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Europe’s Capital Markets Marriage Altar

2019 October 13 by

With Brexit and a new central bank chief hogging the EU agenda, the financial services industry has revived the call for capital markets union set out in recent blueprints to strengthen the existing commercial and supervisory foundations and competiveness versus developed and emerging world rivals. An IMF paper notes that regional households and companies overwhelmingly rely on banks, and that relatively small national size may cost an extra 250 basis points for debt. Integration has been a goal since single market launch decades ago with alignment lacking on transparency, regulatory and insolvency practices. The survey shows “no roadblocks” or “grand bargain” need for immediate progress on cross-border private risk sharing to promote growth and absorb economic shocks. Euro area bank assets are 300% and corporate bonds 85% of GDP, but securities are less than 70% in Central Europe and the Baltics. Home bias takes half of equity allocation, and the half trillion euros investment fund industry is the main institutional and retail segment under the UCITS directive, followed by insurers and private pensions.  Hedge and private equity funds are half the US total, and derivatives through London with the associated clearing houses will likely shrink in the near term with Brexit undermining liquidity and trading. Startups are particularly unable to find funding, and the lack of portfolio diversification hurts consumption and income. The IMF polled officials and executives and charted wide variation in offering, accounting and tax treatment. Bankruptcy frameworks are separately tracked with the World Bank’s Doing Business data base across a broad range, and outside the evolving “single rulebook” the new European Securities Authority (ESMA) will enforce and monitor. However its powers are “limited” in terms of mandates and fines, the document remarks.

The 2015 action plan focused on innovation, infrastructure investment, and administrative alignment and was updated in 2017 to enable issuance of common prospectus, securitization and venture capital rules. On prudential oversight the European Parliament approved a risk-based formula this year for firms with assets over Euro 30 billion, and an area-wide personal pension model is under development. Another proposed standard will cover corporate insolvency and a consumer protection one is under consideration. The IMF recommends a central reporting system and data base as with EDGAR in the US, and faster withholding tax refund on-line. Oversight should be “proportional” and apply to critical structures like clearing houses and the largest bank-connected houses. ESMA could use independent board members and forge cooperation pacts with global counterparts in its initial stages, and debt enforcement standards are an immediate priority in view of big disparities. Capital market and banking unions should be in “healthy competition” as Europe moves away from traditional relationship-driven sourcing. The push came amid a mixed MSCI Index showing from members through August, with Greece the only positive core constituent on a 20% jump, while the Czech Republic, Hungary and Poland fell 5-10%. On the frontier Romania was up 20% and Estonia off 5%, as the Baltics grapples with pervasive money-laundering scandals carrying financial institution penalties and demanding future integrity and solidarity on the issue

Venezuela’s Circuitous Sanctions Cycle

2019 October 13 by

Following Venezuela’s removal from benchmark bond indices after US sanctions as rival international coalitions line up to remove and support the Maduro government, investors stuck with exposure have joined Latin American researchers in questioning the endgame of commercial pariah status. The Lima Group and EU also imposed curbs, as Cuba, China and Russia continue to support Caracas as well as opposition talks with National Assembly head Guiado forty countries recognize as the accepted President. Washington’s crackdown began in the Obama Administration with top official asset and visa confiscation, and President Trump added hundreds of individuals and companies and entire sectors before a recent blanket ban. The specific order against state oil monopoly PDVSA went into effect in June as creditors scramble to lay claim to Citgo and other holdings to collect overdue payment. The central bank is on the list as well as Russian banks involved in the petroleum industry, and all US dollar and crypto-currency transactions are taboo. Sanctions are not to blame for the economic, social and humanitarian catastrophe, as hyperinflation, hunger and mass exodus preceded the ramp-up, according to a September Center for Strategic and International Studies note. Oil production accounting for almost all export revenue fell millions of barrels, and a two-decade record of socialist mismanagement and corruption provoked widespread output and institutional collapse. Even when cash was available to import food and medicine, the regime and military tightly controlled distribution, and they never allowed free and fair elections in independent observers’ view. An oil-for-food program as the UN coordinated during the Saddam era in Iraq would require unlikely external access and oversight, amid evidence staple subsidies routinely exclude political enemies. Direct aid through churches and community centers outside government interference is unrealistic and unwieldy, even as citizens demand help though additional channels.

CSIS cites a financial and diplomatic vise on Maduro’s inner circle, but calls for a greater chokehold on criminal enterprise including drug dealing and money laundering. It recommends repurposing of internationally-garnered assets for humanitarian needs, as an estimated 4 million refugees are spread throughout the Andean region. It remarks that Chevron still operates in the country lacking a clear framework, and US banks should identify sound untainted counterparts for future transition. Sanctions have not succeeded in restoring democracy or hastening incumbent exit, and both objectives await a separate design from the expanded global community. Russia’s behavior in Ukraine has not changed from the version there, as the civil war in the east leaves tens of thousands displaced and killed. Washington may soon outlaw bond-buying, as the foreign investor share of ruble issuance stands at one-fifth the total. The fiscal and current account outlooks have worsened for 2020, as regular Moscow demonstrations mobilize anti-Putin sentiment. Overtures toward the new President in Kiev may bring a thaw such as prisoner exchange, but his focus is on restoring the IMF program to bolster the currency and reserves. With legislative curbs on Russian paper US fixed income investors could diversify into domestic 15% yields with the Fund’s sanctioned approval of budget and energy sector reforms.

Lebanon/Turkey’s Rearguard Refugee Roundup

2019 October 4 by

Media and law enforcement reports that thousands of Syrian refugees in Lebanon and Turkey, out of the millions fleeing there from the 8-year civil war, had been forcibly relocated or detained heightened investor aversion amid recession, monetary and political risks. Through August their respective stock markets were down 4% and 21% on the Morgan Stanley Capital International Index, as Fitch downgraded Lebanon’s sovereign rating to “CCC” near-default with officials scrambling for more “financial engineering” to manage the 150% public debt/gross domestic product ratio.  The Istanbul government threatened to remove up to half a million unregistered Syrians before an end-August deadline and take them to permitted provinces and border areas, as rumors circulated  that ethnic Uighurs could also be deported at China’s behest.  

Turkey hosts the largest population escaping the Assad regime conflict and claims to have spent over $35 billion on processing, infrastructure and social services since 2011. It signed a euro 6 billion deal with the European Union in 2016 to prevent onward migrant movement, as aid groups cite evidence that refugees have been returned to Idlib, the last opposition city holdout, in violation of international law. President Recep Tayyip Erdogan’s party lost the rerun of the Istanbul mayor’s race in part due to opinion surveys showing discontent with the influx amid economic slowdown.

 In Lebanon refugees do not have the same rights to education and employment and children have joined parents in low-wage underground farm and factory work. Output will again contract this year around half a percent, with cement and car sales dropping 25% from January-July although tourist arrivals remained positive. The forecast does not yet incorporate the fallout from creeping Hezbollah-Israel reprisals as the Netanyahu administration tries to curtail the Iran ally’s military presence next door, where it is a member of the government coalition often against budget and state enterprise reforms.

Positive GDP growth in 2020 depends on fiscal, structural and banking sector adjustments that can also release over $10 billion in aid pledged at a Paris conference. The cash budget gap this year is estimated at 8% of national income with accumulated arrears to official and private contractors, according to a September Institute for International Finance(IIF) analysis. Banking deposit interest and individual income taxes were hiked, and lower oil import prices should reduce government electricity company losses. Next year value added and fuel levies will rise, and an independent tribunal is to fight chronic tax evasion. Interest servicing should decline with this consolidation and less pressure from the near 15% local currency yields the central bank offered in direct commercial bank deals over the summer.

 The IIF believes this “feedback loop” could bring 2.5% economic expansion at around the regional average, especially if accompanied by monetary easing with the 1500 Lebanese/US dollar peg intact. In the past month banks attracted $2.5 billion in non-resident deposits to lift foreign reserves above $30 billion, but the high interest rate choked domestic credit at the same time, with construction and real estate portfolios souring. Capital adequacy and liquidity are solid, but bad loans are 11% of the total in International Monetary Fund classification, twice the central bank’s figure. Resident capital outflows run at an annual $2 billion, and the current account deficit is a whopping 20% of GDP. Exports are mainly gold and jewelry, and improved tourism earnings will be offset by weaker worker remittances from elsewhere in the Middle East. Benchmark 10-year Eurobond yields reached 13% recently on the ratings and geopolitical downgrades, and near-term normalization awaits convincing breaks with decades of competitive and corruption stalemate, the IIF notes.

In Turkey almost one-third of the outstanding $350 billion in foreign currency debt, two-thirds in private company hands, comes due over the next year. Borrowers rely on cross-border rollovers of bank trade credit rather than diaspora lines, and they were routine until the 40% lira depreciation and President Erdogan’s erratic economic and foreign policy moves the past year. With recession cramping imports a rare current account surplus was achieved, but investor anxiety has spiked with the abrupt sacking of the central bank head after he refused to modify the prevailing 25% interest benchmark. His replacement rapidly cut the rate 425 basis points and signaled more reductions to follow, with inflation still in the 15-20% range, in another suspect engineering feat.

Argentina’s Repeat Restructuring Recipes

2019 October 4 by

Argentine securities were in free fall after the August opposition coalition primary election wipeout of incumbent President Macri and his party previewing a clean first round triumph, with credit default swaps predicting 85% of default as new Finance Minister Lacunza acknowledged immediate local and external debt maturity extension urgency. Stocks dragged the MSCI Frontier Index into jeopardy after outperformance through July, while the peso plunged 20% toward 70/dollar and ratings agencies assigned CCC blowup status. Treasury bills held by banks and official agencies will be re-profiled before the October contest, with outstanding dollar obligations across all categories over $300 billion, around 90% of GDP, close to the 2005 peak which set off a decade of crisis and creditor confrontation. The initial stage was an imposed 25% external bondholder haircut, but officials vow not to repeat such unilateral action as they face $25 billion in annual maturities over the next three years. The almost $60 billion IMF program was designed to facilitate commercial rollover, but the Fernandez-Fernandez ticket has indicated renegotiation or rejection if they win and previous assumptions must again be recalibrated in any case. International reserves are down to $55 billion and dollarization and deposit withdrawal domestically could inflict further interest and exchange rate pain, threatening to tip the benchmark rate toward triple digits. Planned Fund disbursements this year were over $20 billion and were to tail off to 5 billion in 2020 before repayment starting in 2021. A delegation visited after the poll result and pledged continued support, but Washington decision making will be delayed by the interregnum awaiting proposed Managing Director Georgieva, who must secure an age waiver since she’ll be 65 in the post.

The government debt is just over half market-based, with almost a quarter of the stock owed to development lenders including the Chinese. It is 80% of the aggregate with 20% corporate, and international bonds with collective action clauses are just one-fifth of instruments. Consensus economic estimates project a small current account surplus averaging $5 billion over the medium term, but cash flow relief was a consideration before the election shock and the T-bill restructuring will reduce net present value to 98 cents/dollar. Extrapolating for other forms at this juncture results in a wide possible exit spread range from 500-1500 basis points. Foreign law global bonds trade in the 40 range and a 75% majority is needed for future modification. Since their EMBI return dedicated investors are overweight and control around $25 billion, and distressed specialists resorting to litigation are in that pack. The “pari passu” covenant loophole which Elliott Associates used in the past to press its claims with an eventual $2 billion payout has been eliminated, but peers reportedly are devising other strategies. Quasi-sovereign corporate issuers may be in their sights for recovery value at a multiple of the 30 in the early 2000s episode, with the intent of raising CDS trigger pressure on the $25 billion gross notional sum tallied in DTCC data. Venezuela went through the determination process and verification recently and was then removed from the EMBI benchmark lifting the spread over US Treasuries to 350 basis points. Another “non-investable” blow to Argentina could be a bitter legacy with higher-profile concern for the election winner.

China/Hong Kong’s Stubborn Standoff Stripe

2019 September 27 by

China’s MSCI components were pressed to keep double digit gains and Hong Kong to stay positive as months of pitched trade and political battles promoted foreign investor outflows and IPO delays, after the renimbi settled below 7/dollar. The US extended the bilateral tariff and investment restriction fight into currencies with a “manipulation” declaration at odds with the IMF’s conclusion that value reflected economic fundamentals. The finding did not meet legislative criteria for current account surplus and intervention size, and since retaliation is already in effect with another duty round the practical effect is limited beyond a negotiating tactic. Ratings agencies pointed out that weakening may have been a tariff rejoinder, but that a combination of flexibility and stability was likely in the future to forestall capital flight and permit Chinese company repayment of $800 billion in dollar debt. Reserves fell $15 billion in July but still exceed $3 trillion, with the manufacturing PMI under 50 with exports and fixed investment only ahead 5%. Retail sales were negative during the month, and producer prices show deflation. The IMF’s Article IV report predicted ‘moderate slowdown” and raised the alarm on debt approaching 275% of GDP this year. The current account balance will be just 0.5%, while the errors and omissions tally is negative with the Fund advising floating exchange rate transition. In the financial sector, the central bank embraced previous recommendations with scrutiny of property borrowing and holding companies, and launch of a benchmark “prime rate” structure reflecting market competition. It has also overseen takeovers of second-tier banks and steered credit toward small business under dedicated facilities. The shakeup contributed to a lower RMB one trillion monthly loan total and single-digit monetary expansion. Real estate developers in particular have turned to onshore and offshore bond issuance and “shadow” commercial acceptance bills, now at $200 billion outstanding for a 30% annual jump. Chinese credit abroad is also under pressure, with BIS Q1 statistics reflecting Japanese lines at four times the $45 billion extended.

The overseas development and Belt and Road portfolios have entered the mix with a Rhodium Group study of 40 restructurings calling sustainability into question, and Johns Hopkins University research tracking $150 billion in African lending the past two decades as the number one creditor. While mainland growth will still be 6% plus, Hong Kong faces recession with a paltry half a percent output improvement in the end-June quarter before the summer street battles between marchers and police. Protesters demand less control from Beijing and the resignation of its allied chief executive Carrie Lam. Officials announced a 0.3% of GDP stimulus package with the political and economic squeeze, as monthly home prices also fell signaling softness in that critical sector. Retails sales and tourism suffered and the PMI index is at a decade bottom. Foreign reserves around $400 billion remain ample to back the dollar peg and ten months imports, but the CNY is half the currency basket and a military crackdown could suspend the arrangement under emergency law. Yuan deposits and equity Connect flows are down, and the Hang Seng index could be the regional laggard with typhoons unleashed in all forms.

Iran’s Raucous Sanctions Romp

2019 September 27 by

After a 20% gain in the fiscal year first quarter ending in June, the Tehran Stock Exchange local index added another 5% through August in the face of  US “maximum pressure” sanctions banning all global oil and banking engagement, as the government hailed decelerating currency and economic slide. The market seemed to shrug off Persian Gulf military alerts on seized oil tankers amid reports a secret trading unit was in place to continue exports to China, India, Syria and Turkey. Analysts estimate that up to 500,000 barrels/ day can be sold in comparison with the previous peak five times that amount, despite Washington’s claims of shutoff campaign victory. The Oil Minister Bijan Zanganeh preserves total deal confidentiality as “war information,” as daily inquiries reportedly arrive intended more to glean intelligence than to arrange shipments. July’s official sales tally was 100,000 barrels/day, an 80% decline from the same month in 2018, as Supreme Leader Ayatollah Ali Khamenei lashed out at the Trump Administration’s “economic terrorism.” He acknowledged that “easy income” from crude oil was no longer viable, and urged domestic goods and services diversification and higher productivity.

Vice President Eshaugh Jahangiri recently told business executives that the past year’s shock from sanctions and poor policy had worn off, as central bank head Abdolnasser Hemmati cited new rial stability at around 120,000 dollar on the parallel market, a 40% recovery over the past year. A secondary regulated foreign exchange hub for non-essential imports was launched in July to relieve pressure, and the Iranian cabinet approved legislation to redenominate the currency by eliminating four zeros and renaming it the toman. This process is well established in emerging markets to engineer a one-time devaluation and attempt to dampen future inflation expectations, with the current rate at 40%. Under the plan 10 rials will equal one toman, and the administrative and printing costs for the transition are put at $150 million. Despite these changes, the government continues to crack down on unauthorized “enemy” dealers, with the judiciary arresting dozens who could face execution. Leaders at Iran Revolutionary Guard Corps-controlled Bank Ansar were implicated in speculative schemes, amid other major financial sector corruption cases targeting the former chief of Sarmayeh Bank and labor minister, who received millions of dollars in loans without collateral.

The minister was a well-known Reformist party lawmaker and so-called “aghazadeh,” roughly translated as “child of a noble.” This bloc is a main pillar of support for President Hassan Rouhani, but its standing has waned ahead of parliamentary elections scheduled in six months. A candidate recently lost the deputy speaker race, and a conservative cleric ousted the chair of the national security and foreign policy committee from that group. In Tehran municipal contests in July, the Reformists in charge had a mixed showing on just 10% voter turnout. Opponents accused them of “poor performance “in a sign their legislative majority could fade next February as another movement, Iran Revival, embraces the political and economic overhaul mantle.

Gross domestic product is down 5% and forecast to be barely positive next year, with the International Monetary Fund projecting just 1% growth into 2024. Economists note a 2% decline in private consumption as a relative bright spot, as stock pickers target household plays such as Seamorgh, a poultry company, and Bank Pasargad, a privately-owned retail lender as compelling alongside the bargain five times average price-earnings ratio on the exchange. Futures and options trading began the past year, and a “prime” listing tier will soon be inaugurated with a minimum 25% free-float and formal corporate governance and transparency score, according to management. Securities depository information through July shows financials, chemicals and autos as the most actively traded sectors, often through ETFs investment houses with overseas experience pioneered. Large scale state enterprise divestiture could be on the table as well as a stock market driver in the near future, as Iran’s Planning and Budget Organization issues a blueprint for further constraining deficits after citizen subsidy rollbacks. While foreign borrowing fell 5% in the end-March quarter to $9.5 billion under US prohibition, domestic debt through Islamic Treasury bills as a fresh channel has spiked, while the government turns to barter to settle private sector arrears under self-inflicted maximum fiscal pressure. 

Blended Finance’s Poor Country Swirl

2019 September 20 by

Amid the ‘billions to trillions” hype over combining official and private finance to achieve the 2030 Sustainable Development Goals for low-income economies a sobering OECD and UN report working from 2017 data found that only 5% of the blend went there as opposed to emerging market destinations.  South Asia and Africa took almost half the total, with credit and risk guarantees the main bilateral and multilateral contribution. By sector energy, banking and financial services dominate, and domestic investors only account for 15% of transactions. A number of general principles apply but have been followed unevenly, including national ownership, technical assistance and a local presence in deals. Over the period under review, FDI fell almost 20% and official aid remains the top external source. A new cash-flow methodology is used for tracking, with the “missing middle” as small and mid-sized business seeking up to $1 million in funding is bypassed in databases compiled by the UN and blended specialists like Convergence. In 2017 $1.5 billion was mobilized for poor countries, and the leading recipients over time were African commodity exporters (Angola, Senegal, Zambia) and Asian garment hubs Bangladesh and Cambodia. Over 45 nations featured, but conflict and small island states were excluded. The average deal amount was $5 million, compared to $30-$60 million in the middle income category. A weak correlation exists between aid and blended finance totals, but economic growth and policy scores are not broken out for greater performance distinction. Guarantees have been 60% of volume over a 5-year horizon, while simple co-financing was the number one individual project tool. Energy and banking were half the industry focus, followed by mining and telecoms. Oil and natural gas power plants were 40% of the first allocation, while renewables are the majority in more advanced developing markets. By provider, the World Bank’s MIGA with 15% of the total, the US and France are the largest, with new entrants like Canada and Korea moving up the ranks. Local investors have been a small minority and most active in Africa, especially in agriculture and forestry pursuits. Often participation is through national development banks reprising a role after decades out of favor in the aid community over continued losses and bad governance. The current mantra is public-private partnership and these units are encouraged to get credit ratings and continuously report accounts and operations in contrast with previous experience. In industrial economies they are also under consideration to meet large scale physical and cyber infrastructure mandates. The survey suggests further experimentation and research in the nascent field, with different interpretations and versions of the “flexible concept.” A marker may be imminent when the US Development Finance Agency is formally launched in October, with a menu of debt, equity and guarantee offerings under an eventual $60 billion cap. In testimony core executives from OPIC and AID have previewed early organization divided into policy and transaction departments, but instrument and strategy preferences await rollout, although low-income regions are a target. Private sector bankers and fund managers will likely be recruited in a first wave, alongside an expert advisory committee to be named with a talent blend, according to the original legislation,

Thailand/Philippines’ Second Half Second Guessing

2019 September 20 by

After double-digit gains through July to lead ASEAN, Thailand and the Philippines stock markets entered the second half with slower growth on both domestic and external account slippage, despite good currency performance and ruling party post-election affirmation.  Thailand’s economic expansion forecast this year was cut to 3%, and the Philippines’ will be double that increase on business and consumer pullbacks at home and abroad. The baht and peso were among the few emerging market units to rise against the dollar, with the former leading the pack with a 5% rise. Thai Prime Minister Prayuth Chan-ocha finally assembled a cabinet after a controversial poll win on his military-backed constitutional and financial advantages, while President Rodrigo Duterte’s allies scored handily in their contests, sloughing off infrastructure project budget delay and international outcry over the anti-drug crusade claiming thousands of lives. Both leaders followed the region into an anti-slowdown strategy of interest rate reduction and fiscal stimulus, while they contend with their own threats including household debt and remittance restraint.

Thailand’s new government took office amid the worst quarterly growth in five years at less than 2.5% slashing the full 2019 estimate to 3%. Almost every category was down with agriculture off 1% after drought and auto and electronics exports 6% with the strong baht, which also kept tourism flat and knocked manufacturing 5% in June. The central bank acknowledged weakness on subdued 1% inflation with a 25 basis point nudge in the benchmark rate to 1.5% in August, with further reduction expected as the governor declared US-China trade protectionism “far from over.” The first half current account surplus was relatively unchanged as oil import prices also fell, with this year’s consensus figure at 6.5% of GDP. Although international reserves are ample at $250 billion, intervention has been limited to “disorderly movement” following the International Monetary Fund’s recommendation, although rules were tightened on non-resident baht account balances and reporting, and local pension funds and insurers may be permitted to invest more overseas. Despite appreciation against the dollar, the balance of payments excess may add the country to the US Treasury Department’s manipulation “watch list.”

In the immediate aftermath of the poor results, Finance Minister Uttama Savanayana unveiled a $10 billion spending bill aimed at farmers, the poor and domestic tourists. Family and low-income earner subsidies will be hiked and landowners get debt relief. Thai travelers are eligible for an allowance to travel outside their provinces, but a proposal for China and India visitor visa-free entry was dropped over security concerns. The package accompanied the larger $15 billion deficit planned for the 2020 fiscal blueprint, within overall direct government debt at 40% of GDP. It stresses public-private partnerships in road and transport, and mortgage restructuring within designated state and private bank programs to shrink homeowner leverage. The central bank increased monitoring in this segment as the bad loan ratio approached 5%, and it tapered credit growth to single digits. While foreign investors have been keen buyers of Thai government debt even at yields barely above 2% with the currency kicker, they avoided corporate debentures after two well-publicized defaults by an animal feed producer and energy company. They were a tiny amount of the total outstanding, but the bond market association called on the securities regulator for faster action on auditing and governance lapses.

Philippines’ GDP growth came in at 5.5% in the first half, as officials assured the decline was “temporary” and that budget postponement may have shaved off half to a full point. With outlays now scheduled under the President’s “Build” highway and port envelope the second half forecast is 6.5%, with domestic demand aided by bank reserve requirement and policy rate reduction as monthly inflation at 2.5% is in the target range. However the 3.2% of GDP budget gap goal will likely be breached according to HSBC research, as national debt, two thirds domestic and one-third foreign, jumped 8% this year. On the external ledger, a rare balance of payments gap was registered in June, as remittances were 3% lower than the same month in 2018. The setback came after foreign direct investment net inflows through May were only $250 million, one-sixth last year’s sum. New pledges rose 25% through July, but may not materialize despite the administration’s infrastructure and political buildup.

Myanmar’s Complex Military-Industrial Cudgel

2019 September 13 by

The United Nations Human Rights Council, charged last year with investigating the Myanmar army’s (Tatmadaw) business empire as the biggest single corporate owner amid findings of abuses and war crimes in three states, presented a complex construct of domestic and investor ties to be rolled back and unwound altogether under diplomatic and commercial imperatives. The report focuses on widespread violations in Kachin, Shan and Rakhine states, the first two with longstanding independence movements in gem-producing regions and the last the source of the 850,000 Rohingyas’ escape to Bangladesh after company-supported “cleansing operations” that may fit the universal genocide definition. Senior generals leading the two main Myanmar Economic Holdings (MEHL) and Cooperation (MEC) conglomerates are already under personal international sanctions and asset freezes, and the UN Council’s work, to be debated at the September General Assembly, is designed to reinforce the military’s isolation.

 Its “outsize power” is responsible for systemic persecution and violence and has compromised post-2015 election democracy and free market transition, the document comments. Aung San Suu Kyi is the civilian government head after her party won the most seats, but the Tatmadaw automatically controls one-quarter of the legislature and can veto proposed constitutional revision. It is autonomous with no budget oversight, and retains interior and border ministries along with defense. Dozens of foreign joint ventures and other business connections were identified with MEHL and MEC, and the expose notes the gem industry’s “global reach” and calls on multinational firms, banks, and development lenders to sever all links. A formal boycott could be adopted at the UN plenary next month, as the United States and European Union continue to crack down over the generals’ absence of accountability for the mass Rohingya displacement.

The UN has guiding principles on business and human rights supplemented by Global Compact provisions, and separate codes were prepared by the European Commission and the Organization for Economic Cooperation and Development. The OECD sets out a due diligence framework for conflict minerals and overall human rights supply chain integrity, with another convention outlining anti-bribery and corruption steps. Executives have been held liable in international criminal court for bad conduct, with past cases from Sierra Leone and Yugoslavia. Under general investment criteria, basic accounting and reporting should be available, and neither MEC nor MEHL offer financial documents or list fiscal contributions from oil and gas, minerals and bank ownership. In 2017 the Defense Ministry claimed MEHL revenues at $120 million, and its Myawaddy Bank as the number two taxpayer, without verification.

 Each parent controls an estimated sixty companies, divided into services, trade and production groups in MEHL’s organization. MEC’s focus is more on agriculture and hydrocarbons raw materials, alongside financial and insurance holdings.  Myawaddy is considered a private bank under existing law with almost $1 billion in assets as of 2016, according to the World Bank. The main MEC bank is Innwa, managed by military officers to enable international system access within existing curbs. In Kachin and Shan States jade and ruby extraction is intensive along with family and state-owned partners. Combined operations include large tourism resorts and land tracts, and following new accounting procedures for government-run enterprises reserves can be earmarked for military use. So-called crony companies headed by wealthy individuals such as Asia World, Eden, First Myanmar and KBZ were the target of solicited “donations,” amounting to tens of millions of dollars, for northern Rakhine State road and border wall construction after the Rohingya expulsion, and they provided cash for that purpose as early as 2017, the report suggests. They often have Singapore stock exchange listings and company ties where ethics and governance codes bar such behavior. Chinese and Korean joint ventures are common in mining and steel, and French cement giant Lafarge and Indian construction outfits have also entered. Russia and Ukraine have traded arms and weapons technology under embargo from dozens of other countries and in potential violation of dual-use export restrictions.

The UN study concludes that forced labor and sexual violence are routine in mining areas, and that Rakhine development projects to “erase the Rohingya” may implicate the Tatmadaw and associated businesses in war crimes. Dozens of overseas partners may be drawn in indirectly, and it urges investors, consumers and donors to end all engagement inviting these risks and tragedies for eventual extrication from the broader economic and financial sector regime. 

Central America’s Interrupted Integration Intent

2019 September 13 by

The arrival of hundreds of thousands monthly into the US and Mexico from the Northern  Triangle of El Salvador, Guatemala, Honduras and the rest of Central America over the past year is an economic, diplomatic and humanitarian tragedy and specific investor disappointment. Latin America sovereign bond investors entered originally with a dedicated index. Equities joined corporate bonds on stock exchanges, with Panama recently added to the Morgan Stanley Capital International frontier list. Performance suffered amid fiscal and balance of payments woes, crime and insecurity, and lack of competiveness and policy reform after initial enthusiasm following passage of the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA).

 Regional banking and capital market integration blueprints were considered but never fully realized, amid notable strides in private pension creation and financial sector regulation. International development institutions and private fund managers offered encouragement and technical support, but focus disappeared long before the refugee and rule of law crises. In the US, the Obama Administration led a broad initiative to improve governance, and before cutting aid President Trump repeated that approach. The new Development Finance Corporation may revisit financial market building with venture capital deals, but the bigger agenda is missing to channel portfolio and remittance inflows.

El Salvador after its civil war had reconstruction and modernization as priorities in line with international standards. The central bank, working with the donors, invited bankers and fund managers to share best practices and recommendations for active credit and securities markets Officials committed to Basel Committee capital adequacy guidelines and diversifying beyond private debt placement. The exchange rate regime provided stability as a dollar peg and then the dollar outright was adopted. The ex-rebel FMLN and conservative ARENA parties alternated in power and promoted manufacturing exports to boost the balance of payments.

They introduced private pension funds as a main institutional investor and regular domestic and external bond buyer, However public debt now over 70% of gross domestic product is a drag on the economy projected to grow 2% this year, and it jeopardized the core social security system as benefits were delayed. The new President, former San Salvador mayor Nayib Bukele, took office in June after a landslide victory and promised to clean up the mess through “market-friendly” methods. He campaigned on increased social spending within a 3% fiscal deficit, and fresh funding alternatives to lift domestic demand, which could include a second generation private retirement contribution scheme.

Guatemala and Honduras are smaller in frontier bond markets, with lower debt levels and more commodities dependence. Honduras’ debut issue several years ago coincided with a fight over presidential removal for corruption, as dueling chief executives laid claim before snap elections. It previously received debt relief from bilateral and multilateral lenders under the low-income Heavily Indebted Poor Country program, mirroring a commercial access path more common in Africa.

While the Northern Triangle has pronounced “junk” credit ratings, the Dominican Republic, a small component in JP Morgan’s bond benchmarks, is BB and Panama is investment-grade BBB. Both register faster 5% growth, and have enacted tax and spending changes for greater budget balance. Before its recent tourism scare with unexplained visitor deaths the DR was a rare buy recommendation. Remittances combined with foreign residential and hotel investment for a minimal 1.5% of GDP current account gap, and President Danilo Medina in his second term backs public-private partnerships to remedy chronic electricity shortage. Panama received ratings upgrades the past year, with the incoming Cortizo government intent on combatting corruption and expanding mining and financial services to offset Canal revenue decline.  It was a top MSCI performer in the first half, with a near 25% gain.

Central America’s positive economic and financial sector elements that once comprised the DR-CAFTA spirit have been forgotten with the current migration and security pressures and cross-border business and political recriminations. Bank and broker associations and chambers of commerce can reprise credit and capital market strengthening advocacy, as dedicated multilateral lenders like the Inter-American Development Bank and Andean Development Corporation (CAF) emphasize these themes within good governance and sustainable investment priorities. The CAF held an annual conference in Washington last week, and speakers cited hemispheric displacement and social and physical infrastructure crises new bond issues and indices and investor outreach policies could help overcome.