General Emerging Markets


US Development Finance’s Forgotten Franchise

2020 January 17 by

The new US International Development Finance Corporation (DFC), merging the foreign private investment promotion agency OPIC with the credit support functions of the main overseas development arm USAID, started in October with rare bipartisan political and consensus emerging market expert backing. Recommendations to overhaul the decades-old model dated back to the Obama administration. It gained momentum under President Trump, who has otherwise moved to cut economic assistance, as a financing and geopolitical competitor to China’s global multi-trillion dollar Belt and Road Initiative. The restructuring doubled OPIC’s original balance sheet exposure limit to $60 billion, and added equity to debt, guarantees and risk insurance in the toolbox to spur direct and portfolio inflows to low and middle-income countries.

A September report by the Washington-based Center for Strategic and International Studies (CSIS) acknowledges that the DFC cannot match China’s policy banks and state enterprises “dollar for dollar” in underwriting infrastructure and natural projects throughout Asia, Africa and Latin America. It advises focus on other potential comparative advantages such as technology transfer, small business funding, and capital market creation.

This last category, concentrating on stock exchange launch and modernization, can be an all-encompassing theme with maximum “bang for the buck.” At the same time, it could revive the US aid establishment’s glory days during the 1990s and early 2000s, when securities market introduction was a priority in post-communist and socialist transition economies in Europe and frontier and developing markets worldwide. Emerging market investors, in search of an underlying story for the asset class into the future, could in turn organize dedicated advisory groups as in the past.

CSIS predicts that internal administration and strategy delays will likely keep annual DFC commitments below $10 billion in the initial phase. It begins with 300 staff and a 90-country portfolio, and a lower minimum US investor participation requirement. A fifteen-member board of directors from the cabinet and outside government, and independent panel of academics and advocates yet to be named, will provide governance and guidance. Inherited operations total close to $25 billion with a roughly even split between regions, and one-quarter in “fragile” states.

From a foreign policy perspective, job creation and private sector growth are priorities in the Middle East and Africa to counter terrorism, and in Central America’s Northern Triangle of El Salvador, Guatemala and Honduras to curb mass migration. In Africa, the intent is to leverage parallel US government programs on power generation and trade.  DFC also has expanded authority to offer technical assistance and local currency debt guarantees and to diversify the range of existing venture capital “enterprise funds.” Earlier versions spurred private equity takeoff throughout Central and Eastern Europe, which in turn spurred European Bank for Reconstruction and Development support for public markets.  

OPIC, over its 40-year life, could claim no net cost to the taxpayer as earnings were returned to the budget, often under risk-averse management as high-return assets subsidized poor country engagement. USAID over the past fifteen years largely abandoned capital markets as a core emphasis, as technical assistance shifted to a small Treasury Department unit promoting government bonds throughout the developing world.

After the fall of the Berlin Wall thirty years ago, the US administrations relied on a private sector ecosystem to advance financial market transformation that has since withered. Wall Street bankers and fund managers took short-term assignments in Europe and elsewhere under a Financial Services Volunteer Corps still in existence, and the Nasdaq dispatched experts and encouraged nascent stock exchanges to adopt its over the counter system, as with the Rasdaq in Romania. After the emerging market term was first coined in the late 1980s, Washington had a roster of brokerage executives on hand to travel to far-flung destinations like Kenya preaching the securities gospel.

The African Development Bank has since launched its own initiative mainly for bond markets, and the continent now has half a dozen regional equity components on the benchmark MSCI frontier stock market index. Performance has been overwhelmingly negative this year, as foreign investors decry chronic liquidity and size constraints. Stock exchanges in East and West Africa have long explored cross-trading and consolidation with little progress, as South Africa remains the runaway depth and diversity leader, according to an annual reference compiled by regional banking giant Absa in collaboration with London’s Official Monetary and Financial Institutions Forum (OMFIF). The continent and other overlooked regions such as Central Asia, where Uzbekistan is in startup mode, could be early targets for DFC “soft” infrastructure help in contrast with China’s approach. The payoffs would come in stock market volume and results reflecting increased private company access to finance in the frontier universe, as well as official reputation and investor coalition revival for an impressive triple bottom line debut.   

Sovereign Debt’s Unprincipled Practice Path

2019 December 6 by

The IIF’s annual report on its 15-year old voluntary market-based sovereign debt restructuring principles and related investor relations practices offered mixed sustainability and transparency views. It noted that emerging debt is over one-quarter of the $250 trillion global total, above 300% of GDP, and that half the frontier country amount is in foreign currency with associated refinancing risk. Excluding China, non-resident capital inflows will rise $75 billion to $700 billion this year on yield search despite trade battles, as interest expense increases as a budget item at the same time climate change costs are absorbed. The report finds that good policies and communication over the past decade since crisis have bolstered confidence, as it probes recent defaults in Barbados, Congo, and Mozambique to draw cautions. It focuses on the 35 recipients of official debt relief under a program coinciding with principles launch, with private investors now holding one-fifth of public external obligations. Non-Paris Club bilateral creditors and episodes of “unreported debt” are now prominent. Zambia may soon fall into the hidden and restructured category, and Gambia is a special case where overlapping lines from “plurilateral” providers must be resolved.

Mozambique’s Eurobond exchange offer is due end-October with a collective action clause to reach near unanimous participation, following years of fitful dialogue with discovery of unauthorized loans and IMF program suspension. The former finance minister and Swiss and Russian bank executives are under indictment in the US for corruption and bribery, and the country’s constitutional court struck down previous government guarantees on tuna company debt. The new bond yields are half the former 10% until 2023 when they again revert, with maturities stretching past 2030. An engagement provision reflecting the London-based International Capital Markets Association model was added, and the Fund disbursed an emergency $120 million credit in cyclones’ wake. However debt/GDP is above 100% despite two-thirds at concessional rates, evoking the prospect of near-term renegotiation. The Congo Republic rescheduled with Chinese sources, including unaccounted for construction facilities with the Public Works Ministry. Over $350 million was cancelled, and the IMF approved a $450 million arrangement in July with $900 million in commercial and official arrears still outstanding. Two big oil trading firm are in “good faith “talks with the amount due approaching China’s 20% of GDP and complex pre-financing structures delaying resolution.

Barbados reorganized domestic debt at 80% of the load last year, and proposed large haircuts and maturity extensions international bondholders initially rejected. It received a fresh package of bilateral and multilateral loans after finding pension liabilities hiking the GDP ratio to 150%. Central bank claims were excluded from the local workout, which paved the way for a $300 million Fund deal. The IIF also looked at Puerto Rico, Venezuela and Argentina, with Caracas not paying an October state oil company installment but the Trump administration’s sanctions preventing Citgo asset seizure pending possible internationally-recognized Guiado government takeover. In investor relations norms Ecuador, Egypt, Ghana and Lebanon improved 5+ points in the 40-country scorecard, but Brazil, Mexico and South Africa as seasoned and sophisticated issuers continued to lead on office, website, and data availability best practice.

Global Financial Stability’s Stretched Credulity

2019 November 22 by

The IMF’s October Global Financial Stability publication tracked the relentless government bond negative yield total, now $15 trillion or one-third of the industrial world stock, as interest rate decline also classifies the same portion of emerging market issuers as “overvalued.” It believes equities in contrast are closer to fairly priced, with risk appetite there under trade and economic growth pinches. Excluding China with marginal tightening monetary conditions are easier across the universe and sovereign placement from frontier countries picked up the past six months. Banking systems at high vulnerability include Brazil, India, Korea and Turkey and small and midsize Chinese lenders had funding squeezes requiring rescues. Non-banks in 80% of major financial sectors are under scrutiny, equal to the crisis peak a decade ago, as insurers like Taiwan life firms and institutional investors increase speculative positions. Corporations and households are also overleveraged, the latter particular in Asia as central banks have imposed macro-prudential consumer and mortgage exposure curbs. Developing country debt sustainability is again an issue particularly for low-income borrowers, as global policy coordination may have slackened in recent years with urgency over tackling new ESG challenges, the review points out. External high-yield names are more mispriced than investment-grade counterparts, with half in the B or lower rated category subject to sudden spread widening or access cutoff with global stress. State-owned enterprises, which are half the corporate asset class and one-third the EMBI benchmark, are a “growing concern” with falling profitability and steeper leverage among hydrocarbon producers especially. Their credit ratings have slipped and few have an explicit guarantee for otherwise contingent liabilities. Trouble or default would likely spill over into the sovereign and fallen angels dropping to speculative grade have a narrower investor base.

 Hard currency frontier activity is on track for an annual record and the amount outstanding has tripled the past five years to $200 billion. For the average issuer this debt is 7% of GDP or half of reserves, and over the medium term servicing will spike. Commercial financing engagement has joined with the official shift to non-Paris Club creditor dominance, where China’s restructuring approach differs from Western norms. Commodity-linked loans can backfire with collateral seizure, and record-keeping and reporting is often slipshod in poorer economies. The IMF and IIF are promoting transparency and capacity-building initiatives along these lines, and policymaker should develop local capital markets as a backstop and avoid unproductive obligations in the first place, the report advises. In cross-border banking generally dollar shortages are widespread and likely contributed to reduced emerging market lines the last quarters. Additional bilateral swap facilities with the US Federal Reserve could help alleviate the crunch, after Brazil and Mexico were recipients during the 2008 financial crisis. Sustainable portfolio investment is a burgeoning field with asset size estimated in the trillions to tens of trillions of dollars, despite the lack of accepted definitions or outperformance over conventional allocation. In fixed income the style is most advanced, with green and social bond alternatives. Equities have both negative and positive screening for ESG criteria, and ratings agencies and the IMF in its surveillance are formally incorporating them. China as a leading sponsor is pushing at the same time for international adoption of its green bond rules, as a broader G-20 consensus is still budding.

US Development Finance’s China Finesse

2019 November 1 by

The US International Development Finance Corporation (DFC), combining the overseas private investment arm OPIC and credit operations of the main development agency USAID, formally opened for business under an overarching aim to compete better with China’s multi-trillion dollar Belt and Road program. It has a higher $60 billion exposure cap and wider array of debt, equity and guarantee tools to spur direct and portfolio inflows into low and middle-income economies, and is also designed to promote national security migration and counter-terrorism priorities.

 According to a September Center for Strategic and International Studies (CSIS) report, the new entity will counter China’s “aggressive influence” funding infrastructure and natural resource projects throughout Asia, Africa and Latin America, even though it cannot match Beijing’s heft “dollar for dollar” though state enterprises and policy banks. Supporters believe the DFC’s comparative advantage can be in peer collaboration and technology transfer, and targeting small and mid-size companies and capital market creation where Beijing lags. However CSIS notes that even as Washington’s approach is reinforced to contrast with China’s “export-based politically-driven” model, early expectations should be modest. Annual financing will remain below $10 billion, and internal organization delays could combine with geographic, sector and structural confusion in the initial rollout.

 The launch coincides with the Trump Administration’s continuing efforts to slash foreign aid, with the first year budget request below $1 billion. OPIC during an almost 40 year life  had no net cost to the taxpayer as proceeds were returned to the Treasury, but this argument did not sway the proposed appropriation despite bipartisan consensus on modernizing the US financing apparatus and arsenal. Foreign policy officials weighed in that expanded job creation sources are needed to combat violent extremism in the Middle East and Africa, and curb mass emigration from Central America’s Northern Triangle, but immediate intelligence and security considerations drove allocation. The DFC starts with 300 staff and a 90-country portfolio, and a liability limit doubled from the previous $30 billion. It relaxed criteria for American company participation, formerly at one-quarter of equity, for more local investor scope. Along with the fifteen member board of directors from the cabinet and outside government, an independent advisory panel was set up drawing from think tanks and advocacy groups.

The DFC inherits a $23 billion portfolio about evenly split by region and 25% geared toward fragile states, with financial and power sector concentration. Direct loans were 70% of activity, followed by political risk insurance and investment fund stakes at 15% each. With additional powers it can take equity positions, offer technical assistance and local currency guarantees, and start venture capital enterprise funds. An immediate focus is women’s economic empowerment and it has signed agreements with the Inter-American Development Bank and World Bank to back Latin America and global business growth. In Africa the intent is to leverage the existing Power and Prosper Africa initiatives and work with the Millennium Challenge Corporation, which uses specific economic policy and performance criteria, on country-designed infrastructure frameworks and schemes.

The CSIS paper warns that contrary to hype the DFC is unlikely to double legacy commitments in the near term, as it undergoes teething pains and looks for openings to balance heightened risk and impact. Its role is to catalyze private financing where unavailable, but then to leave the scene with access, and otherwise to complement foreign aid for humanitarian and environmental purposes. The DFC should fit with USAID’s “Journey to Reliance” strategy for concessional assistance graduation, with local capital market development reprised from decades ago, during the post-communist transition, as a major theme. Low-income country engagement may have to be subsidized from high-earning assets, and the initial 7-year authorization should not be a deadline to rush internal and external preparations, especially to shift OPIC’s traditional demand-driven tendency, analysts believe. Functioning money and government bond markets may have to precede corporate debt and equity emphasis, and the Treasury Department has a dedicated technical expert program for support. The study calls for a new generation of enterprise funds in overlooked locations like Central America, currently reeling from poverty and safety threats in El Salvador, Guatemala and Honduras with emigration waves. With such innovation the ecosystem there could eventually evolve to gain admittance to the MSCI frontier equity index, with a 6% gain through the third quarter double the core roster’s.

The SDGs’ Bland Blend Recipe

2019 November 1 by

The September UN General Assembly hosted further meetings and reports on financing the 2030 Sustainable Development Goals after a special summer session, with tepid reviews of public-private “blended” and bilateral and multilateral lender contributions. Official/commercial facilitator Convergence, founded after the 2015 Addis Ababa summit calling for partnerships, issued an annual update of transaction, investor and thematic trends. Its database covers $150 billion in funds and projects, at median $65 million size, concentrated regionally in Africa. Energy and financial services are the leading industries, with concessional debt or equity the main instrument. Goal focus is on Economic Growth (8) and Infrastructure (9), and commercial banks are more active than local and foreign institutional investors. Agriculture and health and low-income and small island states are drawing new interest, but volume is still only $15 billion/year, and only “scaling up” to close an estimated $2.5 trillion gap in the next decade will boost living standards as agreed. Bonds and notes have been used in just one-tenth of deals, and Asia is catching up with Africa with a 30% share, half in India. Latin America had more leverage at 5 times and an average $115 million commitment.

 Renewable energy is popular in that sector accounting for 40% of the total, and addresses the separate Climate Change goal (7). Financial industry priorities have shifted to capital markets and small business access from broader inclusion. Guarantees and risk insurance apply in one-third of cases, while technical assistance has fallen as a tool. Entrepreneurs are the chief target across traditional and social enterprise, micro-finance and family farms, and only 10% have reached completion stage with final evaluation. Public and philanthropic sources are respectively 40% and 15% of the total, with USAID and the World Bank among the top in their cohorts. The EU and Canada have announced new multi-billion dollar facilities, and big emerging markets like Indonesia and South Africa are also sponsors. Impact investors including Calvert and Blue Orchard have been stalwarts, and European and Japanese banks dominate the commercial ranks versus asset managers, insurers and pension funds with “limited” participation, Convergence finds. “Better blending” initiatives through the OECD and other bodies have gained momentum the past year, but different definitions and practices continue to thwart “billions to trillions” ambitions, it concludes.

A separate Center for Global Development paper criticizes the seventeen development lenders involved on a Blended Finance Task Force as “marginal, not transformational,” and points out that private investment cannot deliver the range of infrastructure, health and education demands with consumers earning a few dollars daily. A decade ago, the World Bank’s IFC arm pledged half of operations in the poorest countries, but its recent portfolio peak was 25% and has since slipped. Official institution guarantees, loans and equity back just half a percent of developing economy total allocation, and the catalytic leverage effect is less than 1:1 under strict methodology. Pilots like the African Development Bank’s Infrastructure Fund and USAID’s Power Africa show “little success” in terms of the bankable project pipeline, and few deals can be identified where subsidies ensure viability. The missing piece is marked expansion of traditional aid to meet another elusive goal as a portion of donor national income, CGD suggests.

Frontier Exchanges’ Frayed Leading Edge

2019 September 6 by

Frontier equity markets up 11% on the MSCI Index pulled ahead of the core’s 7.5% advance through July after prolonged underperformance, with 20%-plus gains sprinkled throughout regions. The geographically diverse so-called Next 11 was at the bottom rung with a flat result, even as it is no longer tracked as a separate category in fund structures and statistics. In the Gulf Bahrain and Kuwait rose on average 30%, as the former drew investor attention around a US Mideast post-conflict redevelopment plan, and the latter as a big weighting prepares to ascend to the main index following neighbors’ pattern after technical fixes. Oman was the exception with a 7% loss as oil price recovery has not improved debt and deficit patterns. In the Europe-CIS bloc Kazakhstan and Romania were the winners with over 20% increases, as elections set the stage for new economic policies. The first successor to post-independence President Nazarbaev, formerly the ruling party’s parliament head, signaled faster bank cleanup and large state enterprise privatization through the stock exchange, even as demonstrators challenged poll fairness. Romania’s currency has become a favorite pick with future coalitions likely to follow more orthodox fiscal, monetary and anti-corruption stances to stay in EU and IMF good graces, despite the absence of targeted aid. In the Baltics Estonia (-3%) and Lithuania (+14%) were at opposite ends, as the sub-region is gripped by Russian military intrigue and money-laundering scandals that have claimed top bank executives and government officials. Serbia (-9%) disappointed in the face of high marks under its Fund program, and Ukraine was also off 3% as the Zelensky team shapes its course, while signaling Privatbank will stay in state hands pending restructuring, after runaway legislative victories.

Morocco’s 2% uptick paced the Middle East, and in Africa Kenya was top (+15%) as Botswana and Nigeria fell over 20%. Kenya’s Finance minister faces payoff charges, and bank listings remain shunned with the statutory lending rate cap in place to neutralize further fintech penetration. Nigerian President Buhari’s second term is off to a slow start, with key cabinet appointments under consideration as multinational oil deals will be renegotiated. Domestic debt has skyrocketed from a low base, with fuel subsidies relatively untouched amid a chronic power crunch, and additional spending is forecast to cope with widespread internal displacement and army engagement from the Boko Haram threat. Zimbabwe (+15) extended last year’s positive streak as the government’s foreign exchange squeeze has opened the door to international business, while introduction of a new local electronic currency raises doubts. In Asia Bangladesh and Sri Lanka were off less than 5%, as the latter worked back from church and hotel terrorist bombings. In the Caribbean Jamaica up almost 30% took the mantle, while Trinidad slipped 3%. Jamaica’s latest IMF arrangement track record was praised, as exchange integration with neighbors once again assumed priority. Trinidad’s hydrocarbon boom has ebbed, and Barbados just completed a controversial debt restructuring criticized by commercial holders as coming out of their hide rather than the sprawling civil service. Analysts also claimed that officials overpaid for outside expert advice from London, despite the firm’s long experience with natural and self-made disasters in numerous nearby islands.

The Second Half’s Investment Shakeup Shiver

2019 August 30 by

In the first half of the year emerging market debt and equity asset classes were up low to high single digits in benchmark indices, and combined fund flows were positive at around $40 billion, as early year euphoria gave way to solid performance expectations. Several months ago global investor surveys had the category as a runaway favorite versus developed markets, on the assumption the world’s major central banks would only marginally tighten liquidity, and the two largest economies the US and China could resolve trade and investment disputes over time. Developing market growth was projected at 4-5% on subdued inflation, as bank and non-bank deleveraging s continued after years of double-digit credit expansion. These trends remain largely intact with modifications for monetary pause or easing, as the decade-long cyclical recovery fades with additional tariff and non-tariff barrier drag for competitive and security reasons.

Fund managers are comfortable with these scenarios, but admit that the prospect of emerging market currencies, which almost all fell against the dollar over the period, in the negotiating mix is an unprecedented allocation variable. The US Treasury Department has China and its Asian neighbors on a watch list for possible “manipulation” inviting retaliation, and an understanding was written into the new free trade pact with Mexico. The coordinated system established under Bretton Woods fell apart forty-five years ago as the institutions created then, the International Monetary Fund and World Bank, mark their 75th anniversary under leadership and mission transition affecting foreign direct and portfolio investment flows. The main index providers for core and frontier stocks, and local and external corporate and sovereign bonds, are also in reinvention mode to upset traditional practice, especially as passive exchange traded funds eat into active manager business. MSCI, at the same time it added Chinese “A” shares and Argentina and Saudi Arabia to the core market roster, issued a paper for the index’s 30th year of operation mulling future yardstick change.

The trade and supply chain threats under the Washington-Beijing standoff have been brewing for years, with most emerging economies promising to diversify the export-led growth model and forge new cross-border relationships. Investor preference now is for strong domestic consumption and investment stories, especially if the latter is private and for long-term infrastructure purposes. Vietnam is a popular Chinese assembly and manufacturing backstop since it stayed in the Trans-Pacific partnership despite Trump administration exit and just finalized a deal with the European Union. The EU, in turn, after decades of talks just reached a pact with Mercosur members Argentina and Brazil. Africa has generated excitement with ratification of a continental free trade zone, also envisioning small stock exchange integration.

These arrangements avoid currency questions that could imminently feature not only in the context of goods and services flows, but as historic dollar dominance and recent sanctions promote parallel channels. China and Russia within their own regions and the broader BRICS grouping intend to develop pure emerging market reserve pools for diplomatic and monetary protection. China was included in the IMF’s Special Drawing Rights basket, and other emerging markets have pressed for modification in standard criteria so they can be added on the way to a usable unit reflecting their share.

Portfolio managers into the second half of this year must also brace for reconstitution and consolidation of the multiple gauges for public asset classes, as private ones also enter the fold. MSCI acknowledges that its core benchmark is too Asia-driven, and JP Morgan has unified external corporate and sovereign listings, as it considers dropping heavyweights like South Korea from the former. Sponsors are working to develop hybrids mirroring multi-asset strategies, including for private equity without an existing measure. While the so-called trade war may soon trigger currency revolution, an internal industry one will equally shape near-term performance.

Remittances’ Regional Working Theories

2019 August 3 by

The World Bank’s biannual update on migration and remittances points to an almost 10% jump in 2018 on the latter to $530 billion for low and middle-income countries, with double digit increases to Central and South Asia, although the pace is projected to slow this year for a $550 billion total. The sum exceeds foreign direct investment and official development assistance, with the biggest regional recipients China and India averaging $75 billion, followed by the Philippines and Pakistan at $35 billion and $20 billion respectively, and Bangladesh and Vietnam each with $15 billion. As a slice of gross domestic product the Kyrgyz Republic, Tajikistan and Nepal top the global pack at 30-35%, while by sub-region East and South Asia are roughly even with $150 billion in inflows for 4% annual growth.

 Emerging markets in the Gulf, Russia and China are also large outflow sources, with Saudi Arabia and the United Arab Emirate both accounting for $40 billion, compared with the US’ leading tally of $70 billion. While overall emerging economy economic growth should be “stable” this year, the publication highlights “downside risks” including commodity and geopolitical swings and trade and anti-immigration curbs. The 4% estimated annual spurt, less than half last year’s clip, is also due to stubborn remittance costs still at 7%. Correspondent banks continue to “de-risk” in the developing world under anti-money laundering and terror financing mandates, superseding the 3% Sustainable Development Goal.

South Asia has the lowest cost average at 5%, around half Sub Sahara Africa’s. Banks are the priciest intermediaries, and national post offices in exclusive relationships as in India also impose a premium. The International Labor Organization is spearheading a parallel effort to reduce recruitment charges, and ministers from a dozen Asian countries recently committed to a “zero cost” processing goal. Excessive fees resulted in Nepal’s emigration suspension into Malaysia last year before a new bilateral pact was signed.

 According to the United Nations worldwide migrants and refugees combined are 270 million, and nationalization policies in Gulf Cooperation Council hosts translated into 30% job shrinkage from Bangladesh and Pakistan. Japan agreed to admit 350,000 skilled workers from ASEAN and Indochina over the next five years. Thailand in contrast has deported tens of thousands of undocumented entrants from Cambodia and Myanmar. A 2018 Global UN Compact on Migration was endorsed throughout Asia to standardize family, money transfer and employment practices, but is at an early stage and not legally binding since a treaty was a political non-starter.  

The East Asia-Pacific region’s remittance toll is at the global 7% median, with Thailand’s the steepest at 15%.  Cambodia has started to send nationals to Kuwait, and Japan is the fastest-growing destination for Vietnamese, absorbing half the 140,000 in formal work abroad programs last year. Central Asian low-skill migrants benefited from Russian economic recovery, with Uzbekistan’s $4 billion the remittance leader. In Pakistan and Sri Lanka 2018 inflows were only “moderate” with a 5% increase, as both were dropped from cross-border banking networks on “strategic deficiencies” described by the anti-laundering Financial Action Task Force. This balance of payments support was over 5% of GDP, and in a last-ditch measure to shore up reserves before turning to outside bilateral and multilateral lines, Pakistan’s government introduced a retail investor instrument to attract worker foreign exchange. It was tax exempt and brought in $1 million on a $5000 minimum allocation immediately after launch, but hardly changed the negative net position forcing another International Monetary Fund rescue.

Through the end of June, Pakistan was the worst performer on the Morgan Stanley Capital International core emerging market index with a 17% fall, as the details of the $6 billion 3-year IMF arrangement were finalized. Prime Minister Imran Khan reversed initial defiance when he could only gain limited relief from Gulf and China allies also recognizing “misaligned economic policies,” in the words of the Fund’s staff report. Fiscal deficits and an easy monetary stance, runaway public debt and weak tax collection, and exchange rate overvaluation and international reserve depletion are among the mistakes demanding “urgent action” with release of the first $1 billion installment. The currency moves toward a float and banks will strengthen anti-laundering safeguards under the latest program, with steady remittances also a question of the Khan team honoring its sudden remit.

Global Displacement’s Private Finance Fill

2019 July 21 by

As another World Refugee Day is marked this week, the numbers and complexity of the global forced displacement crisis remain overwhelming, on the 2-year anniversary also of the massive exodus of hundreds of thousands of Muslim Rohingya into Bangladesh after de facto expulsion from Myanmar’s Rakhine state. Despite Sheikh Hasina’s government winning third term re-election in a landslide, its MSCI frontier market entry has been flat through May, as it purges state bank balances sheets and management and grapples with the million refugees at the world’s largest camp alongside communities internally displaced by climate change’s rising seas. International community humanitarian aid appeals, and concessional borrowing through a special refugee window in the World Bank’s International Development Association arm have fallen short of pressing needs, especially as seasonal monsoons destroy flimsy housing and breed disease.

 Dhaka provoked global outcry with a proposal to relocate part of the Rohingya population to an environmentally-fragile island to isolate them further, since they are not allowed to legally work or attend school. It also struck a deal with Myanmar counterparts to begin voluntary repatriation to Rakhine, but few signed up until safety and long-demanded citizenship claims can be honored. In the Cox’s Bazaar area where the refugees are located near popular beaches, Chinese and Indian tourism has suffered. Prime Minister Modi’s nationalist political campaign also promised further deportations of Rohingya living in the country, often accused of terrorist sympathies on social media.

 Indonesia and Malaysia have also received “boat people” inflows over the years, and raised their plight in ASEAN diplomatic summits, but official declarations have not translated into jobs and education to facilitate integration, despite consideration of conventional or Islamic bond issuance for this purpose in the context of local community support. Application of standard private capital market tools to address the chronic multi-billion dollar annual shortfalls through bilateral and multilateral funding is a core recommendation of the new United Nations Global Compact for Refugees. Progress will be reviewed at the upcoming September General Assembly session, and organizations like the Refugee Investment Network and World Refugee Council, respectively based in the US and Canada, are mobilizing both small and large scale innovative solutions mixing commercial and impact investment.

Outside the region, over the past year the Venezuelan migration’s size into Andean neighbors has converged with Syria’s tragedy and the millions who have fled civil war to stay in Jordan, Lebanon and Turkey. The UN refugee agency estimates that 4 million or one-tenth of Venezuela’s population has crossed borders into Colombia, Ecuador and Peru amid economic depression and hyperinflation; crippling drug, food and fuel shortages; and the violent standoff between the Maduro regime and opposition president Juan Guado recognized as the legitimate occupant throughout the hemisphere’s democratic countries The government relies on Chinese and Russian credit to stay afloat after defaulting on most of the estimated $50 billion in emerging market debt. The Trump administration claims it is in contact with the International Monetary Fund, World Bank and Inter-American Development Bank on a “day after” Maduro exit reconstruction plan, with external debt restructuring a presumed element.

In the meantime Colombia has absorbed 1.2 million refugees according to President Ivan Duque, which will shave gross domestic product growth half a percent this year to under 3%, and widen the deficit beyond the fiscal rule ceiling to over 3% of GDP. Fitch Ratings has a negative outlook that may imperil sovereign investment-grade status with the twin current account and budget gaps, in part due to costs and confidence effects from incessant inward migration. Ecuador does not allow the Venezuelans to work with its own double-digit unemployment, and Peru recently ended the practice of no-document asylum and full social services to entrants as President Vizcarra looks to pass political reforms and call for new elections.

President Duque and his team were in London to convince global investors that the influx was manageable in financial market terms, as officials have expressed interest in developing dedicated bond and equity instruments that could harness hundreds of millions to billions of dollars at a clip also for Venezuelans’ return. A flagship World Refugee Council report “A Call to Action” urged such pilots, highlighting potential displacement-related infrastructure and company portfolio allocation, as a member  delegation also heads to London to promote fresh long-term reassurance.

Private Equity’s Blaring Abraaj Alarms

2019 July 21 by

This month the managing partner of giant Middle East fund Abraaj pled guilty to racketeering in a New York court, following the May annual meeting in Washington of the 15-year old Emerging Market Private Equity Association (EMPEA), where hundreds of delegates gathered to celebrate last year’s record $90 billion fundraising dominated by China. A main theme then was the launch by the World Bank’s International Finance Corporation private sector arm of formal impact investing principles to define social alongside commercial returns. Dozens of big global institutional investors signed up, and new Bank President David Malpass hailed the breakthrough in a keynote speech. To address Abraaj’s collapse and liquidation, an EMPEA working group issued general governance and integrity guidelines, as the industry reconsiders penchants for confidentiality and index avoidance.

 Abraaj claimed $15 billion in assets at its peak as the biggest single fund, as US and UK investors now pursue fraud allegations against the founder, a Pakistani national who was close to the development lending elite and lured the Gates Foundation as a partner. It was an aggressive dealmaker in more exotic frontier markets, with an early push into Sub-Sahara Africa, and reported a long-streak of double-digit returns. The fall from grace preceded another recent spectacular one when the head of TPG’s multi-billion dollar “sustainability” vehicle around UN Development Goals was implicated in a US college bribery scandal. Internal personal and cultural missteps will always pose risks, but developing world private capital lacks indices and rankings widely available for public equity. EMPEA members were involved in the original launch of the emerging stock markets data base through the World Bank decades ago, and realize that comparable yardsticks and information disclosure for the asset class may be overdue.

From a geographic standpoint, the Middle East as Abraaj’s home was already under fire, with a survey of hundreds of investors placing it at the bottom of regional preference. It ranked next to Russia, which recently jailed a well-known international private equity executive. Isolation may continue even as Gulf markets increasingly enter the mainstream MSCI stock and EMBI sovereign bond indices, given the tradition of secretive family and royal connections where relationships drive allocation. Before the meltdown, Abraaj had an announced privatization deal with former Pakistan Prime Minister Sharif that never closed, as he was implicated in the Panama papers and tried and convicted for corruption. State enterprise selloff is a linchpin of the latest $6 billion International Monetary Fund program under current Prime Minister Imran Khan, and bidding procedures and stake transfer will presumably be more open.

Africa was also hurt to the extent the regions are combined in a strategy, following previous Sub-Saharan optimism when commitments spiked from big global houses like KKR and Carlyle. At the EMPEA event, the latter’s chief executive, David Rubenstein, was upbeat on developing economies’ future, absent bullishness on Africa given the firm’s mixed track record there. He also stressed business ethics in a possible indirect swipe at Abraaj, as industry leaders hesitate to offend Gulf wealth sources as a deep cash pool. Amid Africa’s rerating on stagnating incomes and growing debt with the eclipsed “rising” narrative, specialists now argue that Abraaj’s splashy headline acquisitions backfired, and overstated earnings and management value. For future funds they recommend extension of the typical 10-year life, to allow more stock market development time so companies have an outside   exit.

Recasting of public-private equity links also applies more broadly to accountability and measurement, in line with investor desire to avoid another Abraaj within evolving hybrid cross-asset strategies. JP Morgan has already combined external corporate and sovereign gauges to integrate debt coverage, as fund manager “total return” mandates increasingly comprise stock-bond mixes and off-index bets. Creating a private equity benchmark, initially through a sampling of top global emerging market players, could offer another building block for next generation allocation. The funds themselves can open to standard emerging market portfolio flow tracking from sources like EPFR and the International Institute for Finance, and could take steps to open their books and practices beyond sophisticated institutional investors though compilation of a  free database on the EMPEA website. Regional bodies like the Asia Venture Capital Association can promote these changes, to solidify a top geographic ranking and banish Abraaj’s vestiges for longer-term confidence.