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Global Displacement’s Private Finance Fill

2019 July 21 by

Posted in: General Emerging Markets   

As another World Refugee Day is marked this week, the numbers and complexity of the global forced displacement crisis remain overwhelming, on the 2-year anniversary also of the massive exodus of hundreds of thousands of Muslim Rohingya into Bangladesh after de facto expulsion from Myanmar’s Rakhine state. Despite Sheikh Hasina’s government winning third term re-election in a landslide, its MSCI frontier market entry has been flat through May, as it purges state bank balances sheets and management and grapples with the million refugees at the world’s largest camp alongside communities internally displaced by climate change’s rising seas. International community humanitarian aid appeals, and concessional borrowing through a special refugee window in the World Bank’s International Development Association arm have fallen short of pressing needs, especially as seasonal monsoons destroy flimsy housing and breed disease.

 Dhaka provoked global outcry with a proposal to relocate part of the Rohingya population to an environmentally-fragile island to isolate them further, since they are not allowed to legally work or attend school. It also struck a deal with Myanmar counterparts to begin voluntary repatriation to Rakhine, but few signed up until safety and long-demanded citizenship claims can be honored. In the Cox’s Bazaar area where the refugees are located near popular beaches, Chinese and Indian tourism has suffered. Prime Minister Modi’s nationalist political campaign also promised further deportations of Rohingya living in the country, often accused of terrorist sympathies on social media.

 Indonesia and Malaysia have also received “boat people” inflows over the years, and raised their plight in ASEAN diplomatic summits, but official declarations have not translated into jobs and education to facilitate integration, despite consideration of conventional or Islamic bond issuance for this purpose in the context of local community support. Application of standard private capital market tools to address the chronic multi-billion dollar annual shortfalls through bilateral and multilateral funding is a core recommendation of the new United Nations Global Compact for Refugees. Progress will be reviewed at the upcoming September General Assembly session, and organizations like the Refugee Investment Network and World Refugee Council, respectively based in the US and Canada, are mobilizing both small and large scale innovative solutions mixing commercial and impact investment.

Outside the region, over the past year the Venezuelan migration’s size into Andean neighbors has converged with Syria’s tragedy and the millions who have fled civil war to stay in Jordan, Lebanon and Turkey. The UN refugee agency estimates that 4 million or one-tenth of Venezuela’s population has crossed borders into Colombia, Ecuador and Peru amid economic depression and hyperinflation; crippling drug, food and fuel shortages; and the violent standoff between the Maduro regime and opposition president Juan Guado recognized as the legitimate occupant throughout the hemisphere’s democratic countries The government relies on Chinese and Russian credit to stay afloat after defaulting on most of the estimated $50 billion in emerging market debt. The Trump administration claims it is in contact with the International Monetary Fund, World Bank and Inter-American Development Bank on a “day after” Maduro exit reconstruction plan, with external debt restructuring a presumed element.

In the meantime Colombia has absorbed 1.2 million refugees according to President Ivan Duque, which will shave gross domestic product growth half a percent this year to under 3%, and widen the deficit beyond the fiscal rule ceiling to over 3% of GDP. Fitch Ratings has a negative outlook that may imperil sovereign investment-grade status with the twin current account and budget gaps, in part due to costs and confidence effects from incessant inward migration. Ecuador does not allow the Venezuelans to work with its own double-digit unemployment, and Peru recently ended the practice of no-document asylum and full social services to entrants as President Vizcarra looks to pass political reforms and call for new elections.

President Duque and his team were in London to convince global investors that the influx was manageable in financial market terms, as officials have expressed interest in developing dedicated bond and equity instruments that could harness hundreds of millions to billions of dollars at a clip also for Venezuelans’ return. A flagship World Refugee Council report “A Call to Action” urged such pilots, highlighting potential displacement-related infrastructure and company portfolio allocation, as a member  delegation also heads to London to promote fresh long-term reassurance.

Private Equity’s Blaring Abraaj Alarms

2019 July 21 by

Posted in: General Emerging Markets   

This month the managing partner of giant Middle East fund Abraaj pled guilty to racketeering in a New York court, following the May annual meeting in Washington of the 15-year old Emerging Market Private Equity Association (EMPEA), where hundreds of delegates gathered to celebrate last year’s record $90 billion fundraising dominated by China. A main theme then was the launch by the World Bank’s International Finance Corporation private sector arm of formal impact investing principles to define social alongside commercial returns. Dozens of big global institutional investors signed up, and new Bank President David Malpass hailed the breakthrough in a keynote speech. To address Abraaj’s collapse and liquidation, an EMPEA working group issued general governance and integrity guidelines, as the industry reconsiders penchants for confidentiality and index avoidance.

 Abraaj claimed $15 billion in assets at its peak as the biggest single fund, as US and UK investors now pursue fraud allegations against the founder, a Pakistani national who was close to the development lending elite and lured the Gates Foundation as a partner. It was an aggressive dealmaker in more exotic frontier markets, with an early push into Sub-Sahara Africa, and reported a long-streak of double-digit returns. The fall from grace preceded another recent spectacular one when the head of TPG’s multi-billion dollar “sustainability” vehicle around UN Development Goals was implicated in a US college bribery scandal. Internal personal and cultural missteps will always pose risks, but developing world private capital lacks indices and rankings widely available for public equity. EMPEA members were involved in the original launch of the emerging stock markets data base through the World Bank decades ago, and realize that comparable yardsticks and information disclosure for the asset class may be overdue.

From a geographic standpoint, the Middle East as Abraaj’s home was already under fire, with a survey of hundreds of investors placing it at the bottom of regional preference. It ranked next to Russia, which recently jailed a well-known international private equity executive. Isolation may continue even as Gulf markets increasingly enter the mainstream MSCI stock and EMBI sovereign bond indices, given the tradition of secretive family and royal connections where relationships drive allocation. Before the meltdown, Abraaj had an announced privatization deal with former Pakistan Prime Minister Sharif that never closed, as he was implicated in the Panama papers and tried and convicted for corruption. State enterprise selloff is a linchpin of the latest $6 billion International Monetary Fund program under current Prime Minister Imran Khan, and bidding procedures and stake transfer will presumably be more open.

Africa was also hurt to the extent the regions are combined in a strategy, following previous Sub-Saharan optimism when commitments spiked from big global houses like KKR and Carlyle. At the EMPEA event, the latter’s chief executive, David Rubenstein, was upbeat on developing economies’ future, absent bullishness on Africa given the firm’s mixed track record there. He also stressed business ethics in a possible indirect swipe at Abraaj, as industry leaders hesitate to offend Gulf wealth sources as a deep cash pool. Amid Africa’s rerating on stagnating incomes and growing debt with the eclipsed “rising” narrative, specialists now argue that Abraaj’s splashy headline acquisitions backfired, and overstated earnings and management value. For future funds they recommend extension of the typical 10-year life, to allow more stock market development time so companies have an outside   exit.

Recasting of public-private equity links also applies more broadly to accountability and measurement, in line with investor desire to avoid another Abraaj within evolving hybrid cross-asset strategies. JP Morgan has already combined external corporate and sovereign gauges to integrate debt coverage, as fund manager “total return” mandates increasingly comprise stock-bond mixes and off-index bets. Creating a private equity benchmark, initially through a sampling of top global emerging market players, could offer another building block for next generation allocation. The funds themselves can open to standard emerging market portfolio flow tracking from sources like EPFR and the International Institute for Finance, and could take steps to open their books and practices beyond sophisticated institutional investors though compilation of a  free database on the EMPEA website. Regional bodies like the Asia Venture Capital Association can promote these changes, to solidify a top geographic ranking and banish Abraaj’s vestiges for longer-term confidence.

FDI’s Sliding Scale Scars

2019 July 14 by

Posted in: General Emerging Markets   

The UN’s trade and development agency charted a third consecutive year of FDI decline in its annual review, down almost 15% in 2018 to $1.3 trillion although the developing country portion rose 2%, led by Africa and Asia. The industrial world total fell over one-quarter, largely due to capital repatriation under more favorable US tax treatment. This year’s forecast is for 10% recovery, as greenfield manufacturing investment momentum should continue. The estimated 1500 state-owned multinationals slowed their acquisition pace, with deals increasingly focused on intangibles like technology rather than physical plant. Of the 100 new policies announced globally, one-third were restrictive, the highest portion in decades. Tougher screening is a main thrust, but 40 additional trade pacts were also signed last year often to replace provisions in old agreements, especially on dispute settlement. Capital market trends incorporating sustainability criteria influence policy and practice, and also special economic zone creation now in the thousands. They are tied to specific industries and value chains, and the tendency is toward more worker inclusion and environmental responsibility. Advanced economies’ performance was the worst in 15 years, and the US, Europe and Australia were less than half the worldwide haul. Emerging markets took $700 billion, topped by China, where outbound investment slipped 10%. Despite hype, South-South FDI is under 30% of the overall total when measured by ultimate ownership, as the ASEAN and African free trade zones are expected to deepen regional relationships. The latter got $45 billion last year, up 10% with the Maghreb, Kenya and South Africa prominent. Conflict countries such as Congo were commodities and mining destinations, while consumer goods and renewable energy were among the continent’s diversified plays. Asia received $500 billion, with China and Southeast Asia roughly even at $150 billion, and India $45 billion. Outflows were roughly $400 billion, with increases from Korea and Thailand despite stricter US and Europe guidelines.

Latin America fell 5%, while natural resources in Argentina and Chile were “resilient” and Caribbean allocation outside offshore financial services was off 30%, according to UNCTAD. Russia and its neighbors got $35 billion, with Moscow’s portion halved while Serbia and smaller Balkans members saw pickups. Fifty low-income economies attracted less than 2% of global FDI, with Chinese multinationals “increasingly active.” Small island states are limited to hotels and tourism, while Sub-Sahara Africa and Central Asia offer raw materials and processing. Asia embraced liberalization with administrative procedure cuts and state company selloff, but a broader trend was national security scrutiny in sensitive industries scuttling two dozen transactions. Another 70 investor arbitration cases were filed last year, as the next generation of bilateral treaties updates this framework following UN recommendations. Stock exchanges continue to subscribe to ESG principles in a common initiative that translates into downstream projects, the study notes. Dedicated economic zones have “spread rapidly” with 5000 currently in 150 countries, and are now a linchpin of international cooperation and regional integration. They are traditionally geared toward manufacturing exports linking local participants in external supply chains, but future direction will emphasize quality labor standards and skills training under the 2030 Development Goals’ “changing production pattern,” the report concludes.

Central Europe’s Strained Strongman Sensibilities

2019 July 14 by

Posted in: Europe   

Central Europe stock markets were unsettled through May, amid a raft of popular protests and backlash against insider dealings and economic policies designed to keep compromised leaders and ruling parties in power. The big three Czech Republic, Hungary and Poland MSCI components were flat to negative, with the first again a regional growth laggard at 2.5% as thousands poured into the streets in anti-Babis demands for his prosecution and resignation over business-political conflict including on EU contracts. Exports dipped 6.5% in Q1 on weak German demand, while wage pressure keeps inflation above target for the central bank’s tightening bias. Brussels has not yet condemned Prague for democratic institution manipulation as in Budapest and Warsaw, where regime allies did well in recent European elections on anti-immigrant expansionary spending platforms. Hungary’s 2020 budget is more restrictive, with a proposed 1% of GDP deficit as cohesion funds run out, but the government retains the option to loosen the purse strings while monetary policy is also slack. Domestic pump-priming is vital to preserving Prime Minister Orban’s support and to counter slumping auto sales as US tariffs go into effect. Poland is the growth champion at 6% in the last quarter on a double-digit capex bump with EU projects, on top of the 2% of GDP stimulus unveiled by Law and Justice officials heading into national elections. It took almost half the vote in the May European contest, with consumer confidence buoyed by strong retail buying. Higher inflation near 2.5% is the tradeoff, with rate hikes likely off the table until polls are completed.

In the frontier mix Bulgaria and Romania were at opposite ends with a respective 5% loss and 9% gain. The former’s net exports suffered from Turkey’s crisis, but household demand drove 3.5% growth. It is on track to enter the exchange rate mechanism’s initial stage this summer on the way to full medium-term euro adoption replacing the currency board. The timetable could be complicated by low income and anti-corruption status, as banks undergo a comprehensive asset quality review. Romania’s growth and inflation are both 4%, as the socialists leading the coalition got only half the previous result in European elections on sleaze outcry landing a former president in jail. Voters approved a non-binding referendum on court system overhaul to punish malfeasance, after a prosecutor was attacked for charging senior officials. Another election may be called for early next year, and could further swell the fiscal deficit toward 5% after promised pension hikes with no IMF program in place. The burden may fall on the central bank to tighten with the currency now a rare overweight recommendation in the area. In the Balkans, Croatia and Serbia have drawn positive notice with expected sovereign ratings upgrades, after S&P restored the former’s investment-grade in March. It is no longer in Brussels’ excess deficit procedure, with improved state company earnings balancing the budget. Formal euro accession negotiations should begin in the coming months, before another election cycle. Serbia’s structural reform record and fiscal rule setting were praised under the IMF’s policy support instrument, as President Vucic remains under pressure to purge political allies accused of wrongdoing while he treads a fine diplomatic line on Kosovo relations as a related tripwire.

Sudan’s Dire Deployment Design

2019 July 5 by

Posted in: MENA   

After ousting three-decade ruler Omar al-Bashir and beginning negotiations for civilian government transition with demonstrators loosely grouped under a “professionals association,” Sudan’s generals reverted to their harsh stance against opposition forces with widespread attacks and killings. Reports circulated of sweeping arrests and dozens of bodies dumped in the Nile River by the military’s notorious Rapid Deployment Force, also recruiting soldiers for Gulf allies’ fight against the Houthi rebels in Yemen. Saudi Arabia and the United Arab Emirates had pledged $3 billion in assistance to the interim regime before the crackdown, with the budget coffers empty from years of subsidies and underwriting the army and intelligence apparatus. The estimated deficit at 20% of gross domestic product was plugged by central bank lines, releasing a liquidity wave and 50% inflation.

The independence of South Sudan providing 75% of oil revenue, with China as a prized customer, and years of US sanctions imposed after Darfur atrocities otherwise decimated the economy. Banks are near collapse amid a draconian hard currency shortage, as the sovereign is cut off from traditional multilateral funding with its poor human rights record and accumulated $50 billion arrears. Commercial debt is in default trades on “exotic” secondary markets at pennies on the dollar. Holders envisioning eventual global financial reintegration under a peaceful post-Bashir succession had begun organizing a creditors’ committee, before the latest events pre-empted near term “Nile Spring” political and business reforms.

At the same time Khartoum confrontations worsened the International Monetary Fund came out with a dire Article IV consultation on South Sudan, which still must regularly transfer a portion of oil earnings north under the autonomy agreement. It has been in civil war along ethnic lines since 2013, with 40% of the population displaced internally or fleeing to neighboring countries as refugees. Since independence in 2011 real income is down 70%, and a tentative peace agreement signed in late 2018 for power-sharing between the President and Vice President and their rival factions has not yet been implemented under a May deadline. Output shrank over 20% the past three years, although oil production recovered to 150,000 barrels/day early in 2019. In fiscal year 2017-18 almost all petroleum earnings went to repay Sudan and collateralized loans from China and elsewhere. Central bank borrowing covered the budget deficit, as arrears increased an estimated 3% of GDP.

Exchange rate depreciation continues, as commercial banks must surrender holdings in multinational company and international organization “special accounts” to the central bank. The parallel market dollar premium over the official rate was 80% in April, and South Sudan is in “debt distress” with external and domestic backlogs. With peace and a national unity government growth could reach 3.5% this fiscal year, under the reopening of damaged wells that can increase output to 200, 00 barrels/day over the next five years. However the state oil company Nilepet has no financial statements so balance sheet and operating performance is unknown, according to the Fund review. It urges currency market liberalization, bank recapitalization, and economic diversification in agriculture/fishing, and officials agree in theory but insist on gradual moves to cushion volatility with the security situation likewise fluid. The South’s evolution may have presaged Khartoum’s backward slide, and argues against quick reform breakthroughs as Chinese and Gulf companies try to maintain investment values.

In Yemen where Sudanese forces enlisted for combat with the Riyadh-backed internationally recognized government in Aden, a May meeting in Jordan under UN auspices with Houthi representatives over budget and central bank conduct broke down in discord. The Houthis control Hudaydah port, where fierce clashes erupted until a cease-fire. It is a critical food import hub generating tens of millions of dollars in annual revenue. Aden authorities insisted they should be in charge of the money with better administrative capacity to pay overdue civil service salaries, and that Houthi central bank official appointments in the area were illegal. The sides tried to strike a compromise text, but in the end took no action other than to commit to further dialogue. The Sana’s Center for Strategic Studies, whose experts attended the Amman sessions, pointed out the meager result may have been a reflection of the UN Special Envoy having only one dedicated economic staffer amid broader conflict resolution demands, as both Sudans threaten to repeat the pattern.   

The World Bank’s Morose Momentum Mooring

2019 July 5 by

Posted in: IFIs   

The World Bank’s June Global Economic Prospects, the first out under new President Malpass, underscores “weak momentum” into the second half, with emerging market GDP growth slackening to a post-2015 low of 4%. Global trade expansion has slowed to 2.5% exacerbated by the US-China tariff fight, with industrial recession widespread and Asia’s semiconductor supply chain particularly hit. All forms of debt accumulated rapidly the past decade, with the government and corporate to national income ratios at 50% and 100% respectively, and the composition increasingly in commercial and non-Paris Club hands. Almost half of low-income countries are at risk of debt distress, after burdens were eliminated under previous official relief programs. Over the next decade this load will keep average growth below 4.5%, 2% less than the rate preceding 2008. The developing world will not have the $2-trillion plus needed annually for infrastructure and poverty reduction for the 2030 UN Goals and debt-service will constrain fiscal and monetary policy. Bond and stock flows have fluctuated with the Federal Reserve refraining from further rate hikes, but bank export lines are down, and FDI has been mixed on geopolitical and security factors. Commodity prices picked up through June, with oil increasing due to sanctions and conflict supply pressure, while base metals softened with Asian demand and agriculture was largely stable despite weather events. Although poor economy growth will continue at 5.5%, current account gaps are over 9% of GDP and must be offset by declining foreign aid and investment eating into reserve positions. For emerging economies 40% will decelerate this year, with lingering financial drag across regions and in Argentina, Brazil, Nigeria, South Africa and Turkey in particular. East Asia will drop to 6%, and Europe and Latin America 1.5%. The Middle East will be under the latter and Sub-Sahara Africa, 3% and then rise into the next decade with higher domestic demand.

Trade relations are “fragile” and tariff changes will be “complex and discretionary” to heighten uncertainty, according to the review. In addition to Washington and Beijing at odds, the North American pact’s replacement has not been ratified and Brexit will trigger a shakeup in EU arrangements. Low-grade corporate defaults could spread in tougher financial markets and currency depreciation, which would also trigger foreign investor flight from local government bonds where average ownership is 40%. The US, Euro area and China are over half of world output, and accounted for two-thirds of growth in 2018, and the three face slowdown and confidence risks. Climate change is a general threat affecting small island states and overpopulated farmlands in Africa especially. Structural reforms should be a priority, including power access, logistics and transport, digital technology and corporate governance improvements. Agricultural productivity  gains are even more urgent against extreme weather patterns, and can draw on less pesticide use to protect the environment and workers. On debt the Bank urges prudent management and tracking. as the IIF finalized a proposed transparency code for private sector lending to low-income sovereigns. It would cover a full range of instruments, and report interest rate ranges with a several month time lag. A central repository will collect and safeguard the records, and may take a year to set up when economic prospects could again shift momentum, according to the proposal.

Zimbabwe’s Unsettled Real Time Wreckage

2019 June 29 by

Posted in: Africa   

While South African shares brightened on President Ramaphosa’s solid election win for his own term despite a ruling ANC party result barely above 50% as he vowed to stick to a moderate anti-corruption path, Zimbabwe’s MSCI frontier component continued to flail on uncertain cross-border relations and meltdown in the new electronic real-time gross settlement currency. It replaced “bond notes” after elections a year ago installed President Mnangawa as previous autocrat Mugabe’s successor with the decades in power Zanu-PF getting a two-thirds majority. The grouping drew on its traditional rural voter strength, but opposition protests erupted soon after to a harsh crackdown criticized by democratic activists. Another round preceded a planned trip to the World Economic Forum in Switzerland to promote international business opening, and the Finance Minister, formerly the African Development Bank’s chief economist and other officials were forced to cover human rights rather than fiscal and monetary issues. At the gathering the government also intended to discuss a formula for repaying development lenders an estimated $2.5 billion in arrears and extend an informal staff monitored program with the IMF, with the latter agreed in March. On assuming office the RTGS/US dollar rate was at parity, and months later it was devalued to 2.5 and in subsequent parallel trading fell 20% in a week. Despite commercial borrowing from a regional hedge fund and the Cairo-based African Export-Import Bank, the fuel import official exchange level could no longer be maintained as pump prices and shortages spiked. Depreciation pass through brought inflation to 65% as GDP is due to contract 2-3% after original predictions of growth at that clip. Agriculture was also devastated by drought followed by a tropical cyclone, undermining planned tighter fiscal policy to halve the 7% deficit in 2018. A 2% financial transaction tax has generated revenue, as the treasury is trying not to tap the central bank to bridge the gap.

A half- dozen state-owned enterprises could be sold soon to stem losses, and the new one-stop foreign investment promotion agency intends to feature the candidates in its pitch. As to other industries mining is on hold after a project conference fizzled out for lack of detailed financial and operating terms, while cheap tourism around Victoria Falls resorts has begun to revive. Tobacco is in long-term decline with global anti-smoking movements and electronic substitutes, and potential joint venture partners remain confused about “indigenization” legislation expecting local control. Civil service payrolls and grain subsidies will be cut, and the state asset management unit is to be restructured for competitive and transparent deals. Commercial banks, insurers and pension funds are to buy T-bills, and the last pool will shift from pay as you go to a defined contribution scheme over time with cities and provinces able to launch their own systems. Reserve targeting will be the core monetary lever, with emphasis on deepening the interbank foreign exchange market if the RTGS$ is to last. With the currency adjustment banks may need recapitalization amid already swollen bad loan portfolios. On private sector development more broadly the Mnangawa administration is committed to improving the bottom tier ranking in the World Bank’s Doing Business, including on basic electricity supply as a real time infrastructure bottleneck.

Green Investing’s Envied Charge

2019 June 29 by

Posted in: General Emerging Markets   

The past year was a “watershed” for ESG allocation with unprecedented global political and practical low-carbon initiatives to prepare for climate change, including the launch of dedicated indices to channel an estimated $725 billion in assets, according to JP Morgan research. Europe continues with most aggressive policies to reach the 2030 Paris targets of a 40% cut in greenhouse gas emissions, and 40% energy share from renewables. It has pricing, trading and tax schemes that have also spread to the Americas and China, and a simple equity selection framework favors the mainland over slowed company adaptation in Brazil and the Persian Gulf. The International Energy Agency notes that 80% of output still comes from fossil fuels, despite the extreme weather evidence of natural disasters paring economic growth. Green bond issuance is already $60 billion this year on track to another record, with corporates over half the total. Commodities are in the direct global warming “crosshairs,” and oil and gas and mining firms are under management and balance sheet scrutiny to transition after high-profile catastrophes and losses, even though market performance under specific screens roughly equals conventional analysis. European fund operators and central banks have led on incorporating environmental disclosure and reporting, and international organizations including the UN, IMF and World Bank set ambitious goals and detailed work plans. The Bank aims for one-third its portfolio in green projects into the next decade, and regional counterparts have joined to offer financing and technical advice to public and private sector borrowers.

Climate investors must weigh measurable impacts and commercial returns both at company and macro-levels, as lack of action can harm earnings and broader economic policy and performance. Weather swings are also correlated with conflict and mass migration, with studies showing that the Syrian civil war and refugee exodus was preceded by water scarcity that affects the volatile Middle East more generally. No blanket preference between emerging and developed markets is obvious, and in the former China is better placed than vulnerable Bangladesh and Nigeria. Index sponsors have rolled out green versions gradually gaining acceptance, with carbon intensity a main country distinction. Surveys reveal that Europe’s portion of global portfolios has fallen below half as other regions catch up, although retail core interest remains around 5% of outstanding exposure. In the US despite the Trump administration view that the issue is a “hoax,” states and municipalities have adopted their own practices and business schemes, with California and New York City in the vanguard. The green bond total should reach $600 billion by year-end, with the high-yield portion just 5%. North Asia is the top geography outside Europe with over 20% of activity, and Chinese bank and government issues are overwhelmingly in local currency. The dedicated worldwide investor base exceeds $100 billion, and loans are also evolving as an asset class following new principles and regulations. The field is predominantly investment-grade rated with limited secondary trading. Housing could be the next niche play as securitized products bundling mortgages for wind and solar-supplied property come to market. As the big US backers are reformed under a renewed post-crisis push this structure could appeal in the future competitive climate, the report suggests.

Bahrain’s Contradictory Conference Agendas

2019 June 22 by

Posted in: MENA   

Bahrain stocks, on a 20% roll through April on the MSCI Frontier index, looked for further grounding as the oil and offshore banking hub will host a regional economic development conference with the long-awaited US aid and diplomatic blueprint for Mideast peace as a centerpiece. It was chosen in part as a relative success story with commodity diversification after launching a global financial services sector decades ago recently reinforced with a new bankruptcy law and full foreign ownership scope. The state aluminum company is a heavyweight accounting for 5% of GDP, on 5% unemployment with two-thirds of workers in the private sector. A government fund offers loans to startup small businesses, as migrants are increasingly steered to low-wage jobs nationals shun. However official positions continue to pay a premium and the Shia majority demand entry as a chronic source of sectarian violence and tension against the ruling Sunni elite. Oil is still half of exports and two-thirds of budget revenue, as last year’s deficit topped 10% of GDP, with neighboring Saudi Arabia leading a $10 billion rescue to seal the hole. A 5% value added tax was introduced in the package, but corporate and income levies and utility subsidy cuts are largely off the table for fear of social unrest. The island ranks high in the Gulf in the World Bank’s Doing Business list with manageable bureaucracy, but education and skills training lag for technical services professionals, according to human resources surveys.

In May MSCI began elevating Saudi stocks to the core index, but large global funds hesitate to raise exposure beyond a fraction of assets, with price-earnings ratios at 20 times and lingering human rights and geopolitical concerns. BlackRock and HSBC unveiled dedicated vehicles at an April gathering in Riyadh, which marked the end of boycotts since the killing of international journalist Khashoggi. It was organized in part to drum up excitement for the Aramco $12 billion external bond instead of the original equity placement, with the proceeds to go toward buying a 70% stake in listed petrochemical giant Sabic. The offer was ten times oversubscribed, but the price fell soon after launch as overseas debt hit 30% of GDP. With the load accumulating local retail investors are new targets for sukuk issuance despite unfamiliarity with the product. With Gulf sovereign bonds now in the benchmark EMBI index after an admission wheeze by sponsor JP Morgan, attention has turned to the trade’s other side, with portfolio managers taking short positions in Oman and Qatar in particular as well in credit default swaps.

Jordan shares were slightly in the red through May, after the country met with donors in London and agreed to extend the $725 million IMF program another year. The King dismissed the previous prime minister and cabinet last June after anti-austerity street protests, and despite a tax amnesty the fiscal deficit will come in over 4%, with public debt at 95% of GDP on continuing state electricity and water company losses. A 10% current account gap leaves usable reserves at $15 billion, and dependence on $10 billion in bilateral and multilateral lines through 2020 alongside Eurobond taps. As host to a million and a half refugees outside the original Palestinian displacement, it looks to an unlikely conference breakthrough to create an alternative   economic and political stability hub.

The US Treasury’s Lengthening Litmus Tests

2019 June 22 by

Posted in: Currency Markets   

The Treasury Department’s regular review of major trading partner currency policies again did not label China a manipulator on evidence of reduced direct intervention, while calling attention to state controls and subsidies that still constitute “unfair practice.” In tariff negotiations Beijing has reportedly pledged exchange rate restraint, as market determination provisions were written into Washington’s new agreement with Canada and Mexico. Elsewhere in emerging Asia, Korea was praised for better disclosure and India was dropped from the monitoring list with the three criteria no longer applying, while Malaysia, Singapore and Vietnam were added. The thresholds will be tighter in future reports to cover all countries with at least a $20 billion goods advantage; 2% instead of previous 3% current account surplus; and unilateral interference over 6 months equal to a minimum 2% of GDP. With the definition expansion 15 partners will be tracked in detail in the context of the Department’s analysis of “important” developing economies. It expresses “significant concerns” over the renimbi level against the dollar after 5% depreciation with the $420 billion bilateral trade imbalance last year. China should continue shifting from fixed investment to household consumption, widen foreign access through structural policies, and boost reserve management transparency. Its G-20 commitment not to competitively devalue will be further examined at the June summit in Japan, as global current account imbalances have been “broadly stable” since 2015 at close to 2% of GDP with Japan and Germany also in the top surplus ranks.

In 2018 emerging market portfolio outflows were $300 billion, but stable FDI offset them, as headline global reserves stayed constant at $11.5 trillion. Non-G3 currencies’ share of the total is now 8%, representing dollar diversification even as pools often exceed short-term debt and import needs. As of May with economic slowdown and bank deleveraging Chinese depreciation pressure is again clear, with net foreign exchange sales amid minor leakage from the $3 trillion reserve pile as documented in the errors and omissions balance of payments category. To keep 6.5% growth Beijing should avoid credit easing and off-budget moves that can distort the Yuan’s value, as broader reforms including on non-tariff barriers strengthen it over time, in Treasury’s view. Korea was excused as the goods surplus fell below $20 billion on higher US fuel and chemical exports. Intervention has been negligible, as officials stress domestic demand stimulus and labor market changes as core competitiveness strategies. Singapore runs external income and services deficits, but manages the local dollar as the main monetary policy tool as the IMF estimates current 5%-plus undervaluation. It has recently shared intervention data with a six-month lag, and may adjust the mandatory pension formula so that citizen savings can be diverted potentially into foreign assets. Malaysia’s surplus with the US was almost $30 billion last year, and the central bank sold the dollar equivalent of 3% of GDP to defend the ringgit, although exact details are unknown. Vietnam’s was $40 billion and it has been a big export relocation base from China even before the tariff fight with the Trump administration. It operates a dollar peg within a tight range and does not publish intervention statistics, and as reserves meet standard adequacy metrics flexibility and transparency should be watchwords to match the watching brief.