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Mexico’s Misplaced Missionary Zeal

2019 August 23 by

Posted in: Latin America/Caribbean   

Mexican stocks lagged peers with a MSCI Index outcome through July, one year after President AMLO was inaugurated, after the Finance Minister resigned in protest over lack of “evidence-based” policies, possibly referring to $20 billion in tax and investment relief for state oil behemoth Pemex relentlessly downgraded by credit rating agencies. His successor and deputy Herrera is another nominally orthodox pick with World Bank background, but the President’s “fourth transformation” anti-economic liberalism stance routinely overrules his team with arbitrary moves. A new $15 billion Mexico City airport was cancelled leaving bondholders in the lurch and government planes and perks have been offloaded, at the same time Pemex already saddled with $100 billion in debt gets an $8 billion refinery. Next year’s budget plan foresees a slight surplus analysts challenge since government contingent liabilities are masked, and the latest GDP figures narrowly skirt recession. Bureaucracy has been slashed in favor of direct cash payments for social spending, with civil servants demoralized the absence of longer-term education and health reform strategy. The peso has dipped toward 20/dollar with investor backlash, but as a general emerging market proxy these effects are offset in industrial world low interest-generated risk-on sentiment.  Members of the President’s party, which has no Senate majority, urge a compromise legislative agenda and warn against individualized power. They united with the opposition on beefing up Central American immigration control, after US President Trump threatened special tariffs despite renewed free trade agreement. Mexican lawmakers are expected to back the accord, which faces tougher sailing in Washington heading into an election year. Democratic presidential candidates advocate stricter environment and labor provisions and to reopen negotiations even with ratification this year. Auto supply chain relocation from China has been notable with that bilateral tiff, and executives note that neighbors like Brazil, which recently signed a pact with the EU as Mercosur’s powerhouse, could be a fallback as treaty and refugee frictions resurface.

Brazil stocks rose 15% despite growth forecast cuts toward 1% and continued corruption allegations surrounding President Bolsonaro’s family and close allies, including famous Car Wash prosecutor Moro who may have interfered in investigations. Nepotism is another complaint with his son reportedly tapped as US ambassador despite lack of credentials, and a 30% favorability rating reflects the anemic economy as well as discontent over ultra-conservative military and social positions. Courts have defied anti-minority rhetoric to enshrine ethnic and sexual preferences in law, but conference tourism has suffered with boycott incidents. Banks have 3% bad loan ratios but credit is expanding just above that pace as the policy agenda focuses on social security reform passage to rein public debt, with initial lower house approval. Argentina (+25%) was the surprise stock market winner before primary election results come in mid-August handicapping President Macri’s second term chances. He picked a Peronist running mate in an attempt to neutralize the “Fernandez 2” ticket which could bring Christina back as Vice President. In early voter surveys the two camps are roughly even as the peso has rebounded on lower inflation since May’s near 60%. The IMF’s $55 billion rescue is largely on course, and the European successor to managing Director Lagarde will likely embrace its largest program coming on board right before the October poll.

Asia’s Fraught Frontier Framing

2019 August 23 by

Posted in: Asia   

Through the first half Vietnam and Kazakhstan led Asian frontier stock markets on the Morgan Stanley Capital International Index with respective 8% and 15% gains, the former in line with the overall gauge’s increase. Bangladesh was up 3%, while Sri Lanka was among the worst performers with a near 10% loss. Since Pakistan returned to the main index, dedicated fund managers have been on the lookout for potential new entrants, with Mongolia often mentioned with dozens of listings in comparison with Cambodia and Laos with just a handful. However MSCI’s June review proposed no additions, as Vietnam remains on the “watch list” for potential upgrade to full emerging market status.

 It noted positive steps to combine the Ho Chi Minh and Saigon stock exchanges and establish a central clearinghouse, modernize securities law, and open to full foreign ownership in sensitive banking and other sectors without a promotion timetable. Foreign inflows spike in advance to reflect greater global index weighting, but await direction as MSCI in the past criticized Vietnam’s “low liquidity” and is wary of strengthening Asia’s hold on the core roster. China, Korea, Taiwan and India already account for 60%, but even as it stays frontier Vietnam will become a larger component as Kuwait likely graduates by the end of this year. Kazakhstan in turn aims to solidify its position as the Astana International Financial Exchange was officially launched, with a wave of privatization offerings signaled in the coming months.

The US-China trade imbroglio reinforced longstanding production relocation to lower cost Vietnam, but export growth slowed in the first quarter with smartphone assembly down in the regional supply chain. As the International Monetary Fund’s July Article IV report cautions, it must upgrade productivity on digital technology, and also faces a looming demographic cliff as rapid aging sets in over the next decade. Economic growth has settled at 6.5% on inflation at half that figure, but weak domestic private investment and state-owned banks remain a drag.

 Stock and bond market development are priorities to diversify funding sources, but public debt at 55% of gross domestic product, 5% below the statutory ceiling, continues to preempt commercial purposes. Treasury bonds are issued at 5-year maturity, but short-term bills are absent for cash and risk management and yield curve creation. The fiscal deficit is forecast to fall to 4% of GDP next year, assuming higher tax collection and reduced civil service spending, but the Fund recommends a tighter medium-term debt ceiling to avoid trouble.

Monetary and exchange rate policies are under close investor tracking, with runaway double-digit credit growth until this year. The central bank slammed the brakes, with consumer and real estate loan limits and asset-liability maturity mismatch prohibition, to slow the annual pace to 3% in June. With Asian Development Bank support, a domestic credit rating agency is in formation, and Basel II bank capital adequacy standards go into effect in 2020. An inflation target will be adopted over time, and the government’s asset management agency has whittled the reported 6.5% bad loan pile, but the bank equity shortfall is still estimated at 2% of GDP bolstering the case for wider foreign ownership. The currency was “broadly stable” against the dollar in the first quarter within a narrow 3% fluctuation band, but investors prefer a more market-determined rate. Intervention with $60 billion in reserves on hand has drawn scrutiny from the Trump Administration Treasury Department, which also criticizes anti-money laundering gaps.

The IMF recently completed a Kazakhstan visit as a successor to longtime President Nazarbaev took office promising to jump-start economic and financial sector agendas. He was formerly parliamentary speaker, and as a ruling party stalwart developed solid business community relationships favoring blue-chip IPOs in the oil and gas and other industries. Growth should approach 4% this year on broad pickup in hydrocarbon and mining exports, construction, and services. Inflation is in the 4-6% target range, and the central bank cut the policy rate in April as banks undergo a thorough asset quality review to determine outstanding risks likely to accelerate disposals at the state Problem Loan Fund. A May study by auditing firm KPMG suggests that private equity, with only a few deals worth $100 million annually, could be interested in  privatization and distressed credit stakes that further raise the frontier market profile.

Greece’s Explosive Election Odyssey

2019 August 16 by

Posted in: Europe   

Greek stocks up 30% on the MSCI Index through mid-year continued to surge after Prime Minister Tsipras’ snap election maneuver backfired, as his party lost to the conservative opposition which took a parliamentary majority. New government head Mitsotakis follows his father in the post previously, with an Ivy League US education and management consulting background pledging business-friendly policies. His Finance Minister will oversee a corporate tax cut, but warned of “hidden bombs” likely to aggravate the record debt load from hundreds of billions of euros in consecutive EU rescues. Contingent liabilities around state enterprises never restructured or privatized under leftist administration could complicate the 15-year repayment plan agreed with Brussels at concessional rates with a long grace period. It insists in return on maintaining stringent fiscal targets such as a 3.5% of GDP primary surplus, which the incoming Prime Minister campaigned against to boost competitiveness and higher growth than the recent meager 1-2%. Officials from the bailout facility repeated that austerity was a “cornerstone” as other regional struggles over Brexit and migration pre-empt appetite for reopening the Greek saga. A potential ally in softer terms may be ECB governor nominee Lagarde, who advocated outright cancellation as IMF chief, but her immediate priority will be another round of quantitative easing in some form to stoke anemic 1% growth and inflation. With bond-buying and commercial bank on-lending potentially exhausted, she is under pressure to follow the Japanese model into equity holding investors consider a double-edged sword. The new team will look for easy wins like slashing foreign investment bureaucracy and screening that has slowed mining projects, and the cabinet draws on well-credentialed expatriates in the hope of luring back professionals leaving over the past decade’s crisis. Right after the victory, a 7-year bond was heavily oversubscribed with a yield under 2%, as an initial vote of confidence that growth and real returns can outpace neighbors, especially as the “peripheral” story fades in Italy, Portugal and Spain. In core emerging markets the juxtaposition is increasingly with Turkey, where stocks were down 5% in the first half coinciding with the ruling AKP party’s second defeat in the rerun Istanbul major’s race. The fragmented opposition unified around a moderate candidate, as President Erdogan’s grouping has begun to splinter, with the latest defection from his former deputy Babacan. The political as well as economic consequences to loss of the biggest city are far-reaching, as big infrastructure projects and favored business relationships will come under scrutiny and could reveal more serious banking and corporate sector weakness. Around $150 billion in external credit lines must be repaid over the next year after a cumulative 40% lira drop against the dollar since 2018. Depreciation drove inflation above 20%, and quashed import demand also helpful in curbing the current account deficit. The President blamed the poll setback on central bank rate hikes to near 25%, which he claims worsen inflation in contravention of economic orthodoxy.  He sacked the governor and named his deputy as replacement in a fit of pique, and the latter immediately cut the benchmark 4% and pledged more accommodation.  Foreign investors shunned securities in their own swift sanctions on undermining independence, as the US and EU prepared to counter Russian military and Cyprus oil moves with punishm

China’s Stumbling Star Turn

2019 August 16 by

Posted in: Asia   

With foreign net inflows in June at $3 billion as “A” shares added to the MSCI index were up over 30%, domestic investor attention in July was on opening of the new Star small cap market designed to lure listings from the US Nasdaq and Shenzhen’s tech tier. Stocks jumped 150% the first trading day pending creation of a benchmark, with 100 companies in the offering pipeline. It has no daily fluctuation limit, but investors need a minimum RMB500,000 account and two year track record. International access is expected over time as officials announced further steps at capital market and industry entry, as rating agency S&P assigned its first financial institution grades with a AAA to an ICBC unit. The moves came as Q2 growth was reported at 6.2%, the lowest in almost three decades, with consumption and fixed investment the main drivers. In the first half exports were flat in dollar terms, as US sales dropped 8% in June with continued trade friction. President Trump has accused Beijing of currency manipulation as well, but the IMF’s periodic review of major economy interaction found fundamentals in line as it urged more flexibility. Analysts point out that depreciation would aggravate the external debt burden, as part of the overall 300% of GDP load according to the latest IIF tally. A new report by the Germany-based Kiel Institute also estimated Chinese overseas lending in dollars at $700 billion, dwarfing other bilateral and multilateral providers, as another impetus for maintaining relative rates.

Corporate bond placement doubled in the first half, and China accounted for 40% of the emerging market total, industry trackers calculate. Dozens of defaults, including at high-profile Minsheng Investment Group, were recorded, and the government is steering real estate developers to refinancing only operations offshore to curb future exposure. House prices in most cites rose 10% on annual basis through June, and municipalities still rely on rising land values as collateral for their own borrowing. The Kiel institute survey also reveals increased non-payment and restructuring among Belt and Road initiative countries, with low-income recipients in Africa and elsewhere in particular experiencing troubles. The total cross-border package of loans, sovereign bonds, and portfolio and direct equity is up tenfold this century to $5 trillion, with thousands of operations in over 150 nations.

The Star market inauguration contrasted with clashes between police and pro-democracy protesters in Hong Kong around the Star ferry, including a standoff in the legislative chamber where the extradition law focusing initial anger was considered. Beijing and its allies condemned student violence and blamed the US for fomenting it with trade negotiations on hold. Shops remain shuttered and damaged, as banks cut the economic growth forecast to 1.5% on home price and tourism tapering. Food costs climbed 3% in June on pork shortages from a disease outbreak, as the local dollar regained its footing within the intervention band despite a setback from cancellation of a multinational beverage company IPO. Official unemployment was 3%, but housing costs and income inequality are major social issues that future Beijing-backed representatives must tackle as the current Carrie Lim-led team’s star fades.

Tunisia’s Testing Turnaround Trickle

2019 August 10 by

Posted in: MENA   

Tunisia joined other Middle East frontier markets Jordan, Lebanon and Morocco with flat to negative results on the Morgan Stanley Capital International Index through mid-year, as the composite gauge was up 8.5%. Despite billions of dollars in international community support since the Arab Spring eight years ago, it has not escaped lackluster 2-3% gross domestic product growth and now heads into another election cycle with political party unity also stalling. Tourism has recovered from a spate of bombings, but recent terrorist attacks on police posts renewed fears at the same time the over 90 year old president was rushed to hospital before his term ends in November. If incapacitated, the octogenarian parliamentary speaker would assume the position. Legislative polls are slated for October, with the Ennahda wing of the splintered ruling coalition pulling 15% in opinion surveys, and the prime minister’s new party only single digits. An outsider wealthy media executive is ahead in popularity, but may be disqualified since no candidate can use foreign funds. The election code also bars challenge to the basic tenets of the 2011 constitution enshrining secular principles and women’s rights, and strict Islamic candidates have complained.

The IMF in June released another $250 million slice of its latest 4-year $3 billion program, amid “high risks to socially-balanced economic stabilization.” It noted energy price hike backsliding after union and business protests last year, with the powerful workers’ federation a main political force. Its strikes stifled phosphate exports, as official unemployment is over 15% and an estimated 30-40% for youth. Inflation and the central bank policy rate are both around 7.5%, with credit growth also at that pace in the first quarter. The fiscal deficit is under 5% with public debt above 75% of GDP, as dinar depreciation swells the latter. The 11% current account gap in 2018 was the highest in decades as agricultural, electrical and textile exports slumped, leaving reserves under less than three months import cover. Medium-term growth could reach 4-5% with the external payments balance halved under an optimistic reform and donor aid scenario, but the immediate picture is grim. Europe slowdown will further dent foreign investment and remittances, as debt peaks at 100% of output at end-decade, the Fund predicts. It warned against civil servant salary hikes in election promises and further state enterprise borrowing, as value added tax is due to rise 5% inviting popular anger.

 On monetary policy the central bank aims for positive rates after inflation, and has reduced commercial bank refinancing. Capital adequacy is sufficient, but the bad loan portion nears 15% and liquidity ratios are strained. Tightening and exchange rate weakness will continue, with the latter at risk of overshooting with more competitive interbank auctions. Small business funding remains constrained pending credit register and collateral changes, including implementation of a new secured transactions law promoted under a US Agency or International Development initiative. Future donor support is a key variable, especially from the Gulf as it tails off from the immediate Arab Spring aftermath, and sources reevaluate investment prospects, the Fund comments.

A Saudi Arabia Article IV consultation at the same time listed domestic priorities that have assumed urgency in the past decade of actual or threatened regional ruling regime overthrow. The IMF calculated mere 2% growth this year on double-digit unemployment, and worsening fiscal and current account balances. Deflation has set in and credit growth will be in single-digits, as banks grapple with deteriorating loan portfolios and capital markets are unable to fill the funding hole. The sovereign wealth Public Investment Fund has successfully borrowed tens of billions of dollars in high profile external debt operations, but the demonstration effect ended there amid longstanding official and corporate governance doubts. The so-called Vision 2030 has yet to take shape amid chronic internal labor and private sector deficiencies, according to the analysis.

The richest sovereign wealth fund and another Tunisia backer, Abu Dhabi’s ADIA, published its 2018 annual report in July estimating lower 5% yearly returns. Its Middle East/ Africa portfolio was 7% of the total, with developed equities outstripping by 10% emerging market ones as the largest exposure. Allocation responsibilities remain split between internal and external managers, who have begun to follow environmental, social and governance criteria. Tunisia’s anti-corruption efforts still lag as measured in the Fund checkup, testing investor eligibility and patience election reshuffling has yet to grasp.

Africa’s Oil Bounce Backfire

2019 August 10 by

Posted in: Africa   

With oil prices on an indefinite roll with geopolitical and production squeezes, big African exporters suffering budget and balance of payments blows and often turning to IMF rescues seek to return to investor favor amid wider economic overhaul doubts. Nigerian stocks continued to perform badly through mid-year with an over 10% MSCI frontier index loss, with banks shunned in particular over lingering mid-size lender weakness. The central bank has seized units and forced mergers most notably between Access and Diamond, as the sector reels from bad corporate and consumer debts from petroleum sale and associated supplier reckoning. The Finance Minister on a US roadshow proclaimed the 5-year downturn was over, and that economic diversification and infrastructure building set a bright future despite scant structural evidence. The recession is technically over, but GDP growth is still in the 3% range with foreign exchange and import restrictions firmly rooted. Electricity shortages have worsened with a flailing private provider and renewables push, and the naira below 500/dollar on the parallel market even as official channels improve hard currency access. JP Morgan has not reinstated local bond index membership, as public debt worries spike despite the modest headline 30% level as a share of output. Tax collection is only 5% of GDP, unable to bridge the fiscal deficit as debt repayment absorbs two-thirds of central government revenue.

 The IMF has recommended a value added levy to shrink the gap, but the re-elected Buhari administration remains unpopular with scant political capital it husbands for the anti-terror fight against Boko Haram and allies. The conflict has widely displaced populations at home and abroad and mixed with a Francophone/Anglophone split in next-door Cameroon, which accounts for half of activity in the Central Africa Monetary zone. The IMF issued a regional report in July with mixed views praising fiscal and monetary changes under new arrangements while criticizing commodity overreliance and lagging non-oil revenue. Other member countries Gabon, Chad and the Central African Republic have Fund programs, and Congo and Equatorial Guinea are in discussions. Congo restructured its debt with China but faces lawsuits from other creditors over unpaid bills, while Equatorial Guinea’s application to join the extractive industries transparency initiative as a first step is pending. Area growth was “subdued” at 2.5% last year, with the oil sector up at double that pace, with public debt at 50% of GDP. The common central bank drained liquidity and tweaked the policy rate, but overdue loans are one-fifth the total as only half of banks comply with concentration risk standards. They have large sovereign and state enterprise exposures, and smaller institutions face closure. The current account hole improved slightly but reserves cover less than three months imports, and new foreign exchange rules surrendering export proceeds have been applied slowly. Angola is the continent’s number three oil producer with the biggest IMF facility at $3.5 billion, after $30 billion was found missing in an audit when successor ruling party President Lourenco took office. Debt/GDP is near 100%, and insider deals continue to plague banking system cleanup and telecoms privatization, where an influential general won a disputed tender with anti-corruption commitment equally questioned.

Remittances’ Regional Working Theories

2019 August 3 by

Posted in: General Emerging Markets   

The World Bank’s biannual update on migration and remittances points to an almost 10% jump in 2018 on the latter to $530 billion for low and middle-income countries, with double digit increases to Central and South Asia, although the pace is projected to slow this year for a $550 billion total. The sum exceeds foreign direct investment and official development assistance, with the biggest regional recipients China and India averaging $75 billion, followed by the Philippines and Pakistan at $35 billion and $20 billion respectively, and Bangladesh and Vietnam each with $15 billion. As a slice of gross domestic product the Kyrgyz Republic, Tajikistan and Nepal top the global pack at 30-35%, while by sub-region East and South Asia are roughly even with $150 billion in inflows for 4% annual growth.

 Emerging markets in the Gulf, Russia and China are also large outflow sources, with Saudi Arabia and the United Arab Emirate both accounting for $40 billion, compared with the US’ leading tally of $70 billion. While overall emerging economy economic growth should be “stable” this year, the publication highlights “downside risks” including commodity and geopolitical swings and trade and anti-immigration curbs. The 4% estimated annual spurt, less than half last year’s clip, is also due to stubborn remittance costs still at 7%. Correspondent banks continue to “de-risk” in the developing world under anti-money laundering and terror financing mandates, superseding the 3% Sustainable Development Goal.

South Asia has the lowest cost average at 5%, around half Sub Sahara Africa’s. Banks are the priciest intermediaries, and national post offices in exclusive relationships as in India also impose a premium. The International Labor Organization is spearheading a parallel effort to reduce recruitment charges, and ministers from a dozen Asian countries recently committed to a “zero cost” processing goal. Excessive fees resulted in Nepal’s emigration suspension into Malaysia last year before a new bilateral pact was signed.

 According to the United Nations worldwide migrants and refugees combined are 270 million, and nationalization policies in Gulf Cooperation Council hosts translated into 30% job shrinkage from Bangladesh and Pakistan. Japan agreed to admit 350,000 skilled workers from ASEAN and Indochina over the next five years. Thailand in contrast has deported tens of thousands of undocumented entrants from Cambodia and Myanmar. A 2018 Global UN Compact on Migration was endorsed throughout Asia to standardize family, money transfer and employment practices, but is at an early stage and not legally binding since a treaty was a political non-starter.  

The East Asia-Pacific region’s remittance toll is at the global 7% median, with Thailand’s the steepest at 15%.  Cambodia has started to send nationals to Kuwait, and Japan is the fastest-growing destination for Vietnamese, absorbing half the 140,000 in formal work abroad programs last year. Central Asian low-skill migrants benefited from Russian economic recovery, with Uzbekistan’s $4 billion the remittance leader. In Pakistan and Sri Lanka 2018 inflows were only “moderate” with a 5% increase, as both were dropped from cross-border banking networks on “strategic deficiencies” described by the anti-laundering Financial Action Task Force. This balance of payments support was over 5% of GDP, and in a last-ditch measure to shore up reserves before turning to outside bilateral and multilateral lines, Pakistan’s government introduced a retail investor instrument to attract worker foreign exchange. It was tax exempt and brought in $1 million on a $5000 minimum allocation immediately after launch, but hardly changed the negative net position forcing another International Monetary Fund rescue.

Through the end of June, Pakistan was the worst performer on the Morgan Stanley Capital International core emerging market index with a 17% fall, as the details of the $6 billion 3-year IMF arrangement were finalized. Prime Minister Imran Khan reversed initial defiance when he could only gain limited relief from Gulf and China allies also recognizing “misaligned economic policies,” in the words of the Fund’s staff report. Fiscal deficits and an easy monetary stance, runaway public debt and weak tax collection, and exchange rate overvaluation and international reserve depletion are among the mistakes demanding “urgent action” with release of the first $1 billion installment. The currency moves toward a float and banks will strengthen anti-laundering safeguards under the latest program, with steady remittances also a question of the Khan team honoring its sudden remit.

Asia’s Halting Halftime Heft

2019 August 3 by

Posted in: Asia   

The Emerging Asia block was roughly in line with the Morgan Stanley Capital International benchmark 9% gain in the first half, while lagging Europe and Latin America and distant from early year euphoria on overcoming growth, debt and trade issues. China “A” shares led with an over 30% jump, followed by the Philippines and Thailand, respectively up 12% and 15%. India, Indonesia, Korea and Taiwan advanced single-digits between 3-9%, while Malaysia was flat and Pakistan was the big loser, down 17%. In the frontier rung, Bangladesh (+3%) and Vietnam (+8%) were positive, and Sri Lanka shed almost 10%.

 Investors positioning for the rest of the year looked to the Japan G-20 summit for signals, with relief that further Washington tariff and currency retaliation against China in particular is on hold with resumed talks. Elections are over in India, Indonesia and Thailand with the status quo prevailing, amid opposition challenges over vote manipulation and broader business and financial community economic policy doubts. Capital spending is weaker after a long period of tech and manufacturing expansion, despite monetary pauses or easing in the region following the US Federal Reserve’s stance. The latter shift may stall bank and non-bank deleveraging after rapid credit growth still outstripping gross domestic product increases, as the second half ambivalent outlook avoids worst case scenarios but lacks macro and structural inspiration.

Chinese May data reported industrial output and fixed investment up 5%, and retail sales 9%, on an annual basis, but the second quarter private-sector Beige Book cited only “modest improvement.” Its shadow bank lending measure was the highest on record, with Beijing relying on this channel for smaller non-state firms after the Baoshang Bank collapse froze the negotiated certificate of deposit market. These borrowing costs 5% above traditional sources raise financial sector risk, according to the research. A central bank survey at the same time confirmed falling loan demand from the previous quarter, with Hong Kong’s Bank of East Asia separately revealing a “worsening real estate portfolio” in major mainland cities. Overlapping fears were underscored when giant developer Evergrande rescued second tier Shengjing Bank with a capital injection, doubling its ownership stake to 35%.

 Local government monthly bond issuance also was at a multi-year peak of RMB 900 billion, as Fitch Ratings found fifteen delayed repayments in 2018 and brokerage CICC estimated that operating income covers just 40% of obligations over the next year. The foreign exchange body SAFE warned of a 12% rise last year in external debt to almost $2 trillion on Chinese company US dollar borrowing. The Yuan threatened to breach 7/dollar, as authorities resorted to new local currency bond issuance in Hong Kong to stave off the prospect. With Presidents Xi and Trump agreeing to reopen negotiations in Osaka, fund managers are now focused on the specific currency elements of a future pact that could serve as a template for resolving neighboring country frictions under US Treasury Department “monitoring.”

India was removed from that list, but is likewise a Trump administration trade target with a $30 billion surplus as it ended duty-free entry preference under a longstanding garment export program. On a New Delhi visit, Secretary of State Mike Pompeo declared that bilateral reciprocity was in sight with wider local access promised by his Indian counterpart. Despite Prime Minister Modi’s resounding re-election, GDP growth was at a 5-year low the last quarter at less than 6%, with questionable methodology in official statistics suggesting even worse performance. The central bank could come under even greater strain to tow the government line with the renewed mandate, as another senior representative resigned after the benchmark interest rate was cut. The upcoming budget will preview any fresh fiscal consolidation or structural reform for a skeptical domestic and foreign investor audience. The combined state and federal deficits are around 9% of GDP, equal to net household savings, and the Reserve Bank will likely again be asked to cough up “excess reserves” to plug the gap. However the non-bank financial sector is in rough shape following the collapse of a blue-chip participant, adding to mainstream state lender woes the authorities have been slow to tackle. Domestic mutual funds have shied away from nonbanks aggravating their liquidity crunch, as the overriding allocation theme for the last six months of 2019 is to split the crisis-confidence difference.

Iran’s Battered Bank Switch Spirits

2019 July 28 by

Posted in: Asia, MENA   

Amid worsening stagflation, currency depreciation and the comprehensive US sanctions campaign moving the past month from oil to other exports and Supreme Leader Ayatollah Ali Khameini’s multi-billion dollar religious foundation controlled assets, the Tehran stock market index recently reached a record 240,000 after poultry and chemical company initial public offerings. In dollar terms it still had outperformed the Morgan Stanley Capital International Frontier Index at the end of April with a 7% loss versus MSCI’s 12% on an annual basis, with  price-earnings ratios at eight times or half the broader emerging market universe average. In the earlier stages of the Trump Administration’s self-described economic “maximum pressure” for renegotiation of the anti-nuclear pact, banks long struggling with undercapitalization and double-digit bad loan portfolios were still relative stock exchange buys. President Hassan Rouhani had campaigned on a re-election platform of modernizing and strengthening the sector, including through more independent central bank oversight and capital market diversification.

 In March four banks linked to the powerful military were merged, following a move last year to bring unregulated credit providers, some associated with the Revolutionary Guard (IRGC), under supervision after poor practice triggered depositor runs. Toward the end of the last fiscal year through March system deposits rose one-third to over $150 billion at the prevailing exchange rate, with even Ansar Bank, newly targeted by Washington as IRGC-owned, reporting steady inflows. However the full onslaught since, including the Guard’s official designation as a terrorist organization placing financial institution holdings at greater risk, has reinforced the domestic “resistance” revolutionary philosophy originally driving bank nationalization four decades ago. Instead of recognizing and incrementally addressing a “slow motion crisis,” in the words of a June analysis from the Washington-based Peterson Institute for International Economics, the regime has indefinitely shelved reform. It will be difficult to revive even after the siege passes, and may invite outright collapse that neither the Rouhani nor Trump administrations planned for in ratcheting the confrontation.

Iran’s official statistics reported that gross domestic product shrank 5% last fiscal year and inflation was almost 40% in June, with staple food and medicine prices rising even more. The International Monetary Fund and World Bank predict worse output contraction and 50%-plus inflation this year, in part due to nonstop currency devaluation. The government rate is around 40,000 for defined essential imports, and the parallel one it has tried to muffle with dealer raids has fluctuated between three and four times that level in recent months.

 Oil sales with the end of waivers to US allies were an estimated 500,000 barrels/day in May, one-quarter the total after ramping up in the immediate aftermath of sanctions relief two years ago. The Treasury Department added steel shipments to the prohibited list, in a push championed by White House national security hardliners when separately applying tariffs on China. Unemployment figures have not been updated, with the youth rate already 30%, as big European carmakers Daimler and Peugeot shut local operations. France, Germany and the UK devised a non-dollar alternative payment structure, Instex, to allow cross-border commerce, but it has not yet been tested and will focus initially on pure humanitarian transactions.

The Peterson Institute paper points out that inflation is also due to 20% annual money supply growth, mainly from central bank liquidity injections to state and private lenders over the past year’s sanctions-aggravated crunch. Its lines also fund the budget deficit, estimated to exceed 3% of GDP this year in contrast with previous balance. Central bank head Abdolnasar Hemmati has considered issuing bonds to outside retail and institutional investors as another outlet, as he also received new authority several months ago to experiment with open-market operations in monetary policy. However his priority now is on tightening the central bank’s grip on the payment and foreign exchange systems, and wholly or partially state-run institutions to overcome US pressure magnifying the “bad situation already” into 2018 according to the Peterson research. Capital adequacy at 4% of assets is half the Basel recommended standard, and nonperforming loans are conservatively estimated at 20-30% of the total if international classification norms apply. Iran has relatively low domestic debt at 30% of GDP, and critics argue that it may be able to throw money at the problem, as reform chances are also thrown away for the foreseeable future in the renewed sanctions squeeze recoil.

Asia Bonds’ Road Map Detours

2019 July 28 by

Posted in: Asia   

The Asian Development Bank’s June local bond monitor for nine East Asian markets charts an unsettled period through May with lower yields reflecting downward gross domestic product growth, while the US-China trade and investment battle embeds “mixed” foreign investor sentiment. It notes currency and stock market falls as well, amid global oil price spikes on geopolitical strife and contagion from poor performing emerging economies elsewhere, particularly Argentina and Turkey. Regional central banks including in Malaysia and the Philippines started to cut interest rates, as advanced country counterparts likewise signal continued easing or pause in the Federal Reserve’s case. The outlook is for increased financial stability risks, as the three-year ASEAN+3 blueprint for bond market strengthening goes into effect. It emphasizes infrastructure finance, innovation such as “green” instruments, and common regulatory standards, with the publication featuring potential for housing-related securities. The plan originally was launched against a solid growth and ambitious reform background, but with moderation and repeated trade tensions the near-term agenda may be diverted, the ADB implies.

In the first quarter ending March East Asian market size was $15 trillion for 15% annual growth, with China accounting for 75% of the total. Korea is number two at $2 trillion, and Thailand leads ASEAN at $400 billion. The Government and corporate bond split is roughly 60/40, and together represent over 80% of regional GDP. Foreign ownership in Indonesia is highest at near 40%, but shares fell in Thailand and the Philippines to 18% and 6% respectively, while Malaysia’s was steady at just under 25%. The ADB’s April regional growth forecast was for 5.5%-plus this year and next, with “simmering trade conflict” disrupting cross-border shipments and business and consumer attitudes. Retail price inflation should be constant at 2.5%, but shifting world commodity values across energy, agriculture and mining could upset the prediction. The review cautions that Washington-Beijing tariff retaliation coincides with fading of a “2-year cyclical upswing,” placing emerging Asian economies at both structural and secular disadvantage.  Currencies were whacked by broader universe weakness since April, as Argentina’s peso and Turkey’s lira hit new lows. Election uncertainty joined doubts over runaway sovereign and corporate debt, and fiscal and external account adjustment programs.

Malaysia has the biggest Islamic sukuk market at 60% of the $350 billion total, while Indonesia’s central bank has started to issue both conventional and sharia-compliant bills. Vietnam is the smallest overall at $50 billion, as corporate bond development remains slow. Cambodia is now tracked in the Monitor database, and the first corporates were recently listed on the tiny stock exchange there. One was a micro-finance firm offering a foreign exchange-indexed component in its $20 million deal. The ADB has also completed a basic guide for Laos, and Mongolia coverage is in the works. In the first quarter aggregate foreign investor inflows were over $8 billion, but Korea experienced outflows at half that figure with won depreciation and Trump-Kim summit failure. Thailand also had modest exit, with the military preparing continued dominance in elections to return civilian government. Cross-border local currency transactions were about the same as the previous quarter at $5.8 billion, with Laos’ power company placing in Thai baht, and Singapore firms in Chinese renminbi, Hong Kong dollars and Korean won. Hard currency issuance from January-April was $115 billion, with the US dollar share almost 95%, and China accounting for $75 billion of the sum with big property and technology group transactions. Malaysia led ASEAN with 5% of activity, including a $2 billion sovereign samurai bond.

Hong Kong’s Monetary Authority, while intervening as the local dollar reached the lower part of the band against the greenback, unveiled a ‘green and sustainable” finance framework to match the government’s 2030 climate action plan seeking to slash carbon emissions by two-thirds. Korea’s financial services regulator introduced a new corporate debt evaluation system, as it tries at the same time to safely manage the household burden. Higher retail investor disclosure is a core element, amid reports that brokerages promoted sophisticated structures with heavy losses, including derivatives beyond customer understanding. Korea also has one of the region’s most advanced housing bond markets, including mortgage-backed and covered versions. The ADB praises their liquidity and credit risk contributions, while property overheating especially around Seoul is an offsetting worry reflecting East Asia’s fixed-income tradeoffs.