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China’s Belt Hole Punch

2018 October 1 by

Posted in: Asia   

Domestic investors continued to dump “A” shares for a 20% loss on the MSCI Index through August as backlash appeared against President Xi’s latest developing world Belt and Road $60 billion multi-year funding package for Africa, repeating a previous bilateral summit pledge. The US criticized the deal as well amid bilateral trade and investment acrimony and warned that sovereign borrowers already tapping the IMF for emergency support could deepen a “debt trap,” even though the Chinese portion is a fraction of the total. On the fifth anniversary of the initiative, a number of studies have offered mixed reviews, with Washington’s Center for Strategic and International Studies examining the half dozen “corridors” and 175 projects to find that they are often bypassed and uncoordinated. The sweep across 80 countries with a $1 trillion goal encompasses both hard and soft infrastructure but lacks definition, as it extends to unrelated athletic and cultural events, according to the review. The analysis tries to reconcile on the ground and strategic outcomes and reiterates that regional land, air and sea connections are well established economic strategies historically promoted by development lenders, and that the ADB has mirrored the approach in the Greater Mekong for example. Subdividing the Asian categories shows an absence of priorities outside Pakistan, and that China’s 30 provinces vie at the same time for program benefits. Geography has extended to the Arctic and outer space without pinpointing borders and locations, and implies that Beijing has less control and vision than described in official media and popular coverage. This gap leaves the field open to the US and other competitors for large-scale alternatives as legislation to create a $60 billion unified development finance agency awaits passage.

In August the manufacturing PMI was 51, barely above neutral, as the currency gained against the dollar with the daily band again subject to the “counter-cyclical factor” used in former periods of stress. The foreign exchange regulator punished two dozen violations, as overseas investors increased their local government debt share to 8% on official agreement to stretch tax exemptions to three years. They are also buying bank bad loans through the Qianhai Assets Exchange as real time delivery versus payment is now in force. According to fund research, two-thirds of international “A” shareholders are in consumer listings and have shunned real estate, where S&P ratings believe debt service capability is at a multi-year low. Cash/short-term debt ratios averaged 125% in the first half, with an estimated $40 billion in maturities over the coming months. Leading developer profits were up 75%, but they have started to shy away from second-tier cities with price declines and resort to heavy discounts to sustain sales. Along with property bubble vigilance regulators have expressed concern over the serial collapse of internet P2P credit platforms and vowed immediate inventory and resolution. While bank non-performing assets are still below 2% by current standards, the central bank has warned of private corporate debt’s rapid rise as industrial profits continued to slow in July. Economic and earnings drag may worsen with the prospect of additional US tariffs on $200 billion of Chinese exports which could force company belt-tightening.

 

 

Iran’s Sanctions Pain Analgesic

2018 October 1 by

Posted in: MENA   

The Tehran Stock Exchange Index was up 10% in local currency terms in July for a 25% year to date gain, as retail investors desperate for outlets parked savings there, as the rial lost half its value against the dollar with the first stage of US sanctions reactivation. Valuations with low single-digit price-earnings ratios and double-digit dividend yields were attractive on the $150 billion market to offer the prospect of real returns, after inflation breached 15% in the immediate aftermath of exchange rate collapse as the unofficial rate blew past 100,000 to the dollar.  Oil and steel companies were popular as tighter global supply under Washington’s trade curbs served as share supports. Payment service and pension fund listings also got inflows with renewed external financial system cutoff as a result of the Trump administration’s nuclear pact denunciation.

France and Germany announced a possible alternative to the cross-border SWIFT payments network which could maintain Iranian bank correspondent relationships in euros, and Italy allowed smaller ailing banks to maintain ties as it works to resolve a debt crisis. However the US Treasury Department in meetings with foreign counterparts opposed creation of parallel structures, which will likely take years to launch, and suggested that participants would be at risk of dollar-access bans. China could offer its own workaround in the form of the CHIPS international channel started in 2015 to promote Yuan global acceptance, but Beijing is now ensnared in separate bilateral trade and investment tiffs to forestall action. From a simple money-laundering standpoint mainstream foreign banks are essentially sidelined from engagement since Iran’s parliament has not yet passed legislation to comply with basic Financial Action Task Force rules, with the October deadline for returning to the body’s black list imminent. Conservatives aligned with the religious-directed Guardian Council object that standards will compromise funding for terrorist allies like Hezbollah. President Rouhani and his “moderate” team have failed to win backing for broad banking cleanup and modernization into his second term, and the central bank head and labor and finance ministers were all ousted in August votes of no-confidence as real and monetary economy indicators spiraled out of control.

President Rouhani blamed a US “plot” for street protests and possible renewed recession with oil export and foreign investment curbs, after direct inflows fell short of target in 2017 at $5 billion, according to the United Nations. He announced that 10% will be drawn from the sovereign wealth fund to combat sanctions, and that an anti-corruption bill establishing a dedicated tribunal was a legislative priority to assuage public anger at reports of insider currency deals. A former deputy central bank governor was implicated in illegal transactions, and a trial was televised of importers who benefited from favorable rates. Independent banking analysts called on the administration to continue in this vein and release a list of individual and state business borrowers responsible for the bulk of bad debts put at 15% of the total, but officials have so far demurred. The new central bank head was previously a top commercial bank and insurance executive with no mandate for sweeping change.

The post-sanctions strategy stresses reliance on allies and trade partners in the region and Asia. An Iranian investor and manufacturer delegation visited Syria in August to tout reconstruction prospects as President Assad moves with regime help, reportedly amounting to billions of dollars in military and security assets through the Revolutionary Guard’s overseas arm, to defeat the last pockets of rebel resistance. Iran-China transactions were almost $20 billion in the first half, and export potential to neighboring countries is at the same figure, the Chamber of Commerce calculates. In the first quarter of the fiscal year through July, sales rose 25% to Iraq in particular, and devaluation could further aid competitiveness in the Chamber’s view. Iraqi Prime Minister Haider al Abadi initially agreed to comply with the resumed US clampdown, but shifted course to seek continued geographic and historic ties. He formally requested exemptions from Washington as daily trade in energy and agricultural commodities hit a record $50 million in August, according to bilateral sources. Iraqi depositors also insist that regulators maintain relationships to recover money lost to fraud and depreciation in Iranian banks, which have plagued them as relentlessly as decades of sanctions episodes.

 

Myanmar’s Consecutive Condemnation Cries

2018 September 24 by

Posted in: Asia   

The one-year anniversary of the escape of over half a million Muslim Rohingya refugees from Myanmar’s Rakhine State into Bangladesh, with a current total of over 900,000 in the world’s largest camp, coincided with clear United Nations condemnation of human rights abuses as well as investor fears over the economic policy and performance fallout on both sides of the border. The military, which controls major state enterprises, will likely face additional Western commercial sanctions and asset freezes with the UN’s call for investigation of genocidal crimes. Before the report, the government’s civilian head Aung San Suu Kyi gave a speech in friendly Singapore assigning neither the army nor leading officials who have concocted a mix of lower growth, higher inflation and currency depreciation blame for their actions.

China as the top Asian ally has felt the impact of tourism and foreign direct investment slowdown, with a 15% $900 million decline in the last fiscal year, as Myanmar reportedly will slash the original $7.5 billion Kyaukpyu port project in Western Rakhine to $1.5 billion. The Belt and Road venture, with Citic Group as the main developer, was reached with the prior government to speed oil and gas delivery to Yunnan Province. However the location in a conflict zone, and headlines over deep debt and structural failures in neighboring Laos and Sri Lanka prompted a rethink which intensified when Soe Win, a former Deloitte management consultant, became Finance Minister in May. With foreign aid cuts and a record budget deficit to be funded 20% by the central bank, he argued that the transaction had to shrink, as frontier market ambitions were otherwise scaled back despite passage of overdue reforms such as a new company law.

The latest updates went into effect in August and allow 100% international wholesale enterprise ownership with a minimum $5 million allocation. Thai textile firms have expressed interest in diversification with higher domestic production costs, but lawmakers regularly criticize the investment agency for blocking and delaying applications amid land and tax disputes. Electricity and information technology infrastructure are also lacking, and the outdated banking system suffers from limited private and mobile competition and exchange rate restrictions, according to an August Yangon seminar on the economic outlook. A main adviser to State Councilor Daw Aung San Suu Kyi, Australian professor Sean Tunnell, echoed the Asian Development Bank forecast that gross domestic product growth will slip under 7%. Inflation hit 7.5% in the last quarter through July with food crop flood damage and a 5% monthly devaluation of the kyat against the dollar through mid-August.

The budget gap is at a 7-year peak with big losses at one-third of thirty government enterprises, including the power and rail monopolies. Less than $2 billion in concessional debt and foreign assistance will come in this year, and the trade deficit widened to $1 billion from April-July after a 4% of GDP pace in 2016-17. The Chamber of Commerce’s recent business sentiment survey revealed a drop from last year on “unclear economic policies” as the government continues to promise an overarching “Sustainable Development Plan” for long-term vision beyond the Rahkine crisis.

With the currency sliding past 1500/dollar under reserve pressure, the central bank abandoned the daily 0.8% fluctuation band and introduced swap facilities in a stabilization attempt. It injected millions of dollars in liquidity in August as private banks were accused of hording foreign exchange, and diesel and sugar re-exports were suspended to mitigate swings. The Chamber of Commerce unveiled a currency reform blueprint to liberalize access and trading, and central bank technocrats urge a free-float system. However the governor in the post for 15 years, U Kyaw Kyaw Maung, was reappointed in July and has traditionally advocated monetary policy and financial institution caution. Interest rates are still controlled and foreign banks were only recently allowed to offer trade credit, and stock exchange promoters of expanded overseas entry expressed regret at the incumbent’s continued tenure.

Bangladesh’s business and financial communities are likewise outraged at the Rohingya refugee status quo, as they point to hosting and environmental costs in Cox’s Bazar without prospects of voluntary return and fulfilled aid pledges. Foreign investors are net equity sellers ahead of elections which could bring their own standoff, and de-listings without compensation multiplied area upsets.

The EU’s Dabbling Direct Investment Detours

2018 September 24 by

Posted in: Europe   

With mixed stock market performance among the eighteen new and prospective EU members as Western Balkan candidates prepare applications, an IMF working paper traces FDI trends prominent in their growth and productivity narratives the past decade and a half. The gross figure came to $700 billion in the main Eastern Europe tier that joined since the early 2000s, while the Balkans group take is around $50 billion after prolonged conflict and financial crisis. Lower wages and geographic proximity to developed Europe remain advantages, but aging populations and technology shifts have eroded them. Market size and stability explain two-thirds of inflows into the Czech Republic, Hungary and Poland, with banking a key target in privatization sales. Other services and manufacturing, in autos and chemicals in particular are also popular. Serbia accounts for half the Balkans stock with a similar industry profile, and advanced economy neighbors are the leading sources: Germany in Central Europe; Scandinavia in the Baltics; and Italy and Eastern Europe into Albania, Bosnia, and Macedonia. Tax holidays and investment credits, and Brussels infrastructure and project aid, enter the mix to boost exports, while domestic value-added has been largely flat over time. Car pre and post-production is almost entirely at parent companies, with local units confined to assembly and limited research and development. From more to less advanced emerging economies manufacturing outflows have linked onward as “flying geese,” but the pattern is far less pronounced than in other regions. The latest World Bank literature surveying 750 multinational firms points out that 80 percent weigh legal and regulatory protection above incentives offered by half the emerging world. Outside the institutional and policy environment the most influential factor is supplier quality, which comprises automation and skills depth.

Business climate and governance gains are noticeable with EU accession, and translate into bilateral FDI increases in the immediate aftermath, but will fade barring labor competitiveness and related reforms, according to historic statistical analyses. The Balkans should extend geographic outreach to realize benefits and has already joined China’s Belt and Road Initiative. Education and logistics spending should ramp up there paid for with reduced fiscal breaks, and officials should insist on domestic content within efficiencies of scale especially if cutting-edge technology applies.

Second quarter GDP growth was solid in the CE-4, with Hungary and Poland at the front in the 5% range. Czech wages were up almost 10% in nominal terms with a tight labor market, as the central bank continues with 25 basis point hikes, while the currency slips since cap removal. Hungary is trying to keep inflation within the 4% target, under ultra-loose monetary policy with negative rates as Prime Minister Orban works to maintain small business loyalty. Poland as the largest equity market is down 5% with the banking sector now majority locally-owned. Warsaw may face cohesion aid suspension as punishment for judicial interference, with the ruling party appointing its own supporters to the highest court. Romanian 10-year bond yields rose 50 basis points with budget overshoot and a cascade of corruption scandals upending the government and sparking mass street unrest. Proposed integrity laws were again diluted and investigators are under threat themselves from shadowy forces darkening the FDI takeoff threshold.

India’s Trampled Roaming Turf

2018 September 18 by

Posted in: Asia   

Indian shares alone among major Asian emerging markets turned positive in local index terms, as foreign investor net inflows also reappeared in August due to good earnings at a cross-section of top thirty companies, despite  price-earnings ratios outstripping the global average by seven times. As Prime Minister Narendra Modi underscored in his last Independence Day speech before  national elections, expected 7.5% medium term gross domestic product growth in the world’s number six economy was “running elephant” pace, even if consumer inflation was  back to 5% and fiscal and current account deficits were criticized in recent ratings agency and International Monetary Fund reports.

The rupee slipped to 70/dollar, below the level five years ago at the height of the “fragile five” scare, despite central bank tightening and intervention from the $400 billion reserve pile, as bond investors in contrast target India for the largest outflows. They accuse Governor Urjit Patel of erratic and missing communication on monetary and exchange rate policy, with the gap even more noticeable since the June exit of top economic advisor Arvind Subramanian, who returned to a US think tank. On the structural front too, fund managers alternated between skepticism and acceptance of tax and banking sector changes as an underlying allocation rationale. Performance is likely to continuing gyrating into the poll period, without clarity on the Modi first term legacy and future plans, as the broader asset class endures harsher judgment after Turkey’s crisis.

Former Indian officials poked holes in the Modi Administration’s track record, with previous Finance Minister P. Chimdaram faulting demonetization and unified tax complications, with additional rate overhaul from the Goods and Services Council in July, for cutting fixed capital formation below 30% of GDP.  An old economic planning head warned of “populist spending” to derail fiscal responsibility, which could include intact subsidies shielding against higher oil import prices. India Ratings decried a 7% drop in household savings the past five years to 16%, while Moody’s estimated the current account deficit will swell 1% to 2.5% of GDP, half the fraction during the 2013 US Federal Reserve Taper Tantrum. Fitch chimed in that the weaker currency will aggravate banking and corporate stress and repayment risk in view of unhedged borrowing, just as big state lenders began to double bad asset recovery in the first quarter under new procedures. The setback revived momentum for a central disposal agency, with a proposal now circulating for a public-private structure with $15 billion in initial capital that would focus in particular on idle power facilities.

The IMF acknowledged “important” insolvency and foreign direct investment steps in its August Article IV survey but urged greater labor and financial sector ones for productivity and savings. Credit growth was down to 12% annually, amid slow deleveraging and poor governance and inefficiency among the dominant state banks. The Fund urged more private competition, as US venture capital giant KKR launched a local financial services unit with a full small business line. It recommended adherence to the 3% fiscal deficit cap and longer-term public debt reduction to 60% of GDP, and insisted that recent agricultural and housing support be counted on-budget. Further interest rate hikes are in store with “upside” inflation, and could invite future government and corporate bond inflows as foreign portfolio ceilings are in principle relaxed. The 2018 Banking Reform Roadmap is “vague” and board independence and privatization should accompany future recapitalization. Trade, infrastructure and product regimes are also outdated, according to the report.

In the region Malaysia too has been on a relative tear, with an 8% gain since July and $100 million poured into the IShares US-based ETF last week during Turkey’s collapse. Prime Minister Mahathir Mohamed at the 100-day mark put $20 billion in Chinese projects on hold over debt concerns, pressed investigations and asset seizures around the IMDB scandal, and replaced the main sovereign wealth fund board. The growth forecast was slightly pared to 5% with the current account surplus intact, and the central bank eased mandatory hard currency export surrender rules on a possible path to reauthorizing offshore derivatives banned under the previous government. Foreign investors maintain one-quarter local bond ownership as Moody’s Ratings praised fixed-rate Islamic issuance as a sound strategy which can withstand wily old politicians’ uneven policy delivery, with Asia now scrambling for these safeguards.

 

The Arab World’s Entrepreneur Ecosystem Entreaty

2018 September 18 by

Posted in: MENA   

MENA stock markets mostly languished through July, with notable exceptions Saudi Arabia and Tunisia up 20% and 40% respectively, as Egypt disappointed as the main core universe component with a 5% loss. Kuwait jumped over 10% on an increased frontier weighting as Saudi shares graduate next year after MSCI’s latest review. Jordan and Lebanon were flat as millions of Syrian refugees stay in place despite the Assad and Russian governments’ hints at safe return and imminent large-scale reconstruction without identified guarantees or funding. Gulf equities are also preparing for competing standard debt gauge entry as JP Morgan finesses criteria for EMBI expansion. A dozen regional economies have yet to create emerging-market caliber entrepreneurial conditions for the “Fourth Industrial Revolution,” according to the latest joint World Bank-Economic Forum competitiveness report. It urges a new generation social contract since commodity riches can no longer support public sector employment and subsidies, amid a demographic youth bulge with still low female labor force participation. The private business enabling environment lags across the board in education, technology and financial sector development. Opinion surveys show around half of respondents decrying income inequality and political governance, and worrying about cyber-attacks and natural resource shortages. The area’s competitiveness index barely budged the past decade, even though Qatar, Saudi Arabia and the UAE rank in the top 30 of 135 countries. Morocco, Algeria and Lebanon slipped the most, and of the dozen pillars measured, only infrastructure and technology showed progress with financial market regression. Gulf Cooperation Council members are behind in training and labor markets, and automation has not translated into innovation. Resource-poor countries like Jordan and Tunisia have better diversification track records, but widespread state intervention in administration and ownership remains an obstacle. Work forces are not equipped for physical, digital and biological overlap that will characterize future business, and traditional bank lending cannot serve emerging entrepreneurs.

Oil and gas exports have accounted for two-thirds of the total, with education quality a key impediment in view of low math and science test scores. Small business credit is limited, with the share at the bottom of all developing regions. Only Africa and South Asia perform worse on the World Bank’s Doing Business scorecard, and high customs and non-tariff barriers hurt trade disconnected from global supply chains. Sound macroeconomic management is a precondition, but micro reforms are lacking from improved logistics to export finance help. Richer countries should liberalize industries for foreign and private entry, while fragile states at the opposite scale should consider dedicated enterprise zones and payments system modernization. Young companies of three to five years are the big job sources and formation rates increased the last decade but still lag the world average, especially when the UAE is excluded. A regional entrepreneur survey last year highlighted market, finance and talent access as the chief priorities for policy and practical steps. Angel investment networks have been launched in the Gulf, Lebanon, Egypt and Morocco to provide seed capital, but cross-border and women’s integration continue to stall and may demand cultural as well as operational transformation, the study suggests.

China’s Multi-Front War Whirlwind

2018 September 11 by

Posted in: Asia   

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

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

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

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

Colombia’s Brimming Border Insecurities

2018 September 11 by

Posted in: Latin America/Caribbean   

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

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

Thailand’s Trade War Tripwire

2018 September 4 by

Posted in: Asia   

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

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

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

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

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

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

 

 

Greece’s Grating Graduation Ceremony

2018 September 4 by

Posted in: Europe   

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

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