Latvia’s Lengthy Laundry List Collection

2018 March 16 by

Posted in: Europe   

Baltic stocks paused from their strong 2018 start as banking center Latvia again came under money laundering and sanctions-busting scrutiny, with a US Treasury Department report that the number three lender ABLV had “institutionalized” illicit operations with North Korean missile exporters. The declaration, after reported weeks of behind the scenes attempts to halt the business, prompted a depositor run with 40% of system accounts still controlled by non-residents, and an emergency government appeal for a EUR 500 million rescue. The central bank chief in the post for decades had come under criticism for previous scandals, including connections to the Russia Magnitsky tax fraud and alleged offshore looting of Kazakhstan’s BTA bank by a family member once close to President Nazarbaev. The dirty money implications featured prominently in 2008’s EUR 7.5 billion crisis bailout when Parex Bank collapsed, and were cited by other EU members ambivalent about 2014’s euro entry. The Anglo-Russian management at Nordvik Bank separately accused the governor of soliciting bribes to ignore questionable behavior, but he fired back that it was trying to influence the outcome of an arbitration claim. The prime minister ordered a full investigation and vowed to reduce international depositor share as a future safeguard, while conspiracy theorists pointed to Moscow’s possible hand in sowing public mistrust with the high-profile charges. They argued that the US too was fooled by another disinformation campaign, and that North Korean suspect funding was typically sourced through Asia. Since conducting a cleanup in recent years, penalties for offending banks have been mild, and the suspicious orbit has spread further in Eastern Europe to include Moldova, which had to turn to the IMF as well after wealthy political heavyweight executives bankrupted major lenders. Latvian officials for their part have been forced to strike a delicate balance after emerging from the post-2008 “internal devaluation” era to maintain the then euro peg. Self-imposed austerity crippled wages and incomes as banking remained a relative growth sector still providing high-paying jobs.

The international condemnation underscored the new importance of anti-corruption considerations in EU deliberations, especially with the aid budget under review pending Brexit. The Baltic position is to continue the EUR 1 trillion in “cohesion” assistance which are large portions of middle and lower-income recipient countries’ GDP.  Scandinavian donors Denmark and Sweden are in the so-called “Frugal Four” calling for reductions over the next pledging round. Recent entrants Bulgaria and Romania have been most under pressure to combat fraud and improve governance. The former is the poorest of the 28 bloc states with a EUR 10 billion allocation from the current bilateral package through 2020. Decent growth is expected at another 3.5% clip this year, and successive administrations have kept budget balance to support the currency board arrangement. As it takes the rotating EU Presidency, the lack of structural reform amid pervasive graft remains a central issue and has contributed to halving FDI since 2015. Companies cite bribery as a bigger burden than taxation, with a lowly 75th place in the Transparency International ranking. After a big bank failure concern is also mounting about another construction-associated credit bubble. Despite good capital, liquidity and profitability indicators for the industry number four First Investment Bank had a dubious asset quality review in 2016 and since has struggled to wash away residual balance sheet grime.

The Asian Development Bank’s Indochina Bond Barrage

2018 March 16 by

Posted in: Asia   

While Cambodia and Myanmar, despite logging high-single digit GDP growth, have been off mainstream investor radar screens as they face possible US and EU human rights sanctions, the Asia Development Bank issued bond market guides charting potential allocation paths to join the rest of the region’s $10 trillion local currency volume. The studies were conducted under the auspices of the Asean+3 (China, Japan and Korea) Bond Forum, and update their 2012 series with the intent of mobilizing an estimated $1.7 trillion in annual infrastructure funding. Japan’s Nomura Research Institute worked with government-regulatory officials and banks, brokers and stock exchanges in the two countries as they position for near-term launch and takeoff that could follow Vietnam’s more advanced development charted quarterly in the ADB’s on-line tracking service.

Cambodia’s Financial Sector Development Strategy through 2020 envisions government bond issuance, and an interbank money market already trades negotiable certificates of deposit. In 2017 the securities commission finalized rules for corporate bond “qualified buyer” professional institution eligibility, although payment is still physically by check as opposed to electronically in the real-time international standard. The central bank is to take the lead with regular open market operations through designated primary dealers, according to provisions agreed last June. Equity and fixed-income tax incentives were introduced in 2015 which slash the company profit levy 50% and reduce investor withholding over three years. Early this year official decrees are due for credit rating agencies, corporate placement application and disclosure and bondholder representation.

The securities regulator is independent but answers to the Economy and Finance Minister as Chair, who is mainly responsible for the current draft government bond guidelines. The Ministry will finalize primary sales procedures, while secondary trading is overseen by the supervisory authority and stock exchange, which lists five companies. Non-resident firms cannot yet offer debt, although both dollar and rial-denomination will be allowed in the 2018-2020 trial period. Foreign investors get the same withholding tax rebate as domestic counterparts, but currency controls may limit fund repatriation. Documents are published in both Khmer and English, and the future framework assumes overseas wealthy individual bond market participation. A trust law is under preparation to bolster investor protection, and debt securities will be subject to a stock exchange entry fee at 0.1% of the total amount.

The ADB recommends creation of a yield curve, and a capacity building program to spread specialist and public knowledge, with bond market inauguration. Corporate governance from audited statements to management reporting is still lacking, and accounting and custody should convert to international standards. The planned 2019 timetable for pilot government activity will release “pent-up” local demand among insurance and pension funds in particular. A new asset class will be created, which could appeal also to Korean investors with its joint venture stake in the Cambodian stock exchange.

Myanmar is further along on bond market development with technical advice from Japan’s Daiwa Institute of Research, with the government floating bonds since the early 1990s and recently selling 2-5 year Treasuries under competitive auctions. The Myanmar Economic Bank and Stock Exchange are the authorized dealers, with the central bank previously handling direct financial institution transactions. The original government securities act dates back to 1920 under English law, with a more modern code passed in 2013 with powers split between the monetary and exchange supervisory bodies. Corporate bonds are not yet available, and non-residents will not be able to issue under the proposed template. The Finance Ministry has a debt management unit, and in line with International Monetary Fund preference Treasury bills and bonds are equally divided in the total, although without existing benchmarks.

The 3-month interest rate was between 7-9% the past fiscal year, and the 5-year yield was 9.5%, and private enterprises and individuals are big buyers. Default will be covered under the new Companies Law, and credit rating and corporate governance systems are in formation. Repos are used and borrowing and lending may soon be approved to avoid settlement failure. Taxation “lacks clarity” and foreign investors await specific local debt and equity access parameters. The guide predicts “much change,” including municipal bond creation, over the next 1-2 years, with the caveat that sound fiduciary practice may still not apply outside this confined sphere.

China’s Wagging Tail Risk Tide

2018 March 9 by

Posted in: Asia   

Entering the Lunar Year of the Dog Chinese and Hong Kong shares slumped on local and global fears after 2017 calm, despite top-level official assurances at the Davos World Economic Forum of financial risk management and rapid “high-quality” growth embracing anti-poverty and pollution priorities. President Xi, who had made a splash at the event the previous year with his call for open markets and free trade, left the publicity wave to his US counterpart this time,  although President Trump was hard pressed to explain the commingling of “America first” solar panel tariff imposition and global commercial cooperation. “Xi thought” was formally enshrined in the constitution in a more dramatic achievement, even as Development Commission planners warned of possible “black swans” accompanying predicted 6.5% plus expansion. The composite PMI index was near 55 at year-end, but private consumption and investment were up just over 5%, as state-driven fixed asset allocation continued to contribute 60% to annual growth. Industrial production and retail sales rose 6% and 9% respectively in December, as the average company liability/asset ratio stayed 55%. After a 3.5% jump against the dollar extending a strong run within the slim daily fluctuation band, the Yuan lost ground in early February after foreign reserves were reported above $3 trillion. According to the Washington-based Institute for International Finance capital outflows were only $60 billion, and the figure was further helped by other currency appreciation against the greenback. The foreign exchange regulator vowed to crack down harder on underground banks moving money abroad after conducting raids to gather “hundreds of billions of RMB.” Other popular channels include multiple-card cash withdrawals through Hong Kong; $200 billion in offshore dollar bond issuance last year; and an estimated $3 trillion in wealthy individual accounts in Singapore and elsewhere.

Total bond maturities will be $400 billion in 2018, as regulators push deleveraging and stricter disclosure to pare excess debt. Regional bank frauds were uncovered to stiff fines, and Fitch Ratings noted that balance sheet coverage of wealth management products will hit capital as thousands of system transactions were found questionable. With the unconventional borrowing route under pressure companies have turned to traditional IPOs, which doubled to 450 hauling in RMB 230 billion last year, as authorities continue to promote state enterprise debt-equity swaps to stave off restructuring and closure. Profits increased 15% and over one thousand “zombies” were closed according to government statistics. Almost $1 trillion in overseas assets could also be repatriated for support, although they now serve a dual function in aid of the Belt and Road program, where 90% of contractors in Asia and Europe were Chinese as calculated by think tank research. The first OBOR bond was placed domestically to finance cement plant equipment purchased at a 6.5% yield and was oversubscribed, as S&P Ratings forecast local government instrument defaults with the pile at RMB 16.5 trillion at year-end. Construction firms have sued municipalities for non-payment, as the real estate sector is due to soften with new buying and leverage curbs going into force. In Hong Kong, which the Heritage Foundation again ranked the freest economy in the world, private home prices have soared close to 500% the past fifteen years, as the monetary board must both defend the peg against capital exit and property overheating burns.

South Africa’s Sedulous Cyril Bettors

2018 March 9 by

Posted in: Africa   

South African stocks and bonds after gaining momentum on Vice President Cyril Ramaphosa’s win as ANC head postponing a sovereign ratings downgrade, were further buoyed as President Zuma was forced to resign before the end of his term in 2019 on overwhelmingly member vote. He had tried to fend off immediate departure by agreeing on a comprehensive corruption inquiry, in light of bribery and favoritism disclosures around the influential Gupta family, which had reportedly engineered cabinet appointments. Representation of their interests claimed another scalp when a prominent London public relations firm was abandoned by clients and employees after it was found to be behind a racist social media campaign, which was described as “ setting back black-white-Indian relations a decade.” The President made his final stand ahead of the scheduled state of the nation speech before ceding power to his former deputy, a wealthy business executive who has advocated investor-friendly economic and monetary policies. He struggled to control the timing of his departure as hundreds of money laundering and corruption counts are outstanding from serial investigations. Among the sensitive issues at the top of Ramaphosa’s agenda going into the next elections are land redistribution, the new mining code and the heavy household debt load. On farmland, party activists advocate forced seizure and transfer along neighboring Zimbabwe’s lines, since voluntary commercial deals have been slow to evolve under the original program. The latest proposed black empowerment provisions for mining had increased mandatory stakes to 30% and were fought by the main industry association as prices and production seek to rebound. Although the Big 4 banks have a global reputation as well-managed and conservative, supervisors are scrambling to come to terms with the extent of small enterprise and personal uncollateralized lending at exorbitant rates, often through specialist providers ultimately tied to the mainstream system. Retailer Shoprite, a leading stock, was fined for pushing expensive customer credit without proper warnings, and the government is not in position to mount a rescue with public debt already at 50% of GDP on anemic 1% growth. Foreign investors have steered clear of the mess with non-financial picks and buying bonds instead with real 4% yields, but central bank credibility is at stake over reducing individual and household leverage with unemployment stuck officially at 25% and the transition period to new polls likely to inject more uncertainty.

Cross border ties with Zimbabwe also feature prominently in the mix over coming months as President Mnangagwa, another forced successor, promises free elections with international observers, an end to indigenization laws prohibiting majority foreign ownership, and reconciliation with Western official lenders including the IMF and World Bank where massive arrears have accumulated. In December Finance Minister Chinamasa outlined initial plans in the budget emphasizing anti-corruption crackdowns but otherwise vague on potential privatization of hundreds of loss-making companies and elimination of the recent shunned “bond notes” introduced to address real hard currency scarcity. Banks have less than $50 million in US dollars and rand to support $6.5 billion in deposits, according to estimates, and even the central bank is long overdue for recapitalization as bilateral and multilateral creditors including the Chinese look for historic heavy lifting.

Iraq’s Stalled Post-ISIS Stake

2018 March 2 by

Posted in: MENA   

Iraqi bonds and stocks held by specialist foreign investors tried to shake off extended torpor, as a donor conference convened in Kuwait to pledge reconstruction help since Mosul was retaken to finally expel ISIS after a 5-year fight. The World Bank using on-the-ground and aerial drone surveillance estimated initial physical and social rebuilding costs at $90 billion, as roughly half of the IMF’s $5 billion facility agreed in 2016 has been used despite “frail” performance on fiscal consolidation and bank restructuring. Baghdad still owes the conference host $5 billion in compensation from the early 1990s invasion by Saddam Hussein which has been deferred, and other Gulf allies are expected to chip in alongside Asian and European counterparts and Iran.

The US recently provided a Treasury Department guarantee for a sovereign bond issue, but the Trump administration will not offer new economic assistance as it reviews bilateral relations following a tiff over Kurdish region independence where oil reserves are concentrated, and ahead of April scheduled elections where sectarian political divisions and violence again threaten. President Trump’s controversial campaign mantra about “taking the oil” in exchange for continued military support has featured in the debate as production ramps up toward the 5 million barrels/day target for the leading OPEC member. It is also flaring less natural gas to realize a reported $6 billion in lost earnings, and electricity supply has improved with private sector responsibility for distribution. However petroleum exports still account for 90% of government revenue as the security mess and a decades-long legacy of state control hamper normal enterprise and financial sector development. On the stock exchange, capitalized at only 5% of GDP, foreign buying tends to chase the few competitive stocks available, such as Coca Cola’s local bottling unit and number one weighting telecoms provider Asiacell.

Economic growth will be positive in the forecast 2-3% range this year with the better oil picture, and on the assumption that the displaced population of several million citizens and refugees can return to employment. Inflation is subdued with the continued exchange rate peg to the dollar, which the IMF views as “appropriate” for post-war stability as the parallel market premium dropped to 5% with ISIS’ defeat. Double-digit fiscal and current account deficits were the norm during the conflict and are due to narrow to manageable levels, but public debt spiked to 65% of GDP, including external arrears on non-Paris Club obligations and short-term rollovers to state-owned banks in turn funded by the central bank. To curb spending the public sector payroll and electricity subsidies were cut, and the revenue side will be bolstered by new import taxes and tighter customs enforcement. The government will decentralize budget responsibility to provinces and major cities, and has tried to streamline investment approval, with its World Bank Doing Business ranking at 160 of 180 countries, while considering partial privatization for hundreds of officially-run companies from the Saddam era. The onset of 3G in 2015 and the internet’s spread encouraged burgeoning e-commerce, and consumer goods and construction have emerged as diversification plays on big traditional industry names on the stock exchange now in the portfolio of Middle East and Asia-dedicated frontier funds.

The two Rs, Rafidain and Rasheed, dominate the “shallow” banking system with 70% of deposits and half of credit and act as a “drag,” according to the IMF’s 2017 Article IV report. They have not been audited under international standards and are “severely undercapitalized” with double-digit bad loan portions. Anti-money laundering and terror financing rules are absent, and the central bank lacks oversight and monitoring powers and has also been charged with providing small business lines. However in the past two years private competitors have grabbed share from the seven state institutions as Gulf regional banks also acquired local stakes. Traditionally the government giants handled all wages and pensions and trade finance, and without deposit insurance they also enjoyed an implicit guarantee as comparative advantage. A formal scheme is now under preparation, and with US Agency for International Development help a central credit registry is another project which can spur consumer as well as company lending. With stricter prudential rules capital has more than tripled to $7 billion over the ISIS attack period, and intrepid investors in attendance believe such smaller-scale reconstruction may succeed well before Kuwait conference ambitions.



Multilateral Development Banks’ Shifting Agenda Shortcuts

2018 March 2 by

Posted in: IFIs   

As the G-20 prepares to receive the findings of a high-level appointed group on the multilateral development banks’ future, think tanks worldwide have begun to submit recommendations, with a February paper compiled jointly by Brookings and CGD in the US and ODI in Europe. The authors argue that the system must deliver more to pursue the 2030 Sustainable Development Goals in terms of governance and “operational and policy coherence.” Common data, project design and technical assistance platforms are overdue, and approaches should be adapted in the categories of fragile, high-debt and upper middle-income countries. Global public goods can also be targeted in combination on issues like climate, health, migration and financial crisis. Capital and leverage can be scaled up to mobilize trillions of dollars for infrastructure and other needs, and portfolios can be turned over to the private sector at return and management thresholds. Shareholder oversight should not be limited to individual institutions and incorporate competing and complementary missions through UN bodies. The next two decades will see history’s biggest urban expansion and landmark developing world demographic transition, especially with Africa’s youth bulge. The banks’ “value proposition” is to stay a trusted partner able to offer capacity and reform advice, long-term funding, and global and regional expertise and help when economic instability spreads. Pure financial transfers barely register in middle-income countries where they are less than 1% of private flows, but “development solutions” remain in demand. The World Bank’s net allocation is now lower than regional counterparts, and clients seek input on cross-cutting themes like connectivity, small business formation and inclusion and inequality. Donor harmonization was pledged in the Rome Declaration 15 years ago but application has lagged, with the new Asian Infrastructure Bank trying to avoid uncorrected overlapping and onerous safeguards. Collaboration on public-private partnerships, evaluation and procurement has increased but core agendas are still at odds and often redundant, according to the filing. Shared country and sector strategies, research and impact measurement are viable, and will facilitate the so-called cascade effect for commercial finance as little used instruments like guarantees are more widely deployed. Regular asset sale programs should in turn be scheduled to release original capital and prevent constant shareholder calls.

In fragile states reconstruction should not be delayed over constitutional and electoral formulas and be supported mainly by grants. Administrative procedures should be more flexible and bank staff should handle the load instead in “low capacity” places. Debt sustainability risk is high or moderate in 30 chiefly African countries that got official relief and now tap external bond markets, and management complexity must take into account rollovers, contingent liabilities and other aspects where MDBs can offer global lessons and tracking mechanisms.  Advanced emerging markets still may seek public finance at the sub-national level and policy dialogue and peer convening power where private debt and equity sources do not engage. The Bretton Woods lenders have not been thoroughly reviewed for 75 years and lack a “periodic ambition and mandate inventory.” The report calculates that their $40 billion base can be multiplied the next decade for $2 trillion in resources under far less conservative loan/asset ratios. Individual banks have their own comparative advantages such as the EBRD in energy and AfDB on water and topical rather than geographic focus can define future relationships from high-level summits to daily communications as a tangible near-term goal, it concludes.



South Asia’s Bulging Belt Lashes

2018 February 24 by

Posted in: Asia   

China’s multi-trillion dollar hard and soft infrastructure investment Belt and Road Initiative (BRI), officially entering its fifth year, was again in the spotlight at the Davos World Economic Forum, where Asian portfolio managers tried to assess stock market recovery prospects in major recipients Pakistan and Sri Lanka in particular. Their MSCI component indices lost 21% and 1% respectively in 2017 as all other Asian exchanges tallied double-digit gains. A recent paper by the Washington-based Center for Strategic and International Studies (CSIS) noted that Beijing loaned Colombo $1.3 billion for a port multilateral development banks refused, and then took an 80 % equity stake in lieu of unpaid interest as part of an $8 billion portfolio in the country ahead of 2019 presidential elections. Pakistan’s traditionally close commercial and diplomatic ties, especially as the US plans to cut back on economic assistance in anti-terror cooperation protest, have strengthened with a $60 bilateral aid and building program.

However Sri Lanka’s high debt, along with corruption scandals and political standoff, forced recourse to the IMF in 2016, and Pakistan is expected to return there imminently without additional backstop from more cash-strained Gulf donors. Currencies have plummeted in both places to aggravate food and fuel-price driven inflation, and the BRI cannot mask leadership doubts and fiscal and monetary policy lapses.

The CSIS analysis points out that Chinese projects barely benefit local contractors, as their own companies get 90% of funding. State-owned construction firms in particular, at seven of the world’s ten largest in 2017, can draw on massive size and subsidies. From 2000-2014 development bank credit totaled $350 billion, three quarters on commercial terms, with focus on the power and transport industries.  In contrast with Western providers China’s approach is “centralized and flexible,” with unified agency decisions and relaxed environmental, social and governance standards. Natural resources are accepted for payment instead of cash, and capital outflow restrictions are not as strict for BRI deals, according to the document. It adds that large infrastructure schemes are unlikely to be completed on time or budget, and typical Chinese labor over-reliance will spark backlash.

In Davos Pakistan’s Prime Minister Shahid Khaqan Abbasi dismissed debt trap concern over the Economic Corridor with China, which he insisted would proceed under mutual “sustainability” principles and was designed to stimulate all foreign investment with energy and security improvements. However in December water authority officials scuttled a proposed $15 billion dam project over Beijing’s onerous financing demands, and railway deals in Karachi and elsewhere were also put on hold. In January the government’s own debt policy statement acknowledged deterioration in external servicing ratios across-the-board as the total hit $85 billion, versus $15 billion in foreign exchange reserves covering just three months imports. After successfully placing Eurobonds in conventional and sukuk form late last year, rating agency Moody’s warned that further rupee depreciation and the persistent 3-4% of GDP current account deficit would hurt “affordability.”

In Switzerland the Prime Minister spurned the prospect of immediate elections and IMF program application, as he previewed a tax amnesty to extend collection beyond the current less than 1% of the population and restrain public debt buildup at the 65% of GDP danger zone. He pointed to information technology as an emerging domestic demand driver buttressing traditional garment exports and remittances for 5% predicted economic growth this year, according to the World Bank. Double-digit credit increases and good monsoon rains should support near-term performance, but analysts caution that capital account trouble could materialize under currency flight and debt reimbursement pressures.

Sri Lanka’s official growth forecast is for the same pace, as foreign direct investment was estimated to double to $1.5 billion in 2017 amid good agriculture and tourism earnings. Going into February parliamentary polls President Maithripala Sirisena and his minority party are struggling with popular outcry over tax hikes and 8% inflation, with staple coconut prices doubling. The IMF arrangement aims to limit the fiscal gap to 5% of GDP, which the central bank has historically bridged through money printing. Domestic debt maturities peak this year and foreign ones over 2019-22, according to experts, but the President announced in January that he did not have a detailed accounting for $60 billion or 90% of previous external loans, a claim that stretched both credulity and comfortable Belt size.




Central American Remittances’ Premium Protection Stakes

2018 February 24 by

Posted in: Latin America/Caribbean   

With the US planning to lift “temporary protection status” for Northern Triangle El Salvador, Honduras and Nicaragua and Haiti migrants, remittances jumped 8% to $75 billion for the seventeen countries in the Inter-American Dialogue database last year. The pace was a multiple of 1% regional GDP growth and mirrored export increase. For Central America and the Caribbean 3.5% growth was due to a 15% remittance uptick, and the numbers reflected continued North American labor demand as well as dollar depreciation in Mexico, the Dominican Republic and Costa Rica. The violence-prone Triangle area has been in recession for a decade and families continue to head to the US border with apprehensions also declining. In Guatemala as an example 15% of the Western Highlands population left and transfers were up 17% according to the central bank. One-quarter of El Salvador’s citizens want to leave, surveys show, and in the Dominican Republic despite greater stability the number of transactions has jumped. Haitian emigration on the eighth anniversary of the record earthquake is toward Canada and South America as well, particularly to Brazil and Chile, which now hosts 100,000 in contrast with 5000 before the event. Mexican remittance growth was steady at 6%, but the weaker dollar may have prompted slightly lower volume. The individual principal amounts sent  roughly reflect the 2016-17 aggregate changes, but deportation fears may be forcing more savings on hand in case of such action. The flows contribute in the range of 5-35% of GDP, and work abroad is often the main alternative to informal employment at home, with substandard pay and labor protection. In El Salvador and Haiti immediately targeted for status termination, they account for one-third of national income, and Haitian migrants with the TPS designation are 6% of the total, the Dialogue report notes. President Trump allegedly used an epithet to describe the poorest hemisphere country, as a 2017 survey of five US cities revealed mounting Latino anxiety over potential law enforcement crackdown or new taxation.


On average a dozen payments are transmitted annually and only one-tenth are through the internet. With a tax 40% polled would resort to informal services, and one-quarter plan to cut amounts. One-third of immigrants think they will be deported, and 60% do not expect home government support. Over half would be open to a fine to normalize status, and the same portion claimed jobs were harder to get with the Administration’s tougher despite the healthy US economy. 70% of respondents believe that the door will be shut altogether to legitimate refugees as the provisional shelter program also lapses. Honduras’ external bond was shaky as President Hernandez was inaugurated for a second term after a disputed election fostering street protests and a security force response with live ammunition. The opposition candidate, a sports broadcaster, cited computer manipulation of his apparent victory and national strikes were organized against “dictatorship” as the Organization for American States urged a rerun. Chile may harden its line against Haitians after President Pinera’s second term win, which upgraded the growth forecast to 3.5% on boosted private sector confidence and modest rate cuts alongside but he may turn previous social spending promises to rubble.

Kazakhstan’s Sullied Diplomatic Splash

2018 February 17 by

Posted in: Asia   

Kazakhstan’s MSCI frontier stock component, after a 70% gain, and dollar bond prices at 130 cents both sputtered into 2018 as President Nursultan Nazarbaev marked twenty-six years at the helm with high profile foreign investor energy and banking clashes despite a triumphal US visit. In Washington President Trump dismissed corruption and money laundering references to the long reign with his own campaign under the microscope for Russia and neighboring ties, and in New York while chairing the monthly seat rotation on the UN Security Council, the Kazakh chief was praised by Secretary-General Antonio Guterrres for Central Asia development and anti-terror initiatives focusing on infrastructure and drug crime. While there Wall Street money managers also probed details of scheduled sovereign wealth fund partial state enterprise sales to include the airline and natural resource holdings.

European counterparts had previously joined the parade after the EU inked a Partnership and Cooperation Agreement, which aims at bilateral “WTO-plus” free trade slashing both tariff and non-tariff barriers. The pact came on the heels of the country’s 15 place jump on the World Bank’s Doing Business ranking, despite staying in the bottom quartile of Transparency International scores. The European Bank for Reconstruction and Development also signed a new 3-year program memorandum stressing small business and privatization support. However these official achievements were blemished by simultaneous private antagonism after the local unit of US electricity operator AES was seized for one dollar, and Bank of New York Mellon was forced to freeze $22 billion or half of Kazakhstan national fund assets to satisfy a possible Moldovan oil and gas investor claim. At the same time banking instability at home spiked when the ninth largest institution, RBK, was rescued after a depositor run for reported fraud, at an estimated initial $1.5 billion tab. The sector was still coming to grips with the forced merger of the two state behemoths Halyk and Kazkommertsbank, as bad balance sheets linger a decade after the original crisis despite the President’s positive diplomatic headlines.

In his January state of the nation speech President Nazarbayev repeated financial system cleanup and anti-corruption priorities without hinting at an executive succession preference or timeframe, even though parliament in principle gained relative power under 2017 constitutional amendments. He continues to dismiss cabinet members and prime ministers at will, and unilaterally decided on an alphabet switch from Cyrillic to Latin script creating widespread academic and professional confusion. After Kyrgyzstan’s President reportedly insulted him the border was closed temporarily, and Astana delayed its neighbor’s membership in the Russia-led Eurasia Economic Union. Last year GDP growth came in at 4% on 7% inflation, and the central bank recently reduced the base rate to 9.75% as the tenge firmed around 325/dollar. Oil price rebound spurred a 25% trade and an almost 10 million barrel/day output rise, with Kazakhstan now the top over-producer in the OPEC and allies’ global agreement. The Economy Ministry said hundreds of projects were completed under the 5-year privatization plan, as the new Astana International Financial Center based on advanced economy legal and operating standards began registering companies in partnership with the Shanghai Stock Exchange and NASDAQ.

The dedicated offshore framework must contend with the harsh image and arbitrary rule displayed several months ago in the AES saga, where the Fortune 200 power company was stripped of control over two hydro-facilities run since the 1990s. It spent hundreds of millions of dollars installing a state of the art electricity grid only to have a contract compensation clause ignored, when the government demanded ownership and offered one dollar for alleged violations instead of the $90 million AES calculates is due. The debacle was soon followed by the wealth fund asset freezes in the US and Europe in long-running Moldovan investor actions against the state, after it confiscated petroleum fields in 2010. The plaintiffs won a $500 million international arbitration award and tried to enforce payment in Belgian and Dutch courts with Kazakhstan filing counterclaims, and they threaten to pursue future compensation in the giant Kashagan tract if the damages are not met. With over $20 billion in reserves off limits, the Nazarbayev administration will have difficulty mustering additional bank rehabilitation lines, and financial markets will remain wary pending development of a successor plan emphasizing instead governance and management overhaul. .



Turkey’s No Good Cresting Credit Craze

2018 February 17 by

Posted in: Europe   

Turkish stocks were pressed to sustain their 2017 35% MSCI gain as political opposition to President Erdogan further solidified with a successful gathering organized by the new Iyi (good) party founded by a former interior minister expelled from the ruling AKP, and the central bank hoisted rates 50 basis points to stem near 15% inflation from the state-credit turbocharged economy expanding 7% in the third quarter. Investors were also spooked by a senior Halkbank executive New York conviction in an illegal gold for oil trading scheme with Iran violating sanctions, which may result in SWIFT network dollar-clearing curbs. Iyi’s head Aksener fashioned a conservative cultural anti-terror platform which promotes women’s rights and criticizes the presidency’s unchecked powers. Over 50,000 have been jailed and hundreds of thousands of government employees were removed under broad security authority after the botched putsch, and waves of educated professionals otherwise fled abroad. The US has been accused of aiding plotters and of encouraging a Kurdish stronghold along the Syrian border, while Turkish embassy personnel were accused of beating protesters in Washington during a bilateral summit. Visa services were suspended between the two countries in the aftermath, and overtures to Russia and China have increased on commercial and military cooperation. Western human rights groups have blasted the regime’s strong arm tactics, including confiscation of leading private company assets, as well as harsh refugee treatment despite hosting over 3 million escaping Syrians. With emergency law tourism is down despite the softer lira toward 3/dollar, and the current account deficit again approaches 5% with booming domestic demand, on household spending up 12% annually. Turkish business has borrowed $215 billion overseas, and the government will keep weaker firms from assuming more debt under recent changes. Banks likewise depend on foreign lines, and their position may be more precarious with global monetary tightening and lingering exposure from the guarantee fund push.

Refugee labor market practice was condemned in a December report by advocacy organization Refugees International calling for “sustainable solutions” after seven years of Syria’s civil war. Despite government and EU assistance the population must “fend for itself,” and can only find informal economy work with substandard wages and conditions with few permits issued under a 2016 program. Over 5000 Syrian-owned businesses have opened, but employees otherwise face prohibitive administration and fees. One million are in Istanbul, and over 90% are in urban centers with limited language and skills access. They are under “temporary protection” and must live in the city where registered and wait six months to apply for work approvals, now at 15000 total since introduction. Cash transfers are minimal for family support, and households typically must also send money to relatives in Syria. An estimated 80% of refugees are in the underground sector, and 40% of children are out of school in such labor, particularly in the low salary textile industry. The survey documented scarce permit information through community centers and employer hiring appetite with the minimum wage, social security and other charges attached. Few refugees speak Turkish and they encounter long delays in obtaining ID cards prior to seeking permits as well as discrimination in renting which can literally undermine prospects for roofs over their heads, according to the analysis.