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Debt Flows’ Cascading Crimp

2019 September 6 by

Posted in: Fund Flows   

Emerging market local and hard currency debt flows over $50 billion continued to swamp negative equity ones into August, and looked for year-end direction as retail investors unloaded in the wake of the Chinese devaluation-manipulation saga and Washington’s 10% across-the-board tariff surcharge. It will dent growth around half a point and ricocheted through Asian trade partners and Latin American commodity exporters in particular, with Europe otherwise occupied by flat expansion and inflation expected to spur new ECB chief Lagarde into more asset buying. Only one-tenth of the debt exposure has been domestic with the strong dollar and global central banks led by the US Federal Reserve on a rate-cutting spree. ETF exposure has been modest at $5 billion, and strategic holders like insurers and pension funds remain committed. They have yet to reposition for extended monetary and commercial conflict, and external sovereign and corporate technicals were favorable before the blowup. On the former over $110 billion has been placed on pace for $150 billion in total, with the Gulf a core segment after joining the EMBI benchmark. The latter has tripled that volume on the way to a $400 billion finish, with July unusually busy and Asia still half the field. Tenders and buybacks continue strong with a $50-75 billion estimate by December. However with the US Treasury yield falling on easing and safe haven purchase valuations are arguably stretched with both gauges’ spreads around 300 basis points. The EMBI’s gap shrank with Venezuela’s removal after extended notice, and with announcement of a full bilateral embargo American holders are stuck with dud paper until an eventual restructuring with a successor government. Russian traders are active but liquidity is absent, and they in turn are worried about additional Washington sanctions outlawing primary sovereign subscription in response to chemical attacks on London-based Kremlin enemies. Marking two decades in power, President Putin also faces stagnant growth and doubled consumer borrowing as protesters take to Moscow’s streets demanding fair municipal elections. Corporate fund managers prefer Russian names with investment-grade ratings, but have turned defensive on commodity credits in particular.

Around China upset also focuses on Hong Kong, in literal lockdown as the police and democracy campaigners fight it out despite Beijing’s withdrawal of a controversial extradition law. Thirty years after the Tiananmen events, the army could be called out to subdue unrest, which has already prompted international travel warnings to the popular shopping and re-export hub. Growth could be erased in the coming months, as stratospheric property values supporting the budget surplus come under pressure with potential exodus. The dollar peg has not come under sustained speculation, but the Yuan is half the intervention basket and serious greenback realignment will force difficult choices. From a financial market standpoint, analysts point out that with the launch of Shanghai’s new tech startup platform to complete the multi-trillion dollar complex Hong Kong’s claim is not as secure as an overriding caution against crackdown. In India as well, local debt holders after Prime Minister Modi’s sweeping reelection were spooked by threatened new taxes and Kashmir’s takeover, with Pakistan vowing to answer with the subcontinent again on a delicate fiscal and nuclear timer.

Frontier Exchanges’ Frayed Leading Edge

2019 September 6 by

Posted in: General Emerging Markets   

Frontier equity markets up 11% on the MSCI Index pulled ahead of the core’s 7.5% advance through July after prolonged underperformance, with 20%-plus gains sprinkled throughout regions. The geographically diverse so-called Next 11 was at the bottom rung with a flat result, even as it is no longer tracked as a separate category in fund structures and statistics. In the Gulf Bahrain and Kuwait rose on average 30%, as the former drew investor attention around a US Mideast post-conflict redevelopment plan, and the latter as a big weighting prepares to ascend to the main index following neighbors’ pattern after technical fixes. Oman was the exception with a 7% loss as oil price recovery has not improved debt and deficit patterns. In the Europe-CIS bloc Kazakhstan and Romania were the winners with over 20% increases, as elections set the stage for new economic policies. The first successor to post-independence President Nazarbaev, formerly the ruling party’s parliament head, signaled faster bank cleanup and large state enterprise privatization through the stock exchange, even as demonstrators challenged poll fairness. Romania’s currency has become a favorite pick with future coalitions likely to follow more orthodox fiscal, monetary and anti-corruption stances to stay in EU and IMF good graces, despite the absence of targeted aid. In the Baltics Estonia (-3%) and Lithuania (+14%) were at opposite ends, as the sub-region is gripped by Russian military intrigue and money-laundering scandals that have claimed top bank executives and government officials. Serbia (-9%) disappointed in the face of high marks under its Fund program, and Ukraine was also off 3% as the Zelensky team shapes its course, while signaling Privatbank will stay in state hands pending restructuring, after runaway legislative victories.

Morocco’s 2% uptick paced the Middle East, and in Africa Kenya was top (+15%) as Botswana and Nigeria fell over 20%. Kenya’s Finance minister faces payoff charges, and bank listings remain shunned with the statutory lending rate cap in place to neutralize further fintech penetration. Nigerian President Buhari’s second term is off to a slow start, with key cabinet appointments under consideration as multinational oil deals will be renegotiated. Domestic debt has skyrocketed from a low base, with fuel subsidies relatively untouched amid a chronic power crunch, and additional spending is forecast to cope with widespread internal displacement and army engagement from the Boko Haram threat. Zimbabwe (+15) extended last year’s positive streak as the government’s foreign exchange squeeze has opened the door to international business, while introduction of a new local electronic currency raises doubts. In Asia Bangladesh and Sri Lanka were off less than 5%, as the latter worked back from church and hotel terrorist bombings. In the Caribbean Jamaica up almost 30% took the mantle, while Trinidad slipped 3%. Jamaica’s latest IMF arrangement track record was praised, as exchange integration with neighbors once again assumed priority. Trinidad’s hydrocarbon boom has ebbed, and Barbados just completed a controversial debt restructuring criticized by commercial holders as coming out of their hide rather than the sprawling civil service. Analysts also claimed that officials overpaid for outside expert advice from London, despite the firm’s long experience with natural and self-made disasters in numerous nearby islands.

Asia’s Isolated Islamic Finance Flashes

2019 August 30 by

Posted in: Asia   

Indonesia and Malaysia stock markets lagged on the Morgan Stanley Capital International index through July, with the former up 7%, just behind behind the overall gauge increase, while the latter fell 2.5% despite strong Islamic finance indicators. In the first half sukuk issuance rose almost 55% to near $90 billion, with Malaysia accounting for half and Indonesia one-tenth the global sum. The total outstanding is now over half a trillion dollars, but only half a percent of world fixed-income activity, according to a recent report by the London-based Official Monetary Institutions Forum (OMFIF). Saudi Arabia is the other main market with a 15% share, followed in the Gulf with Qatar’s 3%. Sovereign is catching up with dominant corporate placement, as governments and central banks establish yield curves and liquidity facilities. Indonesia floated the first “green” $1 billion sukuk last year to promote clean energy transition, and Malaysia engineered several murahaba commodity buybacks beyond traditional techniques.

Sharia-compliant assets are 30% of Malaysia’s banking and 10% of its insurance industries, with longstanding official support of commercial and regulatory development. Tax benefits and professional fee discounts are available for Islamic funding, with small and midsize company borrowing rates lowered an average 2% compared with conventional sources. In the Gulf ratings agency Standard & Poor’s predicts 25% sukuk growth this year for debt refinancing and budget deficit coverage. Asia and the Gulf Cooperation Council cooperate to harmonize rules, and in 2018 Malaysia’s Islamic financial services and Bahrain’s accounting and auditing bodies agreed to devise common prudential and governance norms. However “regulatory dissonance” prevails in the OMFIF’s view as thousands of scholars in dozens of countries differ over interpretations and standards following the Koran’s text. Despite a global market estimate of trillions of dollars in the medium term across the complex, multilateral convergence is lacking and may be further delayed as new administrations in Indonesia and Malaysia confront messy domestic policy agendas.

 An Indonesian court confirmed President Joko Widodo’s re-election by a 10% margin, with his coalition also winning over half of parliamentary seats, despite continued Jakarta street clashes in part over the durability of 5% gross domestic product growth. Consumption dependence in the world’s fourth most populous nation is a buffer against external shocks, but heightened by manufacturing and foreign direct investment weakness, after the latter dropped 9% last year. The government unveiled consecutive infrastructure packages to close the gap with neighbors, but spending eroded budget balance and fueled the 2% of GDP current account deficit with equipment imports. Instead of direct control, Finance Minister Sri Mulyani Indrawati, expected to stay in her post in the second term, proposed tax breaks for land acquisition and feasibility studies that will also apply to securities buyers. Likely looser fiscal policy will be matched on the monetary front, as bank reserve requirements were already eased in June, and the 6% benchmark rate  is due to normalize after emergency hikes nine months ago.

Rate cuts must be weighed against the need to preserve foreign portfolio inflows, particularly in local government bonds where international ownership is 30%. They may help stimulate bank credit, which jumped 12% in the first quarter, but the financial system remains “shallow” at 75% of GDP in the words of the latest International Monetary Fund Article IV review. Bank corporate lending has pulled back amid new rules limiting foreign exchange exposure after offshore bond defaults, and fintech competition is a priority in Jokowi’s second turn to improve access and lower costs. Stock market heavyweight state-run Bank of Central Asia will invest heavily in technology and small business outreach, and rating agencies identified potential financial sector takeoff to mirror regional peers as a factor in a recent one-notch upgrade.

Malaysia’s central bank was the first in ASEAN to ease, but it has not boosted the popularity of Prime Minister Mahathir Mohamed’s Pakatan coalition one year after taking office. Public opinion approval is around 35%, as the economy feels the fallout of Asian semiconductor supply chain disruption and public investment retrenchment after a workout of China Belt and Road projects. The government avoided a $5 billion penalty with renegotiation of the East Coast rail link, as growth was pared to the 4% range with goods and services tax rebates saved for other mounting contingencies.

The Second Half’s Investment Shakeup Shiver

2019 August 30 by

Posted in: General Emerging Markets   

In the first half of the year emerging market debt and equity asset classes were up low to high single digits in benchmark indices, and combined fund flows were positive at around $40 billion, as early year euphoria gave way to solid performance expectations. Several months ago global investor surveys had the category as a runaway favorite versus developed markets, on the assumption the world’s major central banks would only marginally tighten liquidity, and the two largest economies the US and China could resolve trade and investment disputes over time. Developing market growth was projected at 4-5% on subdued inflation, as bank and non-bank deleveraging s continued after years of double-digit credit expansion. These trends remain largely intact with modifications for monetary pause or easing, as the decade-long cyclical recovery fades with additional tariff and non-tariff barrier drag for competitive and security reasons.

Fund managers are comfortable with these scenarios, but admit that the prospect of emerging market currencies, which almost all fell against the dollar over the period, in the negotiating mix is an unprecedented allocation variable. The US Treasury Department has China and its Asian neighbors on a watch list for possible “manipulation” inviting retaliation, and an understanding was written into the new free trade pact with Mexico. The coordinated system established under Bretton Woods fell apart forty-five years ago as the institutions created then, the International Monetary Fund and World Bank, mark their 75th anniversary under leadership and mission transition affecting foreign direct and portfolio investment flows. The main index providers for core and frontier stocks, and local and external corporate and sovereign bonds, are also in reinvention mode to upset traditional practice, especially as passive exchange traded funds eat into active manager business. MSCI, at the same time it added Chinese “A” shares and Argentina and Saudi Arabia to the core market roster, issued a paper for the index’s 30th year of operation mulling future yardstick change.

The trade and supply chain threats under the Washington-Beijing standoff have been brewing for years, with most emerging economies promising to diversify the export-led growth model and forge new cross-border relationships. Investor preference now is for strong domestic consumption and investment stories, especially if the latter is private and for long-term infrastructure purposes. Vietnam is a popular Chinese assembly and manufacturing backstop since it stayed in the Trans-Pacific partnership despite Trump administration exit and just finalized a deal with the European Union. The EU, in turn, after decades of talks just reached a pact with Mercosur members Argentina and Brazil. Africa has generated excitement with ratification of a continental free trade zone, also envisioning small stock exchange integration.

These arrangements avoid currency questions that could imminently feature not only in the context of goods and services flows, but as historic dollar dominance and recent sanctions promote parallel channels. China and Russia within their own regions and the broader BRICS grouping intend to develop pure emerging market reserve pools for diplomatic and monetary protection. China was included in the IMF’s Special Drawing Rights basket, and other emerging markets have pressed for modification in standard criteria so they can be added on the way to a usable unit reflecting their share.

Portfolio managers into the second half of this year must also brace for reconstitution and consolidation of the multiple gauges for public asset classes, as private ones also enter the fold. MSCI acknowledges that its core benchmark is too Asia-driven, and JP Morgan has unified external corporate and sovereign listings, as it considers dropping heavyweights like South Korea from the former. Sponsors are working to develop hybrids mirroring multi-asset strategies, including for private equity without an existing measure. While the so-called trade war may soon trigger currency revolution, an internal industry one will equally shape near-term performance.

Mexico’s Misplaced Missionary Zeal

2019 August 23 by

Posted in: Latin America/Caribbean   

Mexican stocks lagged peers with a MSCI Index outcome through July, one year after President AMLO was inaugurated, after the Finance Minister resigned in protest over lack of “evidence-based” policies, possibly referring to $20 billion in tax and investment relief for state oil behemoth Pemex relentlessly downgraded by credit rating agencies. His successor and deputy Herrera is another nominally orthodox pick with World Bank background, but the President’s “fourth transformation” anti-economic liberalism stance routinely overrules his team with arbitrary moves. A new $15 billion Mexico City airport was cancelled leaving bondholders in the lurch and government planes and perks have been offloaded, at the same time Pemex already saddled with $100 billion in debt gets an $8 billion refinery. Next year’s budget plan foresees a slight surplus analysts challenge since government contingent liabilities are masked, and the latest GDP figures narrowly skirt recession. Bureaucracy has been slashed in favor of direct cash payments for social spending, with civil servants demoralized the absence of longer-term education and health reform strategy. The peso has dipped toward 20/dollar with investor backlash, but as a general emerging market proxy these effects are offset in industrial world low interest-generated risk-on sentiment.  Members of the President’s party, which has no Senate majority, urge a compromise legislative agenda and warn against individualized power. They united with the opposition on beefing up Central American immigration control, after US President Trump threatened special tariffs despite renewed free trade agreement. Mexican lawmakers are expected to back the accord, which faces tougher sailing in Washington heading into an election year. Democratic presidential candidates advocate stricter environment and labor provisions and to reopen negotiations even with ratification this year. Auto supply chain relocation from China has been notable with that bilateral tiff, and executives note that neighbors like Brazil, which recently signed a pact with the EU as Mercosur’s powerhouse, could be a fallback as treaty and refugee frictions resurface.

Brazil stocks rose 15% despite growth forecast cuts toward 1% and continued corruption allegations surrounding President Bolsonaro’s family and close allies, including famous Car Wash prosecutor Moro who may have interfered in investigations. Nepotism is another complaint with his son reportedly tapped as US ambassador despite lack of credentials, and a 30% favorability rating reflects the anemic economy as well as discontent over ultra-conservative military and social positions. Courts have defied anti-minority rhetoric to enshrine ethnic and sexual preferences in law, but conference tourism has suffered with boycott incidents. Banks have 3% bad loan ratios but credit is expanding just above that pace as the policy agenda focuses on social security reform passage to rein public debt, with initial lower house approval. Argentina (+25%) was the surprise stock market winner before primary election results come in mid-August handicapping President Macri’s second term chances. He picked a Peronist running mate in an attempt to neutralize the “Fernandez 2” ticket which could bring Christina back as Vice President. In early voter surveys the two camps are roughly even as the peso has rebounded on lower inflation since May’s near 60%. The IMF’s $55 billion rescue is largely on course, and the European successor to managing Director Lagarde will likely embrace its largest program coming on board right before the October poll.

Asia’s Fraught Frontier Framing

2019 August 23 by

Posted in: Asia   

Through the first half Vietnam and Kazakhstan led Asian frontier stock markets on the Morgan Stanley Capital International Index with respective 8% and 15% gains, the former in line with the overall gauge’s increase. Bangladesh was up 3%, while Sri Lanka was among the worst performers with a near 10% loss. Since Pakistan returned to the main index, dedicated fund managers have been on the lookout for potential new entrants, with Mongolia often mentioned with dozens of listings in comparison with Cambodia and Laos with just a handful. However MSCI’s June review proposed no additions, as Vietnam remains on the “watch list” for potential upgrade to full emerging market status.

 It noted positive steps to combine the Ho Chi Minh and Saigon stock exchanges and establish a central clearinghouse, modernize securities law, and open to full foreign ownership in sensitive banking and other sectors without a promotion timetable. Foreign inflows spike in advance to reflect greater global index weighting, but await direction as MSCI in the past criticized Vietnam’s “low liquidity” and is wary of strengthening Asia’s hold on the core roster. China, Korea, Taiwan and India already account for 60%, but even as it stays frontier Vietnam will become a larger component as Kuwait likely graduates by the end of this year. Kazakhstan in turn aims to solidify its position as the Astana International Financial Exchange was officially launched, with a wave of privatization offerings signaled in the coming months.

The US-China trade imbroglio reinforced longstanding production relocation to lower cost Vietnam, but export growth slowed in the first quarter with smartphone assembly down in the regional supply chain. As the International Monetary Fund’s July Article IV report cautions, it must upgrade productivity on digital technology, and also faces a looming demographic cliff as rapid aging sets in over the next decade. Economic growth has settled at 6.5% on inflation at half that figure, but weak domestic private investment and state-owned banks remain a drag.

 Stock and bond market development are priorities to diversify funding sources, but public debt at 55% of gross domestic product, 5% below the statutory ceiling, continues to preempt commercial purposes. Treasury bonds are issued at 5-year maturity, but short-term bills are absent for cash and risk management and yield curve creation. The fiscal deficit is forecast to fall to 4% of GDP next year, assuming higher tax collection and reduced civil service spending, but the Fund recommends a tighter medium-term debt ceiling to avoid trouble.

Monetary and exchange rate policies are under close investor tracking, with runaway double-digit credit growth until this year. The central bank slammed the brakes, with consumer and real estate loan limits and asset-liability maturity mismatch prohibition, to slow the annual pace to 3% in June. With Asian Development Bank support, a domestic credit rating agency is in formation, and Basel II bank capital adequacy standards go into effect in 2020. An inflation target will be adopted over time, and the government’s asset management agency has whittled the reported 6.5% bad loan pile, but the bank equity shortfall is still estimated at 2% of GDP bolstering the case for wider foreign ownership. The currency was “broadly stable” against the dollar in the first quarter within a narrow 3% fluctuation band, but investors prefer a more market-determined rate. Intervention with $60 billion in reserves on hand has drawn scrutiny from the Trump Administration Treasury Department, which also criticizes anti-money laundering gaps.

The IMF recently completed a Kazakhstan visit as a successor to longtime President Nazarbaev took office promising to jump-start economic and financial sector agendas. He was formerly parliamentary speaker, and as a ruling party stalwart developed solid business community relationships favoring blue-chip IPOs in the oil and gas and other industries. Growth should approach 4% this year on broad pickup in hydrocarbon and mining exports, construction, and services. Inflation is in the 4-6% target range, and the central bank cut the policy rate in April as banks undergo a thorough asset quality review to determine outstanding risks likely to accelerate disposals at the state Problem Loan Fund. A May study by auditing firm KPMG suggests that private equity, with only a few deals worth $100 million annually, could be interested in  privatization and distressed credit stakes that further raise the frontier market profile.

Greece’s Explosive Election Odyssey

2019 August 16 by

Posted in: Europe   

Greek stocks up 30% on the MSCI Index through mid-year continued to surge after Prime Minister Tsipras’ snap election maneuver backfired, as his party lost to the conservative opposition which took a parliamentary majority. New government head Mitsotakis follows his father in the post previously, with an Ivy League US education and management consulting background pledging business-friendly policies. His Finance Minister will oversee a corporate tax cut, but warned of “hidden bombs” likely to aggravate the record debt load from hundreds of billions of euros in consecutive EU rescues. Contingent liabilities around state enterprises never restructured or privatized under leftist administration could complicate the 15-year repayment plan agreed with Brussels at concessional rates with a long grace period. It insists in return on maintaining stringent fiscal targets such as a 3.5% of GDP primary surplus, which the incoming Prime Minister campaigned against to boost competitiveness and higher growth than the recent meager 1-2%. Officials from the bailout facility repeated that austerity was a “cornerstone” as other regional struggles over Brexit and migration pre-empt appetite for reopening the Greek saga. A potential ally in softer terms may be ECB governor nominee Lagarde, who advocated outright cancellation as IMF chief, but her immediate priority will be another round of quantitative easing in some form to stoke anemic 1% growth and inflation. With bond-buying and commercial bank on-lending potentially exhausted, she is under pressure to follow the Japanese model into equity holding investors consider a double-edged sword. The new team will look for easy wins like slashing foreign investment bureaucracy and screening that has slowed mining projects, and the cabinet draws on well-credentialed expatriates in the hope of luring back professionals leaving over the past decade’s crisis. Right after the victory, a 7-year bond was heavily oversubscribed with a yield under 2%, as an initial vote of confidence that growth and real returns can outpace neighbors, especially as the “peripheral” story fades in Italy, Portugal and Spain. In core emerging markets the juxtaposition is increasingly with Turkey, where stocks were down 5% in the first half coinciding with the ruling AKP party’s second defeat in the rerun Istanbul major’s race. The fragmented opposition unified around a moderate candidate, as President Erdogan’s grouping has begun to splinter, with the latest defection from his former deputy Babacan. The political as well as economic consequences to loss of the biggest city are far-reaching, as big infrastructure projects and favored business relationships will come under scrutiny and could reveal more serious banking and corporate sector weakness. Around $150 billion in external credit lines must be repaid over the next year after a cumulative 40% lira drop against the dollar since 2018. Depreciation drove inflation above 20%, and quashed import demand also helpful in curbing the current account deficit. The President blamed the poll setback on central bank rate hikes to near 25%, which he claims worsen inflation in contravention of economic orthodoxy.  He sacked the governor and named his deputy as replacement in a fit of pique, and the latter immediately cut the benchmark 4% and pledged more accommodation.  Foreign investors shunned securities in their own swift sanctions on undermining independence, as the US and EU prepared to counter Russian military and Cyprus oil moves with punishm

China’s Stumbling Star Turn

2019 August 16 by

Posted in: Asia   

With foreign net inflows in June at $3 billion as “A” shares added to the MSCI index were up over 30%, domestic investor attention in July was on opening of the new Star small cap market designed to lure listings from the US Nasdaq and Shenzhen’s tech tier. Stocks jumped 150% the first trading day pending creation of a benchmark, with 100 companies in the offering pipeline. It has no daily fluctuation limit, but investors need a minimum RMB500,000 account and two year track record. International access is expected over time as officials announced further steps at capital market and industry entry, as rating agency S&P assigned its first financial institution grades with a AAA to an ICBC unit. The moves came as Q2 growth was reported at 6.2%, the lowest in almost three decades, with consumption and fixed investment the main drivers. In the first half exports were flat in dollar terms, as US sales dropped 8% in June with continued trade friction. President Trump has accused Beijing of currency manipulation as well, but the IMF’s periodic review of major economy interaction found fundamentals in line as it urged more flexibility. Analysts point out that depreciation would aggravate the external debt burden, as part of the overall 300% of GDP load according to the latest IIF tally. A new report by the Germany-based Kiel Institute also estimated Chinese overseas lending in dollars at $700 billion, dwarfing other bilateral and multilateral providers, as another impetus for maintaining relative rates.

Corporate bond placement doubled in the first half, and China accounted for 40% of the emerging market total, industry trackers calculate. Dozens of defaults, including at high-profile Minsheng Investment Group, were recorded, and the government is steering real estate developers to refinancing only operations offshore to curb future exposure. House prices in most cites rose 10% on annual basis through June, and municipalities still rely on rising land values as collateral for their own borrowing. The Kiel institute survey also reveals increased non-payment and restructuring among Belt and Road initiative countries, with low-income recipients in Africa and elsewhere in particular experiencing troubles. The total cross-border package of loans, sovereign bonds, and portfolio and direct equity is up tenfold this century to $5 trillion, with thousands of operations in over 150 nations.

The Star market inauguration contrasted with clashes between police and pro-democracy protesters in Hong Kong around the Star ferry, including a standoff in the legislative chamber where the extradition law focusing initial anger was considered. Beijing and its allies condemned student violence and blamed the US for fomenting it with trade negotiations on hold. Shops remain shuttered and damaged, as banks cut the economic growth forecast to 1.5% on home price and tourism tapering. Food costs climbed 3% in June on pork shortages from a disease outbreak, as the local dollar regained its footing within the intervention band despite a setback from cancellation of a multinational beverage company IPO. Official unemployment was 3%, but housing costs and income inequality are major social issues that future Beijing-backed representatives must tackle as the current Carrie Lim-led team’s star fades.

Tunisia’s Testing Turnaround Trickle

2019 August 10 by

Posted in: MENA   

Tunisia joined other Middle East frontier markets Jordan, Lebanon and Morocco with flat to negative results on the Morgan Stanley Capital International Index through mid-year, as the composite gauge was up 8.5%. Despite billions of dollars in international community support since the Arab Spring eight years ago, it has not escaped lackluster 2-3% gross domestic product growth and now heads into another election cycle with political party unity also stalling. Tourism has recovered from a spate of bombings, but recent terrorist attacks on police posts renewed fears at the same time the over 90 year old president was rushed to hospital before his term ends in November. If incapacitated, the octogenarian parliamentary speaker would assume the position. Legislative polls are slated for October, with the Ennahda wing of the splintered ruling coalition pulling 15% in opinion surveys, and the prime minister’s new party only single digits. An outsider wealthy media executive is ahead in popularity, but may be disqualified since no candidate can use foreign funds. The election code also bars challenge to the basic tenets of the 2011 constitution enshrining secular principles and women’s rights, and strict Islamic candidates have complained.

The IMF in June released another $250 million slice of its latest 4-year $3 billion program, amid “high risks to socially-balanced economic stabilization.” It noted energy price hike backsliding after union and business protests last year, with the powerful workers’ federation a main political force. Its strikes stifled phosphate exports, as official unemployment is over 15% and an estimated 30-40% for youth. Inflation and the central bank policy rate are both around 7.5%, with credit growth also at that pace in the first quarter. The fiscal deficit is under 5% with public debt above 75% of GDP, as dinar depreciation swells the latter. The 11% current account gap in 2018 was the highest in decades as agricultural, electrical and textile exports slumped, leaving reserves under less than three months import cover. Medium-term growth could reach 4-5% with the external payments balance halved under an optimistic reform and donor aid scenario, but the immediate picture is grim. Europe slowdown will further dent foreign investment and remittances, as debt peaks at 100% of output at end-decade, the Fund predicts. It warned against civil servant salary hikes in election promises and further state enterprise borrowing, as value added tax is due to rise 5% inviting popular anger.

 On monetary policy the central bank aims for positive rates after inflation, and has reduced commercial bank refinancing. Capital adequacy is sufficient, but the bad loan portion nears 15% and liquidity ratios are strained. Tightening and exchange rate weakness will continue, with the latter at risk of overshooting with more competitive interbank auctions. Small business funding remains constrained pending credit register and collateral changes, including implementation of a new secured transactions law promoted under a US Agency or International Development initiative. Future donor support is a key variable, especially from the Gulf as it tails off from the immediate Arab Spring aftermath, and sources reevaluate investment prospects, the Fund comments.

A Saudi Arabia Article IV consultation at the same time listed domestic priorities that have assumed urgency in the past decade of actual or threatened regional ruling regime overthrow. The IMF calculated mere 2% growth this year on double-digit unemployment, and worsening fiscal and current account balances. Deflation has set in and credit growth will be in single-digits, as banks grapple with deteriorating loan portfolios and capital markets are unable to fill the funding hole. The sovereign wealth Public Investment Fund has successfully borrowed tens of billions of dollars in high profile external debt operations, but the demonstration effect ended there amid longstanding official and corporate governance doubts. The so-called Vision 2030 has yet to take shape amid chronic internal labor and private sector deficiencies, according to the analysis.

The richest sovereign wealth fund and another Tunisia backer, Abu Dhabi’s ADIA, published its 2018 annual report in July estimating lower 5% yearly returns. Its Middle East/ Africa portfolio was 7% of the total, with developed equities outstripping by 10% emerging market ones as the largest exposure. Allocation responsibilities remain split between internal and external managers, who have begun to follow environmental, social and governance criteria. Tunisia’s anti-corruption efforts still lag as measured in the Fund checkup, testing investor eligibility and patience election reshuffling has yet to grasp.

Africa’s Oil Bounce Backfire

2019 August 10 by

Posted in: Africa   

With oil prices on an indefinite roll with geopolitical and production squeezes, big African exporters suffering budget and balance of payments blows and often turning to IMF rescues seek to return to investor favor amid wider economic overhaul doubts. Nigerian stocks continued to perform badly through mid-year with an over 10% MSCI frontier index loss, with banks shunned in particular over lingering mid-size lender weakness. The central bank has seized units and forced mergers most notably between Access and Diamond, as the sector reels from bad corporate and consumer debts from petroleum sale and associated supplier reckoning. The Finance Minister on a US roadshow proclaimed the 5-year downturn was over, and that economic diversification and infrastructure building set a bright future despite scant structural evidence. The recession is technically over, but GDP growth is still in the 3% range with foreign exchange and import restrictions firmly rooted. Electricity shortages have worsened with a flailing private provider and renewables push, and the naira below 500/dollar on the parallel market even as official channels improve hard currency access. JP Morgan has not reinstated local bond index membership, as public debt worries spike despite the modest headline 30% level as a share of output. Tax collection is only 5% of GDP, unable to bridge the fiscal deficit as debt repayment absorbs two-thirds of central government revenue.

 The IMF has recommended a value added levy to shrink the gap, but the re-elected Buhari administration remains unpopular with scant political capital it husbands for the anti-terror fight against Boko Haram and allies. The conflict has widely displaced populations at home and abroad and mixed with a Francophone/Anglophone split in next-door Cameroon, which accounts for half of activity in the Central Africa Monetary zone. The IMF issued a regional report in July with mixed views praising fiscal and monetary changes under new arrangements while criticizing commodity overreliance and lagging non-oil revenue. Other member countries Gabon, Chad and the Central African Republic have Fund programs, and Congo and Equatorial Guinea are in discussions. Congo restructured its debt with China but faces lawsuits from other creditors over unpaid bills, while Equatorial Guinea’s application to join the extractive industries transparency initiative as a first step is pending. Area growth was “subdued” at 2.5% last year, with the oil sector up at double that pace, with public debt at 50% of GDP. The common central bank drained liquidity and tweaked the policy rate, but overdue loans are one-fifth the total as only half of banks comply with concentration risk standards. They have large sovereign and state enterprise exposures, and smaller institutions face closure. The current account hole improved slightly but reserves cover less than three months imports, and new foreign exchange rules surrendering export proceeds have been applied slowly. Angola is the continent’s number three oil producer with the biggest IMF facility at $3.5 billion, after $30 billion was found missing in an audit when successor ruling party President Lourenco took office. Debt/GDP is near 100%, and insider deals continue to plague banking system cleanup and telecoms privatization, where an influential general won a disputed tender with anti-corruption commitment equally questioned.