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African Securities Development’s Index Indentations

2018 November 12 by

The UK-based OMFIF and South Africa’s Absa Bank released the second annual African Financial Markets Index measuring progress in a half-dozen categories in 20 countries, with improved scores in Kenya, Morocco and Nigeria alongside deterioration in Mauritius and Namibia. In an introduction African Development Bank President Adesina cited its own local bond initiative operating for a decade which catalyzed $250 billion in issuance last year, 80% in short-term maturity Treasury bills. The AfDB’s data base covers twice the number of index economies, and the chief executive noted that universal energy access alone will demand $50 billion in annual capital mobilization through 2025. On a scale of 100, South Africa was again the runaway leader at 93, followed by Botswana, Kenya, Mauritius and Nigeria in the 60s.  At the bottom from 25-35 were Ethiopia, Angola and Mozambique, while Namibia, Ghana, Zambia, Morocco and Uganda were in the middle in the 50s. The components were market depth, foreign exchange availability, tax/regulatory framework, domestic investor capacity, economic potential and international agreement entry. The survey praises dedicated financial sector deepening strategies in Mozambique and South Africa, but criticizes low local investor and currency liquidity averages. On accounting rules, 17 of the 20 mandate IFRS, with Cote d’Ivoire just added to the list. Equity and bond turnover are generally minimal at one-tenth of capitalization, and regional coordination is lacking according to the analysis, which combined desk work with fifty field interviews. In 15 countries size is less than 50% of GDP, and corporate bond activity is negligible where it exists, with the government segment six times bigger at $315 billion. Secondary trading, benchmark yield curves and new listings are rare, and domestic institutional investor allocation guidelines can be rigid. Small company tiers are under consideration, and real estate trusts and Islamic-style sukuk are in the product pipeline. Technology has moved to online dealing and electronic infrastructure, and West and Southern Africa have platforms for exchange integration.

Kenya relaxed exchange controls, while South Africa’s over $1 trillion hard currency volume dominates the continent. Reserves fell in Angola and Nigeria with oil price declines, and Egypt’s tripled the past five years with Gulf and IMF assistance. Half the currencies float freely, while the CFA Franc zones and rand area have pegs. Only half the index countries have corporate credit ratings from the three global agencies, and Uganda has high 20% withholding tax and Rwanda’s legal shareholder protections are not well translated in practice. South Africa has multiple regulators, and just one-third the index follow Basel III banking norms. Pension and insurance funds are undeveloped, with the ratio to domestic assets under 20% apart from Botswana, South Africa, Namibia and Seychelles. Strict product and geographic restrictions limit diversification, and manager knowledge and expertise is likewise narrow. Mauritius is an exception with widespread exposure to derivatives, but risk aversion prevails even in the index members with a sophisticated spectrum of contractual savings providers. Financial inclusion is also a capital markets challenge with scant outreach to small business, women and rural locations. With economic growth expected to stay below 5% and infrastructure needs alone estimated at $150 billion annually, the compelling case for market expansion is clear even if future plans are murky, the review concludes.

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Bulgaria’s Euro Ambition Ambit

2018 November 12 by

Bulgarian stocks showed losses on the MSCI Index through the third quarter along with other East European and Balkans markets, as it prepared to join the euro and EU banking union in a first phase next July. The ECB must complete an assessment before it enters the supervisory mechanism, and inflation running at 3.5% will continue to place price stability pressure on fiscal policy with the currency board in place until then. First half growth was over 3% on good domestic demand and cohesion fund-driven public investment to offset slumping exports to Turkey, which accounts for 7.5% of the total. Corruption and crime marks are still poor on Brussels reviews, but are unlikely to sidetrack long awaited single-currency expansion with Central Europe abandoning plans amid the debt crisis outbreak. The Czech Republic after ending the koruna cap has lifted rates with inflation at 2.5% and energy and wage forces increasing. Hungary’s bias is dovish with inflation in the 3-4% band as it continued unconventional tools like targeted central bank small business lending while phasing out interest swaps and mortgage bond buying. Poland grew at a breakneck pace above 5% at mid-year on strong consumption, but PMI weakening signals industrial crawl in the coming months which should postpone potential tightening. In Romania 5% inflation may have peaked on 4% growth, but the government will likely trigger Brussels excessive deficit procedure with an over 3% of GDP result, and the current account hole still suggests economic overheating. The central bank will introduce macro-prudential limits on household debt after years of 20% expansion, and may turn outright hawkish if currency depreciation worsens. To divert attention the ruling coalition has emphasized a referendum to uphold traditional social values and reverse same-sex marriage recognition. However popular apathy was reflected in low turnout which will sustain such “liberal” social practice.

In Croatia too the cabinet mix hangs by a thread with a 51% bloc majority, as the senior HDZ party should finish well in elections but faces fresh anti-establishment opposition. Controversy over the Agrokor conglomerate rescue has spilled over into shipbuilder help debate with the high third quarter tourist season on track for a double-digit visitor bump. Labor shortages are widespread, as tax and pension reforms go into effect on relative budget balance. To extend 3% growth tax relief is slated for 2019 to reinforce previous packages. Serbia’s 4.5% growth is the fastest in a decade despite next export drag. Household and investment spending have picked up with good progress on the IMF program, and 2.5% inflation is not yet enough to rattle the central bank, which recently battled deflation. Western sell-side research often picks stocks and bonds for recovery value, but cultural and commercial ties with Russia sharing the Cyrillic alphabet instill caution. Russian companies have been removed from external borrowing since new US sanctions in April, and the Treasury Department is studying a full securities ownership ban. International reserves and foreign debt are roughly equal in the $450 billion range, but the ruble continues to slip against the dollar as world oil prices may soften in the near future. With this scenario budget adjustment envisioned delay in the retirement age provoking mass outcry, for a dent in President Putin’s popularity and fiscal soundness.

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Latin America’s Smaller Election Turf Battles

2018 November 5 by

Election attention this year and next in major regional markets Colombia, Mexico, Brazil and Argentina has also prompted an investor scan of under the radar contests throughout less followed locations from Central America to the Southern Cone. Previously assumed outcomes are often in doubt as voters express desire for serious change against an anemic economic growth backdrop even with partial commodity export rebound. In Bolivia President Morales may run for a fourth term after the constitutional court cleared the way, with the opposition perennially divided. Growth may meet the 4.5% target at the cost of runaway credit expansion and dual fiscal and current account deficits. Loose liquidity has combined with an overvalued currency in the IMF’s view, but the 5%-plus budget and balance of payments gaps respectively eliminated public employee bonuses and international reserves. Government debt is 40% of GDP and the Morales administration continues to siphon state bank deposits for infrastructure and social spending. The Dominican Republic is gearing up for 2020 polls with President Medina in contrast facing legal hurdles to another run. Ratings agencies maintain sovereign “BB” grades with a stable outlook despite lack of fiscal reform momentum, since tourism and remittance-backed growth is in the 5% range. The island was added as a fractional component in JP Morgan’s local bond index and it recently switched Chinese diplomatic ties from Taiwan to the mainland to open a big foreign aid and investment channel. Energy-stoked inflation remains a threat with the central bank policy rate over 5%, and oil imports also contribute to a small 1-2% current account deficit offset by solid remittance flows from the US which should support the peso around 50/dollar.

Uruguay’s presidential election is this year, and second quarter growth was just half a percent on export and tourism fallout from Argentina’s crash, exacerbated by exchange rate overvaluation. Earlier drought hit agricultural output, and a railway connecting Montevideo with other key stops may not be completed as planned. Inflation will stay close to 8% through 2019, and despite a primary surplus the budget shortfall is 3% of GDP. Paraguay in comparison is on track to near 5% consumption and fixed-investment driven growth, at half its neighbor’s inflation rate at 4%. Costa Rica’s fiscal plan to lower the 70% of GDP public debt is under debate after an early year Moody’s downgrade. It would introduce value added and adapt capital gains taxes, and add individual and corporate income levies. Civil service wages may be capped on 3% growth, as the government resorts to stopgap borrowing to address strike grievances. Inflation is also 3% with currency depreciation as the central bank tries to prevent a fall to 600/dollar. Panama uses the greenback, and its MSCI frontier stock market component was down almost 40% through the third quarter. Canal volume was solid despite the global trade standoff, and the budget is relatively balanced as opposed to sizable deficits in previous years. Growth should come in at 4% with slowing construction, but the Cobre Panama project should go ahead after negative Supreme Court decisions complicating it amid the private banking reputation hangover from the “Papers” revelations which damaged regional political leaders.

The Next Decade’s Natural Realignment Remedies

2018 November 5 by

With major indices still down through October, emerging markets are in their longest funk since the “taper tantrum” five years ago, but the US Federal Reserve and developed world liquidity movements are no longer the main culprits as investors spot weaknesses beyond the current account deficits highlighted then in the so-called Fragile Five including India and Indonesia. This year general global drivers and specific economic, bond and stock market, and regional risks provoked discomfort, aggravated by crises in Argentina and Turkey. These trends will linger into 2019 pending further analytical rigor so that near-term allocation is again a function of detailed country and instrument evaluation. Through end-decade banking system health after an extended credit binge, and productivity prods to faltering growth will be paramount questions, as portfolio managers also prepare for broader landscape shifts. They will encounter index consolidation and redesign, and emerging markets themselves finally seizing control of benchmarking, capital flow direction and global monetary and trade leadership.

The monetary spillover from the US, Europe and Japan, was never decisively quantified, but tens of billions of dollars presumably went annually into higher return core and frontier stock and local and external sovereign and corporate bond markets. The infusion aided currencies, which reversed this year against the dollar with the Fed’s scheduled rate hikes. Commodities outside oil have not provided support, as agriculture and metals prices are flat or declining. Credit ratings were rising last year but since plateaued, with upgrades and downgrades virtually even. Volatility spiked the past few months as managers are under pressure to rotate into equities from bonds after the latter’s decades-long rally. Politics and geopolitics have dampened enthusiasm with new uncertainties about sound government practice and trade and investment relationships. Populism is prominent, with candidates reeling from the old “Washington consensus” of liberalization and privatization. War may still be a danger in Iran and the Koreas but is defined as well by commercial and financial conflict between the developed world and China in particular.

The International Monetary Fund recently again softened its 2019 GDP growth forecast, with the emerging market average at 5%, and only Asia exceeding that number. Domestic demand is sluggish alongside the traditional export-led model, and private investment has been chronically weak. With currency depreciation and higher energy prices, predicted inflation is the same 5% for no growth in real terms. Over the quantitative easing decade, central banks kept policies loose or flat, but their bias is now toward tightening to defend exchange rates and encourage bank deleveraging after prolonged double-digit credit expansion. Fiscal stimulus cannot readily absorb the slack with accumulated deficits to fund budgets and infrastructure. While the balance of payments has returned to current account surplus, often through import compression, the capital account can show not only portfolio outflows but unchanged foreign direct investment, according to the latest UN agency tally. Asian and Gulf foreign exchange reserves stabilized, but the Institute for International Finance regularly warns of thin short-term debt servicing cushions in a cross-section of countries.

Through 2020, external corporate debt, with hundreds of billions of dollars in annual issuance to outpace the sovereign version, faces large maturity humps. The past six months’ drought has ended but rollovers will be more difficult, especially if quasi-sovereigns at half the estimated universe are not backed by governments if facing default. Non-Western official and commercial debt holders may not follow established restructuring rules, as evidenced by the clash between the US and China over proposed Pakistan relief. Foreign investors own an outsize portion of local bonds at almost one-third the total; public equities have  embedded distortions with MSCI’s heavy Asian and tech weightings, and private equity has no standard index. In the next investing phase these benchmarks will combine, as JP Morgan has already signaled in bonds. Emerging markets themselves, after launching ratings services such as in China and Russia, will develop competing performance measures. They will better reflect so called “South-South” practice and fund flows, as combined market size converges with the 50% share of the world economy. These new gauges will routinely feature in future analysis, as supporting financial market breakthroughs like the BRICs bank, Yuan swap network, and new trade zones in Asia and elsewhere reinforce policy and performance self- determination despite the bumpy journey to a successor era.

 

Corporate Bonds’ Tempered Trillion Dollar Tryst

2018 October 29 by

The primary market external corporate debt drought the past quarter may delay the CEMBI index’s evolution to $1 trillion, with subdued Asian issuance at half the total the main variable, although still a strong force in comparison with the weak Latin America and Middle East regions. Asian supply should stay in the $200-250 billion range this year, despite Chinese property developer under-performance as they were forced to pay half to one percent higher yields compared to 2017, when large maturities were refinanced on favorable terms. In Latin America Argentina and Brazil are on hold with election uncertainty, and the former’s record IMF rescue recently raised to $57 billion to cover all government bond repayments through 2019. President Macri replaced the central bank head, who unlike his predecessor, a fixed-income trader by profession, will refrain from exchange rate intervention under the program’s 35-45 peso/dollar band. Unlike systems elsewhere, Argentina’s banks are not under the microscope since they are liquid and well-capitalized, with credit/GDP low at less than 20%. Investors view the region as more resilient than pockets in Europe including Russia and Turkey and in Asia, predominantly China and India. The state took over Russia’s biggest private lenders, and Turkey’s self-designed medium-term adjustment plan foresees central bad asset absorption or tax write-off incentives. China’s leading commercial banks placed $30 billion in Tier 1 instruments in 2017 to meet Basel ratios, but second-tier names now struggle with the regulatory crackdown on “shadow” products. India’s government agreed to save a major non-bank intermediary after default with its infrastructure importance and intertwined mainstream financial institution ties.

An EMEA tour of trouble spots would add Ukraine, despite 3.5% GDP growth the first half and over $10 billion in remittances from neighbors, as the central bank hiked the policy rate to 18% on public debt servicing spikes though end-decade under the IMF agreement. Elections give former populist President Tymoshenko a chance to return to power, and structural reform progress on business climate and anti-corruption remains halting and could be rolled back under the next administration.  South African polls are also ahead, with President Ramaphosa flailing after initial euphoria amid recession and chronic fiscal and current account deficits. He is unlikely to win a 60% majority the ruling ANC party considers a minimum margin in internal voting at next May’s congress, and his shifting constitutional land redistribution position confused activists and the business community. Stock and bond market outflows persist, and the sovereign rating could tip into across the board junk from all agencies in the coming months. Saudi Arabia will join the EMBI after an admission wheeze by JP Morgan screeners, but the jury is out on the King’s economic repositioning plan as the proposed Aramco IPO stake was indefinitely shelved, with the oil giant borrowing $17 billion abroad instead to buy the state petrochemicals concern. Sub-Sahara Africa has suffered multiple ratings downgrades despite better prices for commodity exporters, with Zambia stuck in Fund talks as it tries to tally aggregate debt owed to China and other bilateral and commercial creditors. Angola has also engaged, and Nigeria elections approach with President Buhari running for another term and a new central bank governor appointment an early agenda item.

 

 

 

Asia’s Equity Faultline Rumblings

2018 October 29 by

Asian emerging equity markets were down 7% compared with the 9% overall decline on the MSCI core Index through September, as Europe, Latin America and the companion frontier gauge fell further. Only Taiwan was positive with a 2% bump, although India, Malaysia and Thailand were close with barely negative readings. China “A” shares, Indonesia, Korea, Pakistan and the Philippines lagged with 10-20% losses, and Bangladesh also dropped double digits on the frontier gauge. The twin benchmarks had few winners, and Argentina and Turkey as crisis epicenters during the period were at the bottom with 50% selloffs.

According to fund trackers like EPFR and the Institute for International Finance, chronic foreign investor outflows, often fueled by ETFs which are one-quarter of the total, brought net allocation below $20 billion year to date, less than half 2017’s sum. Local bond market performance mirrored stocks, even though mutual fund commitments to the debt asset class were higher. Asian currencies slid against the dollar, while the International Monetary Fund maintained the regional economic growth forecast at 6% through 2019 despite festering trade and financial imbroglios with the US. Toward quarter-end money managers were particularly wary of current account deficits in India, Indonesia and the Philippines and possible domestic and overseas private debt overhangs that government fiscal and monetary tools may not readily overcome.

China’s official purchasing managers’ index was just over 50 in September, with export orders at a 2-year low as so-called Phase III tariffs on almost all US shipments are set. The move on its own would cut gross domestic product growth 1%, but JP Morgan predicts offsetting currency depreciation and project and credit stimulus as a complete counter. The Yuan depreciated 4% versus the dollar over the quarter for a 9% six-month slide. Its share of global foreign exchange reserves remains small at 2% according to the IMF, and the central bank pledged future rate increases roughly in line with the US Federal Reserve to prevent misalignment. The People’s Bank signed a memorandum with the Hong Kong Monetary Authority to better drain offshore liquidity, but Moody’s Ratings does not anticipate large-scale intervention.

The rater has a stable banking sector outlook for the coming year under a baseline 6-6.5% growth scenario, as it prepares for further international competition under recent opening gambits to quell Brussels’ and Washington’s access anger. However the Finance Ministry revealed local government debt outstanding in August at $2.5 trillion, approaching one-fifth of GDP, and Beijing reportedly directed state media to downplay risks from this exposure. The household debt/output ratio in turn soared to 50% in 2017, global insurer Allianz calculated. The central and provincial governments plan to issue RMB 750 billion in special infrastructure project bonds to fight export drag, which will add to the load that a new nationwide system is designed to track. Against this backdrop, domestic investors who account for 85% of trading have proven more skittish than foreign counterparts preferring to buy through the Hong Kong Stock Connects to Shanghai and Shenzhen. With the debt-trade blowups neither category was swayed by the news that the rival major FTSE index will increase its mainland share weighting to 5% in incremental stages through end-decade.

India and Indonesia were trouble spots as currencies reached record lows against the dollar with energy-driven external payments imbalances, and authorities responded with rate hikes and import curbs. Presidential incumbents, Narendra Modi and Joko Widodo, head into elections next year with respective 8% and 5% growth, but doubts about investor-friendly policies despite a raft of nominal liberalization and streamlining measures. Indian company earnings continued to advance at an over 10% annual clip to support high valuations, but property and financial industry intertwined woes were illustrated by a major non-bank lender debt default which punctured bullish sentiment. The government sent mixed signals in partially removing restrictions on overseas participation in local and rupee-denominated bonds abroad, while at the same time cracking down on tax and operating advantages of expatriate Indian fund vehicles. Jakarta will review public investment spending with the intent of shifting ownership and management to the private sector, while pressuring international hydrocarbons operators to keep business at home with state giant Pertamina. Along with resolving conflicting approaches, it must also handle natural disasters nearby the Bali IMF-World Bank meetings to magnify investor anxiety.

 

 

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The Middle East’s Reshuffled Index Deck

2018 October 22 by

Middle East stock markets outperformed Asian and other regional rivals on the MSCI Index through the third quarter, as Gulf hydrocarbons exporters in particular benefited from rising prices and graduation and entry moves across benchmark equity and debt gauges. Following the recent elevation of Qatar and the United Arab Emirates from MSCI’s frontier to core roster, Saudi Arabia as the Gulf’s biggest market with $500 billion capitalization will repeat the pattern next year. Those three along with Bahrain and Kuwait will also soon enter JP Morgan’s EMBI sovereign bond index after issuing $125 billion combined the past two years, at an estimated 10-15% weighting.

Fund managers increased exposure ahead of the changes to support double-digit gains, and Egypt and Tunisia were embraced respectively for good marks on its International Monetary Fund program and a 40% frontier index-leading advance. However the rejiggering did not alter underlying dynamics of lackluster 3% average gross domestic product growth by the IMF’s latest forecast, and longer-term  equity market losses, often attributed to the lack of private sector competiveness and economic diversification. A World Bank report published over the summer highlighted the Arab world’s absence of a venture capital and business startup “ecosystem,” and urged thorough public and corporate governance overhauls even with favorable short-term investor positioning.

Saudi Arabia, which will join the MSCI top tier in May 2019, was a main focus as analysts unraveled the contradictory implications of Crown Prince Mohammed bin Salman’s future reform vision, indefinite delay of the Aramco international IPO with a shift to state petrochemical giant stake buyout, and diplomatic spats before the disappearance and alleged murder of a prominent journalist in Turkey, most notably in the cutoff of commercial and cultural ties with Canada over criticism of a women’s rights activist’s detention. MBS has plowed $45 billion into a tech fund run by Japan’s Softbank, and announced a bet ten times that size on a state of the art new Red Sea city during his global investor forum debut a year ago. Reportedly he was at the top of the acquirer list as electric car entrepreneur Elon Musk considered New York Stock exchange delisting. In the Gulf Cooperation Council, he spearheaded the blockade to isolate Qatar for presumed Iran sympathies,  as the 15% equity market jump there through September were identical. The fragmentation has hurt GCC corporate earnings barely increasing at a 10% annual pace, and disrupted banking ties as exposure from the neighboring Turkey crisis worsens.

GDP growth will only be in the 2.5% range through next year despite oil price rebound to $80/ barrel, on subdued construction from cancelled infrastructure projects and new taxes and subsidy cuts eroding consumption. Spending rose under revised fiscal targets which still project a 3% deficit, while the current account surplus will reach 10% of GDP as reserves improve to $525 billion. The $250 billion Public Investment Fund, the sovereign wealth vehicle where the Crown Prince seeks to boost assets to $400 billion by end-decade, did not completely draw on its holdings but instead borrowed $10 billion from an international bank syndicate so Aramco, rather than pursuing its landmark flotation, could purchase $70 billion ownership in the Sabic chemical group. Government officials, after touting an IPO in world financial centers, may have balked at rigorous disclosure despite hints in Hong Kong and elsewhere that rules could be adjusted.

Egypt was essentially flat as the top core index regional component through the third quarter, and Saudi Arabia and the UAE represent one-tenth of foreign direct investment and the overwhelming remittances source, which along with tourism doubled the services surplus to $10 billion, according to the latest figures. Exports from the new Zohr gas field should shrink the 2.5% of GDP current account gap. For the 2018-19 fiscal year growth is forecast at 5.5%, but inflation is almost 15% after another round of fuel subsidy cuts at IMF instigation. The central bank maintained an 18% policy rate which originally prompted $20 billion overseas allocation into local Treasury bills, but the amount fell $5 billion in August as President Abdel Fattah al-Sisi further cracked down on military, media and former regime opponents. Ex-President Hosni Mubarak’s sons were arrested for previous stock manipulation to underscore current enthusiasm risks with their own hint of orchestration.

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The Asian Development Bank’s Divergent Bond Opinion

2018 October 22 by

The September update of the Asian Development Bank’s Bond Monitor, tracking trends through the second quarter in nine local markets, hailed “economic stability” and modest growth to $12.6 billion amid a welter of “downside” trade, debt, commodity and asset class risks. Monetary tightening in the US and EU contributed to currency depreciation in most of the region, as emerging market upsets in Argentina, Turkey and elsewhere spilled over to spur foreign investor outflows especially in Indonesia and Malaysia. Yields diverged from June-August, and rose in Indonesia and the Philippines after serial central bank rate hikes. Increased tariffs on goods between the US and China ratcheted Asia-wide tensions, reflected in both debt and equity market losses over the period.

Quarterly issuance was up slightly in all countries except Vietnam, with the government-corporate respective shares at two-thirds and one-third of the total. Bond market size as a portion of gross domestic product was 70%, with Korea and Malaysia continuing to hold the largest fractions. The ADB’s July revised forecast maintained East Asian growth at 6% this year and next, with China due to slow to below 6.5% and ASEAN members steady at 5.2%. It presumes global trade will expand 5% annually supported by healthy domestic demand, while inflation remains under 3%. However local bonds will stay in near-term danger from “external and domestic uncertainties” including higher oil prices, private debt and political and geopolitical transitions, according to the report.

Credit default swap (CDS) spreads and volatility also spiked, as the JP Morgan external bond EMBI index fell into negative territory. Foreign holdings dropped 4% to 25% in Malaysia, in part due to doubts over the returned Mahathir Mohamed administration. In Indonesia they retreated marginally to 38%, Thailand was constant at 15%, and in China and the Philippines the portion stayed around 4%. “Worrying” turbulence in large emerging markets Argentina and Turkey, with steep dollar-denominated debt and “poor macroeconomic fundamentals,” provoked broader selloffs, including the Indian rupee hitting a record low against the greenback. The ADB publication does not follow India, but examines Hong Kong separately where the monetary authority intervened to defend the local dollar.

Asian economies in comparison have better current account positions, and available policy tools such as interest rate increases to strengthen confidence, but officials should be on alert with “febrile” global markets, the Monitor warns. The US Federal Reserve’s scheduled benchmark lifts and liquidity withdrawal, and bilateral trade disputes with Washington along with the threat of its World Trade Organization exit, are factors in bond pressure, but consumer and investor sentiment remain intact overall. However indirect issues from oil price swings to diplomatic sanctions and crypto-currency threats could tip the balance, in the ADB’s view.

The second quarter 3% growth was double the first quarter pace, and all individual markets outside Vietnam advanced. China is 70% of the amount outstanding, and its size was $9 trillion at end-June with activity driven by local government debt for bond swaps. Korea’s number two market at $2 trillion or 15% of the total, experienced both solid official and corporate placement. The aggregate ASEAN group grew 2.5% to $1.3 trillion, with Thailand the biggest at $370 billion, followed closely behind by Malaysia’s $340 billion, where 60% is Islamic-style sukuk. Singapore’s $280 billion owed mainly to liquidity-draining operations, and Indonesia’s $180 billion had unsuccessful auctions as corporate bonds barely budged. The Philippines and Vietnam as the smallest markets also saw weak appetite, with the latter outright shrinking to $50 billion. Cross-border local currency issuance in turn sank one-third to $5.3 billion in the quarter, with China accounting for almost half, followed by company and sovereign names in Korea, Singapore and Malaysia.

Dollar, euro and yen-denominated international volume likewise dipped $20 billion to $170 billion through July, according to transaction trackers. Among other deals Vietnamese real estate and Cambodian hotel operators featured, with the latter a debut from the country with a 9.5% yield. The former’s undeveloped domestic corporate bond market received a blow, when the central bank tightened rules on bank buying to mandate minimum credit ratings. In China on the other hand, the collateral range was extended to facilitate green and agricultural bond acceptance in a much harsher general Asian climate by the ADB’s weather vane.

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Enterprise Funds’ Mooted Makeover Formula

2018 October 15 by

As the US gears up, after a similar move in Canada, to form a one-stop development finance operation to challenge other bilateral providers with deeper pockets and more powers, think tanks have urged expanded tools and modernization of decades-old concepts like enterprise funds. They were launched originally in the 1990s to inject venture capital and business and management knowhow into former Communist countries, and adapted more recently for the post-Arab Spring with efforts in Egypt and Tunisia. A new Center for Strategic and International Studies paper hails their “unique” contribution as an aid and foreign policy instrument, offering economic development and private sector expertise and returning budget appropriations in full without additional bureaucracy. They allocated $1.5 billion to generate multiple investment sums, original appropriations return in full, new companies and industries, and broader private equity activity. The CSIS calls for a “third wave” with expanded geographic, co-investor, technology and thematic scope. The Middle East would remain a focus in Jordan and Lebanon, and the mass migration “Northern Triangle” in Central America as well. Outside impact investors seeking non-financial returns could join, and mobile banking and on-line platforms would be targets. The Ex-Im Bank, AID and OPIC can build on the 1990s track record which leveraged $7 billion in additional investment and created 300,000 jobs, with the first Polish one spun off as Enterprise Investors, now the country’s largest player. Among global challenges for revised structures is the forced displacement crisis, with 65 million fleeing conflict and despair, and the demographic youth bulge in Africa, where 100 million between the ages of 15 and 25 will add employment and population pressures. Donors give $170 billion now in aid against the trillions of dollars needed to meet the Sustainable Development Goals. The World Economic Forum estimates “blended” facilities as a public-private hybrid with environmental, social and commercial criteria at $35 billion, an amount equal to specialist impact funds with energy, health and agriculture portfolios.

Another imperative is “countering Chinese soft power” through an array of schemes and lenders, including Belt and Road and the Asian Infrastructure Investment Bank, with $100 billion in capital and a planned $10-15 billion annual credit pipeline. Equity and skill-intensive enterprise funds offer a distinct alternative, and provisions of the proposed legislation for creating a new development finance agency authorize them. They must “crowd in” private capital where access and liquidity gaps exist, and boards comprised of proven professionals should be independent and flexible. Operations should be decentralized with qualified local staff a recruitment priority, and business and policy metrics for success defined in advance, such as sector-specific indicators or governance and regulatory progress. A regional approach may be better for small countries to achieve economies of scale and cross-border demonstration effects, and the US innovation can openly compete with Beijing in places its influence is outsize such as in Ethiopia and Zimbabwe, the Center advises. In the former American investment is less than one-tenth the Chinese $7 billion. In Haiti bilateral aid is $375 billion with no venture capital, and longer term North Korea could be a pilot provided nuclear missiles are dismantled or no longer on the radar under inspections Washington and Seoul seek.

 

Central Asia’s Adjacent Agitation Angle

2018 October 15 by

Central Asia and Caucuses markets with close ties were whipsawed by currency and securities selloffs in Russia and Turkey the past month, with the former less severe and mainly due to heightened Western sanctions odds rather than economic policy miscues. Azerbaijan, Kazakhstan and Georgia with internationally traded bonds and stocks suffered damage from the respective lira and ruble declines around 40% and 15% against the dollar this year. Ankara has no formal grouping like the Moscow-led Eurasia Economic Union with a common external tariff, but established a Baku-Tbilisi-Kars rail connection and spearheaded a trade and investment campaign with the “Stans,” including recently opened Uzbekistan after longtime ruler Islam Karimov’s death.

Turkey’s central bank against  President Tayip Erdogan’s wishes hiked benchmark interest rates 6% to stem collapse, while Russia, with budget and current account surpluses and $450 billion in foreign reserves, has not been as concerned about the biggest depreciation since 2016. Russian stocks lost 5% through August compared with Turkey’s 55%, but its local and external bonds were walloped on reports the US Treasury Department may consider stricter asset manager bans under new congressional legislation. Sovereign wealth funds in Azerbaijan and Kazakhstan likely have them in their portfolios as well, but the cross-border fallout was further reaching and mixed with existing banking system, commodity and competitive pressures.

Kazakhstan’s MSCI frontier index component was down only 3% against the composite 15% drop through August, but the currency plunged to 380/dollar into September, around the record low since previous devaluation and flotation. The 15% tenge slide so far this year is in line with the ruble, but local speculators, with their own “carry trade” into high-yield bank deposits, and opposition political parties warning of a crash were also blamed.  Analysts argue it has long been overvalued and should be in the 420 range, and that hydrocarbon and mining export seasonality will bring final quarter appreciation. First half gross domestic product growth was 4% on rising oil prices despite construction and services weakness, with inflation at 6% and the current account in slight deficit. International reserves were $90 billion, with $50 billion in the stabilization fund that can be tapped for exchange rate intervention.

Before the latest tenge scare, the capital Astana celebrated its 20th anniversary and President Nursultan Nazarbaev’s birthday in July with a grand party, where provincial officials offered an estimated $20 million in gifts. Around the same time the state telecoms operator took over the Nordic and Turkish-owned mobile phone leader, a transaction giving it a two-thirds industry share and spooking foreign investors. Critics claim it will hurt competition and new technology and alienate potential buyers, as big government companies are to sell partial stakes on the stock exchange in the coming months. The International Monetary Fund in turn in its September Article IV report called attention to remaining major bank “challenges and risks,” despite billions of dollars in support including for a merger of the top two lenders. The next ranking institution Tsesnabank disclosed a 30% liquid asset decrease, as officials agreed to purchase a 1 billion euro agricultural credit portfolio while the central bank injected another 350 million euros. Its management was reshuffled with the chief executive ousted, and rival Eurasian Bank with almost $3 billion in assets likewise announced a liquidity squeeze. Private sector credit growth has tentatively resumed at a 10% pace, in part driven by the President’s “7-20-25” discount mortgage program unveiled in March, but these rescues reflect IMF views that bad debt resolution and business model overhaul are still lacking.

Azerbaijan’s thinly-traded sovereign debt was unnerved by dual Turkish and Russian economy exposure, and Pasha Bank has an Istanbul subsidiary which issued $25 million in its own bonds this June. GDP growth and consumer inflation are running at 1.5% and 3% respectively, and a strong current account surplus and foreign direct investment inflows continue to back the new dollar exchange rate peg. However the central bank is carefully monitoring local saver dollarization preference, with the deposit ratio currently at 70%, as well as frequent private sector hard currency borrowing. The state oil company has $20 billion in investments in Turkey ravaged by the lira’s meltdown, which will likewise dent tourism numbers into neighboring Georgia that had increased 20% annually, and bleed into external bond prices.

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