Doing Business’ Toted Training Seals

2018 December 3 by

Posted in: General Emerging Markets   

The World Bank’s 15th annual version of its popular Doing Business scorecard, examining entrepreneurial conditions in a dozen areas, hailed a record 315 reforms the past year, one third from Africa, as basic startup time and cost has been halved the past decade. The ten most improved among the 190 countries included China, India and Turkey, as well as conflict-torn Afghanistan and Cote d’Ivoire. The Bank pointed to government official training in poorer economies as a major catalyst for improving on the ground private sector satisfaction as measured in tens of thousands of individual interviews. It intends that the human capital index unveiled at the October Bali meetings will serve as a comparable social indicator standard. In finance the credit access, minority shareholder protection, contract enforcement and insolvency resolution breakdowns are paramount, with the caveat that broader economic performance and political risk factors are unincorporated. Taxes, labor markets, property and construction registration, and electricity available are other considerations in the mix, with better regulation correlated with higher productivity and growth in numerous academic studies. Developing nations Mauritius, UAE, and Malaysia are in the leading 20 ranked, along with more advanced Asian members Hong Kong, Taiwan, Korea and Singapore. Africa’s risers benefited from commercial law harmonization under the 17-state OHADA code, which introduced alternative dispute settlement. China focused on administrative, utility connection and payment process innovations; India automated customs documentation and streamlined approvals. Azerbaijan established a new credit bureau, and Turkey’s banks now share more detailed risk data. Kenya and Rwanda accelerated land titles and tax collection, and Brazil facilitated auto dealings with Argentina as the BRICS together added 20 points. However even with civil servant instruction gains will be limited without popular communication, the publication noted, as it recommended an information strategy to accompany changes.

The UAE unified its collateral registry, and Afghanistan granted secured creditors priority in bankruptcy. Qatar allowed consumers to challenge credit scores, and Indonesia added utilities to the shared network. The Philippines issued audit rules for stock exchange-listed companies; Tunisia required disclosure of related-party transactions; and Kenya made directors liable for self-dealing offenses. Morocco approved debtor-in-possession financing, and Pakistan reorganization options in lieu of previous liquidation. Public procurement procedures will be examined in the next edition, but wider infrastructure and regulatory cost-benefit analysis will remain outside its purview. The Bank has other series on governance and policy and institutional themes, and Europe has started sub-national readings which often show large disparities, although informal business is not surveyed. A multi-tier review process is in place internally to ensure results integrity and verification, as methodology questions seem to be set aside following China’s complaints as standing gained. An estimated 70 countries have formed specific interagency and public-private sector Doing Business committees, and the results are used in the World Economic Forum and other competitiveness indices. Future research seeks to explore the foreign direct investment impact of targeted action, and the Bank’s IFC arm may deepen understanding of capital markets good practice as part of data and information compilation and project support under the “3.0” model to further train the fund manager community about its merits.

Impact Investing’s Masked Momentum Measure

2018 December 3 by

Posted in: General Emerging Markets   

The Global Impact Investing Network’s latest annual survey of 225 firms with $225 billion in assets, with support of the US and UK main development agencies, hailed “transformational” momentum in recent years, while acknowledging “integrity” doubts with no definitive certification process or principles. One-third of respondents participated for five consecutive years, with the chief categories fund managers (60%) and foundations (15%). Asset classes are evenly split between private debt and equity, as is geography between developed and emerging markets. The median portfolio was $100 million, and education and food are fast-growing sectors. Business model, currency and liquidity risks were chief obstacles, and the mix of financial, environmental and social returns remains a moving target. In 2017 $35 billion was allocation among more than 10,000 investments averaging $20 million, while development lenders had the biggest projects at $150 million. Africa and Latin America accounted for half of exposure, and micro-finance, energy and housing were popular choices. Views on government support were mixed, but venture capital definitions and regulatory treatment were more advanced for equity than fixed-income. Lack of skilled professionals and exit options were regularly cited on the ground, and at larger organizations the inability to reach top executives is a “challenge.” Despite breakthroughs last year such as the Ford Foundation’s $1 billion commitment and the launch of TPG’s $2 billion Rise Fund, a shared code of conduct and bottom line are elusive although the GIIN will propose standards in 2019. Climate and carbon policies can better promote energy participation, and tax and blended finance public sector incentives also merit consideration, according to the study. In the future listed stocks will increasingly feature as a preference, and banks and retail investors emphasize individual products. At least half a dozen small buyer funds were recently introduced, including one from Barclays. Managers track the Sustainable Development Goals in overall themes and often apply specific climate and gender “lenses,” and emerging market returns were 8% while still lagging purely commercial instruments.

A number of more specialized networks have also spun off under the general concept, the latest for small companies in frontier economies and global refugee investment. The former “collaborative” backed by Google’s founder and the Dutch government aims to redress the estimated hundreds of billions of dollar funding gap for $20-$200 million startup and working capital needs between normal aid agency and private equity sponsor interest. The latter is an arm of the innovation-driven Global Development Incubator, and notes that forced-displacement grants were less than 1% of the SDG total with missing “connective tissue” among corporate and humanitarian partners. It would create a refugee “lens” from ownership to lending, and jointly source deals and technical assistance across the public-private spectrum. As the UN’s Refugee Compact is due to soon be finalized, it would work with countries on labor and education reforms to bolster business and build a broader “ecosystem.”  Attracting “sleeping giant” institutional investors like insurance and pension funds is a goal in both efforts, as liquidity and size mandates despite upbeat rhetoric mute their potential impact.


Pakistan’s Churlish China Lifeline

2018 November 26 by

Posted in: Asia   

After campaigning on an “Islamic welfare state” platform without “begging” the International Monetary Fund and traditional bilateral lenders China and Saudi Arabia to pay for it alongside estimated year-end debt and import obligations beyond the current $8 billion in reserves, Pakistan Prime Minister Imran Khan recognized the hard numbers and directed his Finance Minister to enter negotiations on another Fund program. A staff mission arrives in November for talks on a loan expected to be again in the maximum $7 billion range agreed five years ago. The Saudi government, after initial hesitation, came through with an oil supply and credit package around the same size on the eve of its boycotted global investor conference over the journalist Jamal Khashoggi’s murder.  It has also promised to join the headline $60 billion in infrastructure projects around China’s Belt and Road initiative.

US Secretary of State Mike Pompeo and Fund Managing Director Christine Lagarde insist that Beijing reveal details of its commercial loan terms under the joint “Economic Corridor,” with the former threatening to scuttle any arrangement that promotes “debt trap diplomacy.”  Chinese capital goods imports have also swelled the current account deficit to 6% of gross domestic product, a gap uneven garment exports and remittances and flat foreign direct and portfolio investment cannot readily bridge. The stock market and rupee fell around 25% through mid-October on admission of dire fiscal and balance of payments straits, and the prospect that the country would follow other Asian borrowers’ path to gain breathing space. Analysts pointed out that assets could be relinquished as in Sri Lanka’s port majority ownership, or projects cancelled or postponed as in Malaysia and Myanmar’s recent decisions. In Pakistan’s case external conventional and sukuk bond holders are likely to be part of the workout as well, after previous restructuring decades ago in the aftermath of the Asian financial crisis. Private creditors could be asked for cash flow relief through extending maturities, or for outright interest or principal reductions. The Paris Club of Western bilateral providers, where China is an observer without subscribing to its rules, in turn reschedules lines under a longstanding formula. Beijing has not shown its hand either in data or approach, and may leave the situation in limbo as in other regions to Islamabad’s and emerging market investors’ frustration

Africa has accumulated large scale collateralized debt to China’s Export-Import and Development Banks on non-concessional terms, as described in recent Standard Chartered research surveying a dozen countries. Djibouti is arguably the most extreme as its load mostly owed the Chinese doubled in several years to almost 100% of GDP in 2017. For private market issuers including Angola, Cameroon, Ethiopia, Zambia and Kenya, China’s portion of external debt ranges from 20-40%, and observers warn the calculations could be greatly understated with limited reporting and verification. Zambia’s application for IMF support and domestic politics have been upended by undisclosed government and state company borrowing, and Mozambique and the Republic of Congo already entered formal restructuring with commercial creditors where Chinese participation alongside another Fund program is a major complication.

The Washington-based Institute for International Finance provided summaries of post-default progress for the two countries in its October update on compliance with the voluntary code of conduct on creditor-debtor communication and coordination adopted in the early 2000s. It labeled Mozambique a “cautionary example” for still failing to account for $500 million in hidden loans from the original unexplained total triple that size. In March the government proposed a write-down through an exchange for a 50% net present value loss that bondholders rejected out of hand. In August a counteroffer was presented tying future payments to hydrocarbon revenue streams, but a Fund facility remains out of reach with the debt-GDP ratio over 120% and China on the sidelines. The Republic of Congo’s Chinese obligations increased tenfold in a few years to $3.5 billion after it got poor country bilateral and multilateral cancellation in 2010. Multinational oil traders and regional and European banks are also commercial creditors, and IMF ties are likewise hung up on unrevealed sovereign and state company debt. While “good faith” negotiations are underway, a main roadblock is uncertainty over Beijing’s “comparable treatment” once a deal is struck, and that admonition applies to a quick resolution of Pakistan’s impasse.

Debt Restructuring Principles’ Pothole Paving

2018 November 26 by

Posted in: General Emerging Markets   

The Institute for International Finance released its annual status report on the 15-year old voluntary emerging market debt restructuring code around the IMF-World bank meetings, as it predicted flat capital inflows to twenty-five economies at just over $1 trillion, half to China. With benchmark stock and bond index entry almost $600 billion will go there as a record, while the rest of the universe’s take is “subdued” and 30% lower than in 2017. Trade conflict between Beijing and Washington could weigh on future allocation in “volatile and challenging” conditions which underscore the stability contribution of these agreed practices between government and quasi-sovereign issuers and private lenders and investors, the IIF comments. The anti-crisis guidelines are flexible and market-based and designed to promote communication and speedy resolution alongside dedicated outreach programs and statistical disclosures the group also tracks regularly. The report lists shared creditor-debtor benefits from cooperation and dialogue, as evidenced by individual cases and broader poor country relief initiatives. The trustees overseeing the norms held consultations with the London-based International Capital Markets Association on collective action clauses and the “good faith negotiation” definition, and with the Bank of England on development of model GDP-linked instruments. They expressed concern about Africa’s debt increase since official cancellation to 50% of GDP last year, with bond and non-Paris Club holders now controlling a large chunk. The continent is the focus of the restructuring profiles, with Latin America examples also reviewed. Mozambique, after admitting to hidden and unauthorized borrowing which resulted in bilateral and multilateral aid suspension, unveiled a swap proposal in March with estimated 50% net present value write-offs rejected by major creditors. They contended that future gas revenues and fiscal consolidation gains were not fully calculated, and that Eurobonds and loans were treated differently. In August a counteroffer was presented with a value recovery feature and annual debt-servicing cap. However debt/GDP is over 120% on 3% growth, and anti-corruption safeguards are still lacking, according to the description.

Chad renegotiated its second oil for cash facility with commodity giant Glencore with participation from global asset managers, and in June stuck a deal within the framework of medium-term sustainability under its IMF program. The Republic of Congo turned to the Fund in 2017 following a tenfold jump in Chinese obligations to $3.5 billion, and previously unreported state oil company liabilities which together pushed the debt-GDP ratio to 110%. Construction firm Commisimpex also has $1 billion in unpaid bills, and contractors succeeded in freezing sovereign bond coupon payments to trigger default. Commercial creditors and government advisers are in constructive talks but the workout depends on China’s approach and a new Fund arrangement. Venezuela and Barbados are the other experiences, and the former is behind on $55 billion in combined state and oil company bonds, with acceleration not yet voted to trigger cross-default provisions. US lawsuits have won attachment of Citgo assets, but organized negotiation is “impossible” with the Maduro administration in view of sanctions and unsound economic policies, the IIF observes. Another $15 billion is outstanding in arbitration claims; big bilateral creditors include China and Russia; and instruments either do not contain or have dated collective action clauses to lighten principles’ weight.


The US Treasury’s Currency Report Backfire

2018 November 19 by

Posted in: Currency Markets   

The US Treasury Department’s twice yearly review of possible exchange rate manipulation singled out Asia and emerging markets China, India and Korea in particular, to alter investor perception into next year as other regions escape continued monitoring and punishment threats. The three quantitative criteria on trade and current account surpluses and intervention size were applied under 2015 revisions, and Japan was given a pass without explicit intervention, while Taiwan dropped from coverage altogether.  India “shifted markedly” from 2017’s heavy currency purchases above the 2% of GDP threshold, but with rupee decline and an underlying current account deficit operations were only $4 billion through June, and it too could disappear in the next update if the bilateral trade surplus falls.

Korea has a 5% balance of payments surplus exceeding the 3% of GDP minimum, and the won has depreciated against the dollar this year although the International Monetary Fund still considers it undervalued. The central bank has been relatively quiet but does not disclose interventions, with greater transparency pledged in 2019. China analysis was the core theme amid rumors it could be again branded a manipulator after a 25-year hiatus. The report noted that despite Yuan slippage in recent months, the bilateral exchange rate in nominal terms was the same as a decade ago, amid “non-market” economic policy of stricter state control. The trading range between 6.8-6.9/dollar remains narrow and will swell future surpluses, and exchange rate practice is “disappointingly” hidden even if manipulation is no longer as plausible a finding as in past appreciation.

On capital flows net emerging market portfolio allocation outside China was negative $115 billion through mid-year, while stable foreign direct investment enabled “slightly positive” overall balance. In China outflows reversed, with stock and bond buying ahead of FDI for the period at $90 billion and $65 billion, respectively. Headline global reserves rose $40 billion to $11.5 trillion in the first half, with net accumulation despite higher dollar value adjustment. The Asian economies in focus have excess holdings beyond short-term debt and import needs. The IMF preaches against this tendency and instead urges “stronger policy frameworks,” according to the Treasury document.

It decries China’s “pervasive” subsidies and unfair trade behavior, while acknowledging “neutral” currency intervention estimated at $45 billion in the second quarter. Beijing may now be emphasizing administrative controls such as resuming the countercyclical factor in the daily fluctuation band, as it repeats the G-20 commitment to skirt competitive devaluation. Reserves are steady at $3.1 trillion with negligible capital exit outside the errors and omissions account, which indicates underground movement. The goods surplus will persist despite a services deficit even with GDP growth dipping to the 6.5% range until market forces and household consumption gain prominence, the US government warned.

At the IMF-World Bank gathering in Bali, Fund Managing Director Christine Lagarde rejected manipulation claims as China’s central bank head lauded a “reasonable equilibrium level” and analysts argued that a drop below 7/dollar was not a line in the sand. However during the meetings, international investors sold $150 billion under the Hong Kong Stock Connect, as the foreign exchange body SAFE revealed almost $5.5 trillion in total overseas liabilities. US Treasury Secretary Steven Mnuchin insisted that currency provisions would be part of any future trade understanding, following the model of the recent US-Mexico-Canada renegotiated agreement. Vice President Mike Pence set the stage in advance of the report with accusations of currency distortions and intellectual property “theft,” but bond managers largely shrugged off the rhetorical torrent in oversubscribing a $3 billion Chinese sovereign bond. They cited healthy central government figures in comparison with local authority off-balance sheet “titanic credit risks” of $5.75 trillion, according to rater Standard & Poor’s.

Korea is also in Treasury’s crosshairs as a currency clause was lacking in the revised bilateral free trade pact, and the IMF believes the won is currently 5% undervalued. It does not publish data on interventions presumably confined to “disorderly markets” from $400 billion in reserves, but promises to start next year. To reduce outsize external surpluses, the US called on Seoul to further stoke domestic demand despite onerous household debt. It welcomed the 2019 budget’s 10% spending increase, but the stock market is down by the same amount through September pending more decisive currency and credit cleanup.


Tunisia’s Smothered Spring Scent

2018 November 19 by

Posted in: MENA   

Approaching the seventh anniversary of its Arab Spring leading dictator ouster and restoration of competitive democracy as a standout regional example, Tunisia with a rare initial public offering topped MSCI indices with a near 40% gain through the third quarter despite splintering of the longtime ruling coalition and International Monetary Fund criticism of fiscal, monetary and investment policies. The Fund agreed to release another $250 million under its latest program to bring the total disbursed to half the $3 billion committed in 2016, and the World Bank chipped in another $500 million on its own. The infusion should allow issuance of a delayed sovereign bond, which have featured partial guarantees from the US and Japan development agencies. Washington also launched a dedicated “enterprise fund” for the country, following an earlier post-communist transition model, with the aim of stimulating broader capital markets and private sector development. It may be absorbed or modified in the new development finance corporation Congress recently authorized with $60 billion in available lines, as proponents struggle to justify the track record to date and future prospects.

For the past five years the so-called veteran politician “two sheikhs” from the Islamic Ennahda and secular Nidaa Tounes parties headed a fractious unity government, before their pact dissolved in September over chronic economic policy discord and the unlikely rival popularity of appointed Prime Minister Yousseff Chahed, who holds a doctorate in agribusiness. He and allies moved to form their own “National Coalition” grouping ahead of presidential and parliamentary elections next year, as the two previous parties in charge field their own candidates vying for support from the powerful labor union federation. It opposes Fund nostrums from public finance reform to state enterprise selloff, with large scale strikes scheduled for October and November. They follow protests earlier this year in poorer regions over tax hikes, which were met with harsh security force response as tens of thousands of youth flee for Europe amid 25% unemployment.

Prime Minister Chabed promised this year would be the “last difficult one,” with gross domestic product growth just 2.5% and inflation triple that level in August. The 2019 draft budget foregoes additional individual taxes and halves them for tech, textiles, and drug companies, while raising charges on luxury items and bank profits. The Fund urges fiscal discipline with the deficit at 5% of GDP, and monetary tightening with the benchmark rate negative in real terms. Officials have moved slowly to curb energy subsidies and civil service spending, and the central bank continues to refinance commercial credit expanding at a double-digit pace. Tourism rebounded with a $1 billion 25% revenue jump through September, but it is only two-thirds the 2014 sum before the Tunis Bardo Museum and Sousse beach resort terror attacks.  Public debt is now 70% of GDP, and next year servicing will come to over $3 billion, almost double the amount in 2016 with the dinar’s 20% depreciation against the dollar the past two years, according to Finance Minister Ridha Chalghoum. Occasional intervention stemmed the tide, but international reserves are under four months imports against the backdrop of an almost 10% of GDP current account gap.

Despite a 20% export rise through August driven by agricultural, manufacturing and electrical shipments, the trade deficit hit a 60-year high at $4.5 billion with the currency trading at half the 2010 dollar level. Officials spurn Fund recommendations for more “flexibility” fearing outright collapse, as they imposed temporary import limits and introduced more competitive foreign currency auctions. Bad loans in the state-dominated banking system were close to 15% of the total in the first quarter, and new capital adequacy and collateral rules were recently finalized despite the inability to resolve failed institutions and pass anti-money laundering laws. Credit bureau and payment systems upgrades are pending and a Qatar-owned Islamic bank acquired a local counterpart. Corruption suspicions continue to plague these transactions as the Prime Minister and Anti-Corruption Agency declare “war” on the scourge, with the Energy Minister dismissed in August following an investigation. The tiny $10 billion Tunis bourse was admitted to the World Federation of Exchanges along with outperformance this year, but awaits breakthrough privatizations since a telecoms sale was cancelled with the Arab Spring outbreak as investors search for a next leg bounce.




African Securities Development’s Index Indentations

2018 November 12 by

Posted in: Africa   

The UK-based OMFIF and South Africa’s Absa Bank released the second annual African Financial Markets Index measuring progress in a half-dozen categories in 20 countries, with improved scores in Kenya, Morocco and Nigeria alongside deterioration in Mauritius and Namibia. In an introduction African Development Bank President Adesina cited its own local bond initiative operating for a decade which catalyzed $250 billion in issuance last year, 80% in short-term maturity Treasury bills. The AfDB’s data base covers twice the number of index economies, and the chief executive noted that universal energy access alone will demand $50 billion in annual capital mobilization through 2025. On a scale of 100, South Africa was again the runaway leader at 93, followed by Botswana, Kenya, Mauritius and Nigeria in the 60s.  At the bottom from 25-35 were Ethiopia, Angola and Mozambique, while Namibia, Ghana, Zambia, Morocco and Uganda were in the middle in the 50s. The components were market depth, foreign exchange availability, tax/regulatory framework, domestic investor capacity, economic potential and international agreement entry. The survey praises dedicated financial sector deepening strategies in Mozambique and South Africa, but criticizes low local investor and currency liquidity averages. On accounting rules, 17 of the 20 mandate IFRS, with Cote d’Ivoire just added to the list. Equity and bond turnover are generally minimal at one-tenth of capitalization, and regional coordination is lacking according to the analysis, which combined desk work with fifty field interviews. In 15 countries size is less than 50% of GDP, and corporate bond activity is negligible where it exists, with the government segment six times bigger at $315 billion. Secondary trading, benchmark yield curves and new listings are rare, and domestic institutional investor allocation guidelines can be rigid. Small company tiers are under consideration, and real estate trusts and Islamic-style sukuk are in the product pipeline. Technology has moved to online dealing and electronic infrastructure, and West and Southern Africa have platforms for exchange integration.

Kenya relaxed exchange controls, while South Africa’s over $1 trillion hard currency volume dominates the continent. Reserves fell in Angola and Nigeria with oil price declines, and Egypt’s tripled the past five years with Gulf and IMF assistance. Half the currencies float freely, while the CFA Franc zones and rand area have pegs. Only half the index countries have corporate credit ratings from the three global agencies, and Uganda has high 20% withholding tax and Rwanda’s legal shareholder protections are not well translated in practice. South Africa has multiple regulators, and just one-third the index follow Basel III banking norms. Pension and insurance funds are undeveloped, with the ratio to domestic assets under 20% apart from Botswana, South Africa, Namibia and Seychelles. Strict product and geographic restrictions limit diversification, and manager knowledge and expertise is likewise narrow. Mauritius is an exception with widespread exposure to derivatives, but risk aversion prevails even in the index members with a sophisticated spectrum of contractual savings providers. Financial inclusion is also a capital markets challenge with scant outreach to small business, women and rural locations. With economic growth expected to stay below 5% and infrastructure needs alone estimated at $150 billion annually, the compelling case for market expansion is clear even if future plans are murky, the review concludes.

Bulgaria’s Euro Ambition Ambit

2018 November 12 by

Posted in: Europe   

Bulgarian stocks showed losses on the MSCI Index through the third quarter along with other East European and Balkans markets, as it prepared to join the euro and EU banking union in a first phase next July. The ECB must complete an assessment before it enters the supervisory mechanism, and inflation running at 3.5% will continue to place price stability pressure on fiscal policy with the currency board in place until then. First half growth was over 3% on good domestic demand and cohesion fund-driven public investment to offset slumping exports to Turkey, which accounts for 7.5% of the total. Corruption and crime marks are still poor on Brussels reviews, but are unlikely to sidetrack long awaited single-currency expansion with Central Europe abandoning plans amid the debt crisis outbreak. The Czech Republic after ending the koruna cap has lifted rates with inflation at 2.5% and energy and wage forces increasing. Hungary’s bias is dovish with inflation in the 3-4% band as it continued unconventional tools like targeted central bank small business lending while phasing out interest swaps and mortgage bond buying. Poland grew at a breakneck pace above 5% at mid-year on strong consumption, but PMI weakening signals industrial crawl in the coming months which should postpone potential tightening. In Romania 5% inflation may have peaked on 4% growth, but the government will likely trigger Brussels excessive deficit procedure with an over 3% of GDP result, and the current account hole still suggests economic overheating. The central bank will introduce macro-prudential limits on household debt after years of 20% expansion, and may turn outright hawkish if currency depreciation worsens. To divert attention the ruling coalition has emphasized a referendum to uphold traditional social values and reverse same-sex marriage recognition. However popular apathy was reflected in low turnout which will sustain such “liberal” social practice.

In Croatia too the cabinet mix hangs by a thread with a 51% bloc majority, as the senior HDZ party should finish well in elections but faces fresh anti-establishment opposition. Controversy over the Agrokor conglomerate rescue has spilled over into shipbuilder help debate with the high third quarter tourist season on track for a double-digit visitor bump. Labor shortages are widespread, as tax and pension reforms go into effect on relative budget balance. To extend 3% growth tax relief is slated for 2019 to reinforce previous packages. Serbia’s 4.5% growth is the fastest in a decade despite next export drag. Household and investment spending have picked up with good progress on the IMF program, and 2.5% inflation is not yet enough to rattle the central bank, which recently battled deflation. Western sell-side research often picks stocks and bonds for recovery value, but cultural and commercial ties with Russia sharing the Cyrillic alphabet instill caution. Russian companies have been removed from external borrowing since new US sanctions in April, and the Treasury Department is studying a full securities ownership ban. International reserves and foreign debt are roughly equal in the $450 billion range, but the ruble continues to slip against the dollar as world oil prices may soften in the near future. With this scenario budget adjustment envisioned delay in the retirement age provoking mass outcry, for a dent in President Putin’s popularity and fiscal soundness.

Latin America’s Smaller Election Turf Battles

2018 November 5 by

Posted in: Latin America/Caribbean   

Election attention this year and next in major regional markets Colombia, Mexico, Brazil and Argentina has also prompted an investor scan of under the radar contests throughout less followed locations from Central America to the Southern Cone. Previously assumed outcomes are often in doubt as voters express desire for serious change against an anemic economic growth backdrop even with partial commodity export rebound. In Bolivia President Morales may run for a fourth term after the constitutional court cleared the way, with the opposition perennially divided. Growth may meet the 4.5% target at the cost of runaway credit expansion and dual fiscal and current account deficits. Loose liquidity has combined with an overvalued currency in the IMF’s view, but the 5%-plus budget and balance of payments gaps respectively eliminated public employee bonuses and international reserves. Government debt is 40% of GDP and the Morales administration continues to siphon state bank deposits for infrastructure and social spending. The Dominican Republic is gearing up for 2020 polls with President Medina in contrast facing legal hurdles to another run. Ratings agencies maintain sovereign “BB” grades with a stable outlook despite lack of fiscal reform momentum, since tourism and remittance-backed growth is in the 5% range. The island was added as a fractional component in JP Morgan’s local bond index and it recently switched Chinese diplomatic ties from Taiwan to the mainland to open a big foreign aid and investment channel. Energy-stoked inflation remains a threat with the central bank policy rate over 5%, and oil imports also contribute to a small 1-2% current account deficit offset by solid remittance flows from the US which should support the peso around 50/dollar.

Uruguay’s presidential election is this year, and second quarter growth was just half a percent on export and tourism fallout from Argentina’s crash, exacerbated by exchange rate overvaluation. Earlier drought hit agricultural output, and a railway connecting Montevideo with other key stops may not be completed as planned. Inflation will stay close to 8% through 2019, and despite a primary surplus the budget shortfall is 3% of GDP. Paraguay in comparison is on track to near 5% consumption and fixed-investment driven growth, at half its neighbor’s inflation rate at 4%. Costa Rica’s fiscal plan to lower the 70% of GDP public debt is under debate after an early year Moody’s downgrade. It would introduce value added and adapt capital gains taxes, and add individual and corporate income levies. Civil service wages may be capped on 3% growth, as the government resorts to stopgap borrowing to address strike grievances. Inflation is also 3% with currency depreciation as the central bank tries to prevent a fall to 600/dollar. Panama uses the greenback, and its MSCI frontier stock market component was down almost 40% through the third quarter. Canal volume was solid despite the global trade standoff, and the budget is relatively balanced as opposed to sizable deficits in previous years. Growth should come in at 4% with slowing construction, but the Cobre Panama project should go ahead after negative Supreme Court decisions complicating it amid the private banking reputation hangover from the “Papers” revelations which damaged regional political leaders.

The Next Decade’s Natural Realignment Remedies

2018 November 5 by

Posted in: General Emerging Markets   

With major indices still down through October, emerging markets are in their longest funk since the “taper tantrum” five years ago, but the US Federal Reserve and developed world liquidity movements are no longer the main culprits as investors spot weaknesses beyond the current account deficits highlighted then in the so-called Fragile Five including India and Indonesia. This year general global drivers and specific economic, bond and stock market, and regional risks provoked discomfort, aggravated by crises in Argentina and Turkey. These trends will linger into 2019 pending further analytical rigor so that near-term allocation is again a function of detailed country and instrument evaluation. Through end-decade banking system health after an extended credit binge, and productivity prods to faltering growth will be paramount questions, as portfolio managers also prepare for broader landscape shifts. They will encounter index consolidation and redesign, and emerging markets themselves finally seizing control of benchmarking, capital flow direction and global monetary and trade leadership.

The monetary spillover from the US, Europe and Japan, was never decisively quantified, but tens of billions of dollars presumably went annually into higher return core and frontier stock and local and external sovereign and corporate bond markets. The infusion aided currencies, which reversed this year against the dollar with the Fed’s scheduled rate hikes. Commodities outside oil have not provided support, as agriculture and metals prices are flat or declining. Credit ratings were rising last year but since plateaued, with upgrades and downgrades virtually even. Volatility spiked the past few months as managers are under pressure to rotate into equities from bonds after the latter’s decades-long rally. Politics and geopolitics have dampened enthusiasm with new uncertainties about sound government practice and trade and investment relationships. Populism is prominent, with candidates reeling from the old “Washington consensus” of liberalization and privatization. War may still be a danger in Iran and the Koreas but is defined as well by commercial and financial conflict between the developed world and China in particular.

The International Monetary Fund recently again softened its 2019 GDP growth forecast, with the emerging market average at 5%, and only Asia exceeding that number. Domestic demand is sluggish alongside the traditional export-led model, and private investment has been chronically weak. With currency depreciation and higher energy prices, predicted inflation is the same 5% for no growth in real terms. Over the quantitative easing decade, central banks kept policies loose or flat, but their bias is now toward tightening to defend exchange rates and encourage bank deleveraging after prolonged double-digit credit expansion. Fiscal stimulus cannot readily absorb the slack with accumulated deficits to fund budgets and infrastructure. While the balance of payments has returned to current account surplus, often through import compression, the capital account can show not only portfolio outflows but unchanged foreign direct investment, according to the latest UN agency tally. Asian and Gulf foreign exchange reserves stabilized, but the Institute for International Finance regularly warns of thin short-term debt servicing cushions in a cross-section of countries.

Through 2020, external corporate debt, with hundreds of billions of dollars in annual issuance to outpace the sovereign version, faces large maturity humps. The past six months’ drought has ended but rollovers will be more difficult, especially if quasi-sovereigns at half the estimated universe are not backed by governments if facing default. Non-Western official and commercial debt holders may not follow established restructuring rules, as evidenced by the clash between the US and China over proposed Pakistan relief. Foreign investors own an outsize portion of local bonds at almost one-third the total; public equities have  embedded distortions with MSCI’s heavy Asian and tech weightings, and private equity has no standard index. In the next investing phase these benchmarks will combine, as JP Morgan has already signaled in bonds. Emerging markets themselves, after launching ratings services such as in China and Russia, will develop competing performance measures. They will better reflect so called “South-South” practice and fund flows, as combined market size converges with the 50% share of the world economy. These new gauges will routinely feature in future analysis, as supporting financial market breakthroughs like the BRICs bank, Yuan swap network, and new trade zones in Asia and elsewhere reinforce policy and performance self- determination despite the bumpy journey to a successor era.