Pakistan’s Graduation Gravity Spell

2017 September 18 by

Posted in: Asia   

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

Posted in: Latin America/Caribbean   

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.

Power Africa’s Short-Circuited Anniversary Annals

2017 September 11 by

Posted in: Africa   

Power Africa released its first annual report under the Trump administration on its fourth anniversary, as the new head of AID, which coordinates the program, hailed a “hand up” in mobilizing over $50 billion in combined public-private sector commitments to expanding connections as envisioned under the 2015 Electrify Africa Act. A recent breakthrough was a $25 million regional pension fund investment in a generation company, and the team has worked with 100 US partner firms to promote women’s commercial and official participation. To date 80 transactions worth $15 billion have been facilitated producing over 7000 megawatts and reaching over 50 million users. Nigeria has accounted for almost half the extra hookups, followed by South Africa where AID’s office is located and Tanzania, where former President Obama made a high-profile visit to launch a solar project soon after the initiative was announced. Natural gas and hydro technology accounted for over 5000 MW, and two-thirds of connections are through solar lanterns, with 10 million people accessing larger grids and systems. A major thrust is technical assistance for the enabling environment, with a focus on legal and regulatory changes, cost-effective tariffs, and more creditworthy deal structures. The 25 projects at or near completion with US operations should support $500 million in exports. The Trade and Development Agency and Ex-Im Bank backed feasibility studies and loans, and AID leveraged $200 million through its credit authority, while OPIC has been in the lead with $2.5 billion in funding and insurance for ten power plants. Among the 15 bilateral and multilateral counterparts the French government was recently added, and cooperation with the African Development Bank has concentrated on a joint legal facility for project finance and purchase agreements. By end-decade Power Africa’s capacity and coverage should more than double according to projections, provided President Trump preserves such trade and investment engagement with the continent. At the annual private sector AGOA forum in Togo in August US officials including Commerce Secretary Ross could not articulate specific elements of future arrangements even as duty-free Sub-Saharan import status was renewed under the previous Congress.

Private equity is targeted for power ventures as the industry group EMPEA charted double digit first half fundraising and investment jumps, with the $22 billion allocated for the period the highest on record. KKR, which launched a dedicated African vehicle in the wake of Power Africa, closed the biggest fund to date at almost $9.5 billion for Asia, and energy-specific ones are in vogue as evidenced by Actis’ $2.7 billion global tap. Off-grid and micro-generation assets are increasingly attractive to managers with dozens of deals annually the last five years. Emerging market cash inflow into mid-year was half Western Europe’s $45 billion total and 10 percent of the worldwide sum, but PE penetration as a portion of GDP continues to badly lag developed world members. Sub-Sahara Africa’s is only 0.1 percent, with half from Nigeria, and South Africa’s is at the same level. India and Korea top the list at 0.2 percent, and the ratio in Brazil, China, Poland and advanced economy Japan is around the region’s, as the Middle East, Russia and Turkey are further behind on this power curve version.

Argentina’s Convoluted Christening Ceremony

2017 September 11 by

Posted in: Latin America/Caribbean   

Argentine stocks, after sloughing off disappointment at MSCI’s unmentioned first-tier return with the frontier index up 35% through July, was again on edge into mid-August primary elections, with former President Christina Fernandez charting a Senate comeback to rally the opposition Peronist party. She retains popularity especially among working class pockets in the capital as the current political base, given the large social spending during her tenure subsequently slowed under the Macri government’s austerity policies. However corruption and money laundering investigations have put her on the defensive, and she roughly tied with the ruling Change coalition candidate in the preliminary race ahead of the October mid-term polls. Foreign investors took her revived visibility in stride as the central bank intervened to support the peso after relative stability following its free float. Recent inflation figures still at 1.5 percent monthly and delays in agricultural export proceeds have pressured the currency, but the monetary authority has tried to maintain high real interest rates through a 25 percent benchmark and Lebac secondary market transactions. The exchange rate has slipped over 10 percent in nominal terms the past few months to 17/dollar with the current account deficit wider at 3 percent of GDP on goods and services imbalances, the latter from increased tourism abroad. Fiscal policy is mostly on target with the primary gap around 4.5 percent of GDP despite election-related outlays and consolidation backlash as unions organize against consumer subsidy and provincial transfer cuts. Should President Macri’s grouping hold its own in the October contest the process will accelerate as sovereign bond holders have begun to insist on further discipline with growth pickup to sustain high-yield participation.

Brazil is also grappling with overdue reforms as President Temer survived an initial impeachment attempt and his cabinet vowed to press on with labor and social security changes. The employment code overhaul will update World War II era practices and ease administrative burdens for small business in particular, while pension adjustment remains uncertain with plans to extend retirement age and conceivably shift to private fund reliance as the current generous scheme is an outsize budget drag. The pro-business PSDB, which backed Temer’s ouster, is a proponent while his PMDB, the largest party in Congress is divided a year from the next scheduled national elections. The government must tread carefully after bad publicity over price and service switches at passport offices and other essential arms to save money. The overall deficit is stuck at 10 percent of GDP and the once sacrosanct primary surplus will not reappear over the near-term. Loosening has moved to the monetary side as the central bank continues to reduce the benchmark Selic, with inflation at a 20-year low of 3 percent on incipient economic recovery. However recession is still deep in Rio de Janeiro state a year after the Summer Olympics there prompting a media blitz of critical retrospectives. A former governor is in jail and major politicians in charge of the event contacts face criminal prosecution, as law and order has worsened since the closing ceremonies. Federal authorities have dispatched 10000 troops to patrol the streets and beaches as the sporting facilities originally designed for productive municipal use lay idle in another form of retirement abuse.

South Africa’s Unconcealed Radical Regret

2017 September 5 by

Posted in: Africa   

South African shares, after a decent 15 percent jump through July still lagging the core universe 25 percent, scrambled to react to the mixed parliamentary confidence vote message to President Zuma, who won with a slim majority despite dozens of ANC ruling party members defecting in a secret ballot. The opposition Democratic Alliance has seized on unending scandals while attempting to forge a moderate alternative to the “radical economic transformation” newly embraced by the President to rally support and engineer the possible succession of his ex-wife in 2019 elections. Recession was recorded in the first quarter with unemployment near 30 percent, and the populist platform would increase government control across agricultural, industry and financial sectors to shift the post-independence course despite local and foreign investor resistance. Land expropriation would veer toward the Zimbabwe model of minimal or no compensation for transfer to black ownership, and mining firms would have to sell or hand over 30 percent of shares over time, up from the 26 percent in the existing charter, in addition to paying a 1 percent revenue levy. The industry, whose size at 7% of GDP has shrunk with hundreds of thousands of job losses the past decade, promises to fight the changes in court as “confused and contradictory” as listed companies were dumped on the Johannesburg exchange. Deputy ANC President Ramaphosa, a Zuma rival, has sided with the business community in urging reconsideration, as a recent African ranking of mining climates put the country behind neighbors Botswana and Namibia. The central bank with its long record of steady monetary policy management is also in the crosshairs of the activist campaign as it faces calls for rand intervention and social welfare rather than price stability focus.  Commercial banks in turn are under pressure to forgive or slash high-interest consumer debt accumulated in recent years to depress sentiment. With the inflation forecast cut to 5.5 percent, the benchmark repo rate was lowered 25 basis points to 6.75 percent in July. However the Reserve Bank cautioned the relief could be temporary ahead of risk events, including another ANC conference in December and potential sovereign ratings downgrade with the agency review cycle.

Finance Minister Gigaba, a controversial pick, previewed second quarter growth in the 2 percent range while unveiling an “inclusive” stimulus plan drawing on state enterprise balance sheets to boost the economy over the medium term and forestall relegation to “junk” rating status. Fiscal consolidation is still a goal but assigned reduced priority, as a turnaround in the terms of trade and regular drought could offer respite, despite sluggish services readings and uneven rand performance against the weaker dollar this year. Agriculture was a sore spot in Kenya as well going into presidential polls with its MSCI frontier gauge up over 20 percent on expectations of voting calm and a likely second business-friendly Kenyatta term. GDP growth has sputtered below 5 percent, but billions of dollars in infrastructure projects like a China-sponsored railway should raise output while the central bank tries to cap inflation at single digits. In a June pilot government bonds were sold to retail investors by mobile phone in part to finance these ventures, and were snapped up with a 10 percent yield despite technical glitches undermining confidence.



Russia’s Singeing Sanctions Stretch

2017 September 5 by

Posted in: Europe   

Russian stocks continued outlier double-digit losses despite a pickup in Q2 GDP growth to the 4 percent range as US President Trump reluctantly signed new punitive measures against individuals, state banks and energy companies passed overwhelmingly in Congress, which also consider extending post-Crimea and Ukraine invasion punishment to sovereign debt investment. The Treasury Department will study the issue and report back early next year, but the timetable could be accelerated on evidence of Moscow’s further military forays and 2016 presidential election tampering. President Putin decried the action after holding cordial meetings with the Trump team at the recent G-20 summit, and retaliated with expulsion of half the American Embassy staff in the capital. The fighting could literally escalate as Washington reportedly may begin funneling arms to Kiev to repel Eastern rebels who have declared a breakaway Donbas Republic. The push could coincide with more erratic performance under the IMF program, as defense spending has undermined original fiscal discipline commitments despite recession escape and currency stability helping to fuel a 15 percent MSCI frontier index gain through July. Russian industrial output was up 5 percent in June, but retail sales are still flat with lackluster consumer sentiment, prompting retail giant Sberbank to slash mortgage rates to lift confidence. FDI had recovered last year to $13 billion and US banks and companies were again exploring ventures, but momentum may be derailed with the fresh sanctions provisions targeting cyber-security, infrastructure project and “corrupt” privatization broadly. The last category has made headlines with the $3 billion asset stripping lawsuit filed by oil behemoth Rosneft, after taking over rival Bashneft formerly owned by industry conglomerate Systema, after its chief executive fell out of Kremlin favor and was placed under house arrest. The clash underscored perennial corporate governance dysfunction structurally discounting the market P/E ratio to single digits and Rosneft’s high economic profile as it also negotiates additional concessions for Venezuela oil fields after accumulating a 49 percent position in US chain Citgo for collateral in its main joint venture.

As the country skirts possible bond default under pariah status with President Maduro’s installation of a replacement assembly, Russian lenders may be ready to offer backstops, but the sector has been blighted with hundreds of closures ordered by the central bank since 2013. The latest is 30th ranking Yugra, which “manipulated” and falsified accounts to fool depositors and regulators. The bottleneck has occurred against the backdrop of notable strides otherwise in the World Bank’s Doing Business indicators, where Russia and neighbors have led all regions since 2010 according to a companion report. At the same time as the reinforced Washington estrangement, relations with Turkey have turned cozier after a brief trade boycott for plane destruction in Syria ended. The stock market there in contrast is up 35 percent this year on tax, spending and credit stimulus supporting 5 percent growth on the anniversary of 2016’s doomed coup. President Erdogan recently met again with his Russian counterpart, who unlike officials in Brussels has refrained from criticizing mass detentions and firings of government and media workers accused of anti-regime sympathy. He has also seized company stakes and pooled them into a $200 billion sovereign wealth fund for infrastructure outlays, while exhorting private banks to relax their grip from pre-coup torn balance sheets.

Fund Flows’ Record Reset Rumblings

2017 August 29 by

Posted in: Fund Flows   

EPFR-tracked fund bond and equity inflows were at record-setting pace through August, at $70 billion and $50 billion respectively, with numbers due to match 2012, before the Fed Reserve’s taper tantrum blow. Including so-called strategic allocation through separately managed accounts, the former category should exceed the $105 billion total five years ago, as non-dedicated investors have jumped in to join retail appetite reflected in unprecedented ETF preference. Local currency still lags hard currency interest, continuing recent annual trends, but could catch up by end-year as dollar correction persists after its initial lift on Trump reflation and protectionist policy agendas. By the same token external corporate and sovereign exposure is increasingly converging as gross issuance reaches estimated $400 billion and $150 billion sums in 2017, at spreads over US Treasuries in the 250-300 basis point range. Fixed-income index returns average high single-digits, but lag stocks with the benchmark MSCI soaring 25 percent with the P/E ratio at 14 times. In the detailed EPFR breakdown one-quarter of participation is through ETFs and global as opposed to regional or country funds dominate. North American and European investors eagerly subscribe the offerings, while Japanese ones shy away. The data show a heavy tilt toward consumer goods and technology in contrast with financial and commodity listings, and dividend as well as capital gain strategies. Company profits will increase over 10 percent on a forward basis due to better management and margins and the growth uptick to 5 percent in Q2 on China stabilization and positive trade volume after restriction threats. Brazil, Russia and South Africa are back from recession, and inflation is subdued across the universe with food and fuel costs relatively constant as exchange rates strengthen. Against this background, few central banks will raise interest rates with the vast majority staying on hold or easing marginally.

However the BRICS and other core markets have not shaken off political risks that combine to act as a potential future drag. Brazil has avoided a second impeachment for now with a vote not to remove President Temer despite bribery accusations, as his predecessor Lula was found guilty of these charges and sentenced to a long prison stretch he will appeal. Finance Minister Mereilles promised to press on with social security reform after the decision, but the constituency for fiscal discipline is thin and wavering heading into another election cycle. Russia was subject to additional US energy and individual sanctions, after Congress almost unanimously passed legislation over President Trump’s objections that it interfered with executive foreign policy determination. Moscow retaliated by ejecting half of Embassy employees, as Russian shares continue to be an exception with a 15 percent decline through July. Poland has led the regional pack with a 40 percent jump, but the EU is considering penalties under Article 7 for anti-democratic action as the government assumes sweeping power over the nominally independent judiciary. The Brussels backlash follows similar signals against Hungary, another stock market high-flyer, for the Orban administration’s anti-migrant steps, including alleged abuses in detention and residential facilities. The “nuclear option” in both cases would be cohesion fund cutoff, equivalent to 20 percent of GDP, at the same time the world is facing the actual prospect in North Korea with the specter of literal Asian fallout.

Central Africa Should Rejigger Rescue Formula (Financial Times)

2017 August 29 by

Posted in: Africa   

As an August IMF blog recounts, four of the six countries in the Francophone Central Africa Economic and Monetary Community (CEMAC)—Cameroon, Gabon, Chad and the Central Africa Republic—are now in oil price collapse and debt crisis programs with negotiations also begun with the Republic of Congo and Equatorial Guinea. They share a common central bank and the CFA Franc currency tied to the euro and managed through the French Treasury, which requires backing with half of foreign reserves. The Fund notes that despite a summit in Yaoundé last year that pledged commodity diversification and fiscal, financial sector and business climate changes, policy maker delay and the spreading Boko Haram conflict left the region in “dire shape” to be addressed chiefly through traditional austerity and transparency nostrums. French President Macron, at the recent G-20 summit, for his part recommended a new strategy that could involve shedding the 50-year old currency peg, but his message lacked specifics and was garbled by reference to “civilizational” differences like deep-rooted corruption and large families that can frustrate growth and modernization plans. Instead of relying on historic outside bilateral and multilateral relationships to overcome its repeated predicament, Central Africa should focus on its own stalled efforts, such as in banking integration and stock exchange launch, to achieve development breakthroughs and narrow the income and sophistication gap with the neighboring West Africa UEMOA zone led by Cote d’ Ivoire and Senegal, which has started to link with the English-speaking ECOWAS group.

Oil is 60 percent of CEMAC’s exports and earnings halved from 2014-16 as the current account deficit neared 10 percent of output. Public debt rose 20 percent, approaching 50 percent of GDP, and international reserves dipped $10 billion to cover only two months’ imports, below the danger threshold exacerbated by the fixed exchange rate. The Fund arrangements feature standard formulas to correct imbalances and also limit further commercial borrowing from Cameroon and Gabon, which have issued Eurobonds and are components in JP Morgan’s NEXGEM index. Cameroon is to prioritize infrastructure projects from domestic and donor resources, and boost non-oil revenue through land taxes and ending exemptions. High bad loan levels and insolvent banks will be resolved and private sector “administrative obstacles” slashed, with 3.5 percent of GDP safeguarded for education and health spending. Gabon will improve public finance management and show progress across the World Bank’s “Doing Business” indicators, especially on company startup, construction permits, property registration and contract enforcement. After getting the first installment of its $650 million facility, GDP growth stabilized in mid-year at 1 percent with oil price recovery and mining, timber and construction contributions, with exports up almost 40 percent on an annual basis.  Both Cameroon and Gabon are led by longstanding rulers, and their governments must follow extractive industry transparency initiative (EITI) reporting and also clear and disclose outstanding contract arrears. Chad, which must restructure external commercial debt, and the Central Africa Republic, gripped by civil war, face similar program criteria with larger relative allowances for anti-poverty outlays.

As of April the central bank BEAC’s gross reserves were $4.5 billion, as it worked to maintain the integrity of the decades old CFA Franc structure, deal with the 15 percent commercial bank non-performing loan ratio, and tighten monetary policy through a 50 basis point interest rate hike and reduced access to overdraft facilities. Excess liquidity has evaporated from the system, which now requires emergency lines and recapitalization, according to a June IMF regional policy report. Stricter statutory ceilings on government borrowing will apply, and banks in turn will face collateral limitations for refinancing under the latest Fund pacts. Interbank foreign exchange and capital markets will also deepen, and supervision is due to strengthen next year with enforcement of prudential rules including connected lending, risk concentration, asset provisioning and board conduct alongside basic capital sufficiency. Several smaller banks have been closed and seized, most recently in Gabon, and with the deposit insurance regime to be finalized in 2018 other “orderly” insolvencies are likely following the terms agreed between the BEAC regulators.

These promises have fallen short in past efforts, and even if honored member countries could plot their own future direction apart from conventional recipes. They could explore a phased devaluation or peg to a wider currency basket, to include the dollar and major emerging market units given trade and investment links.  “Single passport” cross-border banking approaches should be revisited in full operational and regulatory senses and the dormant Central African securities market, with a few government and state company bond listings, can be cast as an active private sector debt and equity platform, or merged with the bigger nearby West African bourse so this frontier region charts a proprietary path that is no longer desperate.


Iraq’s Unreconstructed Conflict Model

2017 August 23 by

Posted in: MENA   

Iraq’s first $1 billion stand-alone bond was oversubscribed at an almost 7% yield as security forces were poised to retake Mosul from ISIS control and the IMF released another $800 million under its $5 billion multi-year program. In February it issued for the same amount with a US government guarantee at 2%, and a decade ago a $2.7 billion restructuring operation was completed for the post-Saddam era. During July global oil prices also rose $10/barrel, but local investors stayed bearish on equities despite the average P/E ratio at 8 times as the Rabee Securities index slipped 10% in June. State banks are main listings and offer high dividends, with only one-fifth the population having accounts, and fees rather than lending driving income with assets concentrated in Treasury bills amid flush liquidity. The IMF’s review noted fragility and missed targets, with millions displaced by military campaigns and billions of dollars in infrastructure destroyed. The budget deficit was 15 percent of GDP last year, but it is to be eliminated through end-decade to stabilize public debt as the current account also returns to surplus over the period with passage of the defense and humanitarian emergencies. One third of the country, including 250,000 Syrian refugees current receive aid, but internal and external repatriation is unlikely to increase in the near-term even with liberation of Mosul and other cities pending credible rebuilding plans. Elections are due next year and the Finance Minister was replaced after losing parliament’s confidence with the Prime Minister assuming the post. Official debt doubled to near 70% of GDP since 2013, and bond yields spiked to 15 percent before the latest standby agreement was reached. The current account hole was over 8.5 percent of GDP in 2016 and covered chiefly by donor flows, as international reserves dipped to $45 billion or six months imports. The currency appreciated in line with the dollar peg, and credit to the economy was flat with banks’ undercapitalization and double-digit NPLs. Non-oil growth should pick up after ISIS’ defeat, while inflation remains low at 2 percent.

Fund conditions will preserve the dollar-linked exchange rate, as devaluation would aggravate inflation and fail to help exports, but simplify foreign currency allocation and trading procedures to shrink the official-parallel level disparity.  The central bank law will be strengthened with prudential rules to reflect prevailing international standards with outside technical assistance. Along with long-delayed bank restructuring the private business climate is in need of overhaul especially on electricity access and anti-corruption. Program risks are high, the report concludes, with a $7 billion financing gap identified for 2018-19 even under positive direction. Gulf, Asian and Western donors have been approached for additional pledges but regional supporters like Saudi Arabia and the UAE are under pressure to get their own houses in order, as reflected in flat stock market performance while the main core and frontier indices are ahead 15-25 percent. Jordan and Lebanon are also down for the year, with large refugee populations, political infighting and security threats, as “frailty” remains the watchword in the IMF’s view almost fifteen years after the international community’s first Iraq attack rumblings.

Asia Local Bonds’ Unheeded Unstable Equilibrium

2017 August 23 by

Posted in: Asia   

The latest edition of the Asian Development Banks’s local currency bond publication, covering nine emerging markets for the full first quarter through May, cited greater stability with reduced spreads and foreign capital inflows as it cautioned  about immediate global liquidity and cyber-attack risks. It noted an issuance slowdown from China in particular on its deleveraging campaign, with the mainland accounting for 70% of the $10.5 trillion government and corporate instruments outstanding. Indonesia in contrast experienced an overseas ownership leap to almost 40% of the total with a Standard & Poor’s ratings upgrade. On the two decade anniversary of the crisis which launched the Asia Bond Market Initiative with the Bank’s online monitoring and regular technical assistance, the reference also looked at the 2008 and 2013 Taper Tantrum spasms to examine the empirical record of domestic bond market deepening. The evidence pointed to less exposure to currency and maturity mismatch, but did not rule out future troubles on economic, monetary and business cycle turns which could also deflate this traditional “spare tire” supplementing bank loans and stock markets.

The ADB noted that gradual monetary policy normalization in the US, EU and Japan could “impinge” on East Asia’s financial markets. The Federal Reserve has ended quantitative easing and nudged interest rates marginally, and may begin to unwind the $4 trillion portfolio of Treasury, mortgage-backed and agency securities bought for commercial fixed income support the past decade. This rolling off is designed as a multi-year process implying that short-term Asian spillover should be “manageable,” but leverage has accumulated over a prolonged loose money period that could pose danger especially if the Eurozone also pares bond purchases. Global GDP growth forecasts have picked up, with developing Asia to expand 5.7% this year and next, but long-term yields have started to rise and investors have only recently “rediscovered” emerging market assets with fleeting confidence. Moody’s downgraded China’s sovereign rating from Aa3 to A1 at the same time, and continued US rate lifts will “adversely affect” heavy borrower company balance sheets in particular. Yields could spike and trading volumes sink as in 2013, and the consecutive Bangladesh central bank and Wanna Cry cyber- crimes in 2016 and 2017 revealed additional systemic weaknesses across banks and capital market intermediaries compromising safe-asset transactions, according to the review.

First quarter bond market growth was only 1% from 2.5% in the previous one, with China’s local government and corporate placement the main drags. By comparison, Korea’s number two near $2 trillion market was up 1.5% on Treasury bond front-loading for budget stimulus. Thailand and Malaysia each rose 3%, with the latter’s Islamic-style sukuk over half the total. Hong Kong and Singapore were roughly tied at the $250 billion activity range, while Indonesia’s surged 4.5% in the period to close to $175 billion. The Philippines and Vietnam had respective $100 billion and $45 billion totals as the smallest in the region. The annual growth rate was 13% for the quarter, with the government-corporate split at 65%-35% and local currency bonds approaching 70% of GDP.

Foreign ownership strengthened everywhere outside Malaysia, where the share dropped 6 points to 25%, through March, although the trend there also stabilized in April with resumed capital inflows. Investors remain wary after the central bank’s surprise ban on non-deliverable ringgit forwards to hedge positions, and the continuing drip from the 1MDB fund scandal with a repayment to Abu Dhabi creditors past the due date. Thailand’s international participation hit 15% on opposite news as a healthy current account surplus and reserves buoyed sentiment despite lingering political stalemate, as ousted Prime Minister Yingluck Shinawatra prepared to face trial for alleged rice subsidy abuse. Cross-border issuance within East Asia was a paltry $2.3 billion for the quarter, led by China, followed by Korea, Malaysia and Singapore, and a fraction of the $105 billion G-3 currency amount from January-April on good worldwide appetite. Inflation and interest rates were largely steady through May, as countries tweaked laws and regulations to solidify the bond market ballast shown by the ADB’s statistical regressions to offset exchange rate depreciation pressure. China and Thailand announced new rules for low-grade and unrated bonds, and Malaysia and Vietnam authorized short-selling, but after 15 years local bond development is in search of a long-haul catalyst that can apply with the same sense of crisis urgency to overcome potentially imminent global bond bruising.