Asia

img_research

China’s Latin America Litter Litany

2019 March 17 by

China’s MSCI Index comeback, with double-digit gains through February, continues on strong foreign investor inflows. Morgan Stanley and Citigroup predict over $100 billion in allocation this year, even if “A” share weightings only increase incrementally. According to data trackers, around $10 billion went into equities in January, and the Shanghai exchange this week notched the biggest daily rise since 2015 and is up almost 20% for the first two months. Lunar New Year retail sales climbed only 8.5% on an annual basis, the worst performance since coverage began in 2005, and with US trade tensions the current account surplus was barely positive in 2018. However gross domestic product growth is expected to continue in the 6.5% range as the government again opened the fiscal and monetary spigots short of “flood-like” stimulus. It will likely widen last year’s 4% of GDP declared budget deficit, and total social financing hit a record RMB 4.5 trillion in January with a raft of new state bank facilities directed at small business in particular.

The enthusiasm sloughs off research such as respective Morgan Stanley and China Beige Book criticism that the economy is in “long-term decline “ and published national account numbers are “garbage.” It ignores the first offshore state company bond default in 20 years when Qinghai  Provincial Investment Group failed to pay $10 million due in Hong Kong, and stock exchange price-earnings ratios tipping again into double-digits toward recent averages. Retail investor margin loans have resurfaced as a catalyst, and any Beijing- Washington trade truce may prove short lived as President Trump extended the March negotiating deadline. With Venezuela’s eruption spilling over into neighbors, emerging market investors increasingly are wary about China’s large Latin American footprint as a new risk. Bilateral policy bank loans to Caracas totaled almost $70 billion the past fifteen years, according to a database compiled by the Washington-based Inter-American Dialogue. Internationally-recognized President and opposition head Juan Guaido pledged to honor outstanding obligations estimated at $20 billion for principal alone, and Ecuador as another major recipient just agreed on an International Monetary Fund program to be able to settle its own oil for credit ledger, but both contingencies could further erode Chinese financial system and fiscal discipline commitments.

In 2018, the China Development and Export-Import Banks lent over $7.5 billion to Latin American and Caribbean governments and state-owned firms, outstripping activity through the World Bank and Inter-American Development Bank. Venezuela took $5 billion, around two-thirds the sum, and Ecuador and Argentina, which received a record $50 billion IMF rescue last year, each got $1 billion. The Dominican Republic’s electric utility borrowed $600 million, with the regional sector focus as in the past on energy and infrastructure. The arrangements do not attach policy conditions but require Chinese contractors and equipment, as in Argentina’s railway and Ecuador’s earthquake reconstruction. In Venezuela its stake increased in oil output, as the Maduro administration announced the drilling of several hundred wells and a joint venture between the state monopolies CNPC and PDVSA.

Chinese facilities are on commercial terms, but in Ecuador’s case the interest rate was half the 11% through standard global bond issuance. With Venezuela’s additional funding last year, Beijing stipulated an end to a previous principal payment grace period, implying a country exposure limit even before the confrontation between National Assembly leader Guaido and incumbent Nicholas Maduro over presidential legitimacy. Elsewhere dams in Argentina were caught in corruption allegations, and a Bolivian one was halted after lack of local community consultation, the Inter-American Dialogue finds. These projects are under pressure to improve risk assessment and preparation, especially since they were rejected on environmental and social grounds by other development lenders. Latin America’s relationship to the multi-trillion dollar Belt and Road Initiative is also an open question, as Beijing emphasizes closer strategic areas geographically. Argentina and Ecuador reportedly wish to renegotiate loan terms, and Brazil’s new President Jair Bolsonaro campaigned on a platform of reducing oil company Petrobras’ Chinese bank ties. The big four state commercial banks at the same time have been more active in co-financing transactions and specialist funds, as the Asian International Infrastructure Bank also considers regional participation. The review suggests Chinese finance will turn more cautious, and investor sentiment as well, under near-term mounting losses.

Iran’s Somber Revolutionary Stockpile

2019 March 10 by

The Tehran Stock Exchange was down 35% in dollar terms on an annual basis through December, twice the loss of MSCI’s emerging market index, even as the rial-greenback exchange rate stabilized at around 120,000 after post-renewed US sanctions free fall. The currency still lost half its value against the dollar and euro the past year, as the central bank prepares a plan to lop three zeroes off the notes to symbolically restore confidence, following a familiar path for developing economies in double-digit depreciation and inflation. President Hassan Rouhani acknowledged on the eve of the Iranian Revolution’s 40th anniversary that recession and public discontent, from a combination of banking and oil export restrictions and slumping domestic consumption, heralded the worst crisis in decades even as European countries introduced a barter trade instrument for vital food and medicine imports. He promised to continue social spending for the poor and middle class in the latest $40 billion budget despite deficit widening. 

Stock pickers amid bargain single-digit price-earnings ratios now target selective value plays like chemical companies earning hard currency. Partially privatized banks Mellat and Tejarat are also actively traded, as the government forces them to sell real estate portfolios and concentrate on better credit performance to reduce the estimated 15-20% bad loan ratio.  However the currency regime is still a mess, with officials dipping into a presumed $100 billion reserve stash for defense, and jailing and executing unauthorized dealers at the same time without a longer-term strategy. Government borrowing through high-yield Islamic Treasury bills sent public debt toward 50% of gross domestic product, and injects financial system liquidity threatening to embed 20-30% inflation and decimate citizen purchasing power.

The International Monetary Fund expects the economy to contract 3-4% for the fiscal year through March, with daily petroleum sales mainly to Asia at 1 million barrels, half the previous level before Washington exited the nuclear deal. Tourism reportedly increased with the cheaper rial, but industrial production in the auto and other sectors and real estate sales sank 20-30% according to October figures. Europe’s special purpose financing vehicle Instex, created by France, Germany and the UK is at an early stage with only humanitarian shipments qualifying. It is unlikely to evolve into an alternative mainstream banking channel with the US “closely watching” in the words of Secretary of State Mike Pompeo, who is organizing further allied crackdown efforts at a conference this week in Poland.

 Instex’s founders have otherwise hesitated on strong commercial and diplomatic ties. The European Union in January imposed curbs on Iran’s Intelligence Ministry implicated in a Paris bomb plot, and Germany banned Mahan Air, which carries military equipment to Syria, from landing in the country. Damascus and Tehran recently struck a banking cooperation deal on post-war reconstruction estimated to cost $350 billion, as the World Bank calculated $3 billion in Syrian private deposits available in 2016, down from $15 billion at the beginning of the decade. Financing infrastructure around the capital is a priority, along with energy, healthcare and transport according to the two sides.

Yemen is another foreign adventure, with Tehran backing Houthi forces in Sana’a against the Saudi Arabia and United Arab Emirates’ allied, internationally-recognized government in Aden. A United Nations-brokered cease fire briefly allowed food aid and imports into the strategic Hudaydah port in a last-ditch effort to avert mass famine, as economic and monetary policies remain in chaos. The World Bank predicts 3% GDP contraction for 2018, following a 40% cumulative drop the previous three years. Inflation was in the 40-50% range after currency depreciation, staple goods shortages, and widespread money printing by the rival central banks in the two cities to cover public service and troop spending, despite civil service salary and pension payments in hefty arrears. State debt is at 75% of output, with the Sana’a Center think tank in December recommending a restructuring plan. With oil exports suspended and worker remittances dwindling from the Middle East, the current account deficit stands at 9% to shake the currency, even as $2 billion in Saudi deposits and fuel grants the last quarter provided support. The dual monetary authorities are at odds over supervision, and conventional and Islamic banks may join Tehran counterparts in unmet rescue anticipation.

Mongolia’s Foggy Misappropriation Mentality

2019 February 18 by

Mongolia bond positions turned underweight in global emerging market strategies, as tens of thousands of Ulaanbaatar protestors in bitter winter cold called for lifting the “fog” in a play on words combining the initials of the main People’s (MPP) and Democrat (DP) political parties. The action followed another spate of scandal revelations, including the parliamentary speaker selling government positions and insider abuse of a decades old discount mortgage lending scheme, where connected officials and families were able to earn tenfold returns on cheap money.

With the popular discontent new splinter parties plan to enter parliamentary elections in 2020, and the MPP Prime Minister Ukhnaagin Khurelsukh and his cabinet are likely to face another vote of confidence after an attempt narrowly missed in November, just a year after a predecessor was ousted for corruption. He claimed wealthy business executives were behind the move, but independent media commentators now urge resignation as the only route to safeguarding democracy. Neighboring China and Russia ties to be combined in an infrastructure and raw materials “economic corridor” impose their own governance strains, as Mongolia’s trade surplus was down 35% to $925 million through the third quarter of last year despite estimated 6% gross domestic product growth.

In October the International Monetary Fund released another $35 million under its 3-year $430 million program anchoring $5.5 billion in overall bilateral and multilateral assistance, amid banking system and foreign reserve warnings. At the same time Anglo-Australian miner Rio Tinto announced a delay in the $4.5 billion expansion of the Oyu Tolgoi gold and copper joint venture, where the state has a one-third stake. With mechanical challenges the first output may not come until late next year, and the operation could again be complicated by profit-sharing demands reflected in the country’s dozen place drop in the latest World Bank Doing Business rankings. Metal and coal export reliance spotlight these flagship projects, with limited diversification into other industries like processed textiles from cashmere. The European Bank for Reconstruction and Development estimates almost $2 billion in earnings potential from garment added value, and is advising local herders and cooperatives.

Ratings agencies maintained their “B” grade, with 6% range growth again expected in 2019 on inflation just above that level. The budget ran a primary surplus last year, and the central bank adopted a tightening stance in September, after selling 10% of $3 billion in reserves to support the depreciating tugrik currency against the dollar. The IMF review cautioned on a return to 20% annual credit extension even with the institution of macro-prudential limits, such as maximum debt service ratios for consumer and mortgage loans. It noted that bad asset classification and recapitalization exercises were incomplete, and that the Financial Action Task Force continued to assign low anti-money laundering scores. Continued decline in world gold and copper prices and Chinese shift to national coal production will widen the current account deficit, and fiscal loosening this year can pose medium-term public debt danger should the sovereign attempt to re-access markets under higher global interest rates, the Fund report implied.

In November the IMF also fielded a mission in Uzbekistan, and flagged economic “overheating” with 5% growth and 15% inflation, as the current account surplus slid to a 3% of GDP deficit.  Sudden price, trade and exchange rate liberalization under President Shavkat Mirzoyev sparked energy and water shortages, and agriculture suffered bad weather. Public wages were hiked 10% to compensate, as the central bank raised rates above 15% to fight government-directed credit expansion. Quasi-fiscal operations, especially through the Reconstruction and Development Fund, left a 2.5% deficit in 2018. In 2019 tax reform is a priority to close the gap, including better collection of value-added and luxury levies. State enterprise restructuring and divestiture is also on the agenda, with possible sales on the 25 year old Tashkent Stock Exchange. With 125 listed companies, only ten are liquid, with daily turnover under $100,000, according to frontier market specialists. Price-earnings ratios are under five times, and foreign investment in banks may soon be authorized, while public and private equity launches are in preparation through Hong Kong and London. Government leaders were in Germany in mid-January on a road show touting financial services, tourism, food processing and auto-making prospects, although specific deals were foggy.

Indochina’s Pressed Post-Conflict Advantage

2019 February 11 by

Indochina region markets Vietnam and Thailand were not as battered as Morgan Stanley Capital International respective frontier and core counterparts in 2018, while tiny Cambodia with a few listed stocks was up over 30%, as investors single out the area for high growth and value this year. They believe beyond China trade diversification and consumer and tourism inroads can generate outperformance despite serious political and banking system bottlenecks, and that Vietnam in particular benefits from dedicated public and private equity funds sitting on cash. Valuations there trail Asian neighbors, with single-digit price-earnings ratios often applying to second-tier companies.

 Cross-border infrastructure ties, such as a planned expressway between the capitals Phnom Penh and Ho Chi Minh City, and development projects in Laos are increasingly visible with Chinese natural resource and small business interest. Beijing is funding airport construction along the Thai-Cambodia border resort town of Poipet, and the $6.5 billion Lao-China railway which will drive the debt/gross domestic product ratio to 70%, according to the World Bank. Near-term attractions depend on continuing solid Chinese investment and tourism inflows, and involve heavy governance and sustainability tradeoffs, even the most bullish advocates acknowledge.

Cambodia’s GDP growth will again be 7%, but a real estate boom, with prices in the capital approaching Bangkok’s, and runaway 20% credit expansion are among dangers listed in the International Monetary Fund’s November Article IV report.  Economic performance in 2018 was “strong” across garment exports, tourism and construction on 2.5% inflation, but the fiscal and current account deficits rose to 2% and 10% of output, respectively. Reserves cover little more than three months imports, half the regional average, and the managed exchange rate and high dollarization constrain competitive and policy space. On the budget, the Fund recommends tying public service wage increases to performance, and raising land and corporate and individual income taxes.

 While government debt is low at 30% of GDP, public-private partnerships may mask contingent liabilities and deal incentives should be rationalized. Macro-financial risk on the other hand is an immediate concern, with the average bank loan-to-deposit ratio at 100% and non-performing assets “understated” amid rising corporate and household leverages. Real estate credit spiked 35% annually in recent years, with looser and unregulated mortgage conditions. Loan to value limits are overdue in this category and tighter capital, liquidity and foreign exchange exposure treatment should be in place broadly as international financial reporting standards are introduced this year, the IMF urges.

Micro-finance institutions remain subject to an interest rate cap, and lax money laundering procedures may harm correspondent bank relationships, as headquarters come under official and shareholder pressure for links with the ruling Hun Sen regime and allies implicated in political and human rights infractions. Local currency use could be further promoted through government payments in riel and capital market development, both corporate bonds and equities. Land registration and a commercial court will facilitate small business borrowing, and an anti-corruption unit has been formed with investigations underway, but lacks practical independence and a track record fostering transparency and integrity, the review concludes.

Vietnam too is on track for repeated 6.5-7% growth, on the back of free trade agreements with the European Union and through the revived Trans-Pacific partnership without the US. However manufacturing exports slowed at year-end in line with the global cycle, and the trade surplus of over $5 billion though the third quarter will likely shrink. Non-resident capital outflows in turn h eroded the estimated $65 billion reserve position, and prompted central bank intervention to preserve the currency band against the dollar. Small 1-2% devaluation may be triggered in the coming months, but monetary authorities must also contend with projected 4-5% inflation and state bank cleanup where sudden rate moves can upset balance sheets and franchises. Further consolidation and tightening and possible stock exchange divestitures could lure wary investors, already noting steep bank valuations against regional peers.

Thailand’s central bank signaled hiking despite negligible 1% inflation against the backdrop of direct and portfolio investment outflows, as the current account surplus and growth fall to the 4% range. Government infrastructure spending is expected to be the main economic driver and a potential vote-getter in this long-promised election year, with military-backed candidates and exchange-listed materials and construction firms aided by the building binge.  

Asia’s Spent Sprint Spirits

2019 February 4 by

Hopes were dashed for a later year core Asia emerging stock market rally and clear momentum going into 2019, as Chinese “A” and Korean shares shed over 20% on the Morgan Stanley Capital International Index as the biggest losers outside Pakistan, which tumbled almost 40%. In the rest of the pack in order the Philippines was down 17%, followed by Indonesia and Taiwan (-11 %,) and India, Indonesia and Thailand (-8%), for regional performance roughly in line with the overall benchmark’s more than 15% drop. On the frontier list Bangladesh, Sri Lanka and Vietnam sank 15%, with the only positive geography for 2018 in the Middle East with double-digit gains in Kuwait, Saudi Arabia and Tunisia. Investors are set for continued choppiness against the backdrop of slower global growth, trade and currency friction, and steeper interest rates. They note that as Washington and Beijing remain at odds, the comprehensive free commerce pact between Asian and Latin American signatories was inked. Fund managers focus on immediate beneficiaries like Vietnam from possible supply chain diversion and expansion, as they target counties and sectors that can ride out likely export, infrastructure and banking system upsets.

China and Korea received the most from $20 billion in data tracked equity fund inflows due to their large index weightings, with exchange traded funds allocating one-quarter the total. The Asia Development Bank pointed to warning signs in December as Korean exports were flat, but off 15% to China with an 8% semiconductor plunge on an annual basis. China’s Purchasing Managers Index at the same time was below 50, into contraction for the first time in two and a half years. Auto sales slipped 3% in 2018 breaking a two-decade streak, and new export orders were down for a half-year straight in December. The services PMI was 54 in contrast, as the third quarter $80 billion services deficit was $20 billion under the goods surplus. With external debt reported at almost $2 trillion at end-September, the central bank pledged that loose monetary policy to preserve 6.5% growth, including a small business-directed reserve requirement cut, would keep the Yuan stable. Analysts otherwise predict intervention will cap the dollar exchange rate at 7 while US trade and investment negotiations continue. The government repeated stimulus restraint while focusing on tax relief and “structural deleveraging,” as state-owned and private companies prepared to extend their $180 billion cross-border deal binge, up 15% annually.

The 25% Shanghai Composite slide was the worst in a decade, as the number of approved initial public offerings was one-third below 2017. With the correction officials claimed to be out of bubble danger and called for deeper changes to spur long-term domestic inflows through asset managers, including foreign-controlled ones. Tech companies separately raised $70 billion in private equity according to industry sources, and the institutional investor vision aims to mirror wealth management product participation, which grew online 65% in recent years by Moody’s Ratings calculations.

 India also has a vibrant venture capital scene, but new tax policies may hurt activity, as the ruling coalition appeals to lower and middle-class voters in the upcoming national elections after December setbacks in state polls. Although the equity market loss was half China’s, the currency depreciated 10% against the dollar with the stubborn current account deficit. New project investment in the last quarter was the lowest in Prime Minister Modi’s term, and central bank independence is in play after the previous head resigned and was replaced by a senior finance ministry representative. Although GDP growth is estimated above 7%, the deficit has already overshot the March full fiscal year target.

Indonesia heads into its own April re-election contest with incumbent President Joko Widowo, after recruiting a vice presidential candidate with strong Islamic party ties, in the opinion survey lead by twenty-five points over previous challenger General Prabowo. Foreign direct investment softened 20% in the third quarter with an Australia free trade accord still on hold, but private consumption sustains 5% growth. The 1.7% of GDP budget gap was the best in five years, while the current account deficit at that level in 2017 could double into 2019 on hydrocarbon imports. With almost a 200 basis point bump, the central bank was the top hiker last year with an uphill climb in store for the region across monetary policy and other areas.

Bangladesh’s Supercharged Subcontinent Drift

2019 January 28 by

Stock market strategists picking Bangladesh over Pakistan and Sri Lanka in 2019 after a losing year in the three returned to the drawing board, as Sheikh Hasina’s Awami League won all but 10 out of 300 parliamentary seats for a third term sweep. The opposition coalition, for the first time without their long-serving Bangladesh National Party leader in jail for corruption, and independent observers denounced a crackdown on media and political critics in advance, and widespread irregularities during the voting, including alleged ballot-stuffing and list purges. Violence again was prominent with dozens of deaths and injuries, and investors braced for possible resumption of nationwide strikes if recount and rerun demands are spurned, as with previous League victories under dubious circumstances. Just as importantly, Sheikh Hasina and her team now have an unchallenged economic policy grip, with years of 6% growth at risk from export competitiveness and banking system overhaul delays.

The currency did not depreciate as badly as in neighbors against the dollar with $30 billion in reserves covering six months imports, but the current account surplus turned to deficit the past fiscal year with high capital goods and oil demand. Garment exports and remittances are the main balance of payments drivers. The former thrive with European trade benefits and wages under $100/month, below China and Indochina rivals. Sheikh Hasina promised to raise the minimum salary during the election campaign without offering productivity offsets to meet international clothing company skills and technology qualms. She previously agreed to upgrade building and worker safety standards after a tragic fire and factory collapse killed hundreds, and foreign monitors note improvements but enforcement is still spotty. Remittance flows were up 15% to $15 billion in the fiscal year ending in June, but the weak taka was a key explanation as contracts end for Middle East construction crews in particular.

The country’s population of over 150 million with a median age of 25 is often pitched as a consumer growth play, with auto, health care and smart phone providers among popular stock exchange listings. Honda joined other foreign operators to recently set up a motorcycle factory, and a local competitor will launch a public equity offering in the coming months. Samsung announced it will soon assemble phones for the domestic market, and also manufactures appliances like refrigerators still yet to become standard household items. Pharmaceuticals companies like heavyweight Beximco register double-digit earnings increases, and are expanding abroad regardless of dedicated government strategy or support, with applications on file with the US Food and Drug Administration. Infrastructure projects, including the Padma Bridge between the capital and southwest and the Dhaka-Chittagong Highway extension, will boost commercial vehicle sales growing 20% annually and tourism both from Western and Asian visitors. Big hotel chains Hilton and Marriott are in place, and more affordable outlets are opening for middle-class Chinese and Indian visitors.

Bad loan levels and management at leading state banks still threaten the system, and the International Monetary Fund in its 2018 Article IV report urged faster action with problems festering for a decade. The administration did not preview course shifts in the election run-up, and private sector competitors have diversified into new business lines and mobile money to survive. Digital payments applications are in the startup phase, and new lending and retail entrants have already emerged to challenge traditional banking franchises in a country where account penetration is limited.

In Sri Lanka bank valuations are already below book value amid monetary and political uncertainties, with IMF program review on hold until the government is restored or new elections as the President, parliament and Supreme Court clash over constitutional practice for dismissing the prime minister. Fiscal and current account deficits continue to trigger concern, with the latter approaching 4% of gross domestic product. Portfolio outflows, with 15% currency depreciation against the dollar, further shrank reserves to $8 billion in October. The central bank raised benchmark rates in November in a tightening pattern that will likely last and keep growth at the 3% level. Pakistan likewise runs large twin deficits against the background of higher interest rates and a tumbling currency.  As the new Imran Khan government negotiates another Fund agreement estimated in the $5 billion range, sub-region stocks are not yet poised for a bad news bounce.

Afghanistan’s Economic Withdrawal Factions

2019 January 21 by

 President Trump’s unilateral decision to halve the US troop presence in Afghanistan, reportedly due more to political and pocketbook than strategic military considerations came against ambivalent outside reviews of economic policy and performance, as Kabul also grapples with sanctions and austerity fallout in trade partners Iran and Pakistan. The International Monetary Fund assigned a “satisfactory” grade in the December report of its 3-year, $45 million extended fund facility, scheduled to expire in mid-2019. It cited growth, fiscal and banking system risks amid precarious security, reflected in terror attacks around the end-October parliamentary elections. The November donor conference in Geneva, held to assess progress on the $15 billion in aid pledged in 2016, was likewise light on praise. The country jumped 15 spots on the World Bank’s Doing Business rankings, but remains at the bottom of the anti-corruption Transparency International list. President Ashraf Ghani, expected to seek a second term next year, tried to summon investor interest with a reference to the” potential trillion dollar” natural resource economy, but the audience was more concerned with reclaiming assets stolen in  the Kabul Bank fraud after another commercial lender was liquidated in August.

The IMF lowered the gross domestic product forecast growth this year to 2.3% after agricultural drought on 3% inflation, and projects “modest” medium term 3-5% expansion which will still not serve to cut extreme poverty. The extractive industry and regional integration strategy backed by bilateral and multilateral agencies may see results in the next decade, but remittance and export spillovers from economic squeezes in Iran and Pakistan will be ”adverse” in the meantime. On the former, the US State Department exempted the Chabahar port project from sanctions for partial relief.  The fiscal deficit excluding grants is 7% of GDP, and officials are to introduce a value-added tax and public-private infrastructure partnerships to shrink it. Monetary policy is closely tied to the exchange rate, which depreciated to a record bottom against the dollar in October despite central bank intervention amid large trade and current account deficits. Exports increased 30% in the first half “from a low base,” and foreign reserves are enough to cover ten months imports with continued aid inflows.

Bank cleanup is at the heart of longstanding structural reforms, as state and private competitors conduct wide-ranging “corrective action plans.” New corporate governance and crisis prevention frameworks are under preparation, and a central bank-Finance Ministry Stability Committee will soon be established. An international forensic auditor will strengthen efforts to trace lost Kabul Bank proceeds and help mitigate official rescue costs. A mobile money-directed inclusion campaign is designed to modernize the payments network and expand formal accounts within both conventional and Islamic-style systems. Global bank correspondent relationships have not revived despite 2017’s release from the Financial Action Task Force laundering and terror watch list, given meager profitability and lingering corruption concerns. Senior government representatives are supposed to declare assets, but legal guidance and enforcement capabilities are not yet in place. The Fund notes that its own tougher governance regime could affect future ties, and that without proper accountability Afghanistan’s debt distress danger is high when loans replace grants. President Ghani’s team for now aims to preserve the partnership with a program extension request to December 2019, when the outcomes of presidential elections and recent Taliban peace talks may be known even as financial sector and public integrity overhauls are pending.

Another war zone, Yemen, received a Fund visit around the same time as representatives from the recognized government and central bank met with staff in neighboring Jordan. The mission found that four years of war “crippled” purchasing power, interrupted hydrocarbon exports, and slashed essential food, fuel and medicine imports. It acknowledged that humanitarian assistance should address goods and foreign exchange shortages, while pressing the authorities in Aden to control spending and disclose accounts. Reunification of central bank operations with the Houthi-rebel run counterpart in Sana’a could enable public salary payments and service functioning, as also urged by the business community’s Development Champions Forum. It estimated that half of civil servants were unpaid the past two years, as pensions arrears will begin to be cleared as of November. The group of economists and company executives urged a pause in military hiring as peace talks unfold in Sweden, and joint central bank currency support after a brief depreciation bout lull.

Myanmar’s Cresting Condemnation Count

2019 January 14 by

While the tiny Myanmar Stock Exchange formally reopened to foreign investors as a new companies law went into effect several months ago, they continue to keep their distance amid slowing growth and currency depreciation, and potential removal of European Union garment export duty free entry over the Rohingya refugee crisis. Government leader Aung San Suu Kyi refused to accept APEC summit criticism over expulsion and human rights violations against the Rakhine state Muslim minority, as Bangladesh tried to start a repatriation program for a few thousand of the 750,000 there with no volunteers. She replaced economic officials but refused to acknowledge a “gathering storm” described in a World Bank December report of policy lapses and delays reflected in sliding tourism and foreign direct investment, as the country ranks in the bottom twenty of its “Doing Business” publication. The International Monetary Fund’s latest Article IV visit piled on with a call for a “second reform wave” to achieve frontier market status, as it cited fiscal risks from large recently-agreed China-funded infrastructure projects and hesitant state-run banking system restructuring.

The World Bank predicts gross domestic product growth will slow half a point to 6.2% in the 2018-19 fiscal year ending in March. Industrial sector decline was tracked in purchasing manager index readings below 50 the last quarter, with business sentiment faltering according to a separate survey. The mid- year pace of approved manufacturing foreign direct investment was half the previous $1.5 billion pace, and services output fell slightly with tourism reputation fallout over the Rohingya issue. Arrivals are up less than 1% compared with 7% in 2017, with double-digit drops from Europe and North America. The government removed Asian neighbor visa requirements in a bid to bridge the gap but their spending and stays continue to lag wealthier country visitors. Garment exports are a “bright spot,” accounting for 3% of GDP and almost 750,000 mostly women-held jobs, but EU and US preferences are under review for possible trade sanctions resumption. Agriculture as the main employer is flat following flood-related crop damage and Indian import curbs, and private consumption will “moderate” with rising food and fuel price and currency depreciation-driven inflation, expected to reach 9%. Officials poured money into energy and transport projects in an attempt to stoke demand, also hiking the budget deficit to 4% of output.

The trade deficit was a 5-year low of $300 million in the second quarter, with formal jade exports to China doubling despite an international campaign to boycott so-called “genocide gems” controlled by the military. Reduced capital goods imports should shrink last year’s 2.5% of GDP current account gap, and FDI flows have traditionally offset it but were only $1.7 billion from April-September versus $4 billion the preceding period. Oil and gas exploration and production remains shunned pending law and tax changes, and companies from Singapore, China and Thailand are in sequence the leading sources. They represent 70% of the total, with “limited diversification” through other regions, and China’s 15% slice is likely to increase with the bilateral Economic Corridor under the Belt and Road Initiative, the Bank report comments.

Kyat depreciation against the dollar roughly mirrors regional trends, with an August spike when the central bank removed a daily fluctuation band and the rate settling around 1550 since October. Thin formal foreign exchange trading may exacerbate volatility, and officials recently authorized dollar swaps to aid liquidity. The swings have little influence on Chinese border trade denominated in renimbi, and competitive export gains are elusive since imported input costs rise. The central bank continued interventions at $15 million from April-September, as first quarter credit growth was barely in double digits after the previous 25% clip with tighter bank regulation demanded by international donors. Two-thirds of loans go to trade, construction, services and agriculture customers, with a “large state enterprise bias.” Profitability as measured by return on assets is in steady decline as interest rate controls remain in place. The lack of market determination applies also to Treasury bill and bond issuance to finance the deficit, where auction participation is “below potential.” The first credit bureau for banks and non-bank lenders to better pool information and manage risk is under formation and may improve small business access, but medium-term progress depends as much on image and portfolio rehabilitation as an urgent broader leadership signal , the review claims.

India’s Unreserved Reserve Grab

2019 January 7 by

Indian stock market performance remained barely positive in contrast with the rest of Asia in the red through November, ahead of state elections in December and Prime Minister Namenda Modi’s formal re-election campaign over the coming months, as good tech company earnings and strong 7.5% economic growth offset dramatic non-bank frailties adding to financial system jeopardy. Defaults by 30-year old Infrastructure Leasing and Financial Services, with $13 billion in debt outstanding, revealed the breakneck 20% annual increase of such “shadow bank” lending mainly for construction and property projects in recent years, and threatened a broader liquidity and possible solvency seize with close mainstream bank and mutual fund ties. Institutions like ILFS together equaled the one-quarter of the total credit contribution of private banks. Dominant state ones still account for half the amount even as their equity valuations are discounted for poor management, inefficiency and regular scandals like February’s $2 billion Punjab National Bank fraud.

The government’s immediate crisis policy reaction further stoked financial and real estate sector jitters when it tried to press the nominally independent central bank to release a reported half of its $100 billion reserves in emergency lines. The move not only underscored the size of the potential balance sheet hole officials have consistently denied through incremental recapitalization and liberalization steps, but represented unprecedented overt intrusion in the monetary realm. Former governor Raghuram Rajan was alleged to have fallen out with the Modi team after facing behind the scenes pressure to slow bank bad asset cleanup, and the incumbent Urjit Patel through his deputy signaled that reserve turnover would have “potentially catastrophic” effects on the central bank’s perceived autonomy and technocratic reputation. His backbone was a surprise after acquiescing to the sweeping ill-fated demonetization strategy immediately upon appointment, and in a compromise talks were agreed between the Finance Ministry and Monetary Authority. They may still lead to an outcome with a sizable holdings chunk transferred, and  the episode magnified doubts about fiscal consolidation and banking overhaul prospects in a Modi second term.

The latest quarter expected 7.5% gross domestic product growth, down from the previous period’s 8%, is in line with international forecasts like the OECD’s as output statistical measurement changes continue to invite criticism. Figures were again adjusted to cut the previous government’s average pace to 6.5% and widen the gap since Prime Minister Modi took office, and former Finance Minister P. Chidambaram blasted them as a politically-motivated “bad joke.” Despite the headline number and partial rupee recovery toward 70/dollar with imported oil price relief, analysts highlight soft spots as the BJP ruling party re-election drive kicks off.  Unemployment was 7% in October, and despite a good PMI manufacturing reading of 53, business sentiment is weak and slower auto sales also point to consumer pessimism. With retail inflation within the 4% medium term target, benchmark interest rates should be on hold into next year, but lower food prices will hurt agriculture. This fiscal year’s 3.3% of GDP budget deficit goal will likely be missed, according to India Ratings, and although exports were up 18% in October, they continue to slide in value terms with the current account gap stuck at 2.5% of GDP.

Indian structural reform progress was hailed in a 25-place jump in the latest World Bank Doing Business rankings, with a top credit access score now facing reversal with the shadow-bank induced liquidity crunch. Morgan Stanley predicts single digit loan expansion through the March 2019 fiscal year, even though state banks will provide guarantees to over-leveraged non-banks, which loaded up on short-term corporate debt to support long-term housing and infrastructure portfolios in a classic maturity mismatch. ILFS had a top AAA credit rating to ease wholesale borrowing, and its default sparked fixed-income mutual fund and Mumbai exchange share panic. Funds sold off debt at heavy discounts to meet redemptions, and big players like Dewan Housing Finance experienced double-digit equity price declines. State banks taking large government bond losses in recent months will be reluctant to offer non-bank credit enhancements despite central bank authorization, as big foreign portfolio investors shun the sector entirely in the wake of institutional arrangement and rescue policy muddles. They dumped $2 billion in financial shares in November according to stock exchange data, and outflows will continue until crisis cooperation and rehabilitation flow more smoothly.

Asia Bonds’ Aversion Tendencies

2018 December 31 by

The November edition of the Asian Development Bank’s local bond publication, reviewing the August-October quarter in nine East Asian markets, cited higher yields, currency depreciation and reduced foreign holdings as likely trends into next year against the backdrop of emerging economy “risk aversion” and developed world monetary policy adjustment. It noted that equity markets also sold off, while credit default swap spreads stayed intact on 4% quarterly growth in the group to $13 trillion, almost three-quarters from China. The ADB added that the trade fight with the US could dent “healthy” economic expansion, and an annual survey of liquidity conditions was mixed, with the absence of corporate and government bond hedging tools a main bottleneck. In advance of the next phase of the 15-year old Asian Bond Markets Initiative, it offered a retrospective tracking progress against Latin America. The work praised corporate issuance strides, but found that domestic currency regional placement remains stuck with onerous non-resident rules.

The ADB’s September economic update put gross domestic product growth below 6% in 2019 with domestic demand still “robust,” but trade conflict could be a further drag. While China continues above that threshold, ASEAN members’ advance is set at 5% and Hong Kong’s and Korea’s just 3%. Consumer price inflation will rise 0.5% to near 3% next year, with geopolitics aggravating oil cost uncertainty. In the third quarter yields rose everywhere except China and Vietnam, with the largest 150-200 basis point increases in Indonesia and the Philippines. Only the Hong Kong dollar and Thai baht appreciated during the period, while the Indonesian rupiah and Korean won depreciated 3.5%. and 2%, respectively. Credit default swap spreads inched up in Thailand and Korea, with the latter capped by ebbing tensions with the North. International ownership of local bonds dropped in all markets outside China, with the level there a small 5% in contrast with 25% in Malaysia and 35% in Indonesia, where the central bank hiked rates five times between May and September to sustain inflows.

On an annual basis market growth is almost 13%, with China’s same magnitude leap in local government special bond issuance leading the way in the quarter. Korea’s $2 trillion size was second, accounting for 15% of East Asia’s total. ASEAN combined was $1.3 trillion at end-September, with Thailand and Malaysia each around $350 billion, and Islamic-style sukuk 60% of the latter. Singapore’s $300 billion market had heavy monetary authority issuance to absorb excess liquidity, and Vietnam’s tiny $50 billion one registered improvement in the nascent corporate segment. Government bonds are still two-thirds of activity overall, with the ratio to GDP at 73%. Indonesia’s pace near doubled over the three months with the return of conventional central bank bills as of July, while the Philippines’ 38% drop was greatest without the previous quarter’s retail Treasury bond exercise.

 East Asia cross-border transactions were down 20% in the timeframe to $4 billion, with Hong Kong and mainland China 60% of the sum. Lao PDR reappeared with a $400 million deal, with the Chinese Yuan the top currency denomination. US dollar, euro and yen regional issuance slipped 9% to $220 billion through the third quarter, with the dollar the 90% preference. Chinese names including Tencent and Construction Bank were the biggest portion, and Korean state banks were also active. Indonesia’s $15 billion was one-third of the ASEAN total, and Cambodia was represented with Naga Corporation’s $300 million.

Yield curves moved up across the board with US Federal Reserve rate hikes and balance sheet shrinkage, as speculative-grade corporate offerings were shunned, the report commented. The Malaysian Securities Commission liberalized retail investor access; the Philippines central bank approved simpler placement rules; and the Thai Bond Market Association is considering digital bitcoin settlement to strengthen non-government demand. The yearly online participant and regulator survey revealed worse or unchanged liquidity in Indonesia, Korea and Malaysia, with the last “sidelined” awaiting policy direction from the re-elected Mohamed Mahathir administration. Their turnover ratios slid, as bid-ask spreads widened to almost 5 basis points. On qualitative indicators, along with missing hedging tools, the lack of investor diversity, tax clarity and repo availability were obstacles. Government bonds are tax-exempt in China, Malaysia, and Vietnam, while other jurisdictions apply 10-25% interest withholding to illustrate uneven performance and development paths ahead for more selective buyers.