General Emerging Markets


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.




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.