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Myanmar’s Cresting Condemnation Count

2019 January 14 by

While the tiny Myanmar Stock Exchange formally reopened to foreign investors as a new companies law went into effect several months ago, they continue to keep their distance amid slowing growth and currency depreciation, and potential removal of European Union garment export duty free entry over the Rohingya refugee crisis. Government leader Aung San Suu Kyi refused to accept APEC summit criticism over expulsion and human rights violations against the Rakhine state Muslim minority, as Bangladesh tried to start a repatriation program for a few thousand of the 750,000 there with no volunteers. She replaced economic officials but refused to acknowledge a “gathering storm” described in a World Bank December report of policy lapses and delays reflected in sliding tourism and foreign direct investment, as the country ranks in the bottom twenty of its “Doing Business” publication. The International Monetary Fund’s latest Article IV visit piled on with a call for a “second reform wave” to achieve frontier market status, as it cited fiscal risks from large recently-agreed China-funded infrastructure projects and hesitant state-run banking system restructuring.

The World Bank predicts gross domestic product growth will slow half a point to 6.2% in the 2018-19 fiscal year ending in March. Industrial sector decline was tracked in purchasing manager index readings below 50 the last quarter, with business sentiment faltering according to a separate survey. The mid- year pace of approved manufacturing foreign direct investment was half the previous $1.5 billion pace, and services output fell slightly with tourism reputation fallout over the Rohingya issue. Arrivals are up less than 1% compared with 7% in 2017, with double-digit drops from Europe and North America. The government removed Asian neighbor visa requirements in a bid to bridge the gap but their spending and stays continue to lag wealthier country visitors. Garment exports are a “bright spot,” accounting for 3% of GDP and almost 750,000 mostly women-held jobs, but EU and US preferences are under review for possible trade sanctions resumption. Agriculture as the main employer is flat following flood-related crop damage and Indian import curbs, and private consumption will “moderate” with rising food and fuel price and currency depreciation-driven inflation, expected to reach 9%. Officials poured money into energy and transport projects in an attempt to stoke demand, also hiking the budget deficit to 4% of output.

The trade deficit was a 5-year low of $300 million in the second quarter, with formal jade exports to China doubling despite an international campaign to boycott so-called “genocide gems” controlled by the military. Reduced capital goods imports should shrink last year’s 2.5% of GDP current account gap, and FDI flows have traditionally offset it but were only $1.7 billion from April-September versus $4 billion the preceding period. Oil and gas exploration and production remains shunned pending law and tax changes, and companies from Singapore, China and Thailand are in sequence the leading sources. They represent 70% of the total, with “limited diversification” through other regions, and China’s 15% slice is likely to increase with the bilateral Economic Corridor under the Belt and Road Initiative, the Bank report comments.

Kyat depreciation against the dollar roughly mirrors regional trends, with an August spike when the central bank removed a daily fluctuation band and the rate settling around 1550 since October. Thin formal foreign exchange trading may exacerbate volatility, and officials recently authorized dollar swaps to aid liquidity. The swings have little influence on Chinese border trade denominated in renimbi, and competitive export gains are elusive since imported input costs rise. The central bank continued interventions at $15 million from April-September, as first quarter credit growth was barely in double digits after the previous 25% clip with tighter bank regulation demanded by international donors. Two-thirds of loans go to trade, construction, services and agriculture customers, with a “large state enterprise bias.” Profitability as measured by return on assets is in steady decline as interest rate controls remain in place. The lack of market determination applies also to Treasury bill and bond issuance to finance the deficit, where auction participation is “below potential.” The first credit bureau for banks and non-bank lenders to better pool information and manage risk is under formation and may improve small business access, but medium-term progress depends as much on image and portfolio rehabilitation as an urgent broader leadership signal , the review claims.

The Gulf’s Cracked Finance Facade

2019 January 14 by

Gulf stock markets were mixed, with Qatar, Saudi Arabia and Kuwait with 10-25% gains, Bahrain flat, and Oman and the United Arab Emirates with losses on the MSCI index. The OPEC meeting revealed further fractures as Qatar quit the group, and remaining members no longer in control of world oil price direction geared production toward the estimated $90/ barrel break even for budget balance. On the geopolitical front, Saudi and UAE support for the legacy Yemen government’s fight against Houthi rebels came under US and Europe diplomatic and military challenge, as the UN convened an initial round of peace talks in Sweden. As money managers consider their 2019 regional weighting beyond technical index changes, the International Monetary Fund also came out with dual studies on the financial sector and foreign investment climates. They highlighted gaps with emerging market peers that hamper growth, diversification and inclusion, and the findings reinforce near-term aversion that will persist after reallocations temporarily lift performance.

The IMF paper argues that outside Saudi Arabia financial system development lags economic fundamentals, with dominant banks and missing non-bank institutions like pension funds and insurers. Debt markets are nascent and equity activity is sizable but narrow, with large state companies the main participants. Small business and women’s credit access is minimal, in part due to limited knowledge. Overdue reforms include government bond yield curve creation, tighter corporate governance and investor protection rules, and wider international ownership scope.

 Total Gulf Cooperation Council bank assets are $3 trillion, about 200% of gross domestic product in line with other emerging economies, with the non-bank system share at 20%. The UAE sector is biggest and Oman the smallest, and only Bahrain has both wholesale and retail lending. Islamic finance has grown at a 10% clip the past decade, double the conventional rate, with large company funding the preferred business model. Saudi Arabia is an exception with a half dozen non-bank intermediaries, and aims to place sovereign wealth money in local hands now chiefly placed abroad. It is the leading stock market in terms of capitalization and turnover, but Qatar and Kuwait are ahead in relation to output. The GCC just started to issue government bonds to cover fiscal deficits the past five years, and private activity is negligible at 5% of GDP as corporates tap global markets instead.

Scaled by population, the number of equity listings is particularly meager in Oman, and in 2017 the region had just twenty initial public offerings worth $1 billion. Market concentration is high with banks and state-owned enterprises around half of capitalization, and buy and hold primary investors constrain share free float. Foreign ownership is around 5% overall, with Oman and Saudi Arabia still imposing minority company positions. Household borrowing relies on informal family and work channels outside banks, and 60% of youth have accounts compared with 80% of adults, and small firms get 5% of loans. This inclusion gap is identified as a policy priority, but officials must further expand credit bureaus, overhaul insolvency codes and introduce fintech innovations, the survey insists.

Stock market regulation improvement paved the way for the UAE, Qatar and Saudi Arabia to move from the MSCI frontier to core index, but implementation of governance and protection norms remains “weak.” Debt markets lack repos and competitive auctions, and robust disclosure and ratings systems. Currency instruments have been thwarted by the dollar exchange rate peg, and Bahrain has the only sizable mutual fund sector at one-quarter of GDP. Life insurance is “negligible” as a possible catalyst for long term fixed income allocation, and private pension plans are rare. A partial program to remedy these deficiencies would bring modernization benefits that raise per-capital income growth at least half a percent, the document concludes.

Broader trade and investment criticism was also pointed in a separate study, which noted “limited progress” in shifting from oil exports at two-thirds of the total and integrating into global supply chains. The intra-GCC amount was 10% of non-oil commerce and has further contracted with the Qatar embargo. FDI inflows have “stalled” despite rich natural resource endowments with lagging worker skills and productivity. Outside hydrocarbons they are skewed as a result toward real estate, where slowdown in the Dubai hub in particular may match the faltering financial market foundation.

The Debt Pile’s Pile-On Plume

2019 January 7 by

Government and private sector debt accumulation acting as a global growth drag was a G-20 summit topic focus in Argentina, where the Macri Administration’s external market return after a decade in the wilderness again dug a hole requiring IMF rescue. Participants registered concern as efforts to establish a comprehensive member data base again assumed importance, but attention mostly veered toward China’s deleveraging course amid US trade and investment caution and tariff imposition. Both sides backed a three-month cooling off period, but Washington has extended the fight into national security and aid financing, with vows to curb Chines defense and technology access and challenge and match infrastructure and development deals under the Belt and Road program with establishment of a new agency. JP Morgan’s annual update puts government debt/GDP outside China at 50%, almost a record, with the private load equally near an historic peak. Fiscal deficits above the 3% standard cutoff will result in 90-100%-plus levels in relation to output in Argentina as well as Egypt, Jamaica and Mongolia, and 5-10 point increases the past year were in Angola and Ecuador.  The bank argues that the foreign exchange and bonded components of external debt are the main vulnerability metrics, with Bahrain and Uruguay in trouble on these counts. Debt/ reserve ratios above 1 also mean difficulty for Pakistan and Ukraine. With China private debt/GDP is close to 115% and excluding it the figure is 75%. China’s level rose by the same 75% the past decade, with corporate borrowing up the most. The household 37% debt average is half the developed world, but Korea’s and Malaysia’s total mirrors the latter group. Asia overall has the top private credit portions outstanding, while reductions since last year were in Saudi Arabia, Kazakhstan, Croatia and South Africa.

Local currency exposure is almost 95%, mostly through commercial bank loans rather than capital markets. Since 2015 the overhang has been a concern that will now worsen with the global business end- cycle coinciding with worldwide rate hikes. In the government ledger, 90% is domestic, but non-residents own one-quarter of the amount and 30 new chiefly frontier sovereigns have debuted since 2010. A combination of tighter liquidity and commodity prices will widen bond spreads in this segment, according to the survey. Private credit doubts center on China, where a crackdown has relented with slower 6.5% growth and Washington’s trade test. A spike in bad loans is likely throughout the universe with Turkey’s crisis offering a precedent, and the traded corporate bond size of $2 trillion is a large number even if an estimated half is held by local investors.  In Asia especially 1200 first time issuers the past decade may be in peril with more defaults as economic and cash flow indicators deteriorate. Based on empirical data half a dozen countries are in serious danger, and most have already turned to the IMF, including Argentina, Mongolia, Pakistan and Zambia. Stock markets through November reflected the same negative sentiment, with the MSCI core and frontier indices down 15%. Argentina and Pakistan with respective 45% and 30% drops were big losers, with only a handful of Middle East entries with strong results as commodity windfalls service debt and equity allocation.

India’s Unreserved Reserve Grab

2019 January 7 by

Indian stock market performance remained barely positive in contrast with the rest of Asia in the red through November, ahead of state elections in December and Prime Minister Namenda Modi’s formal re-election campaign over the coming months, as good tech company earnings and strong 7.5% economic growth offset dramatic non-bank frailties adding to financial system jeopardy. Defaults by 30-year old Infrastructure Leasing and Financial Services, with $13 billion in debt outstanding, revealed the breakneck 20% annual increase of such “shadow bank” lending mainly for construction and property projects in recent years, and threatened a broader liquidity and possible solvency seize with close mainstream bank and mutual fund ties. Institutions like ILFS together equaled the one-quarter of the total credit contribution of private banks. Dominant state ones still account for half the amount even as their equity valuations are discounted for poor management, inefficiency and regular scandals like February’s $2 billion Punjab National Bank fraud.

The government’s immediate crisis policy reaction further stoked financial and real estate sector jitters when it tried to press the nominally independent central bank to release a reported half of its $100 billion reserves in emergency lines. The move not only underscored the size of the potential balance sheet hole officials have consistently denied through incremental recapitalization and liberalization steps, but represented unprecedented overt intrusion in the monetary realm. Former governor Raghuram Rajan was alleged to have fallen out with the Modi team after facing behind the scenes pressure to slow bank bad asset cleanup, and the incumbent Urjit Patel through his deputy signaled that reserve turnover would have “potentially catastrophic” effects on the central bank’s perceived autonomy and technocratic reputation. His backbone was a surprise after acquiescing to the sweeping ill-fated demonetization strategy immediately upon appointment, and in a compromise talks were agreed between the Finance Ministry and Monetary Authority. They may still lead to an outcome with a sizable holdings chunk transferred, and  the episode magnified doubts about fiscal consolidation and banking overhaul prospects in a Modi second term.

The latest quarter expected 7.5% gross domestic product growth, down from the previous period’s 8%, is in line with international forecasts like the OECD’s as output statistical measurement changes continue to invite criticism. Figures were again adjusted to cut the previous government’s average pace to 6.5% and widen the gap since Prime Minister Modi took office, and former Finance Minister P. Chidambaram blasted them as a politically-motivated “bad joke.” Despite the headline number and partial rupee recovery toward 70/dollar with imported oil price relief, analysts highlight soft spots as the BJP ruling party re-election drive kicks off.  Unemployment was 7% in October, and despite a good PMI manufacturing reading of 53, business sentiment is weak and slower auto sales also point to consumer pessimism. With retail inflation within the 4% medium term target, benchmark interest rates should be on hold into next year, but lower food prices will hurt agriculture. This fiscal year’s 3.3% of GDP budget deficit goal will likely be missed, according to India Ratings, and although exports were up 18% in October, they continue to slide in value terms with the current account gap stuck at 2.5% of GDP.

Indian structural reform progress was hailed in a 25-place jump in the latest World Bank Doing Business rankings, with a top credit access score now facing reversal with the shadow-bank induced liquidity crunch. Morgan Stanley predicts single digit loan expansion through the March 2019 fiscal year, even though state banks will provide guarantees to over-leveraged non-banks, which loaded up on short-term corporate debt to support long-term housing and infrastructure portfolios in a classic maturity mismatch. ILFS had a top AAA credit rating to ease wholesale borrowing, and its default sparked fixed-income mutual fund and Mumbai exchange share panic. Funds sold off debt at heavy discounts to meet redemptions, and big players like Dewan Housing Finance experienced double-digit equity price declines. State banks taking large government bond losses in recent months will be reluctant to offer non-bank credit enhancements despite central bank authorization, as big foreign portfolio investors shun the sector entirely in the wake of institutional arrangement and rescue policy muddles. They dumped $2 billion in financial shares in November according to stock exchange data, and outflows will continue until crisis cooperation and rehabilitation flow more smoothly.

Russia-Ukraine’s Brooding Border Clashes

2018 December 31 by

Russia and Ukraine stock market relative outperformance on the respective MSCI core and frontier indices was in play as a naval confrontation in Crimea sparked international condemnation and Kiev’s martial law declaration in border provinces already reeling from Moscow’s port grab. The Russian Foreign Ministry blamed stray ship provocation after forcibly boarding it and arresting sailors, while the US and Europe convened a UN Security Council session to criticize the action and threat further commercial and diplomatic sanctions. The incident preceded the annual G20 summit in Argentina with Presidents Putin and Trump in attendance and focused regional attention on the civil war in Eastern Ukraine with its heavy economic and humanitarian toll. Russian-supported rebels have taken over factories and declared their own government, while tens of thousands have been killed or fled the area 5 years after the Minsk agreement outlined a peace framework, according to outside monitors. GDP growth is set at 1.5% this year with oil above the budget’s $40/ barrel breakeven price, but sovereign borrowing continued in the wake of the latest Crimea events to close a slight deficit after VAT and pension changes. Geopolitical friction further weakened the ruble and the stock market’s valuation discount, and could send inflation toward 5% into next year prompting modest central bank tightening. State-owned Sberbank and VTB earnings were healthy in the latest reports with strong moves into infrastructure and technology to support domestic franchises, aided by depositor flight from ailing and shuttered private rivals under tougher supervision. Leading officials and executives have tried to encourage de-dollarization, with foreign reserves in the currency to be phased out in a challenge to Washington as Moscow also allies with Iran, North Korea and Venezuela.

Ukraine’s reaction was magnified by a bruising presidential contest with the incumbent Poroshenko running behind former holder of the post Tymoshenko, as both called for a harsh response. They are also dueling over a successor 1-year $4 billion IMF program after an October staff agreement was reached. Kiev passed energy price and tax hikes to keep the budget deficit below 3% of GDP and enable release of a first tranche in early 2019, but Tymoshenko’s and other candidates’ platforms oppose Fund austerity demands and pledge to roll back fuel cost increases. The fiscal package is also negative for securities markets with a 15% dividends levy, and could generate 10% inflation also due to currency depreciation with the meager less than three months imports’ reserve coverage. The 4% of GDP current account gap lingers despite a record $12 billion in remittances this year, and another Eurobond issue to ensure external financing is likely off the table until poll results are in, analysts believe. The EBRD predicts 3% growth in 2019, with both domestic consumption and investment stymied by high interest rates and political doubts. Successful privatization could boost confidence, with utility Centrenergo going on the block mid-December, but agriculture and metal exports are the mainstays drawing private equity and strategic investor interest. Eyes are also on next door Poland’s general elections at the end of 2019 which hosts the Ukrainian worker influx, with the populist ruling party still favored but experiencing an opposition incursion in recent local contests.

Asia Bonds’ Aversion Tendencies

2018 December 31 by

The November edition of the Asian Development Bank’s local bond publication, reviewing the August-October quarter in nine East Asian markets, cited higher yields, currency depreciation and reduced foreign holdings as likely trends into next year against the backdrop of emerging economy “risk aversion” and developed world monetary policy adjustment. It noted that equity markets also sold off, while credit default swap spreads stayed intact on 4% quarterly growth in the group to $13 trillion, almost three-quarters from China. The ADB added that the trade fight with the US could dent “healthy” economic expansion, and an annual survey of liquidity conditions was mixed, with the absence of corporate and government bond hedging tools a main bottleneck. In advance of the next phase of the 15-year old Asian Bond Markets Initiative, it offered a retrospective tracking progress against Latin America. The work praised corporate issuance strides, but found that domestic currency regional placement remains stuck with onerous non-resident rules.

The ADB’s September economic update put gross domestic product growth below 6% in 2019 with domestic demand still “robust,” but trade conflict could be a further drag. While China continues above that threshold, ASEAN members’ advance is set at 5% and Hong Kong’s and Korea’s just 3%. Consumer price inflation will rise 0.5% to near 3% next year, with geopolitics aggravating oil cost uncertainty. In the third quarter yields rose everywhere except China and Vietnam, with the largest 150-200 basis point increases in Indonesia and the Philippines. Only the Hong Kong dollar and Thai baht appreciated during the period, while the Indonesian rupiah and Korean won depreciated 3.5%. and 2%, respectively. Credit default swap spreads inched up in Thailand and Korea, with the latter capped by ebbing tensions with the North. International ownership of local bonds dropped in all markets outside China, with the level there a small 5% in contrast with 25% in Malaysia and 35% in Indonesia, where the central bank hiked rates five times between May and September to sustain inflows.

On an annual basis market growth is almost 13%, with China’s same magnitude leap in local government special bond issuance leading the way in the quarter. Korea’s $2 trillion size was second, accounting for 15% of East Asia’s total. ASEAN combined was $1.3 trillion at end-September, with Thailand and Malaysia each around $350 billion, and Islamic-style sukuk 60% of the latter. Singapore’s $300 billion market had heavy monetary authority issuance to absorb excess liquidity, and Vietnam’s tiny $50 billion one registered improvement in the nascent corporate segment. Government bonds are still two-thirds of activity overall, with the ratio to GDP at 73%. Indonesia’s pace near doubled over the three months with the return of conventional central bank bills as of July, while the Philippines’ 38% drop was greatest without the previous quarter’s retail Treasury bond exercise.

 East Asia cross-border transactions were down 20% in the timeframe to $4 billion, with Hong Kong and mainland China 60% of the sum. Lao PDR reappeared with a $400 million deal, with the Chinese Yuan the top currency denomination. US dollar, euro and yen regional issuance slipped 9% to $220 billion through the third quarter, with the dollar the 90% preference. Chinese names including Tencent and Construction Bank were the biggest portion, and Korean state banks were also active. Indonesia’s $15 billion was one-third of the ASEAN total, and Cambodia was represented with Naga Corporation’s $300 million.

Yield curves moved up across the board with US Federal Reserve rate hikes and balance sheet shrinkage, as speculative-grade corporate offerings were shunned, the report commented. The Malaysian Securities Commission liberalized retail investor access; the Philippines central bank approved simpler placement rules; and the Thai Bond Market Association is considering digital bitcoin settlement to strengthen non-government demand. The yearly online participant and regulator survey revealed worse or unchanged liquidity in Indonesia, Korea and Malaysia, with the last “sidelined” awaiting policy direction from the re-elected Mohamed Mahathir administration. Their turnover ratios slid, as bid-ask spreads widened to almost 5 basis points. On qualitative indicators, along with missing hedging tools, the lack of investor diversity, tax clarity and repo availability were obstacles. Government bonds are tax-exempt in China, Malaysia, and Vietnam, while other jurisdictions apply 10-25% interest withholding to illustrate uneven performance and development paths ahead for more selective buyers.

Zimbabwe’s Tempestuous Transition Toss

2018 December 24 by

Emerging and frontier stock markets this year have been battered with one unusual exception: Zimbabwe’s MSCI Index was up 100% through October as local investors are desperate to preserve savings value, with bank collapse and hyperinflation again looming a year after longtime President Robert Mugabe was forced to resign. His successor and former deputy and army head Emmerson Mnangagwa won his own term for the ruling Zanu-PF party in elections this July, with the opposition claiming widespread violence and vote-rigging. The President and his team, with previous African Development Bank chief economist Mthuli Ncube as Finance Minister, have tried to shake off years of international commercial sanctions and shunning with outreach at the recent International Monetary Fund-World Bank meetings and conferences in the US and UK. They have endorsed state enterprise privatization, fiscal discipline and official arrears clearance while the banking and multi-currency systems heavily reliant on electronic transfers and artificial “bond notes” unravel. Foreign portfolio investors remain at a distance from the monetary chaos and lingering pariah status, when they could join domestic counterparts in formal collaboration to press for urgent steps to hasten a return to the developing financial market mainstream.

In October in Washington an executive delegation, hosted by the US Chamber of Commerce and Corporate Council for Africa, proclaimed Zimbabwe “open for business.” Banking and finance was not represented as presentations focused on difficulties accessing credit and funding normal operations in real estate, energy, agriculture and technology. Potential partners attending the roundtable noted the absence and basic nature of slide shows reflecting inexperience at global investor gatherings. Zimbabwe’s Ambassador urged participants to again consider its human and natural resources after a long period where cross-border engagement was confined mainly to the South Africans and Chinese. A State Department official expressed the Trump Administration’s view that political and economic reforms were preconditions to stronger diplomatic and trade ties, as individuals associated with the Mugabe regime remain under asset freezes.

President Mnangawa later ramped up the rhetoric for a Financial Times London event, when he compared planned restructuring efforts to the Thatcher “revolution” four decades ago in cutting the public sector payroll and selling off state-run companies. He promised to collect taxes and proposed a new levy on electronic transfers comprising 95% of financial transactions, and also targeted hundreds of millions of dollars in revenue through an anti-corruption crackdown. A “zero tolerance” campaign resulted in top business and government representative arrests, with suspects going into exile to avoid investigation. Gross domestic product growth may exceed the IMF’s 3%-4% forecast with gold production already higher than the 2017 total, and the private sector will expand in farming with compensation for previous seizures. The President lauded Minister Ncube’s official creditor overtures on debt settlement, and progress toward a full Fund program.  

However the Minister admitted in October that the 11% of GDP budget deficit was triple the original target. Staple food, fuel and medicine costs suddenly spiked several hundred percent, recalling the pre-2009 hyperinflationary era, as he signaled intent to purge bank accounts of “bad” electronic and bond note dollars which trade at a discount to hard cash. His office also threatened 10 years in prison for underground currency traders, and the central bank further stoked financial system anxiety with an order to keep remittance flows in separate quick access facilities. The Cairo-based African Export-Import Bank, which backed the bond notes introduced in 2016, again agreed to guarantee them at full parity value with physical money, and the Mnangawa administration as a backstop also borrowed $250 million from London investment fund Gemcorp, which was founded by a former executive with Russia’s VTB Capital. According to local brokerage reports, out of $9 billion in deposits only around 10% is US dollars, euros or South African rand, with the overwhelming balance so-called “zollars” which economists agree should be phased out over time for monetary stability.

Minister Ncube has implored citizens for patience over the transition, but the memories of massive devaluation and lack of trust are too embedded. Against this background, London conference investors in November were unmoved by the MSCI Index’s triple-digit gains and his pledge to end indigenization laws and permit foreign majority ownership of listed companies. To resolve confidence and policy impasses, both sides should form a joint economic and financial market task force to speed rebuilding and reintegration. It would concentrate private capital focus still lacking under the new leadership, while finally tackling dual banking and currency crises for a fresh start. This interim model could also fill a glaring gap as post-sanctions countries elsewhere on the continent, like Sudan, begin the journey toward longer-term commercial financing.

The Middle East-Central Asia’s Wayward Aim

2018 December 24 by

Middle East and Central Asian financial markets are under immediate fire from souring emerging economy sentiment and the Turkey crisis in particular, and also lag on commodity diversification, fiscal discipline, and private business support, according to the International Monetary Fund’s November review. It pointed out that sovereign bond spreads increased 100 basis points through August to mirror the broad emerging market trend, with distinct Turkish banking and trade linkages. Parent banks in Qatar and Lebanon control over 5% of local assets, and Azerbaijan suffers from reduced import demand with lira depreciation. The US-Europe-China trade battle more generally hurts oil, mineral, auto and textile shipments from the area, and will aggravate gross domestic product growth and current account deficit worries already weighing on investor confidence, the IMF signals.

Gulf oil exporters will see 2.5-3% growth through 2019, but the medium term price forecast is for gradual decline to $60/barrel. Public infrastructure spending is the main driver, including Expo 2020 and 2022 World Cup preparations in the United Arab Emirates and Qatar respectively. Other petroleum powers Iran, Iraq and Libya are under international commercial sanctions or still experiencing internal conflict. The combined current account surplus is estimated at $120 billion, with the capital account also receiving inflows from $30 billion in sovereign debt issuance and Saudi Arabia’s MSCI stock market index upgrade. However state-owned companies face a large $135 billion maturity hump next year to warrant caution, the report stresses.

In Saudi Arabia, the UAE, Kuwait and Qatar the fiscal position is balanced or slightly expansionary, but sustainability will require public sector salary and subsidy cuts and tax collection such as recent VAT introduction. Bank liquidity is better but private credit is “tepid” with 5% range annual growth, on weak construction and real estate demand. Borrowing rates are higher in line with US Federal Reserve moves under the dollar exchange rate peg, and small business access is limited although fintech is opening new channels. Bankruptcy law, corporate governance, and credit bureau overhauls are overdue and local corporate bond market development should be a priority. More than one-quarter of employment is government-related, triple the emerging economy average, and domestic job creation is subject to numerous costs and distortions and poor professional education and training.

Arab world oil importers have double the growth at 4.5%, with Egypt and Pakistan leading the way as domestic consumption and remittances strengthen. Current account deficits still average 6.5% of GDP despite 15% export expansion, and Egyptian tourism has recovered with heightened security and resumed direct Russia flights. However reserves are under pressure in Jordan, Tunisia, Pakistan and elsewhere, with bilateral and multilateral financing needed for support. Banks are “stable and adequately capitalized,” but portfolios tilt toward government lending with public debt over 90% of GDP in half the group’s countries. More than 50% of the total is foreign currency-denominated, and interest payments take one-fifth of revenue. Energy subsidy reform is “critical,” but will worsen double-digit inflation that could spur further monetary tightening. Per-capita income growth has been lower than peers the past decade, and overriding challenges include reducing informality and raising productivity with “downside risks” to the outlook.

Central Asia and the Caucuses growth is also in the 4% range, but the rate will ebb over time from economic partner spillover and soft private investment. Exchange rates appreciated against the Russian ruble to help contain inflation, and allow easing in Azerbaijan, Georgia, Kazakhstan and Tajikistan. The negative fiscal balance improved to 4%, as stimulus programs like Kazakhstan’s Nurly Zhol housing plan end. Positive terms of trade and increased foreign direct investment help oil exporters, but current account gaps will widen in the Kyrgyz Republic, Tajikistan and Uzbekistan. Highly dollarized banking systems in Azerbaijan and Georgia are vulnerable to capital outflows and currency swings, and the region will not reach middle-income status for at least two decades. Officials pledge to slash government control and ownership but advance slowly, such as with the Kazakhstan stock exchange’s partial strategic company sales to maintain a positive MSCI return through October. Armenia and Georgia are among featured reformers on the World Bank’s Doing Business list and stiffer bank regulation has been promoted, but securities market infrastructure and oversight languish to investor chagrin, the survey warns in foreshadowing likely 2019 and beyond performance.

Yemen’s Bank Catastrophe Call

2018 December 17 by

As the US and UK call for a ceasefire and reconsider military support for the Saudi-backed Yemeni government’s campaign against Houti rebels, with fierce fighting now around the strategic Hudaydah port, the UN’s special envoy Martin Griffiths  underscored the scope of “economic warfare” accompanying hunger  for an estimated half the 30 million population. He cited “income famine” with years of unpaid civil servant salaries as split officials and central banks in charge in Aden and Sana’a clash over spending and banking and currency policies. The former, headed by President Abdo Rabbu Mansour Hadi operating from Riyadh, authorized fuel access to only licensed importers in September, while the latter spurned the decree and threatened retaliation against complying businesses, banks and money changers. The actions further reinforced fuel and exchange rate squeezes, as the rial slumped 50% against the dollar between July-September on the parallel market. In the view of experts on the ground such as the Sana’a Center for Strategic Studies, the established financial system and currency are at risk of outright collapse to add to the humanitarian catastrophe, without practical steps and policy reforms coordinated by international development institutions and private partners.

Yemen’s is the region’s poorest economy, and the latest International Monetary Fund projections are stark. Once a promising oil exporter, gross domestic product will contract 3% with the civil war, on 40% inflation from staple scarcity and rial depreciation. The fiscal and current account deficits are each estimated around 10% of GDP, and turnarounds next year are predicated on ebbing conflict. Output collapse since the outbreak of hostilities has been worse than in Libya and Syria, and the Fund notes “urgent needs” for food supply and public sector salary assistance. In the Gulf banking sector broadly private credit is “tepid” with state borrowing demand and commodity-related retrenchment in the construction industry, which was the mainstay in Yemen alongside hydrocarbons and agriculture. Saudi Arabia has provided fuel grants and deposited $2 billion to strengthen the currency, but transaction details are sketchy and confidence and substantive effects are so far minimal. In an October visit, special envoy Griffiths called for a collaborative emergency economic plan between local, foreign and regional parties, concentrated on exchange rate and central bank strengthening.

 The UN humanitarian chief, Mark Lowcock, in turn, emphasized that half the population was in pre-famine condition, and two-thirds were “food insecure,” for a once in a century disaster. The international community has a $3 billion appeal underway, with 70% of pledges met according to the latest tally. The Rethinking Yemen’s Economy project, a network of analysts and business and government leaders funded by the European Union, points out that 90% of products were imported commercially before the war, through conglomerates like the Hayel Saeed Anam Group, which now operates out of the United Arab Emirates. Food is still available, but with destroyed distribution channels and consumer purchasing power costs have skyrocketed. Children suffer the most, with over 2 million “acutely malnourished” and also prone to cholera and other preventable diseases. The World Bank has announced a trade finance facility for food shipments and a war risk insurance mechanism is under donor consideration for other cross-border commercial engagement.

Yemen’s banking system was cut off globally over money laundering and terror funding concerns, before the 2011 version of its Arab Spring precipitated the then-President’s ouster and the chain of events to renewed war. European and American correspondents severed all contact from 2015 and refused to accept physical cash common in business dealings, forcing traders into informal currency houses escaping central bank regulation. International reserves quickly depleted as oil revenue was also diverted through these channels, and the monetary authority became completely dysfunctional when the respective Houti- and recognized government rivals were set up in late 2016. Unified supervisory, liquidity management, and payment capabilities no longer exist, as state-owned and private banks must increasingly rely on the two with their own capital crunch. The UN has convened meetings between the sides outside the country in Jordan and Kenya, but beyond informal contact progress is scant. With the currency literally under the gun, the system may be unsustainable and abolition of the two-tier system, which breeds corruption under the official rate, and a shift to a pegged regime as in the rest of Gulf, is likely another unplanned war legacy.

The BUILD Act’s Beguiling Build-out

2018 December 17 by

With strong bipartisan passage of the US Better Utilization of Investments Leading to Development (BUILD) Act in October, the six-month clock is ticking for OPIC and USAID bureau unification and specific plans for using new equity and foreign currency authority under the doubled $60 billion allocation maximum. An Atlantic Council paper urges Sub-Sahara focus, which already absorbs one-quarter of OPIC’s portfolio with a push from the Obama Administration’s Power Africa program, as well as attention to informal markets and supporting commercial and financial “eco-systems” in underserved poorer economies. The organization has provided political risk insurance and debt and private equity fund investment for almost four decades with $5 billion returned to the Treasury. The oldest bilateral provider is the UK’s CDC in existence for sixty years, and together with counterparts in France, Germany and the Netherlands $35 billion was committed mostly to Africa, with Asia and Latin America then evenly split. Non-Western sources including China, India, Turkey and Morocco are also “aggressive,” with Beijing now the largest debt holder at 15% of the total. It backs thousands of infrastructure projects and in September added $60 billion to the pot through end-decade. According to consulting firm McKinsey two-way annual trade is over $200 billion, as the AGOA free trade arrangement with Washington has stagnated, and may be renegotiated under the Trump team’s aversion to existing deals. The Development Finance Corporation must follow first-mover, catalyst, and strategic interest principles but the activity and product landscape is ripe for experimentation. An African venture capital association survey underscores local currency exposure as an overriding risk, despite fund growth to $35 billion with development lenders as anchor investors. However this sum was less than 1% of the global one, and the continent’s job creation is only one-third the annual 10 million positions needed for new entrants.

The document recommends consideration of small companies that “straddle” formal and informal markets, such as car hire in Nigeria and food sales in Kenya, and incubator creation that also offers a technical assistance range. Private equity subscriptions could be on a shared platform to standardize procedures and avoid duplication, and the financing menu could otherwise embrace first-loss coverage and feasibility grants. Tech investment should be a priority with the US competitive advantage and China’s challenge; performance metrics should be finalized and publically accessible over the coming months; and senior private sector experts should be recruited temporarily in the startup phase. Sub-regional approaches should be tried in the first wave of funds and other offerings, as the Millennium Challenge Corporation already applies in its pacts, the Council believes. Public equity in turn has been in the dumps, from core South Africa with a 30% loss to frontier components Kenya and Nigeria, down around 15% through October. Elsewhere in SADC, Botswana is off 35%, while Zimbabwe is the runaway winner with a 100% gain on the MSCI index as a savings refuge. The Finance Minister, previously chief economist at the African Development Bank, has floated controversial “bond note” proposals further spiking scarce hard currency demand, as the stock exchange builds a safe haven reputation by comparison.