General Emerging Markets

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FDI’s Ultimate Purpose Posturing

2017 December 5 by

An IMF working paper, responding to gaps in the benchmark coordinated direct investment survey and bilateral reporting generally, has stripped out offshore special purpose structures for the first time in an attempt to chart ultimate investor relationships and totals. It stipulates “asymmetries” in country inward and outward numbers where one is twice the other in half of cases and small economies have disproportionate shares as purely financial conduits. They do not represent physical ownership at the accepted 10 percent threshold and through “complex chains” can mask the business and geographic source. The analysis uses new OECD data and removes the artificial vehicles to chart actual integration and linkages where tiny global hubs in Europe, Asia, the Caribbean and elsewhere fade in importance among the 115 nations tracked. The average discrepancy in pairs is over $5 billion and may derive from conflicting valuation methods for unlisted equities despite Fund guidance. The proliferation of special purpose entities (SPEs) at multinational firms distorts “real” activity, as they are non-resident domiciles without production or presence and often “pass-throughs” for tax and confidentiality advantages. Offshore frameworks can be readily created in major jurisdictions like the US, where they bring in an estimated $100 billion in annual revenue. They encourage questionable transfer pricing for intragroup sales which are to be at “arms- length,” but violated EU rules through Luxembourg and Ireland-based transactions. Tax-shifting to low-cost or exempt locations is another goal and the British Virgin and Cayman Islands are two examples of places that do not report to outside bodies. The final investor with majority voting control may be unknown, but SPE isolation knocks one-third from the IMF survey results even though regional true FDI ties between neighbors, such as with Hong Kong and China are strong. When excluding these arrangements Cyprus and Mauritius are no longer on the top 40 locations and are replaced by “traditional economies” such as the Czech Republic and Saudi Arabia which do not offer financial engineering and round-tripping possibilities. The publication urges permanent statistical revisions around the concept of actual interconnectedness which could feature in the next comprehensive tabulation due in the coming months, at the same time that the US tax code could be changed to reflect productive rather than paper trail direction according to bipartisan advocates.

 

The fresh methodology will not improve Turkey’s relative position as its aspirations to better balance international portfolio and direct inflows and bridge the chronic current account deficit clash with visa and aid disputes. US commercial relations have frayed since last year’s aborted coup and subsequent crackdown on hundreds of thousands of alleged sympathizers, including a prominent philanthropist and think-tank head the past month. President Erdogan insists that exiled cleric Gulen be extradited and accused embassy personnel of abetting overthrow , as big state lender Halk Bank is under investigation in Washington for illegal gold trading with Iran. Bilateral visa processing has been suspended as the currency again slipped toward 4/dollar on the tensions, aggravated by a threatened EU aid cutoff for anti-democratic practice. Entry talks are already in the deep freeze, and the Turkish President criticized Brussels for “wasting time” and hinted at quitting both the decades-long negotiations and model FDI makeover.

 

Sovereign Debt Restructuring’s Loaded Cases

2017 November 22 by

The Institute for International Finance’s annual survey of  its restructuring principles and investor relations trends, prepared under joint public-private sector senior executive direction, covered a half-dozen country cases and forty active communications programs as the joint tracking begun in the early 2000s reflected this year’s sharp capital flow predicted pick up from $750 billion to $1 trillion.  The group noted that a brief July scare around advanced economy central bank liquidity moderation was a minor repeat of the 2013 Federal Reserve taper tantrum and that rising emerging market foreign currency denominated sovereign and quasi-sovereign obligations posed risks, even as systemic crisis was not flagged. The workouts in the report were relatively minor but could be revisited in the near future and also represent troubling precedents. Belize was back for a third round on its $525 million original “super bond” after natural disaster aggravated fiscal and current account deficits. A creditor committee was formed one week after the government sought relief, and 90 percent of holders agreed to lower coupons and an equal installment amortization schedule from 2030-34. Consent solicitation replaced a formal exchange offer due to collective action clause provisions, and negotiations took less than six months, with financial and legal advisers paid for under the previous agreement. Mozambique defaulted on a Eurobond and two loans and proposed to swap state tuna company-owned for sovereign claims in a “compact timeframe” without full consultation. Exit consents applied in the March 2016 operation which got 100 percent acceptance for extended maturities at a 10.5 percent yield. After the deal officials revealed another $1 billion in outstanding credit, prompting IMF program cutoff and an external audit which found that half the proceeds could not be traced. Parliament and the local courts declared the official guarantees illegal, and international banks leading the syndicate are reportedly under US Justice Department investigation. Informal discussions have been held with creditors, who are pressing for a fresh Fund arrangement and debt sustainability analysis with recognition of existing cash flow help in a “cautionary tale,” according to the IIF.

Venezuela is in full-blown crisis with total foreign debt estimated at $150 billion, or 150 percent of GDP, and liquid reserves at $2 billion following a series of state oil company re-profiling and new finance transactions last year. Chinese debt for petroleum exports has already been restructured, and the central bank sold a $3 billion PDVSA bond at a one-third discount to a US asset manager in May in a controversial placement which catalyzed momentum for Treasury Department sanctions against future debt or equity purchase. President Maduro has delayed almost $4 billion in payments due the last quarter and ordered his Vice President, under previous bilateral curbs as an individual for alleged drug trafficking, to lead comprehensive restructuring talks with all commercial and official creditors with a wide disparity in geopolitical and instrument composition. The IMF may be called in to verify statistics, but Caracas with its dueling parliaments and record inflation and violence will remain at the opposite extreme of the IIF’s data and investor outreach winners. Almost half the countries tracked were in the top quartile with  Indonesia, Mexico Turkey with the highest score followed by Brazil, Russia, South Africa and Poland in need mainly of restructuring  information and network links.

Refugee Bonds’ Millions to Billions Chant

2017 November 17 by

At the annual meetings of the IMF and World Bank, the global refugee crisis, which has spread from the Middle East to Asia with the headline escape of hundreds of thousands of Rohingya from Myanmar into Bangladesh after years of flight into the broader region, was in the spotlight. World Bank President Jim Young Kim emphasized the new development lender mantra of “turning billions into trillions” through innovations and risk management tools to better mobilize private capital, as the Institute for International estimated that foreign inflows into emerging debt and equity markets would again reach $500 billion with this year’s stellar index performance.

The poor country IDA window envisions $2 billion in the future for refugee host needs, as Bangladesh’s Finance Minister submitted an initial request for the Rohingya influx which alone may cost $1 billion, according to a local economist. The Bank may issue additional emergency bonds in its own name for on-lending alongside the Global Concessional Financing Facility (GCFF) – created by the Bank, EBRD and the Islamic Development Bank to allow discount borrowing by middle-income frontline states like Jordan and Lebanon – but conventional emerging and frontier market investors could more easily be directly tapped for larger sums through dedicated “refugee bonds” where the Bank instead should emphasize credit enhancement. Jordan’s government has shown interest in a pilot program which, after modest startup and preparation outlays, could raise hundreds of millions to billions in fresh long-term funding the first year.

Sovereign bonds are a logical starting point for refugee capital markets development, but public and private equity participation through investment funds is also feasible, particularly in view of the number of large listed stock exchange companies already providing goods and services to this population in camps and cities. Jordan is just one possibility in the area’s economies overwhelmed by refugee and displaced person waves, including Turkey, Lebanon, Tunisia and Iraq. It has issued external bonds both cleanly and with US government guarantees, and a $500 million one at 7% yield was oversubscribed recently within the guidelines of its IMF program aiming to prevent increase in the steep 90 percent of GDP debt ratio.

Preliminary discussions with traditional emerging market investors, as well as those focused on “impact” investing drawn to the socially-responsible component, suggest that the government could offer a lower yield for a refugee bond that ties the cost to detailed, independently verified reporting on proceeds allocation. The instrument would be designed to promote “best practice” in relief and to identify revenue streams, such as tax-producing job entry and business creation, that generate repayment cash flow. For collateral backup, buyers could also potentially have limited ownership rights in housing, road, power and sanitation facilities built to handle extended influxes into host countries, now averaging stays of more than a decade, according to UN data.

Bangladesh, which has accessed international markets once, would be a compelling candidate for development bank guarantee and risk support in an inaugural refugee bond. The Asian Development Bank could help arrange a local currency alternative as well, reflecting its mandate to strengthen domestic and intra-regional bond markets since the late 1990s financial crisis. Its work contributed to transforming India, Indonesia, Malaysia, Pakistan and Thailand, also with large Rohingya migrant populations, into mainstream fixed-income emerging market investor destinations. Malaysia has become the global hub for Islamic sukuk activity, and a debut Bangladesh bond with sharia compliant features could be structured through there as the Malaysian government considers a separate one. The World Bank’s South Asia director said that its own form of bonds for the emergency is under review, as it still grapples with the right public-private sector mix in refugee operations. A creative emerging financial market-based solution has been presented to the institution and awaits official, commercial, or philanthropic sponsorship to realize millions to billions in available foreign investment beyond slogans.

 

Private Debt’s Hangover Remedy Rumbling

2017 October 22 by

As IMF officials at their annual meeting continued to sound the alarm on private debt buildup as a looming systemic risk, big investment houses have projected calm, with JP Morgan statistics pointing to a slight annual drop to 115 percent or close to 80 percent of GDP excluding China. Government debt in turn increased marginally since 2016 to 50 percent of output, half the level of the US and Europe, with Gulf and frontier countries running up the tab. Egypt, Mongolia, Jamaica and Lebanon have burdens in the 100 percent-plus range, but the external portion for the overall universe has been steady the past decade at around 25 percent. Deleveraging started almost two years ago, including in China where shadow banking-spurred credit growth is down to single digits. Corporate debt spurted 25 percent to almost 85 percent of GDP since the 2008 financial crisis, and the private remainder is household particularly mortgages and credit cards in East Asia and this region has the highest commercial load at 150 percent-plus in China, Taiwan, Korea, Malaysia and Thailand. Since 2014 Mexico and Egypt totals rose 5 percent, and fell comparable amounts in Croatia, Kazakhstan and Ukraine. Domestic borrowing is almost 95 percent of the sum, and 80 percent is through traditional bank lending rather than bonds. As of Q3 credit expansion outside China was 6.5 percent, versus almost triple that pace in 2011. African countries like Nigeria dropped 20 percent on an annual basis, but the cycle has improved in Brazil, Russia and Turkey so that the net effect is no longer negative, according to the JP Morgan research. The trend is reflected in the IIF’s latest survey of banking conditions released before the IMF gathering, with a 48 result approaching the neutral 50 mark. The better outcome is also attributed to developing economy growth pickup across the board highlighted in the Fund’s upgrade to 4.5-5 percent this year.

The corporate benchmark CEMBI was introduced in 2007 and since avoided major selloffs, and local and foreign pension fund investors have jumped in with mandates to follow the 50 country $400 billion gauge. However index allocation misses half the universe in this segment as well as external and domestic sovereigns, and portfolio managers now argue for a blended or unconstrained approach through individual accounts. US public pensions have less than 5 percent of assets in EM debt, and September paper by fund giant Eaton Vance, which recently bought socially responsible specialist Calvert, argues for top-down multi-class exposure. After assessing economic and political risk, bottom-up company and instrument research and market trading and infrastructure capacity should be guides, and institutional investors may lack these dimensions with in house expertise. According to sentiment readings taken during the IMF heavy inflows already near $100 billion and fixed-income overweights should last through 2018, although equities will outperform. Currency and bond enthusiasm will shrug off industrial world central bank planned liquidity tightening, world geopolitical tensions now concentrated on the Korean peninsula, and likely credit rating downgrades which may continue for China, South Africa and other prime destinations caught in their  own subprime borrowing predicaments.

Exotic Sovereigns’ Pedestrian Sustainability Sense

2017 October 15 by

The dozen countries in JP Morgan’s frontier NEXGEM index continue to outstrip the main external bond gauges as spreads over US Treasuries are at a decade thin 100 basis points, as public debt jumped an average almost 15 percent over the period to 70 percent, resurrecting sustainability fears after large official relief programs. Economic growth and exchange rate stress testing suggests medium term deleveraging could stabilize ratios, and domestic borrowing would increase its relative portion. However levels in Ghana, Jamaica, Mongolia and Ukraine would rise 5-15 percent and translate into higher spreads under normal differentiation, which may not apply currently with sloshing global liquidity and investor positions remaining underweight. Since last year fundamentals have “decoupled,” but the relationship with most specific credits has held up since index introduction, according to the sponsor. In Central America and the Caribbean Moody’s downgraded Costa Rica in February one notch to lower speculative status, a further slip from the previous investment-grade rating. Another blow looms on the horizon with promised fiscal consolidation failing to balance spending and revenue with debt/output already at 65 percent. The government is hamstrung entering next year’s election with control of only one-fifth of legislative seats. Earmarks take up 90 percent of appropriations, and despite announcement of a “budget emergency” and likely wider foreign investment scope for local debt decisive action will await the new administration. The Dominican Republic in contrast was upgraded in September after a well-received $500 million international issue, with debt-to-GDP twenty points less and 5 percent growth on track, with good remittances and tourism before the spate of area hurricanes. Ecuador’s public debt doubled the past five years with oil price collapse and heavy state infrastructure and social outlays. Its main overseas creditor was China until market return in 2014, and President Moreno has yet to signal a break from the loose purse strings of his predecessor and socialist policy champion Correa. The Vice President has been implicated in another Odebrecht bribery scandal around previous construction projects, and dollarization is set to continue with business and financial community support despite populist backlash. Major external bond maturities are not due until end-decade, and relations have resumed with the IMF for possible emergencies beyond a recent earthquake when it was tapped for aid.

El Salvador’s debt stands at 65 percent of GDP and the two main political parties have been at loggerheads over pension reform after missed payments. The opposition recently managed a compromise to hike the contribution rate to 15 percent and extend retirement age over time. The net present value of liabilities is still estimated at 90 percent of national income only expanding at a 2 percent annual pace. Private pension funds must buy the government notes to cover obligations, potentially subjecting them to portfolio and default risks. Jamaica with its world-beating 120% of GDP load has been under IMF supervision for five years, and completed a series of local and foreign debt swaps. A three-year $1.5 billion standby was inked in 2016, and the local dollar continues to depreciate as more flexible currency and inflation-targeting regimes are adopted. A 5 percent-plus budget primary surplus has been regularly achieved but the wage bill has been pared back slowly amid glacial 1% growth.

Stocks’ Crisis Retrospective Run-Ups

2017 October 9 by

Thirty years after the 1987 New York Stock exchange 25 percent crash and a decade on from the 2008 financial crisis, MSCI core and frontier indices turned in respective 25 percent and 20 percent gains through Q3 for the best performance since 2010. Only Russia and Gulf country indices under trade and financial boycotts were down, alongside refugee emergency-hit Jordan and Lebanon, recent main gauge returnee Pakistan and tiny Botswana. The BRIC component overall was superior with a 30 percent advance, while Poland (+45 percent) led the big roster and Argentina and Ghana on the other one were ahead 60-70 percent. Zimbabwe recorded a stratospheric 250 percent jump through September with the stock exchange the only outlet to preserve savings, with draconian bank deposit withdrawal limits and new borrowing from the African Export-Import Bank to inject emergency dollars. China “A” shares after MSCI’s marginal index addition have surged to almost narrow the gap with the broader mainland 40 percent increase ahead of the Party Congress due to reappoint President Xi and his designated team, which could include well-known economic reformers and technocrats. On the eve monetary policy was loosened through a reserve requirement nudge for dedicated small business credit, as authorities seek otherwise to cap real-estate related personal lending.

Elsewhere in Asia Korea (+30 percent) brushed off border bellicosity, amid harsh rhetoric from Pyongyang against Seoul and the US and a series of test nuclear missile launches. Tech firms were in a sweet spot in the earnings and global manufacturing cycle, helping to overcome Chinese restrictions on consumer goods and Washington’s threat to renegotiate its bilateral trade pact. India (+22.5 percent) faded on demonetization and national sales tax hangovers which have crushed average entrepreneurs and assembly operations, while Indonesia was another 10 percent behind as religion and politics mixed more dangerously with loud calls for more action to protect the Muslim minority Rohingya fleeing Myanmar for makeshift camps in Bangladesh, where the market rose almost 10 percent.

In Latin America Brazil (+25 percent) roared back during the quarter after lagging, as investors were spared a second impeachment even though President Temer remains under criminal investigation  for alleged bribery and his party and allies are unlikely to pass overdue state pension cutbacks to restrain the 10 percent of GDP fiscal deficit. Mexico had the same showing as Pemex private sector exploration auctions proved popular and NAFTA reworking talks appeared to dismiss total breakup with Canada’s views closely aligned. Chile (+30 percent) was at the crest before the first round of presidential elections likely to return free market business magnate Pinera to the post. In Europe behind Poland, Hungary and Turkey each climbed over 25 percent on domestic demand juiced by state lending programs as relations further soured with the EU. Prime Minister Orban has defied Brussels on immigration quotas and President Erdogan accuses it of reneging on visa-free travel promised in exchange for additional Syrian refugee acceptance on transfer from Greece. There after Europe’s biggest run last year improvement is just over 10 percent as banks await another cycle of asset reviews which may reflect crisis respite short of repair to again rouse international community urgency.

Global Refugees’ Brimming Business Case

2017 September 25 by

A new Center for Global Development study commissioned by the Tent Foundation, started by the chief executive of yogurt maker Chobani to organize US company efforts to tackle the refugee crisis in the Middle East and elsewhere, found that global business concentrated on the three areas of hiring and supply chains, impact investing and goods and services provision alongside broader policy shaping efforts. Social and reputation benefit, brand loyalty, and bottom-line profitability are the main motives, although agreed standards are lacking for accountability and results. The world’s close to 25 million refugees are displaced 10 years on average and over half are in cities, and “sustainable engagement” beyond periodic product and expertise donations increasingly applies, as with furniture manufacturer IKEA’s transition from energy and housing help to artisan employment in Jordan. The report notes that work, travel, education and childcare restrictions continue to block progress, despite evidence that migrant inflows can spur occupational and wage improvements for host populations. In offering positions Starbucks is a leader with a commitment to 10,000 retail slots, although in many countries work permits are unavailable and transport costs prohibitive. In Jordan only a quarter of the 200,000 promised labor authorizations under a concessional World Bank loan and EU trade preference deal have come through. Specialized initiatives like WEConnect and Building Markets aim to link women, entrepreneurs and small business to multinational company supply networks, and a quick review of 20 low and middle-income economies with the most refugees cites consumer products, agriculture, retail and information technology as promising sectors. Development agencies facilitate and sponsor new arrangements, such as with US grocer Safeway in Jordan and the UN’s craft enterprises in West Africa. Hydrocarbons could also be an entry point, and reconstruction in Iraq and Syria could take off eventually as dedicated matchmaking hubs promote partnerships, as the guide recommends.

Impact assets that seek environment and social alongside financial returns are estimated at $115 billion, and diaspora communities, such as Somalis in Kenya, also mobilize capital for frontline state high-risk allocation. They can take stakes in startup operations like the 10000 Syrian-owned ones in Turkey which average ten employees and contribute $330 million to the economy, according to a recent census. However global investment houses tend to shy away with the small scale and difficult to measure metrics, although project specific humanitarian or development bonds, with a donor or government paying upon achieved outcomes, may be a refugee channel. They are under preparation in the Middle East, and group loans to Syrian borrowers are offered through on-line site Kiva. As “base of the pyramid” consumers, the financial and telecoms sectors are ripe for innovation, and Mastercard has created digital vouchers and prepaid debit cards in cooperation with relief agencies, and European phone company Orange has built international dialing and banking infrastructure in Uganda. The paper concludes that these early models for refugee business may be inspiring but still lack a “rigorous evidence base.” It advises establishment of ethical standards, evaluation tools, country dialogues and research centers to solidify commercial awareness and lay the foundation for routine participation that lasts apart from the Tent label.

Equity Indices’ Consumer Consummation

2017 August 10 by

With both core and frontier stock markets up double-digits through mid-year index providers like S&P Dow Jones have rolled out fresh benchmarks with traditional ones “quite limited” for investment outperformance. Broad gauges are “highly correlated” as S&P’s BMI beat the MSCI by 30 percent over the past 15 years with a 435 percent gain. South Korea is excluded from the former as a developed market while its 15% weight with lagging results has been a drag on the latter. The two also differ since MSCI has no small-cap stocks, often consumer and health care-related, which have advanced 170 percent more than mid and large-cap peers concentrated in banks and exporters over the period. The gap has been particularly wide the past decade as personal discretionary and staples outpaced energy listings by 80 percent, with a lead across all regions. Among the main geographies Latin America and Europe have big natural resource exposure as in Brazil and Russia, while Asia features information technology. To better capture the consumer play Dow Jones has introduced a global Titans 30 index with top representation from South Africa, China, India and Mexico. Korean and Taiwanese firms are outside since their sales are predominantly to industrial economies. Its volatility-adjusted return exceeded overall industry measures back-tested to the early 2000s, and dozens of additional dedicated country, sector, and size indices are available for sophisticated managers, according to the report.

Private equity has also evolved as emerging market allocation increased nine times since 2005 to over $550 billion at end-2016, a Preqin industry survey reveals. Fundraising last year was below 2015, with buyout and venture capital deals moving in opposite directions. Despite major country economic and world geopolitical challenges long-term middle class and young working class growth remain drivers even if returns lag Europe and North America vehicles. Funds have begun to distribute more capital than called, with net cash flow at records. In the past five years activity has slowed from the peak when EM was half the PE total. In 2016 it was 12 percent with almost 200 fund closes for $45 billion. Through 2017 so far the numbers are 60 and $15 billion, respectively, for one-fifth of global raising. Asia has been 80 percent of the sum the last decade followed by Latin America, and diversified mandates are just 5 percent. By category growth and venture capital funds dominate in volume, but buyout types have attracted 40 percent of the action in recent years. Only 15 percent of general partners could reach completion within six months, and three-quarters are based in developing economies for easier analysis and marketing. Four out of the five largest launched since 2008 are from China with combined $50 billion in commitments. The investor base comprises almost 900 institutions, over one-quarter from Greater China, and banks, corporations and portfolio managers are the majority with venture capital preference. Funds of Funds apply more in developed markets, and according to a survey of 200 respondents China and India will be the favored near-term destinations, while Central Europe and the Middle East will stay sidelined. This April phone company Didi Chuxing set a venture mark with a $5.5 billion transaction, with mainland and foreign partners ringing the right tone.

Rave Universal Returns’ Scarce Selectivity

2017 August 3 by

All emerging market debt and equity asset classes rallied in the first half, replicating advance economy minimum yield flight in 2016 despite marginal central bank benchmark rate increases and reflecting slight economic growth and earnings improvement over original forecasts. Stock markets outperformed after a multi-year funk with the MSCI core and frontier indices up 17% and 12%, respectively, while local government bond gains at 8% outstripped external sovereign and corporate ones around 5%. Resurgent fund flows at over $100 billion combined according to data trackers, a large portion from exchange-listed ETFs, have channeled momentum since the end of the first quarter when a brief global scare from the new US administration’s trade and immigration policies, which could hit China and Mexico in particular, faded into the background. The dollar retreated from previous highs and commodity prices stabilized in the aftermath, and retail and institutional investors then poured money in with scant geographic and asset class distinction. The second half will determine if markets can begin again to rise and fall on their own virtues in their own long-delayed “normalization” process, coinciding with the 20th anniversary of Asia’s and a decade since the US and Europe-led world financial meltdown.

As in the mania that preceded the late 2000s crash, stock market gains in the big BRIC economies mirrored the MSCI result, with Russia the only loser, down 15%. China and India were each ahead 20%, while Brazil was essentially flat with a 2% uptick. Brazil and Russia are out of recession but still grapple with stagflation. China’s 6.5% growth and steady currency and reserves were on target before the upcoming Party Congress, but the well-telegraphed incremental inclusion of “A” shares in the gauge was also a catalyst. India’s GDP increase was the same as China’s, and its price-earnings ratio toward 20 is five points above the emerging market average, but it is considered a structural reform standout despite lagging a generation behind peers, and the mixed record so far with recent months’ large banknote elimination and just-launched national tax unification. Including South Africa in the group, as a charter member of the BRICS Bank now in operation, contributes another 5% plus bump but reinforces the broad narrative of ambivalent economic and political fundamentals and model change. The IMF and World Bank tweaked the developing world growth forecast to 4.5% this year but warned about fiscal deficits, monetary strain from bank deleveraging, and balance of payments pressure from voluntary and hidden capital outflows. They suggested another period of business and financial sector opening and deepening was overdue with reactivation of stalled concepts like state bank and enterprise privatization.

The BRIC rebound has likewise been instrumental in lifting external corporate and sovereign bonds. Issuance was a record $100 billion and $250 billion in the respective segments through end-June, at average spreads around 300 basis points. China’s giant state-run and real estate companies, with tighter onshore access, have been 40% of corporates and Brazil’s Petrobras, the biggest individual debtor, has bounced off last year’s bottom after ratings downgrades and defaults hit Brazilian names broadly. Despite lingering international sanctions, Russia has returned in force to both markets, and a spate of new and resumed entrants, including Argentina and Gulf countries lifted lackluster traditional sovereign activity. Local bond average yields over 6% sparked a renewed carry trade wave among fast-moving investment funds borrowing in low-volatility industrial world currencies, a phenomenon largely absent the past decade. For more exotic destinations in Africa and elsewhere, IMF program negotiation resurfaced as an allocation driver, with Ghana, Zambia, Cameroon and Mongolia among popular bets shunned in the absence of additional official support.

With a nascent global bond selloff already arriving in July, EM fixed-income in particular could correct across the board, and the pure valuation argument for equities is increasingly questionable with profits hurting in many sectors outside world value chain connected consumer goods and technology. Local currency debt, and smaller and frontier country shares, should be able to hold if investors reflect and differentiate in the space in a long-term successful strategy, rather than risk disappointment with an overriding narrative of modest growth pickup and taper tantrum sequel avoidance.

 

US Development Policy’s Demolition Crew Din

2017 July 27 by

With the Trump Administration proposing 30 percent bilateral and multilateral development assistance cuts, and wide ranging yet undefined reorganization with management consultants first scouring the State Department, Washington researchers have scrambled to offer their own comprehensive reforms for executive and legislative consideration. The Center for Global Development unveiled a “practical vision” with over a dozen priority items to be coordinated across twenty agencies led by AID and more focused arms like OPIC and the Millennium Challenge Corporation, despite total spending at half the OECD average 0.3 percent of GDP. Four thematic areas—fragility, inclusion, health and humanitarian aid—would drive future interventions and strategy and offer a government-wide integrated approach. For fragile and transitional countries, AID’s traditional competitive bidding, typically a 2-year cycle, could be waived to allow quick program and personnel deployment. The surge would come under a new operation after previous attempts like State’s Conflict and Stabilization Bureau proved inadequate. The report recommends joint AID-MCC programs since the latter’s 5-year country compacts can frame broader economic policy change, and the former could deploy its credit authority to foster private financial flows.  It adds that agreements could be extended indefinitely on steady governance and inclusion improvement since few new eligible candidates appear annually. OPIC should be expanded into a full-service funding organization despite the initial Trump budget seeking abolition, with the existing range stretched to public equity investment and technical assistance, while enterprise ventures promoted elsewhere are transferred to its control. Disaster relief remains AID’s comparative advantage, although refugee humanitarian duties should be split with the State Department’s migration bureau. Food, which has to be shipped by US carriers under outdated law, should not be the Agriculture Department’s responsibility and reforms should focus on cheaper local supply and distribution not distorting traditional markets. Reporting and strategy should be streamlined and shared across a common platform, and a comprehensive review of UN and multilateral development bank contributions can weigh detailed costs and benefits for billions of dollars that may be better allocated under alternative arrangements.

The CSIS think tank convened another bipartisan task force on the subject, with the reminder that foreign aid is just 1 percent of the budget or around $40 billion, while the original enabling act is over 50 years old and over 20 government units are now involved with congress layering on hundreds of earmarks and information mandates. A main purpose is international economic partnership to create US jobs and sales, and the group warns about repeating the mid-1990s overhaul experience, with large layoffs “crippling” AID leadership and technical ranks. It notes that today’s complex challenges include forced migration, pandemics, terrorism, political dysfunction and transnational crime, as private capital flows to developing countries are five times official support. Canada will soon join the rest of the G-7 in launching its own full-fledged development finance arm, leaving the US alone with its lagging OPIC structure. Middle income recipients should graduate over time, and development bank burden sharing must be clearly defined after a 15-year period of “benign neglect.” The number of sectors should be narrowed following the base realignment parallel at the Pentagon, and short and long-term pools should stay separate with management from a dedicated career corps of specialists not cultivated under current work force planning, according to the blueprint.