General Emerging Markets


Enterprise Funds’ Mooted Makeover Formula

2018 October 15 by

As the US gears up, after a similar move in Canada, to form a one-stop development finance operation to challenge other bilateral providers with deeper pockets and more powers, think tanks have urged expanded tools and modernization of decades-old concepts like enterprise funds. They were launched originally in the 1990s to inject venture capital and business and management knowhow into former Communist countries, and adapted more recently for the post-Arab Spring with efforts in Egypt and Tunisia. A new Center for Strategic and International Studies paper hails their “unique” contribution as an aid and foreign policy instrument, offering economic development and private sector expertise and returning budget appropriations in full without additional bureaucracy. They allocated $1.5 billion to generate multiple investment sums, original appropriations return in full, new companies and industries, and broader private equity activity. The CSIS calls for a “third wave” with expanded geographic, co-investor, technology and thematic scope. The Middle East would remain a focus in Jordan and Lebanon, and the mass migration “Northern Triangle” in Central America as well. Outside impact investors seeking non-financial returns could join, and mobile banking and on-line platforms would be targets. The Ex-Im Bank, AID and OPIC can build on the 1990s track record which leveraged $7 billion in additional investment and created 300,000 jobs, with the first Polish one spun off as Enterprise Investors, now the country’s largest player. Among global challenges for revised structures is the forced displacement crisis, with 65 million fleeing conflict and despair, and the demographic youth bulge in Africa, where 100 million between the ages of 15 and 25 will add employment and population pressures. Donors give $170 billion now in aid against the trillions of dollars needed to meet the Sustainable Development Goals. The World Economic Forum estimates “blended” facilities as a public-private hybrid with environmental, social and commercial criteria at $35 billion, an amount equal to specialist impact funds with energy, health and agriculture portfolios.

Another imperative is “countering Chinese soft power” through an array of schemes and lenders, including Belt and Road and the Asian Infrastructure Investment Bank, with $100 billion in capital and a planned $10-15 billion annual credit pipeline. Equity and skill-intensive enterprise funds offer a distinct alternative, and provisions of the proposed legislation for creating a new development finance agency authorize them. They must “crowd in” private capital where access and liquidity gaps exist, and boards comprised of proven professionals should be independent and flexible. Operations should be decentralized with qualified local staff a recruitment priority, and business and policy metrics for success defined in advance, such as sector-specific indicators or governance and regulatory progress. A regional approach may be better for small countries to achieve economies of scale and cross-border demonstration effects, and the US innovation can openly compete with Beijing in places its influence is outsize such as in Ethiopia and Zimbabwe, the Center advises. In the former American investment is less than one-tenth the Chinese $7 billion. In Haiti bilateral aid is $375 billion with no venture capital, and longer term North Korea could be a pilot provided nuclear missiles are dismantled or no longer on the radar under inspections Washington and Seoul seek.


Corruption’s Newsworthy Economic Embrace

2018 October 8 by

The IMF, which regularly includes difficult to assess anti-corruption steps in its programs as in Ukraine’s required court setup, published research for the first time with historic “big data” news article collection to correlate trends with economic and financial performance. It is defined as “public office abuse for private gain,” and development agencies and interest groups have created indicators and indices over decades to flag direction, such as the Transparency International ranking. These expert measures broadly score institutional and regulatory capacity to promote integrity but are based on perceptions rather than hard statistics which the study’s compendium of over 650 million global articles may help to foster in a descriptive model. The data base shows asset price and macro growth, policy and capital flow effects to underscore background literature on the subject describing fiscal and monetary instability and business and finance trust erosion. Previous efforts have used news coverage and social media posts to track relationships, but not in a comparable diverse sample with the accumulated information dating back to the 1980s subject to numerous frequency and vetting algorithms. However the framework is limited by different approaches to press coverage and freedom and cultural norms surrounding corruption and refinements incorporate related Freedom House and other yardsticks to redress the gap. The results reflect “major turning points” and close association with traditional breakdowns. The news flow index is higher for developing versus advanced economies, but low-income countries had “large improvement” in recent years. For emerging markets capital inflows were pronounced even as mentions spiked since the financial crisis a decade ago. Nonetheless big shocks generated long-run investor changes, and the media work tracked established institutional quality benchmarks published by the World Economic Forum and World Bank. Case illustrations link deterioration to lower per capita growth and stock market values, increased sovereign borrowing costs, currency depreciation and falling direct investment. These relationships are tighter for developing countries, and lasting benefit from anti-corruption progress must be followed with actual investigations and corrective action beyond popular attention.

The Fund looked at experience in Indonesia, Malaysia and Singapore and found that after setting up an anti-corruption commission with passage of an enabling law in the early 2000s this coverage has prevailed for a better reputation. Malaysia’s record is better with many initiatives such as on whistleblower protection beyond formal statute. Singapore’s most stringent strategy is “holistic” both in legal and enforcement terms, and pays high-level public officials a salary premium to reduce bribery odds. The paper notes that information technology is more common in detection and probing and that technical assistance could leverage the news index tool for greater impact. Fragile states may benefit in particular as they work from a minimal foundation to set long-range vision, and future research should further classify shock taxonomy and examine regional and income level distinctions. Ukraine will soon have the chance to produce more news with candidates, including previous corruption defendants, scrambling ahead of presidential elections with so-called “odious debt” repayment to Russia from the former ousted kleptocrat regime an enduring headline issue.

The BRICS Summit’s Tentative Troughs

2018 August 28 by

The annual leading emerging economy BRICS gathering in Johannesburg, 15 years after the term was coined in global investment bank research, failed to lift the collective financial market mood after the category was down 5% on the MSCI Index through mid-year. Russia, India, Brazil and South Africa joined China in condemning trade protectionism as the Beijing-Washington tariff and currency slugfest ratcheted up, with the International Monetary Fund as a summit participant also warning of “mounting world growth threats.” to asset values. In the well-known Bank of America fund manager survey 60% of respondents cited trade and investment retaliation as the top tail risk, repeating the anxiety level from the onset of the European debt crisis five years ago.

The Washington-based Institute for International Finance at the same time pointed the finger at BRICS China, Brazil and South Africa for rapid government and corporate debt increases contributing to the $25 trillion, 320% of output, global total in the first quarter. India and Russia escaped criticism, and their stock markets were the best performers, near positive toward the end of July. The cohort agreed to cooperate on industrial policies and further target infrastructure projects through the joint New Development Bank, as the Asian Development Bank separately published its 2030 strategy promoting common financial services rules and platforms. Unlike previous declarations and actions, such as when the group created a contingency fund for balance of payments support or Beijing’s Asian International Infrastructure Bank explicitly agreed to work with the NDB and ADB, the Johannesburg outcome did not sway markets. As illustrated by the reactive protectionism statement, they remain uncomfortably on the defensive into the third quarter amid souring fundamentals and sentiment.

China, Brazil and South African stocks are down double-digits as respective region heavyweights on the MSCI benchmark, and China’s “A” class momentum in particular has reversed since June inclusion. Second quarter gross domestic product rose 6.7%, but industrial slowdown was clear in the latest monthly figures as the IMF slightly lowered this year’s forecast. The Yuan in turn shifted course against the dollar, but depreciation was less than the 7% first half emerging economy average. Chinese officials called the fluctuation range “reasonable” as they acknowledged “binary volatility,” with international reserves still over $3 trillion despite foreign direct and portfolio investment pullbacks. The securities regulator announced “A’ share opening to individual investors and launch of a direct Shanghai-London link in 2019. Although The Economist’s “Big Mac” Index calculates Yuan undervaluation still at 40%, analysts argue that deliberate weakening would further discourage FDI and raise the cost of $775 billion in offshore corporate dollar bonds, according to Nomura Securities data.

Corporate defaults continued with Wintime Energy the largest this year at $10 billion across a dozen instruments, as Moody’s Ratings commented that new money was difficult to access with “cycle change.” The National Development and Reform Commission has already limited property firm overseas debt issuance, with $250 billion in total repayment due next year. Local governments are also leveraged and face heavy rollovers in the coming month. The central bank again injected liquidity into the banking system to sustain lines to problem customers, even as stricter classification criteria will downgrade “special” to bad loans.

India is in the Trump Administration’s sights both for import and currency intervention practices, but shares rebounded in recent weeks on good high-tech bellwether and private bank earnings. The latter gained favor as the government injects more capital into state-owned giants following poor management and corruption revelations. Prime Minister Narendra Modi and the ruling BJP Party are in re-election mode, as key economic indicators outside 7% headline growth falter. The trade deficit and inflation are at 5-year highs, and a bid to win farmer votes with heftier subsidies will likely swell the fiscal deficit. Other BRICS Brazil and South Africa are also struggling with runaway budgets and political transition while dealing with resurgent inflation. Brazil’s October presidential election could bring an anti-establishment team into power as the public pension system imperils debt sustainability, and South Africa’s contest next year will be a verdict on President Cyril Ramaphosa’s business-friendly policies to attract over $100 billion in new foreign investment. These leaders face steep climbs, with the Johannesburg summit’s meager results highlighting the lack of parallel market traction.



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.