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Africa’s Truncated Free Trade Tug

2018 April 20 by

The African Union, with stock exchange unification still a vision, struck an outline continental free trade accord in March with 45 countries signing to set the ratification clock with the notable exception of Nigeria with strong protectionist business and labor lobbies. Studies show that less than one-fifth of the region’s mostly raw material exports are cross-border due to tariff, administrative and infrastructure barriers, and that with manufacturing catching up at almost half the total, growth could increase 1% with integration. In principle 90% of duties will be eliminated on a common product list, and customs processing and licensing should also be harmonized. However specific time frames are absent until parliaments in half the entrants endorse the treaty, and they must also accommodate sub-regional arrangement like COMESA. Host Rwanda also took up traditional political and investment issues prominent in the East Africa zone with Kenya jitters despite good securities market performance. Re-elected President Kenyatta and perennial rival Odinga insisted they and party-tribal camps had reconciled, following months of street violence and a government media crackdown criticized as a dictatorship precursor. Despite another year of predicted 5% economic growth, private sector sentiment plunged at the height of confrontation and has since rebounded above the 50 neutral reading. The investment authority touts FDI lure with an Ernst and Young survey placing the country at the top of the list after the World Bank Doing Business ranking climbed twenty spots. Industrial policy centers on manufacturing diversification, but the financial sector remains handicapped by the interest rate ceiling as heavy borrowing has run up 50% of GDP public debt. A China-built high-speed railway between Nairobi and Mombasa completed last year cost over $3 billion and halved bus passenger travel time, but was designed chiefly to accelerate cargo shipment. The World Bank estimated 10 million tons annually will bring viability, but the most optimistic projections so far are for half that amount.

Nigeria opted out ahead of 2019 presidential elections, where the incumbent Buhari has been urged not to seek a second term due to illness, unpopularity and an anemic economy. His anti-corruption platform is in tatters with multiple scandals and the Boko-Haram insurgency and North-South religious and income divide are in global headlines with the continued child abduction saga and border town attacks. The naira was floated in theory but the central bank continues to intervene as access restrictions maintain benchmark local bond index exclusion. South Africa is preoccupied with its own imminent contest now that President Ramaphosa was picked to finish out the Zuma tenure and assembled an interim cabinet to unveil a cautious budget. It will boost social spending and raise value-added tax, and modestly shave the fiscal deficit to 3.5% of GDP allowing retention of Moody’s residual investment grade. 3% growth was registered in the end-2017 quarter, but still lags the rest of the continent as gold and platinum exports are subject to stricter mining charter employment and ownership mandates. Ruling party activists call also for forced land transfers to redress income inequality and insist on extending the swollen civil service payroll, one-third the budget. Banks have been stock market leaders but may be compromised by consumer loan provider connections as opposition politicians join in ratifying debt relief edicts.

 

 

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Asia Local Bonds’ Yanked Yields

2018 April 20 by

The Asian Development Bank’s March regular survey of nine domestic bond markets, with insights from the last quarter of 2017 through February, alerted the region to higher long-term government yields and private financial stability concerns around global central bank liquidity retreat and economic growth uptick. Market size topped $12 trillion at year-end, and mainland China accounted for half of final quarter issuance as the government-corporate split stayed 65%-35%. It is 70% as a portion of East Asia GDP, and net overseas investor inflows were strong, with Malaysia in particular benefiting while Korea was the exception with outflows. From December- February 10-year instrument rates rose everywhere but in Vietnam’s smallest $50 billion. market.

The report suggested that Japan’s March decision previewing 2019 monetary policy “normalization” with the US and EU would reinforce this trend, alongside the region’s steeper 3% inflation forecast with another year of 6%-range output expansion. It noted that 2-year yields briefly fell with portfolio rebalancing, and that Malaysia’s foreign ownership share increased to 30% as the central bank hiked rates in January. Tightening will support currencies but hurt stocks as valuations also adjust to better reflect corporate earnings, and investors “closely monitor” listed company debt-equity ratios. The ADB warned at the same time that rapid corporate bond and household loan accumulation could dent consumption and balance sheets and pose financial crisis risk, while global trade is also under an internal and external competitive and policy vise. It urged greater deleveraging and anti-inflation stances for more solid medium-term bond markets even as the current “foundation” is intact, and cited studies associating private debt overhang with asset price and growth collapse.

China is 70% of the total outstanding and quarterly growth has been around 5% as officials impose credit restraint, including a local government placement ceiling. Second place Korean activity was flat after the central bank lifted the policy rate in November. Thailand is ASEAN’s largest market at $350 billion, with Malaysia slightly behind as the Islamic sukuk leader at 60% of its volume often for infrastructure projects. Indonesia is half as large at $185 billion, with shariah-compliant central bank bills a main offering. The Philippines $110 billion market increased most among the group in the final 2017 quarter, with retail Treasury bonds diversifying from traditional institutional auctions. Corporate activity is minimal there as well as in Indonesia and Vietnam at amounts under $30 billion. On an annual basis East Asia’s local currency pile was up 12%, with Indonesia’s 40% foreign share the highest after another BBB sovereign ratings upgrade in December. At the other extreme international ownership is just 3.5% in China, and 11% in Korea, where outflows spiked on end-year maturities and rate hike expectations.

Cross-border transactions in local currency, mostly from China and Hong Kong topped $4 billion in the last quarter, with the Korea Development Bank the single biggest name active in multiple denominations. The Government of Laos completed a $450 million operation in Thai baht and the hydroelectric Nam Ngum 2 Power Project tapped the same pool as the country accounted for 15% of the total. Malaysia’s Maybank sold $150 million in Chinese renimbi and Hong Kong dollar bonds, and Singapore dollar and Philippine peso-denominated ones from other jurisdictions also featured.

Emerging Asia issuance in G-3 currencies was a record $350 billion last year, up from $215 billion in 2016.  The dollar was the 90% choice, and Chinese companies led the pack with $225 billion outstanding although most ASEAN members also participated. China completed a $2 billion sovereign dollar issue, the first in fifteen years, without a credit rating. In China and Korea banks and real estate firms were the most prominent by sector, while Malaysia stood out as a decliner with its ban on offshore ringgitt trading. Spreads were unchanged between prime and low-rated companies over the period, but in a cited initiative Thailand’s securities commission introduced new investor protections in case of default. As the size spectrum from China to Vietnam announced annual borrowing plans, several bilateral and multilateral cooperation pacts on information sharing, trading and currency settlement were inked, according to the review. They may as well be precautionary, and a form of joint leverage against the ADB’s predicted financial version.

 

 

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Low Income Economies’ Grinding Ground Stops

2018 April 12 by

The International Monetary Fund’s latest annual poor region survey covering 60 countries offers a lengthy economic, banking system and debt worry list which has already prompted program rescues across Africa and elsewhere and is likely to invite additional public and private sector scrutiny around the April spring meeting. The group is subdivided into commodity and diversified exporters, frontier markets commercially borrowing overseas and fragile states in conflict or weak administration.  Average GDP growth was under 5% in 2017 and should rise to just above that level this year, with raw materials producers lagging. Fiscal deficits have increased, and inflation is in double-digits for one-quarter and problem banks plague one-third the universe despite improved global conditions, although aid and remittances are down. In commodities metals have rebounded in particular, and foreign direct and portfolio inflows were “robust” in the wake of a half dozen sovereign bond placements. The 30 fragile countries are at the bottom of these ranks, but nonfuel exporters’ slowdown widened the distance to the Sustainable Development Goals. Fiscal deficits are worse in 70% of low-income economies, at around 5% of GDP, and the rationale that they are tied to higher public investment applies to only a minority. Current account gaps remain in the 3-4% range despite bridging, with reserve coverage under the 3 month recommended threshold in 20 countries. Median inflation is 5.5% and lower with pegged exchange rate regimes as in the two Francophone zones, while real interest rates fell with bad loan ratios in double digits. Private credit/GDP is stuck at 25% with spreading bank failures and non-bank stress is up in 15 locations. A dozen new Fund arrangements and augmentations were approved last year in Africa, and several requests are in the pipeline with per capita income and investment lagging medium-term forecasts.

A separate chapter is devoted to rising debt, with an estimated 40% facing vulnerabilities and creditors now predominantly non-Paris Club, commercial and domestic. Private external markets carry steeper servicing costs and risks, and official managers often lack a comprehensive view of liabilities and structures. Greater transparency on both sides can facilitate cooperative workouts and the Fund and World Bank provide technical assistance to strengthen country capacity. In the past five years public debt spiked a dozen points to almost 50% of output with the most pronounced changes in Sub-Sahara Africa, the Middle East and Central Asia. Interest outlays are 5% of revenue, above the advanced economy norm, and the 10% of GDP fiscal financing requirement is a decade high. Civil war and epidemics were non-economic causes, and fraud was a driver in Mozambique and Moldova. Commodity shocks partially contributed to the rest of debt takeoff, but runaway budget and off-budget spending were chief culprits. Eight poor nations are currently in distress and Republic of Congo and Mozambique have formally defaulted on global bonds and are in restructuring talks. The latter after conducting an audit of undisclosed loans and missing funds unveiled an initial exchange offer in March with big haircuts creditors rejected. In Congo’s case collateralized loans may have complicated resolution with a “seniority race.” Public-private partnerships are rarely captured in reporting and are another obstacle in post-HIPC category redesign, the report concludes.

 

 

Central Securities Depositories’ Sideline Topics

2018 April 12 by

A new IMF Working Paper supported by the multi-donor First Initiative itemized the range of considerations for developing securities market central depositories (CSDs), and in particular whether the account, settlement and safekeeping functions should  be held in a single entity and if the government should own and operate them. No international detailed best practice has yet been developed in this area, and the study urges balance between safety and efficiency within explicit legal and supervisory regimes and public and private stakeholder involvement. The oversight body IOSCO presents general financial market infrastructure principles, and global case studies of central banks and stock exchanges clarify outstanding themes. CSDs are systematically important with payments network links and monetary policy applications including for open market operations. Corporate debt and equity responsibility is normally with the Finance Ministry, and of 95 countries surveyed, over half have a single one, with this model most common in the Eurozone. In Africa central banks lead the process, and of the 150 depositories in the World Bank’s data base one-third are run by them for government paper only. Economy of scale is the main argument for one unit enabling high cost technology recovery, and international custodians prefer this simpler model. Distributed ledger “block chain” capability may be the next generation with direct user access. Safety is an offsetting concern, and multiple provider systems integration may be an easier fix as in Tanzania and Georgia. Competition between operators is another solution as in India with the caveat that risk standards could also lower. Cross-border arrangement may be the chosen route as in the West Africa Francophone zone, and less formal unions such as Latin America’s Pacific Alliance grouping Chile, Colombia, Mexico and Peru. Private actors may not have the money or knowhow, and in startup stock exchanges like Rwanda’s the government has been fully in control from the outset. They must have contingency plans, offer book-entry automation and manage capital, credit and liquidity for their account within defined legal and regulatory parameters. The chief executive must also have convening power to mobilize banks, brokers, and central bank and ministry representatives, which may be difficult if commercial return is the overriding motive.

The paper cites a full gamut of alternatives, such as the dual CDSs in the Kyrgyz Republic for stability; Mexico’s pioneer single private one; the Philippines’ Finance Ministry governance: and Lithuania’s gradual public stake sale. Global debt houses are gearing up for an end decade burst of activity in the multiple local and external corporate and sovereign asset classes currently running $700 billion against benchmark indices with half in hard currency. Credit quality is majority investment-grade and duration and yields are above the developed world. Regional exposure is diversified and emerging markets account for only 10% of world debt versus 40% of GDP. Frontier destinations are early in refining depository methods despite economic stabilization and capital market development progress, and fund managers will increasingly incorporate such institutional factors into future allocation. According to recent research by Europe’s NN Partners on its 25th anniversary infrastructure reliability could feature in an extended environmental-social-governance screen also likely to be a central function.

 

Asean’s Split Sentiment Sentry

2018 April 6 by

ASEAN’s main stock markets were mixed heading into the first quarter close, with Thailand and Malaysia at the front with respective 10% and 5% gains, and Indonesia and the Philippines behind with average losses over 5% on the MSCI Index. Currencies started the year strong, but in February the prospect of multiple US Federal Reserve rate hikes and trade spats sparked regional local bond selloff, with $3 billion in outflows. Politics has injected its own volatility with Malaysia’s yet to be scheduled poll inviting fresh vitriol between the ruling and opposition parties,  Indonesian and Thai candidates positioning for 2019 elections, and Philippines President Rodrigo Duterte slamming critics and rejecting UN sway over his bloody anti-drug trafficking campaign. At the same time inflation and possible overheating have become concerns with faster 5% range growth, as banks also widen the credit spigots amid business and household debts drawing rating agency unease.

Malaysian Prime Minister Najib Rezak will call elections before the end of April with his Barisan Nasional coalition vying for another 5-year term. Allies in a longstanding tradition have gerrymandered voting districts to improve their odds, but the rival Pakatan Harapan pulled in his predecessor Mahathir Mohamad to join forces with jailed head Anwar Ibrahim to mount a stiff challenge in a race hinging on the economy. The opposition has hammered away at the Prime Minister’s responsibility over the $600 million missing in the 1MDB fund scandal, with heated rhetoric accusing him of “bankrupting” the country. It advocates elimination of the recently-imposed goods and services tax and toll road fees, which the Finance Ministry claims would open a $150 billion budget hole.

The ringgit is steady around 3.9/dollar with the central bank on hold, after $1.5 billion in net portfolio inflows so far this year. Foreign direct investment was $10 billion and reserves passed $100 billion in 2017, and World Economic Forum competiveness standing rose two places. The International Monetary Fund recently outlined Malaysia’s track toward “high-income” status, and the Prime Minister’s adviser pointed out that debt/GDP was below the statutory 55% level despite the opposition’s “insolvency” charge. Public and private sector forecasts are for another year of 5-5.5% growth and subdued 3% inflation on an ample current account surplus compensating for uneven domestic demand. However a bitter campaign will reduce the likelihood of future economic policy consensus, as Moody’s Ratings in a March banking system report continued to flag high household leverage and souring commercial real estate loans.

Indonesia may re-run the 2014 presidential sweepstakes as General Prabowo Sabianto of the Gerindra party has reportedly sounded out colleagues as well as Islamic activist organizations kept at a distance by the Jokowi government. The incumbent’s opinion popularity is solid, but he again will fall short of the 7% growth target, with Coordinating Minister Darmin Nasution previewing a first quarter under 5% figure. Finance Minister Sri Mulyani Indrawati acknowledged a softer rupiah below 14000/dollar and $3 billion reserve dip in February, but cited favorable tax revenue and current account trends. Stocks trade at a hefty 17 times price-earnings ratio with a bare profits increase, and foreign investors otherwise trimming local bond exposure may have stalled the pace with inclusion in a benchmark Barclay’s index. The President and his team are aggressively pitching infrastructure projects to fund managers at home and abroad to reverse output slack, and will turn to banks for above 10% annual loan expansion, including through new fintech providers, after years at a single-digit clip.

Thailand’s ruling junta has yet to formally fix a date for long postponed election return as the central bank signaled a growth upgrade to over 4% on good tourism and manufacturing numbers, aided by a 10% predicted rise in Asian neighbor inward direct investment. Exports are set to increase 7% to sustain the large current account surplus fueling baht appreciation alongside capital inflows. The Philippines in contrast ran a $2.5 current account deficit in 2017, and the peso is ASEAN’s worst performer despite frontrunner 6.5% growth. The central bank tightened monetary policy, but not headline interest rates as inflation nears the 4% upper band goal. Investor consensus holds that both the economy and the President’s temper may be overheating, but the dizzying cross-country rotation may spin again toward mid-year

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Sovereign Debt’s Testing Trillion Dollar Trill

2018 April 6 by

With $150 billion in annual issuance the last two years external sovereign hard currency size has passed $1 trillion, and 2018 should continue the high volume new entrant streak, according to JP Morgan research. Middle East oil exporters jumped in heavily over the period with price reversal leaving large budget deficits, and another $60 billion is forecast this year. Saudi Arabia, Oman and Kuwait each have large gaps that would otherwise be covered by wealth funds and reserve depletion. Argentina also has borrowed for this purpose since striking a deal with holdout creditors and returning to the market in 2016, and has sustained Latin America’s one-third share of the global total, followed by 25%-plus Europe and the Mideast/ Africa as the next top regions. The latter’s portion has doubled and an estimated $75 billion tap over the coming months will be half of supply. Dollar-denominated activity is 80% of the amount outstanding, with the rest in euro where countries outside Europe, like Mexico and Senegal, have tested the waters. The past decade brought 30 debuts from Sub-Saharan Africa and Central Asia, while recent returnees include China, Iraq and Belarus. Of the $150 billion completed in 2017 the split was even between high-yield/unrated and investment-grade, partially due to prime European sovereigns turning instead to local currency instruments. As a portion of overall debt the domestic segment at 45% of GDP is seven times greater, and $350 billion in assets are dedicated to the EMBI benchmark tracking 40% of the index sum. In 2019 large maturities will start to come due reaching $80 billion in 2022, but increasingly frequent liability management will likely spur early redemption. The biggest five borrowers in rank order from $60-85 billion are Argentina, Turkey, Indonesia, Mexico and Poland.

Russia is close to joining the pack with a multi-billion dollar offering oversubscribed in the face of US and UK additional punishment for election meddling and alleged dissident killings. S&P restored the investment grade rating with net debt under 10% of GDP, relative fiscal balance, and inflation under control as President Putin faces token opposition to reelection after his most potent rival Navalny urged a boycott. Stocks have led the MSCI Index pack after last year’s poor showing, with dominant state lender Sberbank reporting a 20% profit jump. Russian defiance of the West has played well politically to boost the incumbent’s opinion approval, despite qualms over the cost and casualties of Syrian Assad regime support. Moscow has steered the debate toward rebuilding with a recent conference to consider at least $200 billion in infrastructure projects, although the energy sector remains under global restriction. At the same time it directed an overture at Saudi Arabia with the government venture capital fund eyeing a possible anchor stake in the future Aramco IPO. The Eastern Ukraine war continues with the US taking modest steps to transfer new military equipment as the Crimea takeover goes unchallenged and Gazprom refuses to pay $2.5 billion in international arbitration damages for pipeline interruption. Western donor have soured on the $17 billion IMF program, where the latest $1 billion installment is a year behind pending anti-corruption court creation ahead of new presidential elections a year from now possibly extending bad behavior.

Egypt’s Secure Election Sieve

2018 March 29 by

Egypt’s February external bonds were again oversubscribed, with the 30-year yield falling below 8%, ahead of the end-March election where President Al-Sisi does not even face token opposition, since the lone eligible candidate Moussa is an ally refusing to debate as too much of a “challenge” to the incumbent.  Along with jailing political opponents and activists before the contest, journalists have been rounded up as military officers take over large media swathes. The government has also tried to block websites and managed to close hundreds as “fake news and extremist.” It released footage of reported ant-terror raids in the Sinai in a bid for public support, but turnout could lag the less than half of voters who participated in 2014, when the then general got 97% of ballots. Since signing the IMF accord and floating the pound, foreign investors have poured into debt and equity with double-digit returns despite near 20% inflation and the 8.5% of GDP fiscal deficit after fuel, but not more sensitive food subsidy cuts. The recently inaugurated Zohar gas field in the Nile Delta should generate billions of dollars in revenue and cheap energy, and staunch donor Saudi Arabia in March inked a $10 billion deal for a border “megacity” and business zone called Neom Riyadh had previously unveiled at a big 2017 investor conference.

The Kingdom plans to refinance its own $10 billion sovereign loan from 2016 as the budget deficit will still be over $50 billion or 7.5% of GDP this year despite higher oil prices. The public debt cap is set at 30% of output, with the current level approaching 20%, and the petroleum earnings windfall has been partially diverted to the separate $250 billion wealth fund, about equal to the reserve drawdown in recent years. A 5% value added tax was introduced after excise levies went on to soda and tobacco to also encourage healthier lifestyles amid a diabetes alert. To boost coffers, payments have also slowed on outstanding contracts according to export credit agencies, and an initial $15 billion was collected from detained business executives in the Ritz-Carlton hotel accused of corrupt and irregular transactions. Officials claim they will eventually net $100 billion through continuing investigations and control over asset disposition while they are pending. Crown Prince bin Salman embarked on a global financial tour after the action to tout his economic reform agenda and the Saudi Aramco IPO as a centerpiece, which may be delayed into 2019. He has been behind the aerial bombing campaign against rebels in Yemen which has displaced and sickened millions as a world’s worst humanitarian crisis. The central bank is broke, and the Saudis allocated $2 billion in January to relieve currency collapse and mass starvation. Morocco also has a King in charge who has warned of a “political earthquake” if living standards and regional income extremes are not clearly improved under the 5-year development plan. The IMF’s $3.5 billion latest precautionary line was completed to a mixed review. On 4% GDP growth and initial widening of the exchange rate band, the report urged greater flexibility and fiscal and business environment reform to also address social tensions flaring alongside core phosphate exports.

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Iran’s Convulsive Currency Crux

2018 March 29 by

The Tehran Stock Exchange was on track to close the end-March fiscal year with a 25% gain in local index terms as a remaining safe haven after the commercial currency market, a popular investment alternative, was shattered by a record plunge in February to 50000 rial/dollar prompting officials to shut dozens of dealers and ban imported good greenback use. Central Bank governor Valiollah Seif, after keynoting the Euromoney Iran conference in Paris in the wake of major French oil and auto sector commitments, abandoned business-friendly rhetoric and vowed to work with security forces against “speculators.” The monetary authority issued high-interest bonds in an attempt to divert leftover liquidity, as its own operations came under banking community criticism for uneven intervention following months of bottlenecks in accessing foreign exchange.

A new electronic trading platform to be rolled out is designed to facilitate transactions, but the market has also been spooked by recent national anti-regime protests with thousands of arrests,   international nuclear pact doubt as US President Trump calls for renegotiation and stiffer sanctions, and pared Gulf bank ties as a corollary to the Qatar boycott for its perceived Iran alliance. Citizen anger has been directed at Supreme Leader Ayatollah Ali Khamenei and President Hassan Rouhani for religious foundation and Iran Revolutionary Guard Corps (IRGC) economic domination, while lifetime savings have been lost in unregulated financial institutions and social spending continues to decline in real terms amid double-digit unemployment. The President’s second term assigned priority to banking crisis management, and billions of dollars have been released slowly for depositor reimbursement, bad loan reduction and recapitalization. The Supreme Leader acknowledged in a February speech the need for low and middle income earner “justice” but remains opposed to dismantling state and IRGC financial and industrial sector control, including in monetary policy where the government continues to dictate Islamic “return” rates and exchange rate unification is now indefinitely postponed.

Since the currency squeeze the market rate recovered to 45,000/dollar, as the authorities try to prevent inflation worsening from 10% and preserve 4% GDP growth mainly on oil export rebound. According to a University of Maryland-commissioned survey two-thirds of the public consider the economy “bad,” versus half when the six-country nuclear agreement was signed with initial sanctions lifting. The Supreme Leader ordered the Guards and the rest of the military to sell off “irrelevant” assets in January without defining them, and equity investors view divestiture as inextricably linked to greater transparency, free float and corporate governance which can establish Tehran as an accepted frontier exchange and catapult placement in the World Bank’s Doing Business rankings. Their poor management and hard line contributed to a months-long strike at a big steel company listing, where worker demonstrations over unpaid salaries were met with arrests.

The Industry Ministry estimates that $180 billion in foreign direct investment is required to achieve desired 7-8% medium-term growth, but last year only $2 billion was registered. It continues to blame residual US restrictions for keeping multinational banks and their clients away, even though $55 billion in credit lines were recently secured from Europe and Asia, including lenders in Austria, Italy, Belgium, China and South Korea. Iranian banks are fully reconnected with the SWIFT cross-border payment network, and have started to apply global anti-money laundering and terror rules created by the Paris-based Financial Action Task Force. President Rouhani in March urged international regulatory compliance as part of a “modern Islamic system” despite a backlash from conservative lawmakers describing such measures as “disarmament.” He admitted “shortcomings” including tens of billions of dollars in non-performing assets and fraud such as in the 2017 collapse of the Caspian Credit Institute, which helped trigger popular outrage. Separately municipalities such as Tehran have run up huge debts, with the capital’s annual servicing cost at $1.7 billion, according to representatives.

In the first ten months of the fiscal year total loans rose 8% to $100 billion, as the 2018-19 budget extended central bank support for penalty forgiveness of overdue obligations. The housing bank Maskan, the Export Development Bank, and Melli, the largest state-owned unit received capital injections. President Rouhani’s advisers have long advocated much bolder approaches, including a possible joint public-private sector asset disposal agency, but as problems fester their credibility has become a rapidly-depreciating currency.

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Trade Wars’ Tactical Retreat Cry

2018 March 22 by

Early year stock and bond returns paused their extended double digit momentum as the US administration revisited trade conflict fears by slapping tariffs on aluminum and steel, following less headline-grabbing action against solar panel and washing machine imports. At the end of February the MSCI and GBI-EM indices tallied 1.5% gains as external corporate and sovereign and frontier equity benchmarks were down. Other factors contributed to diminished enthusiasm, including growth data leveling off after months of positive economic activity surprises lifting the global forecast to 5%. With new Federal Reserve chair Powell highlighting strength which could lift rates further than the original “dot plot” path, local currency instruments were re-priced. The key question for exporters hit by Washington’s action is retaliation as a combination of commercial and diplomatic considerations, and China in particular has signaled such response while retaining negotiation options pending release  of the section 301 report expected to list in detail intellectual property violations. Beijing has already dispatched President Xi’s lead economic adviser in an effort to reverse tougher investment stances as well with a succession of pending financial services and high-tech deals unable to pass muster with the Treasury Department’s CFIUS panel. Aluminum and steel are only fractional shares of emerging market exports, and affected countries could ease fiscal and monetary policies to offset the near-term blow. Asian PMI readings were previously slowing from last year’s torrid electronics supply chain cycle pace, and in Indonesia and India authorities had been contemplating rate hikes to narrow consumer import-fed current account deficits. In EMEA, South Africa, Turkey, Russia, Bahrain and others could be affected at the margin by the industrial metals fallout, but asset allocation will more be driven by delicate political junctures over the coming months. Retail investors registered occasional outflows through February especially in ETFs, but sovereign and corporate issuance has boomed at $50 billion and $80 billion respectively.

African borrowers lined up for Q1 include Kenya, Nigeria, Cote d’Ivoire and Senegal despite 20-year retrospectives on the original HIPC official relief which ultimately covered 30 countries, with Ghana for example cutting its burden to 10% of GDP. Later it led the inaugural bond parade, and with commercialization private creditors now are bigger holders than the traditional Paris Club, IMF and World Bank. The latter’s debt sustainability analyses have consistently understated potential distress from these more expensive obligations, as Ghana and Mozambique went into workout operations. Corporate valuations are stretched with Latin America the favored region and Asia dominating placement. Commodity names are one-quarter of the CEMBI and prices are solid, while healthy balance sheets overall should keep defaults below 5%. Credit rating direction is almost neutral, but deleveraging banks are risky picks with declining financial ratios. So-called cross-over investors with global mandates have entered in force, but local institutions are prominent buyers across major regions. Supply should again be in the $450 billion range this year, and specialized ETFs could increase their presence with only $50 billion in external bond vehicles currently in the market. “Green bonds,” half dedicated to renewable energy, could take off with more standardized information as funds position for that space, while distressed ones concentrate on Venezuela restructuring scenarios, where half value recovery would seem to be contingent on regime change.

Latin America’s Ineluctable Election Elevation

2018 March 22 by

Financial markets in Argentina, Brazil and Mexico strained to continue early year positive direction, with looming presidential election cycles overwhelming business and economic ones themselves presenting a mixed picture. Argentina’s contest is not until next year, but another term favorite President Macri has run into trouble with his “gradualist” adjustment program initially cheered and now displaying lackluster growth, inflation and FDI results. Labor unions long associated with the Peronist political opposition have gone into the streets to press for annual wage gains above the 15% target, after the price gauge was up 25% last year. The union federation head has been accused of embezzlement, but orchestrated a truckers strike also designed to challenge proposed labor reforms. The central bank’s anti-inflation credibility in turn was eroded after a surprise unexplained interest rate cut which may have been designed to curb peso appreciation with strong foreign portfolio inflows. The government issued $10 billion in external debt through February, and provinces and corporations joined the bandwagon. The carry trade case is still compelling on double-digit yields but the one-way bet will be muted with a volatility dose that the monetary authority could intend. The strategy could be compromised by chronic direct investment weakness, at 1.5% of GDP half the regional average, in the capital account. The infusion is also needed to cover the higher current account deficit as drought ravages agricultural exports, and consumers embark on an import spending binge with restrictions lifted from the Kirchner era. Industrial production was flat in December as a recent construction boom could be over, and the 2017 growth tally will not reach the 3% threshold for bonds’ warrant premium. Investors can point to fiscal deficit progress with subsidy rollback, but balance will remain elusive pending implementation of structural tax and pension changes. The President and his team propose more action in a second term, but social transfer cuts were a wedge issue in the parliamentary polls several months ago, and rival party chamber control supported by opinion surveys against future reductions will be difficult to overcome.

Brazil enthusiasm picked up on a court ruling that former President Lula, the front runner with a commanding lead over right winger Bolsonaro, was ineligible to run with his criminal bribery conviction, but left after he appealed the decision. The pension overhaul narrative was dented too as the Temer Administration, seeking supermajority congressional passage of a constitutional amendment, abandoned the effort in the face of its 5% popular approval. Ratings agencies downgraded to “BB” in response, as the embedded cost of mid-50s early retirement is predicted to swell government debt to 75% of GDP by end-decade. S&P also cited unmet “fragilities” in the federal fiscal framework, including previous state and local authority rescues since they cannot place debt. “Subdued” growth estimated at 3% this year will not alter the budget path, and inflation could also increase over the medium term from current under-target lows. In external accounts the agency praised near elimination of the current account hole, but warns the country has reverted to a net debtor position with private sector borrowing, with total net liabilities over 250% of receipts. Petrobras tops the list with close to $150 billion outstanding, after settling a US class action lawsuit for $2.5 billion on clear shareholder candidate victory.