Global Reserves’ Restocked Shelf Space

2017 May 21 by

Posted in: General Emerging Markets   

Global foreign exchange reserves, after slumping $1 trillion from mid-2014 through the end of last year mainly due to dollar fluctuations, have stabilized in recent months with restored emerging market capital inflows, according to IMF and central bank figures. The global total is now almost $11 trillion and $8.5 trillion for developing economies after a double-digit annual fall from China and Gulf country drawdowns in particular. Fund tracking data shows $50 billion in foreign investor debt and equity allocation in the first quarter, with leaps in IIF monthly high-frequency numbers. Currency manipulation through deliberate depreciation is no longer the case, although many countries have excess reserves as defined by international yardsticks of four months import and short-term debt coverage, with Hungary and Turkey exceptions with shortfalls on the respective measures. The emerging market 15 percent savings rate now tops the developed nation one, and the spurt outstrips the reserve accumulation pace. The US and UK on the flip side run the highest current account deficits as a portion of world output, although the dollar accounts for two-thirds of foreign exchange holdings, with the euro a distant second at 20 percent, and the RMB only 1 percent. In fixed income both external sovereign and corporate issuance at $75 billion and $170 billion through April are at records. In the former half the supply has been from the Middle East, with Argentina also contributing $7.5 billion. These new entrants have spurred the asset class, along with a $100 billion annual refinancing hump toward end-decade. Big houses like JP Morgan predict $50 billion in retail and institutional inflows this year, and 5 percent cash positions built up during the initial Trump confrontation scare can help accommodate heavy hard currency-denominated pipelines.

The CEMBI spread at 250 basis points over US Treasuries is at an unprecedented low with a 4 percent index return so far, and projected high-yield defaults have halved to 2 percent with commodity price recovery. Final issuance in 2017 should approach $400 billion, with one-quarter from Asia, almost all China. One third of advanced economy bonds still carry negative yields, and Latin America has been the best performing region, as Brazil and Russia bounced off bottoms. The difference between speculative and investment-grade paper has narrowed to 300 basis points and scarcer euro-denominated have returned more than dollar bonds through April. Commodities remain mixed, and dollar strength has faded, but the main risk is with unhedged domestic-oriented consumer and utility names. Daily trading volume by the US TRACE system is $3.5 billion, half in quasi-sovereigns. Dedicated assets under management are $80 billion, and so-called crossover investor interest has increased although US high-yield exposure is still below 3 percent. Recovery values were dismal last year at 35 cents, and 20 instruments in Brazil and Venezuela currently trade at 50 percent of par or under in deep distress. Net debt and ratings downgrade ratios have improved with better earnings estimates. Of the $2 trillion tracked half is quasi-sovereign with Asia and the Gulf having majorities in the category, and leverage indicators have stabilized although state support is the credit bulwark increasingly offset by policy wobbles, analysts caution.

The Balkans’ Suppressed Agrokor Agony

2017 May 21 by

Posted in: Europe   

Croatia, Slovenia and Serbia held on to single-digit MSCI Frontier index gains through April following passage of a law to facilitate orderly restructuring at food and retail chain Agrokor, with hundreds of thousands of employees and suppliers across ex-Yugoslavia after it was unable to get emergency commercial loans. The Zagreb government under terms of EU membership cannot guarantee the private conglomerate’s liabilities despite its systemic importance, and such a move would jeopardize fiscal deficit progress at less than 1 percent of GDP last year to lift potential Brussels sanctions. Domestic consumption and investment will suffer pending resolution, and could jeopardize the 3 percent growth target likely with good tourism numbers.  Banks in the sub-region face a blow but may be able to absorb it with  Serbia’s IMF cleanup, Slovenia’s privatization of NLB, and Croatia’s new single borrower rules capping exposure at one-quarter of capital. The local sector has just emerged from the Swiss-franc mortgage conversion mess, and Agrokor provisions will again cramp profitability while the central bank is on standby to offer liquidity. The perennial coalition balancing act could be strained after the main opposition party SDP proposed a no-confidence vote against the Finance Minister, a former senior executive of the company. Another cabinet reshuffle is expected, but the prime minister has fought another election round until alternatives are exhausted to try to advance the economic modernization agenda demanded by EU accession and ratings agencies to forestall further downgrades with the 85 percent of GDP public debt. Balkans interest shifted to Romania amid the fallout as stocks rose 15 percent, but a fiscal deficit blowout to 4 percent, the same as projected growth, has prompted unease. The new government has brushed off IMF recommendations with pension and salary hikes, and was forced to backtrack on a corruption amnesty bill only after massive street protests. The current account gap likewise widened to 3 percent of output despite a weaker currency adjusted for inflation. Interest rates have been on hold but tightening may be forced by the loose budget and a series of scheduled VAT and customs duty increases.

Ukraine has also been a double-digit performer after the Fund released another $1 billion from the $17 billion program and 2 percent growth was achieved in 2016 after years of near-depression. However enthusiasm is muted by the renewed outbreak of fighting in the East coupled with a blockade against the Russia-backed separatists, which President Porochenko, with a 10 percent approval rating, was late to endorse. His former business colleague and central bank head Gontareva resigned her post after spearheading a crackdown against leading oligarchs which won international praise but domestic enmity. In a survey 80 percent of citizens distrusted her policies, and with departure reform momentum may flag at the same time pension and healthcare overhauls are in the works. Privatization of strategic enterprises has yet to resume, and a $3 billion sovereign bond dispute with Moscow is pending in London, while officials have hinted at reopening the recent global deal with commercial holders even as GDP-linked warrants may pay off this year. The prime minister, plucked from a post as mayor, has avoided his predecessor’s corruption taint ahead of 2019 elections, which could be advanced if austerity agony persists.

Iran’s Rouhani Economic Resistance Rut (Asia Times)

2017 May 13 by

Posted in: MENA   

After a 5% loss from December to end-March, the Tehran Stock Exchange retraced the previous 79000 point level ahead of May 19 elections pitting the incumbent President Hassan Rouhani against a half dozen approved candidates Hard-liners Ebrahim Raisi, a protégé of Supreme Leader Ayatollah Khamenei, and Mohammed Baqer Qalibaf, the capital’s mayor since 2005 and a contender in the 2012 contest, are positioned as the main rivals after the ruling clerics rejected former President Mahmoud Ahmadi-Nejad’s surprise application for another term. In a televised debate these rivals castigated rising unemployment, officially up 1.5% to 12.5% the past year despite Rouhani’s international nuclear deal for sanctions relief, which restored oil exports to 2 million barrels/ day for estimated 4.5% growth according to the IMF. Their campaign platforms draw on the Supreme Leader’s “resistance economy” concept, spurning Western foreign investment and advocating self-reliance and higher cash transfers to the poor and struggling middle class.

Rouhani has acknowledged slow improvement in living standards since the accord went into effect in early 2016, and lapses in bank and state enterprise restructuring to boost competitiveness. His description at the time of the “golden page” in history was overstated and may be further tarnished should President Trump formally withdraw the US from the six-nation pact, but the stock market is betting he and his team could redouble competitiveness and integration efforts with extended tenure. However even with victory these reform wishes could again be misplaced by populist backlash magnified by the race, as the growing tab to rescue government banks and companies again resuscitates recession fears.

Raisi was appointed to head the country’s biggest charitable foundation, with $15 billion in assets in charge of the holiest shrine in Masshad and close ties to the Revolutionary Guards still under Washington’s commercial and financial prohibitions. An Islamic law scholar, he also spent his career working with the security forces and was a member of the notorious “Death Commission” two decades ago which killed thousands of political prisoners. Supporters tout his experience as head of the religious endowment for charting economic direction that is “pro-people and production” and avoids “social shocks,” according to recent statements. In the past four years of Rouhani’s term the Guards have taken over nominally “privatized” factories and properties, and continue to control large chunks through affiliates of leading stock exchange listings. Analysts attribute their dominance to the “corruption, mismanagement and lack of regulation” which continue to place Iran in the lower tier of the World Bank’s “Doing Business” ranking.

Raisi has seized on the rich-poor gap and 35% youth joblessness to call for a tripling in budget cash handouts, even though fellow conservatives like the parliamentary speaker Ali Larjani remind him no money is available with the chronic deficit and 60% of the population escaping tax. He may turn to the central bank and state-owned lenders as an alternative for resource transfer, but so-called quasi-fiscal activities are already high and explain the 20 percent annual rise in the monetary base jeopardizing the single-digit inflation target. President Rouhani managed to slash the rate from 40% to just over 10% with relatively tight policies, and hailed such achievements as “actions not slogans” in re-election rhetoric. Diversification from hydrocarbon dependence has been another hallmark, and the non-oil current account is now roughly in balance with almost $90 billion in exports for the end-March fiscal year, the Economy Ministry reported.

However bank bad loans following local classification rules remain over one-tenth of portfolios, and proposed cleanup legislation that would stiffen guidelines and grant more independent enforcement and resolution powers are stuck in political limbo. The next government may face an outright crisis with “difficult to address” issues including recapitalization and rollback of targeted lending schemes, according to the Industry and Trade Minister. The overdue reckoning coincides with Iranian bank reconnection to the external SWIFT payments network and applications to reopen branches in Europe in Asia, as smaller counterparts beneath the radar of lingering US sanctions forge correspondent relationships. These ties inject new cross-border risk as the dual exchange rate system also awaits modernization, with such obstacles potentially resistant to near-term change by the surviving reform constituency.




China’s Index Inclusion Indentations

2017 May 13 by

Posted in: Asia   

China’s respective main and A share categories were up 15 percent and 5 percent respectively on the MSCI Index, as the provider is poised to marginally add the latter to the country’s 28 percent global weighting with access upgrades from the Hong Kong Connect experiment. Big houses like Black Rock consulted for the June decision have endorsed progress to begin incorporation, despite existing underweight positions and continued reservations over banking system and currency paths. PMI readings were barely over 50 in April, as the IMF reported that RMB assets were only 1 percent of combined central bank reserves after SDR entry and Fitch Ratings cited internationalization stall the past two years with depreciation and capital outflow streaks. Cross-border bank transfer rules requiring inward and outward matching were lifted, but the state foreign exchange body indicated that onshore trading must deepen and stabilize before broader controls are eased. In March bank hard currency sales were the lowest in six months, but major policy changes will likely be suspended until after the next Communist Party Congress due to extend President Xi’s tenure. He and US President Trump also have been in contact over the North Korea nuclear crisis, but harsher trade and financial moves against ally Pyongyang may in the same vein be postponed until after the leadership conclave. Consensus GDP growth estimates are between 6.5-6.7 percent for the rest of the year, and the President recently criticized slow government enterprise restructuring, as planners previewed statistical  overhauls and tax cuts.

The benchmark 7-day repo rate passed 3 percent as the central bank embraced “neutral and prudent” monetary policy in view of “alarming” leverage which provoked another shadow banking crackdown in a flurry of risk management edicts. Bond and equity flows though entrusted investments, conservatively estimated at $1 trillion and commingled with wealth management products, could be caught in the net. The Shanghai stock market had the biggest daily loss this year as the securities regulator joined in to punish irregularities “without mercy.” Insurance will not be spared from coordinated stricter oversight and reporting as assets more than doubled in 5 years to RMB 15 trillion in 2016, and policy holders channeled money offshore to evade restrictions. In April China Minsheng bank was snared in an unguaranteed high-yield offering scandal and trust companies were explicitly order to slash property exposure as credit overall rose 25 percent to the sector in the first quarter. Standard bond issuance in social financing also attracted supervisory scrutiny with banks buying half of all dollar bonds for potential currency mismatch, and the junk category accounting for $12 billion through April compared with $2 billion in 2016. According to JP Morgan data, Chinese corporates have represented two-thirds of global activity, and yields have narrowed toward onshore ones with buoyant conditions and double-digit profit jumps from last year’s nadir. The Hong Kong Bond Connect is scheduled for launch in the coming months to further meld the investor base, as RMB deposits in the enclave otherwise dip to half the 2014 peak, and the local dollar continues to weaken against the greenback. However first quarter mortgage credit soared 80 percent on an annual basis with private home prices again at a record triggering index indigestion.

Sovereign Wealth Funds’ Somber Secrets

2017 May 5 by

Posted in: Fund Flows   

The latest sovereign wealth fund (SWF) profile from tracker Prequin, after a decade of following the industry, shows assets largely flat at $6.5 trillion across 75 vehicles. The ten largest control 80 percent of the total, led by Norway with $835 billion and smaller ones in Malaysia and elsewhere have combined for scale. Hydrocarbon earnings provide over half of capital, with the Abu Dhabi and Kuwait Investment Authorities main representatives. Asian countries with large trade surpluses, headed by China, are the other 45 percent and non-energy commodity producers account for just 1 percent of the field. Traditional public equity and fixed income asset classes are in the portfolios of 80 percent of participants, and Ghana and Peru completely allocate to bonds. Private debt and equity also draws a majority, and over half are in alternatives like real estate, infrastructure and natural resources with Kazakhstan and Angola among the examples. Hedge funds are another strategy and take one-tenth of global institutional money there, but their short-term nature and illiquidity limit popularity. Equity engagement can be designed to support the local stock exchange as in Taiwan’s case and Venezuela is rare in having no such exposure after controls forced its market out of the MSCI index. Distressed loans are the chief private debt class, with European banks with EUR 2 trillion on their books the prevailing source. According to consultants Price Waterhouse the SWF definition meet basic criteria, including a clear mandate as a financial passive investor; an autonomous structure to counter the resource “curse” and fiscal imprudence; and distinct governance and operation apart from the government in power. Funds nonetheless can come under official interference and pressure despite nominal independence and protection, as with requests to Brazil’s and Nigeria’s startups to aid the budget and currency and the transfer of post-coup try nationalized companies to Turkey’s.

Turkey’s delegation to the IMF-World Bank spring meetings downplayed such concern and presented President Erdogan’s razor-thin referendum win on constitutional changes as a political stability sign. The next national elections are scheduled for 2019, and the Syrian border situation is calmer with greater territorial control. The GDP growth forecast is 4 percent, and the inflation burst from lira depreciation should recede to manageable single digits with monetary tightening. Externally, the current account gap should remain constant and debt rollover ratios for private companies are above 100 percent, although large holes exist in the balance of payment errors and omissions column. The structural reform agenda, which initially included private pension promotion, will be reactivated in the wake of the plebiscite and concentrate on better public finance management and other higher efficiency areas.  Russian representatives likewise cast Western sanctions and diplomatic tensions as a secondary issue, and dismissed recent renewed street protests as a challenge to President Putin’s rule. The ruble has firmed with rising oil prices, and the next budget will be disciplined based on a $40/barrel level. Tax shifts increasing VAT and reducing the payroll levy to tackle informality are in the works, and with good inflation and currency readings the central bank is in gradual rate reduction mode as supervisors continue to clean up the banking system. The deputy governor continues to win international praise for her technocratic deft touch, and was featured on a flagship “emerging market resilience” panel at the Fund meetings amid shaky geopolitics.

Merger Fever’s Testy Temperature Reading

2017 May 5 by

Posted in: General Emerging Markets   

The latest edition of auditing and consulting firm Ernst and Young’s global capital confidence barometer, surveying thousands of senior executives in forty countries across fifteen industries, was upbeat on global economy and M&A prospects despite geopolitical jitters. It found that digital and supply chain evolution, aided by private equity again on the hunt, continue to propel deals. The worldwide rise in purchasing manager indices has translated into “stretched” earnings expectations that drive buying interest beyond internal growth. Short-term credit and securities markets are stable and improving to support higher valuations, although currency and commodity volatility lingers, according to the poll. Policy uncertainty by geography—US, EU and China—and issues including cyber war, trade protectionism and immigration affect the business model but Eurozone breakup and Chinese debt crisis are low-risk probabilities. Technology disruption may be the leading factor in strategy and tactics, with traditional complications like tax rates and government intervention losing sway. It has resulted in global outsourcing of information and finance functions so companies focus on “core competence,” itself a moving target with increased automation and innovation. Acquisition pace may not return to 2015’s record and will spike this year but not overheat, with over half of respondents on the trail. They are following customers and trying to retain competitive edge, and also looking to simpler relationships like alliances and joint ventures. Methods range from full asset purchase to investment through corporate venture capital units, and high-profile bids will attract scrutiny from activist shareholders. In the US and Europe sentiment is split as the business-friendly Trump administration has triggered optimism, while UK-EU negotiations over Brexit prompt a wait and see stance. China is the number two M&A destination, and this year’s trend toward domestic combinations and inward allocation is opposite 2016’s. State enterprise consolidation in excess capacity sectors like aluminum and steel, along with consumer play shifts in the economic model, will be major themes, the study believes. Brazil and India are also in the top ten countries, and autos, energy, mining and telecoms are the main categories on the radar.

Brazil’s FDI is on solid course as portfolio inflows lift stocks and bonds and chase a raft of initial public offerings such as airline Azul after a long pause. Recession is over and inflation is heading toward 5 percent as the central bank may slide the benchmark rate to single digits. According to regulators banks are in decent shape to tackle corporate bad loan damage, while consumer borrowing appetite is frozen as reflected in flat to negative retail sales. The interim government has proposed aggressive pension reform to accompany long-term spending restraint, but Congress may dilute the package to modest changes phased in over time extending fiscal deficit positions. In the House 60 percent of lawmakers must approve before the bill goes to the Senate, and party discipline has fractured with President Temer’s popularity at a nadir under the weight of overlapping scandals. Top officials at the IMF-World Bank spring meetings assured investors that this social security overhaul attempt would not meet the fate of the previous two decades ago which failed by one vote, but political drama could again doom it if early presidential elections are called due to resignation or popular demand which in limited quarters has repositioned disgraced former President Lula on the stage.

Refugee Compacts’ Salient Solution Crush

2017 April 28 by

Posted in: MENA   

A year-long joint global displacement study group by the Center for Global Development and International Rescue Committee cast the issue as a “protracted crisis” and lauded the new aid compact approach with host countries, while urging comprehensive revamp of supporting economic data and policies. Low and middle-income economies host 90 percent of the 20 million refugees fleeing conflict, who are away on average a decade. Only 25 percent are in camps, and humanitarian and development funding and tools have not matched the duration and severity in a “fractured system.” In 2016 governments, bilateral and multilateral agencies and civil society and private sector representatives met at consecutive conferences to channel billions of dollars to Jordan and Lebanon in initial compact pilots, with a separate pledging session for Syria and the region in London and launch of a concessional loan facility led by the World Bank, allocating $700 million to date, with an associated $2 billion poor country refugee influx window. These pacts work with the UN Commission and other performance based deals kike the EU’s EUR 3 billion to Turkey for Syrian repatriation from Greece and select onward resettlement. Education and job creation have been the main goals and the track record is early but standardized methods and outcome measurement are lacking.

The model of a public-private sector implementation board combining political and technical expertise, as adopted for the US Millennium Challenge anti-poverty program, is absent and impedes shared analysis and planning and rapid negotiation and disbursement timeframes can frustrate lasting results. Social service provision must take into account their scarcity for the existing local population, which typically also has steep joblessness. Refugees are often pushed to the labor market “shadows” and children denied school entry. In Lebanon classes are run in shift for citizens and newcomers, with quality suffering for both amid overcrowding. Jordan committed to issuing tens of thousands of migrant work permits in exchange for World Bank cash and EU duty free import access, but the number has not been reached and only 5 percent are to women. The process is bureaucratic and business startup is also “difficult” with minimum local partner and capital criteria, according to the report. The “right actors” have not been at the table, with limited local non-government input and private sector mobilization at home and abroad. They could be instrumental in putting rigorous assessment and procedure in place and creating an inclusive stakeholder mechanism. Basic information gaps endure across the board, from refugee numbers to job and school enrollment, and cost and impact evidence of integration steps is scant and far from the authors’ ideal of an umbrella policy index. The private sector can inject knowhow, resources  and innovation, but collective action like the Partnership for Refugees started under the Obama administration is nascent, with no cross-border coordination capacity. Business and financial firms are equipped to take long-term risk and crisis fundraising could extend beyond philanthropy to commercial sources. Donors could join in sponsoring ventures such as practiced by USAID’s ideas lab. Skills training and infrastructure building are two areas of competitive advantage where compacts could better deliver on promise with enlarged vision scrapping the humanitarian-development divide, the two study backers argue.


Bank Capital’s Stealth Stressful Stretch

2017 April 28 by

Posted in: Global Banking   

The IMF’s Spring Meeting Global Financial Stability Report departed from previous warnings and hailed emerging market “resilience” with higher growth and commodity prices, and lower credit expansion and corporate leverage,  but pinpointed bank capital strains in China and elsewhere despite the positive general shift. It also challenged current optimism about the “benign” rate normalization path in advanced economies, especially in the US, which could stoke asset class risks and volatility and capital outflows concentrated in local bond markets with large foreign investment and frontier destinations with thin reserve and policy buffers. Protectionism either by default or design would hit export revenues and balance sheets and lenders to that sector. Fund flow herd behavior has traditionally come from retail participants, but institutions have pared exposure in recent quarters and big multi-strategy pools unwinding positions can have outsize effects. Last year one firm divested almost 15 percent of a single country’s sovereign bonds in a reallocation, according to the study. Rising costs will add $135 billion in nonfinancial debt, and BRIC borrowers could be most vulnerable. Manufacturing exports as a share of GDP are steep across the universe range including Mexico, Malaysia and Thailand and equity markets have underperformed relative to benchmarks with cross-border trade barrier threats and rethinking of bilateral and multilateral agreements. With reversal metal and oil prices could likewise sink again after recovery the past year and layer another 1 percent onto the company borrowing total. A 300 bank sample shows “comfortable” Tier I capital, with the amount outside China up 20 percent since 2014, but asset quality doubts persist Brazil,. India and Russia have increased bad loans and reduced profits and 40 percent of the cross-section has poor loss coverage. Around $120 billion in further provisions is needed, equal to 5 percent of capital and cutting the Tier I ratio below 10 percent for one-third of the banks, while stronger systems like Colombia and Indonesia would be spared. Foreign exchange risk is another element regulators should closely monitor, and they should offer hedging tools if commercial alternatives are not readily available, the Fund suggests. China is a more urgent case where many mid-tier institutions overly rely on wholesale lines and have asset-liability mismatches, and recent state bank repo operations to inject liquidity may offer only temporary calm.

China’s massive infrastructure programs are feeling the pinch and the World Bank estimates that spending must double over the coming decades to accommodate the 9.5 billion world population in 2050. The respective shares of multilateral development agencies and private partners, at $75 billion and $150 billion, already trail the annual $1.5 trillion required, and OECD member mutual, pension and insurance funds, with $70 trillion under control should join the effort in light of lagging returns in other categories. The current developing economy pipeline is estimated at $1 trillion, focused on Asia, Europe and Latin America., and portfolio allocation should be boosted by an infrastructure bond index under creation at fund researcher Morningstar. The Bank has an array of dedicated project and policy facilities and has linked with the G-20’s global platform created when Australia was chair in a strategy to double guarantees by end-decade. The IFC has a private co-lending arrangement and the new IDA $2.5 billion low-income window has blended and currency pools for better scaling up to the crushing task, according to executives in charge of internal rebuilding.


The Treasury Department’s Maiden Manipulation Artifice

2017 April 22 by

Posted in: Currency Markets   

The Trump Treasury Department released its first review of major economy foreign exchange policies after a bilateral summit with China and before the IMF spring meeting, with no Asian partner called a manipulator while Latin America was dropped from coverage altogether. It followed new criteria from 2015 legislation concentrating analysis on countries with at least a $20 billion trade surplus, a current account one at minimum 3 percent of GDP, and annual currency unilateral intervention of 2 percent of output. No country met all three criteria and the report noted reduced interference the past two years, but questioned whether the shift was just a temporary response to capital outflow trends. It reiterated the claim during the campaign that the US has been “unfairly disadvantaged” by artificial distortions and placed China, Japan, Korea and Taiwan and Germany and Switzerland on respective regional monitoring lists. The US current account gap was shaved to 2.5 percent of GDP in the second half of 2016, but the net international investment position slumped to an $8 trillion deficit.  The world economy expanded 3 percent, the slowest rate in a decade, and global demand distribution remains “highly imbalanced.” Fiscal and monetary policy can correct the tilt but structural reforms, particularly greater competitive access for private versus state-owned firms should be a priority. Chinese capital flight last year was due to local rather than foreign investor exit, including outward direct allocation by big government companies, but new limits have diminished the pace. Outside China net emerging market inflows continued into the last quarter, but currency performance was mixed, with a 15 percent Mexican peso depreciation, while the Taiwan dollar and India rupee were up almost 5 percent against the dollar. The first quarter of this year solidified appreciation tendencies, but global reserves fell marginally to $11 trillion at end-2016 as China and big oil exporters sold off holdings. The figures cannot distinguish between valuation adjustments and interventions, and future reporting and statistical efforts should redress the discrepancy, Treasury urges.

China’s large scale one-way anti-appreciation moves lasted a decade and harmed American workers and business, but from mid-2015 to February 2017 Beijing sold an estimated $800 billion to resist opposite depreciation direction. The authorities still must improve communications and transparency and open further to US goods and services while boosting domestic consumption, the analysis warns. During his recent Florida visit President Xi pledged further banking and securities industry liberalization, but observers pointed out the same commitment from Obama administration economic dialogues yet to permit rule-based majority foreign ownership. Korea too continues to run an outsize current account surplus, and the IMF believes the won is undervalued. Intervention in the spot and forward markets was $6.5 billion or 0.5 percent of GDP, reserves are triple short-term external debt and operations should only occur in “exceptional circumstances.” Taiwan has a pegged exchange rate and its dollar jumped 7 percent versus the greenback in the first quarter. Foreign currency purchases in 2016 were $1 billion/month, and outside experts put undervaluation at 25 percent. It is not an IMF member so does not publish the same reserve data as all other big Asian emerging economies to potentially flag irregularities.

Egypt’s Chiseled Church Chastening

2017 April 22 by

Posted in: MENA   

Egyptian shares with a slight first quarter bump on the MSCI index recoiled after a spate of Coptic Church holiday bombings claimed by ISIS, as President Al-Sissi fresh from a White House meeting with President Trump who praised his toughness, declared a state of emergency granting security forces more discretionary detention power. The President came to Washington seeking US designation of the Muslim Brotherhood as a terrorist group, as counterparts agreed to expand economic and military cooperation. He freed jailed predecessor Mubarak around the time of the trip, and a $4 billion Eurobond was successfully placed as foreign investors also tiptoe back into local debt lured by tax-free double digit yields. Since signature of the $12 billion IMF loan late last year reserves are up $7 billion to $27 billion, the highest since the Arab Spring. The World Bank and African Development Bank have released tranches as part of the package, but remittances rose 10 percent in the last quarter after an extended fall as workers finally repatriated cash with the official pound float and the dollar rate settled at 16-17. With 50 percent depreciation tourism recovered overtaking safety qualms, and non-petroleum exports jumped 25 percent in January. Despite headline 3 percent GDP growth, the PMI manufacturing gauge continues to contract, and consumers have been whacked by subsidy cuts and 30 percent inflation. The fiscal deficit spurted to 12 percent of output and unemployment is reported at the same figure although stricter estimates near double it. Dollar shortages persist but officials on the bond road show diverted concern by pointing out imminent offshore gas production from a large field. However with the human rights crackdown Western donors will again come under pressure from advocacy groups to withhold promised aid, repeating the pattern from the military coup against President Morsi in the initial post-Mubarak transition.

Algeria, with hydrocarbons over 95 percent of the economy, had earlier widespread civil unrest and terrorism and has struggled to diversify and reduce state control without official outside help. It recently embarked on a high-profile US investment campaign emphasizing modest fiscal, commercial law and currency adjustments as 4 percent inflation may outpace growth. The central bank predicts dinar stability against the dollar at around 110, and greater competitive scope for the half dozen private banks against dominant government lenders, although the Development Bank will continue to concentrate 90 percent of the portfolio toward small business. The Treasury bond and stock markets will be expanded, and insurance under two-thirds public ownership is a leading target for double-digit annual activity increases. In the Gulf the area is also ripe for international penetration as barriers ease and non-resident investors also snap up new sovereign bonds, where they have taken half of recent deals. In the past the pool was small and local banks as primary buyers rarely sold. Now the size is $250 million and large blocks can be purchased and traded with the entry of additional market-makers. Once uniform top investment grade ratings are more diverse, and repos have developed although long-term hedging products are still lacking. Tax-free financial zones have encouraged participation by foreign pension funds and asset managers, but private domestic peers have yet to establish a broader congregation for fixed income following according to industry experts.