General Emerging Markets

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The Taper Tantrum’s Repeat Rejection

2018 August 9 by

Early year optimism that 2017’s double-digit emerging market stock, bond and currency upswings could persist was overtaken by opposite sentiment and direction toward mid-year, with all asset classes in decline amid fears of a liquidity and economic squeeze reprising the 2013 US Federal Reserve-induced taper tantrum. Industrial country central banks are now in the end game of quantitative easing which contributed to developing world portfolio inflows, but over a decade the correlation could never be precisely proven, and major emerging market monetary policies were often loose as well.  Average GDP growth and inflation forecasts in the 4-5% range have been relatively constant over the past six months, and trade and geopolitical conflict risks were heightened since the onset of the Trump administration’s bellicose commercial and diplomatic stances. Renewed emerging market qualms should not revert to 5-year old explanations of external forces, including the higher dollar, that help dictate fate but instead reflect the inability to construct their own global leadership and reform narratives for the next five years.

According to fund trackers, foreign investor inflows turned to outflows in May, but net allocation was $20 billion for local and hard currency bonds, and $35 billion for core and frontier equities at end-June. Stock market earnings and valuations were steady, with the latter still at a sizable discount to advanced economy counterparts, and international sovereign and corporate issuance was on target with respective $100 billion and $200 billion-plus gross totals, and rollovers managed with recycled cash flows. Almost all currencies were down against the dollar, but with the exception of countries like Argentina and Turkey with large payment imbalances, the trend retraced previous appreciation, and central banks and securities regulators did not panic as they prepared policy and rate defenses. Argentina bolstered its backstop by turning to the International Monetary Fund for a classic standby program, with $15 billion immediately released from a $50 billion line to cover external financing needs into next year. Outright crisis was further contained with MSCI’s decision to reinstate core index status, reflecting capital market modernization under the Macri administration which stood out in the universe as a distinct “second generation” agenda.

China, in contrast as the biggest MSCI weighting, got only a short-term bump from “A” share inclusion as investors bridled at poor governance practice at both state and private company listings, amid festering trade and debt concerns that are widespread in Asia and other regions. The counter-strategy to breakup of industrial/emerging market pacts like the Trans-Pacific Partnership and NAFTA is formation of pure developing economy blocks, where progress has been slow despite stated ambitions. TPP has yet to resurrect as a bi-regional Asian-Latin American arrangement; the pan-European single market is in jeopardy with Brexit and reduction of Eastern nation cohesion aid; and even with breakthroughs like Africa’s new continental zone the details are murky under long phase-in periods. These fresh deals are more urgent in view of the flat $800 billion in foreign direct investment in 2017 the United Nations recorded in the developing world, historically a multiple and driver of the portfolio number.

Emerging market foreign exchange reserves have rebounded from a year and a half of depletion, especially in Asia and the Gulf, but external corporate debt is under a heavy repayment schedule in 2019, and private borrowing in all forms including household remains a vulnerability despite official deleveraging campaigns. Credit has continued to outpace GDP growth over the past decade, and banks have not reckoned with bad loans under an extended favorable business cycle from liquidity-fueled demand at home and abroad that may now be turning, especially without underlying productivity gains that should also be a policymaker priority. As the asset class tackles these issues on its own terms, second half results are poised to selectively improve in line with country commitment, and a second post-taper tantrum wind can banish the concept as a different future rationale dominates.

 

 

 

 

Corporate Debt’s Mystery Owner Unmasking

2018 July 26 by

With the CEMBI off 2% in the first half as spreads over US Treasuries head toward 300 basis points, research houses have tried to emphasize crisis insulation through widespread local and dedicated investor ownership, which together control over half of eternal corporate bonds according to JP Morgan estimates. So-called global cross-over managers account for another 10%, while roughly 20% of holders are unknown, as the $100 billion benchmarked assets figure is likely understated. Asia has the top domestic base at 80%, and Latin America is at the opposite extreme at10%, while Europe and the Middle East are at 20% and 40% respectively. Under broader analysis of fixed income indices $275 billion may be the total corporate bond allocation including quasi-sovereigns from the dedicated category, and a breakdown of 250 public funds showed 25% exposure, half concentrated in energy names. Chinese onshore investors mainly buy their own issues, and Asia credit funds with over $100 billion in assets are another regional force alongside commercial and private banks. Insurers from Taiwan in particular with over half of portfolios in overseas bonds have also been active, and big Korean institutions likely buy their own paper. Pension funds in Chile and Peru may be leading corporate holders across Latin America, while in Europe Russian and Turkish managers absorb national issuance. US high-grade and high-yield funds participate at under 5% of totals and European counterparts have entered at greater weightings and lower asset sizes translating into a $20 billion inflow.

Gulf banks and institutions are comfortable with Cooperation Council dollar-pegged corporates, with an under 5-year maturity preference. Emerging market investors have otherwise been underweight for years with commodity price, sovereign support and corporate governance qualms. Fiscal balances are up with better oil and tax revenue, but ratings have not been upgraded as public debt ballooned 40% in Oman, Qatar and Bahrain. Qatar’s preparations for the next World Cup have not been interrupted by the trade boycott as long-term gas supply contracts provide ballast. Bahrain’s deficit is almost 10% of GDP and foreign reserves are minimal, as Saudi Arabia and the UAE are assembling another aid package after extending one to neighboring Jordan after another Syria refugee influx. Saudi Arabia’s Aramco IPO was again a hot item as MSCI elevated the stock market to the core universe next year, as the royal family was also pressured to boost oil output to cover the US Iran deal withdrawal. It won international plaudits by finally allowing women to drive, but drew condemnation on systemic gender inequality and disease and destruction associated with the anti-rebel war in Yemen, where a strategic port was the scene of recent fierce battle. In the crossfire Iraq has escaped notice, after elections should keep the al-Abadi government in place in coalition with a Shia cleric previously in opposition. The Chinese will offer $10 billion in aid for an oil pipeline and other projects, as the post-ISIS reconstruction tab was put at $90 billion at a donor conference. The IMF program missed targets to delay disbursement before the polls, in contrast with Egypt where fiscal and structural milestones continue to be met with a possible accord beyond 2019, when two dozen state company exchange listings will seek new ownership.

FDI’s Flat Field Contours

2018 July 1 by

UNCTAD’s annual report on FDI trends was pessimistic with an unchanged $670 billion total in developing economies, against an overall 25% global drop last year to $1.4 trillion. Asia and Latin America had marginal increases, while Africa inflows slumped 20% to $40 billion. Cross-border mergers and greenfield investment fell 20% and 15% respectively, and the 2018 forecast is for marginal improvement, below the past decade average, despite higher GDP growth and commodity prices. Trade tension and policy doubt abound to constrain value chains, and recent US tax reform could shift commercial patterns. Rates of return are now under 7%, and competition is stiffer from portfolio flows with a rising relative share of emerging market external finance. As production moves from physical to intangible factors asset and employee expansion has slowed, and value chain participation peaked five years ago. Liberalization continues with 65 countries adopting measures, but a “more critical stance” is apparent with new ownership and takeover restrictions, particularly on land and technology firms on security grounds. Treaty terminations exceeded fresh agreements in 2017, and state investor disputes are up to 850 cases. Industrial policies are a common tool, with incentives and special zones the preferred models. Most target manufacturing but advanced services are now in the mix which often entail more sophisticated infrastructure. The report advises promoters to avoid overregulation and adopt social and environmental considerations, and to coordinate national approaches with international business partners. The developing world takes almost half of FDI, but transition economies in Europe and Central Asia experienced a 25% drop in 2017’s “negative cycle.” Advanced economy declines were especially pronounced in the US and UK, spurring a rise in Asia’s global share to one-third the total. Africa was battered by the commodity “bust” and South Africa’s allocation shrank 40% on simultaneous political turmoil. China, Hong Kong and Singapore are in the top 5 recipients, and Brazil and India join the leading ten worldwide. In Latin America activity has moved from natural resources to infrastructure, business processing and information technology. As a group the BRICS inflow was steady at $275 billion, while outward investment plummeted 20% from European multinationals across the board to $400 billion. Emerging market companies, particularly Chinese ones, committed 5% less abroad.

Extractive industry deals and greenfield projects slid 70%, and high-skill manufacturing ones are also in long-term decline, according to UNCTAD. Lower-skill South-South versions have been active from Asia into Africa, but are concentrated in a few locations like Ethiopia. FDI has historically been less volatile than bonds and loans, and equity infusion is small given the level of capital market development. Official assistance is stagnant, and remittances are another steady flow but go mostly for household consumption, Higher interest rates, and geopolitical and protectionist risks shadow the medium-term outlook despite relative optimism in corporate surveys. Africa could jump with implementation of the continental free trade pact and Europe should recover outside Russia under continued international sanctions. Financial companies plan to focus on the developed world as investment promotion agencies seek to diversify into food processing, pharmaceuticals and information services. The CFIUS screening process in Washington will be a harbinger of a cooler welcome likely to last beyond the current tempest, the publication cautions.

Global Forced Displacement’s Unforced Errors

2018 June 19 by

A year-long CSIS study involving extensive frontline economy field research warned of “unprecedented” displacement extrapolating from the current pace over the next decade to hundreds of millions globally, which will swamp US relief funding and national security concerns. It urges an “all hands on deck” approach multilaterally to embrace private sector development, with Washington to refrain from short-term budget cuts and agreement withdrawal and reengage while also pressing China, Russia and other countries to raise contributions and absorb migrants and refugees. In Europe sentiment has shifted from welcome to deterrence and deportation in recent years in violation of the 2003 Dublin accord. The legal and logistical system dividing responsibility between the UN Refugee Agency and International Organization for Migration is badly dated and major host countries like Bangladesh, Iraq and Jordan are not signatories. The UN’s budget shortfall was $4.25 billion or 50% last year, and the World Bank and other development lenders have just arrived on the scene. Of the 65 million currently in flight the overwhelming portion have that status for at least 10 years and they are over 80% concentrated in poor and developing countries. Women and children are half the population, and most live in urban centers as opposed to traditional camps. In advanced economies one-tenth of foreign aid now goes to processing and supporting arrivals, and terrorism incidence has been non-existent despite political rhetoric. Jordan, Lebanon  and Turkey have absorbed 6 million Syrians, while only a tiny fraction have been resettled abroad. The US plans to slash this year’s quota to a record low, but India, Japan and Saudi Arabia lock the door altogether.

According to the OECD almost one-fifth of official donations, over $25 billion, are for forced migration. Root causes generally divide into three categories: violent conflict, political persecution and economic mismanagement, and climate and natural disaster. One-third of the displaced numbers face famine or food insecurity, with 6 million at risk in Somalia alone and the toll in Yemen unknown. Education and work should be basic rights and are key to productive stays, but access is often deliberately restricted or beyond host country capacity. These issues are now on the agenda of broad compacts negotiated with the international community, starting with the 2016 Jordan one where the EU agreed to provide additional trade preferences and partners backed enterprise zone expansion. Bangladesh, which has taken in 1 million Muslim Rohingya expelled from next-door Myanmar, is early in this process with wider duty-free garment exports a chief consideration. Since summits in 2016 private business has emerged as a new actor in hiring and supply chain relationships and adapting products and services to migrant needs. Studies show clear bottom-line returns, and refugees themselves have proven active entrepreneurs with thousands of business launches tallied in Turkey. Small-scale financing projects have a mixed record and the planned US Development Finance Corporation may launch a dedicated venture capital fund following previous success in difficult environments. The report recommends more AID missions in “hot spots” and increased World Bank focus through the private sector IFC on innovative business and financial models. It suggests further study to unclog the deal pipeline and size constraints associated with these tragic flows.

Local Bonds’ Unguided Track Traces

2018 June 12 by

JP Morgan’s 12th edition of its annual local bond market guide skirts recent volatility to promote long-term asset class trends, while citing structural foreign investor pullback the past five years. The past two years’ returns reversed previous losses, and Sharpe ratios at 0.5 have not suggested undue swings compared with other debt categories and equities. Almost 95% of emerging market government obligations are local currency and the $8 trillion universe is half the bond total. International ownership is down since the 2013 Taper Tantrum to a 27% share, while institutional flows have increased relative to the retail portion according to fund trackers.  The field is one-tenth of the global bond market, while developing economies are 40% of world GDP.  China, India and Brazil are 60% of the stock, and inflation-indexed instruments are concentrated in Latin America. In the past 15 years the average return has been 7.5% despite wide divergence in underlying currency values. Correlation is low with US Treasuries and higher with other industrial world credit, with real yields remaining steep in historical terms. Output growth should be in the 5% range through end-decade, and contained inflation should moderate rate hikes despite advanced economy quantitative easing fade. Fiscal deficits have worsened in recent years while current accounts have improved, and still managed and pegged currency regimes chiefly in the Middle East should stay intact. Overall government debt is 50% of GDP, and 2018 issuance should rise 3% to $600 billion, the reference projects. Foreign investor stakes vary widely, and China Korea, Israel and India have large non-dedicated participation, but control often ranks just behind domestic banks on the institutional scale. Pension funds have raised EM debt allocation to 5% of portfolios, but only one-fifth of plans are active. ETFs are small with less than $30 billion in assets, dominated by JP Morgan’s own $7.5 billion vehicle. Secondary trading has increased since 2010, and Mexico, India, Brazil and South Africa lead turnover, according to industry body EMTA’s regular surveys.

In Asia, beyond China’s Hong Kong Bond Connect and access liberalization, India lifted the foreign portfolio investment limit 1% to 6% of the government securities amount, and Vietnam and Sri Lanka are new frontier pockets, Malaysia extended onshore currency hedging and Korea duration out to 50-year Treasury bonds. In Europe Serbia, Ukraine and Kazakhstan are under investor consideration, and money poured into Egyptian T-bills following pound flotation under an IMF agreement. Nigeria may rejoin the benchmark GBI-EM index with relaxed foreign exchange curbs amid oil price recovery. Argentina continues to build its fixed-rate yield curve to reduce external funding dependence, Uruguay appeared with two instruments, and the Dominican Republic issued an inaugural index-eligible bond.  In contrast domestic corporate bonds are undeveloped at under 15% of GDP, with China accounting for almost three-quarters if the $7.5 trillion total. Korea and India are next averaging $500 billion, followed by Brazil, Mexico and Russia from $100-125 billion. Israel and South Africa are at $70 billion, and financials are over half the group and two-thirds mature within five years. Chinese quasi-sovereigns in banking and infrastructure are the top names, but only 10% are available through Euroclear to obscure the opportunity set, the review concludes.

Global Public Investors’ Assiduous Asset Pool

2018 June 12 by

The fifth edition of Global Public Investor, a comprehensive survey of 750 central banks and pension and sovereign funds prepared by the London-based Official Monetary Institutions Forum (OMFIF), charts a 7.5% asset rise in 2017 to over $35 trillion versus flat performance the previous year, with only the Middle East down. Half of holdings are in Europe and North America, while Asia led by China has 40% of the total. Equity rallies and “hard” real estate and infrastructure diversification supported the upswing, as gold reserves reached a two-decade high with China’s and Russia’s central banks controlling the bulk. Pension funds are the biggest managers with a $15 trillion stash, and in the Euro area Greece and the Baltics increased portfolios in contrast with the Gulf downturns in Qatar and Saudi Arabia, which both lost $50 billion. Turkey and Kazakhstan were also big gold buyers as instruments included retail and ETF exposure. Environmental, social and governance principles are routinely incorporated, with three-quarters polled requiring outside advisers to apply them and the same percentage already with green and sustainable investments in portfolios. Several funds plan complete fossil fuel divestment over time, and include the $150 billion green bond market in the fixed income category. 20% of respondent will lift renimbi weightings in the near term although only $125 billion is currently positioned, particularly to match the project envelope under the multi-trillion dollar Belt and Road program. Gender balance still lags among the universe at about a 20% average for women in boards and top executives, with Africa the best represented region. Chinese funds accounted for one-fifth of asset growth with a $520 billion gain, while Kuwait’s Investment Authority shrank 10% at the bottom of the pack.  Government bonds take over one-third of allocation, followed by corporate debt and stocks, with illiquid property rising in popularity at a10% slice in a cross-section surveyed by State Street research. The compilation notes that Brazil is the largest emerging world debtor in a reversal of status from the immediate post-2008 crisis period, and that Islamic sukuk issuance is around $500 billion outstanding with geographies extending into conventional European centers.

Contributors to the volume touted African prospects as a remaining unexplored high-growth tier, and new structured products are available to offer institutions diversified passive exposure in keeping with conservative mandates. However the lure must be weighed against alarming reports of sovereign debt commercial distress a decade after sweeping relief under the HIPC initiative granted mainly by official creditors. According to a May analysis by S&P ratings it was only a “partial success” since general government stocks have tripled as a fraction to 55% of GDP since 2010 along with interest at 11% of revenue. It emphasized that net debt improved from pre-HIPC levels, while the service burden is currently worse and “especially high” in Ghana, Uganda and Zambia. Congo-Brazzaville and Mozambique have already defaulted, and ratings downgrades will continue across the complex around the prevailing “B” speculative mark. Zambia’s negotiations on a fresh IMF arrangement have stalled on hidden liabilities spooking investors who did not pay much attention previously to recordkeeping which lagged along with commodity export capacity.

 

 

 

Foreign Reserves’ Hesitant Heft

2018 June 6 by

The IMF released last quarter 2017 global reserve figures, with China now fully added to the mix to cover 90% of the outstanding total, showing a 6% $800 billion increase since end-2016, half due to currency fluctuations against the dollar. GDP growth rose to 3% and bank deleveraging and commodity price retrenchment bottomed over the period, with private emerging market capital flows turning positive and central banks intervening again against appreciation. From 2014-16 holdings dropped $1.5 trillion, but JP Morgan forecasts for this year and next are for just $150-200 billion incremental addition. The current account surplus may not budge on “trade war” outbreak and flat remittances, and rising advanced economy interest rates will divert portfolio investment. Asia with $5.7 trillion, half the world accumulation, led the regional recovery, with China’s over $3 trillion pool still $1 trillion off the previous peak. India, Indonesia, Singapore and Thailand swelled more, while in Europe Russia came back to $350 billion and in the Gulf shrinkage continued the past year but at a negligible $30 billion, one-tenth the preceding loss. Dollar weakness across-the-board in 2017 aided the rebound, but authorities are likely to interfere less in exchange rates in the future to avoid “manipulation” charges from the new US administration. The IIF’s high-frequency indicators through the first quarter in turn suggest neutral debt and equity allocation to major developing markets. By the traditional yardsticks of short-term debt repayment and four months import coverage, these countries have excess reserves, but the IMF recently introduced more nuanced metrics which reveal China in particular as barely above adequate. It points to the money supply buildup to support capital controls as eroding the cushion, and by the updated methodology South Africa and Turkey are in danger and positions are insufficient in Hong Kong and Singapore although they are at the same time offshore financial centers. The dollar and euro have respective 65% and 20% shares, but they continue to slip against other units, although the renimbi portion remains meager at 1%. With “A” share entry into the benchmark MSCI index this June, alongside wider Hong Kong connect access and local bond and investment bank opening, reserve manager deployment should grow, and a 5% take rivaling the UK pound and Japanese yen is possible at end-decade according to analysts.

Foreign investors trimmed securities exposure as Washington and Beijing entered talks to avoid reciprocal tariff imposition, and the Yuan softened ahead of potential negotiation-related adjustment. The Politburo prepared to receive Treasury Secretary Mnuchin and Trade Representative Lightizer as it hewed to stable growth with “proactive” fiscal and neutral monetary policies. Banks reported 5% profit improvement in Q1, as their piece of total social financing again reached 90% from a decade ago before the “shadow” competitor craze. The insurance regulator tightened rules on short-term products and the central bank imposed guarantee and leverage limits on asset managers as it put household debt at 50% of GDP, mostly in mortgages. 40% of loans have gone to property so far this year with average rates rising to 5.5%, as national home sales fell 10% in April with developers scrambling for their own reserves.

Low Income Economies’ Grinding Ground Stops

2018 April 12 by

The International Monetary Fund’s latest annual poor region survey covering 60 countries offers a lengthy economic, banking system and debt worry list which has already prompted program rescues across Africa and elsewhere and is likely to invite additional public and private sector scrutiny around the April spring meeting. The group is subdivided into commodity and diversified exporters, frontier markets commercially borrowing overseas and fragile states in conflict or weak administration.  Average GDP growth was under 5% in 2017 and should rise to just above that level this year, with raw materials producers lagging. Fiscal deficits have increased, and inflation is in double-digits for one-quarter and problem banks plague one-third the universe despite improved global conditions, although aid and remittances are down. In commodities metals have rebounded in particular, and foreign direct and portfolio inflows were “robust” in the wake of a half dozen sovereign bond placements. The 30 fragile countries are at the bottom of these ranks, but nonfuel exporters’ slowdown widened the distance to the Sustainable Development Goals. Fiscal deficits are worse in 70% of low-income economies, at around 5% of GDP, and the rationale that they are tied to higher public investment applies to only a minority. Current account gaps remain in the 3-4% range despite bridging, with reserve coverage under the 3 month recommended threshold in 20 countries. Median inflation is 5.5% and lower with pegged exchange rate regimes as in the two Francophone zones, while real interest rates fell with bad loan ratios in double digits. Private credit/GDP is stuck at 25% with spreading bank failures and non-bank stress is up in 15 locations. A dozen new Fund arrangements and augmentations were approved last year in Africa, and several requests are in the pipeline with per capita income and investment lagging medium-term forecasts.

A separate chapter is devoted to rising debt, with an estimated 40% facing vulnerabilities and creditors now predominantly non-Paris Club, commercial and domestic. Private external markets carry steeper servicing costs and risks, and official managers often lack a comprehensive view of liabilities and structures. Greater transparency on both sides can facilitate cooperative workouts and the Fund and World Bank provide technical assistance to strengthen country capacity. In the past five years public debt spiked a dozen points to almost 50% of output with the most pronounced changes in Sub-Sahara Africa, the Middle East and Central Asia. Interest outlays are 5% of revenue, above the advanced economy norm, and the 10% of GDP fiscal financing requirement is a decade high. Civil war and epidemics were non-economic causes, and fraud was a driver in Mozambique and Moldova. Commodity shocks partially contributed to the rest of debt takeoff, but runaway budget and off-budget spending were chief culprits. Eight poor nations are currently in distress and Republic of Congo and Mozambique have formally defaulted on global bonds and are in restructuring talks. The latter after conducting an audit of undisclosed loans and missing funds unveiled an initial exchange offer in March with big haircuts creditors rejected. In Congo’s case collateralized loans may have complicated resolution with a “seniority race.” Public-private partnerships are rarely captured in reporting and are another obstacle in post-HIPC category redesign, the report concludes.

 

 

Central Securities Depositories’ Sideline Topics

2018 April 12 by

A new IMF Working Paper supported by the multi-donor First Initiative itemized the range of considerations for developing securities market central depositories (CSDs), and in particular whether the account, settlement and safekeeping functions should  be held in a single entity and if the government should own and operate them. No international detailed best practice has yet been developed in this area, and the study urges balance between safety and efficiency within explicit legal and supervisory regimes and public and private stakeholder involvement. The oversight body IOSCO presents general financial market infrastructure principles, and global case studies of central banks and stock exchanges clarify outstanding themes. CSDs are systematically important with payments network links and monetary policy applications including for open market operations. Corporate debt and equity responsibility is normally with the Finance Ministry, and of 95 countries surveyed, over half have a single one, with this model most common in the Eurozone. In Africa central banks lead the process, and of the 150 depositories in the World Bank’s data base one-third are run by them for government paper only. Economy of scale is the main argument for one unit enabling high cost technology recovery, and international custodians prefer this simpler model. Distributed ledger “block chain” capability may be the next generation with direct user access. Safety is an offsetting concern, and multiple provider systems integration may be an easier fix as in Tanzania and Georgia. Competition between operators is another solution as in India with the caveat that risk standards could also lower. Cross-border arrangement may be the chosen route as in the West Africa Francophone zone, and less formal unions such as Latin America’s Pacific Alliance grouping Chile, Colombia, Mexico and Peru. Private actors may not have the money or knowhow, and in startup stock exchanges like Rwanda’s the government has been fully in control from the outset. They must have contingency plans, offer book-entry automation and manage capital, credit and liquidity for their account within defined legal and regulatory parameters. The chief executive must also have convening power to mobilize banks, brokers, and central bank and ministry representatives, which may be difficult if commercial return is the overriding motive.

The paper cites a full gamut of alternatives, such as the dual CDSs in the Kyrgyz Republic for stability; Mexico’s pioneer single private one; the Philippines’ Finance Ministry governance: and Lithuania’s gradual public stake sale. Global debt houses are gearing up for an end decade burst of activity in the multiple local and external corporate and sovereign asset classes currently running $700 billion against benchmark indices with half in hard currency. Credit quality is majority investment-grade and duration and yields are above the developed world. Regional exposure is diversified and emerging markets account for only 10% of world debt versus 40% of GDP. Frontier destinations are early in refining depository methods despite economic stabilization and capital market development progress, and fund managers will increasingly incorporate such institutional factors into future allocation. According to recent research by Europe’s NN Partners on its 25th anniversary infrastructure reliability could feature in an extended environmental-social-governance screen also likely to be a central function.

 

Sovereign Debt’s Testing Trillion Dollar Trill

2018 April 6 by

With $150 billion in annual issuance the last two years external sovereign hard currency size has passed $1 trillion, and 2018 should continue the high volume new entrant streak, according to JP Morgan research. Middle East oil exporters jumped in heavily over the period with price reversal leaving large budget deficits, and another $60 billion is forecast this year. Saudi Arabia, Oman and Kuwait each have large gaps that would otherwise be covered by wealth funds and reserve depletion. Argentina also has borrowed for this purpose since striking a deal with holdout creditors and returning to the market in 2016, and has sustained Latin America’s one-third share of the global total, followed by 25%-plus Europe and the Mideast/ Africa as the next top regions. The latter’s portion has doubled and an estimated $75 billion tap over the coming months will be half of supply. Dollar-denominated activity is 80% of the amount outstanding, with the rest in euro where countries outside Europe, like Mexico and Senegal, have tested the waters. The past decade brought 30 debuts from Sub-Saharan Africa and Central Asia, while recent returnees include China, Iraq and Belarus. Of the $150 billion completed in 2017 the split was even between high-yield/unrated and investment-grade, partially due to prime European sovereigns turning instead to local currency instruments. As a portion of overall debt the domestic segment at 45% of GDP is seven times greater, and $350 billion in assets are dedicated to the EMBI benchmark tracking 40% of the index sum. In 2019 large maturities will start to come due reaching $80 billion in 2022, but increasingly frequent liability management will likely spur early redemption. The biggest five borrowers in rank order from $60-85 billion are Argentina, Turkey, Indonesia, Mexico and Poland.

Russia is close to joining the pack with a multi-billion dollar offering oversubscribed in the face of US and UK additional punishment for election meddling and alleged dissident killings. S&P restored the investment grade rating with net debt under 10% of GDP, relative fiscal balance, and inflation under control as President Putin faces token opposition to reelection after his most potent rival Navalny urged a boycott. Stocks have led the MSCI Index pack after last year’s poor showing, with dominant state lender Sberbank reporting a 20% profit jump. Russian defiance of the West has played well politically to boost the incumbent’s opinion approval, despite qualms over the cost and casualties of Syrian Assad regime support. Moscow has steered the debate toward rebuilding with a recent conference to consider at least $200 billion in infrastructure projects, although the energy sector remains under global restriction. At the same time it directed an overture at Saudi Arabia with the government venture capital fund eyeing a possible anchor stake in the future Aramco IPO. The Eastern Ukraine war continues with the US taking modest steps to transfer new military equipment as the Crimea takeover goes unchallenged and Gazprom refuses to pay $2.5 billion in international arbitration damages for pipeline interruption. Western donor have soured on the $17 billion IMF program, where the latest $1 billion installment is a year behind pending anti-corruption court creation ahead of new presidential elections a year from now possibly extending bad behavior.