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The Middle East’s Munificent Modernization Script

2018 May 24 by

Middle East markets continued to power ahead despite ratcheted up geopolitical clashes after double-digit first quarter gains on the MSCI Index, as foreign investors bet on economic policy changes amid relative leadership continuity to again justify regional exposure. Egypt perked up after a flat quarter as President Sisi’s unopposed re-reelection coincided with a positive IMF review of the 3-year $12 billion program, which has replenished reserves as inflation finally comes down from 15% on a possible path to the single-digit target. GDP growth was upgraded to 5.5% this fiscal year, but the budget hole will remain steep at 8% despite automatic fuel price indexation, while the timetable for electricity subsidy elimination will extend another five years. Capital inflows support the pound after the Fund-ordered float, and disinflation may spur central bank rate cuts to trigger an equity rally matching frontier counterparts. Next-door Israel in contrast has near-zero inflation with rates on hold, as the shekel has strengthened in similar fashion, without eroding high-tech exports helping to sustain near 3.5% growth. Private consumption is also solid as Prime Minister Netanyahu tries to deflect corruption charges against his family with a campaign to lower living costs, especially housing. Political observers believe the controversial effort to evict African immigrants may have derived in part from the urgency to find affordable space in Tel Aviv and other major cities. The plan, with paid relocation to Rwanda and other countries, met with widespread human rights group condemnation at home and abroad and was quickly dropped.

Lebanon was up 5% on the MSCI frontier index ahead of May parliamentary elections, which will experiment with proportional representation rather than mandatory sectarian allotment. Growth continues at a meager 2% clip with tourism improving, as construction will be boosted by billions of dollars in medium-term infrastructure projects pledged at a Paris donor conference. The budget deficit is almost 10% of GDP, and public debt is over 150% with no end to Syria civil war ripples as the central bank opts for bond swaps with the Finance Ministry. The pound peg to the dollar remains sacrosanct, with enough reserves to meet one year’s imports. Saudi Arabia rose over 10% in Q1 and its currency regime likewise is stable with oil prices nearing $70 dollars/barrel. Foreign investor inflows hit a record on an expected Financial Times index upgrade and further Aramco IPO promotion following a royal family global tour. King Salman and his entourage crisscrossed the US and touted deficit halving to 4% of GDP, although VAT introduction will hike inflation to the same level. Investors are positioning for potential partial stock exchange privatizations which could add free float to nominal $500 billion capitalization and release large blocks to compete with consecutive $15 billion external bond taps. Tiny Tunisia jumped 30% over the period with an FDI and tourism spike despite slow progress on state bank bad loan workout intended to recover $2 billion under the IMF accord. During the spring meetings officials pitched businesses on new public-private partnerships to be showcased at an upcoming conference, and fund managers took note of Fidelity’s increased back-office hub in the country as a rare transition trophy.

 

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Venezuela’s Refugee Wave Window (Financial Times)

2018 May 24 by

Emerging market fund managers still investing in Venezuela are no longer just focused on debt restructuring scenarios heading into May elections in the wake of self-inflicted economic collapse, as over 1 million migrants and refugees have already fled to neighboring countries to roil their financial markets with prospects of millions more to come, according to a study by the Washington-based Center for Strategic and International Studies. Over 500,000 Venezuelans are in Colombia in advance of the presidential race there, 250,000 each are in Ecuador and Panama, and 150,000 in both Chile and Peru, and 50,000 in Brazil. Latin American stock markets outperformed rival regions on the MSCI index through the first quarter, but the influx’s humanitarian and fiscal costs have yet to fully register.

The UN refugee agency officially declared a crisis and called on regional governments and international development lenders to exercise individual protection and share the funding load. The Inter-American Development Bank and World Bank are gearing up for infrastructure and social support, but established  public-private sector arrangements like the cross-border Latin America Integrated Market (MILA) stock exchange between Colombia, Chile and Peru could also create specific capital market instruments to foster refugee employment and business creation upon arrival.

Colombia has an estimated 50,000 Venezuelans daily pouring into border towns like Cucuta to meet daily food and health needs or to stay indefinitely. In addition, it has an unresolved legacy of internal displacement as the peace accord negotiated by outgoing President Santos with the guerilla FARC goes into effect, under the general principle of exchanging army demobilization for peaceful civilian return with promised job training. However the fiscal rule in place limits the deficit to 3% of GDP this year, and the front-runner in the end-May presidential contest, Ivan Duque from ex-President Uribe’s party. has signaled a harsher stance toward former rebels. The current account gap is at the same level placing pressure on the sovereign rating, despite higher foreign direct investment in the oil industry. Growth and inflation are in the 3% range, as central bank easing is set to continue. A second round runoff is predicted with more centrist opponents who have tried to co-opt Duque’s business-friendly platform, and forced migration will be likely sidetracked as a priority during the leadership transition as headline movements demand action.

Chile is host also to Haitians who fled the poorest nation in the hemisphere after the 2010 earthquake and subsequent hurricanes, and moved further south after deportation efforts in Brazil in particular. It has traditionally attracted seasonal low-wage workers from neighboring countries, but a permanent presence has posed cultural and labor market challenges. President Pinera, in his second term, promises to revamp the economic model in a free-market and socially-responsible balance, in part to salvage his popularity which previously suffered under an image of wealthy elitism. Refugees outside Santiago seek employment in the copper mines with keen competition and few protections, and like the middle-class students protesting under the previous administration seek wider university access for advanced education and skills. With 3.5% predicted GDP growth and negligible inflation, the solid investment-grade credit rating is intact, but Chile will be a test case for a future “melting pot” demographic and productivity engine.

Peru was the Andean stock market champion with a 10% first quarter gain as President Kucyzynski, implicated in the continent-wide Odebrecht scandal, resigned and was replaced by a technocrat successor and cabinet. Amid the political jockeying before his departure, plans to deepen MILA exchange ties, originally described to MSCI when it threatened frontier index demotion, were shelved and asset managers expect new President Vizcarra and his team to restore momentum. Ecuador takes in the Pact’s largest Venezuelan group after Colombia, and intends to reenter the MSCI frontier gauge and consider new local and global financing sources as President Moreno breaks with his socialist predecessor on fiscal discipline and investor compatibility. He plans to again tap global bond markets and renegotiate Chinese debt terms, and may even consider an IMF program to smooth fundamental and structural shifts including on refugee absorption.

As the international aid and diplomatic communities mobilize to address the systemic Venezuelan exodus, financial markets looking for fresh impetus could act with the same urgency to adapt solutions. On the MILA, listed companies could readily issue securities aimed at local and overseas buyers to expand refugee-related capital, hiring and supplier relationships benefiting host economies. Unlike governments and development lenders, this platform could  generate longer-term commercial flows so far absent in the” burden-sharing” mix, and offer a more optimistic prosperity prescription to shape the regional debate

Bangladesh’s Unheard Crisis Relief Cry

2018 May 16 by

After a 2.5% first quarter loss on the MSCI frontier index as the only down Asian component, Bangladesh shares continued to be shunned by foreign investors on the headline Rohingya refugee influx now at 800,000, and banking sector balance sheet and management woes with bad loans at 10% of the total. Elections are also due this year with the opposition party leader unable to compete under corruption charges, and sporadic street violence erupting among rival political camps amid Islamic fundamentalist terror threats and military takeover rumors. The fifth anniversary of the Rana Plaza garment center collapse injuring and killing thousands also focused attention on unresolved worker safety issues in the mainstay export industry, as remittances from abroad remain uncertain with renewed local employment emphasis in the Middle East and elsewhere.

The spring IMF-World Bank meetings passed without a breakthrough on international development agency support for the refugee emergency, after long-serving Finance Minister Abul Maal Abdul Muhith, due to retire in his mid-80s, tabled an urgent plea in Washington. The World Bank has a dedicated $2 billion window in its poor-country IDA affiliate for global displacement, and Bangladesh may follow Jordan’s previous model and enter a separate “compact” which could promise labor reforms and other investment incentives in exchange for expanded duty-free preferences and aid from major trade partners. In February the Minister also revealed a higher recapitalization bill for half a dozen ailing state and private banks, after rescuing Farmers Bank at the end of last year after a depositor run on alleged fraud.   With chronic risk management and governance lapses, and a legal default process which takes years, overseas fund managers have avoided these listings on the Dhaka Stock Exchange (DSE), even though one-third the population is unbanked and retail products lag in particular that could take off.

GDP growth is 7% but the trade deficit doubled between fiscal years 2016-17, mostly due to capital goods imports in part for Chinese Belt and Road infrastructure schemes. $7 billion in power, rail and tunnel projects have been launched, according to the Washington-based Center for Strategic and International Studies database. The largest is the $4.5 billion Dhaka-Jessore high-speed railway, while a spinoff is planned from Chittagong to Cox’s Bazaar, the Rohinyga refugee camp base. Domestic taxes contribute little to these ventures since government revenue is only 10% of GDP, with less than 5% of registered companies paying VAT by Finance Ministry calculations.

Local banks with trade credit expertise participate in the transactions, but the 60 competitors in the system otherwise tend to chase the same family and state-owned company business. They have turned more cautious under a central bank directive to cut the average loan-to-deposit ratio to 85% by year end, with many institutions currently above 90%. The move has triggered a scramble to lure deposits, with rates doubling to 10%, as liquidity was already tight from borrowing following 2017 flooding and softer remittances. Banks are the main funding channel with the undeveloped bond market, and they have recently spurned dollar exposure with currency volatility in preparation for meeting Basel III capital and risk standards in 2019.

China’s Shanghai and Shenzhen’s stock exchanges will also take a 25% stake in the Dhaka bourse, beating out a rival Indian offer. Officials insist no political influence applied and that the former’s per share price was simply higher and also stressed small business access and free technical assistance. The sale was part of a long-term roadmap agreed after the 2010 crash, which will see the DSE itself go public and the introduction of new products like ETFs and stronger broker capital and professional requirements. It predicts 50 IPOs this year, as revamp and broader economic policies are designed to enhance the distinction with frontier market neighbor Sri Lanka, where shares rose 4% the first quarter on the MSCI Index. There China’s Belt and Road helped balloon debt to over 80% of GDP, and the International Monetary Fund rescue so far has barely moderated fiscal and external balances. A severe displaced population legacy likewise lingers from the civil war, but state bank and enterprise divestiture is at the heart of both countries’ unfinished structural reform agenda for too many sad anniversaries.

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The Treasury Department’s Manipulation Dodge Dudgeon

2018 May 16 by

As the Trump administration demanded currency provisions in the NAFTA and Korea free trade agreements under renegotiation, the Treasury Department again found no formal manipulation among major partners in its regular surveillance report mandated under 2015 legislation. It lists detailed criteria for monitoring: at least a $20 billion bilateral surplus equal to 3% of GDP and unilateral intervention over 12 months at 2% of that figure in scope. India was the only emerging market added alongside China and Korea, while Latin America was dropped altogether. China’s Yuan rose against the dollar in 2017, but was unchanged against a broader basket, and the report criticized “non-market” economic development and lack of reserve management disclosure. Korea’s current account surplus was 5% of GDP on near 15% won appreciation, both diverging from fundamentals in the IMF’s view. India bought $55 billion in foreign exchange on heavy direct and portfolio investment inflows, and its reserves may be excessive with existing capital controls. Germany, Japan and Switzerland were the other countries highlighted, and Washington urged Tokyo only to intervene in “exceptional circumstances.” as it presses for a possible bilateral accord to succeed the Trans-Pacific Partnership. Prime Minister Abe on a White House visit asserted that loose monetary policy was designed to boost growth and that the safe haven yen nonetheless continued to rise, as the upcoming Trump-Kim Jong Un summit was the main topic. For the group the Treasury lamented persistent global imbalances due to insufficient domestic demand and currency adjustments, although it noted a one-third jump in net private capital flows to developing economies which helped boost reserves to $11.5 trillion. The total provides “ample coverage” of short-term debt and import costs, so better policies rather than accumulation is the preferred course, the survey remarked.

China’s goods surplus was $375 billion last year, and the renimbi was up almost 4% versus the dollar in the first quarter. Capital outflows plummeted to $150 billion in the second half from $350 billion in 2016, as estimated currency sales fell below $10 billion with the central bank still not publishing the data. It must also be wary of near 15% credit double GDP growth as it tries to facilitate financial system deleveraging. Korean domestic demand has picked up under new leadership committed to export offset, but adjustment remains “limited.” The US has a services surplus, but the IMF still considers the won undervalued as $400 billion in reserves are deployed in unreported spot and forward transactions. India has a 2% of GDP current account gap but goods and services surpluses with the US and has been “exemplary” in reporting intervention the central bank claims is a result of “undue volatility.” The rupee has appreciated in real terms and is “moderately overvalued” in the IMF’s calculation, so deliberate debasement is a remote scenario. The update concludes with a section on capital flow volatility based on a sample of 70 developing economies, and finds that current trends roughly reflect pre-crisis ones, although it has spiked in a handful like the BRICS, Korea and Taiwan. In Mexico and Russia both inflow and outflow swings are greater as respective free trade and sanctions deviations skew the standard, it suggests.

 

 

Central Asia’s Truculent Trio Test

2018 May 9 by

Central Asian financial markets lacked clear direction after a maelstrom of political, economic a banking system, and international lender cross-currents punctured early year euphoria. Only Kazakhstan is in a benchmark frontier equity index on the MSCI, while Azerbaijan and Mongolia external bonds are tracked on JP Morgan’s off-index NEXGEM list. In recent weeks Azerbaijan’s President Ilham Aliev won another term in a controversial election with suspect margins and turnout; Kazakhstan’s currency was battered in the wake of post-US sanction ruble selloff; and Mongolia got a mixed review under its International Monetary Fund program on lingering fiscal and financial system risks. Into the half year the specter of repeated commodity crisis has abated, but the Asian Development Bank (ADB) cautioned in its sub-regional forecast about output slowdown as government succession paths remain messy or murky.

Azerbaijan bonds were upset as major opposition parties boycotted President Aliev’s poll, and his handpicked election commission gave him an 85% result on 75% voter participation with “no irregularities.” One debate was held where rival candidates did not directly challenge his leadership, as Europe’s international observer mission highlighted the absence of “genuine competition” amid continued civil society and press curbs. Official statistics put first quarter growth at 2.3%, with the non-oil outperforming the hydrocarbons sector, although agriculture, construction and tourism all fell. The ADB predicts below 2% expansion for the year and 7% inflation with post-devaluation exchange rate stability, as the current account surplus tops 6% of GDP. Foreign direct investment was over $5.5 billion in 2017, 85% concentrated in energy and the Shah Deniz field in particular. According to the German head of the Foreign Trade Chamber, bilateral volume will languish due to “poor” export diversification despite Baku’s plans for new industrial plants.

The manat has been steady at 1.7/dollar, and the share of bank deposits in that unit roughly doubled to 40% the past year. The central bank cut the refinancing rate 2% to 11% in April and assured the public of ample cash on hand after spillover from Russia and Turkey troubles. However the restructuring of giant International Bank, to be prepared for privatization, is proceeding slowly as assets slipped below $5 billion awaiting foreign creditor approval of a $3.3 billion workout proposal. An audited financial statement has not yet been released for 2017, and eventual sale must be endorsed by the State Property Committee which previously blocked transactions.

Kazakhstan shares were up almost 20% on the MSCI frontier gauge in the first quarter, as growth came in stronger than expected at 4% with good mining and manufacturing contributions. The latter was aided by the Nurly Zher housing and infrastructure stimulus, and Economy Ministry steps to reduce paperwork requirements 30% to bolster small business. Higher oil prices and production joined with trade diversification to new markets like Vietnam to help the balance of payments and foreign reserves, at $90 billion including the separate stabilization fund. The central bank is easing as inflation may drop below the 5-7% target band, and it dismissed the 3% tenge decline over the week tighter US sanctions were imposed against Moscow as a bump.

Bank fragility stayed in the spotlight as parliament passed a bill to close capital flight loopholes, and another round of foreign currency to tenge mortgage conversion was completed using the pre-devaluation rate. The Halyk-Kazkommertsbank merger timetable slipped to the second half and Standard & Poor’s kept KKB at “B+” credit watch, as it called the combination a “challenge under weak economic conditions.” The state airline, uranium producer, and telecom operator will soon be offered in stock exchange IPOs, and officials travelled to China on a promotion tour, but investment adviser Rothschild urged a quicker pace of $70 billion sovereign wealth fund divestment including pre-offering sales.

Mongolian bonds rose as it got a third IMF tranche under its overall $5.5 billion donor package, following a growth upgrade to 5% on flagship copper project expansion. However the government demanded the extradition of the former prime minister from the US to face corruption charges, and the Fund warned of still outsize public debt at 85% of GDP. Double-digit bank bad loan levels and credit increases also endure, as legislators debate an interest-rate cap for borrowers that could again pave the way for Central Asia’s familiar boom-bu

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Russia’s Designated Selloff Scenario Spread

2018 May 9 by

After a 10% Q1 stock market gain to lead the regional MSCI index while local bond foreign ownership was one-third the total,  Russian assets were dumped in the wake of targeted US sanctions against “specially designated nationals” accused of individual and corporate complicity in “destabilization.” The Treasury Department notice freezes personal and securities holdings as of early May for 25 oligarchs and 15 firms, including global heavyweights like Rusal and gold miner Polyus. Commodity markets in turn were roiled as Glencore is a major shareholder in the aluminum giant, and Russia’s near $10 billion in exports of the metal will be slashed. The listing plunged 10% on the Moscow bourse, which was basking in the afterglow of a rare $100 million information technology IPO. Analysts were reluctant to change immediate growth and inflation forecasts which will likely suffer, as the government pledged banking support from almost half a trillion dollars in reserves without specifying amounts after establishing a $20 billion restructuring facility for rescued private sector lenders. The central bank estimates the corporate refinancing gap over the next year at $70 billion compared with the $100 billon during the original wave of Crimea-imposed sanctions, and domestic credit may be better positioned for the slack assuming the knee-jerk ruble slide stabilizes, as Governor Nabulliena indicated with a no-intervention stance, although she did not rule out a short-term rate hike. With Washington’s boycott names could be removed from the benchmark CEMBI and other indices, but sovereign spreads may barely budge after ratings agency action to restore investment-grade. The SDN label has now been extended to mainstream emerging market multinationals at the same time a future ban on government debt purchase as in Venezuela’s case could be considered. The Trump administration has signaled national security over financial market priorities in its positions so far and military engagement in Syria could invite more sweeping prohibitions, analysts believe.

Turkey is also enmeshed in the civil war there and recently recaptured Kurdish-controlled areas it is pressing Syrian refugees to relocate to after claiming $30 billion in host spending since the influx began. President Erdogan has ramped up his rhetoric on this issue and on the economy, where he lauded stimulus-induced 7.5% growth last year, which also swelled the current account hole to 6% of GDP as the lira breached 4/dollar. Despite overheating and political crackdown concerns as security forces round up academics and students, the central bank is under his admonition not to raise rates amid double-digit inflation. State-backed credit was up 40% over the period and another $40 billion package is in the works as banks otherwise retrench their business and personal lines on souring portfolios. Several big corporate borrowers also relying on external debt rollovers have entered rescheduling talks, and the rumored resignation of Deputy Prime Minister Simsek, a former investment banker, could further erode sentiment. Hungary was another populist hot spot in early April after the convincing two-thirds majority re-election of Prime Minister Orban and his Fidesz party. He too campaigned on an anti-immigrant and free spending platform against a weak opposition, and stocks and bonds rallied on the win but not foreign investor positioning at 20% of the total, half the previous take under more optimistic ruling clique embrace.

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Global Banking Gyrating Compass Compensation

2018 May 3 by

The World Bank’s annual Global Financial Development report charts the South-South shift in particular regionally in global banking the past decade from the traditional Northern advanced economy outward pattern upon post-2008 crisis “exits.” It balances the costs and benefits of cross-border integration infusing capital, expertise and technology while also potentially magnifying shocks and boom-bust cycles. The world’s largest financial institutions which may be too big to fail are under increased regulation and surveillance, but developing country views remain mixed on foreign entry as it relates to skills building, small business credit and other areas original research can help address. According to a recent client survey of 200 public and private sector leaders  in 40 nations opinion was split as 70% praised international banks’ product contribution, but an equal portion accused them of “cherry picking” prime customers and overly complex organizations creating instability. Regional competitors got more favorable marks than overseas-based ones, but stronger host and home country supervision was a consensus recommendation. Net foreign establishment has been negative since 2010, but emerging markets have taken 60% of the total as this group is half the industry in Europe, Latin America and Africa. The Southern share of syndicated lending has doubled to 8% by the latest figures, with East Asia accounting for one-third the amount. Neighborhood “brick and mortar” operations have likewise spread in the MENA region, and Brazil, China, India and South Africa are respective hubs in their geographies. However the review describes “globalization backlash” since 2007 ushering capital flow curbs in the form of macro-prudential policies and separately funded branches and subsidiaries. It urges institutional and infrastructure reforms to support the trend, since liberalization can be countered by “political entrenchment.” Credit registers and contract enforcement are important, and are more likely to drive household and small firm rather than blue-chip company focus. Greenfield investments as opposed to mergers and a diversified service mix may yield more positive long-term effects, but often options are limited under bilateral and multilateral trade agreements. In supervision while Europe is moving to joint arrangements under its Single Mechanism Southern Hemisphere pacts are in their infancy.

The evidence shows that South-South banking can smooth the credit cycle and increase per capita growth 1%, while relying more on local deposit bases. However regulatory capacity is weaker in these jurisdictions and affords less risk-sharing. Alternative capital market sources are now available that financial sector policies must also incorporate even as only large borrowers may retain bond access in difficult times. Stock markets in turn may have relatively unsophisticated disclosure norms that erode confidence and raise crisis odds when a multi-line conglomerate pursues both commercial and investment banking. Fintech is another sensitive subject with thousands of active firms and dozens worth more than $1 billion. Digital models may not have safety nets, data privacy and fraud protection and screening algorithms could be inaccurate or manipulated. On line platforms have only begun to draw oversight complicated by footprints in multiple countries under mass marketing. A “sandbox” approach is increasingly common to devise consumer safeguards and conventional bank ties stoke tremors from this technology earthquake, the Bank cautions.

 

China’s Teflon Tariff Tiffs

2018 May 3 by

As China and the US continued their cycle of equal tariff retaliation on agricultural and industrial goods and threatened tighter investment rules, Beijing accused Washington of self-inflicted wounds, with exports now half their GDP portion of a decade ago at 20% as the tougher Trump administration stance was described as a global trade system danger. Initially $50 billion was at stake for thousands of Chinese products, but analysts dismissed the cost with calculations that an across the board charge on all American shipments would dent growth less than half a percent. The bilateral trade surplus continues to increase in nominal terms at $55 billion for January-February even with 3% renimbi appreciation against the dollar, but a proposed non-tariff crackdown on so-called “Made in China 2025” high-tech reach has drawn intense business and diplomatic focus. The confrontation looms as reputed anti-China hawks Pompeo and Bolton were appointed to top foreign policy posts, and the BIS issued a “code red” warning of banking stress largely overlooked during the spat. The Beige Book lauded “strikingly consistent” Q1 economic results with reservations about commodities and property, as the official PMI topped 51 in March and retail sales and fixed investment were up almost 10%. Consumer inflation was 3% on higher food prices as the producer reading retreated to under 4%. While Washington relations withered Australia inked an expanded currency swap line and local bonds were added to the benchmark Barclays Global Index at a 5.5% weighting as of next year, which could eventually spur $250 billion in inflows, according to estimates. February international reserves were steady at $3 trillion, one-third in US Treasuries, as rumors flew that these holdings could feature in future beyond-trade reprisals.

At the People’s Congress the economic and financial affairs group was upgraded to a commission and new top advisors and regulators were appointed to “work decisively” for risk control. The deputy central bank governor, educated in the US, assumed the helm and will implement President Xi’s restructuring incorporating insurance industry oversight under stronger Communist Party guidance. The securities body will stay separate, as the communiqué urged faster local government and state enterprise deleveraging. Household debt may also be in the 25% of GDP range from single digits a decade ago if peer-to-peer lending not captured in statistics is included. Shadow banking will be subject to harsher disclosure and capital adequacy treatment to “eliminate arbitrage” and an authorized digital currency will be developed. The repo rate was hiked as big banks reported improved profits with second-tier competitor flight. Credit rose 12% last year, with mortgage value at double that pace. The IMF’s Financial Stability Board found that China represented 15% of the world’s $7 trillion non-bank loans for “systemic risk.” Overseas conglomerate Anbang received RMB 60 billion from a public rescue fund to protect insurance policyholders and bank exposure as its former chair faces criminal charges and stakes are sold off. Tech bellwethers like Alibaba are under prodding to list at home and repatriate funds under a new China Depository Receipt program, as the Finance Ministry charted a 10% state company debt jump to $17 trillion in February. Property developers continue to clog the offshore and onshore issuance pipeline as a national tax will be debated in parliament again unlikely to stick.

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Latin America’s Perverse Political Parade

2018 April 28 by

Latin America topped Q1 main stock market results with Peru and Brazil roughly tied with 10% gains, as the President finally bowed to congressional will and public anger at his consulting for disgraced construction firm Odebrecht and resigned, with the moderate vice president assuming the term’s remainder. The move ended months of political standoff and maneuvering and the departure may not protect PPK from judicial prosecution as he must stay in the country for now. Elsewhere Central America kicked off the election season with an unexpected cliffhanger in Costa Rica between the “two Alvarados,” one from the ruling party and the other an evangelist entertainer. The former won the second round with a minority in parliament which will continue to frustrate long-promised fiscal reforms to pare the 60% of GDP public debt. Government salaries take half of revenue, and popular opinion has turned against democracy with only 60% backing on the heels of scandals such as around questionable Chinese cement imports. El Salvador also had legislative and municipal polls in March with an almost 60% abstention rate, with the opposition Arena alliance ahead of the FMLN in power, which suffered its worst defeat since inception. The outgoing mayor of the capital Bukele was not on the ballot, but is tipped as the frontrunner in next year’s presidential run. The incumbent Sanchez Ceren has disappeared from view on rumored illness as GDP growth slugs along at 2% amid increased murder and poverty levels. In Cuba non-democratic next generation transition is also underway as Raul Castro hands over the nominal mantle to Vice President Diaz-Canel in his late 50s, who is a career Communist functionary with unknown economic policies. US tourism is down under stricter Trump administration travel curbs, with less than 5 million visitors in 2017. Havana in turn has cracked down on private sector business, which accounted for over half a million jobs by last count, but coders have found a place with European outsourcing, according to reports.

Mexico was flat for the period amid continued bickering over NAFTA 2.0, with about one-third of the 30 chapters completed and negotiations overshadowed by Washington’s steel and aluminum tariff decision hitting Canada. The latest rounds have been stuck over hot button national content, dispute resolution and expiration clauses with the US Trade Representative pushing for “creative solutions.” Inflation has eased to 5.5% with an eventual 3% target, as new central bank chief Diaz de Leon is on shock watch and prepared to raise the benchmark rate and peso intervention ahead of July’s presidential contest. Although retail sales are weak, manufacturing has been healthy with the PMI at 55 and real wages are up. Leftist-populist candidate AMLO is ahead at this stage with a 40% voter preference as backlash against the main parties’ corruption and security failures. He has downplayed past radical approaches to wealth redistribution and drug cartel relations, and repositioned as a competent economic manager who would scrap the proposed $15 billion Mexico City airport upgrade as wasteful. Conservative PAN standard bearer Anaya had been in second position with charisma and age drawing young and independent support, but now faces allegations of suspect real estate deals. The stock market itself has come under insider trading doubts as the regulator examines patterns in financial group listings, but punishment is rare as impunity likewise lingers in that culture.

Myanmar’s Reform Wave Riptide

2018 April 28 by

As the US and EU debate tougher trade and diplomatic sanctions against Myanmar for expulsion and killing of Muslim Rohingya refugees, after crossing the border by the hundreds of thousands into Bangladesh and now fleeing further South by boat ahead of the rainy season, the two-year old government of Aung San Suu Kyi has also come under harsh international community criticism for economic policy lethargy. The IMF in its March Article IV report joined alienated investors in urging a “second reform wave,” after a number of overdue fiscal, monetary, business and banking steps during the initial transition as outlined under a dozen-point ruling party National League for Democracy plan. These themes were elaborated under a 250 provision blueprint in February spanning objectives from state enterprise overhaul to judicial modernization without designating priorities or assigning responsible ministries.

This muddled vision has kept the country at the bottom of the World Bank’s Doing Business rankings, especially in minority shareholder protection, bankruptcy handling and contract enforcement. It leaves excess bureaucracy and infrastructure defects that hamper normal commercial and credit transactions, despite headline growth and inflation progress. Tax revenue is just over 5% of GDP to embed budget deficits, and implementing rules are still lacking for the new investment code permitting 35% international ownership in local firms. The central bank inaugurated a bad loan resolution push which has stalled without broader direction, as State Counselor Suu Kyi and her team continue to shun technocrats and political outsiders who could contribute sharper business-friendly thinking, including around the moribund Yangon Stock exchange with a handful of illiquid listings.

The IMF report refers to the “downside risk” of the Rakhine State humanitarian crisis, despite limited immediate economic effects. Total reconstruction and social costs have yet to be tallied even as few refugees are likely to repatriate voluntarily, and aid partners may withdraw as investor sentiment sours in protest of documented abuses. Focus there may detract from creation of an “overarching private sector roadmap” for near-term structural changes and productivity gains that can also set a path toward Sustainable Development Goal achievement. Medium term GDP growth will be 7-7.5% with continued foreign direct investment and commodity price improvement, despite a chronic current account gap, but reduced donor  budget support would force repeated reliance on central bank funding at the same time it is trying to curb banks’ runaway 25% credit expansion to the construction and real estate sectors. Financial stability would then be undercut on both fronts, the Fund suggests.

Fiscal year 2017/18 growth is estimated at 6.7%, on agricultural recovery and a 40% rise in rice and textile exports notwithstanding mixed tourism. Inflation should be in the 5% range, and the fiscal deficit will rise to 3.5% of GDP as the authorities target a central bank domestic debt buying ceiling at 30% of the total. A main thrust is to cut state company losses which affected one-quarter of them led by the electric power operator. Tax law regimes await thorough updates for personal and corporate income, and in the mining and natural resources industries. The currency was firmer in 2017 compared with the previous year’s depreciation, but dual official and informal rates persist despite calls for greater flexibility. Foreign exchange auctions get minimal bank and non-bank participation and do not aid price discovery and the 0.8% daily trading bond could be formally removed. The system can still be managed but should aim to avoid intervention outside of “disorderly conditions” to enable reserve buildup beyond the current $5 billion or three months imports, the IMF recommends.

Monetary policy in turn should move to interest rate liberalization and inflation targeting, as the interbank and government bond markets develop with introduction of a yield curve. The central bank is not independent but has imposed reserve requirements and bolstered supervisory capacity with expert technical assistance. New capital, liquidity, loan classification and large borrower exposure rules were introduced nine months ago. Private and state run units, with respective two-thirds and one-third asset shares, are undercapitalized and unprofitable. The former must whittle down real estate-related overdrafts, and the latter should “move ahead” with restructuring, both the Fund and international banking analysts argue. However this cleanup has languished along with the broader post-socialist era sweep, as frontier market portfolio investors indefinitely relegate allocation to the dustbin.

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