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Refugee Bonds’ Millions to Billions Chant

2017 November 17 by

Posted in: General Emerging Markets   

At the annual meetings of the IMF and World Bank, the global refugee crisis, which has spread from the Middle East to Asia with the headline escape of hundreds of thousands of Rohingya from Myanmar into Bangladesh after years of flight into the broader region, was in the spotlight. World Bank President Jim Young Kim emphasized the new development lender mantra of “turning billions into trillions” through innovations and risk management tools to better mobilize private capital, as the Institute for International estimated that foreign inflows into emerging debt and equity markets would again reach $500 billion with this year’s stellar index performance.

The poor country IDA window envisions $2 billion in the future for refugee host needs, as Bangladesh’s Finance Minister submitted an initial request for the Rohingya influx which alone may cost $1 billion, according to a local economist. The Bank may issue additional emergency bonds in its own name for on-lending alongside the Global Concessional Financing Facility (GCFF) – created by the Bank, EBRD and the Islamic Development Bank to allow discount borrowing by middle-income frontline states like Jordan and Lebanon – but conventional emerging and frontier market investors could more easily be directly tapped for larger sums through dedicated “refugee bonds” where the Bank instead should emphasize credit enhancement. Jordan’s government has shown interest in a pilot program which, after modest startup and preparation outlays, could raise hundreds of millions to billions in fresh long-term funding the first year.

Sovereign bonds are a logical starting point for refugee capital markets development, but public and private equity participation through investment funds is also feasible, particularly in view of the number of large listed stock exchange companies already providing goods and services to this population in camps and cities. Jordan is just one possibility in the area’s economies overwhelmed by refugee and displaced person waves, including Turkey, Lebanon, Tunisia and Iraq. It has issued external bonds both cleanly and with US government guarantees, and a $500 million one at 7% yield was oversubscribed recently within the guidelines of its IMF program aiming to prevent increase in the steep 90 percent of GDP debt ratio.

Preliminary discussions with traditional emerging market investors, as well as those focused on “impact” investing drawn to the socially-responsible component, suggest that the government could offer a lower yield for a refugee bond that ties the cost to detailed, independently verified reporting on proceeds allocation. The instrument would be designed to promote “best practice” in relief and to identify revenue streams, such as tax-producing job entry and business creation, that generate repayment cash flow. For collateral backup, buyers could also potentially have limited ownership rights in housing, road, power and sanitation facilities built to handle extended influxes into host countries, now averaging stays of more than a decade, according to UN data.

Bangladesh, which has accessed international markets once, would be a compelling candidate for development bank guarantee and risk support in an inaugural refugee bond. The Asian Development Bank could help arrange a local currency alternative as well, reflecting its mandate to strengthen domestic and intra-regional bond markets since the late 1990s financial crisis. Its work contributed to transforming India, Indonesia, Malaysia, Pakistan and Thailand, also with large Rohingya migrant populations, into mainstream fixed-income emerging market investor destinations. Malaysia has become the global hub for Islamic sukuk activity, and a debut Bangladesh bond with sharia compliant features could be structured through there as the Malaysian government considers a separate one. The World Bank’s South Asia director said that its own form of bonds for the emergency is under review, as it still grapples with the right public-private sector mix in refugee operations. A creative emerging financial market-based solution has been presented to the institution and awaits official, commercial, or philanthropic sponsorship to realize millions to billions in available foreign investment beyond slogans.

 

Central Asia’s Prickly Business Reform Prize

2017 November 17 by

Posted in: Asia   

The 15th edition of the World Bank’s Doing Business report, which surveys tens of thousands of entrepreneurs, lawyers and accountants for on-the-ground insight into commercial and regulatory conditions across a dozen categories, showed Uzbekistan as one of the top ten reformers the past year among the 190 countries tracked. The favorable publicity was soon overshadowed by the fallout over an immigrant’s truck attack in New York City, but extended a record of top sub-regional performance as Azerbaijan, Kazakhstan, Mongolia were also cited for annual strides. Kazakhstan’s number 36 ranking was just behind Russia, while Tajikistan was at the bottom of the pack in 123rd place. In the neighboring Caucuses Georgia is a perennial rule change frontrunner, and in the top 10 of the overall ease index led by advanced and big emerging economies New Zealand, Singapore, Denmark and Korea.

Uzbekistan’s new President Shavkat Mirziyoyev unleashed a reform wave after decades under the authoritarian control of Islam Karimov, including freeing the currency, and courted foreign investors at September’s UN General Assembly meeting. He spurred advances in half of the World Bank’s focus areas, such as a “turnkey” electricity connection at the state utility and faster construction permit approval. His government acknowledges short-term adjustment costs and recently admitted the longtime 7% growth target may not be reached. The International Monetary Fund reinforced this wariness in its companion economic update issued during the October annual meeting, as it listed “deep-rooted”  banking system, fiscal and monetary policy and private sector development weaknesses  offsetting  relative micro-level company progress.

In the 2016-17 reporting period, property rights strengthened in Kazakhstan with public disclosure of ownership around Almaty. In Mongolia a new movable property law went into effect allowing leases and titles as collateral to be entered into modern registries. Azerbaijan clarified corporate governance and transparency norms to include multiple board service, executive compensation, and formal independent audits. Kazakhstan’s stock market was a top 40% gainer on the MSCI frontier index through October, aided by expanded shareholder lawsuit scope for investor protection. Uzbekistan also introduced on-line tax payment, and Georgia further increased creditor insolvency power. Tajikistan, despite its ranking in the lower half of all countries, updated labor practice by raising minimum severance pay for dismissal and simplified business licensing. Azerbaijan’s banking crisis, where state giant IBA is in debt restructuring estimated to equal one-tenth of GDP as smaller competitors try to recapitalize, sparked a flurry of improvements in credit reporting and bankruptcy reorganization.

After 2.5% growth in 2016 another 1% pickup is forecast for Central Asia and the Caucuses this year and the medium term trend will be 4-4.5%, around half the early 2000s average, according to the IMF. Hydrocarbon exporters Azerbaijan, Kazakhstan and Turkmenistan have stabilized with higher world prices and decent agriculture and construction backstops, but were urged to further diversify. Oil importers could see 4% growth in 2017 on Russia remittance rebound and boosted gold output in the Kyrgyz Republic. However financial sector damage lingers beyond Azerbaijan, as Kazakhstan merged the two largest banks and injected 4% of GDP this year, and Tajikistan’s government mounted a similar bailout. Consolidation has also taken place in Georgia in the face of steep bad loan ratios, while credit growth is flat or negative with the exception of Turkmenistan, where the rapid pace invites “future quality risks” in the Fund’s view. Azerbaijan and Kazakhstan issued foreign debt to cover fiscal deficits, and despite drastic exchange rate adjustment, such as with Uzbekistan’s official and parallel rate unification where the som lost half its value against the dollar, the region’s current account gap will improve only “gradually” from last year’s 6.5% of GDP. With the currency no longer the monetary policy anchor, central banks were encouraged to adopt inflation-targeting and more liquid and longer-term local Treasury bonds. With a nod toward the Doing Business attention, the Fund outlook praised “comprehensive initiatives” on competitiveness and the commercial environment, but lamented the lack of state enterprise privatization and anti-corruption and foreign investment promotion steps otherwise. It warned that “complacency” in headline reform movement may hamper fits with China’s Belt and Road and other global integration programs where rulebooks call for more thorough trade and financial reorientation.

 

Russia’s Revolutionary Sentiment Turn

2017 November 10 by

Posted in: Europe   

On the centenary of the Bolshevik revolution overthrowing the czars Russian stocks stayed down less than 5% on the MSCI Index as global emerging market funds shifted to overweight positions surpassing other BRICS, according to industry trackers. The inroad is chiefly at India’s expense where price-earnings ratios are double in the twenty times range, and reflect oil prices again drifting toward $60/barrel and central bank easing to lift predicted 2 percent growth ahead of elections next year. Safe haven state bank inflows also contribute as the central bank shutters big private lenders on capital and accounting deficiencies. At the annual IMF-World bank meetings officials also emphasized fiscal consolidation under primary deficit elimination set for 2019 without tax hikes and relying on better centralized collection and management. A big IPO went ahead from controversial entrepreneur Deripaska caught up in the investigations intrigue over the 2016 US presidential election as a longtime client of campaign manager Manafort, who was the first indictment by special counsel Mueller for alleged money laundering and conspiracy. Oil giant Lukoil has been prominent in extending existing bilateral sanctions for a planned decade under the suspicion around the Trump administration, which prompted Congress to tie its hands while expanding the government individual and company blacklist. Sovereign debt investment could soon be banned as well after a Treasury Department report is completed, and could target local currency participation back at one-fifth the total for foreign buyers on renewed ruble embrace. Moscow has moved away from traditional energy ties with giants like Exxon Mobil to forge ventures with China, Saudi Arabia and Venezuela, where it has secured access to rich fields in return for liquidity injections to avoid default. Long-term credit default swaps assign almost a 100 percent chance of non-payment, as new debt purchase there has been barred by Washington pending free elections in contrast with recent governor races widely seen as rigged. Russia’s version of “managed democracy” is likewise under the microscope, with President Putin yet to declare re-election intentions as another opposition candidate, former talk show host Sobchak, entered the contest alongside jailed activist Navalny. Her father was mayor of St. Petersburg and Putin’s original mentor, but the campaign platform may be thin on substance and particularly the economy and she risks cannibalizing the anti-incumbent vote. Putin has now been in power close to twenty years but has not marked the occasion with public notice since it may draw uncomfortable references to the anniversary of the czarist demise.

The international impasse over Eastern Ukraine has not budged, with thousands of displaced residents preparing again for the harsh winter. Officials proclaimed successful external bond market re-entry and compliance with IMF program conditions on the budget deficit, bank cleanup and gas subsidies as growth turned positive aided by metal export price rebound. Infrastructure in the undamaged heartland is a big push through a dedicated road fund and port rehabilitation, but corruption remains a sore spot, with President Poroshenko’s popular approval in the basement for identified conflicts and cronyism and former integrity honcho Saakashvili leading street protests against him. Agriculture reform and capital controls relaxation are stuck on the agenda pending revolutionary breakthroughs unlikely from discredited and exhausted administration forces, according to political observers.

Saudi Arabia’s Veering Vexed Vision

2017 November 10 by

Posted in: MENA   

Saudi stocks struggled to stay positive on the MSCI frontier index, where they remain after graduation refusal both there and by rival FTSE, as officials zigzagged on Aramco offering plans and other Vision 2030 elements during the annual Bretton Woods institutions’ gathering and so-called “desert Davos” at a 2-day global investor event in Riyadh. Hundreds of portfolio managers converged on the latter in the hope of securing mandates and insight into the strategy of the $200 billion Public Investment Fund, which plans to double its assets over the medium term through leveraging state enterprise stakes and startup and acquisition deals at home and abroad. It is an anchor in the $100 billion Softbank technology vehicle, the world’s largest, and also revealed ambitions for a $500 billion next decade new commercial and residential zone along the Red Sea called Noem. At the appearances oil diversification was the mantra even with price rebound above $50/barrel and geopolitics was downplayed as a boycott continues against Qatar for allegedly supporting terrorism and Iran, and Yemen civil war intervention results in tens of thousands of deaths from air bombardment and disease and famine. The rejiggering of National Transformation Program deliverables and timetables prepared with assistance from international management consultants was presented as more realistic, despite simultaneous fiscal discipline slippage with the reinstatement of civil servant allowances. The Aramco IPO timetable was extended from next year into 2019, and a local listing now seems preferred over meeting the disclosure and liquidity standards in Asia, Europe and North America after exchanges there plumbed for the business. A private placement cannot be ruled out either to a strategic or financial buyer, with Chinese firms a natural fit under the infrastructure-led Belt and Road initiative. The head of the Capital Markets Authority touted interest in qualified foreign investor and new banking licenses, with respectively 100 applications in for limited stock exchange access and Citibank recently awarded full approval. International activity is only 2 % of the total, but another entry round for smaller institutions is foreseen as development of a second-tier equity market slowly evolves alongside the main Tadawul index. He tried to reassure audiences that the dollar peg will remain indefinitely, while acknowledging interruption in Gulf Cooperation Council banking and monetary union the past decade further stymied by the Qatar split.

Since the Saudi cutoff joined by Bahrain, the UAE and Egypt stocks there plunged double-digits on the MSCI index and the government has drawn on an estimated one-tenth of its $350 billion reserves including the sovereign wealth pool to sustain trade and banking. Cross-border commerce with Iran is up 50 percent in a perverse effect from criticizing previous relations, and Dubai as the regional offshore center has also suffered from suspended contracts and capital and credit flows. Benchmark bond yields stabilized at 3.5 percent after an initial spike on the fallout, as normal reserve assets were roughly doubled to $40 billion using updated IMF methodology. Egypt has benefited from its geopolitical and economic reform choices under a Fund program by comparison, as the central bank  hosted a well-attended reception at the Washington meetings and investment strategists added local Treasury bills to their recommendations, after  long post-Arab spring consideration as an eyesore under the old currency construct.

The Czech Republic’s Missing Mate Mooring

2017 November 3 by

Posted in: Europe   

Czech Republic stocks, after a 20 percent MSCI index advance through September, rocketed on the sweeping election win of former Finance Minister Babis, a wealthy business executive, who formed the new Ano (Yes) party in a clear break from years of traditional political group coalition reshuffling. His platform was pro-business and Europe but otherwise vague, as the campaign was shadowed by allegations of inordinate tax break claims and other questionable transactions. He resigned from the last government to protest his innocence, and if other parties are invited to join the administration representatives will likely be drawn from a fresh pool to leave behind the outgoing prime minister and peers as adversaries. Babis took a similar anti-immigration populist stand as in neighbors Hungary and Poland but has otherwise talked of running the country in more company-like fashion to regain the bellwether competitive position of the early post-communist transition. Local brokers argue another wave of state enterprise privatization and big IPOs could be forthcoming, and that unlike the rest of Central Europe where private pensions are under threat or been dismantled, these schemes could be strengthened with overdue social security reform. These ambitions may be misplaced but exchange rate and monetary policies recently generated excitement, as the longtime koruna-euro ceiling was removed and a first interest rate hike accompanied an above target inflation rise to 2.5 percent. Hungary in contrast has continued to ease in unconventional fashion through loan facilities and long-term yield curve reduction, with inflation still under 2 percent. Despite leadership spats with Brussels, EU cohesion funds pour in and contribute to a 5 percent of GDP external surplus. Prime Minister Orban has ignored a European Court of Justice ruling that 2015 refugee quotas organized by Germany should be honored, and pointed to Chancellor Merkel’s setback in recent elections as vindication of his position. Inflation is also below-target in Poland with the central bank on hold, as court interference proposals which drew international condemnation were diluted and fiscal discipline honored despite increased social spending to keep Law and Justice party campaign promises. Consumption has maintained 4 percent GDP growth, aided by emigrant return from the UK post-Brexit which has kept downward wage pressure as compared with Romania, where large civil servant salary jumps have concerned the IMF under a monitoring program. The budget giveaway prompted the central bank to shrink the interest rate corridor in response as monetary policy tries to fight back.

Investors worry the Balkans pattern of public sector imbalance could be repeated as in Croatia struggling to preserve its credit rating with a 1 percent of GDP deficit, and in Serbia where a Fund arrangement in place will produce a small surplus with moves like airport divestiture and tax system revamp. Meanwhile in Greece fiscal consolidation has outperformed on 2 percent growth and bolstered the EU austerity camp view that a 3.5 percent primary surplus can be met over the medium term. The IMF continues to cooperate but presumes future additional debt relief as the latest deal ends in less than a year. The remaining banks with 40 percent bad loans have ignored the debate and begun to return to global bond markets for recapitalization capitalizing on an historic buying frenzy.

Argentina’s Churlish Change Election

2017 November 3 by

Posted in: Latin America/Caribbean   

Argentina financial assets shook off a brief scare about a parliamentary election opposition and Peronist party comeback against President Macri’s new Change movement with a rally after it won 40 percent of the vote and gained seats in both houses although still in minority position. The victory reflected popular acceptance of the government’s “gradualist” reform agenda despite opinion survey dips as well as rivals’ weakness, with no clear candidates emerging to claim the mantle of ex-President Christina Fernandez, who was narrowly defeated in a Buenos Aires Senate race as the target of corruption and abuse investigations during her time in office. Ruling party momentum should translate into promised labor, tax and capital market overhauls as details are proposed. Corporate income rates could come down 10 percent, and worker formalization could include amnesty while the social security system stays intact. Local institutional investor development, particularly mutual funds, is a priority with near-term elevation to core MSCI stock market status in mind. An infrastructure public-private partnership framework is also set to roll out an estimated $10 billion in annual projects through end-decade. The economy is out of recession and the fiscal deficit will improve this year, while inflation is stuck at 20 percent forcing the central bank to keep interest rates high as credit, especially mortgages begin to pick up after a prolonged freeze. The budget gap relies on external financing with another $2.5 billion sought before year-end, and exchange rate adjustment has lured investors after the decade-long capital controls regime while widening the current account deficit. The administration has pushed to realize potential from non-agriculture exports with currency competitiveness, but the scope is limited pending productivity and technological changes for small-scale manufacturing.

Elections are in the spotlight throughout Latin America as a main risk amid commodity recovery and sovereign ratings stabilization. Brazil’s Finance Minister Mereilles is rumored as a presidential candidate in 2018, as opinion polls show former convicted President Lula in the lead amid a pack of ideological entrants who may be too extreme for average voter appeal. Social security overhaul could be enacted before the thick of the political cycle, with modest trims the most likely scenario. Interest rate cuts may have run their course with inflation at the bottom of the target band, despite output slack, as development bank subsidies are also pared with a market-based benchmark. President Temer’s approval number is only single digits and he barely escaped the impeachment track, but is still in prosecutor sights for allegedly pocketing bribes from disgraced meat purveyor JBS, which faced securities holder lawsuits in the US and other jurisdictions.

Mexico’s peso has again flagged under US threats to dissolve NAFTA, after several negotiating rounds ended in acrimony. Trade Representative Lightizer insisted on strict local content revisions and a periodic sunset clause under which the agreement would automatically expire every five years without explicit renewal. Mexican officials tried to portray the talks as normal posturing while pointing out that half of cross-border commerce would survive pact abolition. The economists presenting the Mexican side have tried to make the case that the bilateral trade deficit is due to multiple factors, and pointed to recent breakthroughs in state oil company Pemex’s private auctions as removing barriers, but Trump tweets call for more dramatic change.

Africa’s Miffed Market Maturity Measures

2017 October 27 by

Posted in: Africa   

African official and private sector sponsors including Barclays, the OMFIF think tank and the African Development Bank joined to unveil a planned annual Financial Markets Index covering seventeen countries initially, with qualitative and quantitative assessments across half a dozen categories. They probe market depth, foreign exchange access, regulation and taxation, local investor capacity and economic strength for a total possible 100 score. South Africa far outstrips the pack with a 92, followed by Botswana, Mauritius, Kenya and Nigeria in the 50s and 60s, with nascent exchanges in Ethiopia, Mozambique and Seychelles in the rear 25-35 range. For subjective results over fifty bank, brokerage, accounting and multilateral agency executives were surveyed with the aim of establishing a “useful” new foreign investment tool that can be presented during the IMF-World Bank yearly gatherings. Domestic institution scope was a glaring poor performer, with a 22 average outside South Africa and Namibia with big pension and insurance sectors. Transparency in terms of rule adoption in contrast was high, although enforcement lags. Egypt and Kenya did well on liquidity as stock market capitalization was 60 percent of GDP among the group, but turnover outside those two was just 2.5 percent and bond trading is scarcely above that figure. Capital controls are heavy and increased in recent years in Rwanda, Tanzania and Zambia with commodity export price retrenchment and currency intervention siphoning international reserves. Portfolio inflows are only 5 % of GDP, with Kenya and Mauritius in the lead with a net $9 billion compared with $450 million for the rest. Fragmentation prevails despite regional integration efforts, notably through Cote D’Ivoire’s West African CFA Franc zone bourse, and the report urged further cross-border policy and transaction steps.

Depth looks at securities and hedging products, internationalization, and secondary dealing and only rand- denominated bonds are listed on Euroclear and market-makers formally exist in a dozen countries but are relatively inactive. Small and midsize company access is meager and large state enterprises tend to dominate and officials often shun capital market innovations that may create volatility. Wide exchange rate fluctuations and multiple quotations act as deterrents, and outside South Africa’s $1 trillion market hard currency volume is negligible. Namibia has adopted economic empowerment legislation mandating 25% black and disadvantaged population company ownership to inhibit foreign capital. Regulation is “improving but uneven” with limited tax treaty networks and frequently stiff capital gains and withholding levies. Morocco, Uganda and Mozambique have thin minority investor protection, while Nigeria crafted a good exchange information and broker oversight system after previous complaints. Less than half the list is working on Basel III banking standards, but most follow international financial reporting ones. Half the index members have no corporate ratings for credibility and visibility, and capital markets authorities often lack political and professional independence. Pension and insurance assets increased $150 billion on the continent the past decade and funds are typically too big for local markets while operating under allocation guidelines confining them there. Seychelles’ pools are offshore-based for tax reasons, and cross-border preferences when allowed are surfacing as for Kenyan funds in Mauritius. With little derivatives and securities borrowing activity, countries do not subscribe yet to the relevant master global agreements urged in a future index haul, according to the last distinct evaluation snapshot.

 

Iran’s Currency Run Unraveling Pose

2017 October 27 by

Posted in: Asia   

Iran’s currency, which had gradually moved over the past year in official and parallel markets from 30,000 toward 35,000 to the dollar, immediately tumbled past 40,000 and the Tehran stock exchange index also shed 2% ahead of President Trump’s new sanctions on the Revolutionary Guard (IRGC) and declaration to the US Congress to decertify nuclear accord compliance. Equities had been up 10 percent in the first half of the fiscal year from March to September, and the influential Planning and Budget Organization chief, Mohammad Baqr Nobakht, a close economic adviser to re-elected President Hassan Rouhani, had ruled out devaluation before the financial market rout, which may have been triggered by other factors beyond Washington’s harder line that could target IRCG-controlled listed companies it accuses of “confiscating wealth.”

The central recently cut the benchmark deposit rate to 15% as inflation hovers around 10%, and customers scrambled into foreign exchange, also buoyed by demand around the Kurdish independence referendum in northern Iraq. The move was also precipitated by continued delay in unification of the dual exchange rate system, despite repeated promises to the International Monetary Fund and correspondent Asian and European banks which now conduct business since the country rejoined the SWIFT payments network. Reinforced US secondary sanctions could scupper these ties, but frozen financial sector reform is an equal threat especially since it is a centerpiece of President Rouhani’s second term agenda.

The IMF in its latest World Economic Outlook forecast GDP growth around 3.5% this year and next, as oil production ramped up to almost 4 million barrels/day within OPEC agreed limits for a 4.5% jump in the first quarter. Agriculture came in under that number, and industry including mining and construction showed the same performance, while services like hospitality and retailing surged 8%. Tourism boomed the past fiscal year with a 50% visitor rise to 6 million, and officials plan to triple the influx by 2025. Reported unemployment is 12.5%, and the youth figure is double that amount according to national statistics. The current account balance is solid with non-oil foreign trade increasing 5%, and exports to Russia a whopping 35%, in the first half. Foreign debt is low at $9 billion, with one-third short-term, and Vice President Eshaq Jahangari put FDI inflows at $15 billion since the nuclear deal went into effect in 2016.

Central bank governor Valiollah Seif projects trillions of dollars more in investment over the coming decade, as $20 billion in credit lines were recently signed with big Chinese and Korean and mid-size Austrian and Danish banks.  A study last year by global consultancy McKinsey estimated $1 trillion in additional output in the next twenty years, tapping into the 80 million young, educated and tech-savvy population often cited by the few foreign portfolio managers who have started dedicated funds. Iran advanced seven spots in the World Economic Forum’s 2017-18 Global Competitiveness Index, at 70 out of 140 countries, on incremental infrastructure and regulation improvements. Housing may finally be in recovery after a long recession with 9% sales growth in September in Tehran. The state-owned mortgage specialist Bank Maskan plans to finance an ambitious 1.5 million homes in the coming years, and slashed the discounted borrowing rate to 7.5%., while other commercial banks have shunned exposure under 12-year repayment terms.

The IMF in an October visit praised moves to crack down on previously unregulated “shadow” lenders which evaded rate caps, following the summer decision by the Paris-based Financial Action Task Force to allow further time for anti-money laundering rule adoption. A ratings agency established by the central bank and Economy Ministry is to publically reveal general balance sheet  risk ratings for the sector, with $700 billion in assets, this month. Iran’s thirty-five banks currently have capital adequacy ratios between 6-10%, as they struggle with double-digit bad loan loads and prepare for eventual Basel III prudential standards. Leading executives from fully private competitors calculate that only half the current system will survive under a cleanup that may cost in the $100-billion range in the initial phase. Foreign investors bypass these listings even as their trading rose 25% in the year through August, according to the securities supervisor. The country’s leadership nightmare may not come only from President Trump’s “bad deal” interpretation, but currency and share slides reflecting monetary and financial system inaction.

Private Debt’s Hangover Remedy Rumbling

2017 October 22 by

Posted in: General Emerging Markets   

As IMF officials at their annual meeting continued to sound the alarm on private debt buildup as a looming systemic risk, big investment houses have projected calm, with JP Morgan statistics pointing to a slight annual drop to 115 percent or close to 80 percent of GDP excluding China. Government debt in turn increased marginally since 2016 to 50 percent of output, half the level of the US and Europe, with Gulf and frontier countries running up the tab. Egypt, Mongolia, Jamaica and Lebanon have burdens in the 100 percent-plus range, but the external portion for the overall universe has been steady the past decade at around 25 percent. Deleveraging started almost two years ago, including in China where shadow banking-spurred credit growth is down to single digits. Corporate debt spurted 25 percent to almost 85 percent of GDP since the 2008 financial crisis, and the private remainder is household particularly mortgages and credit cards in East Asia and this region has the highest commercial load at 150 percent-plus in China, Taiwan, Korea, Malaysia and Thailand. Since 2014 Mexico and Egypt totals rose 5 percent, and fell comparable amounts in Croatia, Kazakhstan and Ukraine. Domestic borrowing is almost 95 percent of the sum, and 80 percent is through traditional bank lending rather than bonds. As of Q3 credit expansion outside China was 6.5 percent, versus almost triple that pace in 2011. African countries like Nigeria dropped 20 percent on an annual basis, but the cycle has improved in Brazil, Russia and Turkey so that the net effect is no longer negative, according to the JP Morgan research. The trend is reflected in the IIF’s latest survey of banking conditions released before the IMF gathering, with a 48 result approaching the neutral 50 mark. The better outcome is also attributed to developing economy growth pickup across the board highlighted in the Fund’s upgrade to 4.5-5 percent this year.

The corporate benchmark CEMBI was introduced in 2007 and since avoided major selloffs, and local and foreign pension fund investors have jumped in with mandates to follow the 50 country $400 billion gauge. However index allocation misses half the universe in this segment as well as external and domestic sovereigns, and portfolio managers now argue for a blended or unconstrained approach through individual accounts. US public pensions have less than 5 percent of assets in EM debt, and September paper by fund giant Eaton Vance, which recently bought socially responsible specialist Calvert, argues for top-down multi-class exposure. After assessing economic and political risk, bottom-up company and instrument research and market trading and infrastructure capacity should be guides, and institutional investors may lack these dimensions with in house expertise. According to sentiment readings taken during the IMF heavy inflows already near $100 billion and fixed-income overweights should last through 2018, although equities will outperform. Currency and bond enthusiasm will shrug off industrial world central bank planned liquidity tightening, world geopolitical tensions now concentrated on the Korean peninsula, and likely credit rating downgrades which may continue for China, South Africa and other prime destinations caught in their  own subprime borrowing predicaments.

Ghana’s Addled Issuance Anniversary Angles

2017 October 22 by

Posted in: Africa   

Ghana marked a decade since it Sub-Saharan Africa setting sovereign bond debut as rating agencies have one-third of the continent on negative watch on still slippery commodity recovery, with $25 billion in near-term maturities due. Oil earnings were half the 2013 peak last year at $1.5 billion, and cocoa exports continue to draw $2 billion in syndicated loans with arranger banks emphasizing relationships rather than crop resurgence. International lines have been in the sector forefront as domestic counterparts battle with 20 percent bad loan portfolios that forced the central bank to close two institutions in August and transfer them to state-run Ghana Commercial Bank, a heavyweight stock exchange listing, with the MSCI frontier index up 70 percent through the third quarter after a prolonged slump. Banks are also absorbing the impact of local debt swaps to reduce costs and extend tenors, as $2.5 billion in new issuance will tackle energy arrears and inject liquidity. Total global obligations are $30 billion and servicing drains one-third of government revenue, but the currency is no longer in free fall after an IMF program and inflation is near single-digits at 12 percent. Fiscal discipline is the centerpiece of the Fund accord recently stretched to 2019, with this year’s deficit estimated at 6 percent of GDP as “ghost workers” were dropped from the official payroll and a new digital identification system is to incorporate informal tax evaders. President Akufo-Addo, whose father held the post after independence, campaigned on a pro-business platform and named well-known former investment bankers to the Finance Ministry.  However the World Bank Doing Business ranking is 110, and the President has come under criticism for minister sprawl as he rewarded over 100 appointees associated with his party and decades of political life. Relations with China are also controversial, as his team cracked down on small-scale gold miners after complaints from mainland operators and set ambitions as a sub-regional rail hub with Chinese borrowing and technology.

The move is widely viewed as a West Africa challenge to giant Nigeria, where President Buhari has been on medical leave abroad and secessionist stirrings in Biafra have reignited with the anemic 2 percent growth rate and Boko Haram pillaging and terror. Since April the foreign exchange crunch has eased with more regular auctions for essential imports, and foreign investors have crept back into Treasury instruments with nominal 15 percent yields despite eviction from the main JP Morgan index. The MSCI stock gauge in turn has rebounded 25 percent through September on stronger oil prices boosting reserves, and likelihood that the President may step aside before the end of his term in 2019 and in a history repeat from the last administration transfer power to his more dynamic and economics-savvy vice president. In East Africa Kenya has also gained 25 percent on the frontier index as the presidential contest is replayed in mid-October after a constitutional court found evidence of vote hacking and count irregularities in the original exercise. The ruling was hailed as a democracy triumph in good governance circles, but spooked the business community with another round of uncertainty and potential large-scale violence between rival tribal candidate camps. Blue-chip Safaricom announced expansion plans in Ethiopia as a strategy response despite the glaringly more questionable free-election path.