China’s Multi-Front War Whirlwind

2018 September 11 by

Posted in: Asia   

Chinese stocks were at the bottom of the Emerging Asia pack into August, down 20% in local index terms, as the so-called “trade war” with Washington added another 25% mutual tariff blow on tens of billions of dollars in goods. The International Monetary Fund urged a negotiated settlement as it predicted only “limited direct impact” on the economy shaving growth half a percent under a medium-case scenario, while holding to this year’s 6.6% forecast. However the Fund also warned that credit expansion was unsustainable and that tighter global financing conditions posed “downside risk,” as the renimbi continued its 10% slide since April.

The IMF’s Beijing representative described the Yuan as “fairly valued,” even though analysts estimated that depreciation would translate into higher exports with a time lag to offset the tariffs. . US Treasury Secretary Steven Mnuchin raised the stakes with notice that his department was “carefully monitoring weakening” in preparation for another currency manipulation assessment due in October. The dollar is less than a one-quarter weight in the overall daily fluctuation basket, comprised 40% of neighboring emerging market currencies. Chinese officials insist that market forces rule with no competitive devaluation strategy, as the central bank reinstated bank forward position reserve requirements to curb speculation. However the bilateral exchange rate and trade regimes now closely overlap as an overhang on “A” share consideration, despite China’s 30% slice on the benchmark MSCI index, with a clean resolution of cross-cutting issues unlikely to offer recovery prospects in the coming months. As if these battles were not enough to daze foreign investors, whose first half $45 billion in inflows have turned to outflows, another theater opened after Pakistan’s July election brought the prospect of another IMF balance of payments rescue that could also repay Beijing’s Belt and Road commercial infrastructure lending, as the two systems try to reconcile debt workout procedures. US Secretary of State Mike Pompeo, responding to congressional concerns, insisted that a Fund program would not benefit mainland coffers.

Although exports increased over 10% on an annual basis in July, a $30 billion current account deficit in the first half was the sole instance the past two decades as outbound tourism jumped. The official purchasing manager index hit a five month low of 51, and the services optimism reading was the poorest since 2015. Monetary policy was loosened as money market rates fell 200 basis points year to date, and the State Council pledged “more active” fiscal steps short of stimulus. The mid-year budget deficit came in less than 2017’s, as one hundred fixed investment projects were approved worth $40 billion. Local government spending will ramp up in the second half as RMB 1.8 trillion in bond issuance is allowed, in part to compensate for sliding land sales. The Housing Ministry ordered provincial authorities to better manage risks, as the news agency Xinhua tallied 200 property tightening rules across the country to deflate bubbles. With the domestic downturn Chinese institutional investors only allocated $4.5 billion to overseas property in the second quarter, a 45% drop on an annual basis according to global tracker Cushman & Wakefield.

Financial sector troubles continue despite “preliminary deleveraging results” in the government’s view, as the central bank injected a record RMB 500 billion in one-year liquidity. It called for greater small business credit, as regional lenders with 40% of system assets retrench under capital constraints and seek to launch share offerings in Shanghai and Shenzhen. According to the banking regulator only 35% of RMB 250 trillion in assets are onshore, and overseas disclosure is opaque. Financial services overseers were otherwise swamped with depositor protests after 150 P2P lending platforms suddenly closed. Thousands have proliferated to serve an estimated 50 million borrowers, and range from well-known e-commerce units to personally-run pyramid schemes. The asset management association also revealed “lost registration”  with hundreds of private equity and hedge funds that failed to renew registration. The State Council announced further measures against illegal financial firms and activities, after twenty mainstream corporate bond defaults through July, with state enterprises facing a heavy rollover schedule in 2019. Standard & Poor’s Ratings found that over half of investors with put options, mostly in the property sector, exercised immediate repayment rights over that period. The National Development and Reform Commission calculated foreign exchange liabilities were back to 2014’s steep levels, as currency mismatch also prominently surfaced as an element in the belligerent terrain.

Colombia’s Brimming Border Insecurities

2018 September 11 by

Posted in: Latin America/Caribbean   

Colombian shares led Latin America with a 10% gain through July, as President Duque took office on a pledge to rework the FARC rebel peace pact, as members of their new political party won parliament seats. He refused to consider a similar accord with the rival ELN until they abandon violence, as his sponsor former President Uribe was forced to resign from the Senate to face charges of aiding paramilitary gangs. President Santos finished his term with abysmal opinion ratings on perceived guerilla negotiation economic policy mishandling, with growth stuck at 2-3% on a chronic current account gap and public-private infrastructure partnerships slow to materialize. However before leaving he granted temporary residence and work permits to half a million Venezuelans roughly doubling the internal population, and covered health costs while appealing for international assistance. The US chipped in $60 million for humanitarian support to the region now hosting 1.5 million Venezuelan refugees, with experts predicting the number to double as President Maduro further squeezes the opposition and economy after narrowly escaping a drone attack. The assassination bid delayed new currency issuance as existing denominations cannot keep pace with estimated 1,000,000% year-end inflation, according to the IMF. The government long ago stopped updating statistics, but the fiscal deficit may be 30% of GDP and foreign reserves may be totally exhausted beyond minimal external debt and essential import payments. The sovereign could be removed from the JP Morgan benchmark index on both default and future tradability risks, as existing US Treasury Department curbs could imperil restructurings for new paper. Any workout will bump against parallel sanctions against Russia’s state energy giants with controlling stakes in oil fields, as well as Chinese bilateral lending in the $50 billion range. An IMF program is off the table since the socialist regime renounced relations over a decade ago, although Colombia with a backup credit line has requested a dedicated refugee facility which could partner with the World Bank’s concessional middle-income country pool for this purpose.

The UN Refugee agency urges that designation so that asylum and protection treaties signed by neighbors apply, with the 30-year old Cartagena declaration designed for Central America’s war exodus potentially a cross-border cooperation model. Latin America’s safety nets and infrastructure are more advanced than in other developing regions hosting displaced groups, with Colombia also able to share funding and service experience from handling its 15% relocated domestic population. Chile and Ecuador could also be eligible for the World Bank’s discount window, and the Inter-American Development Bank could establish an umbrella fund to meet objectives in a comprehensive framework, as recommended by the proposed Global Compact on Refugees. The US Agency for International Development head recently visited Colombia to underscore crisis priority, as the new unified Finance Corporation moves through congressional passage to modernize the bilateral toolkit. OPIC’s investment ceiling will double to $60 billion as it is equipped to take equity stakes alongside existing debt and risk guarantees. It could help launch refugee-specific pilots to prepare for a time when Caracas’ leadership will shift ideological for diplomatic and investor solidarity as stagnation and starvation drone on relentlessly.

Thailand’s Trade War Tripwire

2018 September 4 by

Posted in: Asia   

Two years after a constitutional referendum passed to set the stage for 2019 elections returning civilian rule, amid calculations that the US-China trade war will only fractionally hurt growth, Thailand’s stock market enjoyed political and economic momentum for an essentially flat performance on the MSCI index through July compared to Asia’s 5% decline. According to official estimates the loss of machinery, plastics and vehicle exports in the first tariff waves of the bilateral clash will be readily offset by new Chinese investment into the $30 billion high tech Eastern Economic Corridor in particular, as rice and rubber shipments may also increase. Gross domestic product rose almost 5% the first quarter, and the central bank and International Monetary Fund predict growth toward that figure for the year on a 10% tourism jump through June and public infrastructure spending.

Inflation at 1.5% is at the bottom of the target zone, and the fiscal deficit is manageable at a projected 3% of GDP as poll outlays pick up. In external accounts, the current account surplus, over 10% of GDP last year, is “excessive” in the Fund’s view, but along with intervention from $200 billion in reserves has preserved baht strength against the dollar amid capital outflows. Monetary policy remains neutral, but household debt again swelled in the first quarter to almost 80% of GDP, as the Bank of Thailand governor vowed  to “break bad habits,” which may continue to depress consumption through the military’s promised exit from power.

With renewed activity the Big Four banks announced earnings above estimates to boost share prices, with number one Bangkok Bank profits up 15%. Over half of personal borrowing is for credit cards, autos, and unsecured loans, with mortgages taking another one-third.  A Financial Times Research survey of 1000 consumers revealed that most apply 30% of their income to service debt, and almost half were refused additional credit the past year. Bad assets are only 3% of the total, but the central bank is considering tougher “macro-prudential” measures to ensure deleveraging even as car sales were artificially lifted 20% in the first half by a government tax rebate.

The Thai investor sentiment index compiled by the main capital market organizations improved in June and July despite net portfolio outflows and tighter regional interest rates. Exports continue to advance at a 10% clip, especially electronics and commodities outside immediate trade conflict. Corporate bond issuance increased slightly from January-June, and the Bond Market Association raised the second half forecast by $25 billion. Chinese visitors, who account for one-quarter the total, may stay away after the Phuket ferry disaster that killed 50, but the incident was eclipsed by the soccer team rescue garnering favorable global headlines.

In contrast to Thailand’s streak, the Philippines was shunned for a 15% MSCI Index drop through July as torrid 6.5% economic growth also spurred inflation and current account deficit concerns. The peso is at a dozen-year low at 53 against the dollar, as the central bank begins to hike rates to reach the 4% inflation target. The IMF expects the balance of payments gap to worsen to 1.5% of GDP as a currency drag, along with uncertain remittances from the Middle East. Food and transport costs and 6% peso depreciation hoisted the consumer price index 5.5% in July, at the top end of the central bank’s forecast. The Treasury recently rejected bids on 10-year bonds since yield demands were too high, as President Rodrigo Duterte’s administration continues its $170 billion “build, build, build,” transport program. It will bring the budget deficit to over 3% of GDP, against IMF and ratings agency admonitions. Moody’s warned the fiscal outlook could further deteriorate after the immediate effects of steeper excise taxes fade, and criticized the President’s “contentious law and order policies.”

Revision of the four decade old constitution which imposes a presidential single term limit is another controversy upsetting foreign investors, who according to initial drafts will stay subject to minority ownership of land and local companies. The so-called “charter change” was a centerpiece of Duterte’s original campaign platform nominally intended to create a federal system, but opponents including a former Supreme Court Justice accuse him of a power grab at the same time higher-cost staples and debt are starting to bite and corporate and political governance arouse deeper suspicions.



Greece’s Grating Graduation Ceremony

2018 September 4 by

Posted in: Europe   

Greek share performance remained above the Europe average into August, the date for final exit from almost EUR 300 billion in serial EU-led rescue packages, as record tourism combined with estimated 2% growth and official debt relief though maturity extension to work away at the 180% of GDP load.  International agencies will continue with quarterly checks, and capital controls will stay in place in the immediate transition ahead of parliamentary elections next year. Prime Minister Tsipras and his party are behind in opinion surveys, and wildfire spread claiming lives and property added to subdued sentiment. In July US private equity giant KKR struck a deal for EUR 150 million in bad loans as they still account for half of bank portfolios after rounds of European Central Bank liquidity injection. With asset and labor costs slashed during the crisis, venture firms are considering existing and new industry acquisitions, mainly as a regional springboard with domestic unemployment at 20% and poverty one-third the population. The government is committed to a 3.5% of GDP primary budget surplus the next five years, with a lower income tax threshold kicking in at end-decade. The IMF’s latest Article IV consultation praised “stability,” but noted that real output is just three-quarters of the pre-crisis peak. Competitiveness lags neighbors, and approaching polls bring “uncertain” reform direction. The current account gap shrank on import compression, and government arrears were EUR 4 billion at the end of April, with reduced pension spending driving fiscal adjustment. Voluntary external bond markets reopened in 2017 for liability management operations, and benchmark 10-year yields were 4% following ratings upgrades. Bank balance sheets are still a mess with flat credit, although private deposits are up on the way back to 2015 size.

Public and commercial investment will enable future recovery, including from privatization deals, while net exports are marginal. The Fund urged greater flexibility rather than caps on healthcare and civil service outlays while further rationalizing the tax code. Legislation should allow out-of-court debt restructuring alongside existing strides in household and business insolvency. Bank governance standards are not best practice, and deferred tax credits comprise too large a portion of capital as new international financial reporting norms apply. Small enterprises deprived of credit demand creation of a dedicated development lender, but consideration should not divert cleanup attention, the report implies. Labor market and minimum wage rules remain rigid, and previously closed professions and licensing are not as strict, but more progress should be a priority. Anti-corruption agencies are now stronger in principle, but implementation and independence continue in question, according to the review. Greece’s 10% loss on the MSCI Index was in contrast to Turkey’s 35% through July, as the lira neared 5/dollar with the central bank on hold against double-digit inflation and currency depreciation. President Erdogan’s son-in-law was put in charge of economic policy after the ruling party joined with a right-wing counterpart to secure a parliamentary majority, and he has blamed “foreign disruption” for overheated growth and overstretched bank concerns.’

The BRICS Summit’s Tentative Troughs

2018 August 28 by

Posted in: General Emerging Markets   

The annual leading emerging economy BRICS gathering in Johannesburg, 15 years after the term was coined in global investment bank research, failed to lift the collective financial market mood after the category was down 5% on the MSCI Index through mid-year. Russia, India, Brazil and South Africa joined China in condemning trade protectionism as the Beijing-Washington tariff and currency slugfest ratcheted up, with the International Monetary Fund as a summit participant also warning of “mounting world growth threats.” to asset values. In the well-known Bank of America fund manager survey 60% of respondents cited trade and investment retaliation as the top tail risk, repeating the anxiety level from the onset of the European debt crisis five years ago.

The Washington-based Institute for International Finance at the same time pointed the finger at BRICS China, Brazil and South Africa for rapid government and corporate debt increases contributing to the $25 trillion, 320% of output, global total in the first quarter. India and Russia escaped criticism, and their stock markets were the best performers, near positive toward the end of July. The cohort agreed to cooperate on industrial policies and further target infrastructure projects through the joint New Development Bank, as the Asian Development Bank separately published its 2030 strategy promoting common financial services rules and platforms. Unlike previous declarations and actions, such as when the group created a contingency fund for balance of payments support or Beijing’s Asian International Infrastructure Bank explicitly agreed to work with the NDB and ADB, the Johannesburg outcome did not sway markets. As illustrated by the reactive protectionism statement, they remain uncomfortably on the defensive into the third quarter amid souring fundamentals and sentiment.

China, Brazil and South African stocks are down double-digits as respective region heavyweights on the MSCI benchmark, and China’s “A” class momentum in particular has reversed since June inclusion. Second quarter gross domestic product rose 6.7%, but industrial slowdown was clear in the latest monthly figures as the IMF slightly lowered this year’s forecast. The Yuan in turn shifted course against the dollar, but depreciation was less than the 7% first half emerging economy average. Chinese officials called the fluctuation range “reasonable” as they acknowledged “binary volatility,” with international reserves still over $3 trillion despite foreign direct and portfolio investment pullbacks. The securities regulator announced “A’ share opening to individual investors and launch of a direct Shanghai-London link in 2019. Although The Economist’s “Big Mac” Index calculates Yuan undervaluation still at 40%, analysts argue that deliberate weakening would further discourage FDI and raise the cost of $775 billion in offshore corporate dollar bonds, according to Nomura Securities data.

Corporate defaults continued with Wintime Energy the largest this year at $10 billion across a dozen instruments, as Moody’s Ratings commented that new money was difficult to access with “cycle change.” The National Development and Reform Commission has already limited property firm overseas debt issuance, with $250 billion in total repayment due next year. Local governments are also leveraged and face heavy rollovers in the coming month. The central bank again injected liquidity into the banking system to sustain lines to problem customers, even as stricter classification criteria will downgrade “special” to bad loans.

India is in the Trump Administration’s sights both for import and currency intervention practices, but shares rebounded in recent weeks on good high-tech bellwether and private bank earnings. The latter gained favor as the government injects more capital into state-owned giants following poor management and corruption revelations. Prime Minister Narendra Modi and the ruling BJP Party are in re-election mode, as key economic indicators outside 7% headline growth falter. The trade deficit and inflation are at 5-year highs, and a bid to win farmer votes with heftier subsidies will likely swell the fiscal deficit. Other BRICS Brazil and South Africa are also struggling with runaway budgets and political transition while dealing with resurgent inflation. Brazil’s October presidential election could bring an anti-establishment team into power as the public pension system imperils debt sustainability, and South Africa’s contest next year will be a verdict on President Cyril Ramaphosa’s business-friendly policies to attract over $100 billion in new foreign investment. These leaders face steep climbs, with the Johannesburg summit’s meager results highlighting the lack of parallel market traction.



Asian Stocks’ Safety Scramble Scrum

2018 August 28 by

Posted in: Asia   

With the negative MSCI showing across all Asian core and frontier stock markets, fund managers began the second half constructing narratives around selected countries’ relative trade and currency war evasion and upbeat economic and financial system health as preferred spots. Specific company size and industries were also promoted, with India on a recent run with embrace of high-tech stalwarts like Tata Consultancy Services and less-followed e-commerce listings without lofty double-digit valuations. Indonesia has enjoyed a foreign investor revival of debt and equity inflows with its domestic consumption-led story, tighter monetary policy, and diminished populist and religious fundamentalist concerns in elections.

Vietnam is coming off economic and share overheating according to the International Monetary Fund’s July Article IV report, and will be a main beneficiary of any successor Trans-Pacific Partnership free trade pact concluded without the US, in the view of think tanks like the Washington-based Institute for International Economics. Kazakhstan as a dual Eurasian destination, and a rare frontier gainer up 3% through mid-year, is likewise on the radar after the s launch of the Astana International Financial Center lured dozens of offshore banks and securities houses ahead of planned state company offerings. These picks carry momentum into the third quarter, but underlying financial sector and structural reform disappointment could still stifle it as investors again rotate toward more familiar and liquid locations.


Indonesia’s central bank abandoned its neutral stance, and raised the benchmark rate 100 basis points in consecutive meetings to 5.25% to stem heavy capital outflows in May. It also bought local bonds in secondary markets as yields neared 8%, and intervened from the $125 billion reserve stockpile to support the rupiah as it softened 5% against the dollar. With the moves the growth and current account deficit forecasts stayed respectively at 5% and 2% of gross domestic product. Officials announced measures to stimulate the property market by relaxing the minimum 15% down payment for first time home owners and expanding available credit. Standard and Poor’s Ratings predicted activity would remain flat, but acknowledged potential supplier benefits. On trade Jakarta dispatched a delegation to Washington, which ran a bilateral $13 billion deficit in 2017, to address the threat of duty-preference removal raised by the Trump Administration in April. Garments and rubber are chief targets following a US Trade Representative review which placed Indonesia on a dozen country “priority watch list.”  To maintain international payments balance, Finance Minister Sri Mulyani Indrawati proposed possible equipment import limits for infrastructure projects that may be finalized soon.

The central bank reintroduced short-term 9 and 12-month government paper to diversify foreign investor options as overseas debt hit $360 billion in May, evenly split between official and private. The latter is concentrated in mining, manufacturing and electricity company borrowers, and the debt-GDP ratio is 35%, but over 85% is long term. However Asian high-yield bond rates have gone from 6% to 9% in recent months on leverage worries among Indonesian and Chinese names in particular. Against this background leading Bank Mandiri, despite a 30% first half profit jump, may confront resistance as it seeks $500 million in overseas lines in the near future according to its chief executive.

Indonesia’s credit default swaps spiked to 175 basis points over US Treasuries before settling down and the non-resident local bond share is still almost 40%. Regional elections at end-June were inconclusive as a signal to 2019’s presidential contest, but the incumbent Joko Widodo will likely face a close race as voter sentiment veered away from establishment candidates and family dynasties. Nonetheless former President Suharto’s son Tommy plans to form a new party and enter the competition on a nominal anti-corruption platform.

Vietnam is on track for better 6.5% growth with impetus from the Trans-Pacific and EU free trade agreements, on inflation within the 4% target. However fiscal consolidation must go further to keep public debt within the 65% of GDP legal cap, and credit expansion above 15% is too fast, the IMF survey argues. State-owned banks continue in trouble with low capital and earnings, and bad loan resolution through the central asset management agency can be accelerated. Longer range capital market development, particularly corporate bonds to balance with equities, is also lacking and may damp quarterly enthusiasm, the review cautions.

Africa’s Fumbling Favorable Narrative

2018 August 21 by

Posted in: Africa   

African frontier stock markets were down 2% through midyear on the MSCI index as the group struggled to reprise the “rising” story amid uneven commodity price recovery and renewed debt crisis warnings. Kenya and Zimbabwe were exceptions with double-digit gains, as the  threat of political violence faded in the former with reconciliation between perennial party rivals, and the latter conducted the first post-Mugabe elections with his former vice president and leading general predicted to win a full term against the unorganized opposition also at a disadvantage in funding and media coverage. Nigeria was flat heading into its 2019 contest, with President Buhari vying for another term against the advice of civilian and military allies and medical experts. Oil rebound has ended recession and foreign reserve drain, aided by wider hard currency access while the central bank has kept the benchmark rate close to15%. The Boko Haram fight is a major campaign issue with the cost and mixed results of security operations, and recognition that a broader displacement and refugee crisis has developed with neighboring Cameroon, where the English-speaking south increasingly agitates for separate rule. Cameroon’s President Biya now holds the tenure record with Mugabe gone approaching forty years in power, and his health is uncertain with no designated successor. The July review of the 3-year $700 million IMF facility reiterated fiscal and banking weakness while disbursing another $75 million. As the biggest economy in the Francophone Central Africa zone it has catalyzed “fragile” recovery, with 4% growth set for 2018 with new natural gas production and construction around next year’s football Africa Cup. Inflation with the euro peg is minimal at 1%, and the current account gap should settle at 3% of GDP. However public debt ballooned to 40% of output in 2017, with the state oil refinery a chief cause.  Government borrowing in the regional bond market tends to stifle private credit, which barely increased through March. Banks have large sovereign exposures that can compromise capital and liquidity positions as the zone central banks apply stricter prudential standards. They also have business customers owed contract arrears that officials have yet to tally and honor. The tax/ GDP ratio is below 15%, and debt managers do not have a full accounting of state company contingent liabilities. Financial inclusion also lags with only one-tenth the population with a bank account, and structural competitiveness reforms do not match peers, according to the Fund.

In West Africa Ghana’s marks improved on its program following successful Eurobond issuance in May, as first quarter growth was almost 7% and inflation dropped to single digits. A fiscal responsibility law will cap the deficit, and the central bank sold dollars to support the slumping currency. The mining code will be revised, and UK-based Tullow Oil is under fire for alleged tax underpayment. Francophone giant Cote D’Ivoire likewise tapped the external market at 30-year maturity, and the IMF predicted another year of 7% growth on good cocoa prices and halving of previous 30% annual credit expansion. President Outattara, a former Fund executive, reshuffled his cabinet amid ruling coalition disputes, as jockeying starts for the end of second term contest which may recycle old political and personal rivals in a numbing narrative.


Haiti’s Refueled Rage Resignation

2018 August 21 by

Posted in: Latin America/Caribbean   

Haiti’s Prime Minister Lafontant resigned before a legislative no-confidence vote as violent protests erupted over a 40% fuel price hike President Moise’s government introduced under the six-month old IMF staff monitored program. The unrest is estimated to cost 2% of GDP, equivalent to projected growth improvement this fiscal year, as the restored police force with the exit of UN troops last year struggled to quell the rioting. Subsidies take one-tenth of public spending and the wealthy receive a large share, and adjustments intend to free cash for social and infrastructure needs. Venezuela’s $300 million bilateral aid for these purposes disappeared with its economic catastrophe, and the President has been unable to deliver on the promise of “shovel ready” projects since winning office with only 20% electoral turnout. The petroleum discounts also encouraged smuggling to the Dominican Republic on the same island, and the President’s party could not beat a censure motion in parliament with its political weakness. He also vowed steady electricity supply, and the Fund in a June visit noted reduced state monopoly losses with the budget deficit shaved to 2%of GDP despite Hurricane Matthew rebuilding costs. Double-digit inflation was already forecast before subsidy withdrawal, and the current account gap will rise on higher capital and consumer goods imports amid flat FDI and remittances. Officials have backtracked on the original plan to maintain tourism inflows in particular at risk if commercial destruction continues. They are expected to unveil a smarter package in content and communications to pave the way for renewed IMF credit, after the previous facility expired with prolonged presidential poll standoff. Haitians granted temporary US protection after fleeing in the aftermath of the 2010 earthquake are due to be deported soon, and the Trump Administration has not targeted the government for additional aid like in the Northern Triangle of Central America where families escape corruption and security threats in waves. Nicaragua may join El Salvador, Guatemala and Honduras at the epicenter as President Ortega unleashes a crackdown on opponents including the church claiming human rights abuses and unpaid social security benefits.

Cuba is contending with its own popular backlash as it moves to recognize private property under a constitutional redraft, but published hundreds of pages of new rules for business operation and taxation. The non-state sector comprises thousands of restaurants, taxis and other product and service providers that employ 15% of the work force. Owners must now open a special bank account for income tracking, and additional bureaucracy will slow consolidation trends that could potentially pose competition to government companies. A non-Castro is at the helm for the first time since the revolution but has yet to articulate a detailed economic platform, as technocrats appear sidelined from major posts. Both Port au Prince and Havana after absorbing aid blows from Caracas will reassess relations with Brazil after October elections there, with the major candidates offering thin foreign policy views. Former President Lula, who championed their cause, remains in prison on embezzlement and the contenders are focused on law and order and economic recovery issues at home, after a massive truckers strike and indicators pointing to possible recession repeat after a fresh team tries to lift the air of resignation.

Mongolia’s Roughshod Rescue Refrain

2018 August 14 by

Posted in: Asia   

A year after the international community assembled a $5.5 billion emergency package, Mongolian stock and bond performance reflected debt crisis escape, but “more downside than upside risks” persist according to the IMF’s July program review. The lender released another $35 million of its $435 million 3-year facility on “good progress,” as it urged further  steps to strengthen fiscal, balance of payments, banking sector and investment climate positions. The stock exchange index is down 5% to outpace MSCI-tracked frontier markets, and external bond yields at 400 basis points over US Treasuries were firm against general asset class selloff as Fitch Ratings upgraded the sovereign to still speculative “B.” It also elevated two state-owned banks, while noting lingering weakness with the reported 8.5% bad loan ratio as comprehensive asset quality and stress testing unfold.

Ulan Bator was briefly in the geopolitical limelight as a possible host for the inaugural US-North Korea summit, but was sidelined by Singapore’s all expenses paid bid with state of the art infrastructure.  The Fund  report too seized upon positive headlines, including 6% first quarter growth and a 10% international reserve increase to $3.25 billion, but pointed to “core vulnerabilities” such as high commodity reliance, public debt and bank recapitalization needs.  The next parliamentary elections are in 2020, when corruption accusations between the main parties and runaway voter spending are also likely to intensify, the analysis suggests.

The World Bank predicts 6% growth this year on construction and manufacturing around the Tavan Tolgoi (TT) coal project, while agriculture has yet to recover from the harsh past winter. Another phase of the giant OT copper mine will go on line in the medium term to further expand exports, as the Bank recommended greater economic diversification and productivity gains. Foreign direct investment was $400 million in the first quarter, but strong domestic demand worsened the current account deficit and inflation, now at 8%. The central bank regularly cut rates the past year but may turn more cautious, especially as it applies more stringent loan provisioning rules to identify bank capital and liquidity gaps. Corporate credit extension was flat in recent months, following years of double-digit upticks.

Fiscal policy was mixed in Fitch’s view, as “rapid improvement” with revenue up 25% through May is offset by “structural reform delays” leaving government debt at 85% of GDP. Fuel subsidies and family social transfers have not been adjusted, and infrastructure concessions and discount mortgages are large liabilities. The Development Bank’s portfolio has not been audited and fully incorporated into the budget, and non-political oversight is lacking. Its overseas borrowing can repeat depreciation pressure on the currency, which has steadied the past year.

Both Fitch and the IMF argue that bank cleanup over the next six months will determine the vitality of policy and practical turnaround. Officials will present a detailed bad loan resolution strategy and introduce new collateral enforcement and bankruptcy procedures. They may propose a central disposal agency and macro-prudential curbs on household credit, with almost half in default danger at debt-service to income ratios above 60%. The Financial Action Task Force also criticized lax anti-money laundering practice, and without action the country could be “grey listed” and cut off from overseas correspondent relationships.

The threat comes as Prime Minister Ukhnaa Hurelsukh broke ground on an oil refinery financed with a $1 billion soft loan from India under a campaign to forge links beyond traditional international mining company and China-Russia partners. The project was broached during a 2015 visit by Prime Minister Narendra Modi, and follows decades of aborted domestic building efforts.  The Indian delegation in pointed reference to regional rivals described a “spiritual alliance,” and the plant will eventually boost national output 10% according to government estimates.

In June Mining Minister Sumiyazabar Dolgorsuren proposed an initial public offering on local and overseas markets for up to one-third of state company TT shares, reprising previous attempts which valued the transaction at billions of dollars. Underwriters were originally named, but the deal was abandoned when both the government and coal prices collapsed in 2016.  Canadian-owned operator Erdene at the same time became the first cross-listed play on the Mongolian stock exchange with a small $1.5 million capital raising, as more modest feats may have to satisfy fund managers into the IMF program’s second anniversary.





The East Caribbean’s Test Tube Tsunami

2018 August 14 by

Posted in: Latin America/Caribbean   

With continued economic and banking strains the past decade in the six island East Caribbean Currency Union, with a joint central bank and currency peg, an IMF working paper applied stress tests to model major shocks on the interconnected financial system, which revealed that a regional crisis could trigger the collapse of half its lenders. Bad credit is down from the peak but still one-tenth the total and provisioning lags while good deposit growth has created excess liquidity. The sector averages 150% of GDP, with St. Kitts and Nevis and Montserrat at double the proportion, and Grenada, Dominica and Antigua and Barbuda at or below the norm. The 35 institutions are evenly split between local and foreign-owned, mainly from Canada. Interbank exposure has dropped in recent years, but sovereign debt holdings are 15% of assets in some members and close ties are common with non-bank credit unions, insurers and pension funds. In St. Vincent and the Grenadines they control 10% of deposits, and wholesale withdrawal carries risk. These relationships are not simulated in the disaster scenarios with the paucity of information and data, and the exercise also excludes global groups that would depend on their parent for support in the absence of separately-capitalized area subsidiaries. The East Caribbean Central Bank has limited lender of last resort capacity and deposit insurance is lacking. After calculating isolated bank failure and severe individual country and regional output contraction that could result from tourism scares or natural disasters, the research finds that 10 institutions would be insolvent in the direst case, as undercapitalization and heavy public debt portfolios play out. The results are an additional warning to foreign frontier bond investors after serial restructurings in Grenada, and planned haircuts and swaps now in neighboring Barbados. If an IMF program accompanies the workout as in Jamaica, the process can be further complicated and lengthened with authorities there conducting two exchanges over the course of consecutive arrangements. In the broader region, calls have circulated for sovereign wealth fund formation to act as contingency buyers, as the latest Invesco survey of the field identifies 2% emerging market debt allocation. It points out that equity and alternative investments in turn are fast expanding categories, as managers look to increase returns after mixed records the last decade.

According to fund trackers retail and strategic investor bond outflows accelerated at the end of the first half, and are larger than during the Taper Tantrum five year ago. ETFs are 15% of the former, and dedicated manager cash positions remain steady at under 5%. Even though sovereign wealth vehicles as a group may level off in the near term, Norway and others maintain big exposures at 15% of the fixed income bucket. Foreign ownership of local bonds stands at a 25% average, and frontier name participation in Central and Latin America, like Costa Rica and Ecuador, may be stretched in the view of major market-making firms. In mainstream instruments technical indicators suggest excess weightings in Mexico, Russia, South Africa and Indonesia as the respective regions endure practical stress tests the IMF may help cushion in financial and research terms.