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Corporate Bonds’ Evenly Dispersed Blessings

2018 January 21 by

The CEMBI’s 2017 8% return was slightly lower than the previous year’s 10%, but gains were equally distributed between rating and regional segments, JP Morgan commented in its annual asset class roundup. High yield led results at 45% of issuance, and by industry commodities including hydrocarbon and mining names were the winners. The benchmark spread has dropped the past two years with low volatility reminiscent of the early 2000s period, when the margin was lower than the current 230 basis points over Treasuries. Duration has been steady at 4.5 years, and the CEMBI Broad traded inside the sovereign EMBIG Diversified in 2017 due to a combination of Asia high-grade credits in the former and distressed weighting Venezuela/PDVSA, continuing to miss payments, in the latter. High-yield in turn has been tighter than the US counterpart, likely because of the universe of well-supported quasi-sovereigns. By geography Latin America and Africa were the top performers (+12%), followed by Europe, Asia and the Middle East in declining order although their range was a narrow 5-7%. The external sovereign and local government JP Morgan indices had respective 9% and 15% gains but also fluctuated more widely. The biggest individual issue surge was from Petrobras (+17%) and other Brazilian banking and industrial components also shined. China listings like CNOOC, Bank of China and Evergrande were likewise major contributors, according to the research.

Speculative-grade default rates fell to a six-year low of 2%, with the number halved to sixteen from the preceding year, as “robust” refinancing conditions enabled weak story access. Latina offshore spilled over into 2018, as Noble and Agrokor hurt Asia and Europe, respectively. Venezuela state oil company PDVSA did not enter the total, even though derivatives body ISDA and ratings agencies declared default while the government intends an as yet undefined restructuring. Recovery values almost doubled to 50%, with the bottom levels in the consumer and financial sectors. Leverage was the same as in 2016 at 3 times, with Latin America the most indebted region. The rating upgrade to downgrade ratio was 0.8, with Argentina getting 15 promotions after S&P raised the sovereign to “B.” Turkish companies were slashed an equal number with Fitch’s BB+ cut, while China had the most downgrades at 55 versus 30 upgrades. The Middle East and Africa suffered with South Africa and Qatar actions, which may fade under the prospect of fresh ANC ruling party leadership and lifting of the GCC boycott this year. Primary activity was a record approaching $500 billion, 50% above 2016, with net financing “manageable” under $150 billion. Tenders and buybacks were a hefty $80 billion, and Asia was over half of volume at $300 billion with “sustained” local investor support, the survey notes. China was $200 billion, with Korea next at $25 billion and financials were half of regional supply. In Europe Russia marked its post-sanctions rebound with $20 billion, although new US Treasury Department guidance could again close the window. Regulation S SEC-registered private placements were 55% of the total, beating the previous year peak, and debuts were one-fifth of all transactions, another precedent in value terms although not in issuer number. Asia had 125 maiden offerings, with ASEAN active in particular under longstanding bond market promotion programs.

Asia’s Fleeting Triumph Trundle

2018 January 21 by

Emerging Asia core stock markets outperformed Europe and Latin America ones in 2017 with a 40% gain, above the benchmark MSCI index 35% advance, with Pakistan’s over 25% drop the sole loser. China “A” shares jumping almost 50% as they prepare for a larger weighting were the main turnaround story and driver, followed closely by South Korea’s 45% shaking off the North’s bellicosity to herald the new administration’s chaebol and consumer debt cleanup. India was next at 35%, ahead of ASEAN markets where Thailand led (+30%) and Indonesia, Malaysia and the Philippines finished in the 20-25% range.

Among frontier exchanges Vietnam’s 60% surge was more than double the index, while Sri Lanka was flat and Bangladesh rose 15%.  The universal upswing was supported by headline GDP growth and earnings exceeding expectations, and positive trade and capital flows overcoming gloom from US and Western government protectionist sentiment and incremental monetary tightening. However on entering 2018 banking and foreign investment clashes in regional linchpin China again weighed on the outlook, while fund managers positioning for more selective returns began to dissect neighbors’ underlying economic and financial system diversification and overhaul in view of political and practical limitations.

China’s December official manufacturing PMI was over 51, but masked a meager 5% rise in private fixed asset investment, a one-year low.  Both the local and offshore renimbi were up 7% against the dollar in 2017, but the foreign exchange body SAFE started the new year with stricter individual bank card holder caps on domestic and overseas dollar withdrawals, with the latter set at $15,000 annually. The National Development and Reform Commission in turn issued a directive mandating on-line registration of all cross-border deals above $300 million, and requiring approval for “sensitive” media and defense-related transactions regardless of size. The capital exit crackdown was coupled with foreign investor overtures, including temporary tax exemption for “favored” sector allocations such as in mining and technology in response to President Trump’s global corporate tax cut. The Commerce Ministry promised to speed financial services opening after a bilateral summit agreement , but the banking regulator still will not allow international ownership of domestic units over 20% for a single shareholder and 25% generally. Washington signaled its disappointment with access by refusing the proposed Ant Financial takeover of MoneyGram on reciprocity and national security grounds, as the Treasury Department’s CFIUS panel flagged account piracy and cyber-espionage potential.

The Central Economic Work Conference met to endorse the “Xi-nomics” mix of progress and stability and the medium term 6.3% growth target, as state-owned forms announced double-digit profit increases for the year. However the private sector China Beige Book pointed to retail industry revenue and cash-flow weakness which will delay “old economy” displacement, especially as commodity sector companies such as steel once more ramp up capacity and production contradicting previous pledges. Central bank head Zhou in his message vowed to maintain prudent monetary policy, as big state lenders were poised to enjoy an interest windfall from a 2% available reserve requirement cut around the Lunar New Year, which will not apply to smaller competitors whose shares plunged. The Finance Ministry offered its own mixed signals in describing the “illusion” of Beijing continuing to absorb local government debt, which reached $2.5 trillion in November, as over half of current bond issues roll over old obligations under the existing program.

Korea’s 10% currency appreciation against the dollar topped the region, and it was the only country to raise interest rates to try to slow accumulation of personal debt now the highest in the OECD.  India reprised 6.5% growth in the last quarter but worse 5% inflation came with it, and Prime Minister Modi’s ruling coalition lost ground in his home state of Gujarat and now faces a dedicated opposition Congress Party with Rahul Gandhi officially elected leader. In ASEAN Indonesia moves into 2018 split between prominent infrastructure building forays abroad, with state company issues of rupiah-denominated “Komodo bonds,” and religious and anti-corruption infighting at home, with President Jokowi’s key ally the parliamentary speaker facing graft charges. Vietnam managed successful IPOs, most recently of a popular brewery, but has struggled with corporate debt placement. It may soon tap the Asian Development Bank for help in a snapshot of Emerging Asia’s uneven financial market path despite 2017’s linear rally.

 

 

 

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Mongolia’s Daring Debt Dash

2018 January 15 by

Mongolia was lauded for more “durable than anticipated” 3% GDP growth in 2017 in December’s first review of its $400 million IMF program, following an $800 million 5-year external bond return in October where the 5.5% yield was half the previous peak. Since the May rescue commodity exports have picked up to China in particular with mine closures there and its ban on North Korea coal imports, and boosted budget revenue in local currency terms with the weaker exchange rate against the dollar. “Investor confidence recovery” with the successful international issuance will boost the balance of payments and reserves, and fully cover 2018 maturities and refinance more expensive domestic debt.

However both the Fund and frontier market fund managers continue to be wary as political and banking sector complications dilute the upbeat narrative. The new government elected in July lost a confidence vote ousting the Prime Minister, who was then replaced by his deputy while the Fund’s health check was delayed. Bank credit growth is still at a runaway 20% annual pace, with large foreign exchange exposure and 7.5% bad loans pending the results of an overall asset quality audit by the central bank. Despite headline economic strides, on structural reform the IMF report assigned a “mixed” score, as regional peers Azerbaijan and Kazakhstan not under the lender’s thumb likewise have rebounded from crisis but remain ambivalent near-term bond bets.

Mongolia’s coal, copper and gold price jump from Chinese demand stoked 5% first half GDP growth, but construction has been negative for four years with excess real estate inventory. The windfall produced a budget surplus through September, but scheduled social and civil servant handouts will result in a deficit, as the 2018 blueprint adopted by parliament could send the overall gap close to 10% of GDP, according to President Khaltmaa Battulga, who vetoed it as against the Fund arrangement. Growth is slated at 4.2% amid introduction of a progressive income tax, but the President lambasted “inefficient investment projects” pushed by the opposition People’s Party which holds 65 of the 75 seats. A fiscal stability law envisions end-decade balance, but the IMF warns that the government wage bill compromises the target and threatens medium-term sustainability with public debt already at 85% of output.

Inflation was over 8% in October, and monetary policy has reversed course toward easing with a 100 basis point benchmark rate drop to 11%. The Fund urged the central bank to go slowly on cuts as the recent reserve buildup to $2.5 billion on a stable tugrik may not last. The Bank of Mongolia has regularly dipped into the stash for intervention, even though its currency powers are murky and shared with the Finance Ministry. An updated organic law is to clarify the Bank’s independence and regulatory authority more broadly, but in the meantime its hands are full with the asset quality exercise conducted with accountants Price Waterhouse Coopers. It will screen bank business plans and apply stress tests, with capital holes to be remedied by the end of next year when deposit insurance is due to start. Among outstanding challenges the financial sector agenda is “most important” and funding decisions should not tilt to favored shareholders or jeopardize the public sector balance sheet, the Fund evaluation concluded.

Azerbaijan came in for separate caution under a December Article IV survey with stagflation ending  as the hydrocarbon and service industries revive, but banking sector restructuring “ still incomplete.” Inflation will be near 15% in 2017 after exchange rate depreciation, and increased fiscal spending should be reined in by clear rules before 2019, it recommended. Privatization has drawn foreign investor interest in real estate, and external debt remains minimal at under 20 % of GDP. Fitch Ratings expects positive growth in 2018 muddied by “continued bank asset quality pressure” despite the bad loan cleanup at IBA. The rater was also skeptical about the Halyk-Kazkommertsbank consolidation as the biggest government-owned lender in Kazakhstan following the initial stage of operations merger in December. Foreign exchange positions may deteriorate as local depositor tenge sentiment continues to swing as measured by dollarization levels, and international bonds were shaken by a New York court ruling freezing central bank reserves in an investor dispute while the overall system is in knots.

 

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GDP Bonds’ Simpler Structure Sanctification

2018 January 15 by

For the past year official and private sector representatives, acting under the G-20’s original direction, have organized informal working groups and events around possible introduction of GDP growth-linked bonds. The idea first gained notice in the aftermath of the 1990s Asian financial crisis, and more recently for Greece, as an automatic stabilizer with countercyclical risk-sharing when recession or natural disaster hit that can also provide upside in boom times. Argentina and Ukraine followed early post-Brady plan restructurings in offering warrants that pay a premium when growth is above 3 percent, but full-fledged instruments have yet to be adopted in standard issuance and workouts despite concerted pushes from the IMF, Institute for International Finance, and other bodies.

Since the middle of 2016, the Fund has published papers on “state-contingent” debt and the Bank of England and International Capital Markets Association in London have taken the lead on global emerging market investor outreach which resulted in a model term sheet. It indexes coupons and amortization to nominal GDP, has both foreign and local currency options, and would be governed under international law with creditors ranking equally. The framework also contains  complex provisions around collective action clauses and statistical calculation which muddy legal and practical understanding. An easier approach would be to incorporate the concept into smaller deals, such as the recent frontier sovereign wave in Africa and elsewhere, to build a credible track record where any dispute from the limited buyer base and transaction size could be handled by independent experts.

The IMF’s May review examined a range of bond alternatives adjusted for economic indicators or weather events and found that other tools can “preserve space” in difficult periods such as international reserve accumulation, fiscal rules, commercial insurance, and central bank swap lines. However, well-designed GDP-formula bonds are more accessible and also promote concrete securities diversification and the more abstract “global safety net,” in the Fund’s view. Its simulations showed that one-fifth of the debt stock in this form would increase emerging economy limits on average 10 percent before debt reached dangerous levels. Real money long-term managers at big institutions are the logical buyers, as they have wider fiduciary scope to balance country welfare with asset returns, the paper argued. However pilot efforts will still demand a novelty premium with liquidity and performance doubts, which could be magnified by data frequency and reporting gaps as in Argentina’s notorious past and in Venezuela’s present case, where related bad governance and economic policies would likely make upfront costs prohibitive. Professional debt agencies and not politicians should be in charge of these operations to plan beyond the next election cycle, and ratings agencies should participate at an early stage, the primer recommended.

Inflation-adjusted instruments offer a foundation and remain popular in Latin America among local and foreign investors, and commodity-tied value recovery rights featured in a dozen decades-old sovereign debt exchanges, but verification lags and other intricacies have impeded mainstream embrace. GDP-linkers will take time to develop benchmarks, and pricing is assumed to be at least 50 basis points over conventional offerings at the outset, according to the literature. Global pension funds controlling $40 trillion may be confined to hard-currency investment-grade exposure to further narrow the structure, while Islamic finance vehicles committed to risk-sharing could be a smooth fit. In discussions on the London term sheet, lawyers have criticized voting and cross-default clauses which seem to prevent aggregation and subordinate “plain vanilla” bonds to GDP-related ones. Analysts in turn are deeply suspicious of government data manipulation in the absence of an established separate mechanism for calculation and publication, and insist in the proposal on possible immediate redemption through a put option for protection.

Instead of mainly relying on these elaborate consultations often with acrimonious debate over motives and principles, GDP-linked bond advocates including the IMF, which has indicated possible balance sheet and technical support, should instead be open to ad hoc insertion in ongoing minor emerging market placements. Leading candidates were the past year’s restructurings in Belize, Mongolia, and Mozambique amid their other outstanding economic policy and statistical disclosure concerns. The three are serial defaulters with fates connected to natural resources, and creditors have been frustrated by continued negotiation and workout impasses which may be more readily overcome with specific data or event-triggered instruments. A standing group of mutually-agreed professional monitors could oversee adapted versions of the template,  as innovation champions bypass lengthy deliberations to forge missing links.

 

 

Lebanon’s Retracted Resignation Roundabout

2018 January 8 by

Lebanese bond prices stabilized and credit rating agencies delayed action after Prime Minister Hariri returned to his post a month after resigning at Saudi Arabia’s behest over his government coalition with Hezbollah, allied with Iran and Houthi rebels in the Yemen civil war accused of firing missiles at Riyadh. He reprised the “dissociation” stance in regional conflicts despite the alignment in effect the past six years in Syria, against stronger Hezbollah fighter support for the Assad regime now prevailing with Russian air power against remaining rebel pockets. Hariri has dual Saudi citizenship and was briefly detained before flying back to Beirut, raising suspicion he was caught in the anti-corruption net for dozens of royal princes held in the Ritz-Carlton hotel. At home his team had finally passed a budget and forged an agreement for parliamentary elections after a decade hiatus. Tourism increased and offshore oil projects were under negotiation since taking office a year ago, although economic growth stayed at 1.5% under a 145% of GDP world-leading sovereign debt pile, which absorbs almost one-third of local bank assets as the major buyers. One-tenth the budget goes to debt service, and the central bank has resorted to fancy financial engineering to maintain allocation alongside the $7-8 billion in annual diaspora inflows. They are needed also to sustain over $40 billion in central bank reserves to maintain the longstanding 1500 pound/dollar peg. Other fixed dollar relationships in the Gulf have been in the crosshairs with geopolitical fissures, notably in Qatar under commercial and diplomatic boycott which recently extended to Tunisia with refusal of airport access. Lebanon’s scheme is considered solid in the absence of depositor flight, which has spiked rarely during shocks such as the assassination of Hariri’s father and Hezbollah-Israel war outbreak.

Egypt floated its currency after reaching a 3-year $12 billion IMF pact triggering heavy foreign investor bond and stock market inflows, and half the sum has been disbursed so far. Growth improved in the latest quarter to 5%, but inflation soared to 30% with the 50% pound devaluation and electricity subsidy adjustment. The budget deficit hit 10% of GDP mainly due to higher interest payments, as the central bank hoisted benchmark rates toward 20% following “prudent” monetary policy, according to the Fund’s November review. International reserves are at a record $37 billion, double the corresponding 2016 level,  to cover seven months imports on combined remittance, and direct and portfolio investment strides. Gulf allies Saudi Arabia and the UAE in turn extended maturities on $4 billion in deposits coming due in 2018. President al-Sisi has targeted their investors to help develop his new desert “administrative capital,” at an estimated $5 billion first phase cost. Private property firms have purchased land and the Chinese will build a commercial center. However potential Saudi sponsors may be rethinking plans with Crown Prince Mohammed bin Salman’s crackdown on wealthy peers, including globetrotting Kingdom Holding chief executive Prince Alwaleed, with a commanding stake in Citigroup. The attorney-general has signaled minimum $100 billion forfeiture from the hundreds of influential business titans under confinement, as next year’s budget hiked spending for the first time in three years on forecast 2.5% growth aided by the captive payments.

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Investor Surveys’ End-Year Party Indulgence

2018 January 8 by

2017’s impressive debt and equity market streaks are set to continue indefinitely subject to economic growth and inflation adjustments and other caveats focused on global central bank actions and geopolitics, according to early investor pulse-takings. The best year in a decade shrugged off Trump administration and Federal Reserve moves and China and commodity price worries that will remain prominent, and in 2018 EM currencies may not beat G3 ones, according to a limited Bloomberg poll of money managers. Mexico, Brazil, Indonesia and Russia will be outperformers, while China, Argentina, Poland and South Africa should lag. By the main three regions, Asia is favored over Latin America and EMEA, but the often cited “Goldilocks” combination of output, earnings and monetary impetus will be more selective across asset classes and geographies under still buoyant index results, the analysis finds. Turkey is viewed as the riskiest bet as the failed coup repercussions linger, President Erdogan’s allies are implicated in a US money laundering trial, the economy may be overheating with 8 percent growth the past quarter, and interest rates were hoisted only 50 basis points with double digit inflation amid the President’s charge it is on the “wrong path.” EMTA’s Q3 survey also came out to report steady $1.3 trillion in trading, with Asia outpacing Latin America for the first time in its two decades history. Local debt, at 57% of the total was led by India at $130 billion, followed by South Africa, Brazil, Mexico and China in the $75-$95 billion range. Eurobonds, split 53% and 40% percent between sovereign and corporate, had Argentina and Saudi Arabia prominent in the former category.  Brazil and India instrument dealing was almost equal overall, and China and Mexico ones were tied for runner-up status. Warrant and option turnover was $9 billion for the period and without a detailed breakdown were presumably on Venezuela and other oil exporters with value recovery rights from previous restructurings.

China has not yet entered mainstream domestic bond indices, but should be added next year as the stock market weighting also rises marginally on the MSCI. November economic data were mixed, with retail sales and exports up over 10 percent but fixed investment only ahead 7 percent at the slowest clip in two decades. Foreign exchange sales resumed even though the state allocation body cited currency “balance” and the bank regulator will soon end the waiting period for foreign institution yuan trading licenses. The official growth forecast remains 6.7 percent amid reports that the deleveraging push may soften at the December work conference. Tech firms not as indebted as large government enterprises now account for 15 percent of output and 10 percent of employment according to official research. The securities overseer has denied over 100 IPO applications although state company profitability is the best in five years. Moody’s Ratings has a stable banking sector , with the shadow segment under tougher rules as commercial lending continues to jump RMB 1 trillion monthly approaching a 15% annual pace. After signaling opening after a Beijing visit by US President Trump, Beijing insisted the 5 percent ownership reporting mandate will not change, as Washington’s new national security strategy criticized China’s “aggressive, mercantilist” system hardly putting international stakes first.

Nepal’s Framed Frontier Expedition

2018 January 1 by

After disappearing from early emerging market investor radar screens in the 1990s with a prolonged plunge into civil war and political instability, followed by an epic earthquake and border closure with traditional  ally India two years ago, Nepal completed local and national elections won handily by the Leftist alliance of the nominal Communist and Maoist parties. According to initial results they took control of six out of seven provinces and 70% of parliament, crushing the Nepali Congress formerly in power and an array of fringe opponents including anarchists and royalists. Workers abroad in the Middle East and Asia, whose remittances account for one-third of output, did not vote despite court authorization, but likely would have reinforced the pro-left margin since their campaign focused mainly on infrastructure development and economic modernization rather than revolutionary rhetoric.

Following provisions of the new constitution no-confidence motions, a staple of the previous system which resulted in endless cabinet and government reshuffles, will not be allowed for two years to offer unaccustomed calm. Lowland Madhesis among the country’s poorest continue to advocate for more rights and support under the charter, but the incoming administration due to be headed again by veteran Prime Minister K.P.Ohli has vowed to be more inclusive both toward ethnic and income groups and subcontinent neighbors. In his 2015 term in he signed trade and investment agreements with China, and recently signaled a stalled hydropower joint venture may go ahead to diversify from historic Indian dominance. In his victory speech he promised “never witnessed private sector cooperation” alongside a higher social spending agenda, as the sleepy Nepal Stock Exchange index stayed flat post-poll awaiting concrete economic growth and reform breakthroughs.

Nepal’s Chambers of Commerce and Industry have been dubious in the absence of an “implementation framework” for the socialist economy enshrined in the constitution, amid talk of double taxation at the federal and provincial levels to cover increased social welfare payments. Ohli and his team plan public-private partnerships for large projects and small business, commodity and tourism promotion without specifying policies, as capital flight may spike while the vacuum lasts according to critics. They also worry about an expected rise in domestic borrowing, which has been capped at 5% of GDP annually, and favoritism toward cooperatives associated with ruling coalition leaders. Independent economists argue that the government should focus on better managing earthquake reconstruction after 650,000 homes and over one-third of output were destroyed, the World Bank estimated. In December it approved a $300 million credit to follow on the $200 million in the event aftermath, and pick up the pace for the over 350,000 residences still slated for rebuilding. They urge renegotiation of ventures such as the $2.5 billion dam suspended with the Chinese over contract irregularities on more concessional rather than commercial terms, even though foreign debt is low unlike other low-income economies, in the view of the IMF’s latest Article IV report this March.

The Fund described Nepal as “trapped in a low growth and investment equilibrium,” with GDP expansion averaging 4% the past decade as a regional laggard. Inflation and the fiscal deficit are under control, but state banks and enterprises got almost 2% of GDP in equity support in recent years which should be curbed, the analysis advised. Decentralization under the new constitution could raise budget risks, and without electricity tariff adjustment power supply will stay compromised, it added.

On monetary policy the Indian rupee peg was praised as a “transparent anchor” as demonetization fallout continues to hit local households and firms, but it has been “overly accommodative” with annual credit growth reaching 30% to spur recent tightening. The central bank introduced an interest rate corridor in 2016 to keep medium term inflation within the 7% target range, and uses repos as a liquidity instrument, with banks experiencing shortages around the election period. Financial sector reform was jointly identified as a priority by the Fund and regulatory officials, with plans to modernize prudential standards and enforcement for lending, securities and insurance. On the stock exchange in December the government revived a pledge to divest its 35% ownership and finalized rules for margin trading, but frontier market investors after decades out of the action will hold off at least another few months for clearer weather to mount a daring expedition.

 

 

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The Yangon Stock Exchange’s Anniversary Angst

2018 January 1 by

The Yangon Stock exchange added a fifth telecoms firm listing and launched on-line trading  to mark its second year since opening, but the local index was stuck at 475 capping a year of foreign investor disappointment despite passage of a new companies law that will eventually allow access. The Rakhine State crisis, as it is called in official media since the Rohinga population is not formally recognized, has blemished the civilian government’s reputation as the accounts of hundreds of thousands of refugees fleeing to Bangladesh describe human rights abuses warranting UN investigation and possible donor aid cutoff and trade sanctions. ASEAN’s recent Philippines summit suggested that while the region may continue its “non-interference” stance the US and Europe will likely take punitive action. President Trump and his Secretary of State Rex Tillerson have been famously at odds over their personal relationship and diplomatic direction, but were united on a strong warning to Aung Saung Suu Kyi that ethnic cleansing reports should be verified and met with economic and military consequences.

The IMF in a November Article IV visit cautioned GDP growth would come in around 6% for the 2016-17 fiscal year , with bad weather hurting dominant agriculture and construction project slowdown. It added that the tourism and investment impact of the humanitarian emergency had yet to be felt and may be “localized,” and cited risks “tilted to the downside” from banking sector and other uncompleted reforms. They have prevented global value chain integration and poverty reduction notwithstanding the refugee scrutiny, and the Fund urged a “well-sequenced second wave” of liberalization and infrastructure development for viable frontier market status.

Growth above 6.5% is projected next year on inflation at the same level, and the current account deficit should shrink 1% to 4% of output. The shortfall has been covered chiefly by foreign direct investment, and reserves at three months imports and the exchange rate are “broadly stable,” according to the report. Critics believe that FDI has been sluggish since the National League for Democracy assumed a parliamentary majority in the civilian transition early in 2016, and then unveiled a dozen-point economic plan with scant detail. The Fund estimates the sum at $4-5 billion this year with large data gaps, after a previous spurt on one-time hydrocarbon and telecoms ventures.

The army, which still controls one-quarter of legislative seats, key security ministries and strategic state enterprises also holds sway over economic policy, described as “sick” by the chief advisor to the former junta Dr. Myint. He has expressed skepticism over meeting the end-decade per capita income target of $1,800 and even catching up and competing with poverty stricken socialist neighbor Laos. His vision is  private-sector led with a defined social safety net for the disadvantaged, in contrast with the “low delivery and expectations” he associates with  Aung Sung Suu Kyi’s administration. Ruling party leaders like U Lay Nyint on the Economic Committee have urged farm export diversification and central bank independence under internal “frustrations,” while asking the international community for patience under existing political and technical limits.

Amid fanfare last week President U Htin Kyaw signed the long-awaited updated Companies Act, replacing century-old provisions, enabling a 35% foreign ownership stake in domestic counterparts and authorizing trading on the Yangon Stock Exchange. It modernizes corporate governance and minority shareholder rights, with an automated registry to be in place with Asian Development Bank assistance. Previously only selected industries like building materials and car distribution were open to outsiders, and a companion 1940 law barred non-resident equity sales. However officials indicated that implementation rules could take another nine months, and lawyers representing overseas investors lamented “missed opportunity” from the delay.

The same pattern applied to new central bank rules for “overdraft” loans, 70% of the $9 billion total, which are made on preferential terms or indefinitely rolled over to lock in customers. Originally they were to be cleaned up under a six-month deadline, now extended to three years, since executives from the industry’s two dozen institutions raised the specter of widespread runs with an immediate crackdown. Amid the standoff, five new state sector-specific lenders in farming, mining and tourism were approved to worsen allocation to favored clients. The central bank itself is forced to finance the near 5% of GDP budget deficit, as an historic  hostage to financial system inertia alongside the stock market.

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Russia’s Banking Blockade Blowback

2017 December 25 by

Russian shares tried to finish the year positive, as President Putin signaled his reelection run amid swirling allegations of manipulation and back-channel deals during the 2016 US polls and Trump transition aftermath. Former national security adviser Flynn joined other junior and senior campaign officials in facing prison time on criminal charges, with his perjury guilty plea focusing on diplomatic contacts before the administration took office where 2014 sanctions modification may have been explored. The President’s son-in-law in turn is reportedly under investigation for private and early government interactions with top executives of Russian state VTB, a main target of the original bilateral business ban which was reinforced this year with further legislation widening the potential scope against individuals and institutions particularly in the energy and financial sectors. The new reach could include all sovereign debt allocation to be considered in a Treasury Department study, as the foreign investment share in ruble paper stands at one-fifth the total. A pullback would raise pressure on domestic banks to fill the gap after the collapse of two major private competitors, and as they are already over-exposed to corporate borrowers with the twenty biggest accounting for 225% of common equity according to a December report by rater S&P. Concentration risk may be understated as it is “not fully captured” in current reporting which may flout single customer limits and not combine bond investment and credit lines. Large companies have also transferred cash from foreign to local banks, and do not disclose the holdings. From 2014-16 the overreliance intensified with the system’s high interest costs and low profitability aggravated by the oil price crash. Sanctioned Sberbank, VTB, Rosselkhozbank and Gazprombank hold half of the load on their books, without incorporating ruble and Eurobond allocation. For individual clients the ceiling under IFRS standards is put at $40 billion, and Rosneft had $25 billion in outstanding credit alone in the September quarter, the ratings firm noted. The recent failures of Okritie Bank and cohorts, following the central bank’s withdrawal of 250 other licenses, accelerated retail depositor flight to quality and size which injected funds, but companies could further experience losses in smaller intermediaries only partially covered by insurance.

While both leading state banks and corporates have pared foreign debt by necessity over the sanctions period, they owe $100 billion in interest and principal payment in 2018. The amount is manageable but may require deposit drawdown at home and abroad, especially if refinancing channels are constrained by fresh US and ally curbs. To prepare capital spending has been cut on major projects with the exception of a few high-profile hydrocarbons and railway deals. The government has indicated it will be selective in future equity participation, and has ruled out sizable privatizations in strategic enterprises while demanding increased dividends. The top three state banks do not need near-term Western capital market access, but their retail deposit growth will slow and the central bank’s foreign exchange support program dating from the 2015 crisis is winding down. The “specially designated” bank pariah list could also be expanded and secondary penalties applied against other countries under the “Countering America’s Adversaries” law aligning Washington’s political parties on an anti-Putin platform, the review concludes.

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The CFA Franc’s Dogged Devaluation Designs

2017 December 25 by

The CFA Franc two-decade old peg to the French counterpart and then the euro, with a 50 percent devaluation in 1994, is again under the microscope after recent commodity price decline worsened domestic and external imbalances in the respective Central and West Africa monetary unions, according to a ratings agency report which identifies countries most at risk from currency realignment. CEMAC’s oil export dependence puts it in worse position as current account and fiscal deficits were in the high single digits to national income at end-2016, with $5 billion in reserves covering just over half of monetary liabilities against the 20 percent minimum needed under the French Treasury arrangement. Budget gaps have eaten into liquid assets at the regional central bank, which has also exhausted overdraft facilities to member governments. WAEMU is more diversified with bigger output and leaders Cote d’Ivoire and Senegal register 7 percent GDP growth and better governance, S&P comments. Foreign exchange and fiscal reserves are “comfortable” and the analysis does not forecast formal depreciation but offers a sensitivity index ranking the most vulnerable in a switch. Congo, currently in negotiations on an IMF program with a low “CCC” sovereign grade, is at the top of the list with an 80 percent share of imports/output, the worst fiscal deficit in the two groups and a default record on its $500 million international bond. Its statistics are not reliable or frequent, and although the commercial debt burden would spike the relative damage would be greater in Cameroon, Gabon, Cote d’Ivoire and Senegal with bigger and more regular Eurobond issuance. They may have partially hedged risk through an African Development Bank window but another 50 percent CFA Franc drop would compromise budget positions and hurt ratings. Petroleum exporters Cameroon and Gabon already signed Fund programs and Senegal’s economic indicators are “much better” than in the 1990s. The sustainability debate over the currency regime has been “largely political” reflecting colonial era estrangement and new Asia outreach. In September protests erupted across the zones as Paris under President Macron unveiled a fresh Africa strategy stressing bilateral investment and security improvement, but immediate alternatives are lacking. Monetary flexibility is limited but low inflation in the 2-3 percent range, versus 15 percent for the rest of the continent average, has been a stability buffer outweighing possible competitive gains from devaluation, the review concludes.

Sovereign debt restructuring that may be in play regardless of exchange rate level should follow market-based recommendations compiled by an expert study group, according to the UN’s Economic and Social Affairs Department sponsoring the effort. Detailed templates should be developed for loans as well as bonds, and the more popular fiscal agent could be shifted to a trust structure to more easily bind creditors. Their committees should be free of conflict of interest, including holding credit default swaps on instruments while in dialogue and negotiation. The IMF’s “good faith” requirement must entail information disclosure and prevent arbitrary voting pool designation and is otherwise a “safety valve” to flag egregious behavior. Bank regulators including the BIS should reconsider capital standards and other treatment that foster pro-cyclicality and delay resolution despite both sides earnest engagement, the UN panel urges.

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