Argentina’s Rough Repeat Reentry Paths

2018 July 13 by

Posted in: Latin America/Caribbean   

Argentine stocks and bonds tried to recoup big losses at mid-year after turning again to the IMF for a 3-year $50 billion standby program, and gaining readmission to the MSCI core index starting next May following capital market modernization steps. Massive portfolio outflows began in April to shake the peso, and the central bank proved unable through intervention and interest rate hikes to halt double-digit decline against the dollar and its head resigned with Fund recourse. Local and foreign investor lack of monetary policy confidence was apparent for months after inflation persisted at above target 25% and a neutral to easing stance was pursued nonetheless. Fiscal credibility was also in question with likely overshoot of the 3% of GDP deficit goal on spending plans ahead of 2019 elections, with President Macri widely expected to eye a second term. With access to multilateral credit lines, including from the World Bank and Inter-American Development Bank, he can meet the $20 billion external financing hump over the next year and a half, but near-term growth is set at less than 1% under ambitious budget and exchange rate blueprints. They envision a primary surplus and subsidy and provincial transfer cuts, and regular $5 billion incremental boosts to $25 billion in net reserves while steering inflation toward 20%. Central bank autonomy will be reinforced under new legislation, and the Treasury will conduct continuous currency auctions as domestic bond LEBAC stock is reduced. The policy rate will rise to 40% by year end for peso stability and then can relax for slight depreciation against the dollar, assuming pass-through inflation is on track toward moderation and fourth quarter union wage settlements do not upset the mix. Austerity will combine with agricultural drought for technical recession, and Brazil’s outlook as a leading export destination has soured at the same time, with the pre-election 2018 growth forecast recently halved to 1%. A baseline scenario projects no commercial borrowing except through public-private infrastructure projects, as buybacks retire more expensive debt. The current account gap will remain high over the medium term, but level off at 4% of GDP with import compression, according to initial calculations.

Brazil as well fell from grace as stocks went negative through May, as the central bank defended the real through swaps after a long respite and the benchmark rate cutting cycle bottomed. A national truckers strike over increased fuel costs tested investor patience over smooth inflation and political transitions. A large fiscal adjustment is need to restore the primary surplus and social security solvency and cap ballooning public debt, and Lula whose administration bequeathed the mess, remains the presidential favorite while in prison on a corruption conviction. Right winger Bolsanoro and leftist Silva are next, each with 15% in opinion surveys, but “none of the above” respondents are an unprecedented chunk. The candidates attack establishment taint and pledge wholesale reform but have been careful not to propose draconian spending curbs and state enterprise privatization to appeal to swing and young voters. In the balance of payments FDI at 3% of GDP has more than covered the current account hole, but a market-unfriendly election result could interrupt the inflow and unleash corporate remittances to tarnish that silver lining.






The Rohingya Crisis’ Brooding Business Agenda

2018 July 13 by

Posted in: Asia   

The UN’s Refugee Agency’s (UNHCR’s) annual global forced displacement trends report, released on World Refugee Day, focused on the additional 650,000 “marginalized and stateless” Muslim Rohingya expelled from Myanmar into Bangladesh from mid-2017, bringing the year- end total to almost 950,000 housed in the world’s largest camp in rural Cox’s Bazar. They face “increased protection risks” during the May-September monsoon season from natural disaster and disease, aggravated by overcrowding and aid delivery coordination difficulties listed in a separate analysis by Washington based advocacy group Refugees International. The Bangladesh government has floated a proposal to relocate part of the population to Bhahshan Char Island off the Bay of Bengal coast, also a vulnerable climate zone.

The UN points out that over half of the latest Rohingya refugee wave, which followed previous ones in 2016 and in the 1990s and 1970s, is children under the age of 17, and that women and girls often experience sexual violence. Back in Myanmar’s Rakhine state an estimated 125,000 are internally displaced (IDP) in camp detention the past five years, while less than 500,000 remain in the northern part under “entrenched discrimination and denied human rights.” Myanmar ranks as the number four home country for refugees globally, with only Afghanistan at number two with double the exodus at 2.5 million exceeding it in Asia. Almost 1.5 million Afghans have fled to neighboring Pakistan over decades of civil war, and Iran hosts just under 1 million. In Southeast Asia advanced emerging markets Malaysia and Thailand have also received large Rohingya contingents fleeing by boat, and a new study co-authored by the US-based Center for Global Development (CGD) and Tent Partnership for Refugees finds them mostly in urban areas with ready employment and supply-chain access to local and multinational business.

In 2017 the world’s displaced total reached another high of 68.5 million, with 20 million other and 5.5 million Palestinian refugees over several generations. Developing nations are host to 85%, with Turkey at the top of the list with half of Syria’s 6.5 million uprooted, and Uganda a leading destination for multiple African crises. The Rohingya exit was “particularly rapid,” as hundreds of thousands arrived over three months. The Asia-Pacific refugee population is 4.2 million, and it is already under a “protracted situation” where at least 25,000 are in place in an asylum country for a minimum 5 years, and the life-saving emergency has passed without a long-term solution. Return and resettlement are options, but came to less than 1 million for both categories leaving local integration as a main emphasis, promoted by best practices to be finalized in a new UN Global Refugee Compact this year. They include full citizenship, education and employment opportunities even as Asian hosts currently impose curbs on political and poverty grounds. The trends report noted that the region had IDP return successes in the Pakistan and the Philippines last year with around 300,000 going home in each country, but warned that their security was still “hazardous.” It added that international protection was especially difficult to obtain in Japan and Korea, where initial asylum approval rates are less than 10%, while applicants from China still had almost 100,000 claims outstanding worldwide. Regional anomalies were cited as well, such as Indonesia’s only 25% female and Tajikistan’s entirely male refugee groups, and Afghanistan’s nearly three-quarters versus Nepal’s 10% children’s share.

The CGD-Tent survey confirmed across a sample of two dozen host states that 60% were in urban locations, and half working age. Of the latter, one quarter are in the biggest cities where multinational companies typically operate and can offer thousands of local jobs and supplier relationships. Malaysia has more than 50,000 urban refugees, while Thailand is at the opposite end with less than 7000 under the research classifications, although both have over 2000 registered foreign direct investors.  In Bangladesh, Chittagong, a city of 4 million is relatively close to Cox’s Bazar and the giant Kutupalong-Balukhali camp. However proximity is just a “first step,” since labor, skills and legal restrictions are common which keep refugees in the low-paying informal economy at best. The paper urges the business community to demonstrate with pilot projects and “policy voice” potential bottom line and host community returns, with East and South Asia immediate test cases for more compassionate and commercially-minded Rohingya treatment.

China-India’s Big Bet Boomerang

2018 July 6 by

Posted in: Asia   

China after adding MSCI Index “A” shares plunged into the negative column for a greater loss than India into the first half close, as the Washington-based Institute for International Finance reported $12 billion in major market stock and bond outflows in May, two thirds  from Asia. The World Bank updated its 4.5% emerging economy GDP growth forecast to warn of “considerable downside risks” in trade, fiscal and monetary policy and geopolitics, and projected around the same annual expansion through end-decade. Fund tracker EPFR tallied respective equity and fixed income foreign investor inflows through May at $50 billion and $20 billion, off 2017’s frenzied pace. In private equity, industry association EMPEA reported low $7 billion first quarter fundraising, although Asia was the preferred region.

The European Central Bank contributed to pullback sentiment with its declaration to end bond-buying by year end. Meanwhile Japan committed to ultra-loose liquidity through 2019, with inflation still less than 1% and private consumption flagging. International Monetary Fund Managing Director Christine Lagarde reinforced caution in a speech on “damaged” business confidence, while the UN’s Trade and Development Agency noted flat foreign direct investment in the developing world as the overall figure dropped almost 25% to $1.5 trillion in 2017.  Emerging market observers at the G-7 meeting in Canada were aghast at the unleashing of retaliatory tariffs within the group as a harbinger of fuller scale export and supply chain chokeholds, as energy import costs also spiked with oil at $75/barrel. China remained locked with Washington in a bilateral commercial and technology dispute with mirror image countermeasures, as the IMF predicted growth slowdown to 5.5% over the next five years with a “high quality” consumption-led shift that will shake up the current share listing range.

The Fund predicts 6.6% growth this year, and the manufacturing PMI index remains positive over 50 despite only a 6% fixed asset investment increase from January-May, the slowest in almost three decades. Retail sales rose 8% in May, the worst showing in fifteen years, and the import was double the export uptick. Producer price inflation topped 4% on higher world commodity values as reserves are steady above $3 trillion, and the Yuan was one of the few emerging market currencies to stay firm against the dollar. To encourage further allocation the foreign exchange regulator eased qualified foreign investor repatriation and lock-up periods, as the securities overseer worked to launch a Shanghai-London Stock Connect over the coming months.

Banks are reportedly in line for initial public offering approvals to mobilize $15 billion in capital as they again dominate total social financing, while property developers have started to trade at discounts to book value as 40 second and third tier cities announced new speculative crackdowns. The Paris-based Organization for Economic Cooperation and Development in a separate analysis pointed to their “mounting refinancing needs until 2020,” with traditional bank lending unlikely to fill the gap. A dozen listed companies have already defaulted on bonds as an estimated RMB 20 trillion is due over the next twelve months, according to information source Wind. With the crunch ratings agencies Standard & Poor’s and Fitch revealed plans to establish fully-owned Chinese arms to meet demand after two decades in joint ventures.

India’s growth will surpass China’s at 7.3% this fiscal year, after a first quarter reading nearly half a point higher on strong public sector spending. However imported oil costs sent inflation toward 5%, as the central bank incrementally lifted rates despite an overall neutral stance. After $4 billion in portfolio outflows through May, the Reserve Bank governor embarked on an international media campaign citing medium term liquidity drain from the unwinding of Federal Reserve Treasury bond purchases. Moody’s Ratings in turn expects the fiscal deficit to stick at 3.5% of GDP, and the current account hole to worsen to 2.5%. State-owned banks remain a sore spot after $130 billion in bad loans were declared in Q1 under stricter norms, which require big borrower resolution plans within 180 days and possible implementation of new bankruptcy procedures. With the corporate mess lenders are trying to bolster retail business, where fintech and inclusion are jointly promoted by the government and private sector, with the aim of rivaling Chinese competitors under sudden investor and regulatory scrutiny in these areas to their short-term disadvantage.


Africa’s Private Equity Road Ruts

2018 July 6 by

Posted in: Africa   

The EMPEA trade association offered a 5-year retrospective on Africa private equity investing in a paper to chart the “road ahead,” and cautioned that traditional fixed-life funds may hamper business improvement and exit. Record fundraising was $6 billion in 2014-15, with US and European pension and endowment pools joining development lenders for the first time. In the aftermath commodity-induced economic slowdown and currency volatility have dented enthusiasm and returns, especially in the leading spots Nigeria and South Africa which had recessions. Even though consumer focus has often avoided the fallout, exchange rate effects battered portfolios, as companies are forced to grow out of depreciation over longer holding periods. From 2015-17 deal flow was only $1 billion annually despite big fund closings by KKR, Carlyle Group and Helios, and rising valuations may have contributed, with earnings multiples at 7.5 times according to one estimate. $100 million-range transactions were considered then shunned on narrow exit prospects, as frustrated investors expected GPs to allocate more industry and risk expertise. Regional strategies are increasingly standard either through organic or partnership arrangements in a so-called “platform model.” By sector technology is the future priority from finance to e-commerce, with East Africa the prime target, as small-firm orientation favored by aid sponsors has lost luster. With scarce capital markets and strategic buyers, fund managers have turned to secondary sales as an outlet. A 10-year life under limited terms may no longer be suitable, and “ever greening” and flexibility will likely be the success formula over the coming decade.  Liquidity provision is an overriding concern, and investments in local securities market deepening will facilitate outcomes at both ends, the organization believes.

Sovereign debt ructions have also affected the asset class, with index spreads widening in particular for frontier market components this year. South Africa was in recession Q1 with mining and agriculture setbacks, as the weaker rand hurt consumption. GDP growth may only be 1% again, as the central bank aims to keep the benchmark rate steady. The fiscal deficit plan is 3.5% of GDP with major union negotiations and state enterprise reforms pending, and new President Ramaphosa due to consider constitutional changes for land redistribution. Sub-Saharan external debt is up 10% from 2015, and budget consolidation is under scrutiny as current account gaps swell at the same time for energy importers. Nigeria’s growth should be 3% heading into 2019 elections, as the PMI manufacturing gauge was almost 60 in May. Reserves are over $45 billion and the central bank has eased the foreign exchange crunch under tight monetary policy with a 14% policy rate. Ghana’s expansion is forecast at 6-7% on good commodity and oil export performance, and a primary surplus has set a path for public debt reduction to 60% of output under the IMF program. Inflation may settle in single digits, and foreign investors have retained exposure to local debt despite currency volatility bouts and an estimated 5% balance of payments hole. Kenya too has twin deficits, and President Kenyatta in his second term has maintained bank lending and deposit rate controls, which may soon be reinforced by new rules on customer fairness to choke private sector credit landing in the ditch after the poll results.

Pakistan’s Third Strike Depreciation Drive

2018 July 1 by

Posted in: Asia   

Pakistan stocks and bonds tried to shake off the third rupee devaluation since December as it touched 120/dollar for a 15% drop over the period. Foreign reserves are down to $10 billion or two months imports on a 5% of gross domestic product current account deficit, swelled by equipment imports under China’s Economic Corridor energy and infrastructure projects and sliding remittances.  The interim government recently borrowed more through Chinese banks and the bilateral central bank swap line to bolster the position and repay foreign debt, as the business and financial communities brace for possible reapplication of an International Monetary Fund program after July elections. Caretaker Finance Minister Dr. Shamshad Akhtar urged “immediate corrective measures” to restore debt and balance of payments sustainability, as Moody’s kept the low “B” sovereign rating on both credit and political risks. The PML-N party in power under Prime Minister Nawaz Sharif had basked in the glow of IMF exit and easy global bond access before the ouster on corruption charges, but his successor faces immediate cash and economic policy credibility crises that will leave foreign investors, already net equity sellers, on edge.

The World Bank predicts a near 1% GDP growth slowdown to 5% next fiscal year, as inflation veered toward that figure in May. The budget deficit could be 6.5% of GDP when the 2017-18 year ends in June, and the Bank expects fiscal and monetary tightening ahead. Massive government borrowing lifted public debt to 80% of output, and interest payments exceed development and defense spending. Meanwhile tax collection remains meager, and a future IMF arrangement will insist on more progress widening the base and targeting wealthy evaders. In external accounts, even with 15% export growth in mainstay garments and other sectors, the trade deficit was $35 billion through May, while $2 billion in foreign direct investment was the same pace as the previous year. Worker remittances were slightly up to $15 billion over the past ten months, but are projected to flag from the Gulf in particular. Higher imported oil and natural gas costs will add pressure, and gross foreign debt nearly doubled the past five years to $90 billion, over 300% of exports according to the central bank.

After tapping Chinese sources for billions of dollars in bridging facilities, the government announced in May a $200 million syndicated loan with United Arab Emirates banks. Benchmark global bond prices have fallen to new lows with the squeeze, with the 2027 issue below 90 cents. Separate plans for an inaugural Chinese renimbi-denominated “Panda” and individual investor “diaspora” bonds are also on hold, until a new debt management team is in place and current turbulence in world financial markets subsides. After the policy rate was hiked 50 basis points in May, domestic borrowing will in turn be more expensive.

Sri Lanka, where the Morgan Stanley Capital International frontier index fell 2% through May, also experienced currency weakness, despite good marks on fiscal targets under its IMF accord and GDP growth rebound to 3.5%. The central bank, which is to gain more independence and an inflation-targeting framework under a new law, continues with coordinated depreciation to try to overcome external debt at 60% of output and a heavy 2018-19 amortization schedule. Higher oil prices will boost the current account deficit and shave reserves to around five months imports, and previously loose monetary policy will likely be reversed to damp import demand and support the rupee.

Bangladesh has better 7% economic growth, lower debt and a narrower current account gap, but the IMF’s latest Article IV report warned of “slow progress” with the Rohingya refugee influx creating the world’s largest camp. An emergency international appeal of almost $1 billion is designed to obviate budget strain, as the monsoon season begins further threatening lives and shelter. Interest rates were recently cut as authorities seek to curb almost 20% annual private credit expansion through macro-prudential measures. They have also upgraded cyber-defenses after $80 million was stolen from reserves in 2016, and are considering recapitalization of state-owned commercial banks ahead of possible partial sale. However such long-overdue changes will have to wait until scheduled end-year elections with uncertain opposition party participation, as the subcontinent endures further depreciation of actual and political currencies.


FDI’s Flat Field Contours

2018 July 1 by

Posted in: General Emerging Markets   

UNCTAD’s annual report on FDI trends was pessimistic with an unchanged $670 billion total in developing economies, against an overall 25% global drop last year to $1.4 trillion. Asia and Latin America had marginal increases, while Africa inflows slumped 20% to $40 billion. Cross-border mergers and greenfield investment fell 20% and 15% respectively, and the 2018 forecast is for marginal improvement, below the past decade average, despite higher GDP growth and commodity prices. Trade tension and policy doubt abound to constrain value chains, and recent US tax reform could shift commercial patterns. Rates of return are now under 7%, and competition is stiffer from portfolio flows with a rising relative share of emerging market external finance. As production moves from physical to intangible factors asset and employee expansion has slowed, and value chain participation peaked five years ago. Liberalization continues with 65 countries adopting measures, but a “more critical stance” is apparent with new ownership and takeover restrictions, particularly on land and technology firms on security grounds. Treaty terminations exceeded fresh agreements in 2017, and state investor disputes are up to 850 cases. Industrial policies are a common tool, with incentives and special zones the preferred models. Most target manufacturing but advanced services are now in the mix which often entail more sophisticated infrastructure. The report advises promoters to avoid overregulation and adopt social and environmental considerations, and to coordinate national approaches with international business partners. The developing world takes almost half of FDI, but transition economies in Europe and Central Asia experienced a 25% drop in 2017’s “negative cycle.” Advanced economy declines were especially pronounced in the US and UK, spurring a rise in Asia’s global share to one-third the total. Africa was battered by the commodity “bust” and South Africa’s allocation shrank 40% on simultaneous political turmoil. China, Hong Kong and Singapore are in the top 5 recipients, and Brazil and India join the leading ten worldwide. In Latin America activity has moved from natural resources to infrastructure, business processing and information technology. As a group the BRICS inflow was steady at $275 billion, while outward investment plummeted 20% from European multinationals across the board to $400 billion. Emerging market companies, particularly Chinese ones, committed 5% less abroad.

Extractive industry deals and greenfield projects slid 70%, and high-skill manufacturing ones are also in long-term decline, according to UNCTAD. Lower-skill South-South versions have been active from Asia into Africa, but are concentrated in a few locations like Ethiopia. FDI has historically been less volatile than bonds and loans, and equity infusion is small given the level of capital market development. Official assistance is stagnant, and remittances are another steady flow but go mostly for household consumption, Higher interest rates, and geopolitical and protectionist risks shadow the medium-term outlook despite relative optimism in corporate surveys. Africa could jump with implementation of the continental free trade pact and Europe should recover outside Russia under continued international sanctions. Financial companies plan to focus on the developed world as investment promotion agencies seek to diversify into food processing, pharmaceuticals and information services. The CFIUS screening process in Washington will be a harbinger of a cooler welcome likely to last beyond the current tempest, the publication cautions.

Barbados’ Motley Default Crew Crucible

2018 June 25 by

Posted in: Latin America/Caribbean   

After her party’s sweeping election victory taking all seats in parliament in a repudiation of the government’s economic mismanagement, including failure to modernize sewage treatment as it leaked into tourism spots, Prime Minister Motley bowed to the inevitable with an intended IMF program and debt restructuring. Last year’s emergency fiscal plan showed meager results as ratings agencies kept the near default CCC sovereign grade, and commercial banks were forced to raise bond exposure on incremental central bank deficit financing withdrawal. Two thirds of the debt is domestic, but international bond prices almost halved following her announcement with the likelihood of a haircut coupled with thin liquidity. Analysts shifted course after originally predicting the Jamaica model would be followed and spare foreign obligations. Its bonds and stocks have languished too this year, with the latter down 5% on the MSCI frontier index. Trinidad’s component in contrast was up 10% through May on higher energy export value, although it is at risk from Venezuela’s mass exodus with Tobago just a short boat trip away. Both neighbors are at least growing unlike Barbados, where output shrank half a percent on an annual basis into the poll period. The Fund in its latest Article IV report projected 1% medium term expansion with the reported 135% of GDP gross debt, reserves at less than two months imports, and “lingering uncertainty.” The current account gap remains at 2-3% as planned hotel and oil facility privatizations are delayed. The 2017 adjustments were geared toward tax increases while state enterprise reform lagged, according to the review. Government borrowing was almost half of GDP the last fiscal year and bank minimum allocation was hiked to one-fifth of deposits in January as private sector credit was flat. Bad loans are in high single digits and profitability is minimal, but capital adequacy at 20% of assets is a shock absorber. The public wage and pension bills are crushing and job and benefit cuts are overdue and social safety nets must also be better targeted in the future, the Fund observed. Fifteen companies and funds receive most of the transfers which are almost 40% of total spending, and the national social security scheme runs large arrears and has disproportionate government bond holdings.  The insurance sector is stagnating, offshore business registration should be more closely monitored, and the longstanding currency peg may be in question with evidence of overvaluation, it added.

The Caribbean does not feature as a preferred venture capital destination in the latest industry statistics and rankings compiled by EMPEA, which had Asia and Latin America ex-Brazil in the top 5 spots. The former took 90% of Q1 $7 billion fundraising, and disclosed transactions for the period were a record $17 billion. E-commerce deals were one-third the total, with fintech just behind as a popular play. Impact investment vehicles gathered $200 million through a half-dozen offerings, although 80% of LPs surveyed specifically weigh environment and social factors in allocation. Emerging markets represent one-tenth of global subscriptions and 15% of company activity, while private equity penetration rates remain negligible at under 0.5% of GDP across the geographic range.


The Asian Development Bank’s Blessed Bond Behavior

2018 June 25 by

Posted in: Asia   

Fifteen years after the ASEAN+3 (China, Japan and Korea) countries launched their local bond market initiative in the aftermath of financial crisis, the Asian Development Bank which coordinates it prepared an updated good practice guide to build on ‘remarkable progress.” Vietnam joined the group after the original membership, and Indochina neighbors Cambodia, Laos and Myanmar have recently been added after the ADB issued initial evaluations and recommended strategies. The paper notes that the Asia-Pacific is a government bond pioneer and can offer “South-South” policy and technical advice to emerging and frontier market peers as outlined in a G-20 summit declaration.

Macroeconomic and debt stability are preconditions, but officials in charge must also be aware of long-term infrastructure project timeframes and the danger of crowding out private investment. The publication lists essential pillars for consideration across public finance and debt management, money markets and monetary policy, primary and secondary placement, investor and intermediary function, custody and settlement and accounting and taxation. It stresses the themes’ legal and regulatory aspects and calls on market participants to exercise leadership with the central bank and finance ministry. A successful collaboration model is a high-level interagency committee, which sets a road map with interrelated tasks, but new formations with equal private and public responsibility can be adapted as the reform agenda shifts to corporate bonds and derivatives, the ADB suggests.

Bond market size skyrocketed the past two decades to $12 trillion, or 65% of gross domestic product, in the eight countries. Capitalization is twenty times the pre-crisis level, and Indonesia and Thailand were praised for “concerted effort,” while Korea and Malaysia struck a corporate-government balance and China’s total dominates both segments. Brunei and Indochina are in nascent stages as the regional record remains “uneven” and bond strength assumes priority with stricter prudential rules on bank lending. Despite the gaps, lessons can still be transferred to Africa and other geographies in preliminary launch, as envisioned in a 2017 G20 working group.

Along with fiscal deficit and inflation control, financial sector liberalization is an important element so yields can be market-determined and the government is a “price taker,” according to the study.  Cambodia, Laos and Myanmar can follow Vietnam’s path as it graduated to lower middle income status and moved from concessional to commercial financing. In the mid-2000s it started bond issues under a regular calendar, and in 2013 direction was expanded for infrastructure-related corporate instruments. Treasury bill and repo markets are key short-term foundations, and competitive auctions and a primary dealer system are traditional features, even though electronic platforms can increasingly bypass the latter. The institutional and retail investor base should be diverse, but Asia lags Latin America on private pension schemes. Among ADB member countries, only Kazakhstan and Georgia have mandatory second pillar defined contributions for long-term savings, and fixed-income mutual funds for individual buyers have been slow to take off. Foreign investors can face access restraints, and seek complementary currency hedging facilities which have been lacking onshore. Trade and self-regulatory organizations which should be at the front lines of professional integrity and market efficiency can be rudimentary or reticent, and their absence can hamper advanced techniques such as securities netting.

Custody and settlement and accounting and taxation must be aligned increasingly with international standards. For the former national central securities depositories should be electronically linked with foreign counterparts to ensure liquidity and safekeeping. For the latter tax exemption and bilateral treaty treatment, and fair value distinguishing between the trade and hold to maturity portfolios, are often unclear.  In general the master action plan should be routinely circulated through public websites and revised to reflect fresh priorities and sequencing, the ADB advises. It examines in detail experiences in Indonesia, Malaysia and Thailand and in the last notes the strong role of the professional dealer association in changing focus to corporate development and information disclosure. Indonesia’s task force was more official-led but forged breakthroughs such as a dedicated bond index and state of the art repo agreement. Malaysia’s version has worked closely with the stock exchange to create ETF and sukuk products for average investors. The trio should now turn their attention to cross-border integration where capital markets modernization in the broader sense is unfinished and expose fractures with current foreign flight, the primer concludes.


Global Forced Displacement’s Unforced Errors

2018 June 19 by

Posted in: General Emerging Markets   

A year-long CSIS study involving extensive frontline economy field research warned of “unprecedented” displacement extrapolating from the current pace over the next decade to hundreds of millions globally, which will swamp US relief funding and national security concerns. It urges an “all hands on deck” approach multilaterally to embrace private sector development, with Washington to refrain from short-term budget cuts and agreement withdrawal and reengage while also pressing China, Russia and other countries to raise contributions and absorb migrants and refugees. In Europe sentiment has shifted from welcome to deterrence and deportation in recent years in violation of the 2003 Dublin accord. The legal and logistical system dividing responsibility between the UN Refugee Agency and International Organization for Migration is badly dated and major host countries like Bangladesh, Iraq and Jordan are not signatories. The UN’s budget shortfall was $4.25 billion or 50% last year, and the World Bank and other development lenders have just arrived on the scene. Of the 65 million currently in flight the overwhelming portion have that status for at least 10 years and they are over 80% concentrated in poor and developing countries. Women and children are half the population, and most live in urban centers as opposed to traditional camps. In advanced economies one-tenth of foreign aid now goes to processing and supporting arrivals, and terrorism incidence has been non-existent despite political rhetoric. Jordan, Lebanon  and Turkey have absorbed 6 million Syrians, while only a tiny fraction have been resettled abroad. The US plans to slash this year’s quota to a record low, but India, Japan and Saudi Arabia lock the door altogether.

According to the OECD almost one-fifth of official donations, over $25 billion, are for forced migration. Root causes generally divide into three categories: violent conflict, political persecution and economic mismanagement, and climate and natural disaster. One-third of the displaced numbers face famine or food insecurity, with 6 million at risk in Somalia alone and the toll in Yemen unknown. Education and work should be basic rights and are key to productive stays, but access is often deliberately restricted or beyond host country capacity. These issues are now on the agenda of broad compacts negotiated with the international community, starting with the 2016 Jordan one where the EU agreed to provide additional trade preferences and partners backed enterprise zone expansion. Bangladesh, which has taken in 1 million Muslim Rohingya expelled from next-door Myanmar, is early in this process with wider duty-free garment exports a chief consideration. Since summits in 2016 private business has emerged as a new actor in hiring and supply chain relationships and adapting products and services to migrant needs. Studies show clear bottom-line returns, and refugees themselves have proven active entrepreneurs with thousands of business launches tallied in Turkey. Small-scale financing projects have a mixed record and the planned US Development Finance Corporation may launch a dedicated venture capital fund following previous success in difficult environments. The report recommends more AID missions in “hot spots” and increased World Bank focus through the private sector IFC on innovative business and financial models. It suggests further study to unclog the deal pipeline and size constraints associated with these tragic flows.

ASEAN’s Malaysia Maelstrom Milage

2018 June 19 by

Posted in: Asia   

The shock victory and anti-corruption and economic policy cleansing promised by Malaysia’s opposition alliance roller-coasted stocks  before a slight MSCI index gain, and cast a shadow on  ASEAN peers the Philippines and Thailand with their own political and fiscal battles under overall asset class retrenchment. The International Monetary Fund chimed in with caveats at a Singapore event marking a decade since the 2008 financial crisis, as it called for “budget and monetary buffer rebuilding” with  capital outflows. On the positive side, exchange rates are more flexible and reserve coverage is above the adequacy standard, but Asia’s current account balance is down the past decade amid higher external and public debt, which has jumped 15% to 60% of gross domestic product with average fiscal positions now in deficit.

The Fund’s Deputy Managing Director Tao Zhang noted a “striking increase” in corporate and household debt over the period and urged targeted macro-prudential measures. He also warned of higher inflation through rising oil and other commodity import costs, and the unfinished financial inclusion agenda with “large disparities” in automatic teller and formal banking access across the region. His speech put the Asia-Pacific behind Sub-Sahara Africa on mobile transactions and urged stronger credit bureau and payment system infrastructure to tap unreached customers.

Foreign investors , who own over one-quarter of Malaysia’s local debt and equity, had already trimmed exposure before the election on steep valuations over 15 times earnings. They joined in an immediate 5% forward ringgit selloff as a party coalition, led by former President Mahathir Mohamed, other than the ruling UNMO won a parliamentary majority for the first time since independence. When last in office during the 1990s financial crisis, he lambasted “unscrupulous” currency traders and imposed capital controls, and fund managers turned skittish fearing a reprise. The party manifesto hinted at possible currency intervention, while assigning the central bank responsibility for reviving “international market value.” However Mahathir signaled a hands-off approach in early finance minister and other appointments based on track records rather than ethnic or crony ties as in the past.

On the Kuala Lumpur Stock Exchange consumer goods listings were buoyed by the incoming administration’s promise to abolish the goods and services tax, while maintaining fiscal discipline through cutting unspecified project spending. Prime Minister Mahathir after reassuming power ordered a raid on his predecessor Najib’s residence, and barred him from leaving the country as the government tries to recover billions of dollars allegedly siphoned from the 1MDB sovereign wealth fund. The Belt and Road relationship with China will in turn be reexamined on suspicion that $30 billion in agreed bilateral transport financing posed a debt trap that could presage Chinese asset seizure as in Sri Lanka. The East Coast rail link to Singapore, underwritten by China’s Export-Import Bank and estimated at half that sum, will be scrapped as “economically unviable” although it would have created tens of thousands of jobs according to a Mahathir adviser.

The political earthquake resounded in Thailand, where street protestors demanded an end to four years of junta rule as the timetable for February elections next year was again in doubt. General Prayuth Chan-ocha, who heads the military government, may be positioning to stay in charge under a nominal civilian regime, as next generation activists organize new parties. GDP growth at 4.8% in the first quarter was the fastest in five years on healthy exports and tourism, although private consumption and investment were weak. Inflation is only 1% with the benchmark interest rate on hold, but foreign investor capital market confidence  turned bearish in May with a 75 index reading.

Philippines’ GDP growth came in at 6.8% on President Rodrigo Duterte’s 15% infrastructure spending push under the $180 billion “Build Build Build” program, but double-digit credit expansion also lifted inflation above 4%, triggering a 25 basis point rate change. The trade deficit swelled on equipment imports and remittances slipped in a lethal peso depreciation combination, down 5% against the dollar this year. The setbacks hurt the President’s popularity rating currently at 70%, as ratings agencies cited overheating and governance worries despite low external debt.  Standard & Poor’s upgraded the outlook to positive, as international fund managers reserve such small market ASEAN judgment with building tensions.