Asia

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The Asia Subcontinent’s Subpar Sweep

2019 November 15 by

Pakistan on the main Morgan Stanley Capital International Index with a 15% loss and Bangladesh and Sri Lanka, down 5% on the frontier rung, were at the bottom of regional ranks through the third quarter.  Foreign investors shunned bonds as well on uncertain standing with the International Monetary Fund, and political and geopolitical complications. Subcontinent giant India struggling with financial sector crisis reinforced negative neighbor views likely to persist into year-end in the absence of economic policy breakthroughs.

The IMF’s September Article IV report on Bangladesh captured “downside risks” despite strong 7.5% gross domestic product growth predicted again this fiscal year. Private consumption, garment exports, worker remittances and infrastructure projects will be drivers, against the background of rising trade protectionism and natural and humanitarian disasters. Monsoon flooding and climate change erosion could lift food prices beyond the 5.5% inflation target, and the 700,000 Rohingya refugees from next door Myanmar remain in place with a $1 billion donor appeal subject to “fatigue” and fiscal fallout. Reserve money growth as of mid-year was double the 8% central bank goal, and it recently shifted course on lowering banks’ mandatory loan/deposit ratio to 83.5%. Higher electricity charges and value added tax could be inflationary, but disciplined monetary and fiscal policies, with the deficit to be kept under 5% of GDP, are official commitments. Tax collection at 10% of GDP lags behind peers, and without a broader base and exemption elimination revenue mobilization will also stymie progress toward the anti-poverty Sustainable Development Goals, the Fund warned.

Banking system cleanup is pressing with the stated bad loan ratio above 10%, and 30% for state-owned lenders. Under a wider definition stressed assets exceed one-fifth the total, despite a “growing trend” of rescheduling and restructuring. Due diligence and risk management are poor and “comprehensive reforms” are overdue to reverse regulatory leniency. Loan classification and corporate governance criteria should be stricter, and fraud and defaults require court action. The overall historical role of government-run intermediaries must meet a commercial test, especially as national savings certificates sold through them crowd out private capital markets.. As investors in this paper they also come under pressure to breach allocation limits to help relieve short-term budget squeezes, the Article IV commented.

Securities market weakness is in turn an obstacle to economic diversification beyond ready-made garments, as new businesses seek venture funding. South Asian stock exchanges trade at a discount to the region with single digit price-earnings ratios, but the Dhaka heavyweight Grameenphone is in a fight with the telecoms regulator over outstanding fees. Until a settlement and further bad loan purges at banks otherwise prominent among listings, possibly through a central disposal agency as in Vietnam, lethargy is the presumed near-term sentiment.

Sri Lanka’s second quarter GDP growth halved to 1.5% with the Easter terror bombings, but the PMI manufacturing gauge was again over 50 in August signaling recovery. The central bank cut the benchmark rate 50 basis points then on 3.5% inflation, and in October imposed loan cost caps on banks to ensure relief was transferred to borrowers. Investors have taken positions on private sector retail-oriented competitors most likely to benefit, and they could further rally after the November presidential election with the two party contenders are in a close race. The winner may offer additional fiscal and monetary stimulus after the IMF program allowed such temporary moves in the wake of the bloody attacks still denting tourism and consumer confidence. A silver lining in the latter is lower import demand set to narrow the current account gap to 2.5% of GDP.

Pakistan is a contrarian play as the Fund’s mid-September review called for “decisive implementation” of far reaching reforms never achieved under previous arrangements. The central bank is on hold, and fiscal retrenchment is to shrink the coming year’s deficit to 7% of GDP.  Growth is estimated in the 2-3% range, and inflation should fall to single digits. The 5%-plus current account hole has started to improve with the 30% real exchange rate depreciation the past two years, although foreign direct and portfolio investment have yet to rouse. The Kashmir confrontation with India has again raised the nuclear alarm, at a time when prospective share buyers prefer to monitor that reaction within the economic sphere.

Asian Stocks’ Staid Strictures

2019 November 8 by

Emerging Asia stock markets mirrored the almost 4% Morgan Stanley Capital International core index gain through September, and equaled Latin America and beat Europe performance, with China “A” shares up 28% the runaway leader. The main China component rose 5% and the Philippines, Taiwan and Thailand increased in the 5-10% range. India was barely positive (+1%) and Indonesia was fractionally negative, while Korea (-2%), Malaysia (-7.5%) and Pakistan (-17%) were losers. On the frontier rung, the regional advance was double at 9%, as big weighting Vietnam (+12%) offset 5% drops in Bangladesh and Sri Lanka.

 The Asian Development Bank noted that the first two of these members experienced double-digit export jumps with the US-China trade war, as it cut this year’s economic growth forecast to below 5.5% with underlying electronics cycle “sharp contraction.” The ADB expects weaker trade and investment into 2020, as the International Monetary Fund predicted a 1% global growth setback and new head Kristalina Georgieva pledged to tackle the slump to “minimize crisis risk.” Global fund trackers reinforced gloom with a $25 billion emerging market equity outflow total, as surveys pointed to Hong Kong’s and non-banks’ respective drags in China and India as asset class overhangs.

Chinese August data showed slack in industrial production, retail sales and fixed investment, with producer prices deeper into near 1% deflation. The Bank for International Settlements’ triennial foreign exchange study had the Yuan share of global trading unchanged at 4%. Formal foreign institutional investment quotas were lifted but remain one-third unused, with international reserves frozen at $3.1 trillion. Fitch Ratings projects gross domestic product growth below 6% next year, despite record total social financing from January-August over RMB 15 trillion. The central bank reported one-tenth of 4500 lenders at high distress risk comprising 5% of system value.

 Standard & Poor’s again sounded the alarm on local government debt, with almost RMB 4 trillion to be repaid by 2021. Dealogic, monitoring cross-border mergers and acquisitions, revealed that Chinese companies had already divested $40 billion in overseas assets through August, versus $32 billion for all of 2018. New home prices were up in only 55 of 70 cities, a six-month low, with widespread property developer layoffs. After one hundred days of protests, Moody’s downgraded Hong Kong’s outlook to negative as reserves fell $15 billion to $430 billion, the most in two decades.

Foreign direct investment for the year was $9 billion, a 3% rise, and the official manufacturing PMI gauge was under 50 in September. In the balance of payments the combined current and capital account surpluses were matched in the $130 billion “errors and omissions” outflow, signaling strong underground money flight. The private sector-oriented Beige Book described the third quarter as particularly hard for retail and services, as “shadow banking” like bond issuance registered a period peak as the chief funding channel. The Finance Ministry relaxed commercial bank bad loan provisioning requirements, as the central bank warned that regional players were “overstretched” and shareholders would face the consequences. Researcher FT/Wind estimated a capital shortage in most stock-exchange listed banks, as rumors circulated in Washington that the Trump Administration was considering US investor portfolio investor curbs as a negotiating lever.

Indian growth similarly disappointed in the April-June quarter at 5%, as ratings agencies cited “precipitous private consumption decline” that will not be overcome by a surprise 10% corporate income tax reduction. They argue structural reforms are still missing to improve competitiveness and business sentiment, and that the break will hike the fiscal deficit above target to 4% of GDP. Fitch puts the combined state and central government gap at 7% at year-end, even after the central bank was forced to transfer record reserves. It has been in easing mode with another recent 25 basis point move to just over 5% in the benchmark rate, but household confidence remains soft amid overlapping real estate and financial sector crises following the collapse of non-bank giant ILFS. According to local consultants stalled residential projects now total $65 billion, and analysts believe the banking system bad loan ratio is again heading toward 15% on damage from housing specialist ties. Listed Yes Bank was caught in the vortex, as share value was almost wiped out with its affirmation of a speculative shadow franchise under harsh investor glare.

Asia Bonds’ Serial Signal Clashes

2019 October 25 by

The Asian Development Bank’s quarterly local currency bond survey of mid-year and through end-August trends noted lower yields with slower economies, amid still positive “risk off” foreign investor sentiment raising future flags. The US-China trade standoff continued to loom over regional markets cutting interest rates in line with developed world central banks. The Japan-Korea diplomatic and export clash added to aversion, as equity markets also slid and currencies weakened against the dollar. Annualized growth was almost 15% in the latest period for combined size of the nine Emerging East Asian destinations over $15 trillion, three-quarters from mainland China, and close to another 15% from Korea. A Cambodian bank bond as the third such listing on the stock exchange was a highlight as broader Indochina coverage may soon join Vietnam in the publication.

In most places the 10-year government bond yield drop surpassed the 2-year, with curve flattening suggesting economic “gloom,” the ADB commented. Korea, Malaysia and Thailand reduced benchmark rates 25 basis points, and Indonesia got a sovereign ratings upgrade to slash cost. Hong Kong’s fall was less than the rest with “political uncertainties” from months of anti-Beijing street riots. The International Monetary Fund in its July outlook predicted 2.5% trade growth this year will be half the pace of 2017. Emerging market gross domestic product expansion will be just 4%, with inflation almost a point higher. Asia’s clip is a “rock solid” 5.7%, despite Hong Kong and Korea at half that figure. Vietnam was an exception to the stock market spin in part due to possible MSCI index elevation from the frontier to core rung in 2020.

 Credit default swap spreads “rose sharply” in July, even as overseas ownership of domestic bonds was “stable,” according to the report. However Malaysia and the Philippines had 1.5% declines, with net outflows in the former on oil export price softness and potential removal from an FTSE global bond index. A new World Bank policy paper points out that East Asia is ahead of other regions in developing capital markets for a state and corporate borrowing “spare tire” since the late 1990s financial crisis, although the private sector can be “crowded out” and small and midsize company access lags. The update warns that Chinese growth “moderation” is a bigger risk than US recession, while multiple trade conflicts rage. While the Federal Reserve reversed course toward lower interest rates, major emerging market upsets elsewhere, such as in Argentina and Turkey, can still readily translate into asset class selloffs, it added.

The government-corporate bond divide is 60%-40%, and overall growth was 3.5% in the second quarter, roughly the same increase as in mainland China. In contrast Hong Kong’s outstanding amount slipped slightly to $250 billion, while ASEAN’s combined was up 2% to $1.5 trillion. Thailand leads there at $425 billion, followed by Malaysia’s $350 billion and Indonesia’s $220 billion. In Malaysia 60% of volume is Islamic-style sukuk, and Singapore’s $320 billion market is also moving into this niche. The Philippines and Vietnam are minnows at $125 billion and $50 billion respectively, although Manila stands out with a retail investor program. As a fraction of regional GDP the total is near 85%, with Korea the outlier with a 125% proportion. The foreign investor share ranges from 5% in China to almost 40% in Indonesia, with net buying over the April-July timeframe.

 Cross-border Asian placement was $3.5 billion, with China names accounting for half. Bank of China had the single biggest $750 million issue in Hong Kong dollars, and denominations in Singapore dollars, Korean won and Malaysian ringgit were 5% of activity. Hard currency East Asia offerings climbed 20% from January-July to over $200 billion, 90% in the greenback. Indonesia was responsible for $12 billion; Thailand $1.5 billion; and Vietnam Prosperity Bank completed a $300 million bond. Cambodia’s Advanced Bank local listing had a 7.75% coupon above bank term deposits, with the proceeds going to more speculative rural business. It got a “B” Standard & Poor’s rating to facilitate institutional and individual sale, with over 20,000 investors now registered on the $150 million exchange. The small bourse is on the radar screen especially of Indochina specialists already in Vietnam, and eying fresh spots with the announced merger of the Hanoi and Ho Chi Minh markets, under the caveat that “rock solid” may also describe boulder dangers.

Central Asia’s Currency Steppe Changes

2019 October 25 by

Central Asian currencies entangled in Russian ruble and Chinese Yuan slides dipped to new lows against the dollar in August, as external bond investors took the signal to trim positions. The Kazakh tenge, Uzbek som and Tajik somoni fell 2-12% due to outsize Russian trade and remittance dependence. Kazakhstan is a member of the Moscow-led Eurasian Economic Union, and gets one-third of imports from its historic ally and neighbor. Tajik worker proceeds from there account for one-third of gross domestic product; for Uzbekistan the fraction is only 10%, but the central bank ended the foreign exchange fluctuation band during the month in another liberalization move drawing frontier market investor interest. China’s currency weakened amid the prolonged US tariff and technology restriction battle for additional sub-regional pressure, as foreign direct investment in natural resources and infrastructure gathers pace under the Belt and Road push.

In Kazakhstan, with new President Kasym-Zhomart Tokayev in office, panic buying prompted a documentation crackdown on customer and dealers as the tenge veered toward 400/dollar. It had stayed in a 375-385 range despite oil price weakness on presumed sovereign wealth fund intervention. Since the dollar peg’s collapse 5 years ago, a half dozen devaluations have hurt the population, which erupted in nationwide protest when snap elections were called in June. With double-digit unemployment and state banks still reeling from troubles originating a decade ago, a recent poll showed just 60% of citizens satisfied with living standards. To shake up the banking system the government intends to boost Islamic finance’s share, which now barely registers, to 3% over the medium term and may allow conventional lenders to open sharia-compliant arms. Next door Kyrgystan has a 5% goal, and Tajikistan and Uzbekistan are designing legal and regulatory frameworks with support from the Islamic Development Bank. According to Moody’s Ratings growth in this segment will strengthen and diversify funding sources, including from Asian hubs like Indonesia and Malaysia, but must link to existing deposit insurance and liquidity schemes to be competitive and sustainable.

Against the background of renewed currency jitters, Mongolia’s recent predicament of 25% depreciation and exhausted reserves before turning again to an International Monetary Fund rescue haunted portfolio managers, as bonds were dumped ahead of a heavy repayment schedule next year. Its August Article IV report predicts 5% plus growth over the next five years, but warns of the “narrow economic base” with mining 80% of exports and almost entirely destined for China. The OT copper project is half of foreign investment, with continued delays in coming fully on line. A $500 million swap line with a domestic bank and the bilateral Chinese central bank facility tapped for $1.8 billion expire in 2020, and large Eurobond amortizations start in 2021.The reserve position is projected to plateau then at $4 billion, but under a stress scenario could plummet to $1 billion as public debt hits 95% of GDP.

Years of double-digit household loan expansion have hurt bank capital and profitability and an asset quality review is not yet complete as the 2020 parliamentary election cycle approaches to further postpone action. Inflation is still high at 8%, amid chronic fiscal and current account deficits and worsening environmental damage to the key livestock industry. A budget rule was adopted but not enforced as the Development Bank runs up contingent liabilities, and retail borrowers circumvent macro-prudential debt service/income limits through resort to unregulated non-banks charging 40% interest, the review adds.

Investor qualms also touched hydrocarbon exporter Azerbaijan recovering from bank collapse and recession, despite selective appetite for its illiquid “exotic” bonds. The exchange rate is a de facto peg at 1.7 manat/dollar, after the SOFAZ sovereign wealth pool transferred billions of dollars in holdings for stabilization. Growth is expected at 2.5% and inflation 3.5% this year, as the fiscal stance moves from stimulus to consolidation, the IMF comments in a September Article IV survey. Monetary policy moved to inflation targeting, and structural reform strides are evident with a leap in the World Bank’s Doing Business rankings. However banking sector cleanup remains a work in progress after fraud and failure at leading state institution IBA, and corruption and transparency scores are poor. Local government bond development is also lacking until a durable shift in currency and capital markets confidence, the report cautions even high-risk speculative investors.  

China Bonds’ Zero Intolerance

2019 October 19 by

Global fixed income portfolio managers contending with a near $15 trillion universe of low and negative yielding developed world government bonds, with euro-denominated emerging market issues also in the fold, have hailed the entry of positive return Chinese local instruments into benchmark indices. Together inclusion in major Bloomberg, Financial Times and JP Morgan gauges will trigger estimated hundreds of billions of dollars in allocation to raise foreign investor ownership beyond the current 2% share, as compared with an average ten times greater for big developing markets in Asia and elsewhere.  In the region China accounts for three-quarters of the $13 trillion local bond total, as the number two market worldwide in nominal terms behind the US. Starting in February next year, it will get a full 10% individual weighting in JP Morgan’s GBI-EM gauge embedding Asian dominance there, just as in equities where  China’s “A” share addition boosts the already 30% portion on the core Morgan Stanley Capital International Index. This step caps a three-year opening process luring thousands of participants in domestic interbank bond dealing, as Beijing declares a path toward automatic foreign institutional access joining the emerging market mainstream. Its long-awaited arrival on the scene as a top-rated credit is an upbeat asset class story despite growth, trade and banking system concerns continuing into 2020.

Amid the anti-export tariff, currency and national security imbroglio with the US likely to last through next year’s presidential election, an expanded bond channel can support domestic demand through infrastructure projects, and reduce disproportionate bank reliance in total social financing. It will enable China’s global gross domestic product contribution to increase to 20% over time despite a probable shift to current account deficit status, and demographics-driven economic slowdown from decades of the one-child policy. Diversified financial intermediation can offset falling total factor productivity, with recent annual gains in the 1-2% range. However while overseas investors may be sanguine in the near term about the reported government debt level at 50% of GDP, they will insist that the 150% state enterprise load, due to leap another 10 trillion Yuan this year, be reined in for overall sustainability.

On the index launch mechanics, JP Morgan will incorporate a half dozen liquid government bonds, and projects an early $20 billion infusion with the 10% weighting since it is tracked by $200 billion in assets. The Finance Ministry puts the amount outstanding at $2 trillion on a defined yield curve, with 1-10 year maturities auctioned monthly. Banks and insurers are the main buyers with the former taking two-thirds of issuance, and secondary trading is minimal. Policy bank offerings from the Agricultural, Development and Export-Import Banks are also part of the sovereign mix but so far eligible only for Bloomberg’s separate yardstick. With integration Hong Kong’s Bond Connect scheme for onshore entry in effect since 2017 is expected to improve, especially in addressing remittance and settlement complications. The currency convertibility timetable, with a vague next decade target, could also be spelled out concretely to harness fresh inflows, in the wake of recent annual drops in Standard Chartered’s Renimbi Globalization measure. Trade settlement and international payments rankings have declined despite acceptance in the International Monetary Fund’s Special Drawing Right (SDR), and official no-devaluation assurances.

Chinese local corporate bond participation should pick up at the same time despite the absence of a dedicated index, as 80% of borrowing is still through banks and Standard &Poor’s has begun competitive credit ratings. Surveys of central bank reserve managers also reveal an appetite for higher safe asset exposure with only 2% of holdings Yuan-denominated, below the 10% stake in the SDR, amid the search for dollar and euro alternatives on commercial and geopolitical grounds. On an historical view, emerging market analysts predict a similar trajectory for local bonds as external ones the past decade, as half a trillion dollars in corporate issuance now leads as a stalwart in JP Morgan’s benchmark for that field. Offshore investors continue to snap up risky property developer placements this year, with double digit yields rarely available elsewhere. They may default and leave holders at the mercy of uncertain legal recourse, while Chinese central government paper is considered a solid bet for now on the basic balance sheet.   

China/Hong Kong’s Stubborn Standoff Stripe

2019 September 27 by

China’s MSCI components were pressed to keep double digit gains and Hong Kong to stay positive as months of pitched trade and political battles promoted foreign investor outflows and IPO delays, after the renimbi settled below 7/dollar. The US extended the bilateral tariff and investment restriction fight into currencies with a “manipulation” declaration at odds with the IMF’s conclusion that value reflected economic fundamentals. The finding did not meet legislative criteria for current account surplus and intervention size, and since retaliation is already in effect with another duty round the practical effect is limited beyond a negotiating tactic. Ratings agencies pointed out that weakening may have been a tariff rejoinder, but that a combination of flexibility and stability was likely in the future to forestall capital flight and permit Chinese company repayment of $800 billion in dollar debt. Reserves fell $15 billion in July but still exceed $3 trillion, with the manufacturing PMI under 50 with exports and fixed investment only ahead 5%. Retail sales were negative during the month, and producer prices show deflation. The IMF’s Article IV report predicted ‘moderate slowdown” and raised the alarm on debt approaching 275% of GDP this year. The current account balance will be just 0.5%, while the errors and omissions tally is negative with the Fund advising floating exchange rate transition. In the financial sector, the central bank embraced previous recommendations with scrutiny of property borrowing and holding companies, and launch of a benchmark “prime rate” structure reflecting market competition. It has also overseen takeovers of second-tier banks and steered credit toward small business under dedicated facilities. The shakeup contributed to a lower RMB one trillion monthly loan total and single-digit monetary expansion. Real estate developers in particular have turned to onshore and offshore bond issuance and “shadow” commercial acceptance bills, now at $200 billion outstanding for a 30% annual jump. Chinese credit abroad is also under pressure, with BIS Q1 statistics reflecting Japanese lines at four times the $45 billion extended.

The overseas development and Belt and Road portfolios have entered the mix with a Rhodium Group study of 40 restructurings calling sustainability into question, and Johns Hopkins University research tracking $150 billion in African lending the past two decades as the number one creditor. While mainland growth will still be 6% plus, Hong Kong faces recession with a paltry half a percent output improvement in the end-June quarter before the summer street battles between marchers and police. Protesters demand less control from Beijing and the resignation of its allied chief executive Carrie Lam. Officials announced a 0.3% of GDP stimulus package with the political and economic squeeze, as monthly home prices also fell signaling softness in that critical sector. Retails sales and tourism suffered and the PMI index is at a decade bottom. Foreign reserves around $400 billion remain ample to back the dollar peg and ten months imports, but the CNY is half the currency basket and a military crackdown could suspend the arrangement under emergency law. Yuan deposits and equity Connect flows are down, and the Hang Seng index could be the regional laggard with typhoons unleashed in all forms.

Iran’s Raucous Sanctions Romp

2019 September 27 by

After a 20% gain in the fiscal year first quarter ending in June, the Tehran Stock Exchange local index added another 5% through August in the face of  US “maximum pressure” sanctions banning all global oil and banking engagement, as the government hailed decelerating currency and economic slide. The market seemed to shrug off Persian Gulf military alerts on seized oil tankers amid reports a secret trading unit was in place to continue exports to China, India, Syria and Turkey. Analysts estimate that up to 500,000 barrels/ day can be sold in comparison with the previous peak five times that amount, despite Washington’s claims of shutoff campaign victory. The Oil Minister Bijan Zanganeh preserves total deal confidentiality as “war information,” as daily inquiries reportedly arrive intended more to glean intelligence than to arrange shipments. July’s official sales tally was 100,000 barrels/day, an 80% decline from the same month in 2018, as Supreme Leader Ayatollah Ali Khamenei lashed out at the Trump Administration’s “economic terrorism.” He acknowledged that “easy income” from crude oil was no longer viable, and urged domestic goods and services diversification and higher productivity.

Vice President Eshaugh Jahangiri recently told business executives that the past year’s shock from sanctions and poor policy had worn off, as central bank head Abdolnasser Hemmati cited new rial stability at around 120,000 dollar on the parallel market, a 40% recovery over the past year. A secondary regulated foreign exchange hub for non-essential imports was launched in July to relieve pressure, and the Iranian cabinet approved legislation to redenominate the currency by eliminating four zeros and renaming it the toman. This process is well established in emerging markets to engineer a one-time devaluation and attempt to dampen future inflation expectations, with the current rate at 40%. Under the plan 10 rials will equal one toman, and the administrative and printing costs for the transition are put at $150 million. Despite these changes, the government continues to crack down on unauthorized “enemy” dealers, with the judiciary arresting dozens who could face execution. Leaders at Iran Revolutionary Guard Corps-controlled Bank Ansar were implicated in speculative schemes, amid other major financial sector corruption cases targeting the former chief of Sarmayeh Bank and labor minister, who received millions of dollars in loans without collateral.

The minister was a well-known Reformist party lawmaker and so-called “aghazadeh,” roughly translated as “child of a noble.” This bloc is a main pillar of support for President Hassan Rouhani, but its standing has waned ahead of parliamentary elections scheduled in six months. A candidate recently lost the deputy speaker race, and a conservative cleric ousted the chair of the national security and foreign policy committee from that group. In Tehran municipal contests in July, the Reformists in charge had a mixed showing on just 10% voter turnout. Opponents accused them of “poor performance “in a sign their legislative majority could fade next February as another movement, Iran Revival, embraces the political and economic overhaul mantle.

Gross domestic product is down 5% and forecast to be barely positive next year, with the International Monetary Fund projecting just 1% growth into 2024. Economists note a 2% decline in private consumption as a relative bright spot, as stock pickers target household plays such as Seamorgh, a poultry company, and Bank Pasargad, a privately-owned retail lender as compelling alongside the bargain five times average price-earnings ratio on the exchange. Futures and options trading began the past year, and a “prime” listing tier will soon be inaugurated with a minimum 25% free-float and formal corporate governance and transparency score, according to management. Securities depository information through July shows financials, chemicals and autos as the most actively traded sectors, often through ETFs investment houses with overseas experience pioneered. Large scale state enterprise divestiture could be on the table as well as a stock market driver in the near future, as Iran’s Planning and Budget Organization issues a blueprint for further constraining deficits after citizen subsidy rollbacks. While foreign borrowing fell 5% in the end-March quarter to $9.5 billion under US prohibition, domestic debt through Islamic Treasury bills as a fresh channel has spiked, while the government turns to barter to settle private sector arrears under self-inflicted maximum fiscal pressure. 

Thailand/Philippines’ Second Half Second Guessing

2019 September 20 by

After double-digit gains through July to lead ASEAN, Thailand and the Philippines stock markets entered the second half with slower growth on both domestic and external account slippage, despite good currency performance and ruling party post-election affirmation.  Thailand’s economic expansion forecast this year was cut to 3%, and the Philippines’ will be double that increase on business and consumer pullbacks at home and abroad. The baht and peso were among the few emerging market units to rise against the dollar, with the former leading the pack with a 5% rise. Thai Prime Minister Prayuth Chan-ocha finally assembled a cabinet after a controversial poll win on his military-backed constitutional and financial advantages, while President Rodrigo Duterte’s allies scored handily in their contests, sloughing off infrastructure project budget delay and international outcry over the anti-drug crusade claiming thousands of lives. Both leaders followed the region into an anti-slowdown strategy of interest rate reduction and fiscal stimulus, while they contend with their own threats including household debt and remittance restraint.

Thailand’s new government took office amid the worst quarterly growth in five years at less than 2.5% slashing the full 2019 estimate to 3%. Almost every category was down with agriculture off 1% after drought and auto and electronics exports 6% with the strong baht, which also kept tourism flat and knocked manufacturing 5% in June. The central bank acknowledged weakness on subdued 1% inflation with a 25 basis point nudge in the benchmark rate to 1.5% in August, with further reduction expected as the governor declared US-China trade protectionism “far from over.” The first half current account surplus was relatively unchanged as oil import prices also fell, with this year’s consensus figure at 6.5% of GDP. Although international reserves are ample at $250 billion, intervention has been limited to “disorderly movement” following the International Monetary Fund’s recommendation, although rules were tightened on non-resident baht account balances and reporting, and local pension funds and insurers may be permitted to invest more overseas. Despite appreciation against the dollar, the balance of payments excess may add the country to the US Treasury Department’s manipulation “watch list.”

In the immediate aftermath of the poor results, Finance Minister Uttama Savanayana unveiled a $10 billion spending bill aimed at farmers, the poor and domestic tourists. Family and low-income earner subsidies will be hiked and landowners get debt relief. Thai travelers are eligible for an allowance to travel outside their provinces, but a proposal for China and India visitor visa-free entry was dropped over security concerns. The package accompanied the larger $15 billion deficit planned for the 2020 fiscal blueprint, within overall direct government debt at 40% of GDP. It stresses public-private partnerships in road and transport, and mortgage restructuring within designated state and private bank programs to shrink homeowner leverage. The central bank increased monitoring in this segment as the bad loan ratio approached 5%, and it tapered credit growth to single digits. While foreign investors have been keen buyers of Thai government debt even at yields barely above 2% with the currency kicker, they avoided corporate debentures after two well-publicized defaults by an animal feed producer and energy company. They were a tiny amount of the total outstanding, but the bond market association called on the securities regulator for faster action on auditing and governance lapses.

Philippines’ GDP growth came in at 5.5% in the first half, as officials assured the decline was “temporary” and that budget postponement may have shaved off half to a full point. With outlays now scheduled under the President’s “Build” highway and port envelope the second half forecast is 6.5%, with domestic demand aided by bank reserve requirement and policy rate reduction as monthly inflation at 2.5% is in the target range. However the 3.2% of GDP budget gap goal will likely be breached according to HSBC research, as national debt, two thirds domestic and one-third foreign, jumped 8% this year. On the external ledger, a rare balance of payments gap was registered in June, as remittances were 3% lower than the same month in 2018. The setback came after foreign direct investment net inflows through May were only $250 million, one-sixth last year’s sum. New pledges rose 25% through July, but may not materialize despite the administration’s infrastructure and political buildup.

Myanmar’s Complex Military-Industrial Cudgel

2019 September 13 by

The United Nations Human Rights Council, charged last year with investigating the Myanmar army’s (Tatmadaw) business empire as the biggest single corporate owner amid findings of abuses and war crimes in three states, presented a complex construct of domestic and investor ties to be rolled back and unwound altogether under diplomatic and commercial imperatives. The report focuses on widespread violations in Kachin, Shan and Rakhine states, the first two with longstanding independence movements in gem-producing regions and the last the source of the 850,000 Rohingyas’ escape to Bangladesh after company-supported “cleansing operations” that may fit the universal genocide definition. Senior generals leading the two main Myanmar Economic Holdings (MEHL) and Cooperation (MEC) conglomerates are already under personal international sanctions and asset freezes, and the UN Council’s work, to be debated at the September General Assembly, is designed to reinforce the military’s isolation.

 Its “outsize power” is responsible for systemic persecution and violence and has compromised post-2015 election democracy and free market transition, the document comments. Aung San Suu Kyi is the civilian government head after her party won the most seats, but the Tatmadaw automatically controls one-quarter of the legislature and can veto proposed constitutional revision. It is autonomous with no budget oversight, and retains interior and border ministries along with defense. Dozens of foreign joint ventures and other business connections were identified with MEHL and MEC, and the expose notes the gem industry’s “global reach” and calls on multinational firms, banks, and development lenders to sever all links. A formal boycott could be adopted at the UN plenary next month, as the United States and European Union continue to crack down over the generals’ absence of accountability for the mass Rohingya displacement.

The UN has guiding principles on business and human rights supplemented by Global Compact provisions, and separate codes were prepared by the European Commission and the Organization for Economic Cooperation and Development. The OECD sets out a due diligence framework for conflict minerals and overall human rights supply chain integrity, with another convention outlining anti-bribery and corruption steps. Executives have been held liable in international criminal court for bad conduct, with past cases from Sierra Leone and Yugoslavia. Under general investment criteria, basic accounting and reporting should be available, and neither MEC nor MEHL offer financial documents or list fiscal contributions from oil and gas, minerals and bank ownership. In 2017 the Defense Ministry claimed MEHL revenues at $120 million, and its Myawaddy Bank as the number two taxpayer, without verification.

 Each parent controls an estimated sixty companies, divided into services, trade and production groups in MEHL’s organization. MEC’s focus is more on agriculture and hydrocarbons raw materials, alongside financial and insurance holdings.  Myawaddy is considered a private bank under existing law with almost $1 billion in assets as of 2016, according to the World Bank. The main MEC bank is Innwa, managed by military officers to enable international system access within existing curbs. In Kachin and Shan States jade and ruby extraction is intensive along with family and state-owned partners. Combined operations include large tourism resorts and land tracts, and following new accounting procedures for government-run enterprises reserves can be earmarked for military use. So-called crony companies headed by wealthy individuals such as Asia World, Eden, First Myanmar and KBZ were the target of solicited “donations,” amounting to tens of millions of dollars, for northern Rakhine State road and border wall construction after the Rohingya expulsion, and they provided cash for that purpose as early as 2017, the report suggests. They often have Singapore stock exchange listings and company ties where ethics and governance codes bar such behavior. Chinese and Korean joint ventures are common in mining and steel, and French cement giant Lafarge and Indian construction outfits have also entered. Russia and Ukraine have traded arms and weapons technology under embargo from dozens of other countries and in potential violation of dual-use export restrictions.

The UN study concludes that forced labor and sexual violence are routine in mining areas, and that Rakhine development projects to “erase the Rohingya” may implicate the Tatmadaw and associated businesses in war crimes. Dozens of overseas partners may be drawn in indirectly, and it urges investors, consumers and donors to end all engagement inviting these risks and tragedies for eventual extrication from the broader economic and financial sector regime. 

Asia’s Isolated Islamic Finance Flashes

2019 August 30 by

Indonesia and Malaysia stock markets lagged on the Morgan Stanley Capital International index through July, with the former up 7%, just behind behind the overall gauge increase, while the latter fell 2.5% despite strong Islamic finance indicators. In the first half sukuk issuance rose almost 55% to near $90 billion, with Malaysia accounting for half and Indonesia one-tenth the global sum. The total outstanding is now over half a trillion dollars, but only half a percent of world fixed-income activity, according to a recent report by the London-based Official Monetary Institutions Forum (OMFIF). Saudi Arabia is the other main market with a 15% share, followed in the Gulf with Qatar’s 3%. Sovereign is catching up with dominant corporate placement, as governments and central banks establish yield curves and liquidity facilities. Indonesia floated the first “green” $1 billion sukuk last year to promote clean energy transition, and Malaysia engineered several murahaba commodity buybacks beyond traditional techniques.

Sharia-compliant assets are 30% of Malaysia’s banking and 10% of its insurance industries, with longstanding official support of commercial and regulatory development. Tax benefits and professional fee discounts are available for Islamic funding, with small and midsize company borrowing rates lowered an average 2% compared with conventional sources. In the Gulf ratings agency Standard & Poor’s predicts 25% sukuk growth this year for debt refinancing and budget deficit coverage. Asia and the Gulf Cooperation Council cooperate to harmonize rules, and in 2018 Malaysia’s Islamic financial services and Bahrain’s accounting and auditing bodies agreed to devise common prudential and governance norms. However “regulatory dissonance” prevails in the OMFIF’s view as thousands of scholars in dozens of countries differ over interpretations and standards following the Koran’s text. Despite a global market estimate of trillions of dollars in the medium term across the complex, multilateral convergence is lacking and may be further delayed as new administrations in Indonesia and Malaysia confront messy domestic policy agendas.

 An Indonesian court confirmed President Joko Widodo’s re-election by a 10% margin, with his coalition also winning over half of parliamentary seats, despite continued Jakarta street clashes in part over the durability of 5% gross domestic product growth. Consumption dependence in the world’s fourth most populous nation is a buffer against external shocks, but heightened by manufacturing and foreign direct investment weakness, after the latter dropped 9% last year. The government unveiled consecutive infrastructure packages to close the gap with neighbors, but spending eroded budget balance and fueled the 2% of GDP current account deficit with equipment imports. Instead of direct control, Finance Minister Sri Mulyani Indrawati, expected to stay in her post in the second term, proposed tax breaks for land acquisition and feasibility studies that will also apply to securities buyers. Likely looser fiscal policy will be matched on the monetary front, as bank reserve requirements were already eased in June, and the 6% benchmark rate  is due to normalize after emergency hikes nine months ago.

Rate cuts must be weighed against the need to preserve foreign portfolio inflows, particularly in local government bonds where international ownership is 30%. They may help stimulate bank credit, which jumped 12% in the first quarter, but the financial system remains “shallow” at 75% of GDP in the words of the latest International Monetary Fund Article IV review. Bank corporate lending has pulled back amid new rules limiting foreign exchange exposure after offshore bond defaults, and fintech competition is a priority in Jokowi’s second turn to improve access and lower costs. Stock market heavyweight state-run Bank of Central Asia will invest heavily in technology and small business outreach, and rating agencies identified potential financial sector takeoff to mirror regional peers as a factor in a recent one-notch upgrade.

Malaysia’s central bank was the first in ASEAN to ease, but it has not boosted the popularity of Prime Minister Mahathir Mohamed’s Pakatan coalition one year after taking office. Public opinion approval is around 35%, as the economy feels the fallout of Asian semiconductor supply chain disruption and public investment retrenchment after a workout of China Belt and Road projects. The government avoided a $5 billion penalty with renegotiation of the East Coast rail link, as growth was pared to the 4% range with goods and services tax rebates saved for other mounting contingencies.