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Enterprise Funds’ Mooted Makeover Formula

2018 October 15 by

Posted in: General Emerging Markets   

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

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

 

Central Asia’s Adjacent Agitation Angle

2018 October 15 by

Posted in: Asia   

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

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

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

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

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

Papua New Guinea’s Summit Host Submission

2018 October 8 by

Posted in: Asia   

Papua New Guinea, after a failed sales attempt two years ago, began a global road show for a $500 million inaugural bond to relieve a chronic foreign currency crunch, as emerging and frontier market issuance vanished in recent months with totals down 20% from 2017’s pace according to transaction trackers. Fund outflows persist for both debt and equity, which have each fallen below $20 billion in the latest data from US-based EPFR. Standard & Poor’s recently lowered the sovereign rating to “B” citing overdependence on hydrocarbons and mining industries, “weak institutions” and fiscal and monetary policy rigidity. Moody’s placed it on negative watch, and the downgrades overshadowed favorable publicity as the upcoming host for November’s Asia Pacific Economic Cooperation (APEC) summit.

Credit Suisse, chosen by the government as a lead underwriter, arranged a $500 million syndicated loan last year for infrastructure, including facilities for the APEC event. In 2016 the World Bank lent $300 million, and double that amount is owed China out of the $2.5 billion foreign debt total. Prime Minister Peter O’Neill and his economic team have scrambled to deal with declining revenue from Exxon Mobil’s flagship $20 billion gas plant, and severe drought and earthquake in succession. The Asian Development Bank, which began disbursing $100 million in support in August, predicts gross domestic product growth around half the original official 3% estimate. The worsening fiscal deficit sent public debt over 30% of GDP, approaching the 35% statutory ceiling. S&P noted that domestic banks had reached internal limits for government bond exposure, leaving the central bank as lender of last resort and forcing offshore borrowing. This recourse is also needed to overcome a backlog of requests under foreign exchange controls the business community ranks as the number one complaint in regular surveys.

The central bank governor criticized these protests in July, with the claim that import orders were met under a “reasonable timeframe” with recovering hard currency inflows from the liquefied natural gas and OK Tedi and Borgera mining projects. The 2018 budget also hiked tariffs on 250 items, with a 25% one introduced for previously exempt dairy products. The ruling coalition at the same time is reviewing the mining code to consider more foreign investor royalties and taxes, despite warnings from the Chamber of Mines and Petroleum that unilateral changes could backfire and put 80% of island exports and 20,000 jobs at risk. It urges devaluation of the local currency, now around 0.4 to the Australian dollar, as another option to gain competitiveness and earnings but the government rejects this route. The Prime Minister and Treasurer blame the predicament on global commodity prices outside their control, as they promote tourism, fishing, forestry and small enterprise diversification and infrastructure public-private partnerships against exchange rate overvaluation arguments. They condemn natural resource contracts predecessors signed as too lenient in allowing proceeds to stay overseas, and stress restructuring will ensure “responsibility” while calling for food import bans to “improve self-sufficiency.”

Better connectivity and transport were priorities ahead of the November APEC meeting in Port Moresby expected to attract close to 10,000 visitors, half the total projected for the year. In preparation a new mining project, Wafi-Golpu was rolled out amid an information campaign to increase direct investment from Australia, China, Southeast Asia, and Japan. Australia’s colonial ties have positioned it as the lead commercial and aid partner, but China’s $3 billion in trade in 2017 and project loans put it in second place. Chinese companies have pumped billions of dollars into copper, gold and nickel ventures, and timber exports are another bilateral mainstay although PNG pledges to phase out tropical logging by end-decade. With the planned 10-year external bond the government intends to extend maturities, while preserving the country’s no-default record. It also has a broader capital markets modernization strategy that includes opening the 15-company local stock exchange to foreign buyers. As preconditions basic securities laws would be revised, and an international bank custodian recruited to provide depository and safekeeping services. Shareholding and governance of the Port Moresby bourse, currently owned by two brokerages, could also be overhauled. Corporate bonds could eventually be added to the mix with initial placement success abroad, which will depend on mining ambiguous investor sentiment already the pattern domestically.

Corruption’s Newsworthy Economic Embrace

2018 October 8 by

Posted in: General Emerging Markets   

The IMF, which regularly includes difficult to assess anti-corruption steps in its programs as in Ukraine’s required court setup, published research for the first time with historic “big data” news article collection to correlate trends with economic and financial performance. It is defined as “public office abuse for private gain,” and development agencies and interest groups have created indicators and indices over decades to flag direction, such as the Transparency International ranking. These expert measures broadly score institutional and regulatory capacity to promote integrity but are based on perceptions rather than hard statistics which the study’s compendium of over 650 million global articles may help to foster in a descriptive model. The data base shows asset price and macro growth, policy and capital flow effects to underscore background literature on the subject describing fiscal and monetary instability and business and finance trust erosion. Previous efforts have used news coverage and social media posts to track relationships, but not in a comparable diverse sample with the accumulated information dating back to the 1980s subject to numerous frequency and vetting algorithms. However the framework is limited by different approaches to press coverage and freedom and cultural norms surrounding corruption and refinements incorporate related Freedom House and other yardsticks to redress the gap. The results reflect “major turning points” and close association with traditional breakdowns. The news flow index is higher for developing versus advanced economies, but low-income countries had “large improvement” in recent years. For emerging markets capital inflows were pronounced even as mentions spiked since the financial crisis a decade ago. Nonetheless big shocks generated long-run investor changes, and the media work tracked established institutional quality benchmarks published by the World Economic Forum and World Bank. Case illustrations link deterioration to lower per capita growth and stock market values, increased sovereign borrowing costs, currency depreciation and falling direct investment. These relationships are tighter for developing countries, and lasting benefit from anti-corruption progress must be followed with actual investigations and corrective action beyond popular attention.

The Fund looked at experience in Indonesia, Malaysia and Singapore and found that after setting up an anti-corruption commission with passage of an enabling law in the early 2000s this coverage has prevailed for a better reputation. Malaysia’s record is better with many initiatives such as on whistleblower protection beyond formal statute. Singapore’s most stringent strategy is “holistic” both in legal and enforcement terms, and pays high-level public officials a salary premium to reduce bribery odds. The paper notes that information technology is more common in detection and probing and that technical assistance could leverage the news index tool for greater impact. Fragile states may benefit in particular as they work from a minimal foundation to set long-range vision, and future research should further classify shock taxonomy and examine regional and income level distinctions. Ukraine will soon have the chance to produce more news with candidates, including previous corruption defendants, scrambling ahead of presidential elections with so-called “odious debt” repayment to Russia from the former ousted kleptocrat regime an enduring headline issue.

China’s Belt Hole Punch

2018 October 1 by

Posted in: Asia   

Domestic investors continued to dump “A” shares for a 20% loss on the MSCI Index through August as backlash appeared against President Xi’s latest developing world Belt and Road $60 billion multi-year funding package for Africa, repeating a previous bilateral summit pledge. The US criticized the deal as well amid bilateral trade and investment acrimony and warned that sovereign borrowers already tapping the IMF for emergency support could deepen a “debt trap,” even though the Chinese portion is a fraction of the total. On the fifth anniversary of the initiative, a number of studies have offered mixed reviews, with Washington’s Center for Strategic and International Studies examining the half dozen “corridors” and 175 projects to find that they are often bypassed and uncoordinated. The sweep across 80 countries with a $1 trillion goal encompasses both hard and soft infrastructure but lacks definition, as it extends to unrelated athletic and cultural events, according to the review. The analysis tries to reconcile on the ground and strategic outcomes and reiterates that regional land, air and sea connections are well established economic strategies historically promoted by development lenders, and that the ADB has mirrored the approach in the Greater Mekong for example. Subdividing the Asian categories shows an absence of priorities outside Pakistan, and that China’s 30 provinces vie at the same time for program benefits. Geography has extended to the Arctic and outer space without pinpointing borders and locations, and implies that Beijing has less control and vision than described in official media and popular coverage. This gap leaves the field open to the US and other competitors for large-scale alternatives as legislation to create a $60 billion unified development finance agency awaits passage.

In August the manufacturing PMI was 51, barely above neutral, as the currency gained against the dollar with the daily band again subject to the “counter-cyclical factor” used in former periods of stress. The foreign exchange regulator punished two dozen violations, as overseas investors increased their local government debt share to 8% on official agreement to stretch tax exemptions to three years. They are also buying bank bad loans through the Qianhai Assets Exchange as real time delivery versus payment is now in force. According to fund research, two-thirds of international “A” shareholders are in consumer listings and have shunned real estate, where S&P ratings believe debt service capability is at a multi-year low. Cash/short-term debt ratios averaged 125% in the first half, with an estimated $40 billion in maturities over the coming months. Leading developer profits were up 75%, but they have started to shy away from second-tier cities with price declines and resort to heavy discounts to sustain sales. Along with property bubble vigilance regulators have expressed concern over the serial collapse of internet P2P credit platforms and vowed immediate inventory and resolution. While bank non-performing assets are still below 2% by current standards, the central bank has warned of private corporate debt’s rapid rise as industrial profits continued to slow in July. Economic and earnings drag may worsen with the prospect of additional US tariffs on $200 billion of Chinese exports which could force company belt-tightening.

 

 

Iran’s Sanctions Pain Analgesic

2018 October 1 by

Posted in: MENA   

The Tehran Stock Exchange Index was up 10% in local currency terms in July for a 25% year to date gain, as retail investors desperate for outlets parked savings there, as the rial lost half its value against the dollar with the first stage of US sanctions reactivation. Valuations with low single-digit price-earnings ratios and double-digit dividend yields were attractive on the $150 billion market to offer the prospect of real returns, after inflation breached 15% in the immediate aftermath of exchange rate collapse as the unofficial rate blew past 100,000 to the dollar.  Oil and steel companies were popular as tighter global supply under Washington’s trade curbs served as share supports. Payment service and pension fund listings also got inflows with renewed external financial system cutoff as a result of the Trump administration’s nuclear pact denunciation.

France and Germany announced a possible alternative to the cross-border SWIFT payments network which could maintain Iranian bank correspondent relationships in euros, and Italy allowed smaller ailing banks to maintain ties as it works to resolve a debt crisis. However the US Treasury Department in meetings with foreign counterparts opposed creation of parallel structures, which will likely take years to launch, and suggested that participants would be at risk of dollar-access bans. China could offer its own workaround in the form of the CHIPS international channel started in 2015 to promote Yuan global acceptance, but Beijing is now ensnared in separate bilateral trade and investment tiffs to forestall action. From a simple money-laundering standpoint mainstream foreign banks are essentially sidelined from engagement since Iran’s parliament has not yet passed legislation to comply with basic Financial Action Task Force rules, with the October deadline for returning to the body’s black list imminent. Conservatives aligned with the religious-directed Guardian Council object that standards will compromise funding for terrorist allies like Hezbollah. President Rouhani and his “moderate” team have failed to win backing for broad banking cleanup and modernization into his second term, and the central bank head and labor and finance ministers were all ousted in August votes of no-confidence as real and monetary economy indicators spiraled out of control.

President Rouhani blamed a US “plot” for street protests and possible renewed recession with oil export and foreign investment curbs, after direct inflows fell short of target in 2017 at $5 billion, according to the United Nations. He announced that 10% will be drawn from the sovereign wealth fund to combat sanctions, and that an anti-corruption bill establishing a dedicated tribunal was a legislative priority to assuage public anger at reports of insider currency deals. A former deputy central bank governor was implicated in illegal transactions, and a trial was televised of importers who benefited from favorable rates. Independent banking analysts called on the administration to continue in this vein and release a list of individual and state business borrowers responsible for the bulk of bad debts put at 15% of the total, but officials have so far demurred. The new central bank head was previously a top commercial bank and insurance executive with no mandate for sweeping change.

The post-sanctions strategy stresses reliance on allies and trade partners in the region and Asia. An Iranian investor and manufacturer delegation visited Syria in August to tout reconstruction prospects as President Assad moves with regime help, reportedly amounting to billions of dollars in military and security assets through the Revolutionary Guard’s overseas arm, to defeat the last pockets of rebel resistance. Iran-China transactions were almost $20 billion in the first half, and export potential to neighboring countries is at the same figure, the Chamber of Commerce calculates. In the first quarter of the fiscal year through July, sales rose 25% to Iraq in particular, and devaluation could further aid competitiveness in the Chamber’s view. Iraqi Prime Minister Haider al Abadi initially agreed to comply with the resumed US clampdown, but shifted course to seek continued geographic and historic ties. He formally requested exemptions from Washington as daily trade in energy and agricultural commodities hit a record $50 million in August, according to bilateral sources. Iraqi depositors also insist that regulators maintain relationships to recover money lost to fraud and depreciation in Iranian banks, which have plagued them as relentlessly as decades of sanctions episodes.

 

Myanmar’s Consecutive Condemnation Cries

2018 September 24 by

Posted in: Asia   

The one-year anniversary of the escape of over half a million Muslim Rohingya refugees from Myanmar’s Rakhine State into Bangladesh, with a current total of over 900,000 in the world’s largest camp, coincided with clear United Nations condemnation of human rights abuses as well as investor fears over the economic policy and performance fallout on both sides of the border. The military, which controls major state enterprises, will likely face additional Western commercial sanctions and asset freezes with the UN’s call for investigation of genocidal crimes. Before the report, the government’s civilian head Aung San Suu Kyi gave a speech in friendly Singapore assigning neither the army nor leading officials who have concocted a mix of lower growth, higher inflation and currency depreciation blame for their actions.

China as the top Asian ally has felt the impact of tourism and foreign direct investment slowdown, with a 15% $900 million decline in the last fiscal year, as Myanmar reportedly will slash the original $7.5 billion Kyaukpyu port project in Western Rakhine to $1.5 billion. The Belt and Road venture, with Citic Group as the main developer, was reached with the prior government to speed oil and gas delivery to Yunnan Province. However the location in a conflict zone, and headlines over deep debt and structural failures in neighboring Laos and Sri Lanka prompted a rethink which intensified when Soe Win, a former Deloitte management consultant, became Finance Minister in May. With foreign aid cuts and a record budget deficit to be funded 20% by the central bank, he argued that the transaction had to shrink, as frontier market ambitions were otherwise scaled back despite passage of overdue reforms such as a new company law.

The latest updates went into effect in August and allow 100% international wholesale enterprise ownership with a minimum $5 million allocation. Thai textile firms have expressed interest in diversification with higher domestic production costs, but lawmakers regularly criticize the investment agency for blocking and delaying applications amid land and tax disputes. Electricity and information technology infrastructure are also lacking, and the outdated banking system suffers from limited private and mobile competition and exchange rate restrictions, according to an August Yangon seminar on the economic outlook. A main adviser to State Councilor Daw Aung San Suu Kyi, Australian professor Sean Tunnell, echoed the Asian Development Bank forecast that gross domestic product growth will slip under 7%. Inflation hit 7.5% in the last quarter through July with food crop flood damage and a 5% monthly devaluation of the kyat against the dollar through mid-August.

The budget gap is at a 7-year peak with big losses at one-third of thirty government enterprises, including the power and rail monopolies. Less than $2 billion in concessional debt and foreign assistance will come in this year, and the trade deficit widened to $1 billion from April-July after a 4% of GDP pace in 2016-17. The Chamber of Commerce’s recent business sentiment survey revealed a drop from last year on “unclear economic policies” as the government continues to promise an overarching “Sustainable Development Plan” for long-term vision beyond the Rahkine crisis.

With the currency sliding past 1500/dollar under reserve pressure, the central bank abandoned the daily 0.8% fluctuation band and introduced swap facilities in a stabilization attempt. It injected millions of dollars in liquidity in August as private banks were accused of hording foreign exchange, and diesel and sugar re-exports were suspended to mitigate swings. The Chamber of Commerce unveiled a currency reform blueprint to liberalize access and trading, and central bank technocrats urge a free-float system. However the governor in the post for 15 years, U Kyaw Kyaw Maung, was reappointed in July and has traditionally advocated monetary policy and financial institution caution. Interest rates are still controlled and foreign banks were only recently allowed to offer trade credit, and stock exchange promoters of expanded overseas entry expressed regret at the incumbent’s continued tenure.

Bangladesh’s business and financial communities are likewise outraged at the Rohingya refugee status quo, as they point to hosting and environmental costs in Cox’s Bazar without prospects of voluntary return and fulfilled aid pledges. Foreign investors are net equity sellers ahead of elections which could bring their own standoff, and de-listings without compensation multiplied area upsets.

The EU’s Dabbling Direct Investment Detours

2018 September 24 by

Posted in: Europe   

With mixed stock market performance among the eighteen new and prospective EU members as Western Balkan candidates prepare applications, an IMF working paper traces FDI trends prominent in their growth and productivity narratives the past decade and a half. The gross figure came to $700 billion in the main Eastern Europe tier that joined since the early 2000s, while the Balkans group take is around $50 billion after prolonged conflict and financial crisis. Lower wages and geographic proximity to developed Europe remain advantages, but aging populations and technology shifts have eroded them. Market size and stability explain two-thirds of inflows into the Czech Republic, Hungary and Poland, with banking a key target in privatization sales. Other services and manufacturing, in autos and chemicals in particular are also popular. Serbia accounts for half the Balkans stock with a similar industry profile, and advanced economy neighbors are the leading sources: Germany in Central Europe; Scandinavia in the Baltics; and Italy and Eastern Europe into Albania, Bosnia, and Macedonia. Tax holidays and investment credits, and Brussels infrastructure and project aid, enter the mix to boost exports, while domestic value-added has been largely flat over time. Car pre and post-production is almost entirely at parent companies, with local units confined to assembly and limited research and development. From more to less advanced emerging economies manufacturing outflows have linked onward as “flying geese,” but the pattern is far less pronounced than in other regions. The latest World Bank literature surveying 750 multinational firms points out that 80 percent weigh legal and regulatory protection above incentives offered by half the emerging world. Outside the institutional and policy environment the most influential factor is supplier quality, which comprises automation and skills depth.

Business climate and governance gains are noticeable with EU accession, and translate into bilateral FDI increases in the immediate aftermath, but will fade barring labor competitiveness and related reforms, according to historic statistical analyses. The Balkans should extend geographic outreach to realize benefits and has already joined China’s Belt and Road Initiative. Education and logistics spending should ramp up there paid for with reduced fiscal breaks, and officials should insist on domestic content within efficiencies of scale especially if cutting-edge technology applies.

Second quarter GDP growth was solid in the CE-4, with Hungary and Poland at the front in the 5% range. Czech wages were up almost 10% in nominal terms with a tight labor market, as the central bank continues with 25 basis point hikes, while the currency slips since cap removal. Hungary is trying to keep inflation within the 4% target, under ultra-loose monetary policy with negative rates as Prime Minister Orban works to maintain small business loyalty. Poland as the largest equity market is down 5% with the banking sector now majority locally-owned. Warsaw may face cohesion aid suspension as punishment for judicial interference, with the ruling party appointing its own supporters to the highest court. Romanian 10-year bond yields rose 50 basis points with budget overshoot and a cascade of corruption scandals upending the government and sparking mass street unrest. Proposed integrity laws were again diluted and investigators are under threat themselves from shadowy forces darkening the FDI takeoff threshold.

India’s Trampled Roaming Turf

2018 September 18 by

Posted in: Asia   

Indian shares alone among major Asian emerging markets turned positive in local index terms, as foreign investor net inflows also reappeared in August due to good earnings at a cross-section of top thirty companies, despite  price-earnings ratios outstripping the global average by seven times. As Prime Minister Narendra Modi underscored in his last Independence Day speech before  national elections, expected 7.5% medium term gross domestic product growth in the world’s number six economy was “running elephant” pace, even if consumer inflation was  back to 5% and fiscal and current account deficits were criticized in recent ratings agency and International Monetary Fund reports.

The rupee slipped to 70/dollar, below the level five years ago at the height of the “fragile five” scare, despite central bank tightening and intervention from the $400 billion reserve pile, as bond investors in contrast target India for the largest outflows. They accuse Governor Urjit Patel of erratic and missing communication on monetary and exchange rate policy, with the gap even more noticeable since the June exit of top economic advisor Arvind Subramanian, who returned to a US think tank. On the structural front too, fund managers alternated between skepticism and acceptance of tax and banking sector changes as an underlying allocation rationale. Performance is likely to continuing gyrating into the poll period, without clarity on the Modi first term legacy and future plans, as the broader asset class endures harsher judgment after Turkey’s crisis.

Former Indian officials poked holes in the Modi Administration’s track record, with previous Finance Minister P. Chimdaram faulting demonetization and unified tax complications, with additional rate overhaul from the Goods and Services Council in July, for cutting fixed capital formation below 30% of GDP.  An old economic planning head warned of “populist spending” to derail fiscal responsibility, which could include intact subsidies shielding against higher oil import prices. India Ratings decried a 7% drop in household savings the past five years to 16%, while Moody’s estimated the current account deficit will swell 1% to 2.5% of GDP, half the fraction during the 2013 US Federal Reserve Taper Tantrum. Fitch chimed in that the weaker currency will aggravate banking and corporate stress and repayment risk in view of unhedged borrowing, just as big state lenders began to double bad asset recovery in the first quarter under new procedures. The setback revived momentum for a central disposal agency, with a proposal now circulating for a public-private structure with $15 billion in initial capital that would focus in particular on idle power facilities.

The IMF acknowledged “important” insolvency and foreign direct investment steps in its August Article IV survey but urged greater labor and financial sector ones for productivity and savings. Credit growth was down to 12% annually, amid slow deleveraging and poor governance and inefficiency among the dominant state banks. The Fund urged more private competition, as US venture capital giant KKR launched a local financial services unit with a full small business line. It recommended adherence to the 3% fiscal deficit cap and longer-term public debt reduction to 60% of GDP, and insisted that recent agricultural and housing support be counted on-budget. Further interest rate hikes are in store with “upside” inflation, and could invite future government and corporate bond inflows as foreign portfolio ceilings are in principle relaxed. The 2018 Banking Reform Roadmap is “vague” and board independence and privatization should accompany future recapitalization. Trade, infrastructure and product regimes are also outdated, according to the report.

In the region Malaysia too has been on a relative tear, with an 8% gain since July and $100 million poured into the IShares US-based ETF last week during Turkey’s collapse. Prime Minister Mahathir Mohamed at the 100-day mark put $20 billion in Chinese projects on hold over debt concerns, pressed investigations and asset seizures around the IMDB scandal, and replaced the main sovereign wealth fund board. The growth forecast was slightly pared to 5% with the current account surplus intact, and the central bank eased mandatory hard currency export surrender rules on a possible path to reauthorizing offshore derivatives banned under the previous government. Foreign investors maintain one-quarter local bond ownership as Moody’s Ratings praised fixed-rate Islamic issuance as a sound strategy which can withstand wily old politicians’ uneven policy delivery, with Asia now scrambling for these safeguards.

 

The Arab World’s Entrepreneur Ecosystem Entreaty

2018 September 18 by

Posted in: MENA   

MENA stock markets mostly languished through July, with notable exceptions Saudi Arabia and Tunisia up 20% and 40% respectively, as Egypt disappointed as the main core universe component with a 5% loss. Kuwait jumped over 10% on an increased frontier weighting as Saudi shares graduate next year after MSCI’s latest review. Jordan and Lebanon were flat as millions of Syrian refugees stay in place despite the Assad and Russian governments’ hints at safe return and imminent large-scale reconstruction without identified guarantees or funding. Gulf equities are also preparing for competing standard debt gauge entry as JP Morgan finesses criteria for EMBI expansion. A dozen regional economies have yet to create emerging-market caliber entrepreneurial conditions for the “Fourth Industrial Revolution,” according to the latest joint World Bank-Economic Forum competitiveness report. It urges a new generation social contract since commodity riches can no longer support public sector employment and subsidies, amid a demographic youth bulge with still low female labor force participation. The private business enabling environment lags across the board in education, technology and financial sector development. Opinion surveys show around half of respondents decrying income inequality and political governance, and worrying about cyber-attacks and natural resource shortages. The area’s competitiveness index barely budged the past decade, even though Qatar, Saudi Arabia and the UAE rank in the top 30 of 135 countries. Morocco, Algeria and Lebanon slipped the most, and of the dozen pillars measured, only infrastructure and technology showed progress with financial market regression. Gulf Cooperation Council members are behind in training and labor markets, and automation has not translated into innovation. Resource-poor countries like Jordan and Tunisia have better diversification track records, but widespread state intervention in administration and ownership remains an obstacle. Work forces are not equipped for physical, digital and biological overlap that will characterize future business, and traditional bank lending cannot serve emerging entrepreneurs.

Oil and gas exports have accounted for two-thirds of the total, with education quality a key impediment in view of low math and science test scores. Small business credit is limited, with the share at the bottom of all developing regions. Only Africa and South Asia perform worse on the World Bank’s Doing Business scorecard, and high customs and non-tariff barriers hurt trade disconnected from global supply chains. Sound macroeconomic management is a precondition, but micro reforms are lacking from improved logistics to export finance help. Richer countries should liberalize industries for foreign and private entry, while fragile states at the opposite scale should consider dedicated enterprise zones and payments system modernization. Young companies of three to five years are the big job sources and formation rates increased the last decade but still lag the world average, especially when the UAE is excluded. A regional entrepreneur survey last year highlighted market, finance and talent access as the chief priorities for policy and practical steps. Angel investment networks have been launched in the Gulf, Lebanon, Egypt and Morocco to provide seed capital, but cross-border and women’s integration continue to stall and may demand cultural as well as operational transformation, the study suggests.