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The BIS’ Layered Globalization Glee

2017 June 24 by

Posted in: Global Banking   

The Bank for International Settlements hailed globalization’s “profoundly positive” results the past half-century in its annual report, due to the “deeply symbiotic” connection between trade and financial openness. It acknowledged inequality and instability with the process, which can be better governed and managed as an economic development strategy both domestically and globally. The proliferation of foreign assets and liabilities and currency hedging, often through banks following cross-border customers, can be divided into three increasingly complex layers moving from simple commodities sale and associated credit to direct transactions for balance sheet purposes. Around half of trade is invoiced in dollars and one-quarter in euros, and basic letters of credit are used in one-sixth of deals. As the global value chain and FDI have deepened in recent decades, more specialized products like derivatives have spread, and in the final phase since the 1980s purely financial engineering supercharged integration so that emerging market international exposure almost doubled to 180 percent of GDP. Developing economies represent half of the worldwide manufacturing chain, with China alone taking one-fifth. As with multinational companies in commerce, global banking groups dominate finance with vast country and regional networks unable to be reflected accurately in nation-based reporting and statistics. Emerging markets’ inward investment contains both debt and equity flows, with the latter implying long-term commitment and the former short-run intra-firm borrowing and speculation. Their exposure has jumped toward offshore money centers as treasuries became more sophisticated and allocations did not involve plan and equipment outlays.

Since the financial crisis a decade ago globalization has been “in check” due in part to lingering trade weakness, but conventional measures of assets and liabilities to output overstate the correction as developing market openness has continued “unabated,” the report insists. Pullback has centered on cross-border bank loans, particularly from Europe, as portfolio fixed-income and stock volume increased. “Deglobalization” is debunked by careful definitions of the prevailing data, which shows lenders in forty jurisdictions reporting a 20 percent drop in cross-border claims from 2007-13 on a balance of payment basis, which can double count and ignore local lines of the consolidated unit. Scrubbing the numbers by bank nationality, Europe’s retreat is  pervasive but can be attributed largely to cyclical deleveraging needed to meet stricter BIS capital and liquidity rules. Financial linkages also transfer technology and boost inclusion by allowing low-income borrowers access to new channels, but can favor capital over traditional labor returns to create wealth disparities. In historical experience cross-border credit flows have been pro-cyclical to amplify booms and busts, and the dollar has soared in risk aversion periods as well to harm emerging market accounts. Since the 2008 crash global monetary policy has also been ultra-sensitive to US Federal Reserve moves, and in addition to building foreign reserves macro-prudential tools have been a crucial defense, and joint regulatory approaches have been forged between geographic and functional financial system blocks. Currency swap mechanisms and tax harmonization can go further, especially with long-run interest rate correlation so tight in recent years. In a sampling of 35 countries, 25 had close spillovers from Fed rate and quantitative easing decisions, and simultaneous shocks could add another layer to the future one-world story.

 

Cuba’s Thwarted Thaw Thickening

2017 June 24 by

Posted in: Latin America/Caribbean   

Cuban asset prices sank as the Trump administration announced partial reversal of bilateral travel and commercial openings and harshly criticized authoritarian human rights practices overlooked in other regions. The tougher line fulfills a presidential campaign pledge to Miami’s exile community cheering the changes, while business lobbies like the US Chamber of Commerce were upset that global competitors would have easier access, as their countries long ago approved individual tourism and joint ventures under military control that will now be banned after the Treasury Department issues guidelines. Airlines had reduced or severed routes before the decision, as visitor infrastructure from internet availability to hotel occupancy frustrated demand with renewed diplomatic relations two years ago. However big cruise lines with expansion plans through end-decade may preserve their strategy as they cater to groups with accommodations in place, but disappointments also mounted with the lack of credit card acceptance, dual exchange rate, and poor organized visit experience for foreigners. Starwood was the only US operator to offer a resort as an alternative to state-run hotels, as the Brookings Institute projection of $10 billion in hospitality earnings by 2030, twice current imports, appeared remote without underlying tax and administrative shifts as well promoting more private sector investment. Nearby Haiti, with the hemisphere’s lowest per capita income, has been considered a more promising destination, and new President Moise will encourage agricultural and industry hubs with reliable electricity supply around northern beach locations in his economic strategy under an IMF staff-monitored program.

In the Dominican Republic in contrast tourism revenue was up 10 percent last year to over $6.5 billion, almost one-tenth of output, with 2017 set to deliver another record. European visitors now account for one-quarter of the total, with North Americans still dominant at two-thirds. Remittances in turn, mainly from the US, swelled near 15 percent as Q1 economic growth continued at a 5 percent clip as the regional leader. A primary budget surplus has helped halve the deficit to 2 percent of GDP, and the current account gap is the same with higher gold exports and slashed oil imports, with the difference covered by mining and hotel FDI. Costa Rica is close with 4 percent growth heading into the 2018 election season, with inflation within the 3 percent target range. Fiscal reform has stumbled on political opposition with public debt hitting 60 percent of GDP, with the external portion rising faster on international bond issuance. The 10 percent trade deficit likewise persists, and the central bank has warned capital goods demand may not translate quickly into productive capacity. El Salvador is caught in a low growth twin deficit trap with a $600 million global bond in February used to repay local Treasury bills, as pension fund obligations have not been met amid government infighting. Panama alone has maintained its investment grade as Chinese diplomatic recognition was shifted from Taiwan to Beijing in advance of its president’s White House trip. With expansion Canal toll earnings jumped 20 percent in the first quarter, and re-exports through the Colon Free zone have also picked up to support 5 percent growth. A fiscal responsibility law has enabled sovereign wealth fund transfer, and the Panama papers tax evasion saga has faded although reputation isolation lingers.

 

 

Islamic Finance’s Africa Affinity Sweepstakes

2017 June 18 by

Posted in: Africa   

Malaysia’s Islamic Finance Center regular bulletin surveyed the sector’s “centerpiece” status in a half dozen African countries, with 50 banks including major ones in Egypt, Nigeria, Kenya and South Africa providing sharia-compliant products through dedicated windows. Sukuk bonds in turn have spread to Senegal, Mauritius, Gambia and Morocco with the African Finance Corporation recently issuing a $150 million pilot. Globally the industry should have $6 trillion in assets by end-decade, and Kuala Lumpur’s example, with 75 percent of corporate fixed income in sukuk form, can be replicated elsewhere. The worldwide Islamic bond total last year was $350 billion, almost a 10 percent annual increase. The report argues that the style fits a “responsible investment” strategy with over $20 trillion in commitments and that the regulatory and liquidity management pieces are now in place with twenty core standards and official backstop facilities. African growth is partially due to Asian and Middle East funds seeking additional outlets and to its natural resource and demographic base creating demand for credit and savings tools. It is also a means to financial inclusion with the vast unbanked population, with family and friends relied on ten times more than formal sources for small-scale loans across eight representative countries including Niger, Uganda and Zambia. Micro-finance could be a catalyst for business such as halal food export and the Islamic Development Bank and Sudan have concentrated efforts there.  Regional infrastructure needs are close to $100 billion/year and long-term Islamic bonds should meet diversification goals as short term government activity picks up in Gambia, Cote d’Ivoire and Senegal. “ Green” clean energy projects are proliferating across the continent to relieve shortages where these techniques could be adopted at the outset, aided by technical assistance from official lenders as well as consulting and training arms attached to more advanced Islamic hubs.

Egypt’s previous push was associated with Muslim Brotherhood rule, but since President Al-Sisi came to power it has been tied to local and external bond market normalization in the context of IMF program return. Foreign investors have acquired $1 billion in domestic instruments after shunning them entirely since the Arab Spring. The first Fund mission praised the 9 percent of GDP budget deficit and 4% growth for the first quarter, although inflation spurted to 30 percent after currency and subsidy swings. The central bank hiked the policy rate 200 basis points to over 17 percent to further fatten local yields although taxation could change. Nigeria has also tightened monetary policy through open market operations and foreign exchange sales as officials try to ease currency controls in the belief that economic shock has passed with oil price recovery and non-oil sector stimulus. Spending is due to rise 10 percent in real terms in the latest budget as the government looks to foreign military and diplomatic support to fight Boko Haram and famine in the north. The president is still on extended medical leave with an undisclosed illness and the vice president is by all accounts in charge of the reform and stabilization agenda to include a new petroleum industry bill debated for years without passage. A diaspora external bond is in the pipeline with a sukuk version likely as the family expands.

Venezuela’s Crass Credit Craving

2017 June 18 by

Posted in: Latin America/Caribbean   

Venezuelan bonds as top EMBI performers came under pressure for boycott or index removal, after leading houses were reported to have scooped up issues held by the central bank and other captive buyers at a steep discount through small specialist brokers. Goldman Sachs bought a $3 billion chunk at one-third the price through a London intermediary, and Nomura and Morgan Stanley were also involved in deals. Opposition parties in Caracas condemned the move and expatriate demonstrations were organized in Miami and Washington as a former Planning Minister, head of Harvard’s International Development Institute, referring to widespread staple food shortages, dubbed the instruments “hunger bonds.” He called for benchmark index removal as MSCI applied long ago for equities given pervasive exchange controls. Although international reserves are not formally divulged they are estimated in gross terms at $10 billion, roughly equivalent to import needs with scant cushion for debt-servicing. PDVSA has already executed a maturity swap which won bare acceptance with local investor control, and its future was further thrown into question with its chief executive due to depart. A President Maduro loyalist is set to fill the slot, who was previously in charge at US unit Citgo, which has pledged collateral both to bondholders and Russian partner Rosneft in case of default. The Treasury Department increased scrutiny of the relationship as the Trump administration debates sanctions against the regime after the President tweeted about a meeting with the spouse of jailed opposition head Lopez. Military support at home may be wavering as security forces demur at cracking down on street protesters, as Maduro’s bid for a hand-picked national assembly to rewrite the constitution and mollify popular outcry has met with sweeping criticism following the Organization for American States’ anti-democracy condemnation. The Chinese meanwhile are bracing for further losses on their $50 billion bilateral loans with unknown asset claims that could place them in direct conflict with other creditors.

Previous high-flyer Brazil has also lost favor, as MSCI equity gains fell to 3 percent through May, with the Electoral Court to determine whether President Temer received illegal campaign contributions after release of a payoff tape he claimed was “doctored.” Core PMDB party backing may no longer be assured as the stage is set for another potential impeachment. He promises to continue pressing labor and fiscal reform agendas, but major public pension overhaul in particular could be in danger with the budget deficit heading toward 10 percent of GDP despite renewed growth. The Temer recording allegedly came from one of the founding brothers of global meat supplier JBS, which faces bond and stock holder lawsuits after admitting to bribery and accepting a $3 billion penalty. Prosecutors got wind of wider misconduct after investigating inspector kickbacks for tainted products. Beef rival Argentina in contrast paced frontier markets with a 45 percent jump on possible track toward an MSCI upgrade in advance of primary elections before the October parliamentary poll. President Macri and his party intend to underscore economic success with the recession over and fiscal targets mostly honored with a one-time amnesty as $30 billion in capital has poured into one-month central bank bonds with yields over 20 percent. A new internationally-compliant consumer inflation gauge will be operational in July with likely IMF endorsement as the current administration craves its approval after a decade of resistance.

The World Bank’s Economic Prospect Pratfalls

2017 June 10 by

Posted in: IFIs   

The World Bank’s June Global Economic Prospects analysis predicted 4 percent emerging market growth this year after 2016’s 3.5 percent “stagnation,” on broad commodity export and domestic demand rebound, but warned of longer-term structural productivity and trade drags for an overall “soft” recovery. Fiscal sustainability is often an issue, while currencies have strengthened with inflation in retreat. Household balance sheets are stretched in big natural resource countries like Brazil, Russia and Kazakhstan, and energy lags metal and farm sales performance. Sub-Sahara Africa has floundered with 2.5 percent growth forecast on additional political, security and weather challenges. In Francophone West Africa infrastructure has been the main driver, and Senegal re-tapped the Eurobond market in May. Current account deficits remain high in Rwanda and Uganda as they also struggle with refugee inflows. Exchange rates have collapsed in the Democratic Republic of Congo as President Kabila clings to power despite promised elections, and in Mozambique with external debt default following an inflation spike above 20 percent in the first quarter. While China and India slow other major developing economies including Mexico and Turkey will pick up the slack, but “headwinds” linger against further momentum ranging from lack of value chain integration to governance and institutional weakness. By region Europe-Central Asia and MENA will grow 2 percent, and Latin America/Caribbean just 1 percent this year, with the latter dampened by US policy fallout from the new administration’s pledged import and immigration curbs. Budget stimulus in industrial nations should be a net benefit, but “downside” protectionist and geopolitical risks will outweigh it, according to the Bank. The Middle East is at the perennial center of conflict worries, but North Korea is now in the mix and food and water scarcity cut across wide swathes of Africa. Tighter and more volatile global finance could loom with monetary policy changes not just in the North America, Europe and Japan but in China as well with the current deleveraging push with shadow banking’s squeeze. Dollar appreciation could aggravate corporate foreign currency borrowing as domestic credit backstops are not as readily available, according to the IIF’s latest lending condition survey with the still below 50 index. Oil prices could again slide with shale gas competition and non-observance of OPEC pacts. The earlier output boom from capital accumulation has not been followed by innovation and technology strides, and demographic pressures have also started to limit potential, the review cautions.

China is singled out for reform urgency with progress in state enterprise, tax, local government debt, and securities market consolidation amid lingering corporate and financial vulnerabilities. Private sector discipline and hard borrowing constraints could go further, and land and urban migration shifts can boost efficiency and employment. Emerging economies generally need increased banking system capital and liquidity, and public debt maturities should be extended and sovereign stabilization funds replenished. Labor and education overhaul and higher fixed capital formation with better property rights should be priorities and bilateral and regional commercial deepening in the absence of global agreements, such as the EU’s recent partnerships with CIS and Central American counterparts may be the future model. These accords can slash poverty but require supporting competition and capital market rules for more favorable prospects, the Bank insists.

 

 

The Arab Spring’s Seasonal Exam Markdown

2017 June 10 by

Posted in: MENA   

The IMF completed reviews on the second post-Arab Spring round of programs with Jordan, Tunisia and Morocco, as Egypt awaited a turn after signing its agreement six months ago with stock markets flat to negative reflecting the lackluster reports. Jordan’s economic plight remained “challenging” with 2 percent growth, 4 percent inflation and over 15 percent decade-high unemployment. The fiscal deficit fell to 4 percent of GDP last year, with state utility company losses down, but public debt rose to 95 percent and the current account gap swelled above 9 percent. Geopolitical and security tensions still “impinge” on the medium-term investment outlook, despite additional donor support for refugee hosting, now able to be channeled through a World Bank-led $1 billion concessional platform. The Fund urged further moves against tax exemption and evasion and toward public-private partnerships to reduce budget costs and strengthen infrastructure efficiency. The central bank has hiked rates with foreign reserves slipping below target, as work continues on deposit protection, insurance, bankruptcy and other rules to bolster the business climate. Tunisia also was scolded for its runaway government wage bill elevating debt/GDP to 65 percent as growth doubles to a meager 2.5 percent, “too low” to attack youth joblessness and interior region poverty. The 5-year development plan aims to restore stability and tackle structural barriers through corruption and state bank and enterprise cleanups. Exchange rate flexibility and pension overhaul are on the agenda, and the country could benefit from the G-20 Compact for Africa initiative under outgoing host Germany. At home protests have erupted over proposed “economic reconciliation” legislation that would grant amnesty to illegal fund holders in return for declaring and investing the proceeds, as a “second revolution” has sparked occupation of key mining sites triggering military protection. The new US-trained Finance Minister has yet to win additional backing from Washington, as preparations for the joint commercial summit inaugurated last year stay on hold under the Trump administration.

For Morocco’s $3.5 billion arrangement risks are to the “downside” despite an expected growth rebound to 4 percent with unfinished fiscal and banking sector consolidation. Inflation is in the 1-2 percent range, and corporate and household deleveraging cut credit expansion to 5 percent, as the bad loan ratio neared double digits. Concentration with leading banks chasing the same state company borrowers and cross-border exposure throughout Sub-Sahara networks are major concerns, as the construction industry also heads into a weak period. The current account deficit should be 2 percent of GDP this year with good phosphate exports and tourism and remittance inflows. After preliminary fuel subsidy rollback, budget efforts have stalled and the Justice and Development party after securing an extended mandate in October elections intends to pursue decentralization, civil service salary caps, and better public enterprise governance. Parliament is set to approve provisions for bank emergency liquidity assistance as formal supervisory understandings are forged in the respective Francophone zones with a Moroccan presence. The currency peg is gradually shifting to a fluctuation band, and “e-regulation” is at the center of a campaign to lift the number 70 ranking in the World Bank’s Doing Business publication. Small firm credit access is a priority, and new collateral procedures are designed to unblock traditional financial establishment hesitation, according to the latest Article IV survey.

Private Equity’s Public Preference Probe

2017 June 3 by

Posted in: Fund Flows   

The latest EMPEA trade association annual survey of over one hundred  private equity institutional investors with $500 billion in dedicated global assets averaging one-fifth in emerging markets offered mixed sentiment, as dollar levels are due to rise while allocation size in the overall  portfolio shrinks. While developed market exposure continues to rise in contrast, bigger managers with $10 billion or with a decade or more experience are more likely to increase the relative share. Private pension funds will forge fewer general partner (GP) relationships while development lenders plan to extend them with at least five new ones, as both groups stress operating savvy rather than buyout approach as their main selection factor. Co-investing and deal by deal structures are important and local currency returns are no longer the decisive benchmark in light of recent volatility implying resort to hedging strategies. India is the number one preferred destination and attracted $8.5 billion the past two years, Southeast Asia is in second and Latin America ex-Brazil took third as almost 20 transactions were completed in Argentina after a long drought. Sub-Sahara Africa beat out China, which takes one-quarter of capital deployed, and Russia and Turkey were at the bottom of the heap. Brazil’s standing rose but 15% of respondents will cut or end involvement there with continued political upheaval despite economic stabilization and growth return. By industry consumer goods and healthcare were the runaway favorites, with the former attracting $25 billion in 2015-16. Although half of investors complained about lack of exit and fund distribution, only 15% are considering secondary sales for cash and liquidity as they await efficiency and transparency improvements. Currency risk topped the list of macro concerns after the dollar’s recent surge erased local unit gains, and GP team stability was the chief operational one, especially with regular talent poaching and spinoffs from original vehicles reshuffling personnel. While 70% of limited partners polled thought their portfolio performance met expectations, only a minority still believe the previous 15% desired annual return is in reach. They assume developed markets will continue to lag and tap Asian funds as the top prospects, while Europe/MENA and Russia-Turkey offerings are not likely to gain 10%.

Sponsors have looked to Gulf sovereign wealth pools for anchor money, but with Saudi Arabia’s $20 billion commitment to a Blackstone infrastructure fund announced during President Trump’s trip there for an Arab summit, PE attention has turned to possible local deals that could be targeted in the mandate. The stock exchange was down through April on the MSCI index, but public capital market development is a core component of the 2030 plan’s modernization push, with equities to be further opened to foreign investors who currently account for 5 percent of activity. The June index review may position the bourse for an upgrade from frontier status, amid preparations for an historic IPO by oil and non-oil behemoth Aramco awaiting sensitive balance sheet and government relationship disclosures that may not satisfy global asset manager demands. They are otherwise dubious of reform intentions to stoke 1 percent GDP growth, expand private sector share, and restrain the budget deficit after civil servant allowance reinstatement and a new housing and debt restructuring stimulus package estimated at tens of billions of dollars over the near term without a convincing exit strategy.

 

Contingent Sovereign Debt’s Emergency Appeal

2017 June 3 by

Posted in: General Emerging Markets   

After months of public and private sector consultations the IMF completed a policy paper at the request of the G-20 on promoting use of state contingent debt instruments (SCDIs) adjusted to continuous economic indicators like GDP or singular events such as natural disasters. They are recognized for countercyclical and risk-sharing features, and recent development institution focus has been on commodity hedging for low-income countries. Recently in Argentina’s and Ukraine’s restructurings growth-linked warrants were offered, but the concept has yet to gain widespread acceptance even in current global low-yield conditions inviting alternatives. As an automatic stabilizer they “preserve space” in bad times , but other tools are available to serve this purpose including foreign reserve accumulation, fiscal rules, commercial insurance, and central bank swap lines. However these backstops all have downsides and are not as accessible as well-designed long-term SCDIs in principle, which also increase securities diversification and the global financial system “safety net,” according to the Fund. Previous simulations show that introduction of GDP-tied bonds can raise the national debt limit before crisis by dozens of points as a fraction of output. The natural investor base would not be commercial banks or other mark-to-market buyers, but so called real money participants that can balance country welfare with asset returns. They nonetheless demand high novelty yields to compensate for liquidity and performance doubts, which would be magnified with data frequency and reporting gaps. For troubled countries the advance cost could spike, and until a track record develops moral hazard could argue that officials will not be as motivated to tackle macro and structural economic weakness. For issuers the operation must be the responsibility of independent debt managers to avoid political considerations and short-term time horizons, and to prepare in the context of asset class trends and sentiment swings. These combined factors argue for gradual testing within strictly-defined gain and loss boundaries, with ratings agencies brought in at an early stage, the study believes.

Official lenders like France’s development agency already provide counter-cyclical facilities to poor countries, and both advanced and emerging economies have adopted inflation-adjusted obligations and contingency features have entered sovereign debt rescheduling since the 1990s Brady Plan. Value recovery rights were in a dozen transactions, with half in detachable form, but the experience has often been indexation lags and undue complexity impeding further adaptation. Nonetheless investors surveyed were open to fresh pilots, on the assumption that pricing may be up to 50 basis points over conventional offerings at the outset. Legal and regulatory treatment should be equal to other instruments, and standard contracts and benchmark issues are preferred, with jurisdiction choices London and New York. Commodity exporters, small states, and emerging markets with shallow local bond activity are potential priority initial borrowers. Pension funds controlling $40 trillion are natural takers but may be confined to hard currency investment-grade exposure. The Islamic finance sector, currently with over $150 billion in sovereign and quasi-sovereign sukuks outstanding, would also be a likely target along with insurers and reinsurers. The document proposes three design versions, one with an automatic maturity extension trigger upon adverse statistics or events. It suggests that official creditors could add guarantees or otherwise work to galvanize multiple attempts through balance sheet and technical support, but concludes urgency is lacking.

Institutional Investors’ Sweeping Sustainability Suspicions

2017 May 26 by

Posted in: General Emerging Markets   

Ahead of consecutive UN conferences on Financing for Development and the Sustainable Development Goals (SDG) a blue-ribbon panel of investment managers and international lending agency officials released a long-term action plan to mobilize global banking and capital markets participants around environment, social and governance (ESG) returns. Infrastructure alone will need $2.5 trillion over the next dozen years for low-carbon energy and education-health purposes, and current financial assets at $300 trillion and increasing 5 percent annually are an untapped pool ready to look elsewhere with the large negative-yield industrial country sovereign debt category. However a wholesale commercial, regulatory, technology  and long-term “reorientation” is needed for outcomes that will only be clear over decades , according to the study under the auspices of the Business Commission on Sustainable Development. New international standards like Basel III do not incorporate SDG criteria, even if the UN Environment Program and related efforts try to transmit practices and principles. The report recommends that banks, rating agencies, stock exchange listed companies and institutional investors with $100 trillion under management apply yardsticks to be created by global accounting and rulemaking bodies. Central banks in Bangladesh, Brazil, China and Indonesia already impose requirements around “green” projects so that lenders duly disclose and monitor benefits and risks. On reporting, following a series of initiatives since the 1990s, over 90 percent of the word’s 250 leading corporations detail ESG performance. Almost 1500 fund houses have signed the UN responsible investment code, but the lack of common universal metrics remains and prevents company comparisons, with 80 percent of managers expressing discontent in a Price Waterhouse survey. Regardless of the gap thousands of empirical studies show a positive correlation between compliance and profitability. Small and midsize enterprises, which have not participated due to cost and information disadvantages, could be specifically targeted in future outreach and standard-setting.

Infrastructure has a $2-3 trillion yearly hole through the SDGs 2030 deadline, two-thirds in emerging and frontier economies, in sectors including energy, transport, telecoms, water and sanitation. The goal is to limit global warming to a two degree temperature rise, as the urban population will roughly double by midcentury to 6.5 billion. Public financing falls short even in the US and Europe, where it is under 2 percent of GDP, one-third the rate to meet developing world demand. The eight major development banks in turn provide just $40 billion annually and they could leverage up to $1 trillion without jeopardizing credit ratings. In seventy five low income countries, mainly in Africa private investment has been only $75 billion the past five years. Insurers are also missing as asset and risk managers for climate change, following a pattern of minimal natural disaster coverage that came to $100 billion in the latest estimate. Regional initiatives like China’s $1 trillion One Belt One Road are in a startup phase and the two big policy banks, each with over $300 billion in assets, charged with credit support are struggling with previous portfolio cleanup in that geographic nexus and elsewhere, particularly Latin America. Private pension fund expansion must go further and sovereign wealth pools should increase infrastructure project exposure with governments acting as the ultimate market maker for sustaining long-term trading products, the group suggests.

Africa’s Multiple Motor Misfires

2017 May 26 by

Posted in: Africa   

Sub-Sahara African MSCI stock market performance was lackluster through April as the IMF released a new economic outlook underscoring the urgency of “growth engine restart.” Last year’s 1.5 percent rate was the worst in two decades, with two-thirds of countries representing 85 percent of GDP slowing. The 2017 prediction is for 2.5 percent, mainly due to commodity and drought recovery in Angola, Nigeria and South Africa. The terms of trade shock will linger for members of the Central African CFA Franc zone, as well as Ghana and Zambia both turning to the Fund for rescues. Non-resource dependent Cote d’Ivoire, Kenya and Senegal have managed high 5 percent-plus range growth, but budget deficits and public debt have run up with mounting arrears and bank bad loan ratios. Fiscal consolidation is overdue in Francophone pegged currency areas, and even where the exchange rate can act as safety valve controls hamper effectiveness. External debt costs have spiked for these frontier markets with postponed access, with the average EMBI spread near 500 basis points in March. The budget gap was 4.5 percent of output in 2016 with big payment backlogs in Gabon, Cameroon, and Mozambique, now in a second round of commercial bond rescheduling. The parallel market premium reached records in Angola and Nigeria with their official restrictions and Ethiopia also imposed import permit rules.  Regional inflation is over 5 percent, and benchmark rates are often negative in real terms and central bank refinancing facilities can offset headline tightening. Current account deficits at 4 percent of GDP are double the pre-commodity price correction level, and median government debt is over 50 percent retracing the relief from last decade’s Heavily Indebted Poor Country program. Dollar appreciation against the euro has aggravated profiles and debt service-revenue indicators for oil exporters are at almost 60 percent from previous single digits.

Bank private sector credit is down, and prudential policies like Kenya’s 400 basis point loan rate cap and the absence of consumer and corporate registries and foreclosure procedures worsen the crunch. Cross-border pan-African networks, with half of deposits in 15 countries, have a larger presence than formerly dominant European banks but pose contagion risk as home and host country regulators try to forge common reporting and oversight approaches. Natural disasters are a final blow, with widespread drought and crop infestations and famine again spreading in the Sahel region. Tax revenue mobilization should be a stabilization priority, and financial sector and business climate development are key items on the unfinished structural reform agenda. In an Article IV report for Francophone West African Monetary Union members at the same time, the Fund lauded over 6 percent growth but criticized budget shortfalls toward that number and a 40 percent public credit jump. Reserves dipped below four months imports and the security situation remained precarious with terror attack and civil unrest throughout the zone. Private participation in infrastructure and better debt management would relieve pressure, and the central bank should strengthen the interbank and securities markets for improved monetary policy. Basel II and III standards are being phased in, and only half of banks meet the current capital adequacy minimum and deposit insurance and resolution regimes are still absent with the supervisory engine idling, according to the review.