General Emerging Markets


Performance Indices’ Indelible Injury

2019 February 4 by

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

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

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

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

The Populist Crusade’s Multilateral Mutation

2019 January 28 by

Populism as an anti-establishment and xenophobic political philosophy reflecting economic backlash against globalization, technological change and income inequality is part of the historical cycle in both the developing and industrial world, and modern financial markets as instantaneous transmission mechanisms magnify strains. In the Americas and Europe, with the US, Brexit, Central Europe and Brazil-Mexico examples, the phenomenon is best known but no region has been spared and the playbook applies in democracies as well as in authoritarian regimes. It has succeeded in bringing in new parties and leaders on the national level and upsetting existing trade, monetary, development and diplomatic arrangement internationally, but election campaign platforms are typically abstract and sentiment based. Translating aspirations into durable policy shifts, with tangible benefits for disgruntled lower and middle class voters, has proven elusive. In recognition of difficulties producing definitive changes aligned with promises and rhetoric, populist movements and representatives are now  “globalizing” to share experiences and forge alliances. Real breakthroughs handling automation and artificial intelligence with employment and privacy implications, and trying to moderate growing cross-border and in-country wealth gaps, can best be assured through joint efforts to forge the future landscape, even if international cooperation and formal treaties are discarded as last century establishment remnants.

Revamping the free trade model to add skills and retraining provisions, services along with goods coverage, and currency considerations  is an evolving consensus, even if the US prefers to resort to bilateral pacts and tariff threats. Africa in contrast has tabled a continental formula encompassing these features. The world and Washington in their own interests seek to reduce dollar reliance as the main reserve unit, and individual central bank diversification and IMF special drawing right creation have been the traditional paths with limited progress. On development, infrastructure building is viewed in both Western and Asian practice as a paramount driver for increasing per-capita income across working classes, and recent institutions on the scene like the AIIB acknowledge the need to partner on large projects and avoid heavy debt. In economic diplomacy, the G-20 summit legacy from the past decade is badly in need of updating or replacement to a more inclusive setting to address the disconnect populists easily grasp.

On migration, Eastern Europe  opted out of the EU resettlement plan, as Hungary also joined the US in rejecting the UN’s voluntary Global Compact for Refugees, which for the first time outlines a 21st century approach to frequent permanent large-scale dislocations. It is not legally binding but an expression of common political will to determine processing, protection and integration norms including on labor access and job creation. Citing fiscal costs that have spurred taxpayer discontent amid cultural tensions, the agreement calls for a move away from chronically inadequate government and international organization aid to private funding and investment for business, infrastructure and social purposes. Populist revolt hastened the long overdue shift and fresh alternatives will be a collective success as modernized multilateralism even as country-first slogans are routinely deployed.

The Global Refugee Compact’s Earnest Expanse

2019 January 21 by

After a year of formal and informal consultations led by the UN Refugee Agency, all members but the US and Hungary endorsed the Global Compact, capping a process that began with the 2016 New York declaration during the General Assembly. It seeks “equitable and predictable” burden sharing for millions in extended displacement in low and middle-income countries, amid a growing gap between humanitarian funding and needs. The document is not legally binding but an expression of political will that builds on previous 1951 and 1967 conventions. For large movements it envisions a comprehensive response framework among governments, official and relief agencies, and the private sector through specific “support platforms” supplemented by a quadrennial forum for all signatories. The “multi-stakeholder” approach emphasizes public-private partnerships on business-financial instruments, and data and evidence collection around host communities including economic and social conditions.  To this end the Urban Institute, under a US State Department contract, has compiled a dedicated site to track relationships between multinational corporations and civil society counterparts. Priorities are early warning and emergency planning, reception and registration, and protection and safety. While in place education, jobs, health, housing, energy and food requirements must be considered. For livelihoods skills and qualifications, and language and professional training, should be matched with labor market access. Readily available internet and remittance links can facilitate employment search and success, and preferential trade arrangements as between Jordan and the EU could be widely adopted after an influx. Infrastructure should focus on climate-friendly solutions in both city and camp settings, and technical capacity can come from commercial local and foreign suppliers. Voluntary repatriation to the country of origin is the preferred outcome, but with decades-long stays increasingly the norm resettlement and sponsorship programs elsewhere should be pursued even if only a small minority qualifies. Integration is the main alternative, and strategies should mirror best practices and the 2030 Sustainable Development Goals. The global meetings will review progress across these agendas, with regular high-level exchanges between the events to address immediate crises and diplomatic-thematic issues.

On funding the call is to expand beyond traditional donors with the UNHCR budget running 60% behind pledges, with development lenders arriving on the scene in recent years. They should provide grants and concessional loans above the normal envelope, within the principles of country ownership and host community benefit. The World Bank’s special facility for middle-income borrowers, already tapped by Jordan and Lebanon, and the IDA- $2 billion low-income window for refugee purposes could be models, and the range of bilateral and multilateral assistance providers must better coordinate operations and planning. Regional development banks may assume leadership in the Rohingya and Venezuela emergencies, as European and African sources collaborate on that corridor, including the European Investment Bank which otherwise concentrates on infrastructure projects. This section urges private sector “maximum contributions” including through official “de-risking” products like guarantees. Job creation is paramount, but innovative technology and financial services can multiply effects. The accord recognizes that an “enabling business climate” is a precondition, and that banks and companies should join academic and research networks in offering sound economic policy advice in a mutually-reinforcing compact.

The Debt Pile’s Pile-On Plume

2019 January 7 by

Government and private sector debt accumulation acting as a global growth drag was a G-20 summit topic focus in Argentina, where the Macri Administration’s external market return after a decade in the wilderness again dug a hole requiring IMF rescue. Participants registered concern as efforts to establish a comprehensive member data base again assumed importance, but attention mostly veered toward China’s deleveraging course amid US trade and investment caution and tariff imposition. Both sides backed a three-month cooling off period, but Washington has extended the fight into national security and aid financing, with vows to curb Chines defense and technology access and challenge and match infrastructure and development deals under the Belt and Road program with establishment of a new agency. JP Morgan’s annual update puts government debt/GDP outside China at 50%, almost a record, with the private load equally near an historic peak. Fiscal deficits above the 3% standard cutoff will result in 90-100%-plus levels in relation to output in Argentina as well as Egypt, Jamaica and Mongolia, and 5-10 point increases the past year were in Angola and Ecuador.  The bank argues that the foreign exchange and bonded components of external debt are the main vulnerability metrics, with Bahrain and Uruguay in trouble on these counts. Debt/ reserve ratios above 1 also mean difficulty for Pakistan and Ukraine. With China private debt/GDP is close to 115% and excluding it the figure is 75%. China’s level rose by the same 75% the past decade, with corporate borrowing up the most. The household 37% debt average is half the developed world, but Korea’s and Malaysia’s total mirrors the latter group. Asia overall has the top private credit portions outstanding, while reductions since last year were in Saudi Arabia, Kazakhstan, Croatia and South Africa.

Local currency exposure is almost 95%, mostly through commercial bank loans rather than capital markets. Since 2015 the overhang has been a concern that will now worsen with the global business end- cycle coinciding with worldwide rate hikes. In the government ledger, 90% is domestic, but non-residents own one-quarter of the amount and 30 new chiefly frontier sovereigns have debuted since 2010. A combination of tighter liquidity and commodity prices will widen bond spreads in this segment, according to the survey. Private credit doubts center on China, where a crackdown has relented with slower 6.5% growth and Washington’s trade test. A spike in bad loans is likely throughout the universe with Turkey’s crisis offering a precedent, and the traded corporate bond size of $2 trillion is a large number even if an estimated half is held by local investors.  In Asia especially 1200 first time issuers the past decade may be in peril with more defaults as economic and cash flow indicators deteriorate. Based on empirical data half a dozen countries are in serious danger, and most have already turned to the IMF, including Argentina, Mongolia, Pakistan and Zambia. Stock markets through November reflected the same negative sentiment, with the MSCI core and frontier indices down 15%. Argentina and Pakistan with respective 45% and 30% drops were big losers, with only a handful of Middle East entries with strong results as commodity windfalls service debt and equity allocation.

The BUILD Act’s Beguiling Build-out

2018 December 17 by

With strong bipartisan passage of the US Better Utilization of Investments Leading to Development (BUILD) Act in October, the six-month clock is ticking for OPIC and USAID bureau unification and specific plans for using new equity and foreign currency authority under the doubled $60 billion allocation maximum. An Atlantic Council paper urges Sub-Sahara focus, which already absorbs one-quarter of OPIC’s portfolio with a push from the Obama Administration’s Power Africa program, as well as attention to informal markets and supporting commercial and financial “eco-systems” in underserved poorer economies. The organization has provided political risk insurance and debt and private equity fund investment for almost four decades with $5 billion returned to the Treasury. The oldest bilateral provider is the UK’s CDC in existence for sixty years, and together with counterparts in France, Germany and the Netherlands $35 billion was committed mostly to Africa, with Asia and Latin America then evenly split. Non-Western sources including China, India, Turkey and Morocco are also “aggressive,” with Beijing now the largest debt holder at 15% of the total. It backs thousands of infrastructure projects and in September added $60 billion to the pot through end-decade. According to consulting firm McKinsey two-way annual trade is over $200 billion, as the AGOA free trade arrangement with Washington has stagnated, and may be renegotiated under the Trump team’s aversion to existing deals. The Development Finance Corporation must follow first-mover, catalyst, and strategic interest principles but the activity and product landscape is ripe for experimentation. An African venture capital association survey underscores local currency exposure as an overriding risk, despite fund growth to $35 billion with development lenders as anchor investors. However this sum was less than 1% of the global one, and the continent’s job creation is only one-third the annual 10 million positions needed for new entrants.

The document recommends consideration of small companies that “straddle” formal and informal markets, such as car hire in Nigeria and food sales in Kenya, and incubator creation that also offers a technical assistance range. Private equity subscriptions could be on a shared platform to standardize procedures and avoid duplication, and the financing menu could otherwise embrace first-loss coverage and feasibility grants. Tech investment should be a priority with the US competitive advantage and China’s challenge; performance metrics should be finalized and publically accessible over the coming months; and senior private sector experts should be recruited temporarily in the startup phase. Sub-regional approaches should be tried in the first wave of funds and other offerings, as the Millennium Challenge Corporation already applies in its pacts, the Council believes. Public equity in turn has been in the dumps, from core South Africa with a 30% loss to frontier components Kenya and Nigeria, down around 15% through October. Elsewhere in SADC, Botswana is off 35%, while Zimbabwe is the runaway winner with a 100% gain on the MSCI index as a savings refuge. The Finance Minister, previously chief economist at the African Development Bank, has floated controversial “bond note” proposals further spiking scarce hard currency demand, as the stock exchange builds a safe haven reputation by comparison.

Doing Business’ Toted Training Seals

2018 December 3 by

The World Bank’s 15th annual version of its popular Doing Business scorecard, examining entrepreneurial conditions in a dozen areas, hailed a record 315 reforms the past year, one third from Africa, as basic startup time and cost has been halved the past decade. The ten most improved among the 190 countries included China, India and Turkey, as well as conflict-torn Afghanistan and Cote d’Ivoire. The Bank pointed to government official training in poorer economies as a major catalyst for improving on the ground private sector satisfaction as measured in tens of thousands of individual interviews. It intends that the human capital index unveiled at the October Bali meetings will serve as a comparable social indicator standard. In finance the credit access, minority shareholder protection, contract enforcement and insolvency resolution breakdowns are paramount, with the caveat that broader economic performance and political risk factors are unincorporated. Taxes, labor markets, property and construction registration, and electricity available are other considerations in the mix, with better regulation correlated with higher productivity and growth in numerous academic studies. Developing nations Mauritius, UAE, and Malaysia are in the leading 20 ranked, along with more advanced Asian members Hong Kong, Taiwan, Korea and Singapore. Africa’s risers benefited from commercial law harmonization under the 17-state OHADA code, which introduced alternative dispute settlement. China focused on administrative, utility connection and payment process innovations; India automated customs documentation and streamlined approvals. Azerbaijan established a new credit bureau, and Turkey’s banks now share more detailed risk data. Kenya and Rwanda accelerated land titles and tax collection, and Brazil facilitated auto dealings with Argentina as the BRICS together added 20 points. However even with civil servant instruction gains will be limited without popular communication, the publication noted, as it recommended an information strategy to accompany changes.

The UAE unified its collateral registry, and Afghanistan granted secured creditors priority in bankruptcy. Qatar allowed consumers to challenge credit scores, and Indonesia added utilities to the shared network. The Philippines issued audit rules for stock exchange-listed companies; Tunisia required disclosure of related-party transactions; and Kenya made directors liable for self-dealing offenses. Morocco approved debtor-in-possession financing, and Pakistan reorganization options in lieu of previous liquidation. Public procurement procedures will be examined in the next edition, but wider infrastructure and regulatory cost-benefit analysis will remain outside its purview. The Bank has other series on governance and policy and institutional themes, and Europe has started sub-national readings which often show large disparities, although informal business is not surveyed. A multi-tier review process is in place internally to ensure results integrity and verification, as methodology questions seem to be set aside following China’s complaints as standing gained. An estimated 70 countries have formed specific interagency and public-private sector Doing Business committees, and the results are used in the World Economic Forum and other competitiveness indices. Future research seeks to explore the foreign direct investment impact of targeted action, and the Bank’s IFC arm may deepen understanding of capital markets good practice as part of data and information compilation and project support under the “3.0” model to further train the fund manager community about its merits.

Impact Investing’s Masked Momentum Measure

2018 December 3 by

The Global Impact Investing Network’s latest annual survey of 225 firms with $225 billion in assets, with support of the US and UK main development agencies, hailed “transformational” momentum in recent years, while acknowledging “integrity” doubts with no definitive certification process or principles. One-third of respondents participated for five consecutive years, with the chief categories fund managers (60%) and foundations (15%). Asset classes are evenly split between private debt and equity, as is geography between developed and emerging markets. The median portfolio was $100 million, and education and food are fast-growing sectors. Business model, currency and liquidity risks were chief obstacles, and the mix of financial, environmental and social returns remains a moving target. In 2017 $35 billion was allocation among more than 10,000 investments averaging $20 million, while development lenders had the biggest projects at $150 million. Africa and Latin America accounted for half of exposure, and micro-finance, energy and housing were popular choices. Views on government support were mixed, but venture capital definitions and regulatory treatment were more advanced for equity than fixed-income. Lack of skilled professionals and exit options were regularly cited on the ground, and at larger organizations the inability to reach top executives is a “challenge.” Despite breakthroughs last year such as the Ford Foundation’s $1 billion commitment and the launch of TPG’s $2 billion Rise Fund, a shared code of conduct and bottom line are elusive although the GIIN will propose standards in 2019. Climate and carbon policies can better promote energy participation, and tax and blended finance public sector incentives also merit consideration, according to the study. In the future listed stocks will increasingly feature as a preference, and banks and retail investors emphasize individual products. At least half a dozen small buyer funds were recently introduced, including one from Barclays. Managers track the Sustainable Development Goals in overall themes and often apply specific climate and gender “lenses,” and emerging market returns were 8% while still lagging purely commercial instruments.

A number of more specialized networks have also spun off under the general concept, the latest for small companies in frontier economies and global refugee investment. The former “collaborative” backed by Google’s founder and the Dutch government aims to redress the estimated hundreds of billions of dollar funding gap for $20-$200 million startup and working capital needs between normal aid agency and private equity sponsor interest. The latter is an arm of the innovation-driven Global Development Incubator, and notes that forced-displacement grants were less than 1% of the SDG total with missing “connective tissue” among corporate and humanitarian partners. It would create a refugee “lens” from ownership to lending, and jointly source deals and technical assistance across the public-private spectrum. As the UN’s Refugee Compact is due to soon be finalized, it would work with countries on labor and education reforms to bolster business and build a broader “ecosystem.”  Attracting “sleeping giant” institutional investors like insurance and pension funds is a goal in both efforts, as liquidity and size mandates despite upbeat rhetoric mute their potential impact.


Debt Restructuring Principles’ Pothole Paving

2018 November 26 by

The Institute for International Finance released its annual status report on the 15-year old voluntary emerging market debt restructuring code around the IMF-World bank meetings, as it predicted flat capital inflows to twenty-five economies at just over $1 trillion, half to China. With benchmark stock and bond index entry almost $600 billion will go there as a record, while the rest of the universe’s take is “subdued” and 30% lower than in 2017. Trade conflict between Beijing and Washington could weigh on future allocation in “volatile and challenging” conditions which underscore the stability contribution of these agreed practices between government and quasi-sovereign issuers and private lenders and investors, the IIF comments. The anti-crisis guidelines are flexible and market-based and designed to promote communication and speedy resolution alongside dedicated outreach programs and statistical disclosures the group also tracks regularly. The report lists shared creditor-debtor benefits from cooperation and dialogue, as evidenced by individual cases and broader poor country relief initiatives. The trustees overseeing the norms held consultations with the London-based International Capital Markets Association on collective action clauses and the “good faith negotiation” definition, and with the Bank of England on development of model GDP-linked instruments. They expressed concern about Africa’s debt increase since official cancellation to 50% of GDP last year, with bond and non-Paris Club holders now controlling a large chunk. The continent is the focus of the restructuring profiles, with Latin America examples also reviewed. Mozambique, after admitting to hidden and unauthorized borrowing which resulted in bilateral and multilateral aid suspension, unveiled a swap proposal in March with estimated 50% net present value write-offs rejected by major creditors. They contended that future gas revenues and fiscal consolidation gains were not fully calculated, and that Eurobonds and loans were treated differently. In August a counteroffer was presented with a value recovery feature and annual debt-servicing cap. However debt/GDP is over 120% on 3% growth, and anti-corruption safeguards are still lacking, according to the description.

Chad renegotiated its second oil for cash facility with commodity giant Glencore with participation from global asset managers, and in June stuck a deal within the framework of medium-term sustainability under its IMF program. The Republic of Congo turned to the Fund in 2017 following a tenfold jump in Chinese obligations to $3.5 billion, and previously unreported state oil company liabilities which together pushed the debt-GDP ratio to 110%. Construction firm Commisimpex also has $1 billion in unpaid bills, and contractors succeeded in freezing sovereign bond coupon payments to trigger default. Commercial creditors and government advisers are in constructive talks but the workout depends on China’s approach and a new Fund arrangement. Venezuela and Barbados are the other experiences, and the former is behind on $55 billion in combined state and oil company bonds, with acceleration not yet voted to trigger cross-default provisions. US lawsuits have won attachment of Citgo assets, but organized negotiation is “impossible” with the Maduro administration in view of sanctions and unsound economic policies, the IIF observes. Another $15 billion is outstanding in arbitration claims; big bilateral creditors include China and Russia; and instruments either do not contain or have dated collective action clauses to lighten principles’ weight.


The Next Decade’s Natural Realignment Remedies

2018 November 5 by

With major indices still down through October, emerging markets are in their longest funk since the “taper tantrum” five years ago, but the US Federal Reserve and developed world liquidity movements are no longer the main culprits as investors spot weaknesses beyond the current account deficits highlighted then in the so-called Fragile Five including India and Indonesia. This year general global drivers and specific economic, bond and stock market, and regional risks provoked discomfort, aggravated by crises in Argentina and Turkey. These trends will linger into 2019 pending further analytical rigor so that near-term allocation is again a function of detailed country and instrument evaluation. Through end-decade banking system health after an extended credit binge, and productivity prods to faltering growth will be paramount questions, as portfolio managers also prepare for broader landscape shifts. They will encounter index consolidation and redesign, and emerging markets themselves finally seizing control of benchmarking, capital flow direction and global monetary and trade leadership.

The monetary spillover from the US, Europe and Japan, was never decisively quantified, but tens of billions of dollars presumably went annually into higher return core and frontier stock and local and external sovereign and corporate bond markets. The infusion aided currencies, which reversed this year against the dollar with the Fed’s scheduled rate hikes. Commodities outside oil have not provided support, as agriculture and metals prices are flat or declining. Credit ratings were rising last year but since plateaued, with upgrades and downgrades virtually even. Volatility spiked the past few months as managers are under pressure to rotate into equities from bonds after the latter’s decades-long rally. Politics and geopolitics have dampened enthusiasm with new uncertainties about sound government practice and trade and investment relationships. Populism is prominent, with candidates reeling from the old “Washington consensus” of liberalization and privatization. War may still be a danger in Iran and the Koreas but is defined as well by commercial and financial conflict between the developed world and China in particular.

The International Monetary Fund recently again softened its 2019 GDP growth forecast, with the emerging market average at 5%, and only Asia exceeding that number. Domestic demand is sluggish alongside the traditional export-led model, and private investment has been chronically weak. With currency depreciation and higher energy prices, predicted inflation is the same 5% for no growth in real terms. Over the quantitative easing decade, central banks kept policies loose or flat, but their bias is now toward tightening to defend exchange rates and encourage bank deleveraging after prolonged double-digit credit expansion. Fiscal stimulus cannot readily absorb the slack with accumulated deficits to fund budgets and infrastructure. While the balance of payments has returned to current account surplus, often through import compression, the capital account can show not only portfolio outflows but unchanged foreign direct investment, according to the latest UN agency tally. Asian and Gulf foreign exchange reserves stabilized, but the Institute for International Finance regularly warns of thin short-term debt servicing cushions in a cross-section of countries.

Through 2020, external corporate debt, with hundreds of billions of dollars in annual issuance to outpace the sovereign version, faces large maturity humps. The past six months’ drought has ended but rollovers will be more difficult, especially if quasi-sovereigns at half the estimated universe are not backed by governments if facing default. Non-Western official and commercial debt holders may not follow established restructuring rules, as evidenced by the clash between the US and China over proposed Pakistan relief. Foreign investors own an outsize portion of local bonds at almost one-third the total; public equities have  embedded distortions with MSCI’s heavy Asian and tech weightings, and private equity has no standard index. In the next investing phase these benchmarks will combine, as JP Morgan has already signaled in bonds. Emerging markets themselves, after launching ratings services such as in China and Russia, will develop competing performance measures. They will better reflect so called “South-South” practice and fund flows, as combined market size converges with the 50% share of the world economy. These new gauges will routinely feature in future analysis, as supporting financial market breakthroughs like the BRICs bank, Yuan swap network, and new trade zones in Asia and elsewhere reinforce policy and performance self- determination despite the bumpy journey to a successor era.


Corporate Bonds’ Tempered Trillion Dollar Tryst

2018 October 29 by

The primary market external corporate debt drought the past quarter may delay the CEMBI index’s evolution to $1 trillion, with subdued Asian issuance at half the total the main variable, although still a strong force in comparison with the weak Latin America and Middle East regions. Asian supply should stay in the $200-250 billion range this year, despite Chinese property developer under-performance as they were forced to pay half to one percent higher yields compared to 2017, when large maturities were refinanced on favorable terms. In Latin America Argentina and Brazil are on hold with election uncertainty, and the former’s record IMF rescue recently raised to $57 billion to cover all government bond repayments through 2019. President Macri replaced the central bank head, who unlike his predecessor, a fixed-income trader by profession, will refrain from exchange rate intervention under the program’s 35-45 peso/dollar band. Unlike systems elsewhere, Argentina’s banks are not under the microscope since they are liquid and well-capitalized, with credit/GDP low at less than 20%. Investors view the region as more resilient than pockets in Europe including Russia and Turkey and in Asia, predominantly China and India. The state took over Russia’s biggest private lenders, and Turkey’s self-designed medium-term adjustment plan foresees central bad asset absorption or tax write-off incentives. China’s leading commercial banks placed $30 billion in Tier 1 instruments in 2017 to meet Basel ratios, but second-tier names now struggle with the regulatory crackdown on “shadow” products. India’s government agreed to save a major non-bank intermediary after default with its infrastructure importance and intertwined mainstream financial institution ties.

An EMEA tour of trouble spots would add Ukraine, despite 3.5% GDP growth the first half and over $10 billion in remittances from neighbors, as the central bank hiked the policy rate to 18% on public debt servicing spikes though end-decade under the IMF agreement. Elections give former populist President Tymoshenko a chance to return to power, and structural reform progress on business climate and anti-corruption remains halting and could be rolled back under the next administration.  South African polls are also ahead, with President Ramaphosa flailing after initial euphoria amid recession and chronic fiscal and current account deficits. He is unlikely to win a 60% majority the ruling ANC party considers a minimum margin in internal voting at next May’s congress, and his shifting constitutional land redistribution position confused activists and the business community. Stock and bond market outflows persist, and the sovereign rating could tip into across the board junk from all agencies in the coming months. Saudi Arabia will join the EMBI after an admission wheeze by JP Morgan screeners, but the jury is out on the King’s economic repositioning plan as the proposed Aramco IPO stake was indefinitely shelved, with the oil giant borrowing $17 billion abroad instead to buy the state petrochemicals concern. Sub-Sahara Africa has suffered multiple ratings downgrades despite better prices for commodity exporters, with Zambia stuck in Fund talks as it tries to tally aggregate debt owed to China and other bilateral and commercial creditors. Angola has also engaged, and Nigeria elections approach with President Buhari running for another term and a new central bank governor appointment an early agenda item.