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Indochina’s Pressed Post-Conflict Advantage

2019 February 11 by

Posted in: Asia   

Indochina region markets Vietnam and Thailand were not as battered as Morgan Stanley Capital International respective frontier and core counterparts in 2018, while tiny Cambodia with a few listed stocks was up over 30%, as investors single out the area for high growth and value this year. They believe beyond China trade diversification and consumer and tourism inroads can generate outperformance despite serious political and banking system bottlenecks, and that Vietnam in particular benefits from dedicated public and private equity funds sitting on cash. Valuations there trail Asian neighbors, with single-digit price-earnings ratios often applying to second-tier companies.

 Cross-border infrastructure ties, such as a planned expressway between the capitals Phnom Penh and Ho Chi Minh City, and development projects in Laos are increasingly visible with Chinese natural resource and small business interest. Beijing is funding airport construction along the Thai-Cambodia border resort town of Poipet, and the $6.5 billion Lao-China railway which will drive the debt/gross domestic product ratio to 70%, according to the World Bank. Near-term attractions depend on continuing solid Chinese investment and tourism inflows, and involve heavy governance and sustainability tradeoffs, even the most bullish advocates acknowledge.

Cambodia’s GDP growth will again be 7%, but a real estate boom, with prices in the capital approaching Bangkok’s, and runaway 20% credit expansion are among dangers listed in the International Monetary Fund’s November Article IV report.  Economic performance in 2018 was “strong” across garment exports, tourism and construction on 2.5% inflation, but the fiscal and current account deficits rose to 2% and 10% of output, respectively. Reserves cover little more than three months imports, half the regional average, and the managed exchange rate and high dollarization constrain competitive and policy space. On the budget, the Fund recommends tying public service wage increases to performance, and raising land and corporate and individual income taxes.

 While government debt is low at 30% of GDP, public-private partnerships may mask contingent liabilities and deal incentives should be rationalized. Macro-financial risk on the other hand is an immediate concern, with the average bank loan-to-deposit ratio at 100% and non-performing assets “understated” amid rising corporate and household leverages. Real estate credit spiked 35% annually in recent years, with looser and unregulated mortgage conditions. Loan to value limits are overdue in this category and tighter capital, liquidity and foreign exchange exposure treatment should be in place broadly as international financial reporting standards are introduced this year, the IMF urges.

Micro-finance institutions remain subject to an interest rate cap, and lax money laundering procedures may harm correspondent bank relationships, as headquarters come under official and shareholder pressure for links with the ruling Hun Sen regime and allies implicated in political and human rights infractions. Local currency use could be further promoted through government payments in riel and capital market development, both corporate bonds and equities. Land registration and a commercial court will facilitate small business borrowing, and an anti-corruption unit has been formed with investigations underway, but lacks practical independence and a track record fostering transparency and integrity, the review concludes.

Vietnam too is on track for repeated 6.5-7% growth, on the back of free trade agreements with the European Union and through the revived Trans-Pacific partnership without the US. However manufacturing exports slowed at year-end in line with the global cycle, and the trade surplus of over $5 billion though the third quarter will likely shrink. Non-resident capital outflows in turn h eroded the estimated $65 billion reserve position, and prompted central bank intervention to preserve the currency band against the dollar. Small 1-2% devaluation may be triggered in the coming months, but monetary authorities must also contend with projected 4-5% inflation and state bank cleanup where sudden rate moves can upset balance sheets and franchises. Further consolidation and tightening and possible stock exchange divestitures could lure wary investors, already noting steep bank valuations against regional peers.

Thailand’s central bank signaled hiking despite negligible 1% inflation against the backdrop of direct and portfolio investment outflows, as the current account surplus and growth fall to the 4% range. Government infrastructure spending is expected to be the main economic driver and a potential vote-getter in this long-promised election year, with military-backed candidates and exchange-listed materials and construction firms aided by the building binge.  

Brazil’s Gentle Jair Jeers

2019 February 11 by

Posted in: Latin America/Caribbean   

Brazilian financial assets extended their late year tear as President Jair Bolsonaro was sworn in January 1 with harsh condemnation of previous “socialism” and a series of executive orders eliminating alleged vestiges in the Agriculture, Education and Labor Ministries. Economic policy chief Guedes, trained at the free-market monetarist University of Chicago and a successful banker and think tank founder, has presented a wide ranging public finance cleanup agenda including fiscal and pension reform, tax simplification and statutory central bank independence. State enterprise privatization will return to the mix, with Electrobras and other utilities likely up first for partial sale. The social security package, covering 40% of government non-discretionary spending, has not yet been finalized and may still incorporate elements of former President Temer’s doomed proposals. Congress with 30 parties is back in session in February, and the new team estimates support from 300 deputies, short of the two-thirds required constitutional amendment majority. The budget deficit and debt/GDP ratios were 7% and almost 80%, respectively in 2018, with sluggish 1.5-2% growth due to continue on below target 4% inflation. The benchmark 6.5% rate will stay on hold as a new central bank chief enters in March. Currency strength around 3.6/dollar should further constrain prices, but may cramp exports as a slight 1.5% of GDP current account gap is projected for the year. FDI inflows continue healthy at 4% of output, with $375 billion in reserves offering ample short-term debt repayment. China takes one-quarter of mainly agricultural overseas sales, and President Bolsonaro campaigned on a tougher trade and investment line against Beijing involving “all-front pressure” in admiration of the US Trump administration stance. He pointedly did not invite Cuba and Venezuela to the inauguration, but also vowed to stay out of Western-backed climate and migration pacts.

Mexico under AMLO’s fresh direction also enjoyed an initial honeymoon on anti-corruption and drug prospects, and renegotiation of the North American free trade zone within tentative border immigration understanding with Washington over Central American asylum-seekers. However manufacturing and non-manufacturing PMIs dipped below 50 in November and December, as investment was off 3% in the third quarter. Inflation was stubborn above 4.5% with the policy rate at 8.25%, and investor confusion mounted on mixed energy overhaul and public consultation signals. AMLO scrapped the modernized Mexico City airport following an informal referendum, and at first refused to honor infrastructure bonds issued before proposing partial reimbursement. The government once again hedged the international oil price, and increased Pemex’s budget almost 20% within an overall 2.5% of GDP deficit and primary surplus. Sporadic shortages resulted from truck instead of pipeline fuel delivery at home to avoid gangs, and the extent of Pemex-private sector joint ventures is still unclear. The President imposed wage restraint, taking a 60% cut on his own, but civil servant unions protest and filed lawsuits against the move. Colombia’s President Duque likewise basked in the immediate afterglow after assuming the post with the same 2.5% of GDP fiscal deficit aim, before tax reform legislation was watered down to yield half of original revenue. Business and Treasury bond levies will ease, but the Venezuelan refugee influx with President Maduro’s disputed re-election is a worsening charge on regional coffers and diplomacy.

Asia’s Spent Sprint Spirits

2019 February 4 by

Posted in: Asia   

Hopes were dashed for a later year core Asia emerging stock market rally and clear momentum going into 2019, as Chinese “A” and Korean shares shed over 20% on the Morgan Stanley Capital International Index as the biggest losers outside Pakistan, which tumbled almost 40%. In the rest of the pack in order the Philippines was down 17%, followed by Indonesia and Taiwan (-11 %,) and India, Indonesia and Thailand (-8%), for regional performance roughly in line with the overall benchmark’s more than 15% drop. On the frontier list Bangladesh, Sri Lanka and Vietnam sank 15%, with the only positive geography for 2018 in the Middle East with double-digit gains in Kuwait, Saudi Arabia and Tunisia. Investors are set for continued choppiness against the backdrop of slower global growth, trade and currency friction, and steeper interest rates. They note that as Washington and Beijing remain at odds, the comprehensive free commerce pact between Asian and Latin American signatories was inked. Fund managers focus on immediate beneficiaries like Vietnam from possible supply chain diversion and expansion, as they target counties and sectors that can ride out likely export, infrastructure and banking system upsets.

China and Korea received the most from $20 billion in data tracked equity fund inflows due to their large index weightings, with exchange traded funds allocating one-quarter the total. The Asia Development Bank pointed to warning signs in December as Korean exports were flat, but off 15% to China with an 8% semiconductor plunge on an annual basis. China’s Purchasing Managers Index at the same time was below 50, into contraction for the first time in two and a half years. Auto sales slipped 3% in 2018 breaking a two-decade streak, and new export orders were down for a half-year straight in December. The services PMI was 54 in contrast, as the third quarter $80 billion services deficit was $20 billion under the goods surplus. With external debt reported at almost $2 trillion at end-September, the central bank pledged that loose monetary policy to preserve 6.5% growth, including a small business-directed reserve requirement cut, would keep the Yuan stable. Analysts otherwise predict intervention will cap the dollar exchange rate at 7 while US trade and investment negotiations continue. The government repeated stimulus restraint while focusing on tax relief and “structural deleveraging,” as state-owned and private companies prepared to extend their $180 billion cross-border deal binge, up 15% annually.

The 25% Shanghai Composite slide was the worst in a decade, as the number of approved initial public offerings was one-third below 2017. With the correction officials claimed to be out of bubble danger and called for deeper changes to spur long-term domestic inflows through asset managers, including foreign-controlled ones. Tech companies separately raised $70 billion in private equity according to industry sources, and the institutional investor vision aims to mirror wealth management product participation, which grew online 65% in recent years by Moody’s Ratings calculations.

 India also has a vibrant venture capital scene, but new tax policies may hurt activity, as the ruling coalition appeals to lower and middle-class voters in the upcoming national elections after December setbacks in state polls. Although the equity market loss was half China’s, the currency depreciated 10% against the dollar with the stubborn current account deficit. New project investment in the last quarter was the lowest in Prime Minister Modi’s term, and central bank independence is in play after the previous head resigned and was replaced by a senior finance ministry representative. Although GDP growth is estimated above 7%, the deficit has already overshot the March full fiscal year target.

Indonesia heads into its own April re-election contest with incumbent President Joko Widowo, after recruiting a vice presidential candidate with strong Islamic party ties, in the opinion survey lead by twenty-five points over previous challenger General Prabowo. Foreign direct investment softened 20% in the third quarter with an Australia free trade accord still on hold, but private consumption sustains 5% growth. The 1.7% of GDP budget gap was the best in five years, while the current account deficit at that level in 2017 could double into 2019 on hydrocarbon imports. With almost a 200 basis point bump, the central bank was the top hiker last year with an uphill climb in store for the region across monetary policy and other areas.

Performance Indices’ Indelible Injury

2019 February 4 by

Posted in: General Emerging Markets   

Last year’s thrashing in all emerging market investment classes, with debt, equity and currencies in simultaneous decline for the first time in a decade, cast equal blame on internal and external forces and provoked a long overdue rethink of allocation rationale into the next decade. For years bonds in particular were spared lasting correction with the global rally from industrial country central bank monetary easing, or the whole category reacted in lockstep to outside liquidity, trade, political and geopolitical steps affecting portfolio values. The 2018 Argentina and Turkey crises as a wake-up call were in part a replay of the Federal Reserve Taper Tantrum hitting the Fragile Five countries in 2013, as retail foreign investors especially sold indiscriminately without detailed knowledge of economic, financial system and technical underpinnings. Contagion may yet spread beyond sentiment and be justified by fundamentals such as bank weakness as the business and credit cycles turn, but for now index performance will continue to be subdued without the specter of uncontrolled crashes. A worst case China meltdown scenario as a possible trigger would damage world markets broadly, unlike the version a decade ago when the rest of Asia and commodity exporters were mainly in the firing line.

The dollar’s strength against all emerging market currencies was a drag, but may again fade as developing world central banks also raise benchmark rates contributing to slower growth. Government borrowing for possible fiscal stimulus will reinforce tightening pressure, against the backdrop of mixed commodity price and credit ratings trends. Lower hydrocarbon values, with oil falling to $50/ barrel, prompted sovereign and corporate downgrades, which continue to run even with upgrades with the overall average at the investment-grade margin.  Populism as a political backlash against globalization, immigration, income inequality and technology change is on the march notably in Central Europe and Latin America after the US and Brexit experience. Geopolitics in turn increasingly centers on trade and aid conflict between Washington and Beijing and their respective allies, with tariff retaliation and pact renegotiation standard tools. Spikes in financial market volatility from computer-driven trading and debt-equity rotation add to the cross-currents looming over asset choices.

The International Monetary Fund downgraded average growth to 4.5% this year on inflation slightly below that level, with foreign trade and direct and portfolio investment due to slacken and stay in the $1 trillion range to major emerging markets, according to the Institute for International Finance. Short-term reserve coverage as a portion of external debt is thin beyond Argentina and Turkey, in places including Chile, South Africa, and Pakistan. Structural reform momentum stalled during the easy money era, with India held up as a rare bold example, but its reputation was badly dented by the central bank head’s resignation over government interference. Relative monetary policy independence to foster price and exchange rate stability, a longstanding fund manager assumption, may now be at risk as authorities also grapple with the fallout of large corporate and household debt loads on bank health. Across the universe and best-known in China, shadow banks and fintech providers are new intermediaries in the system which often escape regulation and have not experienced distress.

Fund trackers put stock and bond inflows at only $20 billion each in 2018, with a meager pickup predicted this year. For the former, China and Korea were favored destinations because of their big weight in the MSCI index, and tech companies are also a big component as the global industry cycle sputters. Valuations are widely discounted to developed markets, but earnings growth is lackluster and fast-moving exchange traded-funds account for one-quarter of participation. In bonds, sovereign and corporate issuance droughts lasted for months last year, and 2019’s totals are projected to further fall to limit refinancing as $2 trillion in combined local and foreign currency maturities come due. Official defaults would already be widespread in Africa without IMF program rescues, and recent Middle East entrants look to JP Morgan index inclusion as the remaining catalyst with reduced placement. While conditions remain sobering, markets and classes will turn selectively positive, as complex layer appreciation returns to replace knee-jerk reaction in determining direction.

The Populist Crusade’s Multilateral Mutation

2019 January 28 by

Posted in: General Emerging Markets   

Populism as an anti-establishment and xenophobic political philosophy reflecting economic backlash against globalization, technological change and income inequality is part of the historical cycle in both the developing and industrial world, and modern financial markets as instantaneous transmission mechanisms magnify strains. In the Americas and Europe, with the US, Brexit, Central Europe and Brazil-Mexico examples, the phenomenon is best known but no region has been spared and the playbook applies in democracies as well as in authoritarian regimes. It has succeeded in bringing in new parties and leaders on the national level and upsetting existing trade, monetary, development and diplomatic arrangement internationally, but election campaign platforms are typically abstract and sentiment based. Translating aspirations into durable policy shifts, with tangible benefits for disgruntled lower and middle class voters, has proven elusive. In recognition of difficulties producing definitive changes aligned with promises and rhetoric, populist movements and representatives are now  “globalizing” to share experiences and forge alliances. Real breakthroughs handling automation and artificial intelligence with employment and privacy implications, and trying to moderate growing cross-border and in-country wealth gaps, can best be assured through joint efforts to forge the future landscape, even if international cooperation and formal treaties are discarded as last century establishment remnants.

Revamping the free trade model to add skills and retraining provisions, services along with goods coverage, and currency considerations  is an evolving consensus, even if the US prefers to resort to bilateral pacts and tariff threats. Africa in contrast has tabled a continental formula encompassing these features. The world and Washington in their own interests seek to reduce dollar reliance as the main reserve unit, and individual central bank diversification and IMF special drawing right creation have been the traditional paths with limited progress. On development, infrastructure building is viewed in both Western and Asian practice as a paramount driver for increasing per-capita income across working classes, and recent institutions on the scene like the AIIB acknowledge the need to partner on large projects and avoid heavy debt. In economic diplomacy, the G-20 summit legacy from the past decade is badly in need of updating or replacement to a more inclusive setting to address the disconnect populists easily grasp.

On migration, Eastern Europe  opted out of the EU resettlement plan, as Hungary also joined the US in rejecting the UN’s voluntary Global Compact for Refugees, which for the first time outlines a 21st century approach to frequent permanent large-scale dislocations. It is not legally binding but an expression of common political will to determine processing, protection and integration norms including on labor access and job creation. Citing fiscal costs that have spurred taxpayer discontent amid cultural tensions, the agreement calls for a move away from chronically inadequate government and international organization aid to private funding and investment for business, infrastructure and social purposes. Populist revolt hastened the long overdue shift and fresh alternatives will be a collective success as modernized multilateralism even as country-first slogans are routinely deployed.

Bangladesh’s Supercharged Subcontinent Drift

2019 January 28 by

Posted in: Asia   

Stock market strategists picking Bangladesh over Pakistan and Sri Lanka in 2019 after a losing year in the three returned to the drawing board, as Sheikh Hasina’s Awami League won all but 10 out of 300 parliamentary seats for a third term sweep. The opposition coalition, for the first time without their long-serving Bangladesh National Party leader in jail for corruption, and independent observers denounced a crackdown on media and political critics in advance, and widespread irregularities during the voting, including alleged ballot-stuffing and list purges. Violence again was prominent with dozens of deaths and injuries, and investors braced for possible resumption of nationwide strikes if recount and rerun demands are spurned, as with previous League victories under dubious circumstances. Just as importantly, Sheikh Hasina and her team now have an unchallenged economic policy grip, with years of 6% growth at risk from export competitiveness and banking system overhaul delays.

The currency did not depreciate as badly as in neighbors against the dollar with $30 billion in reserves covering six months imports, but the current account surplus turned to deficit the past fiscal year with high capital goods and oil demand. Garment exports and remittances are the main balance of payments drivers. The former thrive with European trade benefits and wages under $100/month, below China and Indochina rivals. Sheikh Hasina promised to raise the minimum salary during the election campaign without offering productivity offsets to meet international clothing company skills and technology qualms. She previously agreed to upgrade building and worker safety standards after a tragic fire and factory collapse killed hundreds, and foreign monitors note improvements but enforcement is still spotty. Remittance flows were up 15% to $15 billion in the fiscal year ending in June, but the weak taka was a key explanation as contracts end for Middle East construction crews in particular.

The country’s population of over 150 million with a median age of 25 is often pitched as a consumer growth play, with auto, health care and smart phone providers among popular stock exchange listings. Honda joined other foreign operators to recently set up a motorcycle factory, and a local competitor will launch a public equity offering in the coming months. Samsung announced it will soon assemble phones for the domestic market, and also manufactures appliances like refrigerators still yet to become standard household items. Pharmaceuticals companies like heavyweight Beximco register double-digit earnings increases, and are expanding abroad regardless of dedicated government strategy or support, with applications on file with the US Food and Drug Administration. Infrastructure projects, including the Padma Bridge between the capital and southwest and the Dhaka-Chittagong Highway extension, will boost commercial vehicle sales growing 20% annually and tourism both from Western and Asian visitors. Big hotel chains Hilton and Marriott are in place, and more affordable outlets are opening for middle-class Chinese and Indian visitors.

Bad loan levels and management at leading state banks still threaten the system, and the International Monetary Fund in its 2018 Article IV report urged faster action with problems festering for a decade. The administration did not preview course shifts in the election run-up, and private sector competitors have diversified into new business lines and mobile money to survive. Digital payments applications are in the startup phase, and new lending and retail entrants have already emerged to challenge traditional banking franchises in a country where account penetration is limited.

In Sri Lanka bank valuations are already below book value amid monetary and political uncertainties, with IMF program review on hold until the government is restored or new elections as the President, parliament and Supreme Court clash over constitutional practice for dismissing the prime minister. Fiscal and current account deficits continue to trigger concern, with the latter approaching 4% of gross domestic product. Portfolio outflows, with 15% currency depreciation against the dollar, further shrank reserves to $8 billion in October. The central bank raised benchmark rates in November in a tightening pattern that will likely last and keep growth at the 3% level. Pakistan likewise runs large twin deficits against the background of higher interest rates and a tumbling currency.  As the new Imran Khan government negotiates another Fund agreement estimated in the $5 billion range, sub-region stocks are not yet poised for a bad news bounce.

Afghanistan’s Economic Withdrawal Factions

2019 January 21 by

Posted in: Asia   

 President Trump’s unilateral decision to halve the US troop presence in Afghanistan, reportedly due more to political and pocketbook than strategic military considerations came against ambivalent outside reviews of economic policy and performance, as Kabul also grapples with sanctions and austerity fallout in trade partners Iran and Pakistan. The International Monetary Fund assigned a “satisfactory” grade in the December report of its 3-year, $45 million extended fund facility, scheduled to expire in mid-2019. It cited growth, fiscal and banking system risks amid precarious security, reflected in terror attacks around the end-October parliamentary elections. The November donor conference in Geneva, held to assess progress on the $15 billion in aid pledged in 2016, was likewise light on praise. The country jumped 15 spots on the World Bank’s Doing Business rankings, but remains at the bottom of the anti-corruption Transparency International list. President Ashraf Ghani, expected to seek a second term next year, tried to summon investor interest with a reference to the” potential trillion dollar” natural resource economy, but the audience was more concerned with reclaiming assets stolen in  the Kabul Bank fraud after another commercial lender was liquidated in August.

The IMF lowered the gross domestic product forecast growth this year to 2.3% after agricultural drought on 3% inflation, and projects “modest” medium term 3-5% expansion which will still not serve to cut extreme poverty. The extractive industry and regional integration strategy backed by bilateral and multilateral agencies may see results in the next decade, but remittance and export spillovers from economic squeezes in Iran and Pakistan will be ”adverse” in the meantime. On the former, the US State Department exempted the Chabahar port project from sanctions for partial relief.  The fiscal deficit excluding grants is 7% of GDP, and officials are to introduce a value-added tax and public-private infrastructure partnerships to shrink it. Monetary policy is closely tied to the exchange rate, which depreciated to a record bottom against the dollar in October despite central bank intervention amid large trade and current account deficits. Exports increased 30% in the first half “from a low base,” and foreign reserves are enough to cover ten months imports with continued aid inflows.

Bank cleanup is at the heart of longstanding structural reforms, as state and private competitors conduct wide-ranging “corrective action plans.” New corporate governance and crisis prevention frameworks are under preparation, and a central bank-Finance Ministry Stability Committee will soon be established. An international forensic auditor will strengthen efforts to trace lost Kabul Bank proceeds and help mitigate official rescue costs. A mobile money-directed inclusion campaign is designed to modernize the payments network and expand formal accounts within both conventional and Islamic-style systems. Global bank correspondent relationships have not revived despite 2017’s release from the Financial Action Task Force laundering and terror watch list, given meager profitability and lingering corruption concerns. Senior government representatives are supposed to declare assets, but legal guidance and enforcement capabilities are not yet in place. The Fund notes that its own tougher governance regime could affect future ties, and that without proper accountability Afghanistan’s debt distress danger is high when loans replace grants. President Ghani’s team for now aims to preserve the partnership with a program extension request to December 2019, when the outcomes of presidential elections and recent Taliban peace talks may be known even as financial sector and public integrity overhauls are pending.

Another war zone, Yemen, received a Fund visit around the same time as representatives from the recognized government and central bank met with staff in neighboring Jordan. The mission found that four years of war “crippled” purchasing power, interrupted hydrocarbon exports, and slashed essential food, fuel and medicine imports. It acknowledged that humanitarian assistance should address goods and foreign exchange shortages, while pressing the authorities in Aden to control spending and disclose accounts. Reunification of central bank operations with the Houthi-rebel run counterpart in Sana’a could enable public salary payments and service functioning, as also urged by the business community’s Development Champions Forum. It estimated that half of civil servants were unpaid the past two years, as pensions arrears will begin to be cleared as of November. The group of economists and company executives urged a pause in military hiring as peace talks unfold in Sweden, and joint central bank currency support after a brief depreciation bout lull.

The Global Refugee Compact’s Earnest Expanse

2019 January 21 by

Posted in: General Emerging Markets   

After a year of formal and informal consultations led by the UN Refugee Agency, all members but the US and Hungary endorsed the Global Compact, capping a process that began with the 2016 New York declaration during the General Assembly. It seeks “equitable and predictable” burden sharing for millions in extended displacement in low and middle-income countries, amid a growing gap between humanitarian funding and needs. The document is not legally binding but an expression of political will that builds on previous 1951 and 1967 conventions. For large movements it envisions a comprehensive response framework among governments, official and relief agencies, and the private sector through specific “support platforms” supplemented by a quadrennial forum for all signatories. The “multi-stakeholder” approach emphasizes public-private partnerships on business-financial instruments, and data and evidence collection around host communities including economic and social conditions.  To this end the Urban Institute, under a US State Department contract, has compiled a dedicated site to track relationships between multinational corporations and civil society counterparts. Priorities are early warning and emergency planning, reception and registration, and protection and safety. While in place education, jobs, health, housing, energy and food requirements must be considered. For livelihoods skills and qualifications, and language and professional training, should be matched with labor market access. Readily available internet and remittance links can facilitate employment search and success, and preferential trade arrangements as between Jordan and the EU could be widely adopted after an influx. Infrastructure should focus on climate-friendly solutions in both city and camp settings, and technical capacity can come from commercial local and foreign suppliers. Voluntary repatriation to the country of origin is the preferred outcome, but with decades-long stays increasingly the norm resettlement and sponsorship programs elsewhere should be pursued even if only a small minority qualifies. Integration is the main alternative, and strategies should mirror best practices and the 2030 Sustainable Development Goals. The global meetings will review progress across these agendas, with regular high-level exchanges between the events to address immediate crises and diplomatic-thematic issues.

On funding the call is to expand beyond traditional donors with the UNHCR budget running 60% behind pledges, with development lenders arriving on the scene in recent years. They should provide grants and concessional loans above the normal envelope, within the principles of country ownership and host community benefit. The World Bank’s special facility for middle-income borrowers, already tapped by Jordan and Lebanon, and the IDA- $2 billion low-income window for refugee purposes could be models, and the range of bilateral and multilateral assistance providers must better coordinate operations and planning. Regional development banks may assume leadership in the Rohingya and Venezuela emergencies, as European and African sources collaborate on that corridor, including the European Investment Bank which otherwise concentrates on infrastructure projects. This section urges private sector “maximum contributions” including through official “de-risking” products like guarantees. Job creation is paramount, but innovative technology and financial services can multiply effects. The accord recognizes that an “enabling business climate” is a precondition, and that banks and companies should join academic and research networks in offering sound economic policy advice in a mutually-reinforcing compact.

Myanmar’s Cresting Condemnation Count

2019 January 14 by

Posted in: Asia   

While the tiny Myanmar Stock Exchange formally reopened to foreign investors as a new companies law went into effect several months ago, they continue to keep their distance amid slowing growth and currency depreciation, and potential removal of European Union garment export duty free entry over the Rohingya refugee crisis. Government leader Aung San Suu Kyi refused to accept APEC summit criticism over expulsion and human rights violations against the Rakhine state Muslim minority, as Bangladesh tried to start a repatriation program for a few thousand of the 750,000 there with no volunteers. She replaced economic officials but refused to acknowledge a “gathering storm” described in a World Bank December report of policy lapses and delays reflected in sliding tourism and foreign direct investment, as the country ranks in the bottom twenty of its “Doing Business” publication. The International Monetary Fund’s latest Article IV visit piled on with a call for a “second reform wave” to achieve frontier market status, as it cited fiscal risks from large recently-agreed China-funded infrastructure projects and hesitant state-run banking system restructuring.

The World Bank predicts gross domestic product growth will slow half a point to 6.2% in the 2018-19 fiscal year ending in March. Industrial sector decline was tracked in purchasing manager index readings below 50 the last quarter, with business sentiment faltering according to a separate survey. The mid- year pace of approved manufacturing foreign direct investment was half the previous $1.5 billion pace, and services output fell slightly with tourism reputation fallout over the Rohingya issue. Arrivals are up less than 1% compared with 7% in 2017, with double-digit drops from Europe and North America. The government removed Asian neighbor visa requirements in a bid to bridge the gap but their spending and stays continue to lag wealthier country visitors. Garment exports are a “bright spot,” accounting for 3% of GDP and almost 750,000 mostly women-held jobs, but EU and US preferences are under review for possible trade sanctions resumption. Agriculture as the main employer is flat following flood-related crop damage and Indian import curbs, and private consumption will “moderate” with rising food and fuel price and currency depreciation-driven inflation, expected to reach 9%. Officials poured money into energy and transport projects in an attempt to stoke demand, also hiking the budget deficit to 4% of output.

The trade deficit was a 5-year low of $300 million in the second quarter, with formal jade exports to China doubling despite an international campaign to boycott so-called “genocide gems” controlled by the military. Reduced capital goods imports should shrink last year’s 2.5% of GDP current account gap, and FDI flows have traditionally offset it but were only $1.7 billion from April-September versus $4 billion the preceding period. Oil and gas exploration and production remains shunned pending law and tax changes, and companies from Singapore, China and Thailand are in sequence the leading sources. They represent 70% of the total, with “limited diversification” through other regions, and China’s 15% slice is likely to increase with the bilateral Economic Corridor under the Belt and Road Initiative, the Bank report comments.

Kyat depreciation against the dollar roughly mirrors regional trends, with an August spike when the central bank removed a daily fluctuation band and the rate settling around 1550 since October. Thin formal foreign exchange trading may exacerbate volatility, and officials recently authorized dollar swaps to aid liquidity. The swings have little influence on Chinese border trade denominated in renimbi, and competitive export gains are elusive since imported input costs rise. The central bank continued interventions at $15 million from April-September, as first quarter credit growth was barely in double digits after the previous 25% clip with tighter bank regulation demanded by international donors. Two-thirds of loans go to trade, construction, services and agriculture customers, with a “large state enterprise bias.” Profitability as measured by return on assets is in steady decline as interest rate controls remain in place. The lack of market determination applies also to Treasury bill and bond issuance to finance the deficit, where auction participation is “below potential.” The first credit bureau for banks and non-bank lenders to better pool information and manage risk is under formation and may improve small business access, but medium-term progress depends as much on image and portfolio rehabilitation as an urgent broader leadership signal , the review claims.

The Gulf’s Cracked Finance Facade

2019 January 14 by

Posted in: MENA   

Gulf stock markets were mixed, with Qatar, Saudi Arabia and Kuwait with 10-25% gains, Bahrain flat, and Oman and the United Arab Emirates with losses on the MSCI index. The OPEC meeting revealed further fractures as Qatar quit the group, and remaining members no longer in control of world oil price direction geared production toward the estimated $90/ barrel break even for budget balance. On the geopolitical front, Saudi and UAE support for the legacy Yemen government’s fight against Houthi rebels came under US and Europe diplomatic and military challenge, as the UN convened an initial round of peace talks in Sweden. As money managers consider their 2019 regional weighting beyond technical index changes, the International Monetary Fund also came out with dual studies on the financial sector and foreign investment climates. They highlighted gaps with emerging market peers that hamper growth, diversification and inclusion, and the findings reinforce near-term aversion that will persist after reallocations temporarily lift performance.

The IMF paper argues that outside Saudi Arabia financial system development lags economic fundamentals, with dominant banks and missing non-bank institutions like pension funds and insurers. Debt markets are nascent and equity activity is sizable but narrow, with large state companies the main participants. Small business and women’s credit access is minimal, in part due to limited knowledge. Overdue reforms include government bond yield curve creation, tighter corporate governance and investor protection rules, and wider international ownership scope.

 Total Gulf Cooperation Council bank assets are $3 trillion, about 200% of gross domestic product in line with other emerging economies, with the non-bank system share at 20%. The UAE sector is biggest and Oman the smallest, and only Bahrain has both wholesale and retail lending. Islamic finance has grown at a 10% clip the past decade, double the conventional rate, with large company funding the preferred business model. Saudi Arabia is an exception with a half dozen non-bank intermediaries, and aims to place sovereign wealth money in local hands now chiefly placed abroad. It is the leading stock market in terms of capitalization and turnover, but Qatar and Kuwait are ahead in relation to output. The GCC just started to issue government bonds to cover fiscal deficits the past five years, and private activity is negligible at 5% of GDP as corporates tap global markets instead.

Scaled by population, the number of equity listings is particularly meager in Oman, and in 2017 the region had just twenty initial public offerings worth $1 billion. Market concentration is high with banks and state-owned enterprises around half of capitalization, and buy and hold primary investors constrain share free float. Foreign ownership is around 5% overall, with Oman and Saudi Arabia still imposing minority company positions. Household borrowing relies on informal family and work channels outside banks, and 60% of youth have accounts compared with 80% of adults, and small firms get 5% of loans. This inclusion gap is identified as a policy priority, but officials must further expand credit bureaus, overhaul insolvency codes and introduce fintech innovations, the survey insists.

Stock market regulation improvement paved the way for the UAE, Qatar and Saudi Arabia to move from the MSCI frontier to core index, but implementation of governance and protection norms remains “weak.” Debt markets lack repos and competitive auctions, and robust disclosure and ratings systems. Currency instruments have been thwarted by the dollar exchange rate peg, and Bahrain has the only sizable mutual fund sector at one-quarter of GDP. Life insurance is “negligible” as a possible catalyst for long term fixed income allocation, and private pension plans are rare. A partial program to remedy these deficiencies would bring modernization benefits that raise per-capital income growth at least half a percent, the document concludes.

Broader trade and investment criticism was also pointed in a separate study, which noted “limited progress” in shifting from oil exports at two-thirds of the total and integrating into global supply chains. The intra-GCC amount was 10% of non-oil commerce and has further contracted with the Qatar embargo. FDI inflows have “stalled” despite rich natural resource endowments with lagging worker skills and productivity. Outside hydrocarbons they are skewed as a result toward real estate, where slowdown in the Dubai hub in particular may match the faltering financial market foundation.