Central Asia’s Belt-Road Divots

2018 July 20 by

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.



The Rohingya Crisis’ Brooding Business Agenda

2018 July 13 by

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

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

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

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


China-India’s Big Bet Boomerang

2018 July 6 by

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

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

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

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

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



Pakistan’s Third Strike Depreciation Drive

2018 July 1 by

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

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

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

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

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



The Asian Development Bank’s Blessed Bond Behavior

2018 June 25 by

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

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

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

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

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



ASEAN’s Malaysia Maelstrom Milage

2018 June 19 by

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

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

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

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

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

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


Iran’s Stifling Sanctions Soundtrack

2018 June 6 by

Following a currency crash and ban on parallel market trading in April that ravaged stock-market listed banks reporting a combined $4.5 billion in losses, the sector braced for further damage with President Trump’s decision to resume primary sanctions and scrap nuclear deal participation. They will target the central bank to block dollar access and cross-border correspondent relationships which had proliferated with Asian and European banks the past two years after the system rejoined the SWIFT payments network. In his second term Iranian President Rouhani had bad loan cleanup, officially at $25 billion or 10% of the total, as a priority following a 2017 International Monetary Fund report calling for a” comprehensive asset quality review and recapitalization plan.” He and a team of technocrats tried to pass legislation in parliament to strengthen independent supervision and modernize management and disclosure practice, but it was routinely sidetracked by conservative opponents eager to maintain insider state control and credit provision.

GDP growth is put at 4% for the fiscal year ended in March, despite oil shipments of 2.5 million barrels/day and non-oil exports each generating around $50 billion, following months of protests over poverty and unemployment and labor strikes over unpaid salaries. Although international reserves are over $100 billion, capital flight in the first quarter of this year, mainly through informal hawala channels, may have been $30 billion as the rial lost one-third its value against the dollar before the government imposed a single 42,000/dollar rate and barred individuals from holding more than 10000 euros. It introduced a new foreign exchange trading platform but has yet to define rules for business use, as companies continue to tap underground networks for funding needs as well as for money laundering and speculation. According to the central bank the net capital outflow in the first half of the last fiscal year was $6.5 billion as foreign direct and portfolio investment barely materialized despite the former’s $100 billion medium term goal.  The shunned Revolutionary Guard, whose stock exchange listed construction arm just announced 40 mega-projects to support the “resistance economy,” is still dominant across a range of industries as the World Bank Doing Business ranking is stuck at 125th place.

Fiscal and monetary policies have squeezed middle class households that placed their faith in Rouhani’s reform agenda and improved living standards with the six-nation 2015 sanctions lifting. The latest budget blueprint showed the military and tax-exempt bonyad religious foundations with the largest chunks, as food and fuel subsidies are curtailed and public investment for infrastructure is only 3% of GDP. High interest rates cap fixed investment at 20% of GDP, and the central bank recently floated bonds at 20% yields to try to soak up liquidity from the foreign exchange market. It now claims fluctuations will be limited to 5% annually without detailing intervention strategy or earmarking reserves, further eroding strained credibility prompting calls for governor Valy Allah Seif to resign.

Under compromise proposals for lawmaker consideration this body would not be autonomous but overseen by a “high council” of senior cabinet ministers and politicians. Moves toward Basel III and international financial reporting standards are on hold, as supervisors step back to deal with previously unlicensed credit providers run as pyramid schemes. They seized and merged several into new entities like Ansar Bank that will fall fully under prudential rules. Big banks like Sepah had to dramatically raise capital to meet a stiffer 10% of assets threshold in effect since 2017, as all of them on the Tehran stock exchange were ordered to retain profits. In a vicious debt triangle, commercial lenders owe the central bank hundreds of billions of dollars from decades of emergency lines, while the government owes them $15 billion for past budget borrowing. To clear the arrears and restructure ailing units new bonds are likely to be issued which would be placed with captive pension funds and other equally unhealthy and poorly managed institutional investors. The final workout tab could be $200 billion, and the current 35-strong sector could consolidate into a dozen groups, according to experts, with President Trump’s repeated sanctions now sharpening the blow.


Asia’s Green Bonds Green Light

2018 May 30 by

On the eve of its annual meeting, the Asian Development Bank, which has issued its own “green” bonds for clean energy projects, circulated a lengthy report from the ASEAN+3 local currency initiative calling for wider embrace of this structure to meet long-term low-carbon infrastructure funding under the UN’s Sustainable Development Goals and national plans. The Chinese government, which is furthest along in the region as a main component of the estimated $180 billion global market, sponsored the research to help bolster neighbors’ “modest” participation a decade after the European Investment Bank’s inaugural placement. In 2016 the mainland’s renimbi-denominated volume in the instrument was $35 billion, and elsewhere only Japan and Korea managed over $1 billion while Malaysia, the Philippines and Thailand had only single issues. Beijing has clear guidelines set by the National Development and Reform Committee, but “low awareness’ due to the lack of country policy and investor understanding is the prevailing trend in Asia where green bond markets are “immature” in comparison with Europe and North America, according to the analysis. It recommends an array of demand and supply promotion steps to create a viable project pipeline, which is the “binding constraint” since financing separately should be available.

Worldwide the buyer base is divided between traditional and environmental, social, and governance-oriented “impact” investors, with the latter taking half of recent activity in sample deals. Major providers like MSCI and Bloomberg have launched dedicated green share and bond indices, and stock exchanges in Shanghai, Shenzhen and Singapore designate these listings. The London-based International Capital Markets Association developed voluntary principles, and India is the only other example beside China in Asia of mandatory standards. Commercial banks are the leading names and the most common form is general obligation rather than project-specific. Green bonds carry marginally higher costs up to seven basis points due to stricter reporting requirements, but yields are ultimately identical to conventional offerings, market players believe. Among emerging currencies the Chinese renimbi dominates with a 10% global share as of June 2017, but the World Bank’s International Finance Corporation private sector-affiliate has also been active in Indonesian rupiah, Turkish lira, South African rand, and Brazilian real. The China Development Bank has been a top single name, and the asset class features prime credit ratings and average 5-10 year maturities which have catalyzed “tremendous” growth amid securities industry recognition of greater climate and fossil fuel risks.

A G20 study group in 2016 identified barriers which were repeated by ASEAN+3 investors and regulators, particularly the absence of shared definitions and norms. Asian issuers prefer official over industry direction, and await bond market linkage with Paris Agreement carbon reduction targets, possibly with new sustainability mandates for institutional managers. They noted faster approvals but the process can still lag conventional access, especially with controversies over “greenwashing” as natural resource lenders try to burnish poor environmental records. Regional representatives are observers for the Green Bond Principles first announced five years ago on proceeds use and disclosure, but they remain fluid and complex and the Chinese and Indian models do not reflect capacity and practice in other countries. Korea’s Hyundai Capital completed an electric vehicle flotation and Malaysia a solar plant sukuk, but East Asian banks have broadly avoided engagement. Responsible investing assets in Asia ex-Japan are miniscule at $50 billion or 0.2% of the total, and only a handful of houses have signed the UN’s Principles in that field. Green bond funds do not exist, and the proposed $2 billion pool between Europe’s Amundi and the World Bank unveiled at the Spring Meetings will likely dwarf all near-term potential launches combined.

The ADB calculates Southeast Asia’s infrastructure bill at almost $200 billion through 2030 and asserts that green versions are “well suited” to normal project and public-private partnership bonds. It urges “national inventories” of potential ventures, tax incentives and credit enhancements, and technical assistance and outside auditor fee coverage to advance the agenda. The central bank and securities supervisors can ensure financial institution exposure both as issuer and investor if they design an instrument regime and lower capital set-asides for such risk, the report argues. It envisions a cross-border green professional network to “scale up” this segment by finally planting roots, within fertile existing local currency bond size at trillions of dollars.






Bangladesh’s Unheard Crisis Relief Cry

2018 May 16 by

After a 2.5% first quarter loss on the MSCI frontier index as the only down Asian component, Bangladesh shares continued to be shunned by foreign investors on the headline Rohingya refugee influx now at 800,000, and banking sector balance sheet and management woes with bad loans at 10% of the total. Elections are also due this year with the opposition party leader unable to compete under corruption charges, and sporadic street violence erupting among rival political camps amid Islamic fundamentalist terror threats and military takeover rumors. The fifth anniversary of the Rana Plaza garment center collapse injuring and killing thousands also focused attention on unresolved worker safety issues in the mainstay export industry, as remittances from abroad remain uncertain with renewed local employment emphasis in the Middle East and elsewhere.

The spring IMF-World Bank meetings passed without a breakthrough on international development agency support for the refugee emergency, after long-serving Finance Minister Abul Maal Abdul Muhith, due to retire in his mid-80s, tabled an urgent plea in Washington. The World Bank has a dedicated $2 billion window in its poor-country IDA affiliate for global displacement, and Bangladesh may follow Jordan’s previous model and enter a separate “compact” which could promise labor reforms and other investment incentives in exchange for expanded duty-free preferences and aid from major trade partners. In February the Minister also revealed a higher recapitalization bill for half a dozen ailing state and private banks, after rescuing Farmers Bank at the end of last year after a depositor run on alleged fraud.   With chronic risk management and governance lapses, and a legal default process which takes years, overseas fund managers have avoided these listings on the Dhaka Stock Exchange (DSE), even though one-third the population is unbanked and retail products lag in particular that could take off.

GDP growth is 7% but the trade deficit doubled between fiscal years 2016-17, mostly due to capital goods imports in part for Chinese Belt and Road infrastructure schemes. $7 billion in power, rail and tunnel projects have been launched, according to the Washington-based Center for Strategic and International Studies database. The largest is the $4.5 billion Dhaka-Jessore high-speed railway, while a spinoff is planned from Chittagong to Cox’s Bazaar, the Rohinyga refugee camp base. Domestic taxes contribute little to these ventures since government revenue is only 10% of GDP, with less than 5% of registered companies paying VAT by Finance Ministry calculations.

Local banks with trade credit expertise participate in the transactions, but the 60 competitors in the system otherwise tend to chase the same family and state-owned company business. They have turned more cautious under a central bank directive to cut the average loan-to-deposit ratio to 85% by year end, with many institutions currently above 90%. The move has triggered a scramble to lure deposits, with rates doubling to 10%, as liquidity was already tight from borrowing following 2017 flooding and softer remittances. Banks are the main funding channel with the undeveloped bond market, and they have recently spurned dollar exposure with currency volatility in preparation for meeting Basel III capital and risk standards in 2019.

China’s Shanghai and Shenzhen’s stock exchanges will also take a 25% stake in the Dhaka bourse, beating out a rival Indian offer. Officials insist no political influence applied and that the former’s per share price was simply higher and also stressed small business access and free technical assistance. The sale was part of a long-term roadmap agreed after the 2010 crash, which will see the DSE itself go public and the introduction of new products like ETFs and stronger broker capital and professional requirements. It predicts 50 IPOs this year, as revamp and broader economic policies are designed to enhance the distinction with frontier market neighbor Sri Lanka, where shares rose 4% the first quarter on the MSCI Index. There China’s Belt and Road helped balloon debt to over 80% of GDP, and the International Monetary Fund rescue so far has barely moderated fiscal and external balances. A severe displaced population legacy likewise lingers from the civil war, but state bank and enterprise divestiture is at the heart of both countries’ unfinished structural reform agenda for too many sad anniversaries.


Central Asia’s Truculent Trio Test

2018 May 9 by

Central Asian financial markets lacked clear direction after a maelstrom of political, economic a banking system, and international lender cross-currents punctured early year euphoria. Only Kazakhstan is in a benchmark frontier equity index on the MSCI, while Azerbaijan and Mongolia external bonds are tracked on JP Morgan’s off-index NEXGEM list. In recent weeks Azerbaijan’s President Ilham Aliev won another term in a controversial election with suspect margins and turnout; Kazakhstan’s currency was battered in the wake of post-US sanction ruble selloff; and Mongolia got a mixed review under its International Monetary Fund program on lingering fiscal and financial system risks. Into the half year the specter of repeated commodity crisis has abated, but the Asian Development Bank (ADB) cautioned in its sub-regional forecast about output slowdown as government succession paths remain messy or murky.

Azerbaijan bonds were upset as major opposition parties boycotted President Aliev’s poll, and his handpicked election commission gave him an 85% result on 75% voter participation with “no irregularities.” One debate was held where rival candidates did not directly challenge his leadership, as Europe’s international observer mission highlighted the absence of “genuine competition” amid continued civil society and press curbs. Official statistics put first quarter growth at 2.3%, with the non-oil outperforming the hydrocarbons sector, although agriculture, construction and tourism all fell. The ADB predicts below 2% expansion for the year and 7% inflation with post-devaluation exchange rate stability, as the current account surplus tops 6% of GDP. Foreign direct investment was over $5.5 billion in 2017, 85% concentrated in energy and the Shah Deniz field in particular. According to the German head of the Foreign Trade Chamber, bilateral volume will languish due to “poor” export diversification despite Baku’s plans for new industrial plants.

The manat has been steady at 1.7/dollar, and the share of bank deposits in that unit roughly doubled to 40% the past year. The central bank cut the refinancing rate 2% to 11% in April and assured the public of ample cash on hand after spillover from Russia and Turkey troubles. However the restructuring of giant International Bank, to be prepared for privatization, is proceeding slowly as assets slipped below $5 billion awaiting foreign creditor approval of a $3.3 billion workout proposal. An audited financial statement has not yet been released for 2017, and eventual sale must be endorsed by the State Property Committee which previously blocked transactions.

Kazakhstan shares were up almost 20% on the MSCI frontier gauge in the first quarter, as growth came in stronger than expected at 4% with good mining and manufacturing contributions. The latter was aided by the Nurly Zher housing and infrastructure stimulus, and Economy Ministry steps to reduce paperwork requirements 30% to bolster small business. Higher oil prices and production joined with trade diversification to new markets like Vietnam to help the balance of payments and foreign reserves, at $90 billion including the separate stabilization fund. The central bank is easing as inflation may drop below the 5-7% target band, and it dismissed the 3% tenge decline over the week tighter US sanctions were imposed against Moscow as a bump.

Bank fragility stayed in the spotlight as parliament passed a bill to close capital flight loopholes, and another round of foreign currency to tenge mortgage conversion was completed using the pre-devaluation rate. The Halyk-Kazkommertsbank merger timetable slipped to the second half and Standard & Poor’s kept KKB at “B+” credit watch, as it called the combination a “challenge under weak economic conditions.” The state airline, uranium producer, and telecom operator will soon be offered in stock exchange IPOs, and officials travelled to China on a promotion tour, but investment adviser Rothschild urged a quicker pace of $70 billion sovereign wealth fund divestment including pre-offering sales.

Mongolian bonds rose as it got a third IMF tranche under its overall $5.5 billion donor package, following a growth upgrade to 5% on flagship copper project expansion. However the government demanded the extradition of the former prime minister from the US to face corruption charges, and the Fund warned of still outsize public debt at 85% of GDP. Double-digit bank bad loan levels and credit increases also endure, as legislators debate an interest-rate cap for borrowers that could again pave the way for Central Asia’s familiar boom-bu