General Emerging Markets


Low Income Economies’ Grinding Ground Stops

2018 April 12 by

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

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



Central Securities Depositories’ Sideline Topics

2018 April 12 by

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

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


Sovereign Debt’s Testing Trillion Dollar Trill

2018 April 6 by

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

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

Trade Wars’ Tactical Retreat Cry

2018 March 22 by

Early year stock and bond returns paused their extended double digit momentum as the US administration revisited trade conflict fears by slapping tariffs on aluminum and steel, following less headline-grabbing action against solar panel and washing machine imports. At the end of February the MSCI and GBI-EM indices tallied 1.5% gains as external corporate and sovereign and frontier equity benchmarks were down. Other factors contributed to diminished enthusiasm, including growth data leveling off after months of positive economic activity surprises lifting the global forecast to 5%. With new Federal Reserve chair Powell highlighting strength which could lift rates further than the original “dot plot” path, local currency instruments were re-priced. The key question for exporters hit by Washington’s action is retaliation as a combination of commercial and diplomatic considerations, and China in particular has signaled such response while retaining negotiation options pending release  of the section 301 report expected to list in detail intellectual property violations. Beijing has already dispatched President Xi’s lead economic adviser in an effort to reverse tougher investment stances as well with a succession of pending financial services and high-tech deals unable to pass muster with the Treasury Department’s CFIUS panel. Aluminum and steel are only fractional shares of emerging market exports, and affected countries could ease fiscal and monetary policies to offset the near-term blow. Asian PMI readings were previously slowing from last year’s torrid electronics supply chain cycle pace, and in Indonesia and India authorities had been contemplating rate hikes to narrow consumer import-fed current account deficits. In EMEA, South Africa, Turkey, Russia, Bahrain and others could be affected at the margin by the industrial metals fallout, but asset allocation will more be driven by delicate political junctures over the coming months. Retail investors registered occasional outflows through February especially in ETFs, but sovereign and corporate issuance has boomed at $50 billion and $80 billion respectively.

African borrowers lined up for Q1 include Kenya, Nigeria, Cote d’Ivoire and Senegal despite 20-year retrospectives on the original HIPC official relief which ultimately covered 30 countries, with Ghana for example cutting its burden to 10% of GDP. Later it led the inaugural bond parade, and with commercialization private creditors now are bigger holders than the traditional Paris Club, IMF and World Bank. The latter’s debt sustainability analyses have consistently understated potential distress from these more expensive obligations, as Ghana and Mozambique went into workout operations. Corporate valuations are stretched with Latin America the favored region and Asia dominating placement. Commodity names are one-quarter of the CEMBI and prices are solid, while healthy balance sheets overall should keep defaults below 5%. Credit rating direction is almost neutral, but deleveraging banks are risky picks with declining financial ratios. So-called cross-over investors with global mandates have entered in force, but local institutions are prominent buyers across major regions. Supply should again be in the $450 billion range this year, and specialized ETFs could increase their presence with only $50 billion in external bond vehicles currently in the market. “Green bonds,” half dedicated to renewable energy, could take off with more standardized information as funds position for that space, while distressed ones concentrate on Venezuela restructuring scenarios, where half value recovery would seem to be contingent on regime change.

The Seamless Rally’s Frayed Fabric

2018 February 4 by

Emerging bond and stock market performance in 2017 exceeded the most optimistic early year scenarios, largely focused on feared global monetary and trade squeezes that proved overwrought and quickly faded to pave the way for uniform rallies. Benchmark indices were up double-digits, led by the MSCI’s 35%, with almost all country constituents in core and frontier and local and external measures along for the ride in a pattern last seen a decade ago right before the global financial crisis. Then a Shanghai Stock Exchange “shock” was originally felt in New York and other centers before the mortgage meltdown.

Combined investment fund flows last year at $200 billion mirrored the previous peak, with ETFs that have since mushroomed accounting for respective 10% and 25% portions of debt and equity allocation. Better than expected corporate earnings and average GDP growth, again approaching the 5% level of boom periods with higher exports and domestic demand, bolstered enthusiasm as a mix of positive underlying story and low-return advanced economy aversion. However the embrace did not distinguish between asset classes and leaders and laggards within them for a longer term winning strategy, and overlooked banking system and geopolitical icebergs lurking beneath the surface. Financial stability may again be a prominent theme after years of post-crisis relief, as private sector leverage rings alarms and the public sector running steeper fiscal deficits has limited rescue space.

In stock markets by region Asia outstripped Latin America and Europe in the core universe, with MSCI’s addition of Chinese “A” shares and buoyant company profits in the global tech cycle were key drivers. These factors neutralized continued worry over China’s banking stress, corporate debt overhang, and capital outflows which were prominent topics at the Central Economic Work Conference going into 2018. Authorities have already announced crackdowns on shadow “entrusted loans,” state enterprise leverage, and bank card holder dollar deposit withdrawals, and signaled further moves with financial stability a Party priority. In contrast with 2008, economic and credit spillovers from potential crisis would now slam emerging market bonds as well, where foreign investor corporate and sovereign exposure ranks near the top globally in volume trading surveys by the industry association EMTA. Asian neighbors Korea, Malaysia and Thailand are grappling with high household as well as business debt levels, regularly drawing warnings from the IMF and the BIS, which will be tested this year as allocation turns more selective, according to the latest Bloomberg fund manager polls. Korea’s central bank stood out last year by hiking interest rates and imposing credit card “macro-prudential” curbs to shrink OECD-leading 150 percent of GDP personal leverage.

In Europe, Russia lagged with a barely positive MSCI result despite low valuations, as it may face more Western sanctions for election interference, with the US Treasury Department considering a government bond buying ban. It took over systemically-important private banks and had to close hundreds of others for prudential violations. Turkey’s 35% rise was at the opposite extreme, but was due to post-coup attempt official loan stimulus overheating the economy and stretching the banking system, which has to rollover heavy foreign exchange obligations. Foreign investors as the largest owners trimmed local bond positions in Hungary and Poland, as they recoil at populist administrations courting EU condemnation and aid suspension, and fear that domestic institutional investors lack backup capacity after private pension fund shutdowns.

Latin America has a nonstop 2018 election calendar with presidential contests in Brazil, Colombia and Mexico, with the main parties and their standard bearers offering scant commodity diversification and productivity raising platforms under scandals and criminal investigations. Brazilian banks, including the development BNDES arm, continue to deal with large corporate borrower restructurings, such as with telecom firm Oi.   Argentina’s economic policy turnaround and world capital market re-entry under President Macri, which resulted in record borrowing and a near 75% MSCI Frontier Index bounce in 2017, is offset by Venezuela’s implosion under a harsher socialist regime bringing hyperinflation, debt default and a singular humanitarian catastrophe.

Frontier market stumbles in the Middle East and Africa left the composite gauge 10% below MSCI’s main roster, as Gulf and Southern African components suffered respectively from the Qatar boycott and South Africa-Zimbabwe political transition jitters, which have also hurt bank liquidity and profitability. A big warning to the overall asset class is the Institute for International Finance’s lending conditions survey stuck around the neutral 50 mark, which fund managers have yet to flag it for future momentum drag.  They will better pick their spots in the coming months, and although stock returns likely will continue long-term catch up with bonds, variation will widen by geography and development stage through the financial sector health filter.




Corporate Bonds’ Evenly Dispersed Blessings

2018 January 21 by

The CEMBI’s 2017 8% return was slightly lower than the previous year’s 10%, but gains were equally distributed between rating and regional segments, JP Morgan commented in its annual asset class roundup. High yield led results at 45% of issuance, and by industry commodities including hydrocarbon and mining names were the winners. The benchmark spread has dropped the past two years with low volatility reminiscent of the early 2000s period, when the margin was lower than the current 230 basis points over Treasuries. Duration has been steady at 4.5 years, and the CEMBI Broad traded inside the sovereign EMBIG Diversified in 2017 due to a combination of Asia high-grade credits in the former and distressed weighting Venezuela/PDVSA, continuing to miss payments, in the latter. High-yield in turn has been tighter than the US counterpart, likely because of the universe of well-supported quasi-sovereigns. By geography Latin America and Africa were the top performers (+12%), followed by Europe, Asia and the Middle East in declining order although their range was a narrow 5-7%. The external sovereign and local government JP Morgan indices had respective 9% and 15% gains but also fluctuated more widely. The biggest individual issue surge was from Petrobras (+17%) and other Brazilian banking and industrial components also shined. China listings like CNOOC, Bank of China and Evergrande were likewise major contributors, according to the research.

Speculative-grade default rates fell to a six-year low of 2%, with the number halved to sixteen from the preceding year, as “robust” refinancing conditions enabled weak story access. Latina offshore spilled over into 2018, as Noble and Agrokor hurt Asia and Europe, respectively. Venezuela state oil company PDVSA did not enter the total, even though derivatives body ISDA and ratings agencies declared default while the government intends an as yet undefined restructuring. Recovery values almost doubled to 50%, with the bottom levels in the consumer and financial sectors. Leverage was the same as in 2016 at 3 times, with Latin America the most indebted region. The rating upgrade to downgrade ratio was 0.8, with Argentina getting 15 promotions after S&P raised the sovereign to “B.” Turkish companies were slashed an equal number with Fitch’s BB+ cut, while China had the most downgrades at 55 versus 30 upgrades. The Middle East and Africa suffered with South Africa and Qatar actions, which may fade under the prospect of fresh ANC ruling party leadership and lifting of the GCC boycott this year. Primary activity was a record approaching $500 billion, 50% above 2016, with net financing “manageable” under $150 billion. Tenders and buybacks were a hefty $80 billion, and Asia was over half of volume at $300 billion with “sustained” local investor support, the survey notes. China was $200 billion, with Korea next at $25 billion and financials were half of regional supply. In Europe Russia marked its post-sanctions rebound with $20 billion, although new US Treasury Department guidance could again close the window. Regulation S SEC-registered private placements were 55% of the total, beating the previous year peak, and debuts were one-fifth of all transactions, another precedent in value terms although not in issuer number. Asia had 125 maiden offerings, with ASEAN active in particular under longstanding bond market promotion programs.

GDP Bonds’ Simpler Structure Sanctification

2018 January 15 by

For the past year official and private sector representatives, acting under the G-20’s original direction, have organized informal working groups and events around possible introduction of GDP growth-linked bonds. The idea first gained notice in the aftermath of the 1990s Asian financial crisis, and more recently for Greece, as an automatic stabilizer with countercyclical risk-sharing when recession or natural disaster hit that can also provide upside in boom times. Argentina and Ukraine followed early post-Brady plan restructurings in offering warrants that pay a premium when growth is above 3 percent, but full-fledged instruments have yet to be adopted in standard issuance and workouts despite concerted pushes from the IMF, Institute for International Finance, and other bodies.

Since the middle of 2016, the Fund has published papers on “state-contingent” debt and the Bank of England and International Capital Markets Association in London have taken the lead on global emerging market investor outreach which resulted in a model term sheet. It indexes coupons and amortization to nominal GDP, has both foreign and local currency options, and would be governed under international law with creditors ranking equally. The framework also contains  complex provisions around collective action clauses and statistical calculation which muddy legal and practical understanding. An easier approach would be to incorporate the concept into smaller deals, such as the recent frontier sovereign wave in Africa and elsewhere, to build a credible track record where any dispute from the limited buyer base and transaction size could be handled by independent experts.

The IMF’s May review examined a range of bond alternatives adjusted for economic indicators or weather events and found that other tools can “preserve space” in difficult periods such as international reserve accumulation, fiscal rules, commercial insurance, and central bank swap lines. However, well-designed GDP-formula bonds are more accessible and also promote concrete securities diversification and the more abstract “global safety net,” in the Fund’s view. Its simulations showed that one-fifth of the debt stock in this form would increase emerging economy limits on average 10 percent before debt reached dangerous levels. Real money long-term managers at big institutions are the logical buyers, as they have wider fiduciary scope to balance country welfare with asset returns, the paper argued. However pilot efforts will still demand a novelty premium with liquidity and performance doubts, which could be magnified by data frequency and reporting gaps as in Argentina’s notorious past and in Venezuela’s present case, where related bad governance and economic policies would likely make upfront costs prohibitive. Professional debt agencies and not politicians should be in charge of these operations to plan beyond the next election cycle, and ratings agencies should participate at an early stage, the primer recommended.

Inflation-adjusted instruments offer a foundation and remain popular in Latin America among local and foreign investors, and commodity-tied value recovery rights featured in a dozen decades-old sovereign debt exchanges, but verification lags and other intricacies have impeded mainstream embrace. GDP-linkers will take time to develop benchmarks, and pricing is assumed to be at least 50 basis points over conventional offerings at the outset, according to the literature. Global pension funds controlling $40 trillion may be confined to hard-currency investment-grade exposure to further narrow the structure, while Islamic finance vehicles committed to risk-sharing could be a smooth fit. In discussions on the London term sheet, lawyers have criticized voting and cross-default clauses which seem to prevent aggregation and subordinate “plain vanilla” bonds to GDP-related ones. Analysts in turn are deeply suspicious of government data manipulation in the absence of an established separate mechanism for calculation and publication, and insist in the proposal on possible immediate redemption through a put option for protection.

Instead of mainly relying on these elaborate consultations often with acrimonious debate over motives and principles, GDP-linked bond advocates including the IMF, which has indicated possible balance sheet and technical support, should instead be open to ad hoc insertion in ongoing minor emerging market placements. Leading candidates were the past year’s restructurings in Belize, Mongolia, and Mozambique amid their other outstanding economic policy and statistical disclosure concerns. The three are serial defaulters with fates connected to natural resources, and creditors have been frustrated by continued negotiation and workout impasses which may be more readily overcome with specific data or event-triggered instruments. A standing group of mutually-agreed professional monitors could oversee adapted versions of the template,  as innovation champions bypass lengthy deliberations to forge missing links.



Investor Surveys’ End-Year Party Indulgence

2018 January 8 by

2017’s impressive debt and equity market streaks are set to continue indefinitely subject to economic growth and inflation adjustments and other caveats focused on global central bank actions and geopolitics, according to early investor pulse-takings. The best year in a decade shrugged off Trump administration and Federal Reserve moves and China and commodity price worries that will remain prominent, and in 2018 EM currencies may not beat G3 ones, according to a limited Bloomberg poll of money managers. Mexico, Brazil, Indonesia and Russia will be outperformers, while China, Argentina, Poland and South Africa should lag. By the main three regions, Asia is favored over Latin America and EMEA, but the often cited “Goldilocks” combination of output, earnings and monetary impetus will be more selective across asset classes and geographies under still buoyant index results, the analysis finds. Turkey is viewed as the riskiest bet as the failed coup repercussions linger, President Erdogan’s allies are implicated in a US money laundering trial, the economy may be overheating with 8 percent growth the past quarter, and interest rates were hoisted only 50 basis points with double digit inflation amid the President’s charge it is on the “wrong path.” EMTA’s Q3 survey also came out to report steady $1.3 trillion in trading, with Asia outpacing Latin America for the first time in its two decades history. Local debt, at 57% of the total was led by India at $130 billion, followed by South Africa, Brazil, Mexico and China in the $75-$95 billion range. Eurobonds, split 53% and 40% percent between sovereign and corporate, had Argentina and Saudi Arabia prominent in the former category.  Brazil and India instrument dealing was almost equal overall, and China and Mexico ones were tied for runner-up status. Warrant and option turnover was $9 billion for the period and without a detailed breakdown were presumably on Venezuela and other oil exporters with value recovery rights from previous restructurings.

China has not yet entered mainstream domestic bond indices, but should be added next year as the stock market weighting also rises marginally on the MSCI. November economic data were mixed, with retail sales and exports up over 10 percent but fixed investment only ahead 7 percent at the slowest clip in two decades. Foreign exchange sales resumed even though the state allocation body cited currency “balance” and the bank regulator will soon end the waiting period for foreign institution yuan trading licenses. The official growth forecast remains 6.7 percent amid reports that the deleveraging push may soften at the December work conference. Tech firms not as indebted as large government enterprises now account for 15 percent of output and 10 percent of employment according to official research. The securities overseer has denied over 100 IPO applications although state company profitability is the best in five years. Moody’s Ratings has a stable banking sector , with the shadow segment under tougher rules as commercial lending continues to jump RMB 1 trillion monthly approaching a 15% annual pace. After signaling opening after a Beijing visit by US President Trump, Beijing insisted the 5 percent ownership reporting mandate will not change, as Washington’s new national security strategy criticized China’s “aggressive, mercantilist” system hardly putting international stakes first.

FDI’s Ultimate Purpose Posturing

2017 December 5 by

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


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


Sovereign Debt Restructuring’s Loaded Cases

2017 November 22 by

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

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