General Emerging Markets

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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.

FDI’s Sliding Scale Scars

2019 July 14 by

The UN’s trade and development agency charted a third consecutive year of FDI decline in its annual review, down almost 15% in 2018 to $1.3 trillion although the developing country portion rose 2%, led by Africa and Asia. The industrial world total fell over one-quarter, largely due to capital repatriation under more favorable US tax treatment. This year’s forecast is for 10% recovery, as greenfield manufacturing investment momentum should continue. The estimated 1500 state-owned multinationals slowed their acquisition pace, with deals increasingly focused on intangibles like technology rather than physical plant. Of the 100 new policies announced globally, one-third were restrictive, the highest portion in decades. Tougher screening is a main thrust, but 40 additional trade pacts were also signed last year often to replace provisions in old agreements, especially on dispute settlement. Capital market trends incorporating sustainability criteria influence policy and practice, and also special economic zone creation now in the thousands. They are tied to specific industries and value chains, and the tendency is toward more worker inclusion and environmental responsibility. Advanced economies’ performance was the worst in 15 years, and the US, Europe and Australia were less than half the worldwide haul. Emerging markets took $700 billion, topped by China, where outbound investment slipped 10%. Despite hype, South-South FDI is under 30% of the overall total when measured by ultimate ownership, as the ASEAN and African free trade zones are expected to deepen regional relationships. The latter got $45 billion last year, up 10% with the Maghreb, Kenya and South Africa prominent. Conflict countries such as Congo were commodities and mining destinations, while consumer goods and renewable energy were among the continent’s diversified plays. Asia received $500 billion, with China and Southeast Asia roughly even at $150 billion, and India $45 billion. Outflows were roughly $400 billion, with increases from Korea and Thailand despite stricter US and Europe guidelines.

Latin America fell 5%, while natural resources in Argentina and Chile were “resilient” and Caribbean allocation outside offshore financial services was off 30%, according to UNCTAD. Russia and its neighbors got $35 billion, with Moscow’s portion halved while Serbia and smaller Balkans members saw pickups. Fifty low-income economies attracted less than 2% of global FDI, with Chinese multinationals “increasingly active.” Small island states are limited to hotels and tourism, while Sub-Sahara Africa and Central Asia offer raw materials and processing. Asia embraced liberalization with administrative procedure cuts and state company selloff, but a broader trend was national security scrutiny in sensitive industries scuttling two dozen transactions. Another 70 investor arbitration cases were filed last year, as the next generation of bilateral treaties updates this framework following UN recommendations. Stock exchanges continue to subscribe to ESG principles in a common initiative that translates into downstream projects, the study notes. Dedicated economic zones have “spread rapidly” with 5000 currently in 150 countries, and are now a linchpin of international cooperation and regional integration. They are traditionally geared toward manufacturing exports linking local participants in external supply chains, but future direction will emphasize quality labor standards and skills training under the 2030 Development Goals’ “changing production pattern,” the report concludes.

Green Investing’s Envied Charge

2019 June 29 by

The past year was a “watershed” for ESG allocation with unprecedented global political and practical low-carbon initiatives to prepare for climate change, including the launch of dedicated indices to channel an estimated $725 billion in assets, according to JP Morgan research. Europe continues with most aggressive policies to reach the 2030 Paris targets of a 40% cut in greenhouse gas emissions, and 40% energy share from renewables. It has pricing, trading and tax schemes that have also spread to the Americas and China, and a simple equity selection framework favors the mainland over slowed company adaptation in Brazil and the Persian Gulf. The International Energy Agency notes that 80% of output still comes from fossil fuels, despite the extreme weather evidence of natural disasters paring economic growth. Green bond issuance is already $60 billion this year on track to another record, with corporates over half the total. Commodities are in the direct global warming “crosshairs,” and oil and gas and mining firms are under management and balance sheet scrutiny to transition after high-profile catastrophes and losses, even though market performance under specific screens roughly equals conventional analysis. European fund operators and central banks have led on incorporating environmental disclosure and reporting, and international organizations including the UN, IMF and World Bank set ambitious goals and detailed work plans. The Bank aims for one-third its portfolio in green projects into the next decade, and regional counterparts have joined to offer financing and technical advice to public and private sector borrowers.

Climate investors must weigh measurable impacts and commercial returns both at company and macro-levels, as lack of action can harm earnings and broader economic policy and performance. Weather swings are also correlated with conflict and mass migration, with studies showing that the Syrian civil war and refugee exodus was preceded by water scarcity that affects the volatile Middle East more generally. No blanket preference between emerging and developed markets is obvious, and in the former China is better placed than vulnerable Bangladesh and Nigeria. Index sponsors have rolled out green versions gradually gaining acceptance, with carbon intensity a main country distinction. Surveys reveal that Europe’s portion of global portfolios has fallen below half as other regions catch up, although retail core interest remains around 5% of outstanding exposure. In the US despite the Trump administration view that the issue is a “hoax,” states and municipalities have adopted their own practices and business schemes, with California and New York City in the vanguard. The green bond total should reach $600 billion by year-end, with the high-yield portion just 5%. North Asia is the top geography outside Europe with over 20% of activity, and Chinese bank and government issues are overwhelmingly in local currency. The dedicated worldwide investor base exceeds $100 billion, and loans are also evolving as an asset class following new principles and regulations. The field is predominantly investment-grade rated with limited secondary trading. Housing could be the next niche play as securitized products bundling mortgages for wind and solar-supplied property come to market. As the big US backers are reformed under a renewed post-crisis push this structure could appeal in the future competitive climate, the report suggests.

MSCI’s Angled Anniversary Annals

2019 June 10 by

Index giant MSCI marked 30 years of the emerging market index with a detailed retrospective, while the paper also cast future direction with China’s “transformative characteristics” as full “A” share weighting is 40% of the benchmark. At launch it was 1% and now is 12% of the global equity gauge. Allocation rose from a low base at the start of this century as wider foreign investor access spurred infrastructure and trading improvements. In 2007 frontier and small cap indices appeared, with two dozen components in the core dominated regionally by Asia. The economic growth premium over developed markets is not as pronounced but remains intact, supported by sound fiscal, monetary and structural policies evolving over the period. In a sense the growth differential has come full circle, as the 1980s was also modest with the universe in the throes of debt crisis. Over history inflation conversely narrowed to advanced economy levels, with double digits currently an exception with the advent of independent central banks enshrining price stability. Net public debt is half the industrial world’s 80% of GDP, with a healthier current account balance. Valuations fluctuate with a price-to-book 20% discount the past two decades, and cross-sectional volatility as a standard deviation measure is lower. Correlations among emerging markets continue to emphasize diversification benefits despite the tendency to increase globally during scares. Currency risk analysis from 2010-17 shows that unhedged portfolios outperformed. Active factor investing incorporating momentum and yield produced 1-5% returns the last twenty years. ESG screening is common and enhanced results and “sustainability” portfolios could be standard in the next generation.

Since “A” shares were added a year ago, Chinese exchange liberalization and regulatory reform has advanced with a 20% of free float portion to be phased in by end-2019.Along with Korea and Taiwan, Asia will be over half the main index in the near-term, and helps explain regional preference in private equity as well according to the latest annual EMPEA trade group survey. Over 100 institutions from 40 countries, with almost $1 trillion in assets in the category, plan to raise near-term commitments. Southeast Asia is the most popular destination, followed by China and India, and Brazil and Africa round out the top five. At the rear are Russia, Turkey and the Middle East, and industry and size focus is in tech and the middle market. Fundraising was a record $90 billion for all funds in 2018, and the fraction of global portfolios should average 15% in the coming years. With the Abraaj collapse and scandal, due diligence is more intense, and proprietary questionnaires examine traditional financial and management concerns alongside cyber security, gender diversity and other issues. Asia gets 85% of allocation with China the leader at $35 billion collected last year. In contrast no Russia fund has closed since 2014, as political uncertainty is the overriding deterrent, unlike in Asia where exit difficulty is also less. The main obstacles there are steep entry valuations and crowded deals, according to the study. Past performance is the perennial main selection driver, and one-third of respondents believe ESG criteria and implementation are part of the evaluation.  Asia is viewed as the dominant tech play, and its currency stability compared with other geographies is another lure as EMPEA celebrates its own 15th anniversary.

Green Finance’s Colorful Garden Variety

2019 May 5 by

The IIF’s first quarterly tracking of green, social and sustainable debt issuance under accepted definitions predicts another record this year after 2018’s $250 billion, up tenfold the past five years. The total outstanding is now $430 billion, but less than half a percent of the global bond market. 2019 volume should reach $150 billion for bonds alone as banks and investors embrace low-carbon energy transition, and policy makers and practitioners promote viable mainstream market instruments. The US, Canada, UK-Europe and China dominate, and dedicated ETFs that have sprouted got $300 million in inflows the first three months. Only one-tenth of bonds are internationally-tradable and mostly in asset manager hands, even as ESG criteria routinely feature in allocation according to surveys. Supranational institutions were the original sponsors, but banks and non-banks currently hold a 40% share as the main players. China, France and Germany account for the same portion by geography, with China’s $95 billion the biggest and two-thirds bank-driven. Other emerging economies include India and Mexico at $5 billion each, and 95% of the universe is investment-grade at average 6.5 year maturity. By currency the leading portion is euro (45%), followed by renimbi (25%) and dollar (15%).

Separately securities regulators through IOSCO, and other bodies such as the Financial Stability Board and European Commission, are working on a company disclosure template for financial and material information. The IIF points out that climate change consequences are cross-border and regulatory fragmentation is a risk unless industrial and developing country supervisors agree on common terminology and guidelines. In China the central bank has its own procedures, while other major emerging markets like Brazil and South Africa enshrine them in standard listing and corporate governance norms. Insurance officials in the IAIS have a proprietary code which can further misalign industry treatment and data and methodology limitations cited by the UN’s environment program must be acknowledged. The organization in view of these discrepancies urges voluntary efforts in an initial phase before considering mandatory practice, under a broader concept than individual company threat. Technical and commercially-sensitive items should be excluded, and a unified “taxonomy” adopted for reporting and investment purposes, the analysis suggests.

South Africa’s energy crunch is a core issue in May elections with state electricity company Eskom’s precarious financial and operational state. Business and consumer rationing could keep GDP growth at 1%, with fixed capital formation in a slump. Voter surveys show the ruling ANC with the same 55% percent support as two years ago before President Ramaphosa assumed the post. He may shake up the cabinet in a symbolic move, and try to mitigate the cost of recently-granted Eskom rate hikes with the budget deficit already at 4.5% of GDP. Moody’s postponed possible ratings cut until the second half, and with 5% inflation in the target zone, the central bank may ease should the power shortage further bite. In Saudi Arabia Aramco’s petrochemical firm acquisition in a landmark oversubscribed global bond was designed partly to prepare for a clean energy future, but lower OPEC production and geopolitical shutoff also raised oil prices to the $70 plus range to aid fiscal deficit sustainability.

The World Exchange Federation’s Universal Lessons

2019 April 21 by

The Madrid-based World Federation of Exchanges and EBRD’s Capital Markets Development team unveiled an update on last year’s investor emerging and frontier market survey which found that operational and practical aspects were greater determinants than headline economic and share performance trends. Account opening and management costs, corporate governance in the broader ESG context, infrastructure beyond standard custody and settlement systems, and the local institutional base were core criteria according to the structured interviews with big foreign holders. The World Bank estimates almost $1 trillion in inflows from 2000-2017, and across the 25-country universe covered overseas direct ownership is $100 billion with their slice swamping not as deep domestic fund managers. The US and UK are the dominant sources accounting for 60% combined, followed by Western Europe, North America and Asia. Other emerging markets in Central Europe and the Middle East also actively allocate, and the biggest depository receipt target is Russian companies that received over $35 billion as of mid-2017. The original classifications date back decades, but index providers have created subsets such as advanced and secondary emerging using their own taxonomy beyond per capita income and general access and liquidity. Higher returns remain a prevailing attraction, but cheap valuations and price inefficiencies also contribute to long-term outperformance as an exposure rationale. EM is embedded in global mandates, and passive ETFs are increasingly available for the diversification range. Frontier exchanges “struggle for attention” with their limited research and risk premium, but big houses are forming dedicated teams. Share free float is smaller than developed markets, with the weighted portion halved to 10% of the MSCI All World Index adjusted for this factor. The EBRD is looking to introduce new benchmarks like an EU-wide one that can break these strangleholds and channel smaller company interest, with the possible eventual goal of a Capital Markets Union asset class.

Economic and political conditions were monitored as they affect company earnings and currency stability, but overall policy predictability was a more important consideration. So-called “red lines” varied without consensus, from capital controls and industries such as fossil fuels and tobacco to minimum investment size and trading. Other roadblocks included state and family control undermining minority rights, poor disclosure, steep transaction costs and lack of market data and information. Dual class shareholding with weighted voting was a flag, and management otherwise needed to communicate and interact regularly. Volatility was not a concern for long-term managers, with foreign portfolio swings often a mixed trigger since underlying conditions set the tone. More research on second-tier listings is desirable, and the EBRD is sponsoring a support program to address the gap. Global custodians and delivery versus payment practice are prerequisites, and international financial reporting rules should be followed. WFE and IOSCO membership is welcome, alongside strong insolvency codes.  A competitive brokerage industry and anti-corruption bodies and norms are also in the frame, and greater local investor diversification especially where retail buyers are prominent is a frequent prescription. The review concludes that “friction removal” in the form of taxes and balance sheet and top executive access should be a guiding principle, with stated law and regulation within the same frontier as actual enforcement and experience.

Global Refugee Finance’s Public-Private Priority (Financial Times)

2019 March 4 by

As the Western Hemisphere’s worst refugee crisis unfolds with 3 million Venezuelans pouring into Andean neighbors, and relief agencies projecting that number could soon double with continued standoff between the Maduro and Guiado government claims to legitimacy, the international community is again scrambling for emergency funding. The appeal comes as the budget for the main United Nations arm, the High Commissioner for Refugees, has been running 40% behind the $25 billion requested in 2017; development lenders like the World Bank and Inter-American Development Bank are in the early stages of modest commitments; and private financial markets are just beginning to consider pilot debt and equity issuance from standard emerging economy designs, with three-quarters of displaced populations hosted in developing countries. The Global Compact for Refugees finalized last year after two years of negotiations, and endorsed by all UN members except the US and Hungary, calls for new public-private arrangements and investments to support governments and companies on the front lines, but offers no specific delivery models as global needs continue to increase with the refugee number at almost 70 million at mid-2018. The pact is voluntary and depends on improvised field relationships, and in Latin America’s case and elsewhere a joint official-commercial funding unit could generate resource and policy breakthroughs.

Humanitarian groups have tried for years to change UNHCR’s budget formula, which relies on non-enforceable pledges and draws from a shrinking donor base, with 10 countries contributing nearly 80% of the total. They argue for mandatory assessments as with peacekeeping missions, or separate public goods levies such as on airline tickets that could be earmarked for refugees.  As populist anti-immigrant leaders assumed power throughout advanced and developing economies these proposals have stalled, as initial lack of political will shifted to fierce resistance. UN officials moved from acknowledging the difficulties to considering internal changes a dead end, and instead urge that additional revenue come from wider system partners like the World Trade Organization in the form of host country export preferences. With Jordan the European Union embraced this track and offered duty-free entry for garments using Syrian refugee labor, as part of a broader agreement with bilateral and multilateral donors including the International Monetary Fund. It charted a standard adjustment program for fiscal austerity amid the influx. Subsidy cuts sparked street unrest, forcing King Abdullah to replace his prime minister and cabinet, and the Fund has since come under pressure to rework facilities for protracted refugee emergencies.

The World Bank in 2016 joined with the Islamic Development Bank and European Bank for Reconstruction and Development to create a concessional lending platform, the GCFF, enabling $1 billion in infrastructure projects for Jordan and Lebanon as middle-income economies. The Bank also recently opened a $2 billion window in its low-income International Development Association arm for borrowers like Bangladesh and Ethiopia. It just announced that Colombia, where almost a million Venezuelans have crossed the border, will be the third middle-income country eligible for discount rates, and Inter-American Development Bank President Luis Moreno, himself a Colombian, intends to raise a regional $1 billion fund for refugee social protection and job creation. Bogota has granted work permits and temporary residence, but host community public services have been overwhelmed, as local officials plead for education, health, housing and employment assistance. A national interagency plan was drafted in November, but has yet to be fully aligned with World Bank priorities and procedures to access the low-cost funding. The GCFF is backed by bilateral pledges from ten countries as the World Bank issues traditional bonds and on-lends the proceeds, but has no authority to deal directly with private sector banks and fund managers, despite requests as they organize for trial large scale refugee transactions.

Colombia’s government, an investment-grade frequent emerging market borrower has expressed interest in placing project and sovereign bonds, collateralized by utility revenue streams serving refugee and internally displaced populations. They could feature tax incentives, and be natural portfolio allocations for local banks and private pension funds as well as dedicated overseas asset managers. For equities, a Colombian company investment fund may add to the instrument range where listings on the domestic and regional MILA exchanges can get capital for refugee hiring and product and technology launch. This private market-based innovative approach was a core recommendation of the final January report, A Call to Action, of the World Refugee Council, a two year Canadian-led effort to craft new refugee crisis policy and practical solutions. In the Andean and other pressing regions, commercial emerging market specialists can formally team with humanitarian agencies and official lenders to mobilize additional tens of billions of dollars, and investor insight and discipline that reinforce shared purpose.

Performance Indices’ Indelible Injury

2019 February 4 by

Last year’s thrashing in all emerging market investment classes, with debt, equity and currencies in simultaneous decline for the first time in a decade, cast equal blame on internal and external forces and provoked a long overdue rethink of allocation rationale into the next decade. For years bonds in particular were spared lasting correction with the global rally from industrial country central bank monetary easing, or the whole category reacted in lockstep to outside liquidity, trade, political and geopolitical steps affecting portfolio values. The 2018 Argentina and Turkey crises as a wake-up call were in part a replay of the Federal Reserve Taper Tantrum hitting the Fragile Five countries in 2013, as retail foreign investors especially sold indiscriminately without detailed knowledge of economic, financial system and technical underpinnings. Contagion may yet spread beyond sentiment and be justified by fundamentals such as bank weakness as the business and credit cycles turn, but for now index performance will continue to be subdued without the specter of uncontrolled crashes. A worst case China meltdown scenario as a possible trigger would damage world markets broadly, unlike the version a decade ago when the rest of Asia and commodity exporters were mainly in the firing line.

The dollar’s strength against all emerging market currencies was a drag, but may again fade as developing world central banks also raise benchmark rates contributing to slower growth. Government borrowing for possible fiscal stimulus will reinforce tightening pressure, against the backdrop of mixed commodity price and credit ratings trends. Lower hydrocarbon values, with oil falling to $50/ barrel, prompted sovereign and corporate downgrades, which continue to run even with upgrades with the overall average at the investment-grade margin.  Populism as a political backlash against globalization, immigration, income inequality and technology change is on the march notably in Central Europe and Latin America after the US and Brexit experience. Geopolitics in turn increasingly centers on trade and aid conflict between Washington and Beijing and their respective allies, with tariff retaliation and pact renegotiation standard tools. Spikes in financial market volatility from computer-driven trading and debt-equity rotation add to the cross-currents looming over asset choices.

The International Monetary Fund downgraded average growth to 4.5% this year on inflation slightly below that level, with foreign trade and direct and portfolio investment due to slacken and stay in the $1 trillion range to major emerging markets, according to the Institute for International Finance. Short-term reserve coverage as a portion of external debt is thin beyond Argentina and Turkey, in places including Chile, South Africa, and Pakistan. Structural reform momentum stalled during the easy money era, with India held up as a rare bold example, but its reputation was badly dented by the central bank head’s resignation over government interference. Relative monetary policy independence to foster price and exchange rate stability, a longstanding fund manager assumption, may now be at risk as authorities also grapple with the fallout of large corporate and household debt loads on bank health. Across the universe and best-known in China, shadow banks and fintech providers are new intermediaries in the system which often escape regulation and have not experienced distress.

Fund trackers put stock and bond inflows at only $20 billion each in 2018, with a meager pickup predicted this year. For the former, China and Korea were favored destinations because of their big weight in the MSCI index, and tech companies are also a big component as the global industry cycle sputters. Valuations are widely discounted to developed markets, but earnings growth is lackluster and fast-moving exchange traded-funds account for one-quarter of participation. In bonds, sovereign and corporate issuance droughts lasted for months last year, and 2019’s totals are projected to further fall to limit refinancing as $2 trillion in combined local and foreign currency maturities come due. Official defaults would already be widespread in Africa without IMF program rescues, and recent Middle East entrants look to JP Morgan index inclusion as the remaining catalyst with reduced placement. While conditions remain sobering, markets and classes will turn selectively positive, as complex layer appreciation returns to replace knee-jerk reaction in determining direction.