Blog

img_research

The EBRD’s New Scaffolding Scrapes

2020 February 21 by

Posted in: Europe, IFIs   

The approaching 30th anniversary of the post-communist European Bank for Reconstruction and Development, with a core democracy and private sector building purpose and geographic spread to the Middle East and Central Asia, has set off a wholesale rethink after a high-level task force recently weighed in on the Luxembourg-based European Investment Bank’s future. That report urged reorientation on climate and sustainability lending in poor countries, with the EBRD as a possible shareholder in a spinoff entity. It came as the EIB’s main infrastructure project portfolio will likely come under pressure with post-Brexit budget cuts, and member countries are able to separately attract private debt and equity finance. Europeans together still hold a majority stake in the London-headquartered Bank, originally championed by a French official on the understanding it would be built elsewhere. North African nations joined after the Arab Spring and stillborn attempts to create a stand-alone Middle East body, and the target central and east Europe block now accounts for only one-third of investment, with the Southeast and MENA roughly split at 20%. Total allocation to date is around $150 billion, with Turkey replacing Russia as the leading single focus after post-Crimea sanctions suspended operations in the latter. Infrastructure and energy currently absorb half of commitments, in contrast with the early manufacturing and services footprint. 80% is loans, 15% equity, and 10% guarantees and other “de-risking’ instruments. Banking and capital markets work came to over $50 billion for 2000 projects through 2018, and an active technical assistance program recruits foreign advisers and consultants. Only a half dozen of the founding area members did not rise in income classification, and the Czech Republic “graduated” from eligibility altogether a decade ago. The US remains a large shareholder with a 10% holding, and it has emphasized geopolitical rivalry in recent years against Russian and Chinese economic and credit expansion in the area. Moscow has natural gas pipelines and drew neighbors into the Eurasian Economic Union aiming for full integration with Belarus, while Beijing’s Belt and related initiatives sprinkle $300 billion across the wider Silk Road.

A December CSIS think tank report points out that graduation policy is undefined and that “fault lines” have opened as borrowers may be tempted to turn to cheaper sources with “malign interests.” It argues that assigning a green mandate within the context of a new organization would confuse its mission and undermine a versatile commercial culture, and that expanding into Africa and other low-income regions will stretch capabilities and create additional rivalries. However on the issue of migration the EIB and EBRD could better collaborate on fresh solutions, building on the latter’s Syrian refugee support in Jordan and Turkey which also acts as a “force multiplier” for US humanitarian assistance. Rediscovery more than reinvention should be the future strategy especially with frontier capital market deepening lacking basic knowledge transfer. More countries should graduate under a clear process, and equity and guarantee volume can better balance loans. These changes should be embraced under the next President as longtime leader Chakrabarti exits the scene, and the US should not consider reducing or selling off its estimated $150 million share, which can backfire in both deal and diplomatic terms, CSIS warns.

Index Performance’s Elaborate Endurance Formula

2020 February 13 by

Posted in: General Emerging Markets   

With a last quarter surge after a rocky start in 2019, the main emerging market stock and bond indices managed 15% gains, largely due to relief from negative economic policy and performance expectations. The US Federal Reserve reversed signaled monetary tightening; Washington and Beijing agreed to roll back retaliatory tariffs in their trade and investment showdown; energy and food price inflation resisted geopolitical and climate stress; and developing country growth was only around half a percent below the magic 5% threshold investors consider fast-track. With this worst-case avoidance including, plunge into advanced economies’ negative debt yields, a handful of currencies were up against the strong dollar, as the Dow Jones Index’s return was double double the MSCI benchmark.

Fund flow numbers for the year were over $60 billion positive and $10 billion negative for the respective fixed income and equity asset classes, with retail support the key driver, according to data trackers. On a regional basis, Asia was the best stock performer as its top export technology was also the leading sector. Europe and Latin America lagged from crises in Turkey and Argentina, while the latter experienced a broader setback as civil unrest over stagnant incomes spread throughout the continent. In structural reform, India as a standout example lost luster as it threatened new taxes and restrictions and grappled with non-bank collapse into Prime Minister Modi’s second term. In China second-tier banks were rescued but wider feared carnage did not materialize, but in 2020 economic and financial sector woes must be handled more decisively if fund managers are to retain faith in immediate fundamentals and the longer term major emerging market story.

So-called frontier markets were more judged on individual merits in 2019, with a mixed outcome. Dedicated mutual funds showed outflows, and their returns exceeded the index on external sovereign debt but lagged the equity core universe. Central Europe had this split result, as Ukraine bonds rallied after presidential and parliamentary elections but stocks slid. In the Middle East, the landmark Aramco oil company flotation valuing it at $2 trillion on the Saudi Arabian bourse grabbed headlines, but attracted only local buyers as foreign ones questioned governance and transparency.  Lebanon was at the bottom of performance ranks as street protests coincided with bank runs, exchange rate depreciation, and possible debt default. In Africa Kenya’s 40% jump was an exception to disappointments elsewhere, including a decline half that size in Nigeria. The region was virtually alone in promoting a breakthrough direct and portfolio investment narrative, as a 40-member pan-African free trade agreement was signed, which will be under scrutiny this year for initial implementation.

While traditional metrics did not meet an affirmative test or got benefit of the doubt last year, the renewed screening bar going forward will be complicated by acceptance of ESG criteria as important allocation factors. Environmental, education, health, and corporate and government integrity issues increasingly feature in analysis, amid launch of new industry associations and category benchmarks. Green bonds, including from emerging markets China, Korea and Brazil, have grown to $250 billion outstanding despite continued issuance classification and cost difficulties, as global mainstream investors pledge higher exposure. The Ebola virus resurfaced in Africa, and the swine flu epidemic in Asia is a lingering concern. In Latin America the Venezuelan displacement crisis reached historic proportion as millions flee economic and social misery for neighbors caught in their own poverty and rule of law vise. For 2020 the United Nations requested over $1 billion in international aid, as a previous appeal for half that amount fell short. December‘s Global Refugee Forum in Geneva urged private finance to help fill the gap, previewing future contours of the emerging market selection matrix. Winners this year could be countries like Colombia, intent on preserving an investment grade rating with fiscal discipline steps and displaced population funding innovation, as the asset class lure turns more creative and insistent.

The World Bank’s Conflict Strategy Rifts

2020 February 7 by

Posted in: IFIs   

After extensive consultations over months with interested parties, the World Bank circulated a draft of its 5-year fragility, conflict and violence (FCV) blueprint intended to guide the new leadership and prepare for a scenario where half the world’s poor could be under the classification. It notes that displacement and war in low and middle-income economies have reached peaks, alongside climate, technology, capital flight and terrorism stress. Chronic bad governance is typically a feature due to affect the population and deepens poverty for another generation, and these combined challenges go beyond reconstruction to span a range of institutional capacity and human development issues. The latest IDA replenishment targets $15 billon for such purposes, with special pools like the $2 billion refugee window also available. Within the broader group IFC and MIGA are scaling up private sector activity, with the former committed to a 40% fragile-country portfolio. The template must be adapted to political, economic and security conditions and will require more staff taking greater project risks, the paper suggests. Environmental degradation, rule of law absence and weak business environments are structural obstacles where outside humanitarian and commercial partnerships should be mobilized as a priority. In the past decade major military confrontations have tripled and thirty countries are in constant crisis. They have drug, gang, gender and cross-border dimensions spurring over 30 million each in externally and internally dislocated waves, three quarters women and children. By 2050 Africa, Asia and Latin America could have 150 million climate migrants alone according to expert projections. Natural resource management is at the heart of two-thirds of fighting, and in cases like the Democratic Republic of Congo has perpetuated it locally and among neighbors. It also drives “elite capture and corruption” and tends to overwhelm cost-effective prevention efforts where one dollar invested can save fifteen dollars of damage.

Future engagement should focus on the most vulnerable in society and follow “do no harm” principles. The Bank has tried this approach in Yemen since 2015 with billions of dollars in food, fuel, health and power support. Standard monetary and exchange rate policies must also be monitored during these emergencies, as remittances are often vital while central bank operations cease. Subnational areas can be spared in the worst conflicts, and IFC has expanded agribusiness deals in parts of Afghanistan and Iraq. On refugees the UN’s Global compact in force this year has guided employment and education programs encouraging integration and self-reliance. Pandemics such as Ebola can be tracked more systematically for early warnings and treatment, and social safety nets and cash transfers should be in place if viable. The Bank Board will update its FCV policy as line staff streamlines small loan approval processes. New quantitative and qualitative indicators will aid evaluation and learning, and real time data collection from satellites and other sources can bolster planning. The Crisis Partnership with the UN can be extended to other official and private actors, as multilateral lenders also further build their dedicated economic migration platform. Faith-based and civil society counterparts are already part of natural outreach but banking and corporate executives should be added without disturbing the volatile mix, the document concludes.

USAID’s Private Sector Curt Courtship

2020 January 30 by

Posted in: General Emerging Markets   

As the new Development Finance Corporation absorbs its credit guarantee arm and its first leader with a health care investing background promises transformation, AID proper is spotlighting its 50-page private sector involvement strategy as a breakthrough in its own right despite lingering business and financial community doubts. At the outset it acknowledges that donor agencies alone cannot realize the UN’s Sustainability Goals, and that complex conflicts and disasters demand original humanitarian response. The outreach across all programs and project cycles fits with the ultimate aim of self-reliance through market-based solutions and systems to enable country graduation, according to the Administrator. The document cites existing collaborations like the thousands of companies in the Global Alliance and dedicated food and power initiatives accounting for tens of billions of dollars. Joint work applies across infrastructure and thematic sectors like democracy and governance and has been successful in housing and payment pilots in tough locations Afghanistan and Haiti. Partnerships can be formal or informal but depend on mutual trust often lacking with preconceptions about commercial and foreign policy interests. When AID was created fifty years ago private capital was just one-quarter of total low and middle-income economy flows versus 85% today, even though fragile states are bypassed altogether. Over the next decade consumer spending in these place will grow three times faster than in advanced economies, as one-quarter of funds worldwide are managed with environmental and social screens. The private sector creates 90% of developing world jobs and spearheads technology transfer and supply chain integration. It joined with the Agency to promote Digital Principles with over 50 multinational firm signatories, and can help close the women-led business gap estimated at $300 billion annually. In this fashion the government can offer networks, policy expertise and convening power to harness innovation and scale and produce shared knowledge and concept applications. Other financial tools beyond credit authority are available As in Africa and Central America with agricultural lending and resource pooling feasibility studies and test cases can introduce lasting changes, the strategy emphasizes.

While recognizing the importance of due diligence it pledges to honor intellectual property and proprietary information, and avoid potential market distortions. The paper charges all missions abroad and headquarters units with preparing action plans and measuring results, and setting a longer-term evidence and learning agenda. An appendix lists “myths’’ that should be put to rest, including that profit motive is anathema, and that procurement rules bar separate commercial communication. Traditionally the focus was associated with economic growth, but the intent now is to encompass all activities. Despite the bottom-line ambitions in the outline, critics point out that President Trump’s overall aid priorities are for massive cuts and ties to domestic political imperatives. In the Ukraine saga military support has been in the headlines overshadowing an active financial market development program over decades since post-communist independence. Efforts there were often plagued by local corruption and lack of capacity that emerging market investors were quick to highlight as obstacles to be subject to combined crackdown. Privatization through the dormant stock exchange could be a vehicle for engagement proof, but union will be on hold pending the outcome of the simultaneous impeachment ceremony.

Ukraine’s Unimpeachable New Program Sentiments

2020 January 24 by

Posted in: Europe   

Ukraine shares looked to reverse MSCI Index double-digit loss into the new year, as the Zelinsky government with an overwhelming parliamentary majority and no elections until local ones in late 2020 set out to ink a successor IMF deal with shared anti-corruption and privatization elements. Another $5 billion-plus extended arrangement is under negotiation, although it may be precautionary despite large public and private sector debt repayments if foreign direct and portfolio investment jumps on expected land reform and refusal to return failed Privatbank to controlling oligarch hands. The relationship between that shareholder Kolomosky and the President since they teamed on the former’s television network is at the heart of banking system and donor direction, since a clean break is presumed to firm cleanup credentials. The central bank has been the target of media and personal attacks for nationalization and criminal prosecution and asset recovery steps, with billions of dollars in insider cash allegedly spirited out of the country. Kolomosky’s wealth remains frozen despite London court action, but the cohort’s reach is illustrated by close ties with members of the Trump inner circle among associates of accused money launderer Firtash around the impeachment scandal. Lawyer Giuliani reportedly signed up several Ukrainian clients seeking diplomatic favor and competition with the Naftogaz energy monopoly. Former and current administration officials lobbied for personnel and commercial changes and were part of a push to investigate former Vice President Biden’s son previously serving on the board of a private rival, according to witness testimony to Congress.

The economic backdrop has brightened for Fund facility renewal with growth estimated at 4% through next year on 6.5% inflation in the third quarter, enabling a 100 basis point benchmark rate drop. Food prices are under control with a good harvest, and the currency has stabilized around 25/dollar on a 3% of GDP current account deficit. The 2% budget gap target is on track, and higher gas transit fees and tax collection are possible for further consolidation. Warrants in the original external debt restructuring should pay off with growth above 3%, but the 50% ratio to output remains worrisome as technocrats in Kiev mull another haircut or maturity extension proposal. Geopolitical adversary Russia has a suit outstanding from the Yanukovych era for un-serviced loans, as its banks have taken over networks in Crimea and the east. Presidents Zelensky and Putin may meet amid an unobserved cease-fire in the civil war, as thousands of families are displaced in the Donbas region without access to humanitarian relief. Russian growth is half Ukraine’s with oil exports subject to tricky production understandings with OPEC, and big infrastructure projects slow to materialize as a means also to defuse popular protests. The central bank tapered interest rates and the Kremlin drew on the stabilization fund for modest stimulus, with inflation within the 4% medium-term target. It plans to “de-dollarize” the sovereign wealth pool to avoid Washington’s sanctions ambit and ride ruble appreciation, as it also unveiled an exchange blueprint for smaller and lesser-known companies in the net to raise debt and equity locally. Despite a 30% MSCI surge share manipulation persists in creative forms, the latest a Foundation created for technology listing Yandex to ensure against state ownership removal.

US Development Finance’s Forgotten Franchise

2020 January 17 by

Posted in: General Emerging Markets   

The new US International Development Finance Corporation (DFC), merging the foreign private investment promotion agency OPIC with the credit support functions of the main overseas development arm USAID, started in October with rare bipartisan political and consensus emerging market expert backing. Recommendations to overhaul the decades-old model dated back to the Obama administration. It gained momentum under President Trump, who has otherwise moved to cut economic assistance, as a financing and geopolitical competitor to China’s global multi-trillion dollar Belt and Road Initiative. The restructuring doubled OPIC’s original balance sheet exposure limit to $60 billion, and added equity to debt, guarantees and risk insurance in the toolbox to spur direct and portfolio inflows to low and middle-income countries.

A September report by the Washington-based Center for Strategic and International Studies (CSIS) acknowledges that the DFC cannot match China’s policy banks and state enterprises “dollar for dollar” in underwriting infrastructure and natural projects throughout Asia, Africa and Latin America. It advises focus on other potential comparative advantages such as technology transfer, small business funding, and capital market creation.

This last category, concentrating on stock exchange launch and modernization, can be an all-encompassing theme with maximum “bang for the buck.” At the same time, it could revive the US aid establishment’s glory days during the 1990s and early 2000s, when securities market introduction was a priority in post-communist and socialist transition economies in Europe and frontier and developing markets worldwide. Emerging market investors, in search of an underlying story for the asset class into the future, could in turn organize dedicated advisory groups as in the past.

CSIS predicts that internal administration and strategy delays will likely keep annual DFC commitments below $10 billion in the initial phase. It begins with 300 staff and a 90-country portfolio, and a lower minimum US investor participation requirement. A fifteen-member board of directors from the cabinet and outside government, and independent panel of academics and advocates yet to be named, will provide governance and guidance. Inherited operations total close to $25 billion with a roughly even split between regions, and one-quarter in “fragile” states.

From a foreign policy perspective, job creation and private sector growth are priorities in the Middle East and Africa to counter terrorism, and in Central America’s Northern Triangle of El Salvador, Guatemala and Honduras to curb mass migration. In Africa, the intent is to leverage parallel US government programs on power generation and trade.  DFC also has expanded authority to offer technical assistance and local currency debt guarantees and to diversify the range of existing venture capital “enterprise funds.” Earlier versions spurred private equity takeoff throughout Central and Eastern Europe, which in turn spurred European Bank for Reconstruction and Development support for public markets.  

OPIC, over its 40-year life, could claim no net cost to the taxpayer as earnings were returned to the budget, often under risk-averse management as high-return assets subsidized poor country engagement. USAID over the past fifteen years largely abandoned capital markets as a core emphasis, as technical assistance shifted to a small Treasury Department unit promoting government bonds throughout the developing world.

After the fall of the Berlin Wall thirty years ago, the US administrations relied on a private sector ecosystem to advance financial market transformation that has since withered. Wall Street bankers and fund managers took short-term assignments in Europe and elsewhere under a Financial Services Volunteer Corps still in existence, and the Nasdaq dispatched experts and encouraged nascent stock exchanges to adopt its over the counter system, as with the Rasdaq in Romania. After the emerging market term was first coined in the late 1980s, Washington had a roster of brokerage executives on hand to travel to far-flung destinations like Kenya preaching the securities gospel.

The African Development Bank has since launched its own initiative mainly for bond markets, and the continent now has half a dozen regional equity components on the benchmark MSCI frontier stock market index. Performance has been overwhelmingly negative this year, as foreign investors decry chronic liquidity and size constraints. Stock exchanges in East and West Africa have long explored cross-trading and consolidation with little progress, as South Africa remains the runaway depth and diversity leader, according to an annual reference compiled by regional banking giant Absa in collaboration with London’s Official Monetary and Financial Institutions Forum (OMFIF). The continent and other overlooked regions such as Central Asia, where Uzbekistan is in startup mode, could be early targets for DFC “soft” infrastructure help in contrast with China’s approach. The payoffs would come in stock market volume and results reflecting increased private company access to finance in the frontier universe, as well as official reputation and investor coalition revival for an impressive triple bottom line debut.   

US-China Trade’s Diversion Divination

2020 January 10 by

Posted in: Asia   

Amid continued speculation over a “Phase 1” US-China trade deal while mutual tariff increases are on hold, an IMF working paper points to likely distortions under a “managed “ outcome assuming agreement on higher American imports. In this way global benefits in terms of commercial efficiency and policy certainty are diluted in an effort to remedy bilateral imbalances. The research looks at the top ten products, and assumes that commodities are more substitutable than manufactured items. It finds that big economies like the EU, Japan and Korea will be hit from car, machinery, and electronics exposure, as well as small emerging markets implicated directly or in supply chains. On agriculture, China’s decision to purchase more US soybeans would affect Argentina, Brazil and Canada. Correcting the roughly $350 billion trade gap would entail 2-3% export diversion of ASEAN economies and South Africa, as well as tinier partners Angola and Oman. In a final “cascading” tally of specific categories for US and China sale the study reveals that “intensive” raw materials producers such as Mongolia and the Congo would lose the most, while Indonesia and Russia would suffer 0.5% contractions. With these risks the document urges that an eventual pact also take into consideration spillover into the multilateral trading system, where WTO and other bodies may propose safeguards.

China “A” shares still lead the MSCI index with an over 30% advance, along with Greece which was the subject of a simultaneous Article IV review predicting 2% growth through next year on “lackluster” public and private investment. Despite the Conservative party government’s economic reform agenda, demographic and productivity trends are “adverse” with structural unemployment keeping the formal rate above 15%. Bank balance sheets a decade after the crisis and a series of EU-guided rescues have near 50% bad loan ratios, as net credit provision falls. Fiscal relaxation and foreign capital inflows offer short-term impetus, but privatization and labor market changes lag and imperil long-range debt sustainability despite official breaks. Recovery is “disappointing” with income levels below the euro adoption era, although consumption and tourism are up with inflation less than 1%. The current account deficit is 3.5% of GDP under estimated 10% currency overvaluation, while the primary budget surplus exceeds the 3% target. After bilateral debt relief, sovereign bond issuance at record low 150 basis point spreads has been oversubscribed, and banks repaid emergency liquidity assistance with nonperforming assets only half provisioned. Germany and the UK are the biggest trading partners and face slowdowns and Brexit shocks reinforcing the odds for 2-3% best case medium-term growth. The new administration pledges personal and corporate tax reductions that may halve the primary balance, and pension spending must still be curbed as actuarial and solvency studies are conducted.  Worker retraining should accompany the double-digit minimum wage rise, and bank cleanup awaits new out of court restructuring options and a proposed centrally-guaranteed securitization scheme to tackle euro 80 billion in distressed assets. The legacy state lenders in turn must improve governance and profitability to be internationally-competitive. Business licensing will be streamlined further despite better World Bank rankings, and data transparency remains a serious issue with the sad saga of a prosecuted former IMF statistician lingering, the report implies.

Jamaica’s Festive Fund Graduation Jam

2020 January 2 by

Posted in: Latin America/Caribbean   

Jamaica was a top MSCI Frontier index performer with an over 20% gain after the IMF lauded “exemplary commitment” upon completion of a 3-year $1 billion precautionary facility. The balance of payments backup was untapped with tighter fiscal policy on track to meet the medium-term 60% of GDP public debt target, on low unemployment and inflation, and stronger reserves and central bank oversight. After two consecutive programs spanning six years financial institutions are in better shape, with strides to modernize currency and capital markets and natural disaster risk management. However growth is under 1% with drought and mining company factory renovation, with youth unemployment still at 20% despite new outsourcing, construction and tourism jobs. One-fifth of the population is in poverty, as 4% inflation within the planned range has allowed interest rate and cash reserve cuts. Foreign exchange auctions soon to operate through a dedicated electronic platform reduced local dollar pressure, within a modest 2% current account deficit. Oil import prices remain under control, but weather swings, high crime and plant capacity constraints continue to inject uncertainty. In October S&P raised the sovereign rating to “B” after a successful $1 billion bond liability management operation. Bank lending rates are under 15%, with credit growth at double that pace geared toward mortgages and consumption as the bad portion is just 2.5%. International trade and goods and services taxes support a 5% primary budget surplus, and a fiscal council is in formation. Fuel subsidies and civil service compensation require further overhaul, and state oil refinery loss and exchange rate coverage should be phased out, according to the Fund’s final report. Better household data will help assess system risk for both the central bank and financial services commission as they work on a joint resolution regime and inclusion approaches for poor and rural customers. In the post-program phase supply-side reforms including on land registration, factoring and leasing should be a priority and multi-currency practice can be extended temporarily toward eventual end. Unmet formal and informal small business credit access is estimated at 20% of GDP, and agricultural productivity lags while drug and gang violence run rampant, the review cautions on the unfinished agenda.

Barbados too earned praise under its extended Fund facility in a November visit, with foreign reserves roughly tripling the past year to $600 million. Following domestic debt restructuring in 2018, external bondholders agreed to a 25% interest and principal haircut in October under an exchange instrument with a natural disaster clause. Over the next decade, the debt-GDP ratio should fall to 80% with a raft of additional taxes and reduced state enterprise borrowing. A new law will reinforce central bank independence, and limit currency peg intervention to smoothing only. Regulatory relief is under a strict deadline for banks and non-banks to replenish capital, as credit reporting standards are revamped. With the primary surplus exceeding expectations, another $50 million installment should be available in December. Trinidad and Tobago with a 10% decline on the MSCI frontier benchmark has been an exception to the positive mood as hydrocarbon prices correct, and Venezuelan refugees continue to arrive by boat with no asylum procedures in place to provide durable education and employment solutions.

MENA’s Capricious Capital Flow Flare

2019 December 26 by

Posted in: MENA   

The IMF’s Middle East and Central Asia October economic snapshot highlighted changing capital flow patterns from direct to portfolio inflows in recent years, with pronounced global financial market sensitivity regardless of oil prices. Five countries—Lebanon, Morocco, Pakistan, Qatar and Saudi Arabia—took two thirds of cross-border securities allocation and bank lending, and one-third went for sovereign borrowing mainly to close fiscal deficits. From 2016-18 the broad region accounted for 20% of the emerging market total, quadrupling its share over a decade. Oil exporters have dominated Eurobond issuance with $75 billion from last year through the first half of 2019, while bank flows are above other geography averages despite severed correspondent relationships in Iran and Yemen. For oil importers, current account gap financing is a major driver, despite outstanding foreign investor access and ownership limits as competitive disadvantages. Inflexible exchange rates can also heighten volatility, and the lack of local institutional bases for liquidity and size, and weak corporate and government transparency, can spur large crisis outflows according to a Fund “push-pull” model. Its research also found relative “decoupling” from geopolitical tension despite a spike in a “social unrest index” of protest and strike media coverage.

OPEC has been unable to control this year per barrel oil value fluctuations between $55-75, as hydrocarbon exporter growth is forecast at 1.5%, although the pace should double in 2020. Reduced productivity and FDI dampen output and the Gulf will expand less than 1%, with Kuwait, the UAE, and Qatar looking to sporting and tourism events for boosts. Iran is in “steep recession” and will contract almost 10% under pervasive US sanctions. Algeria, Iraq and Libya are in conflict, and regional non-oil growth is lackluster with narrow private sectors. Commercial banks are adjusting to real estate declines, as state-owned system restructuring is long overdue. Bahrain and Oman have thin fiscal cushions and may need neighbor support, while civil servant wage bills and subsidies are too generous everywhere. Consumption and value-added taxes should be introduced, and procurement processes overhauled. Structural reforms and securities market modernization in particular, could lift GDP half a point annually, with partial sale of designated “strategic” enterprises an untapped revenue and efficiency source. A headline transaction is the 5% IPO of Saudi Aramco listed on the local stock exchange as a 600-page prospectus attempts to lure foreign investors with flush dividend and earnings projections.

Oil importers can expect “tepid” recovery with 3.5% average real growth, on inflation “at bay” outside Egypt, Pakistan, Sudan and Tunisia. Despite solid inward remittances, current account deficits and external debt will together be $250 billion, or 150% of reserves. Lebanon is currently in political and financial crisis against this backdrop, as the pegged exchange rate and bank rollover of state debt through complex “engineering” may be exhausted. Primary fiscal balances are negative across the board, and off-balance sheet liabilities are often untracked. Jordan and Tunisia have large refugee populations with international aid only partially offsetting budget costs. Like Egypt they are under traditional IMF programs to stabilize fundamentals and foster “inclusive” economies with a mixed track record. Egypt’s reserves were replenished and the fiscal deficit cut from double digits, but the 700,000 annual job creation goal remains elusive as a successor arrangement is also pending.

Bank Risk Management’s Super Stress Tests

2019 December 20 by

Posted in: Global Banking   

The tenth annual Ernst & Young/ Institute for International Finance global bank risk management survey, polling 95 institutions in over 40 countries, praised financial strength the past five years in meeting regulatory capital and liquidity ratios while underscoring future gaps from unrelated geopolitical, cyber and other challenges. Since the crisis a decade ago banks have slashed short-term funding, deleveraged balance sheets and divested non-core assets. Accounting changes promoted higher disclosure and “countercyclical” buffer building. Executives increasingly focus on anti-crime and money laundering compliance in prudential norms as they prepare for tougher economic times ahead, with a view also to charting digital and artificial intelligence strategies for new products and customer protection. Climate change is already an overarching theme that affects business lines and physical operations, and will likely usher in additional human and natural resource complications. As line officers try to create a multi-dimensional framework for non-financial risks, boards traditionally focused on audit and governance must in turn develop better understanding and tools or plans will be partial and incapable of execution, the report warns. Trade and military conflicts encompass all regions, as Europe copes with the aftermath of sovereign debt crisis and Brexit. Basel standards apply universally, but are implemented at different levels and timetables, and across a broad automation and technology range.

Unlike 2008, the world is now “de-globalized” with political populism and investment and immigration restrictions, as interest rates dipped further into unprecedented negative readings. Analysts no longer believe standard output, unemployment and sentiment indicators can forecast trouble as they experiment with real-time data collection and machine modeling. Privacy has become an overriding issue with big computer hacks, and Europe’s strict access and sharing guidelines could soon be adopted elsewhere. Cyber-security has become an industry-wide task where preserving critical information and infrastructure also presumes public sector collaboration. The review argues that banks are still “catching up” to severe attack potential and may be misreading defensive performance. Data transitions from in-house and vendor servers and platforms to the cloud are “inevitable,” but backups should also be determined. A consensus holds that political power globally is shifting from West to East and that domestic uncertainty is rising with new parties and foreign influence techniques, and monitoring is not just a policy but a profit and loss responsibility.

 Environmental sustainability looms as a credit, client and societal concern leading to the recent promulgation of UN banking principles, as regulators form their own “green” disclosure and conduct approaches. The IMF’s Financial Stability Board has a task force for this purpose, and central banks have forged separate formal and informal networks. In the next five years products and services likely will move from sale/own to subscription/rent models, replicating the pattern in other industries including retail and entertainment. Half the respondents came from emerging market geographies where economic slowdown and trade war dangers have abated the past month, sparking an MSCI equity rally with both the main and frontier tiers up 7%. China and Russia with 30% gains top the pack, even as their banking links with Western counterparts are at commercial and diplomatic odds for another layer of supercharged risk.