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Ukraine’s Sincere Gnawing Inauguration

2019 June 16 by

Posted in: Europe   

Ukraine stocks and bonds, after a bump on former comedian Zelenskiy’s resounding 75% presidential election haul, girded for a rough foreign policy, economic and anti-corruption transition period with the untested politician taking office. He had reform advisers for the campaign, but also a close relationship with the oligarch controlling the media outlet for the show that launched his candidacy who was implicated in fraud at the largest private bank. The central bank seized it as capital was also injected into ailing state lenders, with the system NPL ratio at 50%. The action was declared unconstitutional right before the vote, as the outgoing government likewise spurned another element of the twisting IMF program by lowering gas prices in a last ditch popular bid. The new president immediately called for fresh parliamentary polls as he seeks to lift lawmaker immunity from criminal charges. Russia offered citizenship to eastern breakaway regions at the same time, and ignored a European human rights tribunal ruling to release detained Ukrainian sailors following a Crimea incident. Fund disbursement is unlikely until the Zelinskiy team settles in and meets previous conditions, including unified bank and securities market regulation. The public sector and banks owe $10 billion in combined external debt over the next year, versus $40 billion in corporate repayment Reserves and liquid foreign assets were $25 billion at the end of 2018, with 40% banking system dollarization and high capital flight risk around political and growth uncertainty. GDP will increase 3% again this year, subject to agriculture and metal commodities price swings, and private consumption reflecting marginally positive credit growth. However the latter could be endangered if Privatbank is returned to its owner, also triggering cronyism accusations, and weak state units like the Export-Import Bank continue to run up contingent liabilities, especially as the books undergo fresh inspection.

Russian financial assets rallied in turn on the removal of incumbent hard-liner Poroshenko from office, although he vows to remain a vocal diplomatic opponent in parliament. Local equity and external corporate bond placements proliferated, and foreign investors snapped up sovereign issues on the prospect of easing regional and global tensions. President Zelinskiy signaled resumed dialogue with the Kremlin during the campaign without offering specifics, and the Mueller report conclusions in the US dismissing 2016 Trump team criminal conspiracy may stall further congressional sanctions momentum, including a government debt allocation ban. Moscow has also agreed to work with Washington to support talks between the Maduro regime and opposition in Venezuela, under the threat of civil war and millions more fleeing the country’s humanitarian and hyperinflationary collapse. However Russian growth remains flat with living standards stagnating below the wealthiest tier, and President Putin recently turned to China to drum up investment in the poor Far East around Vladivostok. A tax-free special economic zone is in place there, but Chinese companies criticize complex rules as a main business deterrent. Arbitrary rule of law is not the same red line Western partners cite as their FDI is barely positive. Jailed private equity fund managers in a dispute with Kremlin allies have requested permission to attend outside meetings ahead of the prestigious Saint Petersburg global forum as a measure of the authorities’ seriousness in mending investor ties.

Sri Lanka’s Second Wave Wallop

2019 June 16 by

Posted in: Asia   

While Pakistan’s stock market losses and risk of return to the MSCI frontier index occupy specialist investor thoughts with announcement of another $6 billion International Monetary Fund fiscal and balance of payments rescue, Sri Lanka’s quieter year-long extension of its program after drawing $1 billion also raises eyebrows. The request was not as abrupt a departure as with Prime Minister Imran Khan’s initial spurning of a deal, and then replacing his finance minister and central bank head with former officials of the maligned Bretton Woods institutions.

It was sealed after “setbacks” including a delayed budget from last year’s political standoff between the president and prime minister over dismissal and possible new elections, and the April multiple church and hotel terrorist bombings killing and injuring hundreds. The authorities declared a state of emergency in the aftermath, as retaliation attacks targeted Muslims and leading foreign visitor sources issued travel warnings. Fresh parliamentary and presidential polls are scheduled over the coming year, but both bond and equity buyers continue to closely track erratic debt refinancing and economic reform signals amid the security contingency and additional donor lifeline.

In March the government tapped external bond markets through a $2.5 billion dual issue at 7% yield to shore up dwindling reserves, below $7 billion at the end of last year. The exercise helped steady the exchange rate, which tumbled almost 15% in 2018 against the dollar on a 3% of gross domestic product current account gap from a combination of lagging agricultural exports and high oil imports. In the latest IMF review not yet incorporating the terror incidents’ fallout, that deficit is projected to improve slightly on 3.5% commodities and manufacturing-driven growth. Despite food price stabilization with normal weather, inflation will be 4.5%, and global financial and trade “adverse shocks” threaten tourism, capital flows, and foreign direct investment.

 Public debt is 90% of GDP, with “lumpy” near term repayments increasing rollover risk, and the fiscal deficit 3.5% target will stay out of reach without state enterprise restructuring and sale. The electricity, petroleum and airline companies had 1.5% of GDP in losses in 2018, and governance and subsidy overhauls are long overdue, according to the document. Divestiture through stock exchange listings could boost foreign investor sentiment after temporary currency controls ended in March, it suggests. While debt owed to China is in the headlines with the $1 billion takeover of the Hambantota port, it accounts for less than 10% of the external total compared with heavier loads due the Asian Development Bank and Japan.

A new central bank law aims to phase out government lending, limit currency intervention and boost independence. It steadied the rupee in the aftermath of the April carnage, but net purchases in the $150 million range have been minor compared with $1 billion last year. A cap on foreign buying of local government bonds remains in place at 5% of the outstanding amount, following large fund outflows during the early 2019 skirmish between the President and Prime Minister. Annual credit growth will approach 15% this year, with bank and non-bank bad loan ratios at 3.5% and 7.5%, respectively. Non-banks need fresh capital to meet Basel III standards, and comprehensive deposit insurance for the entire system will soon be introduced as anti-money laundering procedures are also upgraded to Financial Action Task Force compliance levels, the IMF commented.

Korea

Korean stocks that were positive through April on the other hand also got an excess credit non-bank warning in a May Article IV report. It forecast lackluster 2.5% growth on China-related semiconductor export drag that will only be partially offset by fiscal stimulus. Unfavorable demographic and productivity trends, rising income inequality, and rigid labor and product markets stifling small firm competition against the chaebol conglomerates are longer-term structural obstacles, joining the geopolitical uncertainty on the peninsula with Northern  diplomatic negotiations in limbo. Household credit expansion is still above 5% with the ratio to disposable income at a dangerous 160%, and two-thirds of the total at variable rates. Macro-prudential debt service limits will be extended to non-banks in the coming months, as they shift client emphasis from personal to corporate borrowers in a possible preemptive strategy. Their business real estate lending is up 30%, as aggregate company leverage tops GDP and property defaults raise the specter of a non-nuclear chain reaction.

MSCI’s Angled Anniversary Annals

2019 June 10 by

Posted in: General Emerging Markets   

Index giant MSCI marked 30 years of the emerging market index with a detailed retrospective, while the paper also cast future direction with China’s “transformative characteristics” as full “A” share weighting is 40% of the benchmark. At launch it was 1% and now is 12% of the global equity gauge. Allocation rose from a low base at the start of this century as wider foreign investor access spurred infrastructure and trading improvements. In 2007 frontier and small cap indices appeared, with two dozen components in the core dominated regionally by Asia. The economic growth premium over developed markets is not as pronounced but remains intact, supported by sound fiscal, monetary and structural policies evolving over the period. In a sense the growth differential has come full circle, as the 1980s was also modest with the universe in the throes of debt crisis. Over history inflation conversely narrowed to advanced economy levels, with double digits currently an exception with the advent of independent central banks enshrining price stability. Net public debt is half the industrial world’s 80% of GDP, with a healthier current account balance. Valuations fluctuate with a price-to-book 20% discount the past two decades, and cross-sectional volatility as a standard deviation measure is lower. Correlations among emerging markets continue to emphasize diversification benefits despite the tendency to increase globally during scares. Currency risk analysis from 2010-17 shows that unhedged portfolios outperformed. Active factor investing incorporating momentum and yield produced 1-5% returns the last twenty years. ESG screening is common and enhanced results and “sustainability” portfolios could be standard in the next generation.

Since “A” shares were added a year ago, Chinese exchange liberalization and regulatory reform has advanced with a 20% of free float portion to be phased in by end-2019.Along with Korea and Taiwan, Asia will be over half the main index in the near-term, and helps explain regional preference in private equity as well according to the latest annual EMPEA trade group survey. Over 100 institutions from 40 countries, with almost $1 trillion in assets in the category, plan to raise near-term commitments. Southeast Asia is the most popular destination, followed by China and India, and Brazil and Africa round out the top five. At the rear are Russia, Turkey and the Middle East, and industry and size focus is in tech and the middle market. Fundraising was a record $90 billion for all funds in 2018, and the fraction of global portfolios should average 15% in the coming years. With the Abraaj collapse and scandal, due diligence is more intense, and proprietary questionnaires examine traditional financial and management concerns alongside cyber security, gender diversity and other issues. Asia gets 85% of allocation with China the leader at $35 billion collected last year. In contrast no Russia fund has closed since 2014, as political uncertainty is the overriding deterrent, unlike in Asia where exit difficulty is also less. The main obstacles there are steep entry valuations and crowded deals, according to the study. Past performance is the perennial main selection driver, and one-third of respondents believe ESG criteria and implementation are part of the evaluation.  Asia is viewed as the dominant tech play, and its currency stability compared with other geographies is another lure as EMPEA celebrates its own 15th anniversary.

Central Asia’s Skidding Transition Tread

2019 June 10 by

Posted in: Asia   

The International Monetary Fund’s April update on the Caucasus/Central Asia (CCA) region quelled investor excitement about political and economic transition in Morgan Stanley Capital International frontier-listed market Kazakhstan and elsewhere, as it cited incomplete banking system and structural reforms among other legacies throttling competitiveness and growth. Kazakhstan’s 9% gain through end-April lagged the core emerging market index, despite President Nursultan Nazarbaev’s decision to turn over power to a successor after decades in office, and the prospect of large-scale state enterprise privatizations through the stock exchange following years of preparation. State governance is unlikely to improve should family members or political allies assume the post as expected, and the corporate version will also be stymied by public sector continued ownership control with asset divestiture. The Fund review points out that such ingredients threaten to repeat currency and financial system disaster patterns in the region amid low productivity, as main trading and investment partners China and Russia struggle with their own performance and stabilization challenges.

CCA forecast gross domestic product growth through next year is 4%, with oil exporters relying increasingly on the non-oil pillar. Kazakhstan can look to manufacturing and Azerbaijan to construction and services alongside new gas pipeline operation. Armenia, Georgia and Tajikistan will suffer from falling Russian remittances, offset by infrastructure projects within fiscal consolidation programs. Inflation through 2019 is estimated at 8%, before a drop to 6.5% at end-decade which could allow monetary easing. Medium-term growth will stay constant at 4%, half the clip in the post-independence 2000s, and insufficient to hike incomes to peer economy levels. Bank bad loan ratios in double-digits plague half a dozen countries; Uzbekistan has a long history of government-directed lending; and Armenia and Azerbaijan foreign currency borrowing is unhedged. Kazakhstan and the Kyrgyz Republic provided emergency liquidity, and insolvency is a “lingering risk” with bank resolution and supervision gaps, according to the outlook.

 Interest and exchange rate regimes have been in flux since the 2014-16 Russian ruble depreciation, with widespread shifts toward inflation-targeting and floating currencies. However Tajikistan and Turkmenistan still manage overvalued units, which can raise bank balance sheet pressure in highly-dollarized systems, and foreign exchange trading is typically shallow. Fiscal rules and stricter tax codes were adopted throughout the region, but expansionary policy elevated public debt to 50% of GDP for oil importers. Geopolitics is a drag with the prospect of additional commercial sanctions against Moscow and US military and aid withdrawal from Afghanistan. The export range outside commodities is narrow, and concentrates disproportionately on China and Russia. Capital market development lags such as creation of local government bond yield curves, and better private business climates would foster global supply chain integration. While Bank cleanup is in limbo associated money laundering and corruption can persist, the review warns.

The Fund’s Middle East/North Africa take released at the same time also sounded the alarm by first noting that a new Reported Social Unrest index was at a multi-year peak. It calculates the share of media coverage devoted to conflict, protests and civil strife in recent flashpoint countries including Algeria and Sudan. The gauge has an inverse relationship to per-capita income growth, where Jordan and Lebanon score poorly, as well as investor-friendly rule of law. Gulf oil exporters will grow only 2% this year, but inclusion in the benchmark emerging market external sovereign bond index could spur $40 billion in inflows to counter credit deterioration from energy price swings and spillover from the Syria and Yemen civil wars. Domestic credit expansion is barely positive, and despite healthy bank capitalization real estate exposure will dent earnings and franchise value. Fiscal balance is remote and tax mobilization and spending restraint has slowed, and the state company-led loss-making model is unable to generate the million new jobs annually needed for Gulf Cooperation Council (GCC) members. Small business can be a major employer, but funding access is a chronic impediment demanding deeper securities markets. The Fund urges the GCC to construct a common financial and monetary conditions indicator to equally guide the real economy, but components are either absent or reported with serious lag. In oil importers Egypt, Jordan and Lebanon public debt is above 80% of GDP posing a next-generation burden, the review cautions for more investor pessimism.

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Argentina’s Stretched Intervention Band

2019 June 2 by

Posted in: Latin America/Caribbean   

Argentina’s peso as the worst emerging market performer, down 12% through April, continued to drag stocks and bonds with it as runaway political fears about the return of former President Christina Fernandez joined 50% inflation to force the central bank to abandon the IMF-agreed no-intervention zone. The peso veered toward the low 50s/dollar, as tighter fiscal and monetary policies could not dampen consumer price increase expectations or instill business confidence, amid relentless capital flight and banking system shift to short-term deposits for immediate access. Current President Macri, has fallen behind Christina in opinion polls before the October elections, even though she has not declared and faces corruption charges from her tenure. Her memoir was published at the same time as the popularity surveys and contained anti-IMF diatribe investors cite as the basis for repeated debt default after last year’s $55 billion rescue. In June, the major party contenders will be chosen in primaries to clarify the race, with former Economy Minister Lavagna in the mix from the center-right as a preferred financial community alternative. To tame inflation, the benchmark interest rate was hoisted above 60% and controls were imposed on staple items and quickly provoked shortages. The government has leeway to raise budget social spending, but poverty hits one-third the population and only minimal economic growth is projected this year. The much-promised foreign investment boom never materialized as offshore energy was whipsawed by US fracking competition, and multinational companies faced huge valuation losses in currency translation under standard accounting rules. With cumulative inflation above 100% the past three years, the dollar must now be used in balance sheet statements as the “functional” unit.

Brazil in contrast is positive across financial assets despite recent pullback, as the Bolsonaro Administration’s twisted economic and social strands create conflict and confusion. The President glorifies the pre-democracy military junta but has been at loggerhead with his vice president, a noted former general, over foreign and security policies. As a mainstay in the campaign platform, he denounced immigration, but Venezuelan refugees from socialist Venezuela are now a notable exception. In schools his early emphasis is on purging curricula with untraditional family values, while the business community urges skills and technology training. The manufacturing PMI is above 50, and FDI is on track to recover to $70 billion annually, but industrial output remains slack on 12% unemployment. Corporate profits are up from previous recession to bolster stocks, and bellwether state firms like oil giant Petrobras and development bank BNDES are under dynamic new management. They are under the influence of the University of Chicago free-market approach championed by Economy Minister Guides, who founded a private equity house and a think tank reflecting the philosophy. He is leading the charge for overdue reform of public pensions swallowing the budget, and has battled with lawmakers for a majority to fix the “doomed” system. The effort has been bogged down in internal government fighting over content and strategy, and complications from the relentless Car Wash investigations with parliamentarians and their allies in their sights. With estimated GDP growth under 2%, the 6.5% benchmark rate should not budge, and with $300 billion in reserves and a stronger real intervention is unlikely unless central bankers are accused of unconventional social behavior.

Africa’s Preferred Prosper Pivot

2019 June 2 by

Posted in: Africa   

Six months into the Trump Administration’s unveiling of its “Prosper Africa” initiative intended to boost the middle class, youth employment and business climate in the interest of national security and Chinese aid and investment competition, the Washington-based Center for Strategic and International Studies issued a report on turning it “into reality.” It notes that over half of Sub-Saharan countries are “free” in political terms, aided by the spread of cellphones and other technology to enhance accountability and democracy. The middle class should triple to over $1 billion by mid-century, but media searches show 80% negative mentions with a corruption, conflict and disaster focus. For the past decade US aid averaged almost $10 billion, reflecting longstanding ties but otherwise “economic disengagement. “ Exports to the continent have been under 1% of the total, despite urbanization raising goods and services demand.  Bilateral trade, finance and professional training can reduce joblessness and social instability and tap into household consumption estimated at $2 trillion over the medium term. Europe and Asia have dedicated programs such as Germany’s private sector development “Marshall Plan” and China’s array of infrastructure and loan for natural resource efforts. Its two-way $150 billion trade was triple the US figure in 2017, and for the five years preceding that date credit lines averaged $17 billion under their own debt and environmental sustainability criteria.

Washington has deployed thousands of troops in twenty countries on security and humanitarian missions, and seven are in the top ten of aid recipients globally. The African diaspora is 5% of the immigrant population, and tens of thousands of students are at US universities. One million Americans toured the region in 2017, and overall numbers are projected at 85 million by end-decade as big hotel chains like Hilton and Marriott expand. The visa restrictions recently proposed on Nigeria and neighbors could provoke countermeasures stifling this potential, the think tank warns. The twenty-year old duty-free AGOA arrangement, extended through 2025, is a linchpin but petroleum products dominate despite also targeting garments and manufacturing. AID’s sub-regional trade hubs have created $600 million in projects, and the MCC has approved dozens of host nation public-private sector compacts according to strict objective criteria on good governance, economic growth, and social indicators.

 Power Africa was launched five years ago to catalyze over 100 deals and power connections to 60 million citizens. It “de-risks” investment through official guarantees and financing, and promotes policy reforms and free-market pricing under a dual mandate. The African Development Bank otherwise puts infrastructure needs at $150 billion annually, with half the sum still outstanding. Prosper Africa has not yet been fleshed out, and lacks a communications strategy and specific goals.  Free trade agreements should be a priority as the African Union forges a continental structure, and a dedicated commercial corps through embassies and the main organizations at home could be recruited for business leads and relationships. Telecoms is a particularly promising industry for American competitive advantage and the Ex-Im Bank still lacking board members and the new Development Finance Corporation to succeed OPIC would benefit from thematic and activity reorientation in a new “reality,” CSIS suggests.

The Basel Committee’s Ripple Effect Ripostes

2019 May 27 by

Posted in: Global Banking   

A Center for Global Development task force of academics and multilateral lender and central bank officials channeled emerging market criticism of the Basel III formula into a lengthy report on recommended methodology changes and further research so that a common regime can “work for developing countries.” It notes a “sharp fall” in cross-border global bank lines the past decade, only partially bridged by bond issuance and new South-South flows, which may be due to advanced economy incorporation of the standards. The panel calls on the IMF-housed Financial Stability Board to study the topic, and also examine the asset class implications for infrastructure projects in particular assigned high risk weighting. Home and host country supervisors often clash in setting norms on a consolidated group basis, and regional networks in Latin America, Asia, Europe and the Middle East/Africa may choose tailored rules and monitoring for their close ties. “Proportionality” is desired to reflect the financial system and data realities on the ground, and tradeoff between oversight and growth. The capital and liquidity ratio minimums diverge from the “gold plated” industrial world practice of ratcheting up and adding buffers following credit/GDP measures that do not necessarily apply. Small business and trade finance and capital market building can be greater priorities if the Basel Committee opens to smaller emerging economy members beyond the G20, the review suggests. The basic core principles could then be modified and more universally aligned in the near term, rather than the current version phasing in over years and relying on complex internal and external guidelines suitable only to a minority. Emerging market institutions in contrast are subject to economic volatility, securities depth, data transparency, and capacity-governance limits at odds with the Basel III and potential successor frameworks.

Anti-money laundering/ terror funding and tax information guidelines increase pressure in these geographies, with correspondent bank relationships “significantly decreased.” With quantitative easing’s negligible and negative interest rates since the global financial crisis, emerging market corporate and sovereign debt has mushroomed into a multi-trillion dollar market, but long-term allocation matching loan arrangements is unclear. China through its policy banks and Belt and road Initiative has the biggest South-South nexus but they do not report within the BIS classification, and spillovers could spike with restructuring episodes as currently in Venezuela. The IMF calculates separately that 60% of infrastructure funding is advanced economy-sourced even with Chinese inroads, with current Basle III categories strict on project phase and overall borrower exposure. It could be hedged if tools were available, but formal derivatives markets are thin or nonexistent across the developing world. Foreign bank assets are half the total in a cross-section of the universe from Sub-Sahara Africa to Mexico and Poland, with local and hard currency sovereign debt treatment in conflict. “Shadow” banking’s size and linkages to the conventional system argue for inclusion in China, India and other major emerging markets. Regulators there may need to create a “systemic liquidity tool” to hold in reserve given the chance for government bond shocks and the absence of supplemental safe assets. Securitization can be encouraged to move items off balance sheets and promote investment business, and with wider use Basel authorities may loosen the criteria left from the crisis mortgage fiascos in the US and Europe. New asset-backed forms can benefit the real economy so that they become a public good through private operations, the CGD comments.

West Africa’s Non-Benign Benin Signal

2019 May 27 by

Posted in: Africa   

In March even hard core frontier market investors raised eyebrows when tiny Benin, part of the West Africa CFA Franc Economic and Monetary Zone (WAEMU) dominated by Cote d’Ivoire and Senegal which previously issued abroad, floated a 500 million euro 8-year bond at an initial near 6% yield. It followed another debut deal from Uzbekistan, where the new President has embarked on far-reaching currency and trade reforms and the stock exchange opened to foreign funds with capital control modification.

Benin’s inaugural sovereign ratings were in the speculative “B” category, with Fitch pointing out that over 6% gross domestic product growth from cotton and cashew exports was offset by poor development indicators and weak diversification and external accounts. For two decades the country of 11 million with $11 billion in output has been under International Monetary Fund programs, and relied on agriculture and port activity often directed cross-border to Nigeria. That large neighbor is just emerging from recession, and Benin’s government infrastructure spending as a backstop will likely breach the regional 3% of GDP fiscal deficit target.

The IMF’s March report on WAEMU common policies pointed out that budget and current account gaps were increasingly funded through Eurobonds rather than regional central bank loan facilities and the Abidjan-based government bond market. Public debt approached 55% of GDP and servicing one-third of revenue in 2018, and the “structural impediments” of the local bond market include the lack of primary dealers and a single supervisor and depository stifling placement and secondary trading. External borrowing diverts from core stock exchange challenges such as increasing non-bank investor participation, and also dilutes the zone’s tighter monetary stance to preserve low 2% inflation and the CFA Franc-euro peg, the review suggested.

The global banks which led Benin’s offering may have wished to extend longstanding Francophone Africa relationships and tap favorable temporary high-yield appetite, but could attain dual long-term commercial and development returns through a model shift as technical advisers. They can compete with traditional development institutions like the African Development Bank, with its own dedicated data collection and market building initiative.

Cote d’Ivoire and Senegal Eurobonds in 2018 did not lift international reserves to the recommended five months imports range for the zone, although they covered almost 90% of the combined fiscal deficit. The current account gap rose to almost 7% of GDP on negative terms of trade with oil import demand, and the Fund found “shrinking room for maneuver” to avert debt distress. The average tax revenue/output ratio for the eight member group, which includes conflict and terror-prone Burkina Faso, Mali and Niger, was up only 1% the past decade to 15%. The original public debt ceiling was set at 70% in the aftermath of the 2000s HIPC official relief program when concessional financing dominated, but a 10% lower sustainability threshold is now in order in multilateral agencies’ view.

Banks are phasing in Basel III prudential standards over five years, as annual credit growth remains in high-single digits and concentrated on the public sector. Three large banks could not meet the new capital minimum, and bad loans were almost 15% of the total in mid-2018. A repo market does not yet exist to support broader bond transactions, with banks at rollover risk especially if existing sovereign instruments are of limited collateral use.

Cote d’Ivoire is projected to grow 7% annually over the medium-term aided by state enterprise restructuring, and its debt strategy envisions a two-thirds/one-third regional-external split. However, over the past two years the latter has been the main channel and foreign debt increased to 30% of GDP, and in net present value terms the debt distress trigger is close with the repayment profile, the IMF warns. Maturities range from 8-30 years, and officials are considering hedges with international counterparties for dollar exposure.

Senegal has only a policy support program with the Fund, but it too was admonished about vulnerabilities following “breaches” in debt-to-export measures and missing information on total liabilities, including to Chinese creditors under showcase road and stadium projects. President Macky Sall easily won reelection in February after opponents were disqualified, as critics raised questions about off-budget financing also reflected in asset manager research.

Countries have long promised simple improvements to the regional bond market such as aligning auction and syndication approaches, eliminating multiple regulators, and creating a private insurance and pension fund institutional base, but progress stalled amid recent access to global fixed-income investors. The Benin deal was a breakthrough as well as a wake-up call that the zone may have leverage and functional cracks. International issue underwriters could work to fix them for a more durable franchise, at the same time they seek immediate fees and returns, and the next Francophone exercise can commercially seize this frontier.

Iran’s Offsetting Oil Anguish Salve

2019 May 19 by

Posted in: MENA   

The Tehran Stock Exchange local index hit the record 200,000 mark despite harsher US sanctions aiming to eliminate oil exports and branding in full the Revolutionary Guard (IRGC), which controls listed companies accounting for an estimated one-fifth of the economy, as a terrorist organization. Investors preferred equities over the battered currency and gold markets as they sought refuge from deepening stagflation, with gross domestic product down 4% on 30% inflation through the last fiscal year ending March, according to government figures. The International Monetary Fund predicts greater output contraction over the next year to 6% as consumer prices rise 40%. Oil earnings fund around half the budget, with last year’s deficit at an historic $15 billion. The central bank, which has just begun formal open market operations, is responsible for 20% money supply expansion to further embed inflation, as it tries to kick-start growth and ensure banking system liquidity.

 Economic and financial sector health is at its worst since 2012, when previous global as opposed to unilateral sanctions pushed Tehran into relief talks with outside powers in exchange for nuclear weapons development monitoring. While Washington has withdrawn from the deal, Europe and Asia are still in, as they look for cross-border payment structures to allow continued trade without drawing US Treasury Department ire. France and Germany championed a special-purpose vehicle for barter exchange in essential goods, but it not yet in effect and may be confined to highly-restricted humanitarian purposes with the Trump Administration’s intended ban on all oil exports and Revolutionary Guard-connected transactions. Iraq is the only country to get permission for a waiver on petroleum shipments, and China and Turkey criticized the decision and may phase them out over time, but their banks and companies are clearly in enforcement cross-hairs. The Bank of Kunlun, a well-known Chinese intermediary, has already faded from the scene, and policy banks leading the bilateral Belt and Road initiative are also on the alert. However domestic retail investors have factored in these outside worst-case scenarios and see local currency value only in shares, with the rial in parallel trading free fall toward 150,000, compared with the 42,000 official rate, after the IRGC’s terrorist designation.

Iranian oil sales through March plunged around 60% from the 1.5 million barrels/day projected in the budget, before the Trump Administration’s zero target was finalized. Non-oil exports slipped 6% to $45 billion, reversing the previous year’s 12% increase. The squeeze’s fiscal hole is exacerbated by widespread tax evasion, estimated at 30-40% of the eligible base according to a parliamentary commission. It also jeopardizes the traditionally positive current account balance and international reserve position, which analysts believe is now below $75 billion, with only a fraction held at home immediately accessible and liquid. Iranian officials claim the stash is ample and that their heavy crude is not readily replaceable by major Gulf producers, and secret transaction channels are in place for backup. However recession was reported across the board in the last September-December 2018 quarter, including agriculture, mining and industry, which plunged 9%. Flooding the past month added economic damage with losses put at $2.5 billion, and catapulted meat and vegetable prices 100% into the Persian New Year, government statistics showed.

The World Bank’s Middle East/ North Africa outlook released for the Spring Meetings forecasts another year of near 4% contraction, a 5% of GDP fiscal deficit, and slight current account surplus. It will be the only country in the region in recession, with unemployment also expected to worsen to 15% on youth joblessness double that figure. Multilateral agency observers cite promised banking sector reforms, including central bank monetary policy conduct through benchmark Islamic finance instruments, bond and interbank market deepening, and stricter independent regulatory oversight as pathways out of crisis. They have long advocated exchange-rate unification, shelved indefinitely a year ago when emergency import measures and an informal dealing crackdown were imposed when the US left the nuclear agreement. Iran’s Budget and Planning Organization head admitted in April that the “ approach is not working” with fraud and embezzlement and offshore flight allegedly pervasive. The multi-tier system may be simplified in an open electronic platform, as central bank governor Abdolnasser Hemmati also points to “psychological factors” in currency panic due to linger without broader economic policy sanity.

Asia Financial Inclusion’s Selective Reach

2019 May 19 by

Posted in: Asia   

An IMF working paper, in view of inclusive growth’s place on the Sustainable Development Goals ahead of a UN conference, sets out to measure credit and insurance access progress across Asia, where many countries promote dedicated strategies. Economic and savings benefits are “well documented “and measured by indicators such as citizens with an account and the number of ATMs. Of the 40% unbanked in low and middle-income regions as of 2017, half were in Asia and only one-tenth of the population in these places formally borrows. Despite numerous demand and supply barriers, it outperforms peers amid wide disparities between developed Japan and Korea and poorer members like Myanmar. China, Malaysia and Thailand score well in traditional/ digital banking, while Cambodia and Nepal rely 60% on informal sources despite mobile money strides. Over half of Indians have a bank account following a push early in Prime Minister Modi’s first term, but only one-fifth use it. Gender differences are stark in South Asia, where only 30% of women versus 45% of men are banked. Poverty and rural location is even more exclusionary, with only 10% of poor Indonesians in the system. Higher income levels equate with inclusion, but governments can take specific steps to remedy gaps, such as Cambodia’s mobile public-private partnership, and the Maldives’ fishing boat outreach. Small Pacific island states like Samoa and Tonga have lagging infrastructure and wide interest spreads and are remittance-dependent, with correspondent relationships often in jeopardy from money laundering rules compliance. With their natural disaster threat, fintech is now promoted as preferred safer alternative. Asian companies have less concern about account ease compared with other geographies, but ones in Mongolia, Nepal and Sri Lanka cite both debt and equity constraints. The regulatory climate can be an overriding factor, and the Global Microscope survey based on a dozen metrics has India, Indonesia and the Philippines as leaders and Bangladesh and Myanmar at the bottom. However, consumer and privacy protections, and enforcement and supervision capacity are missing, according to the Fund document.

Public bank ownership can boost penetration at the cost of lower efficiency and earnings, and on the subcontinent usage is compromised by distance and collateral demands. Fintech is a major driver in China and elsewhere, with artificial intelligence reinforcing basic approaches, Chinese consumers have skipped a generation bypassing credit and debit cards, and ASEAN is far along with Thailand’s physical bank branches falling. Despite the region’s pace, it is behind Africa in mobile technology, where the East African Community is particularly active. The paper concludes that inclusion and broader development are not always correlated, with securities market building typically a distinct category. A separate Price Waterhouse-Economist study on major emerging markets projects trends into 2030, when China and India companies and stock exchanges are expected to dominate globally. Outside Asia, Brazil, South Africa and Russia will be top players, as the Chinese retail investor base of 300 million already will be a “huge pot.” The research notes that rivalry with New York and London is stiffer with domestic institutional assets and tighter corporate governance, while geopolitics remains a “drag,” with trade conflict and populism spread defying inclusion.