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


China’s Teflon Tariff Tiffs

2018 May 3 by

As China and the US continued their cycle of equal tariff retaliation on agricultural and industrial goods and threatened tighter investment rules, Beijing accused Washington of self-inflicted wounds, with exports now half their GDP portion of a decade ago at 20% as the tougher Trump administration stance was described as a global trade system danger. Initially $50 billion was at stake for thousands of Chinese products, but analysts dismissed the cost with calculations that an across the board charge on all American shipments would dent growth less than half a percent. The bilateral trade surplus continues to increase in nominal terms at $55 billion for January-February even with 3% renimbi appreciation against the dollar, but a proposed non-tariff crackdown on so-called “Made in China 2025” high-tech reach has drawn intense business and diplomatic focus. The confrontation looms as reputed anti-China hawks Pompeo and Bolton were appointed to top foreign policy posts, and the BIS issued a “code red” warning of banking stress largely overlooked during the spat. The Beige Book lauded “strikingly consistent” Q1 economic results with reservations about commodities and property, as the official PMI topped 51 in March and retail sales and fixed investment were up almost 10%. Consumer inflation was 3% on higher food prices as the producer reading retreated to under 4%. While Washington relations withered Australia inked an expanded currency swap line and local bonds were added to the benchmark Barclays Global Index at a 5.5% weighting as of next year, which could eventually spur $250 billion in inflows, according to estimates. February international reserves were steady at $3 trillion, one-third in US Treasuries, as rumors flew that these holdings could feature in future beyond-trade reprisals.

At the People’s Congress the economic and financial affairs group was upgraded to a commission and new top advisors and regulators were appointed to “work decisively” for risk control. The deputy central bank governor, educated in the US, assumed the helm and will implement President Xi’s restructuring incorporating insurance industry oversight under stronger Communist Party guidance. The securities body will stay separate, as the communiqué urged faster local government and state enterprise deleveraging. Household debt may also be in the 25% of GDP range from single digits a decade ago if peer-to-peer lending not captured in statistics is included. Shadow banking will be subject to harsher disclosure and capital adequacy treatment to “eliminate arbitrage” and an authorized digital currency will be developed. The repo rate was hiked as big banks reported improved profits with second-tier competitor flight. Credit rose 12% last year, with mortgage value at double that pace. The IMF’s Financial Stability Board found that China represented 15% of the world’s $7 trillion non-bank loans for “systemic risk.” Overseas conglomerate Anbang received RMB 60 billion from a public rescue fund to protect insurance policyholders and bank exposure as its former chair faces criminal charges and stakes are sold off. Tech bellwethers like Alibaba are under prodding to list at home and repatriate funds under a new China Depository Receipt program, as the Finance Ministry charted a 10% state company debt jump to $17 trillion in February. Property developers continue to clog the offshore and onshore issuance pipeline as a national tax will be debated in parliament again unlikely to stick.


Myanmar’s Reform Wave Riptide

2018 April 28 by

As the US and EU debate tougher trade and diplomatic sanctions against Myanmar for expulsion and killing of Muslim Rohingya refugees, after crossing the border by the hundreds of thousands into Bangladesh and now fleeing further South by boat ahead of the rainy season, the two-year old government of Aung San Suu Kyi has also come under harsh international community criticism for economic policy lethargy. The IMF in its March Article IV report joined alienated investors in urging a “second reform wave,” after a number of overdue fiscal, monetary, business and banking steps during the initial transition as outlined under a dozen-point ruling party National League for Democracy plan. These themes were elaborated under a 250 provision blueprint in February spanning objectives from state enterprise overhaul to judicial modernization without designating priorities or assigning responsible ministries.

This muddled vision has kept the country at the bottom of the World Bank’s Doing Business rankings, especially in minority shareholder protection, bankruptcy handling and contract enforcement. It leaves excess bureaucracy and infrastructure defects that hamper normal commercial and credit transactions, despite headline growth and inflation progress. Tax revenue is just over 5% of GDP to embed budget deficits, and implementing rules are still lacking for the new investment code permitting 35% international ownership in local firms. The central bank inaugurated a bad loan resolution push which has stalled without broader direction, as State Counselor Suu Kyi and her team continue to shun technocrats and political outsiders who could contribute sharper business-friendly thinking, including around the moribund Yangon Stock exchange with a handful of illiquid listings.

The IMF report refers to the “downside risk” of the Rakhine State humanitarian crisis, despite limited immediate economic effects. Total reconstruction and social costs have yet to be tallied even as few refugees are likely to repatriate voluntarily, and aid partners may withdraw as investor sentiment sours in protest of documented abuses. Focus there may detract from creation of an “overarching private sector roadmap” for near-term structural changes and productivity gains that can also set a path toward Sustainable Development Goal achievement. Medium term GDP growth will be 7-7.5% with continued foreign direct investment and commodity price improvement, despite a chronic current account gap, but reduced donor  budget support would force repeated reliance on central bank funding at the same time it is trying to curb banks’ runaway 25% credit expansion to the construction and real estate sectors. Financial stability would then be undercut on both fronts, the Fund suggests.

Fiscal year 2017/18 growth is estimated at 6.7%, on agricultural recovery and a 40% rise in rice and textile exports notwithstanding mixed tourism. Inflation should be in the 5% range, and the fiscal deficit will rise to 3.5% of GDP as the authorities target a central bank domestic debt buying ceiling at 30% of the total. A main thrust is to cut state company losses which affected one-quarter of them led by the electric power operator. Tax law regimes await thorough updates for personal and corporate income, and in the mining and natural resources industries. The currency was firmer in 2017 compared with the previous year’s depreciation, but dual official and informal rates persist despite calls for greater flexibility. Foreign exchange auctions get minimal bank and non-bank participation and do not aid price discovery and the 0.8% daily trading bond could be formally removed. The system can still be managed but should aim to avoid intervention outside of “disorderly conditions” to enable reserve buildup beyond the current $5 billion or three months imports, the IMF recommends.

Monetary policy in turn should move to interest rate liberalization and inflation targeting, as the interbank and government bond markets develop with introduction of a yield curve. The central bank is not independent but has imposed reserve requirements and bolstered supervisory capacity with expert technical assistance. New capital, liquidity, loan classification and large borrower exposure rules were introduced nine months ago. Private and state run units, with respective two-thirds and one-third asset shares, are undercapitalized and unprofitable. The former must whittle down real estate-related overdrafts, and the latter should “move ahead” with restructuring, both the Fund and international banking analysts argue. However this cleanup has languished along with the broader post-socialist era sweep, as frontier market portfolio investors indefinitely relegate allocation to the dustbin.


Asia Local Bonds’ Yanked Yields

2018 April 20 by

The Asian Development Bank’s March regular survey of nine domestic bond markets, with insights from the last quarter of 2017 through February, alerted the region to higher long-term government yields and private financial stability concerns around global central bank liquidity retreat and economic growth uptick. Market size topped $12 trillion at year-end, and mainland China accounted for half of final quarter issuance as the government-corporate split stayed 65%-35%. It is 70% as a portion of East Asia GDP, and net overseas investor inflows were strong, with Malaysia in particular benefiting while Korea was the exception with outflows. From December- February 10-year instrument rates rose everywhere but in Vietnam’s smallest $50 billion. market.

The report suggested that Japan’s March decision previewing 2019 monetary policy “normalization” with the US and EU would reinforce this trend, alongside the region’s steeper 3% inflation forecast with another year of 6%-range output expansion. It noted that 2-year yields briefly fell with portfolio rebalancing, and that Malaysia’s foreign ownership share increased to 30% as the central bank hiked rates in January. Tightening will support currencies but hurt stocks as valuations also adjust to better reflect corporate earnings, and investors “closely monitor” listed company debt-equity ratios. The ADB warned at the same time that rapid corporate bond and household loan accumulation could dent consumption and balance sheets and pose financial crisis risk, while global trade is also under an internal and external competitive and policy vise. It urged greater deleveraging and anti-inflation stances for more solid medium-term bond markets even as the current “foundation” is intact, and cited studies associating private debt overhang with asset price and growth collapse.

China is 70% of the total outstanding and quarterly growth has been around 5% as officials impose credit restraint, including a local government placement ceiling. Second place Korean activity was flat after the central bank lifted the policy rate in November. Thailand is ASEAN’s largest market at $350 billion, with Malaysia slightly behind as the Islamic sukuk leader at 60% of its volume often for infrastructure projects. Indonesia is half as large at $185 billion, with shariah-compliant central bank bills a main offering. The Philippines $110 billion market increased most among the group in the final 2017 quarter, with retail Treasury bonds diversifying from traditional institutional auctions. Corporate activity is minimal there as well as in Indonesia and Vietnam at amounts under $30 billion. On an annual basis East Asia’s local currency pile was up 12%, with Indonesia’s 40% foreign share the highest after another BBB sovereign ratings upgrade in December. At the other extreme international ownership is just 3.5% in China, and 11% in Korea, where outflows spiked on end-year maturities and rate hike expectations.

Cross-border transactions in local currency, mostly from China and Hong Kong topped $4 billion in the last quarter, with the Korea Development Bank the single biggest name active in multiple denominations. The Government of Laos completed a $450 million operation in Thai baht and the hydroelectric Nam Ngum 2 Power Project tapped the same pool as the country accounted for 15% of the total. Malaysia’s Maybank sold $150 million in Chinese renimbi and Hong Kong dollar bonds, and Singapore dollar and Philippine peso-denominated ones from other jurisdictions also featured.

Emerging Asia issuance in G-3 currencies was a record $350 billion last year, up from $215 billion in 2016.  The dollar was the 90% choice, and Chinese companies led the pack with $225 billion outstanding although most ASEAN members also participated. China completed a $2 billion sovereign dollar issue, the first in fifteen years, without a credit rating. In China and Korea banks and real estate firms were the most prominent by sector, while Malaysia stood out as a decliner with its ban on offshore ringgitt trading. Spreads were unchanged between prime and low-rated companies over the period, but in a cited initiative Thailand’s securities commission introduced new investor protections in case of default. As the size spectrum from China to Vietnam announced annual borrowing plans, several bilateral and multilateral cooperation pacts on information sharing, trading and currency settlement were inked, according to the review. They may as well be precautionary, and a form of joint leverage against the ADB’s predicted financial version.




Asean’s Split Sentiment Sentry

2018 April 6 by

ASEAN’s main stock markets were mixed heading into the first quarter close, with Thailand and Malaysia at the front with respective 10% and 5% gains, and Indonesia and the Philippines behind with average losses over 5% on the MSCI Index. Currencies started the year strong, but in February the prospect of multiple US Federal Reserve rate hikes and trade spats sparked regional local bond selloff, with $3 billion in outflows. Politics has injected its own volatility with Malaysia’s yet to be scheduled poll inviting fresh vitriol between the ruling and opposition parties,  Indonesian and Thai candidates positioning for 2019 elections, and Philippines President Rodrigo Duterte slamming critics and rejecting UN sway over his bloody anti-drug trafficking campaign. At the same time inflation and possible overheating have become concerns with faster 5% range growth, as banks also widen the credit spigots amid business and household debts drawing rating agency unease.

Malaysian Prime Minister Najib Rezak will call elections before the end of April with his Barisan Nasional coalition vying for another 5-year term. Allies in a longstanding tradition have gerrymandered voting districts to improve their odds, but the rival Pakatan Harapan pulled in his predecessor Mahathir Mohamad to join forces with jailed head Anwar Ibrahim to mount a stiff challenge in a race hinging on the economy. The opposition has hammered away at the Prime Minister’s responsibility over the $600 million missing in the 1MDB fund scandal, with heated rhetoric accusing him of “bankrupting” the country. It advocates elimination of the recently-imposed goods and services tax and toll road fees, which the Finance Ministry claims would open a $150 billion budget hole.

The ringgit is steady around 3.9/dollar with the central bank on hold, after $1.5 billion in net portfolio inflows so far this year. Foreign direct investment was $10 billion and reserves passed $100 billion in 2017, and World Economic Forum competiveness standing rose two places. The International Monetary Fund recently outlined Malaysia’s track toward “high-income” status, and the Prime Minister’s adviser pointed out that debt/GDP was below the statutory 55% level despite the opposition’s “insolvency” charge. Public and private sector forecasts are for another year of 5-5.5% growth and subdued 3% inflation on an ample current account surplus compensating for uneven domestic demand. However a bitter campaign will reduce the likelihood of future economic policy consensus, as Moody’s Ratings in a March banking system report continued to flag high household leverage and souring commercial real estate loans.

Indonesia may re-run the 2014 presidential sweepstakes as General Prabowo Sabianto of the Gerindra party has reportedly sounded out colleagues as well as Islamic activist organizations kept at a distance by the Jokowi government. The incumbent’s opinion popularity is solid, but he again will fall short of the 7% growth target, with Coordinating Minister Darmin Nasution previewing a first quarter under 5% figure. Finance Minister Sri Mulyani Indrawati acknowledged a softer rupiah below 14000/dollar and $3 billion reserve dip in February, but cited favorable tax revenue and current account trends. Stocks trade at a hefty 17 times price-earnings ratio with a bare profits increase, and foreign investors otherwise trimming local bond exposure may have stalled the pace with inclusion in a benchmark Barclay’s index. The President and his team are aggressively pitching infrastructure projects to fund managers at home and abroad to reverse output slack, and will turn to banks for above 10% annual loan expansion, including through new fintech providers, after years at a single-digit clip.

Thailand’s ruling junta has yet to formally fix a date for long postponed election return as the central bank signaled a growth upgrade to over 4% on good tourism and manufacturing numbers, aided by a 10% predicted rise in Asian neighbor inward direct investment. Exports are set to increase 7% to sustain the large current account surplus fueling baht appreciation alongside capital inflows. The Philippines in contrast ran a $2.5 current account deficit in 2017, and the peso is ASEAN’s worst performer despite frontrunner 6.5% growth. The central bank tightened monetary policy, but not headline interest rates as inflation nears the 4% upper band goal. Investor consensus holds that both the economy and the President’s temper may be overheating, but the dizzying cross-country rotation may spin again toward mid-year

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The Asian Development Bank’s Indochina Bond Barrage

2018 March 16 by

While Cambodia and Myanmar, despite logging high-single digit GDP growth, have been off mainstream investor radar screens as they face possible US and EU human rights sanctions, the Asia Development Bank issued bond market guides charting potential allocation paths to join the rest of the region’s $10 trillion local currency volume. The studies were conducted under the auspices of the Asean+3 (China, Japan and Korea) Bond Forum, and update their 2012 series with the intent of mobilizing an estimated $1.7 trillion in annual infrastructure funding. Japan’s Nomura Research Institute worked with government-regulatory officials and banks, brokers and stock exchanges in the two countries as they position for near-term launch and takeoff that could follow Vietnam’s more advanced development charted quarterly in the ADB’s on-line tracking service.

Cambodia’s Financial Sector Development Strategy through 2020 envisions government bond issuance, and an interbank money market already trades negotiable certificates of deposit. In 2017 the securities commission finalized rules for corporate bond “qualified buyer” professional institution eligibility, although payment is still physically by check as opposed to electronically in the real-time international standard. The central bank is to take the lead with regular open market operations through designated primary dealers, according to provisions agreed last June. Equity and fixed-income tax incentives were introduced in 2015 which slash the company profit levy 50% and reduce investor withholding over three years. Early this year official decrees are due for credit rating agencies, corporate placement application and disclosure and bondholder representation.

The securities regulator is independent but answers to the Economy and Finance Minister as Chair, who is mainly responsible for the current draft government bond guidelines. The Ministry will finalize primary sales procedures, while secondary trading is overseen by the supervisory authority and stock exchange, which lists five companies. Non-resident firms cannot yet offer debt, although both dollar and rial-denomination will be allowed in the 2018-2020 trial period. Foreign investors get the same withholding tax rebate as domestic counterparts, but currency controls may limit fund repatriation. Documents are published in both Khmer and English, and the future framework assumes overseas wealthy individual bond market participation. A trust law is under preparation to bolster investor protection, and debt securities will be subject to a stock exchange entry fee at 0.1% of the total amount.

The ADB recommends creation of a yield curve, and a capacity building program to spread specialist and public knowledge, with bond market inauguration. Corporate governance from audited statements to management reporting is still lacking, and accounting and custody should convert to international standards. The planned 2019 timetable for pilot government activity will release “pent-up” local demand among insurance and pension funds in particular. A new asset class will be created, which could appeal also to Korean investors with its joint venture stake in the Cambodian stock exchange.

Myanmar is further along on bond market development with technical advice from Japan’s Daiwa Institute of Research, with the government floating bonds since the early 1990s and recently selling 2-5 year Treasuries under competitive auctions. The Myanmar Economic Bank and Stock Exchange are the authorized dealers, with the central bank previously handling direct financial institution transactions. The original government securities act dates back to 1920 under English law, with a more modern code passed in 2013 with powers split between the monetary and exchange supervisory bodies. Corporate bonds are not yet available, and non-residents will not be able to issue under the proposed template. The Finance Ministry has a debt management unit, and in line with International Monetary Fund preference Treasury bills and bonds are equally divided in the total, although without existing benchmarks.

The 3-month interest rate was between 7-9% the past fiscal year, and the 5-year yield was 9.5%, and private enterprises and individuals are big buyers. Default will be covered under the new Companies Law, and credit rating and corporate governance systems are in formation. Repos are used and borrowing and lending may soon be approved to avoid settlement failure. Taxation “lacks clarity” and foreign investors await specific local debt and equity access parameters. The guide predicts “much change,” including municipal bond creation, over the next 1-2 years, with the caveat that sound fiduciary practice may still not apply outside this confined sphere.