Asia

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India’s Trampled Roaming Turf

2018 September 18 by

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

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

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

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

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

 

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China’s Multi-Front War Whirlwind

2018 September 11 by

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

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

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

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

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Thailand’s Trade War Tripwire

2018 September 4 by

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

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

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

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

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

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

 

 

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Asian Stocks’ Safety Scramble Scrum

2018 August 28 by

With the negative MSCI showing across all Asian core and frontier stock markets, fund managers began the second half constructing narratives around selected countries’ relative trade and currency war evasion and upbeat economic and financial system health as preferred spots. Specific company size and industries were also promoted, with India on a recent run with embrace of high-tech stalwarts like Tata Consultancy Services and less-followed e-commerce listings without lofty double-digit valuations. Indonesia has enjoyed a foreign investor revival of debt and equity inflows with its domestic consumption-led story, tighter monetary policy, and diminished populist and religious fundamentalist concerns in elections.

Vietnam is coming off economic and share overheating according to the International Monetary Fund’s July Article IV report, and will be a main beneficiary of any successor Trans-Pacific Partnership free trade pact concluded without the US, in the view of think tanks like the Washington-based Institute for International Economics. Kazakhstan as a dual Eurasian destination, and a rare frontier gainer up 3% through mid-year, is likewise on the radar after the s launch of the Astana International Financial Center lured dozens of offshore banks and securities houses ahead of planned state company offerings. These picks carry momentum into the third quarter, but underlying financial sector and structural reform disappointment could still stifle it as investors again rotate toward more familiar and liquid locations.

 

Indonesia’s central bank abandoned its neutral stance, and raised the benchmark rate 100 basis points in consecutive meetings to 5.25% to stem heavy capital outflows in May. It also bought local bonds in secondary markets as yields neared 8%, and intervened from the $125 billion reserve stockpile to support the rupiah as it softened 5% against the dollar. With the moves the growth and current account deficit forecasts stayed respectively at 5% and 2% of gross domestic product. Officials announced measures to stimulate the property market by relaxing the minimum 15% down payment for first time home owners and expanding available credit. Standard and Poor’s Ratings predicted activity would remain flat, but acknowledged potential supplier benefits. On trade Jakarta dispatched a delegation to Washington, which ran a bilateral $13 billion deficit in 2017, to address the threat of duty-preference removal raised by the Trump Administration in April. Garments and rubber are chief targets following a US Trade Representative review which placed Indonesia on a dozen country “priority watch list.”  To maintain international payments balance, Finance Minister Sri Mulyani Indrawati proposed possible equipment import limits for infrastructure projects that may be finalized soon.

The central bank reintroduced short-term 9 and 12-month government paper to diversify foreign investor options as overseas debt hit $360 billion in May, evenly split between official and private. The latter is concentrated in mining, manufacturing and electricity company borrowers, and the debt-GDP ratio is 35%, but over 85% is long term. However Asian high-yield bond rates have gone from 6% to 9% in recent months on leverage worries among Indonesian and Chinese names in particular. Against this background leading Bank Mandiri, despite a 30% first half profit jump, may confront resistance as it seeks $500 million in overseas lines in the near future according to its chief executive.

Indonesia’s credit default swaps spiked to 175 basis points over US Treasuries before settling down and the non-resident local bond share is still almost 40%. Regional elections at end-June were inconclusive as a signal to 2019’s presidential contest, but the incumbent Joko Widodo will likely face a close race as voter sentiment veered away from establishment candidates and family dynasties. Nonetheless former President Suharto’s son Tommy plans to form a new party and enter the competition on a nominal anti-corruption platform.

Vietnam is on track for better 6.5% growth with impetus from the Trans-Pacific and EU free trade agreements, on inflation within the 4% target. However fiscal consolidation must go further to keep public debt within the 65% of GDP legal cap, and credit expansion above 15% is too fast, the IMF survey argues. State-owned banks continue in trouble with low capital and earnings, and bad loan resolution through the central asset management agency can be accelerated. Longer range capital market development, particularly corporate bonds to balance with equities, is also lacking and may damp quarterly enthusiasm, the review cautions.

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Mongolia’s Roughshod Rescue Refrain

2018 August 14 by

A year after the international community assembled a $5.5 billion emergency package, Mongolian stock and bond performance reflected debt crisis escape, but “more downside than upside risks” persist according to the IMF’s July program review. The lender released another $35 million of its $435 million 3-year facility on “good progress,” as it urged further  steps to strengthen fiscal, balance of payments, banking sector and investment climate positions. The stock exchange index is down 5% to outpace MSCI-tracked frontier markets, and external bond yields at 400 basis points over US Treasuries were firm against general asset class selloff as Fitch Ratings upgraded the sovereign to still speculative “B.” It also elevated two state-owned banks, while noting lingering weakness with the reported 8.5% bad loan ratio as comprehensive asset quality and stress testing unfold.

Ulan Bator was briefly in the geopolitical limelight as a possible host for the inaugural US-North Korea summit, but was sidelined by Singapore’s all expenses paid bid with state of the art infrastructure.  The Fund  report too seized upon positive headlines, including 6% first quarter growth and a 10% international reserve increase to $3.25 billion, but pointed to “core vulnerabilities” such as high commodity reliance, public debt and bank recapitalization needs.  The next parliamentary elections are in 2020, when corruption accusations between the main parties and runaway voter spending are also likely to intensify, the analysis suggests.

The World Bank predicts 6% growth this year on construction and manufacturing around the Tavan Tolgoi (TT) coal project, while agriculture has yet to recover from the harsh past winter. Another phase of the giant OT copper mine will go on line in the medium term to further expand exports, as the Bank recommended greater economic diversification and productivity gains. Foreign direct investment was $400 million in the first quarter, but strong domestic demand worsened the current account deficit and inflation, now at 8%. The central bank regularly cut rates the past year but may turn more cautious, especially as it applies more stringent loan provisioning rules to identify bank capital and liquidity gaps. Corporate credit extension was flat in recent months, following years of double-digit upticks.

Fiscal policy was mixed in Fitch’s view, as “rapid improvement” with revenue up 25% through May is offset by “structural reform delays” leaving government debt at 85% of GDP. Fuel subsidies and family social transfers have not been adjusted, and infrastructure concessions and discount mortgages are large liabilities. The Development Bank’s portfolio has not been audited and fully incorporated into the budget, and non-political oversight is lacking. Its overseas borrowing can repeat depreciation pressure on the currency, which has steadied the past year.

Both Fitch and the IMF argue that bank cleanup over the next six months will determine the vitality of policy and practical turnaround. Officials will present a detailed bad loan resolution strategy and introduce new collateral enforcement and bankruptcy procedures. They may propose a central disposal agency and macro-prudential curbs on household credit, with almost half in default danger at debt-service to income ratios above 60%. The Financial Action Task Force also criticized lax anti-money laundering practice, and without action the country could be “grey listed” and cut off from overseas correspondent relationships.

The threat comes as Prime Minister Ukhnaa Hurelsukh broke ground on an oil refinery financed with a $1 billion soft loan from India under a campaign to forge links beyond traditional international mining company and China-Russia partners. The project was broached during a 2015 visit by Prime Minister Narendra Modi, and follows decades of aborted domestic building efforts.  The Indian delegation in pointed reference to regional rivals described a “spiritual alliance,” and the plant will eventually boost national output 10% according to government estimates.

In June Mining Minister Sumiyazabar Dolgorsuren proposed an initial public offering on local and overseas markets for up to one-third of state company TT shares, reprising previous attempts which valued the transaction at billions of dollars. Underwriters were originally named, but the deal was abandoned when both the government and coal prices collapsed in 2016.  Canadian-owned operator Erdene at the same time became the first cross-listed play on the Mongolian stock exchange with a small $1.5 million capital raising, as more modest feats may have to satisfy fund managers into the IMF program’s second anniversary.

 

 

 

 

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Asia’s Scarce Safety Stopgaps

2018 August 2 by

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

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

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

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

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

 

 

 

 

 

 

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Asia Local Bonds’ Trade Tantrums

2018 July 26 by

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

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

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

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

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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.

 

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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.

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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.

 

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