Exotic Sovereigns’ Pedestrian Sustainability Sense

2017 October 15 by

The dozen countries in JP Morgan’s frontier NEXGEM index continue to outstrip the main external bond gauges as spreads over US Treasuries are at a decade thin 100 basis points, as public debt jumped an average almost 15 percent over the period to 70 percent, resurrecting sustainability fears after large official relief programs. Economic growth and exchange rate stress testing suggests medium term deleveraging could stabilize ratios, and domestic borrowing would increase its relative portion. However levels in Ghana, Jamaica, Mongolia and Ukraine would rise 5-15 percent and translate into higher spreads under normal differentiation, which may not apply currently with sloshing global liquidity and investor positions remaining underweight. Since last year fundamentals have “decoupled,” but the relationship with most specific credits has held up since index introduction, according to the sponsor. In Central America and the Caribbean Moody’s downgraded Costa Rica in February one notch to lower speculative status, a further slip from the previous investment-grade rating. Another blow looms on the horizon with promised fiscal consolidation failing to balance spending and revenue with debt/output already at 65 percent. The government is hamstrung entering next year’s election with control of only one-fifth of legislative seats. Earmarks take up 90 percent of appropriations, and despite announcement of a “budget emergency” and likely wider foreign investment scope for local debt decisive action will await the new administration. The Dominican Republic in contrast was upgraded in September after a well-received $500 million international issue, with debt-to-GDP twenty points less and 5 percent growth on track, with good remittances and tourism before the spate of area hurricanes. Ecuador’s public debt doubled the past five years with oil price collapse and heavy state infrastructure and social outlays. Its main overseas creditor was China until market return in 2014, and President Moreno has yet to signal a break from the loose purse strings of his predecessor and socialist policy champion Correa. The Vice President has been implicated in another Odebrecht bribery scandal around previous construction projects, and dollarization is set to continue with business and financial community support despite populist backlash. Major external bond maturities are not due until end-decade, and relations have resumed with the IMF for possible emergencies beyond a recent earthquake when it was tapped for aid.

El Salvador’s debt stands at 65 percent of GDP and the two main political parties have been at loggerheads over pension reform after missed payments. The opposition recently managed a compromise to hike the contribution rate to 15 percent and extend retirement age over time. The net present value of liabilities is still estimated at 90 percent of national income only expanding at a 2 percent annual pace. Private pension funds must buy the government notes to cover obligations, potentially subjecting them to portfolio and default risks. Jamaica with its world-beating 120% of GDP load has been under IMF supervision for five years, and completed a series of local and foreign debt swaps. A three-year $1.5 billion standby was inked in 2016, and the local dollar continues to depreciate as more flexible currency and inflation-targeting regimes are adopted. A 5 percent-plus budget primary surplus has been regularly achieved but the wage bill has been pared back slowly amid glacial 1% growth.

Household Debt’s Untidy Room Ramifications

2017 October 15 by

The IMF’s fall Global  Financial Stability Report cited the development contribution of rising emerging economy household debt the past decade to a median 20 percent of GDP, one-third the industrial world level, but cautioned about longer term recession and crisis scenarios as deleveraging occurs with overhangs. Developing countries may be “less prepared” to handle the squeeze with institutional limits such as missing personal bankruptcy codes. For the highest debt quartile the average was one-third of GDP in 2016, in part due to cross-border liquidity expansion from loose monetary policy. Credit access can lift domestic demand and consumer wealth, but future adjustment may be sharper with global interest rates around zero for so long. Housing and other investment returns may not meet expectations and borrowing often goes for non-productive purposes. From the supply side bank balance sheets can suffer, and risks be exacerbated with foreign currency-denominated loans. Ratios are under 10 percent of GDP in Argentina, Egypt, the Philippines and Ukraine; and over 50 percent in Malaysia, South Africa and Thailand. One-third the total is mortgages and most are recourse-based, allowing other family collateral seizure upon default. In advanced economies Australia and Canada stand out for their breakneck pace beyond historical norms, and leading emerging markets Chile, China and Poland have also built up fast. Since 2008 the yearly clip was 6.5 percent, well over output growth. Low income households are typically excluded in early industry stages but often turn to micro-finance sources that may not be tracked or regulated. Econometric models indicate that a 5 percent household debt increase over 3 years will halve future growth over the same period. The drag is mainly due to the mortgage element that accompanies house value correction, especially in emerging markets with narrower asset class diversification. An open capital account and fixed exchange rate heighten risks, including banking crisis probability that spikes at 65 percent of GDP, according to empirical work. Financial sector depth and quality bank oversight can cushion the medium-term negative correlation, and stricter capital requirements and dividend suspension may be effective counters. Shared credit registries and education to ward off predatory practices are important steps, the Fund asserts. Macro-prudential measures, such as on loan-to-value and debt-service-to-income, and consumer protection rules are valuable. Mortgage contracts can also be designed for more risk-sharing and resets in the event of extreme circumstances, the chapter suggests.

South Africa’s multinational banking groups have been targeted by ruling party and anti-poverty activists for loan forgiveness, amid accusations of deceptive and punitive rates, as debt burdens have wracked private consumption. A dedicated retail provider with close ties to them was forced to shut down with an extreme portfolio and capital gap, as the central bank now comes under broad pressure to focus less on financial stability than economic aid. Lawmakers reportedly are considering charter changes which would mandate stronger defense of average savers. International financial services firms have likewise come under harsh view with questionable allegiance to the business elite lodged in families with fortunes often predating independence and the end of apartheid. A newcomer clan, the Guptas of Indian background, allegedly worked with foreign auditors and management consultants to misrepresent its company accounts and wangle insider deals with the Zuma administration leaving a household odor.

Stocks’ Crisis Retrospective Run-Ups

2017 October 9 by

Thirty years after the 1987 New York Stock exchange 25 percent crash and a decade on from the 2008 financial crisis, MSCI core and frontier indices turned in respective 25 percent and 20 percent gains through Q3 for the best performance since 2010. Only Russia and Gulf country indices under trade and financial boycotts were down, alongside refugee emergency-hit Jordan and Lebanon, recent main gauge returnee Pakistan and tiny Botswana. The BRIC component overall was superior with a 30 percent advance, while Poland (+45 percent) led the big roster and Argentina and Ghana on the other one were ahead 60-70 percent. Zimbabwe recorded a stratospheric 250 percent jump through September with the stock exchange the only outlet to preserve savings, with draconian bank deposit withdrawal limits and new borrowing from the African Export-Import Bank to inject emergency dollars. China “A” shares after MSCI’s marginal index addition have surged to almost narrow the gap with the broader mainland 40 percent increase ahead of the Party Congress due to reappoint President Xi and his designated team, which could include well-known economic reformers and technocrats. On the eve monetary policy was loosened through a reserve requirement nudge for dedicated small business credit, as authorities seek otherwise to cap real-estate related personal lending.

Elsewhere in Asia Korea (+30 percent) brushed off border bellicosity, amid harsh rhetoric from Pyongyang against Seoul and the US and a series of test nuclear missile launches. Tech firms were in a sweet spot in the earnings and global manufacturing cycle, helping to overcome Chinese restrictions on consumer goods and Washington’s threat to renegotiate its bilateral trade pact. India (+22.5 percent) faded on demonetization and national sales tax hangovers which have crushed average entrepreneurs and assembly operations, while Indonesia was another 10 percent behind as religion and politics mixed more dangerously with loud calls for more action to protect the Muslim minority Rohingya fleeing Myanmar for makeshift camps in Bangladesh, where the market rose almost 10 percent.

In Latin America Brazil (+25 percent) roared back during the quarter after lagging, as investors were spared a second impeachment even though President Temer remains under criminal investigation  for alleged bribery and his party and allies are unlikely to pass overdue state pension cutbacks to restrain the 10 percent of GDP fiscal deficit. Mexico had the same showing as Pemex private sector exploration auctions proved popular and NAFTA reworking talks appeared to dismiss total breakup with Canada’s views closely aligned. Chile (+30 percent) was at the crest before the first round of presidential elections likely to return free market business magnate Pinera to the post. In Europe behind Poland, Hungary and Turkey each climbed over 25 percent on domestic demand juiced by state lending programs as relations further soured with the EU. Prime Minister Orban has defied Brussels on immigration quotas and President Erdogan accuses it of reneging on visa-free travel promised in exchange for additional Syrian refugee acceptance on transfer from Greece. There after Europe’s biggest run last year improvement is just over 10 percent as banks await another cycle of asset reviews which may reflect crisis respite short of repair to again rouse international community urgency.

Refugee Bonds’ Bangladesh Rohingya Crisis Bound

2017 October 9 by

With almost half of Myanmar’s one million Muslim Rohingya population already pouring into next-door Bangladesh by land and sea to flee military and Buddhist civilian attacks, host government prime minister Sheikh Hasina and her ruling Awami League party have appealed to the international community for help in defraying the annual costs of the mass influx, estimated by a local economist at $800 million-$1 billion. The Rohingya have long fled their homes in Rakhine state, where they are denied citizenship, for South Asia including India and Pakistan as well as Indonesia, Malaysia and Thailand, and the refugees have both integrated into urban and rural cities and been isolated in separate camps and centers. Domestic budgets have largely absorbed the costs, and wealthier East Asia’s fiscal positions have left them in better shape to receive “boat people” waves not experienced since Indochina’s post war aftermath four decades ago, when global relief and resettlement agencies took joint publically-funded action. In the current crisis regional officials have no such mechanism for quick collective response but they could call on financial markets which have since developed, and conventional and Islamic-style sukuk bonds in particular promoted under the Asian Development Bank’s aegis, to promptly raise the billions of dollars needed in Bangladesh and elsewhere as specialized refugee instruments.

Bangladesh’s capital markets are “underdeveloped,” according to the IMF’s June Article IV report, and its external sovereign bond and stock market skidded with the displaced person arrival, from a 5% MSCI frontier index gain through August. No facilities or supplies were in place to accommodate hundreds of thousands of Rohingya amid the already poor physical and social infrastructure even though the country has graduated to lower middle-income status with per capita income at over $1500 now surpassing Pakistan’s, as touted in an Economist magazine article. Despite recent monsoon rains which again claimed hundreds of lives and vast crop land, GDP growth is projected again this fiscal year at 7% as textile exports and Gulf remittances regain double digit increases. In July and August they each were up 15% to almost $7 billion and $13 billion respectively, although garment prices dropped overall and the remittance number was skewed by the Eid holiday celebration. Private investment remains weak at under 25% of GDP, and a bill has been submitted to parliament to create a “one stop shop” to lift Bangladesh from the bottom of World Bank Doing Business ranking.

Inflation approaches the economic growth pace with higher food prices, but the central bank has kept the benchmark interest rate on hold. The budget deficit forecast is 5%, but a new value added tax has been introduced and public debt is stable at 40% of GDP. The current account is roughly in balance and international reserves over $30 billion cover nine months of imports, but a proposed sovereign wealth fund would initially take $2 billion from the pool. The exchange rate has softened slightly in nominal terms to above 80/dollar with selective official intervention, and the IMF urged more flexibility as a priority Article IV recommendation.

Banking sector problems, with a 25% bad loan ratio at state-owned units with one-quarter of system assets, are a major chokehold on broader financial market development. Capital adequacy is low at 6%, and it is still tied up in stock market investment after a crash five years ago prompted regulators to order reduced exposure. Government influence harms bank performance, and the Capital Market Master Plan adopted in the wake of the 2011 crash has a large unfinished agenda, including on mutual and pension fund and corporate bond launch, the IMF survey admonished.

Bangladesh may be limited in designing and supporting refugee bond issuance on its own, but could turn to the Asian Development Bank for credit enhancement and technical assistance and also team with neighbors like Malaysia in particular. It hosts a sizable Rohingya contingent and is the biggest sukuk center, accounting for over half the $60 billion total worldwide through the first half, and Prime Minister Najib Rezak raised the issue as a financial and security challenge during his White House visit last week. The Middle East with its Syrian displaced population has shown interest in such capital market innovation, but Asia with its decades of experience with bond promotion and greater depth could commission immediate pilot projects corresponding to Rohingya crisis urgency.




Saudi Arabia’s Dulled Driving Ambitions

2017 October 2 by

Saudis shares stayed mildly positive on the MSCI index, as another big sovereign bond issue was prepared to avoid dipping into reserves and Vision 2030 economic overhaul targets were pared back amid reports of political purges within the ruling royal family. A modernizing wing could claim traction as women finally won the right to drive autos after years of protest, although it will not take effect until next year as religious conservatives vow to scuttle the decision. Aramco is still plodding ahead on its IPO as oil reserves are audited and balance sheet information may then dribble out once international listing locations are finalized. Only a 5% stake will be offered, but the megadeal has spawned a raft of other Gulf state energy company taps as over 30 IPOs worth $1.5 billion were completed through September, more than in 2015 and 2016 together. By contrast Moody’s estimates another $30 billion in external bond sales after last year’s debuts. Even with petroleum prices at $50/barrel to moderate the fiscal deficit, it will come in around $50 billion on 1-2% GDP growth, as the National Transformation Program Prince Mohammed bin Salman introduced in 2016 with global management consultant advice was forced to “adjust and adapt” after state employee allowances were reinstated. Domestic energy subsidies were to be cut further in July, but officials have turned wary with unemployment at 12.5 percent and opted instead to concentrate on promoting private sector-led industrial projects. Privatization deadlines have also slipped to the end of the plan period although a dedicated agency was created, and foreign ownership was liberalized for the education and health sectors while curbs remain on stock exchange access. MSCI dashed core roster graduation hopes in its last review, when it urged authorities to lift quotas and also modernize law and regulation for investor protection.

On that front with specific application to Islamic finance, the showdown between UAE-based Dana Gas and its bondholders on the fate of a $700 million sukuk is under close scrutiny. The company missed payments in the past on contract arrears in Iraq’s Kurdish province, which recently voted for independence in a referendum, and seeks to unilaterally restructure the instrument on the basis of retroactive noncompliance with Shariah code. Attorneys and religious scholars have waded into the fight waged at London’s Royal Court, with global houses like BlackRock maintaining big positions. The saga has cast a market pall with an issuance halt and higher yields, and after the London battle a UAE tribunal will pass judgment in December. The imbroglio has a diplomatic equivalent with the Gulf Cooperation Council member boycott against Qatar for alleged Iran and terrorist sympathies. Both sides have waged aggressive international media campaigns, and Moody’s calculates a 25 percent of GDP cost since embargo launch in June, with $30 billion in capital outflows including 10 percent banking system deposit withdrawal. Trade dropped 40 percent, with two-thirds of construction materials routed through Saudi Arabia and the UAE for offshore gas and football World Cup projects. US and Kuwait mediation attempts failed, and the sovereign rating outlook turned negative as the agency report cited an indefinite pause in regional infrastructure and capital market development drivers.


Ukraine’s Backward Leaning Liability Lull

2017 October 2 by

After a Moody’s ratings upgrade from the low junk category, Ukraine bonds rallied on a post-default market return as $3 billion in issuance split between rollover and new money was doubly oversubscribed at a 7.5 percent yield around the current secondary level. Buyers seemed to slough off concerns about the war with Russia, which won initial judgment in London for payments outstanding under the previous regime, and the 2015 20 percent haircut as the transaction followed a string of other far frontier sovereign bond taps including Iraq and Tajikistan. President Poroshenko called it “unbelievably positive” and the Finance Minister “transformational” despite lapses in the $17.5 billion IMF program now with lukewarm support from the Trump administration and subject to “backward risk” in the words of the Fund’s number two official. GDP growth is now positive but a long way from overtaking the near 20 percent output collapses from 2014-15, and energy, pension and anti-corruption reforms have stalled after early momentum. The courts have interfered with actions taken by the new integrity bureau, whose head has been publically threatened by the media and lawmakers under investigation. The President himself, with his popularity at a single-digit low, has fended off attempts by the panel to pursue allegations against his intact business empire. Heading into winter natural gas tariff raises are overdue for state company cost recovery, which will sustain 15 percent range inflation. A full accounting of the hole in the public pension system has yet to be made, and bank cleanup is still proceeding after the takeover of Privatbank, where auditors Price Waterhouse were found to miss a $6 billion balance sheet gap.

In Russia, the only MSCI core stock market in the red through August, the central bank uncovered a bigger defect at “systemically import” Okritie Bank, the leading private lender. The new local rating agency set up by the government before had downgraded it, spurring a deposit run. Supervisors accused it of “sugarcoating” the books by inflating the value of Eurobonds acquired as Western sanctions for the Crimea invasion restricted external investment. The bank’s head was a well-known trader and bought a portfolio of smaller institutions with cheap post-2008 crisis state funding. With nationalization through a 75 percent stake management was dismissed and another shaky private competitor, B&N Bank was also taken over soon after. With the moves Sberbank, with over $400 billion in assets and a 25 percent earnings jump the last quarter, solidified its dominance as analysts predict the official share of the sector could reach 80 percent. Their support could be essential abroad as well as Rosneft maneuvers to provide Venezuela a credit lifeline in exchange for additional oil field access and ownership. It already retains the right to seize 49 percent of US outlet Citgo in the event of Caracas’ joint venture lapses, while Treasury Department limits may hinder eventual overall workouts with a future debt investment ban. Meanwhile, VTB the second leading government provider, is under fire in Washington for its reported links with the Trump campaign including a post-election meeting with his son-in-law whose New York properties were in need of refinancing under backward cash flow.


Global Refugees’ Brimming Business Case

2017 September 25 by

A new Center for Global Development study commissioned by the Tent Foundation, started by the chief executive of yogurt maker Chobani to organize US company efforts to tackle the refugee crisis in the Middle East and elsewhere, found that global business concentrated on the three areas of hiring and supply chains, impact investing and goods and services provision alongside broader policy shaping efforts. Social and reputation benefit, brand loyalty, and bottom-line profitability are the main motives, although agreed standards are lacking for accountability and results. The world’s close to 25 million refugees are displaced 10 years on average and over half are in cities, and “sustainable engagement” beyond periodic product and expertise donations increasingly applies, as with furniture manufacturer IKEA’s transition from energy and housing help to artisan employment in Jordan. The report notes that work, travel, education and childcare restrictions continue to block progress, despite evidence that migrant inflows can spur occupational and wage improvements for host populations. In offering positions Starbucks is a leader with a commitment to 10,000 retail slots, although in many countries work permits are unavailable and transport costs prohibitive. In Jordan only a quarter of the 200,000 promised labor authorizations under a concessional World Bank loan and EU trade preference deal have come through. Specialized initiatives like WEConnect and Building Markets aim to link women, entrepreneurs and small business to multinational company supply networks, and a quick review of 20 low and middle-income economies with the most refugees cites consumer products, agriculture, retail and information technology as promising sectors. Development agencies facilitate and sponsor new arrangements, such as with US grocer Safeway in Jordan and the UN’s craft enterprises in West Africa. Hydrocarbons could also be an entry point, and reconstruction in Iraq and Syria could take off eventually as dedicated matchmaking hubs promote partnerships, as the guide recommends.

Impact assets that seek environment and social alongside financial returns are estimated at $115 billion, and diaspora communities, such as Somalis in Kenya, also mobilize capital for frontline state high-risk allocation. They can take stakes in startup operations like the 10000 Syrian-owned ones in Turkey which average ten employees and contribute $330 million to the economy, according to a recent census. However global investment houses tend to shy away with the small scale and difficult to measure metrics, although project specific humanitarian or development bonds, with a donor or government paying upon achieved outcomes, may be a refugee channel. They are under preparation in the Middle East, and group loans to Syrian borrowers are offered through on-line site Kiva. As “base of the pyramid” consumers, the financial and telecoms sectors are ripe for innovation, and Mastercard has created digital vouchers and prepaid debit cards in cooperation with relief agencies, and European phone company Orange has built international dialing and banking infrastructure in Uganda. The paper concludes that these early models for refugee business may be inspiring but still lack a “rigorous evidence base.” It advises establishment of ethical standards, evaluation tools, country dialogues and research centers to solidify commercial awareness and lay the foundation for routine participation that lasts apart from the Tent label.

The BIS’ Deliberate Debt Composition Unraveling

2017 September 25 by

The Bank for International Settlements, in its latest quarterly survey of cross-border banking and bond flows, unveiled a deeper statistical set covering euro and yen-denominated activity and a recent profile of emerging market government patterns in two dozen countries. The amount doubled the past decade to almost $12 trillion, with China and India accounting for three-quarters. Composition “changed significantly” with 80 percent through local and international bonds compared with 60 percent fifteen years ago, and concentrated in the former at fixed rates and longer maturities. The foreign currency share halved over the period to 15 percent, and the dollar’s portion was 75 percent. International issues comprised one-third of outstanding official securities in Saudi Arabia, Turkey, Indonesia and Poland, and Mexico is the top issuer overall with almost $70 billion placed over several decades. With few exceptions like Argentina, where over half of Treasuries are dollar-quoted, this structure has progressively faded as Turkey for example redeemed the remaining stock five years ago.  Maturity has “risen sharply” and is just below the advanced economy 8-year average, with South Africa’s the longest at 16 years, outpacing the US, Australia, Germany and Canada. The fixed-return slice in turn jumped to 75 percent from 60 percent in 2000, in contrast with the industrial world’s 90-95 percent standard. Malaysia, Taiwan and Thailand issue only this type, and Chile’s fraction of the total quadrupled to 40 percent since 2005. Inflation indexing has also taken off in Latin America in particular, and is one-third of Brazil’s local debt. The BIS concludes that currency mismatch and rollover risks are reduced to aid sustainability, with the caveat that longer duration could now further erode market value with future global interest rate rises.

The quarterly roundup tracked less than 5% increases in cross-border bank claims and debt placement worldwide, with dollar credit to developing country borrowers at $3.5 trillion at end-March.  Middle East and Africa oil exporters got another $60 billion and Asia and Latin America $40 and $20 billion respectively, while Europe allocation fell $25 billion. Credit above GDP growth trends signal alarm in China and Hong Kong, although debt service ratios remain manageable, according to the report.  Industry association EMTA’s Q2 trading volume tally came out at the same time, with a 15 percent annual and quarterly decrease to $1.1 trillion attributed to greater passive ETF inflows. Local instruments were over 55%, with Brazil, Mexico, South Africa, China and India the favorites.  Eurobond action was close to $500 billion, again with Brazil at the top followed by Argentina.  CDS turnover not yet in the ETF frame was also down 9% to $260 billion. With domestic bond market opening Chinese assets now account for almost one-tenth of activity, helping to offset uncertainty in other asset classes like private equity which has noticeably slackened since 2015, according to a September Preqin study.  Only forty funds worth under $10 billion have closed year to date, with deal value at $35 billion. It casts a shadow on the region as the biggest market, but two-thirds of fund managers polled expect to deploy more capital over the coming year, despite exit and valuation concerns that can decompose the landscape.



Pakistan’s Graduation Gravity Spell

2017 September 18 by

Pakistan shares continued at the bottom of the Asian pack, with an over 10% loss through August, as a typical pattern of post-upgrade retrenchment after rejoining the core MSCI Index combined with extended bouts of political and geopolitical and balance of payments instability resurrecting IMF qualms after the first-ever program completion in 2016. Recent graduates from the frontier to main gauges Qatar and the UAE telegraphed the correction path after large run-ups in advance as they suffered their own diplomatic and fiscal setbacks, but Pakistan’s were more pronounced in view of its lower per capita income developing country status. Prime Minister Nawaz Sharif, a nominal economic reformer, was forced to resign ahead of 2018 elections after a military-influenced court investigation to face corruption charges, although his party, now led by his brother, continues with a parliamentary majority.

The opposition PTI, headed by former cricket champion Imran Khan, has criticized the Sharif family’s dubious wealth accumulation but not yet offered a convincing program to sway the establishment business and financial communities, which increasingly look to Asian alongside traditional Western partnerships again eroded by US President Trump’s rhetorical hard line in his new Afghanistan strategy. With these elements unfolding, the currency dropped to a record 105 low against the dollar, as the central bank and finance ministry accused each other of mismanagement, underscoring lingering policy and performance doubts highlighted by the IMF’s July Article IV report. The new Prime Minister, Shahid Khaqan Abbasi, denied formal devaluation but will reduce “unnecessary” imports to cushion international reserves, down one-quarter to $14 billion from last October’s peak.

The Fund’s retrospective of the 2013-16 arrangement praised macroeconomic and reform steps, but pointed out fresh risks alongside “long-standing” fiscal and current account deficit, public domestic and external debt, financial and power sector, and poverty and unemployment challenges. GDP growth this fiscal year will be above 5% due largely to China’s Economic Corridor infrastructure building, while remittances from the Persian Gulf in particular are “sluggish.” With higher food costs from lagging agriculture headline inflation is also heading toward 5%, and the central bank may have to shift its monetary stance from accommodation to tightening, especially with additional exchange rate pressure. The fiscal position remains precarious, with the gap running below target at 4% of GDP on flagging tax collection amid widespread evasion, which was a chief priority under the Fund facility. The trade deficit was a record $40 billion for the year ending in June, with reserves just over three months imports as the central bank’s foreign exchange derivative obligations nearly doubled to $3.5 billion. Bank private credit is up almost 15% annually but gross bad loans are 10% of the total, as small banks are undercapitalized and deposit insurance is just about to launch.

State power company arrears built up again to the equivalent of 1% of GDP in the first half of the fiscal year, as the stock exchange privatization of distributors, designed to improve governance and payment, remains delayed. With the chronic energy crunch natural gas supplies also languish with 10% losses, above international standards according to experts. Pakistan was among the top 10 gainers in the World Bank’s Doing Business ranking, as it rose four spots to 144 out of 190 countries with records automation and a new secured transactions law. However, the IMF’s July evaluation urged overdue labor market, one-stop investment shop, property registration, and commercial arbitration changes. It also noted a continued poor score at 116 on the companion Transparency International list, with corruption, money laundering and hidden assets found to be common practices. Financial inclusion also lagged toward low income female and rural populations in particular, as a strategy to widen conventional and Islamic banking access through end-decade is at an early stage.

External debt was almost $60 billion at end-March, with $40 billion in bilateral and multilateral loans as sovereign borrowing is increasingly on commercial terms through Eurobonds and China’s One Belt One Road initiative. Finance Minister Ishaq Dar ruled out IMF return urged by chambers of commerce as another $500 million-$1billion global bond is under preparation for the coming months, However credit default swap spreads have recently risen 100 basis points, signaling a likely ratings downgrade and yield premium that could indefinitely scuttle both Fund program and MSCI index graduation ambitions.











Central America’s Clinging Clown Acts

2017 September 18 by

Central  American bonds sold off as Guatemala’s president Morales, formerly a well-known comedian, ousted the UN’s anti-corruption monitor as it investigated his family and political party, and El Salvador grappled with a pension reform standoff accumulated over two decades with total liabilities now at $25 billion or 90 percent of GDP. Costa Rica also tripped up on new external debt authorization and fiscal outlays for court spending which may not get parliamentary backing ahead of February 2018 elections, as Panama’s President Varela, with record low 35 percent approval ratings, was embroiled  in the Brazil construction company Odebrecht bribery scandal, with alleged payments to his campaign and for a metro project bid. Guatemala’s business community is at odds with popular support of the UN integrity body, which dates back decades to the “dirty war” period of army control, and street rallies have condemned the President’s “clown circus” in expelling the mission to possibly salvage his own immunity. Economic growth is around 3 percent, as criminal gangs and violence have spurred emigration once targeting the US, but with increased border enforcement often staying instead in Mexico. El Salvador’s government, with both the FMLN and ARENA parties holding a similar number of assembly seats, initially missed obligations in the mixed public-private system in April, as they argued about overdue contribution charge and retirement age changes. Ratings agency downgrades of at least one notch followed, with S&P assigning “selective default” until the amount was cleared in July on budget appropriation. The next big chunk due is in October and in the wake of court rulings urging compromise the ruling FMLN declared it would consider opposition proposals, which could include caps on monthly draws and private manager fees alongside higher taxes. Performance has lagged the EMBI sub-index as spreads jumped 50 basis points in recent months, with the pension clash and IMF program likelihood scuttled indefinitely especially in light of previous results.

Private pension pioneer Chile has also been debating overhaul to ensure basic floors but debate remains stuck with President Bachelet’s unpopularity and the race on to succeed her in early 2018, with previous incumbent and conservative party stalwart Pinera in the lead. Shares are ahead at roughly the MSCI index 25 percent average on copper price recovery, although this year’s growth is forecast at 1-1.5 percent on 2 percent inflation, which may allow a 25 basis point rate reduction at the next central bank meeting. However Finance Minister Valdes and other officials resigned with confidence ebbing toward the end of Bachelet’s second term amid a cabinet fight over a mining venture’s environmental fallout. Colombia in contrast has share gains only half that range, with growth around the same level and an interest rate cut already on higher than target 4.5 percent inflation. The gross debt burden is near 50 percent of GDP, 10 percent above the “BBB” median,  and the latest fiscal package with a 3 percent deficit may not stave off a downgrade in advance of next March polls. The outlook is negative and the current account hole remains structural with oil exports off a bottom but still lackluster. Ex-guerilla FARC members entered congress after signing a peace pact and receiving demobilization funds, and the ELN may follow suit as lengthy civil war costs shift to their aftermath.