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Iran’s Capital Markets Deal Bridge (Financial Times)

2018 August 9 by

Posted in: MENA   

As the US prepares in August to resume Iran’s commercial and financial isolation after President Trump’s decision to exit the JCPOA six-country nuclear freeze for sanctions relief agreement, Tehran has convened a so-called “economic war” council banning imports and free-market currency trading as the rial‘s collapse reached more than double the official 45,000/dollar rate. European and Asian signatories will be under pressure from Treasury Department exclusion from banking system access to sever energy, trade and monetary ties as a reported fifty multinational firms have already renounced future participation. The Brussels-based cross-border SWIFT payments network is also in the cross-hairs to end Iranian bank membership reopening correspondent relationships with official and private lenders, as local anti-money laundering guidelines were gradually adopted to meet global standards. Washington has already singled out Iran’s central bank, whose head was recently sacked, for supporting military and terrorist action throughout the Middle East, with the leading state-owned banks acting as conduits. The international organization may have little choice to either prohibit or strictly police cash transfers also used for normal export-import business.

However the banking sector, with a double-digit bad loan ratio from ailing government and real estate company borrowers, has struggled since JCPOA to provide routine funding. President Rouhani promised reforms in his second term that have been regularly blocked by conservative lawmakers, including stricter regulation toward Basel III norms, mergers and consolidations, and central agency nonperforming asset disposal. Capital market diversification was another strand but remains a missing link, with foreign investors only accounting for a sliver of stock exchange activity. The free float has been around 20% with badly-managed institutional investors, including religious foundations and elements of the notorious Revolutionary Guard controlling large blocks. The past two years, new domestic retail and wholesale players entered, alongside frontier market funds out of London and elsewhere, in an effort to improve liquidity and governance, and participants could point to incremental progress. Despite the banking and exchange rate dysfunction, the equity and nascent Islamic-style bond markets have rallied, with Tehran’s main index at a record. They are last resorts for savings and economic modernization, and continued international advice can encourage such internal change.

A full world boycott was last in place at the end of the populist free-spending Ahmadi-Nejad presidency, which invited deep recession and runaway inflation. The official and IMF GDP growth forecasts for the fiscal year beginning in March are still in the 4% range, but with currency depreciation and goods shortages the official inflation is back in double digits. Ministry technocrats pledge to maintain budget and monetary discipline, and the central bank bowed to market demands by launching a pilot foreign exchange platform for small and mid-sized enterprises. In external accounts, oil exports will shrink from the 2 million barrels/day before the renewed clampdown, which sparked an offsetting temporary price surge. China and India indicated they will continue imports under credit lines established in their own currencies. Turkey will ignore President Trump’s policy altogether as it continues financial market cooperation established through the Federation of Eurasian Stock Exchanges, originally backed in the early 2000s by the US Agency for International Development to promote common trading and regulatory infrastructure. Along with Russia which recently launched its own ratings agency, Turkish banks and investment firms have lined up to help Iran with an inaugural sovereign bond issue. According to the IMF, Iran’s estimated reserves are $125 billion, but it may need refinancing to clear previous foreign contractor arrears. Western raters have been reluctant to engage under the remaining US secondary sanctions since 2016, and in view of questionable account disclosure and corruption management inviting a low speculative grade.

The country is in the bottom tier of Transparency International Rankings even as the Rouhani administration and average citizens have tried to expose wrongdoing through official pronouncements and messaging apps. The government recently published a list of luxury importers benefiting from the preferential exchange rate, and previously cited unregulated financial firms operating pyramid schemes. The popular encrypted Telegram was blocked for security reasons following Washington’s deal pullout and street unrest, but Iran’s experienced software developers, often touted as public and private equity plays, are devising alternatives. A residual capital market corps of experts from the US, Europe and Asia could help advance corporate governance and financial system diversification principles, and the six parties to the original anti-nuclear pact can agree on a common waiver for such technical exchange as sanctions revive. The effort could work to cultivate a new banking and securities professional class, and pave the way for frontier market entry and recognition when foreign investment is again viable with outside and internal support.

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The Taper Tantrum’s Repeat Rejection

2018 August 9 by

Posted in: General Emerging Markets   

Early year optimism that 2017’s double-digit emerging market stock, bond and currency upswings could persist was overtaken by opposite sentiment and direction toward mid-year, with all asset classes in decline amid fears of a liquidity and economic squeeze reprising the 2013 US Federal Reserve-induced taper tantrum. Industrial country central banks are now in the end game of quantitative easing which contributed to developing world portfolio inflows, but over a decade the correlation could never be precisely proven, and major emerging market monetary policies were often loose as well.  Average GDP growth and inflation forecasts in the 4-5% range have been relatively constant over the past six months, and trade and geopolitical conflict risks were heightened since the onset of the Trump administration’s bellicose commercial and diplomatic stances. Renewed emerging market qualms should not revert to 5-year old explanations of external forces, including the higher dollar, that help dictate fate but instead reflect the inability to construct their own global leadership and reform narratives for the next five years.

According to fund trackers, foreign investor inflows turned to outflows in May, but net allocation was $20 billion for local and hard currency bonds, and $35 billion for core and frontier equities at end-June. Stock market earnings and valuations were steady, with the latter still at a sizable discount to advanced economy counterparts, and international sovereign and corporate issuance was on target with respective $100 billion and $200 billion-plus gross totals, and rollovers managed with recycled cash flows. Almost all currencies were down against the dollar, but with the exception of countries like Argentina and Turkey with large payment imbalances, the trend retraced previous appreciation, and central banks and securities regulators did not panic as they prepared policy and rate defenses. Argentina bolstered its backstop by turning to the International Monetary Fund for a classic standby program, with $15 billion immediately released from a $50 billion line to cover external financing needs into next year. Outright crisis was further contained with MSCI’s decision to reinstate core index status, reflecting capital market modernization under the Macri administration which stood out in the universe as a distinct “second generation” agenda.

China, in contrast as the biggest MSCI weighting, got only a short-term bump from “A” share inclusion as investors bridled at poor governance practice at both state and private company listings, amid festering trade and debt concerns that are widespread in Asia and other regions. The counter-strategy to breakup of industrial/emerging market pacts like the Trans-Pacific Partnership and NAFTA is formation of pure developing economy blocks, where progress has been slow despite stated ambitions. TPP has yet to resurrect as a bi-regional Asian-Latin American arrangement; the pan-European single market is in jeopardy with Brexit and reduction of Eastern nation cohesion aid; and even with breakthroughs like Africa’s new continental zone the details are murky under long phase-in periods. These fresh deals are more urgent in view of the flat $800 billion in foreign direct investment in 2017 the United Nations recorded in the developing world, historically a multiple and driver of the portfolio number.

Emerging market foreign exchange reserves have rebounded from a year and a half of depletion, especially in Asia and the Gulf, but external corporate debt is under a heavy repayment schedule in 2019, and private borrowing in all forms including household remains a vulnerability despite official deleveraging campaigns. Credit has continued to outpace GDP growth over the past decade, and banks have not reckoned with bad loans under an extended favorable business cycle from liquidity-fueled demand at home and abroad that may now be turning, especially without underlying productivity gains that should also be a policymaker priority. As the asset class tackles these issues on its own terms, second half results are poised to selectively improve in line with country commitment, and a second post-taper tantrum wind can banish the concept as a different future rationale dominates.

 

 

 

 

Asia’s Scarce Safety Stopgaps

2018 August 2 by

Posted in: Asia   

At end-June Emerging Asia slightly outperformed the MSCI benchmark with a 5% loss lower than other regions, but all core and frontier markets were in the red. On the former index Indonesia and the Philippines dropped 20%; Korea, China “A” shares and Pakistan were off 10-15%; and India, Malaysia and Thailand fell 5-8%. On the latter Vietnam, Bangladesh and Sri Lanka had single-digit reversals, with Vietnam’s the least at 2%. On the main gauge only Turkey’s 30% plunge was worse, and of the fifty exchanges tracked in total, less than half a dozen had positive results.

According to fund data providers foreign investor outflows were heavy in May and June, although net equity inflows were $35 billion at mid-year. Allocation is a multiple of bonds for the first time in years with higher global interest rates, as portfolio managers target companies with earnings above economic growth that can also endure the region’s cascading trade and currency upsets with the US administration and dollar. However into the second half all sectors from consumer goods and financials to manufacturing and tech exports will stay under pressure, as geopolitics also weighs with Beijing-Washington confrontation and the unresolved Korean peninsula standoff.

China’s index and the renimbi stumbled to erase momentum from “A” share addition, as officials reported that just one out of almost 300 qualified foreign institutional investors put in money in June. The currency softened 3% against the dollar, with new export order contraction and the manufacturing PMI at 51.5 over the month. With international reserves steady at $3 trillion, analysts speculated that depreciation may supplement the bilateral tariff retaliation strategy, but offshore state and private corporate debt is also near $1 trillion and such a move hurts repayment capacity. Property developers that issued $100 billion in bonds from January-May are already under instruction to slow borrowing, and their shares have lagged the market for months. The government has enlisted seven agencies to combat price and sales “irregularities” as it tries again to damp industry “overstimulation.” Bank research increasingly describes an outright bubble, with values doubling the past two years in second and third-tier cities, and the clampdown is expected to reduce GDP growth to 6.5% or below in the second half.

Although the central bank urges stock market calm and rejects comparison to the 2015 scare, a leaked state think tank report warned of “financial panic” with leveraged funds back in force. Monetary policy pledges “prudent and reasonable” credit growth, as the reserve requirement was again cut to release $100 billion in liquidity nominally for debt-equity swaps and small  business lending. Investors remain wary over bank health, with the state enterprise liability/asset ratio unchanged at 60% despite double-digit profit increases. The bear market infected neighboring Hong Kong “H” listings as well, and muddied Xiaomi’s much-touted IPO there at the end of the period. Taiwan also fell into the negative column on trade war high tech supply chain damage, as the President’s popularity continued to erode halfway through her term.

Indonesia was forced to raise benchmark rates to defend against rupiah weakness and capital outflow as President Jokowi began to gear up the reelection machinery with appeals to economic policy and religious moderates. India’s President Narendra Modi too prepared his extended bid as the rupee neared a record low 70/dollar with a rising oil import bill, and the central bank intervened with its hundreds of billions of dollars in available reserves. Although valuations dropped from lofty 20 times earnings levels, major family-owned companies are in debt restructurings under new insolvency procedures designed to clean up bank non-performing portfolios and high-level corruption around credit decisions, with success still elusive on both fronts. Korea enjoyed a bump with the launch of “reunification funds” before sentiment receded with renewed name calling by  Pyongyang, and Thailand received international community support for its daring soccer team cave rescue which did not translate into equity buying. Pakistan after a first quarter bounce continued its drag into July’s national polls, with former Prime Minister Nawaz Sharif sentenced to a decade in prison for embezzlement. The country is trying to avoid the confinement of another IMF program, as Asia’s escape routes for shaken shares are set to narrow the rest of the year.

 

 

 

 

 

 

Ukraine’s Court Jester Jostle

2018 August 2 by

Posted in: Europe   

Ukraine stocks and bonds were on edge though the half-year as decent growth collided with anti-corruption failure to unlock IMF aid, going into the election cycle with President Poroshenko’s popular approval in single digits and perennial candidate Tymoshenko the front-runner after her rocky previous tenure. The MSCI frontier index was flat and fixed income struggled with debt repayments due to double to $7 billion next year, almost half of current reserves. First quarter GDP expanded 3% on improved metal exports and private consumption, but the rebound paled against 2017’s 15% contraction. Inflation is still at that level after sharp currency depreciation, bad weather affecting agriculture in the south which could halve the grain harvest, and the border war with Russia with its lingering bilateral export embargo. Duty free quotas under the EU free trade area do not match market losses, and the current account deficit has only remained a manageable 2% of GDP through slashed imports. The main inflow is $10 billion in remittances from Poland and other neighbors given miserly wages at home. The US and Russian Presidents met for a mid-July summit with the Minsk peace process stuck, and the Trump administration yet to convey support for the $17 billion IMF program, only half disbursed with the inability to meet fiscal and structural targets. The long-debated anti-corruption court became law, but was essentially gutted with appeals sent to the regular judiciary. The budget deficit could be double the 2% goal with gas charge delays and a pre-election spending splurge. The central bank leadership has changed after sector rescue and has monetary policy on hold, but may be forced to tighten as debt default jitters again emerge with expiration of the initial big haircut deal. Opposition party stalwart Tymoshenko won international sympathy for her reported mistreatment as a political prisoner, but may be reprising a populist economic platform that regularly clashed with promised Fund loan adjustments.

More successful Balkan pupil Serbia was off 1% in its MSCI component as the Q1 growth pace neared 5% on buoyant domestic demand, with investment also spurring an import surge in external accounts. Inflation is under 1%, as the central bank in contrast with the surrounding region has battled currency appreciation with regular intervention.  Croatia was down over 10% with growth at half its neighbor’s pace ahead of the peak summer tourist season, amid reports of widespread labor shortages. Early elections may still be called with the ruling coalition hanging by a thread after resignations and infighting over the collapse of the Agrokor conglomerate, employing tens of thousands with EUR 8 billion in debt. Hundreds of representatives gathered in a Zagreb arena in July, to reach an equity conversion and loan write-off deal leaving Russian state banks with 45% control.  A special law ordered the restructuring, with the former chief executive, who escaped to London, and associates still under investigation for criminal fraud. The settlement came a week before a rescue deadline under the statute, and officials hailed it as an antidote to “illiquidity and bad corporate conduct” with implementation due into next year even if the powers in ultimate charge are also reshuffled.

Asia Local Bonds’ Trade Tantrums

2018 July 26 by

Posted in: Asia   

The Asian Development Bank’s mid-year local bond publication described unfavorable yield, debt, currency and trade trends through May, as market size in nine countries increased only 1 % in the first quarter to almost $13 trillion, 70% from China. Benchmark rates rose everywhere except China’s as the central bank cut bank reserve requirements, and all currencies dipped against the dollar aside from Korea’s as pre-summit rapprochement with the North bolstered the won. Indonesia, India and the Philippines also tightened monetary policy, with the region’s corporate and household debt buildup “exacerbating risk,” according to the ADB. Credit default swap (CDS) spreads widened in most markets as a broader sentiment indicator, and foreign ownership fell across-the-board as early year portfolio inflows turned to outflows. Emerging market turmoil outside Asia, notably  in Argentina and Turkey,  injected volatility and the trade battle between Washington and Beijing against the backdrop of scheduled Federal Reserve rate hikes will continue to “adversely affect” economic and financial conditions, the survey warned.

The respective government and corporate markets were $8.5 trillion and $4.2 trillion at end-March, with the bond total equal to 70% of gross domestic product. Issuance was off 10% for the second consecutive quarter, mainly due to phasing out of Chinese local government refinancing. Indonesia’s near 40% international ownership portion was pared most on “vulnerability concerns,” followed by reductions in Malaysia and Thailand. As the rupiah depreciated Indonesia’s central bank lifted the policy rate 50 basis points in two meetings as yields on the 2-year benchmark instrument spiked. Malaysia hiked 25 basis points as early as January ahead of elections, and the Hong Kong Monetary Authority was forced to intervene under the currency board regime when the local dollar weakened. China defied higher yields as growth is set to moderate to 6.5% this year in the ADB forecast, and Bloomberg’s Global Bond Index announced the addition of Yuan-denominated sovereign and state bank offerings. According to the document world economy “momentum” explains upward rates more than inflation, which is projected at a relatively stable 3% in developing Asia in 2018 and 2019

In April Indonesia, Malaysia and Thailand experienced bond and stock outflows, and India and the Philippines were bottom currency performers on worsening current account deficits. Indonesia’s CDS premium jumped 35 basis points on financial risks, while Malaysia’s bump was primarily on political uncertainty as the historic opposition party administration took power. The ten ASEAN bond markets at close to $1.5 trillion combined led first quarter growth at an over 3% clip, with Thailand’s largest $365 billion one driven by corporate activity. Malaysia continued to dominate the no-interest Islamic sukuk space, with $200 billion outstanding or 60% of the total.  Singapore mounted a state company infrastructure push in its $285 billion market, and Vietnam as the smallest at $50 billion had the fastest 8.5% uptick on a central bank placement program to sterilize foreign reserve inflows. Korea’s second ranking $1.2 trillion corporate segment was popular with foreign investors, as geopolitical tensions faded with a landmark meeting between the two Korean leaders.  Philippines’ issuance shrank the most in the first quarter, down one-third to $6 billion, after a large retail buyer outreach the previous three months. However intra-regional local currency transactions doubled to $11 billion for the period, 80% of them from China and Hong Kong in their respective denominations, but also including Thai baht power company ones from Laos.

From January-April in contrast external bond hard currency volume in dollars, euro and yen was up 12% over 2017 to almost $120 billion, with only Korea and Malaysia declining. China approached 60% of the total, but offshore activity was flat with access curtailed for riskier names under Beijing’s deleveraging campaign. The ADB noted that after floating $25 billion in “green” bonds last year Chinese emphasis is on carbon emission control projects, and new certification principles under consideration in ASEAN should expand this version regionally. In Korea banks and insurers were large participants, Indonesia placed sukuk abroad, and a Vietnamese corporate returned to the market for the first time in five years. With sudden interest there, the securities regulator in Hanoi imposed a margin lending policy, aimed at individual investors requiring a 60 minimum deposit, as Asian bonds otherwise feature less margin for gain into the second half.

Corporate Debt’s Mystery Owner Unmasking

2018 July 26 by

Posted in: General Emerging Markets   

With the CEMBI off 2% in the first half as spreads over US Treasuries head toward 300 basis points, research houses have tried to emphasize crisis insulation through widespread local and dedicated investor ownership, which together control over half of eternal corporate bonds according to JP Morgan estimates. So-called global cross-over managers account for another 10%, while roughly 20% of holders are unknown, as the $100 billion benchmarked assets figure is likely understated. Asia has the top domestic base at 80%, and Latin America is at the opposite extreme at10%, while Europe and the Middle East are at 20% and 40% respectively. Under broader analysis of fixed income indices $275 billion may be the total corporate bond allocation including quasi-sovereigns from the dedicated category, and a breakdown of 250 public funds showed 25% exposure, half concentrated in energy names. Chinese onshore investors mainly buy their own issues, and Asia credit funds with over $100 billion in assets are another regional force alongside commercial and private banks. Insurers from Taiwan in particular with over half of portfolios in overseas bonds have also been active, and big Korean institutions likely buy their own paper. Pension funds in Chile and Peru may be leading corporate holders across Latin America, while in Europe Russian and Turkish managers absorb national issuance. US high-grade and high-yield funds participate at under 5% of totals and European counterparts have entered at greater weightings and lower asset sizes translating into a $20 billion inflow.

Gulf banks and institutions are comfortable with Cooperation Council dollar-pegged corporates, with an under 5-year maturity preference. Emerging market investors have otherwise been underweight for years with commodity price, sovereign support and corporate governance qualms. Fiscal balances are up with better oil and tax revenue, but ratings have not been upgraded as public debt ballooned 40% in Oman, Qatar and Bahrain. Qatar’s preparations for the next World Cup have not been interrupted by the trade boycott as long-term gas supply contracts provide ballast. Bahrain’s deficit is almost 10% of GDP and foreign reserves are minimal, as Saudi Arabia and the UAE are assembling another aid package after extending one to neighboring Jordan after another Syria refugee influx. Saudi Arabia’s Aramco IPO was again a hot item as MSCI elevated the stock market to the core universe next year, as the royal family was also pressured to boost oil output to cover the US Iran deal withdrawal. It won international plaudits by finally allowing women to drive, but drew condemnation on systemic gender inequality and disease and destruction associated with the anti-rebel war in Yemen, where a strategic port was the scene of recent fierce battle. In the crossfire Iraq has escaped notice, after elections should keep the al-Abadi government in place in coalition with a Shia cleric previously in opposition. The Chinese will offer $10 billion in aid for an oil pipeline and other projects, as the post-ISIS reconstruction tab was put at $90 billion at a donor conference. The IMF program missed targets to delay disbursement before the polls, in contrast with Egypt where fiscal and structural milestones continue to be met with a possible accord beyond 2019, when two dozen state company exchange listings will seek new ownership.

Central Asia’s Belt-Road Divots

2018 July 20 by

Posted in: Asia   

A new International Monetary Fund research paper predicts “massive” investment inflows into the Central Asia-Caucuses (CCA) from China’s Belt and Road Initiative the next decade, while citing a long list of banking and capital market, fiscal and monetary policy and trade and business environment changes needed to handle the influx. External sovereign bond performance from the eight countries surveyed, including Azerbaijan, Kazakhstan, Georgia and Tajikistan, was sluggish in the first half as investors soured on illiquid frontier market plays with higher global interest rates, and recognized the area’s continued currency, commodity, remittance and debt shocks. The Fund noted strides since 2014 in economic diversification and integration, exchange rate flexibility and private sector-led growth, but called for greater tariff and non-tariff “opening up” beyond World Trade Organization membership and capital account liberalization. It urged financial sector and structural reforms to improve the lending and infrastructure foundation for “full benefits” under BRI and other cross-border projects.

Regional cooperation has also come through the Eurasian Economic Union (EEU) with Russia and other pacts, but low scores persist on trade intensity measures such as openness and value chain participation. Exports concentrate in a few products, with a decade-long import compression trend among both oil consuming and producing countries. Despite aggregate $350 billion GDP in the eight markets, intra-CCA commerce around 10% of the total is “low by international standards” due to administrative and currency restrictions. Average tariffs rose from the previous 4% when Armenia and the Kyrgyz Republic joined the EEU, and Kazakhstan and Uzbekistan ban and impose quotas on a wide range of items. The BRI, already with $10 billion in investments, has been underutilized as a commercial corridor into Europe’s supplier network, according to the report. The WTO in turn has yet to admit Azerbaijan and Turkmenistan as members, and the region has not implemented the 2017 facilitation agreement on customs automation and simplification.

Capital inflows have been flat the past decade mainly in the form of foreign direct investment, and energy exporters Azerbaijan and Kazakhstan also receiving a modest portfolio version are the overwhelming targets. While Armenia and Georgia lifted exchange controls, they remain in place across the CCA, especially with underlying bank fragility and high dollarization ratios. Fiscal deficits reached 5%, and public debt 50% of GDP in most of the group in the 2014-16 crisis period, and tax and spending adjustments are mixed while binding credible “rules” institutionalizing them are absent. Government wage bills and subsidies are bloated, and public investment lacks efficiency and productivity tests for BRI projects to assess merits and limit liabilities. Interference continues in exchange rate and monetary policy, as most of the profiled countries are reluctant or do not have technical capacity to allow respective free-float and inflation-target regimes. The central banks carrying out these functions are often not independent or transparent in practice, and local currency use can be discouraged by prudential rule distortions.

Bank asset quality and competition were weak before the latest balance sheet scare, which prompted large-scale rescues and restructurings. Azerbaijan’s biggest state-owned lender is in voluntary debt rescheduling equivalent to 9% of GDP, and Kazakhstan’s two leading units merged in 2017 after the government injected billions of dollars in capital and liquidity support. Bad loan ratios encompass a wide range from 5% in Georgia to 50% in Tajikistan under local classification criteria, and financial inclusion lags other developing economies, with commercial bank household deposits at 30% of GDP. Regular surveys reveal scant saver trust and borrower applications due to steep interest rates and paperwork requirements. Credit growth has sputtered since 2015, and correspondent relationships were also severed with foreign counterparts on creditworthiness, integrity and business size concerns, with US providers entirely pulling out of the Kyrgyz Republic. The non-bank share of financial system assets is small with “underdeveloped to nonexistent” stock and bond markets, as operating and supervisory frameworks do not meet emerging market standards. Kazakhstan’s launch this year of the Astana International Exchange to remedy these defects is “ambitious” in view of outstanding governance issues and rival regional hubs in Asia and the Middle East with better frontier investor records, the report suggests in a likely preview of second half  disappointment.

 

Central Europe’s Forgotten Convergence Crusade

2018 July 20 by

Posted in: Europe   

With the main Central Europe stock markets in the Czech Republic, Hungary and Poland beaten up through the first half, private equity competitors have moved to urge rediscovery of their asset class marginalized over the past decade, with less than $1 billion in funds raised last year according to industry association EMPEA, just 1% of the broader region total. Despite relatively high-growth consumer-driven economies with a combined 120 million population among a dozen EU member states, inflows are a tiny fraction of the pre-crisis level, when excitement peaked over post-communist income, competitiveness and earnings “catch up.” From 2006-08 $11 billion was easily solicited on strong returns, with individual fund closes above $500 million targeting company privatization and restructuring. Since that period, only half of managers have launched another vehicle, as popular telecoms plays faded. Engineering and technology is a new focus, and exits have included public share offerings in Budapest and Bucharest alongside traditional trade sales. The private capital penetration ratio is 0.1%, and although currency and political risks are favorable versus other emerging markets deal size is a constraint. Outside active development institutions like the EBRD and EIB with a dual smaller transaction mandate, general partners are hard-pressed to allocate several hundred million dollars as most commitments concentrate in the $50 million range. Domestic pension funds are typically absent, with a public instrument preference or bars to speculative venture capital participation. Poland, Romania and the Baltics are exceptions, but their engagement is “piecemeal,” the analysis suggests. It adds on the positive side that fund relationships have developed over decades and valuations are low, with recent buyouts under six times earnings. Low to middle market funds between $100-250 million are an open space, and credit could be offered with equity, experts believe. Poland has absorbed one-third of activity historically, and Southeast Europe and the Balkans are underrepresented, but for private managers to jump in, development agencies must take the lead. Poland’s future in turn is under scrutiny with a populist government emphasizing state intervention already eliminating the voluntary pension industry.

Russia and Turkey were not covered but managers have soured on their prospects too in country choice surveys. Russian securities are under US and EU sanctions, but oil and gas plays have recovered with higher prices as re-elected President Putin again promises economic reforms, with technocrats including former Finance Minister Kudrin in line to rejoin the cabinet. Fiscal discipline may involve military spending cuts and raised retirement age, as monetary policy progressively loosens with rate easing. The bill for big private bank rescues may reach $50 billion as secret stakes and deals with government giant VTB were revealed. The other state behemoth Sberbank meanwhile shed its Turkish subsidiary nominally to focus at home, as concerns also mount about the country’s overstretched banks and economy. President Erdogan handily won re-election, although opposition parties widened their parliament bloc, as financial assets continue to perform at the bottom of the regional pack. With the lira’s double digit depreciation family conglomerates, which must roll over overseas credit lines, are suddenly in renegotiation mode and the outcome may further unsettle byzantine central bank and political standoffs.

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.