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.

Pakistan’s Churlish China Lifeline

2018 November 26 by

After campaigning on an “Islamic welfare state” platform without “begging” the International Monetary Fund and traditional bilateral lenders China and Saudi Arabia to pay for it alongside estimated year-end debt and import obligations beyond the current $8 billion in reserves, Pakistan Prime Minister Imran Khan recognized the hard numbers and directed his Finance Minister to enter negotiations on another Fund program. A staff mission arrives in November for talks on a loan expected to be again in the maximum $7 billion range agreed five years ago. The Saudi government, after initial hesitation, came through with an oil supply and credit package around the same size on the eve of its boycotted global investor conference over the journalist Jamal Khashoggi’s murder.  It has also promised to join the headline $60 billion in infrastructure projects around China’s Belt and Road initiative.

US Secretary of State Mike Pompeo and Fund Managing Director Christine Lagarde insist that Beijing reveal details of its commercial loan terms under the joint “Economic Corridor,” with the former threatening to scuttle any arrangement that promotes “debt trap diplomacy.”  Chinese capital goods imports have also swelled the current account deficit to 6% of gross domestic product, a gap uneven garment exports and remittances and flat foreign direct and portfolio investment cannot readily bridge. The stock market and rupee fell around 25% through mid-October on admission of dire fiscal and balance of payments straits, and the prospect that the country would follow other Asian borrowers’ path to gain breathing space. Analysts pointed out that assets could be relinquished as in Sri Lanka’s port majority ownership, or projects cancelled or postponed as in Malaysia and Myanmar’s recent decisions. In Pakistan’s case external conventional and sukuk bond holders are likely to be part of the workout as well, after previous restructuring decades ago in the aftermath of the Asian financial crisis. Private creditors could be asked for cash flow relief through extending maturities, or for outright interest or principal reductions. The Paris Club of Western bilateral providers, where China is an observer without subscribing to its rules, in turn reschedules lines under a longstanding formula. Beijing has not shown its hand either in data or approach, and may leave the situation in limbo as in other regions to Islamabad’s and emerging market investors’ frustration

Africa has accumulated large scale collateralized debt to China’s Export-Import and Development Banks on non-concessional terms, as described in recent Standard Chartered research surveying a dozen countries. Djibouti is arguably the most extreme as its load mostly owed the Chinese doubled in several years to almost 100% of GDP in 2017. For private market issuers including Angola, Cameroon, Ethiopia, Zambia and Kenya, China’s portion of external debt ranges from 20-40%, and observers warn the calculations could be greatly understated with limited reporting and verification. Zambia’s application for IMF support and domestic politics have been upended by undisclosed government and state company borrowing, and Mozambique and the Republic of Congo already entered formal restructuring with commercial creditors where Chinese participation alongside another Fund program is a major complication.

The Washington-based Institute for International Finance provided summaries of post-default progress for the two countries in its October update on compliance with the voluntary code of conduct on creditor-debtor communication and coordination adopted in the early 2000s. It labeled Mozambique a “cautionary example” for still failing to account for $500 million in hidden loans from the original unexplained total triple that size. In March the government proposed a write-down through an exchange for a 50% net present value loss that bondholders rejected out of hand. In August a counteroffer was presented tying future payments to hydrocarbon revenue streams, but a Fund facility remains out of reach with the debt-GDP ratio over 120% and China on the sidelines. The Republic of Congo’s Chinese obligations increased tenfold in a few years to $3.5 billion after it got poor country bilateral and multilateral cancellation in 2010. Multinational oil traders and regional and European banks are also commercial creditors, and IMF ties are likewise hung up on unrevealed sovereign and state company debt. While “good faith” negotiations are underway, a main roadblock is uncertainty over Beijing’s “comparable treatment” once a deal is struck, and that admonition applies to a quick resolution of Pakistan’s impasse.


Asia’s Equity Faultline Rumblings

2018 October 29 by

Asian emerging equity markets were down 7% compared with the 9% overall decline on the MSCI core Index through September, as Europe, Latin America and the companion frontier gauge fell further. Only Taiwan was positive with a 2% bump, although India, Malaysia and Thailand were close with barely negative readings. China “A” shares, Indonesia, Korea, Pakistan and the Philippines lagged with 10-20% losses, and Bangladesh also dropped double digits on the frontier gauge. The twin benchmarks had few winners, and Argentina and Turkey as crisis epicenters during the period were at the bottom with 50% selloffs.

According to fund trackers like EPFR and the Institute for International Finance, chronic foreign investor outflows, often fueled by ETFs which are one-quarter of the total, brought net allocation below $20 billion year to date, less than half 2017’s sum. Local bond market performance mirrored stocks, even though mutual fund commitments to the debt asset class were higher. Asian currencies slid against the dollar, while the International Monetary Fund maintained the regional economic growth forecast at 6% through 2019 despite festering trade and financial imbroglios with the US. Toward quarter-end money managers were particularly wary of current account deficits in India, Indonesia and the Philippines and possible domestic and overseas private debt overhangs that government fiscal and monetary tools may not readily overcome.

China’s official purchasing managers’ index was just over 50 in September, with export orders at a 2-year low as so-called Phase III tariffs on almost all US shipments are set. The move on its own would cut gross domestic product growth 1%, but JP Morgan predicts offsetting currency depreciation and project and credit stimulus as a complete counter. The Yuan depreciated 4% versus the dollar over the quarter for a 9% six-month slide. Its share of global foreign exchange reserves remains small at 2% according to the IMF, and the central bank pledged future rate increases roughly in line with the US Federal Reserve to prevent misalignment. The People’s Bank signed a memorandum with the Hong Kong Monetary Authority to better drain offshore liquidity, but Moody’s Ratings does not anticipate large-scale intervention.

The rater has a stable banking sector outlook for the coming year under a baseline 6-6.5% growth scenario, as it prepares for further international competition under recent opening gambits to quell Brussels’ and Washington’s access anger. However the Finance Ministry revealed local government debt outstanding in August at $2.5 trillion, approaching one-fifth of GDP, and Beijing reportedly directed state media to downplay risks from this exposure. The household debt/output ratio in turn soared to 50% in 2017, global insurer Allianz calculated. The central and provincial governments plan to issue RMB 750 billion in special infrastructure project bonds to fight export drag, which will add to the load that a new nationwide system is designed to track. Against this backdrop, domestic investors who account for 85% of trading have proven more skittish than foreign counterparts preferring to buy through the Hong Kong Stock Connects to Shanghai and Shenzhen. With the debt-trade blowups neither category was swayed by the news that the rival major FTSE index will increase its mainland share weighting to 5% in incremental stages through end-decade.

India and Indonesia were trouble spots as currencies reached record lows against the dollar with energy-driven external payments imbalances, and authorities responded with rate hikes and import curbs. Presidential incumbents, Narendra Modi and Joko Widodo, head into elections next year with respective 8% and 5% growth, but doubts about investor-friendly policies despite a raft of nominal liberalization and streamlining measures. Indian company earnings continued to advance at an over 10% annual clip to support high valuations, but property and financial industry intertwined woes were illustrated by a major non-bank lender debt default which punctured bullish sentiment. The government sent mixed signals in partially removing restrictions on overseas participation in local and rupee-denominated bonds abroad, while at the same time cracking down on tax and operating advantages of expatriate Indian fund vehicles. Jakarta will review public investment spending with the intent of shifting ownership and management to the private sector, while pressuring international hydrocarbons operators to keep business at home with state giant Pertamina. Along with resolving conflicting approaches, it must also handle natural disasters nearby the Bali IMF-World Bank meetings to magnify investor anxiety.




The Asian Development Bank’s Divergent Bond Opinion

2018 October 22 by

The September update of the Asian Development Bank’s Bond Monitor, tracking trends through the second quarter in nine local markets, hailed “economic stability” and modest growth to $12.6 billion amid a welter of “downside” trade, debt, commodity and asset class risks. Monetary tightening in the US and EU contributed to currency depreciation in most of the region, as emerging market upsets in Argentina, Turkey and elsewhere spilled over to spur foreign investor outflows especially in Indonesia and Malaysia. Yields diverged from June-August, and rose in Indonesia and the Philippines after serial central bank rate hikes. Increased tariffs on goods between the US and China ratcheted Asia-wide tensions, reflected in both debt and equity market losses over the period.

Quarterly issuance was up slightly in all countries except Vietnam, with the government-corporate respective shares at two-thirds and one-third of the total. Bond market size as a portion of gross domestic product was 70%, with Korea and Malaysia continuing to hold the largest fractions. The ADB’s July revised forecast maintained East Asian growth at 6% this year and next, with China due to slow to below 6.5% and ASEAN members steady at 5.2%. It presumes global trade will expand 5% annually supported by healthy domestic demand, while inflation remains under 3%. However local bonds will stay in near-term danger from “external and domestic uncertainties” including higher oil prices, private debt and political and geopolitical transitions, according to the report.

Credit default swap (CDS) spreads and volatility also spiked, as the JP Morgan external bond EMBI index fell into negative territory. Foreign holdings dropped 4% to 25% in Malaysia, in part due to doubts over the returned Mahathir Mohamed administration. In Indonesia they retreated marginally to 38%, Thailand was constant at 15%, and in China and the Philippines the portion stayed around 4%. “Worrying” turbulence in large emerging markets Argentina and Turkey, with steep dollar-denominated debt and “poor macroeconomic fundamentals,” provoked broader selloffs, including the Indian rupee hitting a record low against the greenback. The ADB publication does not follow India, but examines Hong Kong separately where the monetary authority intervened to defend the local dollar.

Asian economies in comparison have better current account positions, and available policy tools such as interest rate increases to strengthen confidence, but officials should be on alert with “febrile” global markets, the Monitor warns. The US Federal Reserve’s scheduled benchmark lifts and liquidity withdrawal, and bilateral trade disputes with Washington along with the threat of its World Trade Organization exit, are factors in bond pressure, but consumer and investor sentiment remain intact overall. However indirect issues from oil price swings to diplomatic sanctions and crypto-currency threats could tip the balance, in the ADB’s view.

The second quarter 3% growth was double the first quarter pace, and all individual markets outside Vietnam advanced. China is 70% of the amount outstanding, and its size was $9 trillion at end-June with activity driven by local government debt for bond swaps. Korea’s number two market at $2 trillion or 15% of the total, experienced both solid official and corporate placement. The aggregate ASEAN group grew 2.5% to $1.3 trillion, with Thailand the biggest at $370 billion, followed closely behind by Malaysia’s $340 billion, where 60% is Islamic-style sukuk. Singapore’s $280 billion owed mainly to liquidity-draining operations, and Indonesia’s $180 billion had unsuccessful auctions as corporate bonds barely budged. The Philippines and Vietnam as the smallest markets also saw weak appetite, with the latter outright shrinking to $50 billion. Cross-border local currency issuance in turn sank one-third to $5.3 billion in the quarter, with China accounting for almost half, followed by company and sovereign names in Korea, Singapore and Malaysia.

Dollar, euro and yen-denominated international volume likewise dipped $20 billion to $170 billion through July, according to transaction trackers. Among other deals Vietnamese real estate and Cambodian hotel operators featured, with the latter a debut from the country with a 9.5% yield. The former’s undeveloped domestic corporate bond market received a blow, when the central bank tightened rules on bank buying to mandate minimum credit ratings. In China on the other hand, the collateral range was extended to facilitate green and agricultural bond acceptance in a much harsher general Asian climate by the ADB’s weather vane.


Central Asia’s Adjacent Agitation Angle

2018 October 15 by

Central Asia and Caucuses markets with close ties were whipsawed by currency and securities selloffs in Russia and Turkey the past month, with the former less severe and mainly due to heightened Western sanctions odds rather than economic policy miscues. Azerbaijan, Kazakhstan and Georgia with internationally traded bonds and stocks suffered damage from the respective lira and ruble declines around 40% and 15% against the dollar this year. Ankara has no formal grouping like the Moscow-led Eurasia Economic Union with a common external tariff, but established a Baku-Tbilisi-Kars rail connection and spearheaded a trade and investment campaign with the “Stans,” including recently opened Uzbekistan after longtime ruler Islam Karimov’s death.

Turkey’s central bank against  President Tayip Erdogan’s wishes hiked benchmark interest rates 6% to stem collapse, while Russia, with budget and current account surpluses and $450 billion in foreign reserves, has not been as concerned about the biggest depreciation since 2016. Russian stocks lost 5% through August compared with Turkey’s 55%, but its local and external bonds were walloped on reports the US Treasury Department may consider stricter asset manager bans under new congressional legislation. Sovereign wealth funds in Azerbaijan and Kazakhstan likely have them in their portfolios as well, but the cross-border fallout was further reaching and mixed with existing banking system, commodity and competitive pressures.

Kazakhstan’s MSCI frontier index component was down only 3% against the composite 15% drop through August, but the currency plunged to 380/dollar into September, around the record low since previous devaluation and flotation. The 15% tenge slide so far this year is in line with the ruble, but local speculators, with their own “carry trade” into high-yield bank deposits, and opposition political parties warning of a crash were also blamed.  Analysts argue it has long been overvalued and should be in the 420 range, and that hydrocarbon and mining export seasonality will bring final quarter appreciation. First half gross domestic product growth was 4% on rising oil prices despite construction and services weakness, with inflation at 6% and the current account in slight deficit. International reserves were $90 billion, with $50 billion in the stabilization fund that can be tapped for exchange rate intervention.

Before the latest tenge scare, the capital Astana celebrated its 20th anniversary and President Nursultan Nazarbaev’s birthday in July with a grand party, where provincial officials offered an estimated $20 million in gifts. Around the same time the state telecoms operator took over the Nordic and Turkish-owned mobile phone leader, a transaction giving it a two-thirds industry share and spooking foreign investors. Critics claim it will hurt competition and new technology and alienate potential buyers, as big government companies are to sell partial stakes on the stock exchange in the coming months. The International Monetary Fund in turn in its September Article IV report called attention to remaining major bank “challenges and risks,” despite billions of dollars in support including for a merger of the top two lenders. The next ranking institution Tsesnabank disclosed a 30% liquid asset decrease, as officials agreed to purchase a 1 billion euro agricultural credit portfolio while the central bank injected another 350 million euros. Its management was reshuffled with the chief executive ousted, and rival Eurasian Bank with almost $3 billion in assets likewise announced a liquidity squeeze. Private sector credit growth has tentatively resumed at a 10% pace, in part driven by the President’s “7-20-25” discount mortgage program unveiled in March, but these rescues reflect IMF views that bad debt resolution and business model overhaul are still lacking.

Azerbaijan’s thinly-traded sovereign debt was unnerved by dual Turkish and Russian economy exposure, and Pasha Bank has an Istanbul subsidiary which issued $25 million in its own bonds this June. GDP growth and consumer inflation are running at 1.5% and 3% respectively, and a strong current account surplus and foreign direct investment inflows continue to back the new dollar exchange rate peg. However the central bank is carefully monitoring local saver dollarization preference, with the deposit ratio currently at 70%, as well as frequent private sector hard currency borrowing. The state oil company has $20 billion in investments in Turkey ravaged by the lira’s meltdown, which will likewise dent tourism numbers into neighboring Georgia that had increased 20% annually, and bleed into external bond prices.


Papua New Guinea’s Summit Host Submission

2018 October 8 by

Papua New Guinea, after a failed sales attempt two years ago, began a global road show for a $500 million inaugural bond to relieve a chronic foreign currency crunch, as emerging and frontier market issuance vanished in recent months with totals down 20% from 2017’s pace according to transaction trackers. Fund outflows persist for both debt and equity, which have each fallen below $20 billion in the latest data from US-based EPFR. Standard & Poor’s recently lowered the sovereign rating to “B” citing overdependence on hydrocarbons and mining industries, “weak institutions” and fiscal and monetary policy rigidity. Moody’s placed it on negative watch, and the downgrades overshadowed favorable publicity as the upcoming host for November’s Asia Pacific Economic Cooperation (APEC) summit.

Credit Suisse, chosen by the government as a lead underwriter, arranged a $500 million syndicated loan last year for infrastructure, including facilities for the APEC event. In 2016 the World Bank lent $300 million, and double that amount is owed China out of the $2.5 billion foreign debt total. Prime Minister Peter O’Neill and his economic team have scrambled to deal with declining revenue from Exxon Mobil’s flagship $20 billion gas plant, and severe drought and earthquake in succession. The Asian Development Bank, which began disbursing $100 million in support in August, predicts gross domestic product growth around half the original official 3% estimate. The worsening fiscal deficit sent public debt over 30% of GDP, approaching the 35% statutory ceiling. S&P noted that domestic banks had reached internal limits for government bond exposure, leaving the central bank as lender of last resort and forcing offshore borrowing. This recourse is also needed to overcome a backlog of requests under foreign exchange controls the business community ranks as the number one complaint in regular surveys.

The central bank governor criticized these protests in July, with the claim that import orders were met under a “reasonable timeframe” with recovering hard currency inflows from the liquefied natural gas and OK Tedi and Borgera mining projects. The 2018 budget also hiked tariffs on 250 items, with a 25% one introduced for previously exempt dairy products. The ruling coalition at the same time is reviewing the mining code to consider more foreign investor royalties and taxes, despite warnings from the Chamber of Mines and Petroleum that unilateral changes could backfire and put 80% of island exports and 20,000 jobs at risk. It urges devaluation of the local currency, now around 0.4 to the Australian dollar, as another option to gain competitiveness and earnings but the government rejects this route. The Prime Minister and Treasurer blame the predicament on global commodity prices outside their control, as they promote tourism, fishing, forestry and small enterprise diversification and infrastructure public-private partnerships against exchange rate overvaluation arguments. They condemn natural resource contracts predecessors signed as too lenient in allowing proceeds to stay overseas, and stress restructuring will ensure “responsibility” while calling for food import bans to “improve self-sufficiency.”

Better connectivity and transport were priorities ahead of the November APEC meeting in Port Moresby expected to attract close to 10,000 visitors, half the total projected for the year. In preparation a new mining project, Wafi-Golpu was rolled out amid an information campaign to increase direct investment from Australia, China, Southeast Asia, and Japan. Australia’s colonial ties have positioned it as the lead commercial and aid partner, but China’s $3 billion in trade in 2017 and project loans put it in second place. Chinese companies have pumped billions of dollars into copper, gold and nickel ventures, and timber exports are another bilateral mainstay although PNG pledges to phase out tropical logging by end-decade. With the planned 10-year external bond the government intends to extend maturities, while preserving the country’s no-default record. It also has a broader capital markets modernization strategy that includes opening the 15-company local stock exchange to foreign buyers. As preconditions basic securities laws would be revised, and an international bank custodian recruited to provide depository and safekeeping services. Shareholding and governance of the Port Moresby bourse, currently owned by two brokerages, could also be overhauled. Corporate bonds could eventually be added to the mix with initial placement success abroad, which will depend on mining ambiguous investor sentiment already the pattern domestically.


China’s Belt Hole Punch

2018 October 1 by

Domestic investors continued to dump “A” shares for a 20% loss on the MSCI Index through August as backlash appeared against President Xi’s latest developing world Belt and Road $60 billion multi-year funding package for Africa, repeating a previous bilateral summit pledge. The US criticized the deal as well amid bilateral trade and investment acrimony and warned that sovereign borrowers already tapping the IMF for emergency support could deepen a “debt trap,” even though the Chinese portion is a fraction of the total. On the fifth anniversary of the initiative, a number of studies have offered mixed reviews, with Washington’s Center for Strategic and International Studies examining the half dozen “corridors” and 175 projects to find that they are often bypassed and uncoordinated. The sweep across 80 countries with a $1 trillion goal encompasses both hard and soft infrastructure but lacks definition, as it extends to unrelated athletic and cultural events, according to the review. The analysis tries to reconcile on the ground and strategic outcomes and reiterates that regional land, air and sea connections are well established economic strategies historically promoted by development lenders, and that the ADB has mirrored the approach in the Greater Mekong for example. Subdividing the Asian categories shows an absence of priorities outside Pakistan, and that China’s 30 provinces vie at the same time for program benefits. Geography has extended to the Arctic and outer space without pinpointing borders and locations, and implies that Beijing has less control and vision than described in official media and popular coverage. This gap leaves the field open to the US and other competitors for large-scale alternatives as legislation to create a $60 billion unified development finance agency awaits passage.

In August the manufacturing PMI was 51, barely above neutral, as the currency gained against the dollar with the daily band again subject to the “counter-cyclical factor” used in former periods of stress. The foreign exchange regulator punished two dozen violations, as overseas investors increased their local government debt share to 8% on official agreement to stretch tax exemptions to three years. They are also buying bank bad loans through the Qianhai Assets Exchange as real time delivery versus payment is now in force. According to fund research, two-thirds of international “A” shareholders are in consumer listings and have shunned real estate, where S&P ratings believe debt service capability is at a multi-year low. Cash/short-term debt ratios averaged 125% in the first half, with an estimated $40 billion in maturities over the coming months. Leading developer profits were up 75%, but they have started to shy away from second-tier cities with price declines and resort to heavy discounts to sustain sales. Along with property bubble vigilance regulators have expressed concern over the serial collapse of internet P2P credit platforms and vowed immediate inventory and resolution. While bank non-performing assets are still below 2% by current standards, the central bank has warned of private corporate debt’s rapid rise as industrial profits continued to slow in July. Economic and earnings drag may worsen with the prospect of additional US tariffs on $200 billion of Chinese exports which could force company belt-tightening.




Myanmar’s Consecutive Condemnation Cries

2018 September 24 by

The one-year anniversary of the escape of over half a million Muslim Rohingya refugees from Myanmar’s Rakhine State into Bangladesh, with a current total of over 900,000 in the world’s largest camp, coincided with clear United Nations condemnation of human rights abuses as well as investor fears over the economic policy and performance fallout on both sides of the border. The military, which controls major state enterprises, will likely face additional Western commercial sanctions and asset freezes with the UN’s call for investigation of genocidal crimes. Before the report, the government’s civilian head Aung San Suu Kyi gave a speech in friendly Singapore assigning neither the army nor leading officials who have concocted a mix of lower growth, higher inflation and currency depreciation blame for their actions.

China as the top Asian ally has felt the impact of tourism and foreign direct investment slowdown, with a 15% $900 million decline in the last fiscal year, as Myanmar reportedly will slash the original $7.5 billion Kyaukpyu port project in Western Rakhine to $1.5 billion. The Belt and Road venture, with Citic Group as the main developer, was reached with the prior government to speed oil and gas delivery to Yunnan Province. However the location in a conflict zone, and headlines over deep debt and structural failures in neighboring Laos and Sri Lanka prompted a rethink which intensified when Soe Win, a former Deloitte management consultant, became Finance Minister in May. With foreign aid cuts and a record budget deficit to be funded 20% by the central bank, he argued that the transaction had to shrink, as frontier market ambitions were otherwise scaled back despite passage of overdue reforms such as a new company law.

The latest updates went into effect in August and allow 100% international wholesale enterprise ownership with a minimum $5 million allocation. Thai textile firms have expressed interest in diversification with higher domestic production costs, but lawmakers regularly criticize the investment agency for blocking and delaying applications amid land and tax disputes. Electricity and information technology infrastructure are also lacking, and the outdated banking system suffers from limited private and mobile competition and exchange rate restrictions, according to an August Yangon seminar on the economic outlook. A main adviser to State Councilor Daw Aung San Suu Kyi, Australian professor Sean Tunnell, echoed the Asian Development Bank forecast that gross domestic product growth will slip under 7%. Inflation hit 7.5% in the last quarter through July with food crop flood damage and a 5% monthly devaluation of the kyat against the dollar through mid-August.

The budget gap is at a 7-year peak with big losses at one-third of thirty government enterprises, including the power and rail monopolies. Less than $2 billion in concessional debt and foreign assistance will come in this year, and the trade deficit widened to $1 billion from April-July after a 4% of GDP pace in 2016-17. The Chamber of Commerce’s recent business sentiment survey revealed a drop from last year on “unclear economic policies” as the government continues to promise an overarching “Sustainable Development Plan” for long-term vision beyond the Rahkine crisis.

With the currency sliding past 1500/dollar under reserve pressure, the central bank abandoned the daily 0.8% fluctuation band and introduced swap facilities in a stabilization attempt. It injected millions of dollars in liquidity in August as private banks were accused of hording foreign exchange, and diesel and sugar re-exports were suspended to mitigate swings. The Chamber of Commerce unveiled a currency reform blueprint to liberalize access and trading, and central bank technocrats urge a free-float system. However the governor in the post for 15 years, U Kyaw Kyaw Maung, was reappointed in July and has traditionally advocated monetary policy and financial institution caution. Interest rates are still controlled and foreign banks were only recently allowed to offer trade credit, and stock exchange promoters of expanded overseas entry expressed regret at the incumbent’s continued tenure.

Bangladesh’s business and financial communities are likewise outraged at the Rohingya refugee status quo, as they point to hosting and environmental costs in Cox’s Bazar without prospects of voluntary return and fulfilled aid pledges. Foreign investors are net equity sellers ahead of elections which could bring their own standoff, and de-listings without compensation multiplied area upsets.