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China’s Party Pep Talk Preening

2017 August 16 by

Chinese shares were up over 30 percent on the MSCI index through July, as solid economic data and financial work conference rhetoric overcame US trade retaliation threats following lack of agreement to cut steel exports in particular during the bilateral strategic dialogue in Washington. Second quarter GDP growth was 6.9 percent, with majority contributions from consumption and services, as infrastructure investment rose 20 percent and fixed-asset outlays at half that pace. Inflation was steady at 1.5 percent with money supply expansion continuing to drop to 9.5 percent on shadow banking and international conglomerate- centered deleveraging. The Yuan appreciated 3 percent against the dollar as the central bank hailed “market confidence” and Fitch Ratings pointed to a 1 percent jump in foreign ownership under the new Bond Connect. President Xi called for improved currency trading and internationalization efforts at the annual financial sector Party forum, ahead of the landmark October Congress which will formalize his second term. Reserves have returned to the $3 trillion mark, and banks have been net foreign exchange sellers the past year, as Chinese tourist spending abroad increased 2.5 percent in 2016. The Economist’s “Big Mac Index” puts RMB undervaluation at 45 percent, but less subjective expert readings have it in the 5 percent range.  Politburo statements at the July meeting focused on debt risks, including in local governments and households, with the latter soon to reach 50 percent of GDP. Ratings agencies reinforced caution, with S&P keeping a long-term negative outlook due to runaway credit despite the high savings rate. A financial stability council was formed to coordinate regulation and urgent action through the central bank, which ordered lower wealth management product returns as they approached a 2-year top toward 5 percent. It will be on the lookout for capital and insurance market “abnormal fluctuations” as well as real estate froth and the warning helped prompt a 17 percent loss on the small company tech-heavy ChiNext.

All big state enterprises will be converted to joint stock ownership by year-end but private capital participation has not yet been defined. Profits were up 15 percent among a cross-section of 100 firms in the first half, but company leverage averages over 150 percent, according to official statistics. The government has introduced curbs on further lending to aggressive overseas acquirers like HNA and Dalian Wanda to set an example as it consolidates holdings, most recently in the shipping industry, with coal and heavy machinery deals in the pipeline. Property investment jumped 8.5 percent at mid-year and the 70-city price index again was higher in June. President Xi may leave the sector alone until his reelection, but he has tightened controls over local government borrowing with phase out of financing vehicles, with large real estate assets, in favor of more disciplined bond issuance. He may elevate anti-corruption chief Wang Quishan, who oversaw the biggest investment trust bankruptcy during the 1990’s financial crisis with foreign creditors, to premier in a sign that top-level restructuring expertise and vision may again be pressing. His latest target was a party boss in Chongqing who may now be eliminated from standing committee consideration, as gaming center Macau continues to suffer from the anti-capital flight and money laundering purge.

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The IMF’s Regional Reinforcement Rehash

2017 August 16 by

Ahead of the next annual meetings the IMF’s Policy Review Department has published background papers on potential elements of an expanded global financial safety net leveraging Fund resources, a priority identified under the Managing Director’s work program and endorsed by major county shareholders. They have agreed in principle on an increased backstop beyond the existing prequalified contingency credit and new coordination approaches, with existing regional mechanisms profiled in a case studies document of a half-dozen recent crisis flare-ups. It looks at emerging economy constructs in Asia, Europe, the Middle East and Latin America and through the BRICS, with a particular focus on information sharing, surveillance capacity, and loan instruments to examine likely Fund facility fits. The analysis separately sketches out a quantitative contagion model that could serve as a future collaboration basis and sequence emergency partnerships according to the formula. The Arab Monetary Fund, founded 40 years ago, has $5 billion in capital and twenty members and was designed to correct balance of payments problems, including sudden oil import difficulties. It offers trade reform, broader structural adjustment and short-term liquidity assistance, and recent operations involved Egypt, Jordan, Mauritania and Sudan. The BRICS’ $100 billion contingent reserve was launched in 2014 with China’s contribution highest at $40 billion. It has not been tapped yet, but rules call for one-third access to currency lines with member agreement, and the remaining available with a formal IMF arrangement. The Chiang Mai Initiative among the Asean+3, a bilateral and multilateral swap regime, has been in place since 2000 with $250 billion on hand. It too offers 30 percent immediately and the rest tied to a Fund program, and has conducted “test runs” while never formally tapped. Members did help Indonesia with backup support during the 2008 crash in de facto application, although the episode passed in short order.

The Eurasian Fund was set up a decade ago by Russia and five CIS neighbors with the biggest Kazakhstan. It can provide $8.5 billion including grants for social purposes, and extended balance of payments aid to Belarus and Tajikistan and infrastructure credit to Armenia and the Kyrgyz Republic. Non-euro EU states have an EUR 50 billion kitty from 2002 predating the 2015 Stabilization Mechanism for the sovereign debt crisis, which was drawn on by Hungary, Latvia and Romania. The ESM’s current size is around EUR 700 billion and has been deployed on multiple occasions in Ireland, Portugal, Cyprus and Greece. Its writ goes beyond traditional external reserves protection in view of the single currency to encompass secondary bond buying and bank recapitalization with central bank consultation. Latin America has its own four decade-old Reserve pool among seven economies with maximum capacity below $5 billion. Ecuador and Venezuela received $500 million range loans and central banks in Colombia and Peru got technical help. Europe the past decade provided all the case evaluations, and they show differences over conditionality, responsibility, burden-sharing and timeliness. Joint reviews were often uncoordinated to undermine confidence and momentum, and out of six experiences listed only Hungary was a clear success in terms of effective collaboration which required the parties to defer to respective “comparative advantages” in know-how and judgment as important as money at stake in future anti-crisis recipes, the authors imply.

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Iran’s Certified Share Momentum Doubts

2017 August 10 by

The Tehran Stock Exchange rebounded slightly for a 3% gain through July as the Trump administration, after putting Iran “on notice” for possible cheating, certified short-term compliance with the six-nation anti-nuclear agreement at the same time new congressional sanctions were passed to punish companies and individuals involved in its ballistic missile program and Syrian Assad regime support. Earlier the Treasury Department had ordered asset freezes against leaders and organizations accused of “malign influence” in the region. Washington’s actions came against the background of hardliner backlash by the Revolutionary Guard ( IRGC) and religious conservatives against President Hassan Rouhani’s easy re-election win. His brother was arrested on corruption allegations which he vehemently denied, after the President blasted the IRGC’s economic and political dominance as “government with a gun.” Its leadership in turn savaged a breakthrough $5 billion gas deal with France’s Total and China’s CNPC as a “conspiracy” against domestic competitors. The Guard also viewed another waiver in June of Financial Action Task Force anti-money laundering measures as infringing on foreign policy and security as officials pass laws and rules to ensure bank adherence. The country remains on the blacklist but smaller European and Asian lenders have resumed correspondent relationships as they try to puzzle out growth and policy trends into Rouhani’s next reform act, thus far offering confused signals.

GDP growth was a torrid 11% for the fiscal year ended in March with oil export reopening and the non-oil sector up half that pace. according to official statistics. The IMF had estimated real growth rebound over 6%, and to further promote non-commodity sales the government  earmarked a $500 million credit line and signed agreements with Korea’s and Turkey’s state trade banks. EU exports were five times higher than last year from January-April at EUR 3.5 billion, concentrated in iron and steel products with Germany as the leading buyer. China remains the main energy importer and Iran is an infrastructure project target and crossroads under Beijing’s Silk-Road straddling Belt and Road scheme. Chinese state companies are active in mining and transport, and its cars and goods flood Tehran and other cities. The Export-Import Bank extended a $1.5 billion railway loan for fast service between the capital and Mashad, and national network electrification is set by 2025. The country has forged new bilateral commercial pacts with France, India, Australia, Pakistan and South Africa and a port deal with Afghanistan to diversify and deepen traditional ties.

Next fiscal year growth projections are in the 4-5% range, but the expansion will still be unable to overcome lengthy recession from the UN sanctions period and crack double-digit unemployment. Inflation fell below 10% but crept up again to that level in June, on money printing to aid ailing banks, higher energy cost with subsidy reduction and real estate price recovery after years of doldrums. Modest exchange rate depreciation is another factor, and the government continues to delay unification between the controlled and parallel rates for fear of further inflationary fallout. The central bank benchmark interest or return rate under the Islamic system is steep at 15%, reflecting tight monetary policy but also choking industrial investment, which has prompted a business community outcry.

However cuts could trigger another inflation spike when the 40% memory of the early Rouhani Administration is not too distant, and will not unclog the lending spigots as banks grapple with a 12% understated nonperforming ratio. Central bank head Valiollah Seif warned executives before the election that a banking crisis could stymie economic integration and modernization progress since sanctions relief. The March bad loan total was almost $35 billion and will swell as international accounting standards enter into force as of July. The government is debating cleanup alternatives, and may first opt for consolidating leading state-controlled banks as in previous troubles. The stock exchange should see additional offerings with this strategy, such as with the recent $25 million flotation of a Bank Mellat subsidiary. Both local and foreign investors tend to shun this lagging sector, despite bargain valuations against the average six times price-earnings ratio. New London-based funds emphasize consumer goods and e-commerce listings with the well-educated young 50 million population, but a share stumble may be unavoidable without certified management and policy changes in second Rouhani term financial system foundations.

 

 

 

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Equity Indices’ Consumer Consummation

2017 August 10 by

With both core and frontier stock markets up double-digits through mid-year index providers like S&P Dow Jones have rolled out fresh benchmarks with traditional ones “quite limited” for investment outperformance. Broad gauges are “highly correlated” as S&P’s BMI beat the MSCI by 30 percent over the past 15 years with a 435 percent gain. South Korea is excluded from the former as a developed market while its 15% weight with lagging results has been a drag on the latter. The two also differ since MSCI has no small-cap stocks, often consumer and health care-related, which have advanced 170 percent more than mid and large-cap peers concentrated in banks and exporters over the period. The gap has been particularly wide the past decade as personal discretionary and staples outpaced energy listings by 80 percent, with a lead across all regions. Among the main geographies Latin America and Europe have big natural resource exposure as in Brazil and Russia, while Asia features information technology. To better capture the consumer play Dow Jones has introduced a global Titans 30 index with top representation from South Africa, China, India and Mexico. Korean and Taiwanese firms are outside since their sales are predominantly to industrial economies. Its volatility-adjusted return exceeded overall industry measures back-tested to the early 2000s, and dozens of additional dedicated country, sector, and size indices are available for sophisticated managers, according to the report.

Private equity has also evolved as emerging market allocation increased nine times since 2005 to over $550 billion at end-2016, a Preqin industry survey reveals. Fundraising last year was below 2015, with buyout and venture capital deals moving in opposite directions. Despite major country economic and world geopolitical challenges long-term middle class and young working class growth remain drivers even if returns lag Europe and North America vehicles. Funds have begun to distribute more capital than called, with net cash flow at records. In the past five years activity has slowed from the peak when EM was half the PE total. In 2016 it was 12 percent with almost 200 fund closes for $45 billion. Through 2017 so far the numbers are 60 and $15 billion, respectively, for one-fifth of global raising. Asia has been 80 percent of the sum the last decade followed by Latin America, and diversified mandates are just 5 percent. By category growth and venture capital funds dominate in volume, but buyout types have attracted 40 percent of the action in recent years. Only 15 percent of general partners could reach completion within six months, and three-quarters are based in developing economies for easier analysis and marketing. Four out of the five largest launched since 2008 are from China with combined $50 billion in commitments. The investor base comprises almost 900 institutions, over one-quarter from Greater China, and banks, corporations and portfolio managers are the majority with venture capital preference. Funds of Funds apply more in developed markets, and according to a survey of 200 respondents China and India will be the favored near-term destinations, while Central Europe and the Middle East will stay sidelined. This April phone company Didi Chuxing set a venture mark with a $5.5 billion transaction, with mainland and foreign partners ringing the right tone.

Syrian Refugees’ Turkey Turnkey Track

2017 August 3 by

A three month study of Syrian refugee entrepreneurs in Turkey, conducted by nonprofit research groups with Canadian support and titled “another side to the story,” estimates over 10000 formal and informal startups the past five years with the former accounting for almost $350 million in investment. Three-quarters are “micro” with fewer than ten employees, with average annual revenue close to half  a million dollars dominated by retail and wholesale trade. Owners are well educated with 70 percent holding at least university degrees, and the same portion intends to keep existing operations after the war ends. Language and inability to access credit or official procurement bids are major barriers, but most of the 250 companies surveyed are positive about the future with asset purchase and expansion plans. Almost two million refugees are working age and 90 percent are in urban areas, with the paper focused on Istanbul and the border town of Gaziantep. Public spending for the crisis, mostly funded internally, has been under 1 percent of GDP, and the influx spurred offsetting consumption and infrastructure contributions. Humanitarian exports quadrupled Gaziantep’s trade to $400 million from 2011-15, as prices fell due to increased immigration providing underground labor. While Turkey’s economy is almost ten times the size of other refugee hosts Jordan and Lebanon combined, integration has been “challenging” with Syrians getting only round 15 percent of  75000 authorized foreigner work permits in 2016, with the remaining hundreds of thousands in informal jobs with minimal pay and protection. From January-April 2017 675 new companies started and the Syrian share is 40 percent of all non-resident control, with the southeast and western cities emerging as hubs, according to the leading association of business executives. Owners overwhelmingly found registration “easy” even though only 10 percent have Turkish partners. One-quarter are in manufacturing where the country is competitive in food, machinery and textile exports. Female entrepreneurs concentrate in services including catering, tourism and translation. The typical stay before launch was almost two and a half years, and 70 percent previously ran operations in Syria where they reported three times more staff.

Over 80 percent have home country passports instead of “temporary protection” status that facilitates internal and external travel.  One third of owners speak no Turkish, and three-quarters use the internet for marketing. Almost all respondents had bank accounts but they reported difficulties securing guarantees and credit cards and few took out loans, as compared with 40 percent of all small and midsize firms in national statistics. The vast majority do not receive development or training help from outside organizations, despite initiatives by chambers of commerce, the UN and World Bank. Legal-accounting and technology advice are priorities, but skilled employee availability is sufficient although 15 percent worry about retention with resettlement often shifting personnel. Joint arrangements are increasingly considered permanent as firms envision a long-term presence should peace and reconstruction loom anytime soon. The report urges higher formalization, work permits and  company refugee quotas and a dedicated network of language and professional instruction. It recommends a senior executive mentor program and outreach to the Syrian diaspora in the region and overseas to stimulate venture capital relationships despite frayed diplomatic ones.

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Rave Universal Returns’ Scarce Selectivity

2017 August 3 by

All emerging market debt and equity asset classes rallied in the first half, replicating advance economy minimum yield flight in 2016 despite marginal central bank benchmark rate increases and reflecting slight economic growth and earnings improvement over original forecasts. Stock markets outperformed after a multi-year funk with the MSCI core and frontier indices up 17% and 12%, respectively, while local government bond gains at 8% outstripped external sovereign and corporate ones around 5%. Resurgent fund flows at over $100 billion combined according to data trackers, a large portion from exchange-listed ETFs, have channeled momentum since the end of the first quarter when a brief global scare from the new US administration’s trade and immigration policies, which could hit China and Mexico in particular, faded into the background. The dollar retreated from previous highs and commodity prices stabilized in the aftermath, and retail and institutional investors then poured money in with scant geographic and asset class distinction. The second half will determine if markets can begin again to rise and fall on their own virtues in their own long-delayed “normalization” process, coinciding with the 20th anniversary of Asia’s and a decade since the US and Europe-led world financial meltdown.

As in the mania that preceded the late 2000s crash, stock market gains in the big BRIC economies mirrored the MSCI result, with Russia the only loser, down 15%. China and India were each ahead 20%, while Brazil was essentially flat with a 2% uptick. Brazil and Russia are out of recession but still grapple with stagflation. China’s 6.5% growth and steady currency and reserves were on target before the upcoming Party Congress, but the well-telegraphed incremental inclusion of “A” shares in the gauge was also a catalyst. India’s GDP increase was the same as China’s, and its price-earnings ratio toward 20 is five points above the emerging market average, but it is considered a structural reform standout despite lagging a generation behind peers, and the mixed record so far with recent months’ large banknote elimination and just-launched national tax unification. Including South Africa in the group, as a charter member of the BRICS Bank now in operation, contributes another 5% plus bump but reinforces the broad narrative of ambivalent economic and political fundamentals and model change. The IMF and World Bank tweaked the developing world growth forecast to 4.5% this year but warned about fiscal deficits, monetary strain from bank deleveraging, and balance of payments pressure from voluntary and hidden capital outflows. They suggested another period of business and financial sector opening and deepening was overdue with reactivation of stalled concepts like state bank and enterprise privatization.

The BRIC rebound has likewise been instrumental in lifting external corporate and sovereign bonds. Issuance was a record $100 billion and $250 billion in the respective segments through end-June, at average spreads around 300 basis points. China’s giant state-run and real estate companies, with tighter onshore access, have been 40% of corporates and Brazil’s Petrobras, the biggest individual debtor, has bounced off last year’s bottom after ratings downgrades and defaults hit Brazilian names broadly. Despite lingering international sanctions, Russia has returned in force to both markets, and a spate of new and resumed entrants, including Argentina and Gulf countries lifted lackluster traditional sovereign activity. Local bond average yields over 6% sparked a renewed carry trade wave among fast-moving investment funds borrowing in low-volatility industrial world currencies, a phenomenon largely absent the past decade. For more exotic destinations in Africa and elsewhere, IMF program negotiation resurfaced as an allocation driver, with Ghana, Zambia, Cameroon and Mongolia among popular bets shunned in the absence of additional official support.

With a nascent global bond selloff already arriving in July, EM fixed-income in particular could correct across the board, and the pure valuation argument for equities is increasingly questionable with profits hurting in many sectors outside world value chain connected consumer goods and technology. Local currency debt, and smaller and frontier country shares, should be able to hold if investors reflect and differentiate in the space in a long-term successful strategy, rather than risk disappointment with an overriding narrative of modest growth pickup and taper tantrum sequel avoidance.

 

US Development Policy’s Demolition Crew Din

2017 July 27 by

With the Trump Administration proposing 30 percent bilateral and multilateral development assistance cuts, and wide ranging yet undefined reorganization with management consultants first scouring the State Department, Washington researchers have scrambled to offer their own comprehensive reforms for executive and legislative consideration. The Center for Global Development unveiled a “practical vision” with over a dozen priority items to be coordinated across twenty agencies led by AID and more focused arms like OPIC and the Millennium Challenge Corporation, despite total spending at half the OECD average 0.3 percent of GDP. Four thematic areas—fragility, inclusion, health and humanitarian aid—would drive future interventions and strategy and offer a government-wide integrated approach. For fragile and transitional countries, AID’s traditional competitive bidding, typically a 2-year cycle, could be waived to allow quick program and personnel deployment. The surge would come under a new operation after previous attempts like State’s Conflict and Stabilization Bureau proved inadequate. The report recommends joint AID-MCC programs since the latter’s 5-year country compacts can frame broader economic policy change, and the former could deploy its credit authority to foster private financial flows.  It adds that agreements could be extended indefinitely on steady governance and inclusion improvement since few new eligible candidates appear annually. OPIC should be expanded into a full-service funding organization despite the initial Trump budget seeking abolition, with the existing range stretched to public equity investment and technical assistance, while enterprise ventures promoted elsewhere are transferred to its control. Disaster relief remains AID’s comparative advantage, although refugee humanitarian duties should be split with the State Department’s migration bureau. Food, which has to be shipped by US carriers under outdated law, should not be the Agriculture Department’s responsibility and reforms should focus on cheaper local supply and distribution not distorting traditional markets. Reporting and strategy should be streamlined and shared across a common platform, and a comprehensive review of UN and multilateral development bank contributions can weigh detailed costs and benefits for billions of dollars that may be better allocated under alternative arrangements.

The CSIS think tank convened another bipartisan task force on the subject, with the reminder that foreign aid is just 1 percent of the budget or around $40 billion, while the original enabling act is over 50 years old and over 20 government units are now involved with congress layering on hundreds of earmarks and information mandates. A main purpose is international economic partnership to create US jobs and sales, and the group warns about repeating the mid-1990s overhaul experience, with large layoffs “crippling” AID leadership and technical ranks. It notes that today’s complex challenges include forced migration, pandemics, terrorism, political dysfunction and transnational crime, as private capital flows to developing countries are five times official support. Canada will soon join the rest of the G-7 in launching its own full-fledged development finance arm, leaving the US alone with its lagging OPIC structure. Middle income recipients should graduate over time, and development bank burden sharing must be clearly defined after a 15-year period of “benign neglect.” The number of sectors should be narrowed following the base realignment parallel at the Pentagon, and short and long-term pools should stay separate with management from a dedicated career corps of specialists not cultivated under current work force planning, according to the blueprint.

Asean’s Ambivalent Crisis Anniversary Anchors

2017 July 27 by

The two-decade anniversary of the Asian financial crisis originating in Thailand and quickly spreading to Indonesia, Malaysia and elsewhere was marked quietly by regional investors and officials, as they acknowledged comeback since that grim period but were wary of new debt and capital flow risks despite healthy first half securities market results. The IMF, which extended $40 billion in rescue programs, noted the pain from broken currency pegs and widespread corporate bankruptcy and average GDP growth at roughly half the previous 7-8% pace, while commending foreign reserve accumulation and financial sector cleanup and regulatory strengthening. The episode prompted local currency bond market expansion under the auspices of the Asian Development Bank, and bilateral and multilateral swap line arrangements with the Chiang Mai Initiative. Franklin Templeton emerging market chief Mark Mobius commented about sovereign and business “harsh lessons” from untenable debt loads at the same time that the Bruegel think tank tracking these trends put ASEAN corporate leverage at 100% in terms of total liabilities to equity, over half of it short term. The Chinese ratio is more extreme at 175%, and although ASEAN’s position is “sound” the Brussels-based monitor stipulated that trade and funding shocks could reprise crisis-era qualms.

Thailand’s ruling generals also hesitated to cite the occasion as a possible reminder of democracy loss since, as its MSCI Index rose 9% through the first half. Since passage of a constitutional referendum a year ago, future election plans remain murky and the army’s self-proclaimed reputation for integrity was dented by a major human-trafficking scandal involving neighboring Myanmar’s Rohingya refugees. The new King has now assumed full control of the estimated $30 billion Crown Property portfolio, which includes stakes in blue-chip stock exchange listings Siam Cement and Siam Commercial Bank. Growth was over 3% in the first quarter on decent consumption, but public investment up 10% was the main driver. Exports rose 7% from January-May, and the central bank recently intervened to curb the baht’s 5% appreciation against the dollar to safeguard gains. The benchmark 1.5% policy rate otherwise is on hold under a loose monetary stance with negligible inflation. The trade surplus recovered to almost $1 billion in May, but consumer confidence is still low with a 75 reading, under the positive 100 threshold, and the manufacturing PMI is barely expansionary. Poor farm prices are hitting agriculture, at one-tenth of GDP, as foreign direct investment there continues under 1% of the total with lingering restrictions.

Indonesian stocks advanced almost 15% through mid-year despite a political scandal around the parliamentary speaker, from the Golkar Party founded in President Suharto’s time and a close ally of the incumbent Joko Widodo. Growth is humming at 5%, below the President’s 7% promise, and fiscal space is limited nearing the 3% of GDP deficit cap. With rising food and energy costs, inflation is 4.5% and the central bank has paused its easing cycle. Credit growth is only in single digits as banks turn wary of private sector debt, which is half the $330 billion external total. Former Bank of Indonesia chief Djiwandono, interviewed about the Asian financial crash, expressed resumed concern over “scary leverage.” Foreign investors have poured $7.5 billion into rupiah notes earning 9%, but Fitch Ratings was cautious about the doubled bad loan ratio at 3% since the 2013 “taper tantrum,” persistent 2% current account gap, and stalled reform momentum from “religious frictions.”

In Malaysia, where the MSCI Index climbed 12%, former Prime Minister Mahathir Mohamed was back in the news not just for crisis retrospective but possible renewed candidacy for the post against under a startup political party against successor Najib Rezak, still stalked by the multi-billion dollar IMDB fund diversion under investigation on three continents. A separate commission of inquiry was established in July to review questionable central bank foreign exchange transactions in the 1980s and 1990s in a counterattack against Dr. Mahathir’s tenure. In advance of likely elections, GDP growth was 5% in the second quarter, and the 2018 budget offered new tax incentives for high-tech innovation. China pledged $80 billion in medium-term projects under the Belt and Road scheme, but household spending remains squeezed by 80% of GDP debt. Inflation was 3.5% in June, and the central bank overnight rate stayed 3% with the currency down 7% the past year despite a recent surge, reflecting the dichotomy in ASEAN’s post-crisis 1998, 2008, and perhaps 2018 investor haven pitch.

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Tunisia’s Nascent Neighborly Nod

2017 July 21 by

Tunisian shares turned slightly positive on the MSCI Index at the half-year on the second anniversary of a bloody beachside tourist attack, as the IMF praised the new unity government’s “corrective action” intent in its first checkup on its 4-year $3 billion facility, and strengthened security internally and along the Libya border preempted further incidents. Officials traveled  to Washington to thank the US Defense and Treasury Secretaries for support, with the message that Libyan reconstruction may also be in the frame in selected areas with civil war and ISIS presence waning. At the same time the Fund report underscored the advanced political transition despite economic lethargy and social discontent, with all coalition parties including the labor-union dominated wing pledging reform  and stability to redress budget and current account deficits, state bank dysfunction and runaway youth unemployment amid high university and training qualifications. This year’s GDP growth forecast was reduced to 2.5 percent from the original 3 percent due to fiscal and monetary tightening countering better phosphate exports and tourism. The medium-term aim is to reprise the 5 percent level existing under the previous authoritarian regime, which followed competitive policies tinged with insider corruption now under investigation and subject to asset recovery efforts. A controversial amnesty law would allow reported billions of dollars to be returned at minimum penalty and separate deals have already been negotiated with business executives close to ousted President Ben Ali allowing them to resume local activities. The legislation could be a major issue in upcoming municipal elections, which will also focus on the rural-urban and interior-coast income divide. The budget gap will again be 6 percent of GDP as wage increases in the bloated public sector overtake lower energy subsidies and a one-time 7.5 percent corporate profit charge. Pension fund arrears continue to mount, and financial transactions have also been hit by a special tax.

Inflation should stay under 4 percent despite near 25 percent currency depreciation since the end of 2015 amid double digit current account holes. The benchmark interest rate was lifted 75 basis points to 5 percent, and the central bank reintroduced foreign exchange auctions to bolster market determination. Civil service cutbacks are in store, and new performance contracts should pare state enterprise contingent liabilities. The three big government banks have been recapitalized with fresh management but the bad loan ratio is still 15 percent and resolution procedures are outdated, according to the IMF. An inclusion strategy embraces micro-finance, credit bureaus, digital services and small business access, and bond markets are a priority with yield curve development. The revised investment code will create a one-stop shop for international projects and public-private partnerships, but commercial climate rankings are “poor” on the World Bank and World Economic Forum surveys. Official debt is to settle at 70 percent of GDP by end-decade, but “slippages” have already endangered the goal and “unsustainable” government spending and “inefficient” legal and regulatory regimes impede overall transformation. After a EUR 850 million Eurobond, Qatar loan rollover, and donor pledges external financing is in place until early 2018 when additional sovereign issuance is scheduled which may no longer carry a third part guarantee if revolutionary progress can be consolidated, the findings suggest.

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The GCC’s Family Fight Fractures

2017 July 21 by

Qatar shares were down 12 percent on the MSCI index in the first half with banks abandoned in particular as Bahrain, Saudi Arabia and the UAE suspended commercial and diplomatic ties with a US nod due to alleged terrorist and Iran sympathies. The Gulf neighbors issued a list of demands to reverse course, including shutdown of the Al-Jazeera TV network, as royal family members scrambled abroad to press their cases in world capitals. Kuwait, which earlier had pulled out of the joint dollar peg, offered to mediate the dispute as economic and monetary union progress remained on hold with hydrocarbon export price slippage. Sovereign bond yields rose 50 basis points on the rupture as the Al-Thani family moved to reassure the 2 million population that the wealth fund with $300 billion in assets would maintain normal trade and public services and World Cup 2022 infrastructure projects. However essential imports have come by Saudi Arabia’s land bridge and Dubai’s Jebel Ali port as Qatar Airways was banned in the region. The investment authority previously had taken over equity stakes in a half dozen major conventional and Islamic banks, which now may be sold if the crisis lingers, along with flagship real estate holdings in Europe including London’s Shard tower. The 2009 lifeline to Barclays Bank in the UK has also come under scrutiny as its top executives may have misrepresented the deal, according to fraud investigators. They may also consider local misconduct signs in the transaction, after the corruption cloud was finally lifted over the World Cup bid following years of FIFA probes which resulted in mass resignations. US Secretary of State Tillerson, with close personal connections to leaders from his Exxon-Mobil CEO tenure, has also tried to bridge the divide which may extend beyond the short term and place GCC integration in indefinite “limbo,” in the words of UAE’s foreign minister. Tiny Oman has also been put in the crossfire, with its MSCI component off almost 20 percent, as it allies with neither camp in the wake of a Fitch Ratings outlook downgrade to negative with a forecast budget deficit at 12 percent of GDP this year with recession. New taxes and energy ventures should support the “A” rating, but it will follow OPEC supply restraint as bank liquidity is squeezed, the agency noted.

Saudi Arabia in contrast was up 5 percent at mid-year after MSCI mooted a chance for core universe entry in a future review on greater non-GCC institutional investor access. Enthusiasm also accompanied the King’s formal announcement of Prince Mohamed bin Salman, architect of the 2030 reform plan and Aramco proposed IPO, as heir. He is younger generation but a conservative foreign policy advocate who has backed Qatar’s isolation and the Yemen civil war intervention against Iran-aided Houthi forces. Aramco underwriters have already been tapped and foreign listing venues could include New York, London and Hong Kong. A 5 percent chunk will be floated and the Prince estimates capitalization at $2 trillion, although experts believe valuation will turn out to be $500 billion lower if full accounts are disclosed. The frenzy will be at the opposite extreme of syndicated loans, which have fallen 65 percent to under $20 billion, a 4-year low, as external bond issuance tries to crack the traditional fold.

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