It has issued external bonds both cleanly and with US government guarantees, and a $500 million one at 7% yield was oversubscribed recently within the guidelines of its IMF program aiming to prevent increase in the steep 90 percent of GDP debt ratio.

Preliminary discussions with traditional emerging market investors, as well as those focused on “impact” investing drawn to the socially-responsible component, suggest that the government could offer a lower yield for a refugee bond that ties the cost to detailed, independently verified reporting on proceeds allocation. The instrument would be designed to promote “best practice” in relief and to identify revenue streams, such as tax-producing job entry and business creation, that generate repayment cash flow. For collateral backup, buyers could also potentially have limited ownership rights in housing, road, power and sanitation facilities built to handle extended influxes into host countries, now averaging stays of more than a decade, according to UN data.

Bangladesh, which has accessed international markets once, would be a compelling candidate for development bank guarantee and risk support in an inaugural refugee bond. The Asian Development Bank could help arrange a local currency alternative as well, reflecting its mandate to strengthen domestic and intra-regional bond markets since the late 1990s financial crisis. Its work contributed to transforming India, Indonesia, Malaysia, Pakistan and Thailand, also with large Rohingya migrant populations, into mainstream fixed-income emerging market investor destinations. Malaysia has become the global hub for Islamic sukuk activity, and a debut Bangladesh bond with sharia compliant features could be structured through there as the Malaysian government considers a separate one. The World Bank’s South Asia director said that its own form of bonds for the emergency is under review, as it still grapples with the right public-private sector mix in refugee operations. A creative emerging financial market-based solution has been presented to the institution and awaits official, commercial, or philanthropic sponsorship to realize millions to billions in available foreign investment beyond slogans.


Central Asia’s Prickly Business Reform Prize

2017 November 17 by

The 15th edition of the World Bank’s Doing Business report, which surveys tens of thousands of entrepreneurs, lawyers and accountants for on-the-ground insight into commercial and regulatory conditions across a dozen categories, showed Uzbekistan as one of the top ten reformers the past year among the 190 countries tracked. The favorable publicity was soon overshadowed by the fallout over an immigrant’s truck attack in New York City, but extended a record of top sub-regional performance as Azerbaijan, Kazakhstan, Mongolia were also cited for annual strides. Kazakhstan’s number 36 ranking was just behind Russia, while Tajikistan was at the bottom of the pack in 123rd place. In the neighboring Caucuses Georgia is a perennial rule change frontrunner, and in the top 10 of the overall ease index led by advanced and big emerging economies New Zealand, Singapore, Denmark and Korea.

Uzbekistan’s new President Shavkat Mirziyoyev unleashed a reform wave after decades under the authoritarian control of Islam Karimov, including freeing the currency, and courted foreign investors at September’s UN General Assembly meeting. He spurred advances in half of the World Bank’s focus areas, such as a “turnkey” electricity connection at the state utility and faster construction permit approval. His government acknowledges short-term adjustment costs and recently admitted the longtime 7% growth target may not be reached. The International Monetary Fund reinforced this wariness in its companion economic update issued during the October annual meeting, as it listed “deep-rooted”  banking system, fiscal and monetary policy and private sector development weaknesses  offsetting  relative micro-level company progress.

In the 2016-17 reporting period, property rights strengthened in Kazakhstan with public disclosure of ownership around Almaty. In Mongolia a new movable property law went into effect allowing leases and titles as collateral to be entered into modern registries. Azerbaijan clarified corporate governance and transparency norms to include multiple board service, executive compensation, and formal independent audits. Kazakhstan’s stock market was a top 40% gainer on the MSCI frontier index through October, aided by expanded shareholder lawsuit scope for investor protection. Uzbekistan also introduced on-line tax payment, and Georgia further increased creditor insolvency power. Tajikistan, despite its ranking in the lower half of all countries, updated labor practice by raising minimum severance pay for dismissal and simplified business licensing. Azerbaijan’s banking crisis, where state giant IBA is in debt restructuring estimated to equal one-tenth of GDP as smaller competitors try to recapitalize, sparked a flurry of improvements in credit reporting and bankruptcy reorganization.

After 2.5% growth in 2016 another 1% pickup is forecast for Central Asia and the Caucuses this year and the medium term trend will be 4-4.5%, around half the early 2000s average, according to the IMF. Hydrocarbon exporters Azerbaijan, Kazakhstan and Turkmenistan have stabilized with higher world prices and decent agriculture and construction backstops, but were urged to further diversify. Oil importers could see 4% growth in 2017 on Russia remittance rebound and boosted gold output in the Kyrgyz Republic. However financial sector damage lingers beyond Azerbaijan, as Kazakhstan merged the two largest banks and injected 4% of GDP this year, and Tajikistan’s government mounted a similar bailout. Consolidation has also taken place in Georgia in the face of steep bad loan ratios, while credit growth is flat or negative with the exception of Turkmenistan, where the rapid pace invites “future quality risks” in the Fund’s view. Azerbaijan and Kazakhstan issued foreign debt to cover fiscal deficits, and despite drastic exchange rate adjustment, such as with Uzbekistan’s official and parallel rate unification where the som lost half its value against the dollar, the region’s current account gap will improve only “gradually” from last year’s 6.5% of GDP. With the currency no longer the monetary policy anchor, central banks were encouraged to adopt inflation-targeting and more liquid and longer-term local Treasury bonds. With a nod toward the Doing Business attention, the Fund outlook praised “comprehensive initiatives” on competitiveness and the commercial environment, but lamented the lack of state enterprise privatization and anti-corruption and foreign investment promotion steps otherwise. It warned that “complacency” in headline reform movement may hamper fits with China’s Belt and Road and other global integration programs where rulebooks call for more thorough trade and financial reorientation.