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Corporate Defaults’ Doubling Down Stakes

2020 May 28 by

With the raging coronavirus, oil price crash, and US dollar climb combining to cramp high-yield corporate issuer access and soundness, sell-side houses have doubled the default forecast to 5%, with Middle East hydrocarbon companies most at risk. That figure is still half the 2009 crisis level, but equal to the taper tantrum fallout five years ago when big emerging economies with fiscal and current account deficits were in the crosshairs. Quasi-sovereign names should be spared, and Chinese property developers likely can rely on onshore backup as the country restarts from the earliest virus rampage. Outside weak known categories like Argentina and Chinese industrials, a large chunk of the universe pre-financed last year and through February when appetite remained. Frontier country participation in turn is small at $70 billion mainly from Jamaica, Ukraine and Nigeria. The distressed fraction below $70 is 15% of the total, and under $50 is 5%, in line with recent crisis trends but far short of the 2009 crash when it was over half of volume. The status is more due to panic selling than poor credit fundamentals at this stage, but certain sectors and businesses are clearly in trouble. Airlines will not soon rebound from health-related travel precautions, and Digicel out of the Caribbean proposed a below par exchange on $2 billion in notes in March. An estimated $70 billion is due this year in the high-yield/unrated segment, out of $250 owed for external corporates overall. With the international channel now closed, most firms should be able to tap local banks and bond markets, but real estate sponsor demand in China may crowd out other candidates. Indonesian refinancing is more elusive, but large near-term maturities do not loom. Should global fixed income volatility continue as measured by the VIX and other gauges, the spread over US Treasuries could magnify to almost 1000 basis points, according to JP Morgan calculations.

Corporate Eurobond trading was $925 billion or 17% of total turnover in 2019, and was outpaced by sovereigns with a 60/40% relative split, trade association EMTA reported. Brazil’s Petrobras was the leader, and Brazilian instruments came in second behind Mexican as the most popular generally with $780 billion in activity. Local debt was over 55% of the total, with Indian, Chinese and South African bonds among the favorites. Argentina dominated sovereign Eurobonds with three frequently traded offerings accounting for $250 billion. It is under virus quarantine and Economy Minister Guzman has signaled that the restructuring offer timetable may slip even as the contours of previously-outlined proposals prepare investors for steep interest and principal reductions. As an academic he also advocated GDP-linked instruments beyond the growth warrants contained in the last swap, and the IMF has released policy and technical papers on the subject that may finally see practical application. The Bank of England and International Securities Markets Association also organized working groups around the theme that could be mobilized in the current Argentina deal, and may also feature in neighbors skirting default with commodities and tourism collapse to double the reach.

Iran’s Banking Sickness Swoon

2020 May 21 by

Iran, presumably through the conduit of close Chinese business and diplomatic ties, has been among the earliest and most severe concentrations of the coronavirus pandemic. With tens of thousands of infections and thousands of deaths reported going into the Persian New Year season, parliament shuttered with spread there following local elections where the cleric-led Supreme Council disqualified perceived economic reform candidates. The epidemic and accompanying price crash in oil, the main export subject to US sanctions have dominated the government agenda, despite cabinet ministers in quarantine or already sick.

In an historic move, the central bank formally requested $5 billion from an International Monetary Fund rapid facility to handle the disease fallout, as it approached allied lenders like the Islamic Development Bank and Asian International Infrastructure Bank for help. At the same time it reported a 50% annual jump in banking system lending to fund the fiscal deficit, with President Rouhani’s cleanup and modernization agenda on indefinite hold with the dual sanctions and Covid-19 confrontations. The state-dominated system, with capital adequacy estimated at half minimum Basel standards, and bad loans at one-quarter or more of portfolios, will be pressed further on announced  business and consumer support programs around the health emergency after decades of dysfunction and weakness. The IMF has long recommended sweeping changes in Article IV surveillance reports, and as part of future agreements the agency with Washington’s backing could work with Tehran to promote fixes that could also thaw bilateral relations.

With the Trump Administration further ratcheting up sanctions after formally designating the Iran Revolutionary Guard Corps a terrorist organization, the Institute for International Finance (IIF) projected the economy would decline another 7% this fiscal year ending in March, after shrinking 5% in the period after joint nuclear deal breakup. Oil exports now under total US prohibition after initial waivers for neighbors and Asian countries slid to only several hundred thousands of barrels/day, compared with over 2 million in 2018. Budget figures have not been released for more than a year, but the IMF forecasts an 8% of gross domestic product fiscal deficit. Inflation officially runs around 20% but food price increases are double that level, and the currency is no longer in free fall against the dollar and has settled again toward the 150,000 range, or triple the fixed 42,000 exchange for essential imports under the multi-tier system. The IIF report expects a shift to annual trade deficits amid the continued sanctions squeeze could leave only $20 billion in international reserves by 2024.

The central bank, which has suffered coronavirus deaths among its own employees, offered in March a package of low cost loans to millions of individuals and businesses to cover damages, along with a three-month moratorium on loan repayments. The eligible industries span the spectrum from hospitality and tourism to agriculture, textiles and tourism. The lines were on top of a 30% annual increase in government debt to banks as of December, along with a reported $110 billion in outstanding private sector debt as Tehran pledges sanctions relief to existing large and small firms and support for high-tech startups.

Prior to these stresses, a June 2019 Peterson Institute for International Economics analysis from a former IMF staffer flagged a “slow motion banking crisis.” It described “problems brewing over decades” from state interference, corruption, and missing regulation and supervision. Despite chronic liquidity and solvency pressures, runs have not materialized due to emergency central bank assistance, de facto deposit guarantees, and limited savings alternatives aside from the stock exchange. It registered a triple digit gain through March, but has a narrow free-float for retail investors. The government controls 70% of system assets through “complex ownership structures and interconnections,” and only recently brought unlicensed shadow banks under oversight after several headline failures. In 2018, as President Trump withdrew from the nuclear agreement, Iran’s parliament put the unofficial non-performing loan ratio at 50%. Capital adequacy was only 5% of assets against the Basel 8-10% recommended standard. Against basic banking law provisions, the central bank as a “lender of first resort” has provided large liquidity facilities without collateral. It extends “exceptional regulatory forbearance” instead of demanding recapitalization and restructuring, according to the Peterson Institute research.

International financial reporting standards have been adopted by several listed banks on the stock exchange, and their share prices collapsed with trading suspended after finding fraud and balance sheet holes. The Financial Action Task Force recently returned Iran to its “black list” for failure to pass anti-money laundering and terror funding rules. Iran has asked the United Nations to block US sanctions during the Covid crisis, as the Trump administration recognizes humanitarian exemption and previously approved a dedicated commercial funding channel. It can extend this logic and allow Tehran’s application to the IMF and World Bank as the biggest shareholder for direct lending and technical assistance. Both health care and banking system strengthening could feature on the intertwined agenda, and Washington, in promoting disease control and free-market reforms, can test rapprochement that could broaden through these institutions.

Contagion’s Contemporaneous Collision Course

2020 May 14 by

Emerging market veterans after decades of crises, including the US Federal Reserve taper tantrum scare five years ago and the fallout since 2018 of Argentina and Turkey debt woes, are always on the lookout for so-called asset class or portfolio contagion, when common economic and financial sector squeezes and fund redemption needs spark large selloffs. Even though the literal form with the coronavirus pandemic originated in China and reached first to neighboring Taiwan, Thailand, and Korea several months ago, investors did not grasp the dual health and financial market threat despite ample warnings on both fronts. In Asia, swine disease that was monitored for potential human jump caused pork shortages raising food prices and inflation, and was on the radar for tourism, a large contributor to current account inflows. The region previously had selective outbreaks of respiratory system virus that came from the Middle East, and Chinese authorities were on notice of the Ebola spread in Congo with close mining connections there. Banks and non-banks reportedly pulled back on credit lines to affected businesses amid heightened regulation to reduce outstanding corporate and consumer debt burdens, often in the high double digit danger zone as a portion of gross domestic product.

Emerging stock markets were down through February on the benchmark MSCI core and frontier indices, but China and Asia outperformed Latin America and Europe in the former as the largest weighting. On the latter Africa, Middle East and Central Europe components had a few positive results as the overall gauge had fallen only 5%. Local and external government and corporate bond markets showed slight gains, as spreads over US Treasuries as a measure of risk continued to narrow. For domestic instruments the average yield was 5%, still representing a large pickup over advanced economy negative and low ones to drive allocation. A few analysts raised the specter of another SARS or AIDS emergency as in decades past, but even when these epidemics were raging they have not been pivotal in decision-making against traditional growth, policy, reform and technical categories.

As Covid-19 went global in March, with total demand and supply shutdowns and fiscal and monetary policy rescues, the immediate market carnage has paralleled the 2008 financial crisis. Currencies, equity and fixed income are off at least 20%, amid weekly fund outflow records at tens of billions of dollars, according to industry trackers. Several stock markets have curtailed operations or closed temporarily like in the Philippines, as they also consider or institute short-selling bans and tap state-owned and private institutional buyers for support. The IMF and World Bank, as the only two development agencies with worldwide presence and necessary firepower, initially combined to offer $65 billion in dedicated facilities to counter the disease and its economic fallout. The Fund put $50 billion aside and was soon swamped by dozens of requests, including from Iran which has not approached it for decades and is under strict US commercial sanctions. New Managing Director Bulgaria-born Kristina Georgieva, the first from an emerging market, has indicated a willingness to deploy a bigger share of its $1 trillion in reserves, roughly equivalent to the developing world damage observers tally with simultaneous oil and other commodity price collapse. The Bank has extended both concessional loans and technical expertise, with its IFC arm activating trade finance lines to maintain exports and value chains.

Growth forecasts were modest at around 4% amid global end-cycle near-recession worries before the health disaster, and double-digit output declines in the coming quarters will leave a barely positive showing at best by end-year across major markets. Fiscal and monetary easing is part of the standard playbook even if bigger deficits and additional currency depreciation result. Structural reforms like privatization and business climate overhaul will likely fade on the agenda as governments turn inward and enact more controls for pandemic protection. They may try to postpone bank and non-bank cleanup, but a cascade of stress and insolvency has been clear in China and India and elsewhere, such as Lebanon where it is coupled with sovereign default. The massive foreign investor exit in turn highlights the urgency of building and strengthening domestic private pension fund bases, which have eroded or never taken off in Asia, Europe and Latin America. Frontier Middle East-Africa should concentrate on establishing domestic debt and cross-border securities platforms as mid-decade priorities. However health, migration, and environmental threats with this universe in the frontline must be weighed equally in the future as contagion assumes a more complex definition.

Lebanon’s Delusional Default Designs

2020 May 7 by

Lebanese stocks at the bottom of the MSCI frontier market pack last year continued to slide through March as the interim government prime minister, a former academic, declared the 150% of GDP public debt unsustainable and officially defaulted on a $1.2 billion Eurobond payment. The rest of the $30 billion outstanding, around half the domestic amount, will be restructured as he warned that the “delusion” of choosing between covering imports and reimbursement with thin foreign reserves had ended. Prior to the action the sovereign credit rating was downgraded to near bust “CC,” while index providers weighed expulsion from benchmarks on tightening capital controls with the informal exchange rate reflecting 25% depreciation in the longstanding 1500/dollar peg. The instrument price plummeted toward the 20-30 range and default swaps will soon be triggered as ISDA rules set the clearing auction level. Local commercial banks are the overwhelming holders after a series of central bank high-yield “financial engineering” maintained subscription in recent years. They lost $15 billion in deposits in 2019, and apply curbs on daily withdrawals and may now face balance-sheet write-downs.

 The IMF and World Bank have been contacted for precautionary facilities and technical advice, as a $10 billion previous international aid package remains in limbo pending fresh elections and structural reforms to close the chronic fiscal deficit. The regime set off large scale violent protests with a proposed internet use tax, following an extended failure to collect street garbage and provide reliably electricity through the state electricity company. The government named legal and financial advisers for negotiations, and UK-based Ashmore has a blocking stake in short term maturities with the 75% collection action clause voting threshold for new terms. The true reserve position will drive the process, with Fitch Ratings estimating that it may be $40 billion net negative with lines to domestic banks and other institutions, including satisfying correspondent relationships essential to diaspora business. Authorities had earlier floated a swap to lengthen tenors quickly exposed as unrealistic with interest payments already gobbling up 40% of shrinking budget revenue. The remittance scare with massive unrest also coincided with a Gulf tourism break amid economic worries in that region, and the prospect of another Syrian refugee wave as President Assad and Russia cleaned out the last civil war rebel pockets.

Neighboring Mideast markets were largely trading flat with their own fiscal and current account gaps and mixed IMF program record. Egypt as the sole core universe representative lost luster as last year’s favorite with privatization listings slow to materialize and a regime crackdown on political opponents, reinforced by austerity measures, heightening investor and tourist unease. Jordan has its own teeming Syrian refugee population alongside the legacy of the Palestinian one, with the long awaited Trump administration peace proposal with Israel complicating and narrowing the parameters for an eventual separate state. The King replaced the cabinet after subsidy cut and living cost demonstrations, but it has yet to inspire business and financial community confidence. Tunisia after months of wrangling agreed on ruling coalition formation but the party lineup is volatile as Fund policy items are delayed and missed, with economic “spring” readily cast as a delusion.

Latin America’s Roiled Remittance Remedy

2020 April 30 by

The 2019 Inter-American Dialogue annual survey of regional remittance trends showed slower 8% growth to almost $100 billion, with “political problems” in Venezuela and Central America driving the increase. US migration restrictions will likely damp the 2% of GDP flow, with 40 million households getting overseas money. The tapering will cramp future economic performance as such a large balance of payments component and family and personal income support, the report warns. Mexico’s clip in particular fell from 11% to 7%, and El Salvador, Haiti and Colombia also slid. In the “most unstable” Northern Triangle countries of Guatemala, Honduras and Nicaragua the cash is the biggest share of output, and for Latin America and the Caribbean yearly growth is projected at 5% through mid-decade. Mexico was the leader receiving $35 billion, as more workers sent higher amounts, according to the analysis. They were larger from Florida, New York and Georgia than in California, reflecting a deportation “Trump fear factor.” While volumes and individual transactions rose, principal was flat as savings were drawn down in recent years. In Central America “victimization” is a key catalyst, and leavers typically have transnational connections and a negative domestic economic outlook. The odds jump with households earning less than $400/monthly. In Nicaragua one-tenth of families had a member flee, mainly to Costa Rica and Spain along with the US. Remittances are 15% of GDP, and 10% of recipients reported a one-third annual jump in the sum to $4000. Venezuela’s population has historically not been a major source since the Maduro regime’s humanitarian and social crisis, and channels are limited due to payment system mistrust and preference for “in-kind materials,” IAD comments. It estimates 3 million people already rely on the inflows, second in the current account after oil, in the increasingly dollarized economy. Fragile states like Haiti, where the portion of national income lead at 35%, will soon be joined by Bolivia, Guyana and Paraguay as examples.

Haiti’s earthquake a decade ago has been overshadowed by the continental Venezuela and coronavirus emergencies, with the President unable to gain parliamentary approval for proposed prime ministers as he advocates constitutional revisions to break the logjam. His government has come under violent protests for unaddressed poverty, with half the county living on under $2.50/day, and lacking food and sanitation. A watchdog group calculates that $2 billion in concessional oil aid was squandered, and growth is flat with currency depreciation and inflation in double digits. Haitians have exited to neighbors and throughout the hemisphere since the natural disaster but Venezuela’s collapse has overshadowed the movement. Citizens from debt-defaulters Argentina and Ecuador could soon expand the exodus. The IMF has declared Argentina’s $100 billion in dollar obligations “unsustainable” but the government has insisted on continued social spending that would postpone fiscal balance until mid-decade. The new Finance Minister has promised a quick offer that could entail a 50% haircut according to investment house consensus, but creditors may push back not only on servicing capacity but the Fund’s traditional senior standing guaranteeing full repayment. Outside observers believe the Fernandez Administration’s program will be more credible with far-reaching administrative and supply-side reforms, especially with offshore oil deposits relatively un-bankable at the current price and tender enthusiasm.

Portfolio Contagion’s Immature Immune Response

2020 April 23 by

The physical coronavirus’ global explosion was matched in market results and fund flows with the initial blow, with currency, debt and equity indices down double digits, and combined two-month January-March outflows over $40 billion, double the 2008 financial crisis total according to the IIF headline tally. Public and private sector economists scrambled to revise already sober GDP growth forecasts to consensus recession, as the UN postulated a “doomsday $2 trillion hit” for a barely positive 2020 finish. China as the outbreak source was the first to report the scale of simultaneous demand and supply destruction, with fixed asset investment and retail sales both off 20%. S&P Ratings expected further “downside risks,” and the IMF Managing Director Georgieva after an original 3% projection could not define the “far fall.” The parallel oil price collapse with Russia and Saudi Arabia refusing output cooperation was another wrench, with a one-day 30% drop to $25/barrel the biggest in three decades. Big importers in Asia and elsewhere would typically benefit from the move especially if it tips the current account balance, but the likely Covid-19 fallout will negate these effects. The IMF and World Bank jumped into the breach, with respective $50 billion and $15 billion pledges for the disease emergency. Iran, with the largest caseload in the Middle East, asked the Fund for $5 billion for the first time since the 1960s. The US has not relaxed its comprehensive sanctions which exempt humanitarian operations, and it or another country could also block help due to internationally-certified noncompliance with anti-money laundering and terror financing rules. Venezuela was another unusual case seeking to tap the special rapid facility, but the request was rejected on the Maduro government’s non-recognition.

In advanced economies the big guns mobilized unprecedented rate-cutting and bond-buying programs. The Federal Reserve in a rare inter-meeting action slashed the benchmark to near zero and rolled out massive Treasury and other instrument backing. New ECB chief Lagarde after first demurring unveiled a euro 750 billion Pandemic bond purchase expansion, and the Bank of Japan deepened forays into corporate as well as government offerings. Washington extended swap lines with Canada, the UK, and Switzerland as well as into select emerging markets like Korea. China reduced bank reserve requirements twice, and Brazil, Indonesia and Turkey cut rates and intervened in currencies for “smoothing” purposes. Asia as the regional epicenter introduced large fiscal stimulus packages beyond China/Hong Kong. Indonesia offered $10 billion in manufacturing tax breaks and small business loans. Brazil chipped in with $30 billion repurposed from the existing budget, despite President Bolsonaro’s flagrant repudiation of recommended social distancing as he organized political rallies. In Europe Poland and Turkey deferred pension charges and expanded health and infrastructure spending, as the EU created a $35 billion pool and vowed more convergence criteria flexibility due to the catastrophe.  This largesse in turn could accelerate exchange rate depreciation against the dollar, with 20% drops for oil exporters in particular, including Mexico and Russia, Mexican President AMLO has also been widely criticized as a virus doubter as he insists on close embraces with government officials and supporters, while Pemex and the sovereign struggle to stave off ratings downgrade spread.

Corporate Bonds’ Blunted Body Slam

2020 April 16 by

Corporate bond promoters continued to slough off growth, earnings credit downgrade, and tight valuation worries with spreads well under 300 basis points over Treasuries into the first quarter before the covid-19 scare, citing Sharpe ratio return over a decade and Asian company resilience after the last SARS epidemic outbreak to support the asset class. JP Morgan’s annual conference participants favored Latin America with China’s economy retreating, despite a likely Pemex fallen angel rerating and Mexico and contentious sovereign restructuring over Argentina’s $100 billion pile owed more to the IMF than commercial holders. A core industry argument is hiring of dedicated analysts to perform bottom up evaluations, with reduced leverage in financial ratios and risks of massive currency depreciation remote. CEMBI risk adjusted returns were superior in particular the past five years, with liquidity also better than US high yield, according to historic calculations. Lower volatility has come with pension fund allocation, and cross over investors from pure advanced country instruments are now committed. Across major Chinese, Russian, Brazilian and Turkish issuers balance sheet and management fundamentals improved, although profit outlooks may suffer with the coronavirus spread. Ratings trends remain slightly negative, with Indian companies recently following post-sovereign rethinking on growth and competiveness reservations. Argentine names already followed this track, while Ukraine ones could benefit from opposite sovereign upgrade. China real estate was an iffy proposition before the disease pressure, and will fall further into the speculative category unlike steady rating patterns otherwise expected. Primary supply in January and February was strong for refinancing purposes chiefly with surprise pickup in Chile at 20% of the region for anti-unrest increased social spending ahead of a proposed constitutional redraft. Asia tapered as the COVID-19 epicenter, and Russian appetite was solid despite the threat of US and Europe election interference sanctions, while ESG green instruments also featured.

Banks have fallen out of favor in the Middle East and elsewhere, joining previously sidelined Chinese and Turkish ones. Non-bank problems are likewise in the spotlight in India and selectively in Latin America, and hydrocarbons and metals as one-fifth of the CEMBI are under demand squeeze with output and environment caps. Oil and gas suppliers can now be screened on a sophisticated range of operational and carbon footprint metrics gaining institutional investor acceptance. The leading providers have launched stand-alone indices that could be merged over the medium term with conventional gauges and cover both public and private markets, experts believe. On Argentina specialists argue that corporate negotiations on a case by case basis could be smoother than the latest sovereign saga. After the IMF declared the debt load unsustainable, recovery in the 50 cent range may not be assumed, and energy-related issuers will have to take on a new set of tariffs and regulation after the Macri government’s liberalization push.  Brazil should be a better bet with infrastructure and consumer goods’ rebound signs, but a key driver will be changing local capital markets behavior as retail customers switch from banking deposits and Treasuries to private securities preference. Mexico has enjoyed a peso bump with passage of another North America free trade pact, but near recession and President AMLO’s erratic decision making exacerbated jitters, despite top industry association investor relations marks for career professionals.

Turkey’s Pesky Pump-Priming Primer

2020 April 9 by

Turkish shares briefly roared into the new year to leave behind 2019’s lagging single-digit gain versus the MSCI benchmark, as Finance Minister and Presidential son-in-law Albayrak unveiled another bank-credit fueled plan to restart 5% growth in contrast with last year’s near recession. The central bank with half a dozen rate cuts the past six months has supported the thrust, with the lira firming for a time at a “competitive” level below 6/dollar after previous crash fears, officials assert. Renewed monetary relaxation has resulted in negative real rates, with inflation stubbornly in low double digits on food price pressure. State and private banks were ordered to reclassify loans so that the NPL ratio is above 5%, but they are expected to again open the spigots as the government debates a central bad asset disposal arm. As a contingent fiscal liability the move along with accounting for public-private infrastructure partnerships could reveal a sizable deficit at odds with traditional balance. High-profile construction projects remain saddled with high debt, as President Erdogan vows completion through local funding and new Gulf and Asian sources. His team pledges better management with industry and operating overhauls at the core of the near-term structural reform agenda, without relinquishing close business ally control.

Along with loose monetary policy, the current account deficit resumed in January after a rare surplus was registered last year on import squeeze. Agriculture and textile exports are at the mercy of world market values and auto-assembly has suffered with Europe-wide downturn. Foreign portfolio outflows as a trend have slowly reversed, but direct investment as a perennial weak spot is meager. The amount of usable foreign reserves is a mystery with resort to interbank and stock exchange currency swaps, while the offshore market is banned and bank deposit dollarization has barely budged. At most tens of billions of dollars is available, as private sector debt rollover is in the $100 billion range in 2020, with the global liquidity picture potentially tightening at the margin. Unlike 20 years ago the government insists an IMF program is not under consideration, as it turns to China and regional neighbors for potential infusions.

Politics is a major driver of the economic strategy repeat after the ruling AKP party lost Istanbul and other big cities to opponents now in charge of over half the country’s output. The former prime minister and his deputy defected from the group to start a new competitor, and a succession race has broken out among the incumbent’s backers. President Erdogan’s popularity was briefly boosted with his takeover of Kurdish-run Syria as US President Trump pulled troops back, although relations between the two remain volatile, with the latter regularly threatening trade sanctions and tariff hikes. Strains with Europe have multiplied over Cyprus, Syrian refugees and Libya, where Ankara voted to intervene militarily on behalf of the Tripoli regime which has lost central bank and oil field control. Its main challenger with ISIS knocked out of the contest is General Shifter, who lived in exile in the US, getting arms from Russia, Saudi Arabia and the UAE. The fighting has spawned massive internal displacement alongside the African onward trek to Europe, with EU assistance not primed for recycling.

Frontier Debt’s Exacting Exploration Excitement

2020 April 2 by

Following consecutive years of double-digit gains above the core sovereign bond benchmark, and with crowded trades in the main emerging market local and external instruments, investment houses pre-virus were touting fundamental frontier allocations based on diversification and underlying country improvements. They argue that risk re-pricing can partially offset illiquidity, although the credits have not been tested in crisis and remain outside standard ETFs, Last year’s big winners were Egypt and Ukraine, while Kazakhstan and Kenya lagged the JP Morgan EMBI and GBI-EM indices. A major debt and equity rebounder predicted for 2020 is Pakistan with another IMF program, with inflows into domestic Treasury bills yielding almost 15% as the currency stabilizes. Economic growth will be 2-3% on fiscal and current account adjustments, as double-digit inflation drops from prior depreciation and bad farming results. The balance of payments gap should halve to 2.5% of GDP with import compression, as reserves are bolstered by fresh foreign direct and portfolio investment. The exchange rate stance has moved from pegged to flexible and at 155/dollar currently is roughly fair value. International reserves remain negative on a net basis but Fund injections aim to restore balance, with the government coalition in slight majority in parliament. Tax revenue may reach 15% of GDP this fiscal year on a wider base and with spending cuts almost eliminate the primary deficit. Energy reform will entail costs over time, and anti-money laundering compliance is outstanding to avoid FATF sanctions. Geopolitics is not in the equation, with India again stoking tensions in Kashmir and denying Muslims future citizenship under a proposed law. Daily T-bill market turnover is over $300 million, with frequent auctions and narrow bid-ask spreads compared with frontier rivals, on 10% withholding tax according to JP Morgan research.

In Africa Ghana and Nigeria are back in favor after foreign investors were subject to access and rule changes resulting in the latter’s local index exclusion. Ghana’s twin deficits are under stricter control heading into end-year elections, with a several billion dollar financial sector cleanup consolidating banks and holding executives accountable for crimes and mismanagement. The crackdown suspended bank shares on the stock exchange prompting removal from the MSCI frontier rung, and potential reinstatement awaits the index provider’s next review. Inflation is in single digits as the central bank is poised to lower 15% interest rates. The current account gap is put at 4% this year, but the currency should be steady on external bond inflow momentum and calmer capital flight after successful poll transitions. A good medium term yield curve is offset by thin trading, but authorities are trying to launch derivatives for further liquidity. In Nigeria the reserve drain has bottomed at around $35 billion, and the central bank has turned its attention from currency intervention to reigniting credit and economic growth. It recently barred domestic buyers from high-yield open market operation (OMO) paper so that banks eventually have more room to extend loans especially to non-oil smaller business. Pension funds and corporations shifted their portfolios into other government instruments, and foreign investors now holding half the amount will be the main OMO target to whet their broad fixed income appetite. The naira after previous convulsions should only fall toward 370 over the coming months as import and dealing grips relent from past seizure.

The World Bank’s Empty Shaft Prospecting

2020 March 26 by

The World Bank’s January Global Economic Prospects issued before the coronavirus surge found “marked deceleration” in global growth last year affecting over half of emerging economies, with the average around 3.5% on weak manufacturing. This year’s projection is only 4%, half a point below previous forecasts, as trade will only expand 2% despite the US-China first phase deal. “Subdued” financial market sentiment will continue and flatten commodity prices, and even with monetary easing about one-third of the developing country universe can expect lower growth. In the medium term low income countries will set the fastest pace at 5.5%, but per-capita income and poverty levels will barely budge. High debt and lagging productivity block anti-shock capacity as traditional policy space is thin. Food and fuel cost controls mask actual inflation, and fiscal deficits limit countercyclical spending as tax bases are unable to support investment and social safety nets. Business climate improvement and technology integration are unfinished agendas, as weather emergencies and energy needs demand “green” solutions, according to the publication. China’s expansion will dip under 6% for the first time in three decades, with total debt over 250% of GDP. Both exports and domestic demand are down, and budget and credit measures cannot reverse the trend. The drag contributes to Asian cross-border goods and services slowdown, with construction and tourism softening for the latter. Protectionist levies affected over $1 trillion in world commerce last year, overshadowing a few new bilateral and multilateral free trade accords most notably a Pan-African one.

Over $10 trillion or one-quarter of global debt has negative yields, spurring emerging market borrowing at narrow spreads although lower-rated sovereigns may not benefit. Most currencies continue to depreciate against the dollar, and FDI slipped in all regions through the first half of 2019 outstripped by remittances. Oil was off 10% to $60/barrel, and agricultural and metals values also fell. Commodity exporters grew just 1.5%, half the figure for importers led in Asia by China and the Philippines. Almost the entire pickup this year will come from a handful of major markets, including Brazil, India, Mexico, Russia and Turkey. Extreme poverty defined as living on less than two dollars a day dropped by a billion people in recent decades, but double that number have no basic sanitation access. The infrastructure elements of the Sustainable Development Goals call for unlikely annual investment over 5% of GDP for poor and middle-income economies, with Africa especially at the bottom as conflict and penury concentrate there, the report warns. On purchasing power parity basis China is now one-fifth of world output and integral in auto and other supply chains at risk from further tariff and geopolitical struggles. Emerging market credit booms have been mostly for consumption, and contagion may center on common foreign investor ownership of local bonds. Social unrest and climate change have economic and financial implications across the asset class yet to be calculated, and China’s excessive leverage can best be tackled over time that may not be available. Almost half of developing markets have insufficient reserves, and macro-prudential policies often stifle banking and securities modernization. Output per worker is less than one-fifth the advance economy result, with a century required to close half the gap as another grim reading.