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Global Forced Displacement’s Unforced Errors

2018 June 19 by

A year-long CSIS study involving extensive frontline economy field research warned of “unprecedented” displacement extrapolating from the current pace over the next decade to hundreds of millions globally, which will swamp US relief funding and national security concerns. It urges an “all hands on deck” approach multilaterally to embrace private sector development, with Washington to refrain from short-term budget cuts and agreement withdrawal and reengage while also pressing China, Russia and other countries to raise contributions and absorb migrants and refugees. In Europe sentiment has shifted from welcome to deterrence and deportation in recent years in violation of the 2003 Dublin accord. The legal and logistical system dividing responsibility between the UN Refugee Agency and International Organization for Migration is badly dated and major host countries like Bangladesh, Iraq and Jordan are not signatories. The UN’s budget shortfall was $4.25 billion or 50% last year, and the World Bank and other development lenders have just arrived on the scene. Of the 65 million currently in flight the overwhelming portion have that status for at least 10 years and they are over 80% concentrated in poor and developing countries. Women and children are half the population, and most live in urban centers as opposed to traditional camps. In advanced economies one-tenth of foreign aid now goes to processing and supporting arrivals, and terrorism incidence has been non-existent despite political rhetoric. Jordan, Lebanon  and Turkey have absorbed 6 million Syrians, while only a tiny fraction have been resettled abroad. The US plans to slash this year’s quota to a record low, but India, Japan and Saudi Arabia lock the door altogether.

According to the OECD almost one-fifth of official donations, over $25 billion, are for forced migration. Root causes generally divide into three categories: violent conflict, political persecution and economic mismanagement, and climate and natural disaster. One-third of the displaced numbers face famine or food insecurity, with 6 million at risk in Somalia alone and the toll in Yemen unknown. Education and work should be basic rights and are key to productive stays, but access is often deliberately restricted or beyond host country capacity. These issues are now on the agenda of broad compacts negotiated with the international community, starting with the 2016 Jordan one where the EU agreed to provide additional trade preferences and partners backed enterprise zone expansion. Bangladesh, which has taken in 1 million Muslim Rohingya expelled from next-door Myanmar, is early in this process with wider duty-free garment exports a chief consideration. Since summits in 2016 private business has emerged as a new actor in hiring and supply chain relationships and adapting products and services to migrant needs. Studies show clear bottom-line returns, and refugees themselves have proven active entrepreneurs with thousands of business launches tallied in Turkey. Small-scale financing projects have a mixed record and the planned US Development Finance Corporation may launch a dedicated venture capital fund following previous success in difficult environments. The report recommends more AID missions in “hot spots” and increased World Bank focus through the private sector IFC on innovative business and financial models. It suggests further study to unclog the deal pipeline and size constraints associated with these tragic flows.

ASEAN’s Malaysia Maelstrom Milage

2018 June 19 by

The shock victory and anti-corruption and economic policy cleansing promised by Malaysia’s opposition alliance roller-coasted stocks  before a slight MSCI index gain, and cast a shadow on  ASEAN peers the Philippines and Thailand with their own political and fiscal battles under overall asset class retrenchment. The International Monetary Fund chimed in with caveats at a Singapore event marking a decade since the 2008 financial crisis, as it called for “budget and monetary buffer rebuilding” with  capital outflows. On the positive side, exchange rates are more flexible and reserve coverage is above the adequacy standard, but Asia’s current account balance is down the past decade amid higher external and public debt, which has jumped 15% to 60% of gross domestic product with average fiscal positions now in deficit.

The Fund’s Deputy Managing Director Tao Zhang noted a “striking increase” in corporate and household debt over the period and urged targeted macro-prudential measures. He also warned of higher inflation through rising oil and other commodity import costs, and the unfinished financial inclusion agenda with “large disparities” in automatic teller and formal banking access across the region. His speech put the Asia-Pacific behind Sub-Sahara Africa on mobile transactions and urged stronger credit bureau and payment system infrastructure to tap unreached customers.

Foreign investors , who own over one-quarter of Malaysia’s local debt and equity, had already trimmed exposure before the election on steep valuations over 15 times earnings. They joined in an immediate 5% forward ringgit selloff as a party coalition, led by former President Mahathir Mohamed, other than the ruling UNMO won a parliamentary majority for the first time since independence. When last in office during the 1990s financial crisis, he lambasted “unscrupulous” currency traders and imposed capital controls, and fund managers turned skittish fearing a reprise. The party manifesto hinted at possible currency intervention, while assigning the central bank responsibility for reviving “international market value.” However Mahathir signaled a hands-off approach in early finance minister and other appointments based on track records rather than ethnic or crony ties as in the past.

On the Kuala Lumpur Stock Exchange consumer goods listings were buoyed by the incoming administration’s promise to abolish the goods and services tax, while maintaining fiscal discipline through cutting unspecified project spending. Prime Minister Mahathir after reassuming power ordered a raid on his predecessor Najib’s residence, and barred him from leaving the country as the government tries to recover billions of dollars allegedly siphoned from the 1MDB sovereign wealth fund. The Belt and Road relationship with China will in turn be reexamined on suspicion that $30 billion in agreed bilateral transport financing posed a debt trap that could presage Chinese asset seizure as in Sri Lanka. The East Coast rail link to Singapore, underwritten by China’s Export-Import Bank and estimated at half that sum, will be scrapped as “economically unviable” although it would have created tens of thousands of jobs according to a Mahathir adviser.

The political earthquake resounded in Thailand, where street protestors demanded an end to four years of junta rule as the timetable for February elections next year was again in doubt. General Prayuth Chan-ocha, who heads the military government, may be positioning to stay in charge under a nominal civilian regime, as next generation activists organize new parties. GDP growth at 4.8% in the first quarter was the fastest in five years on healthy exports and tourism, although private consumption and investment were weak. Inflation is only 1% with the benchmark interest rate on hold, but foreign investor capital market confidence  turned bearish in May with a 75 index reading.

Philippines’ GDP growth came in at 6.8% on President Rodrigo Duterte’s 15% infrastructure spending push under the $180 billion “Build Build Build” program, but double-digit credit expansion also lifted inflation above 4%, triggering a 25 basis point rate change. The trade deficit swelled on equipment imports and remittances slipped in a lethal peso depreciation combination, down 5% against the dollar this year. The setbacks hurt the President’s popularity rating currently at 70%, as ratings agencies cited overheating and governance worries despite low external debt.  Standard & Poor’s upgraded the outlook to positive, as international fund managers reserve such small market ASEAN judgment with building tensions.

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Local Bonds’ Unguided Track Traces

2018 June 12 by

JP Morgan’s 12th edition of its annual local bond market guide skirts recent volatility to promote long-term asset class trends, while citing structural foreign investor pullback the past five years. The past two years’ returns reversed previous losses, and Sharpe ratios at 0.5 have not suggested undue swings compared with other debt categories and equities. Almost 95% of emerging market government obligations are local currency and the $8 trillion universe is half the bond total. International ownership is down since the 2013 Taper Tantrum to a 27% share, while institutional flows have increased relative to the retail portion according to fund trackers.  The field is one-tenth of the global bond market, while developing economies are 40% of world GDP.  China, India and Brazil are 60% of the stock, and inflation-indexed instruments are concentrated in Latin America. In the past 15 years the average return has been 7.5% despite wide divergence in underlying currency values. Correlation is low with US Treasuries and higher with other industrial world credit, with real yields remaining steep in historical terms. Output growth should be in the 5% range through end-decade, and contained inflation should moderate rate hikes despite advanced economy quantitative easing fade. Fiscal deficits have worsened in recent years while current accounts have improved, and still managed and pegged currency regimes chiefly in the Middle East should stay intact. Overall government debt is 50% of GDP, and 2018 issuance should rise 3% to $600 billion, the reference projects. Foreign investor stakes vary widely, and China Korea, Israel and India have large non-dedicated participation, but control often ranks just behind domestic banks on the institutional scale. Pension funds have raised EM debt allocation to 5% of portfolios, but only one-fifth of plans are active. ETFs are small with less than $30 billion in assets, dominated by JP Morgan’s own $7.5 billion vehicle. Secondary trading has increased since 2010, and Mexico, India, Brazil and South Africa lead turnover, according to industry body EMTA’s regular surveys.

In Asia, beyond China’s Hong Kong Bond Connect and access liberalization, India lifted the foreign portfolio investment limit 1% to 6% of the government securities amount, and Vietnam and Sri Lanka are new frontier pockets, Malaysia extended onshore currency hedging and Korea duration out to 50-year Treasury bonds. In Europe Serbia, Ukraine and Kazakhstan are under investor consideration, and money poured into Egyptian T-bills following pound flotation under an IMF agreement. Nigeria may rejoin the benchmark GBI-EM index with relaxed foreign exchange curbs amid oil price recovery. Argentina continues to build its fixed-rate yield curve to reduce external funding dependence, Uruguay appeared with two instruments, and the Dominican Republic issued an inaugural index-eligible bond.  In contrast domestic corporate bonds are undeveloped at under 15% of GDP, with China accounting for almost three-quarters if the $7.5 trillion total. Korea and India are next averaging $500 billion, followed by Brazil, Mexico and Russia from $100-125 billion. Israel and South Africa are at $70 billion, and financials are over half the group and two-thirds mature within five years. Chinese quasi-sovereigns in banking and infrastructure are the top names, but only 10% are available through Euroclear to obscure the opportunity set, the review concludes.

Global Public Investors’ Assiduous Asset Pool

2018 June 12 by

The fifth edition of Global Public Investor, a comprehensive survey of 750 central banks and pension and sovereign funds prepared by the London-based Official Monetary Institutions Forum (OMFIF), charts a 7.5% asset rise in 2017 to over $35 trillion versus flat performance the previous year, with only the Middle East down. Half of holdings are in Europe and North America, while Asia led by China has 40% of the total. Equity rallies and “hard” real estate and infrastructure diversification supported the upswing, as gold reserves reached a two-decade high with China’s and Russia’s central banks controlling the bulk. Pension funds are the biggest managers with a $15 trillion stash, and in the Euro area Greece and the Baltics increased portfolios in contrast with the Gulf downturns in Qatar and Saudi Arabia, which both lost $50 billion. Turkey and Kazakhstan were also big gold buyers as instruments included retail and ETF exposure. Environmental, social and governance principles are routinely incorporated, with three-quarters polled requiring outside advisers to apply them and the same percentage already with green and sustainable investments in portfolios. Several funds plan complete fossil fuel divestment over time, and include the $150 billion green bond market in the fixed income category. 20% of respondent will lift renimbi weightings in the near term although only $125 billion is currently positioned, particularly to match the project envelope under the multi-trillion dollar Belt and Road program. Gender balance still lags among the universe at about a 20% average for women in boards and top executives, with Africa the best represented region. Chinese funds accounted for one-fifth of asset growth with a $520 billion gain, while Kuwait’s Investment Authority shrank 10% at the bottom of the pack.  Government bonds take over one-third of allocation, followed by corporate debt and stocks, with illiquid property rising in popularity at a10% slice in a cross-section surveyed by State Street research. The compilation notes that Brazil is the largest emerging world debtor in a reversal of status from the immediate post-2008 crisis period, and that Islamic sukuk issuance is around $500 billion outstanding with geographies extending into conventional European centers.

Contributors to the volume touted African prospects as a remaining unexplored high-growth tier, and new structured products are available to offer institutions diversified passive exposure in keeping with conservative mandates. However the lure must be weighed against alarming reports of sovereign debt commercial distress a decade after sweeping relief under the HIPC initiative granted mainly by official creditors. According to a May analysis by S&P ratings it was only a “partial success” since general government stocks have tripled as a fraction to 55% of GDP since 2010 along with interest at 11% of revenue. It emphasized that net debt improved from pre-HIPC levels, while the service burden is currently worse and “especially high” in Ghana, Uganda and Zambia. Congo-Brazzaville and Mozambique have already defaulted, and ratings downgrades will continue across the complex around the prevailing “B” speculative mark. Zambia’s negotiations on a fresh IMF arrangement have stalled on hidden liabilities spooking investors who did not pay much attention previously to recordkeeping which lagged along with commodity export capacity.

 

 

 

Iran’s Stifling Sanctions Soundtrack

2018 June 6 by

Following a currency crash and ban on parallel market trading in April that ravaged stock-market listed banks reporting a combined $4.5 billion in losses, the sector braced for further damage with President Trump’s decision to resume primary sanctions and scrap nuclear deal participation. They will target the central bank to block dollar access and cross-border correspondent relationships which had proliferated with Asian and European banks the past two years after the system rejoined the SWIFT payments network. In his second term Iranian President Rouhani had bad loan cleanup, officially at $25 billion or 10% of the total, as a priority following a 2017 International Monetary Fund report calling for a” comprehensive asset quality review and recapitalization plan.” He and a team of technocrats tried to pass legislation in parliament to strengthen independent supervision and modernize management and disclosure practice, but it was routinely sidetracked by conservative opponents eager to maintain insider state control and credit provision.

GDP growth is put at 4% for the fiscal year ended in March, despite oil shipments of 2.5 million barrels/day and non-oil exports each generating around $50 billion, following months of protests over poverty and unemployment and labor strikes over unpaid salaries. Although international reserves are over $100 billion, capital flight in the first quarter of this year, mainly through informal hawala channels, may have been $30 billion as the rial lost one-third its value against the dollar before the government imposed a single 42,000/dollar rate and barred individuals from holding more than 10000 euros. It introduced a new foreign exchange trading platform but has yet to define rules for business use, as companies continue to tap underground networks for funding needs as well as for money laundering and speculation. According to the central bank the net capital outflow in the first half of the last fiscal year was $6.5 billion as foreign direct and portfolio investment barely materialized despite the former’s $100 billion medium term goal.  The shunned Revolutionary Guard, whose stock exchange listed construction arm just announced 40 mega-projects to support the “resistance economy,” is still dominant across a range of industries as the World Bank Doing Business ranking is stuck at 125th place.

Fiscal and monetary policies have squeezed middle class households that placed their faith in Rouhani’s reform agenda and improved living standards with the six-nation 2015 sanctions lifting. The latest budget blueprint showed the military and tax-exempt bonyad religious foundations with the largest chunks, as food and fuel subsidies are curtailed and public investment for infrastructure is only 3% of GDP. High interest rates cap fixed investment at 20% of GDP, and the central bank recently floated bonds at 20% yields to try to soak up liquidity from the foreign exchange market. It now claims fluctuations will be limited to 5% annually without detailing intervention strategy or earmarking reserves, further eroding strained credibility prompting calls for governor Valy Allah Seif to resign.

Under compromise proposals for lawmaker consideration this body would not be autonomous but overseen by a “high council” of senior cabinet ministers and politicians. Moves toward Basel III and international financial reporting standards are on hold, as supervisors step back to deal with previously unlicensed credit providers run as pyramid schemes. They seized and merged several into new entities like Ansar Bank that will fall fully under prudential rules. Big banks like Sepah had to dramatically raise capital to meet a stiffer 10% of assets threshold in effect since 2017, as all of them on the Tehran stock exchange were ordered to retain profits. In a vicious debt triangle, commercial lenders owe the central bank hundreds of billions of dollars from decades of emergency lines, while the government owes them $15 billion for past budget borrowing. To clear the arrears and restructure ailing units new bonds are likely to be issued which would be placed with captive pension funds and other equally unhealthy and poorly managed institutional investors. The final workout tab could be $200 billion, and the current 35-strong sector could consolidate into a dozen groups, according to experts, with President Trump’s repeated sanctions now sharpening the blow.

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Foreign Reserves’ Hesitant Heft

2018 June 6 by

The IMF released last quarter 2017 global reserve figures, with China now fully added to the mix to cover 90% of the outstanding total, showing a 6% $800 billion increase since end-2016, half due to currency fluctuations against the dollar. GDP growth rose to 3% and bank deleveraging and commodity price retrenchment bottomed over the period, with private emerging market capital flows turning positive and central banks intervening again against appreciation. From 2014-16 holdings dropped $1.5 trillion, but JP Morgan forecasts for this year and next are for just $150-200 billion incremental addition. The current account surplus may not budge on “trade war” outbreak and flat remittances, and rising advanced economy interest rates will divert portfolio investment. Asia with $5.7 trillion, half the world accumulation, led the regional recovery, with China’s over $3 trillion pool still $1 trillion off the previous peak. India, Indonesia, Singapore and Thailand swelled more, while in Europe Russia came back to $350 billion and in the Gulf shrinkage continued the past year but at a negligible $30 billion, one-tenth the preceding loss. Dollar weakness across-the-board in 2017 aided the rebound, but authorities are likely to interfere less in exchange rates in the future to avoid “manipulation” charges from the new US administration. The IIF’s high-frequency indicators through the first quarter in turn suggest neutral debt and equity allocation to major developing markets. By the traditional yardsticks of short-term debt repayment and four months import coverage, these countries have excess reserves, but the IMF recently introduced more nuanced metrics which reveal China in particular as barely above adequate. It points to the money supply buildup to support capital controls as eroding the cushion, and by the updated methodology South Africa and Turkey are in danger and positions are insufficient in Hong Kong and Singapore although they are at the same time offshore financial centers. The dollar and euro have respective 65% and 20% shares, but they continue to slip against other units, although the renimbi portion remains meager at 1%. With “A” share entry into the benchmark MSCI index this June, alongside wider Hong Kong connect access and local bond and investment bank opening, reserve manager deployment should grow, and a 5% take rivaling the UK pound and Japanese yen is possible at end-decade according to analysts.

Foreign investors trimmed securities exposure as Washington and Beijing entered talks to avoid reciprocal tariff imposition, and the Yuan softened ahead of potential negotiation-related adjustment. The Politburo prepared to receive Treasury Secretary Mnuchin and Trade Representative Lightizer as it hewed to stable growth with “proactive” fiscal and neutral monetary policies. Banks reported 5% profit improvement in Q1, as their piece of total social financing again reached 90% from a decade ago before the “shadow” competitor craze. The insurance regulator tightened rules on short-term products and the central bank imposed guarantee and leverage limits on asset managers as it put household debt at 50% of GDP, mostly in mortgages. 40% of loans have gone to property so far this year with average rates rising to 5.5%, as national home sales fell 10% in April with developers scrambling for their own reserves.

Asia’s Green Bonds Green Light

2018 May 30 by

On the eve of its annual meeting, the Asian Development Bank, which has issued its own “green” bonds for clean energy projects, circulated a lengthy report from the ASEAN+3 local currency initiative calling for wider embrace of this structure to meet long-term low-carbon infrastructure funding under the UN’s Sustainable Development Goals and national plans. The Chinese government, which is furthest along in the region as a main component of the estimated $180 billion global market, sponsored the research to help bolster neighbors’ “modest” participation a decade after the European Investment Bank’s inaugural placement. In 2016 the mainland’s renimbi-denominated volume in the instrument was $35 billion, and elsewhere only Japan and Korea managed over $1 billion while Malaysia, the Philippines and Thailand had only single issues. Beijing has clear guidelines set by the National Development and Reform Committee, but “low awareness’ due to the lack of country policy and investor understanding is the prevailing trend in Asia where green bond markets are “immature” in comparison with Europe and North America, according to the analysis. It recommends an array of demand and supply promotion steps to create a viable project pipeline, which is the “binding constraint” since financing separately should be available.

Worldwide the buyer base is divided between traditional and environmental, social, and governance-oriented “impact” investors, with the latter taking half of recent activity in sample deals. Major providers like MSCI and Bloomberg have launched dedicated green share and bond indices, and stock exchanges in Shanghai, Shenzhen and Singapore designate these listings. The London-based International Capital Markets Association developed voluntary principles, and India is the only other example beside China in Asia of mandatory standards. Commercial banks are the leading names and the most common form is general obligation rather than project-specific. Green bonds carry marginally higher costs up to seven basis points due to stricter reporting requirements, but yields are ultimately identical to conventional offerings, market players believe. Among emerging currencies the Chinese renimbi dominates with a 10% global share as of June 2017, but the World Bank’s International Finance Corporation private sector-affiliate has also been active in Indonesian rupiah, Turkish lira, South African rand, and Brazilian real. The China Development Bank has been a top single name, and the asset class features prime credit ratings and average 5-10 year maturities which have catalyzed “tremendous” growth amid securities industry recognition of greater climate and fossil fuel risks.

A G20 study group in 2016 identified barriers which were repeated by ASEAN+3 investors and regulators, particularly the absence of shared definitions and norms. Asian issuers prefer official over industry direction, and await bond market linkage with Paris Agreement carbon reduction targets, possibly with new sustainability mandates for institutional managers. They noted faster approvals but the process can still lag conventional access, especially with controversies over “greenwashing” as natural resource lenders try to burnish poor environmental records. Regional representatives are observers for the Green Bond Principles first announced five years ago on proceeds use and disclosure, but they remain fluid and complex and the Chinese and Indian models do not reflect capacity and practice in other countries. Korea’s Hyundai Capital completed an electric vehicle flotation and Malaysia a solar plant sukuk, but East Asian banks have broadly avoided engagement. Responsible investing assets in Asia ex-Japan are miniscule at $50 billion or 0.2% of the total, and only a handful of houses have signed the UN’s Principles in that field. Green bond funds do not exist, and the proposed $2 billion pool between Europe’s Amundi and the World Bank unveiled at the Spring Meetings will likely dwarf all near-term potential launches combined.

The ADB calculates Southeast Asia’s infrastructure bill at almost $200 billion through 2030 and asserts that green versions are “well suited” to normal project and public-private partnership bonds. It urges “national inventories” of potential ventures, tax incentives and credit enhancements, and technical assistance and outside auditor fee coverage to advance the agenda. The central bank and securities supervisors can ensure financial institution exposure both as issuer and investor if they design an instrument regime and lower capital set-asides for such risk, the report argues. It envisions a cross-border green professional network to “scale up” this segment by finally planting roots, within fertile existing local currency bond size at trillions of dollars.

 

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Nigeria’s Prolonged Presidential Visit Preening

2018 May 30 by

Nigerian shares looked for further catalysts to sustain rebound as President Buhari became the first Sub-Saharan leader to meet individually his US counterpart on a state visit, where he diplomatically dismissed reports that President Trump had previously described the region in crude language. His trip served to bolster global prestige that can translate into votes at home after declaring a reelection bid next year against media and APC party age and health objections. Security was in the forefront with his government considering $1 billion in additional spending to fight Boko Haram and protect Northern border and Niger Delta villages. On anti-corruption he and his team have maintained relatively clean reputations in contrast with predecessors, and oil economic diversification has seen progress in agriculture and infrastructure despite the deliberate pace of promised privatization. GDP growth could reach 3% this year, as the PMI index neared 60 in Q1 on rising oil exports and foreign exchange access. Inflation dipped below 15% with the central bank policy rate kept at 14% with possible cuts in the second half. International reserves top $45 billion on current account and portfolio inflows, with continued currency intervention sterilized by open-market operations as the multi-tier system lingers to bar reinstatement in JP Morgan’s local bond index. Eurobonds, including a diaspora issue, have been placed easily as the chronic budget deficit is manageable at 2% of GDP with the country rejecting resort to a formal IMF program.

South African financial assets in turn were poised to extend momentum with President Ramaphosa’s takeover as ruling ANC head on a reform and investment platform starting to take shape. The investment-grade sovereign rating is preserved for now with the fiscal gap predicted at 3.5% of GDP on better 2% growth despite consumer slack. Capex spending and real wage gains support the uptick, with commodity exports holding steady. The President’s “New Deal” has removed state company chief executives and mounted prosecutions against alleged corrupt senior officials, but he remains under attack from party activists calling for harsh redistribution policies, including on land where section 25 of the constitution is under review to allow outright seizures. The minority white population still controls 95% of farms under the existing willing buyer-seller scheme adopted post-apartheid, and poor and middle-class advocates also urge a national minimum wage and more labor protections in the face of 25% unemployment. The central bank slimmed the repo rate 25 basis points in March with inflation in the 4-5% target band and rand stability, but the quasi-fiscal risks of state enterprise borrowing may resume upward pressure. The administration, rejoined by planning stalwart Gordon, aims to attract $100 billion with a “conducive investment climate” breaking from the last two decades, and it envisions a heavy Chinese dollop under the Belt and Road natural resources and infrastructure project initiative. Renewed mining interest is a priority as the basic charter is renegotiated and strategic stakes in Eskom and other major ailing monopolies could be sold off, but elite wealthy families may be ineligible to widen the buyer base.  The government will press its case against the influential insider Guptas and their network of political and commercial allies at the same time to help rewrite the art of the deal.

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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