General Emerging Markets

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Corporate Defaults’ Doubling Down Stakes

2020 May 28 by

With the raging coronavirus, oil price crash, and US dollar climb combining to cramp high-yield corporate issuer access and soundness, sell-side houses have doubled the default forecast to 5%, with Middle East hydrocarbon companies most at risk. That figure is still half the 2009 crisis level, but equal to the taper tantrum fallout five years ago when big emerging economies with fiscal and current account deficits were in the crosshairs. Quasi-sovereign names should be spared, and Chinese property developers likely can rely on onshore backup as the country restarts from the earliest virus rampage. Outside weak known categories like Argentina and Chinese industrials, a large chunk of the universe pre-financed last year and through February when appetite remained. Frontier country participation in turn is small at $70 billion mainly from Jamaica, Ukraine and Nigeria. The distressed fraction below $70 is 15% of the total, and under $50 is 5%, in line with recent crisis trends but far short of the 2009 crash when it was over half of volume. The status is more due to panic selling than poor credit fundamentals at this stage, but certain sectors and businesses are clearly in trouble. Airlines will not soon rebound from health-related travel precautions, and Digicel out of the Caribbean proposed a below par exchange on $2 billion in notes in March. An estimated $70 billion is due this year in the high-yield/unrated segment, out of $250 owed for external corporates overall. With the international channel now closed, most firms should be able to tap local banks and bond markets, but real estate sponsor demand in China may crowd out other candidates. Indonesian refinancing is more elusive, but large near-term maturities do not loom. Should global fixed income volatility continue as measured by the VIX and other gauges, the spread over US Treasuries could magnify to almost 1000 basis points, according to JP Morgan calculations.

Corporate Eurobond trading was $925 billion or 17% of total turnover in 2019, and was outpaced by sovereigns with a 60/40% relative split, trade association EMTA reported. Brazil’s Petrobras was the leader, and Brazilian instruments came in second behind Mexican as the most popular generally with $780 billion in activity. Local debt was over 55% of the total, with Indian, Chinese and South African bonds among the favorites. Argentina dominated sovereign Eurobonds with three frequently traded offerings accounting for $250 billion. It is under virus quarantine and Economy Minister Guzman has signaled that the restructuring offer timetable may slip even as the contours of previously-outlined proposals prepare investors for steep interest and principal reductions. As an academic he also advocated GDP-linked instruments beyond the growth warrants contained in the last swap, and the IMF has released policy and technical papers on the subject that may finally see practical application. The Bank of England and International Securities Markets Association also organized working groups around the theme that could be mobilized in the current Argentina deal, and may also feature in neighbors skirting default with commodities and tourism collapse to double the reach.

Contagion’s Contemporaneous Collision Course

2020 May 14 by

Emerging market veterans after decades of crises, including the US Federal Reserve taper tantrum scare five years ago and the fallout since 2018 of Argentina and Turkey debt woes, are always on the lookout for so-called asset class or portfolio contagion, when common economic and financial sector squeezes and fund redemption needs spark large selloffs. Even though the literal form with the coronavirus pandemic originated in China and reached first to neighboring Taiwan, Thailand, and Korea several months ago, investors did not grasp the dual health and financial market threat despite ample warnings on both fronts. In Asia, swine disease that was monitored for potential human jump caused pork shortages raising food prices and inflation, and was on the radar for tourism, a large contributor to current account inflows. The region previously had selective outbreaks of respiratory system virus that came from the Middle East, and Chinese authorities were on notice of the Ebola spread in Congo with close mining connections there. Banks and non-banks reportedly pulled back on credit lines to affected businesses amid heightened regulation to reduce outstanding corporate and consumer debt burdens, often in the high double digit danger zone as a portion of gross domestic product.

Emerging stock markets were down through February on the benchmark MSCI core and frontier indices, but China and Asia outperformed Latin America and Europe in the former as the largest weighting. On the latter Africa, Middle East and Central Europe components had a few positive results as the overall gauge had fallen only 5%. Local and external government and corporate bond markets showed slight gains, as spreads over US Treasuries as a measure of risk continued to narrow. For domestic instruments the average yield was 5%, still representing a large pickup over advanced economy negative and low ones to drive allocation. A few analysts raised the specter of another SARS or AIDS emergency as in decades past, but even when these epidemics were raging they have not been pivotal in decision-making against traditional growth, policy, reform and technical categories.

As Covid-19 went global in March, with total demand and supply shutdowns and fiscal and monetary policy rescues, the immediate market carnage has paralleled the 2008 financial crisis. Currencies, equity and fixed income are off at least 20%, amid weekly fund outflow records at tens of billions of dollars, according to industry trackers. Several stock markets have curtailed operations or closed temporarily like in the Philippines, as they also consider or institute short-selling bans and tap state-owned and private institutional buyers for support. The IMF and World Bank, as the only two development agencies with worldwide presence and necessary firepower, initially combined to offer $65 billion in dedicated facilities to counter the disease and its economic fallout. The Fund put $50 billion aside and was soon swamped by dozens of requests, including from Iran which has not approached it for decades and is under strict US commercial sanctions. New Managing Director Bulgaria-born Kristina Georgieva, the first from an emerging market, has indicated a willingness to deploy a bigger share of its $1 trillion in reserves, roughly equivalent to the developing world damage observers tally with simultaneous oil and other commodity price collapse. The Bank has extended both concessional loans and technical expertise, with its IFC arm activating trade finance lines to maintain exports and value chains.

Growth forecasts were modest at around 4% amid global end-cycle near-recession worries before the health disaster, and double-digit output declines in the coming quarters will leave a barely positive showing at best by end-year across major markets. Fiscal and monetary easing is part of the standard playbook even if bigger deficits and additional currency depreciation result. Structural reforms like privatization and business climate overhaul will likely fade on the agenda as governments turn inward and enact more controls for pandemic protection. They may try to postpone bank and non-bank cleanup, but a cascade of stress and insolvency has been clear in China and India and elsewhere, such as Lebanon where it is coupled with sovereign default. The massive foreign investor exit in turn highlights the urgency of building and strengthening domestic private pension fund bases, which have eroded or never taken off in Asia, Europe and Latin America. Frontier Middle East-Africa should concentrate on establishing domestic debt and cross-border securities platforms as mid-decade priorities. However health, migration, and environmental threats with this universe in the frontline must be weighed equally in the future as contagion assumes a more complex definition.

Portfolio Contagion’s Immature Immune Response

2020 April 23 by

The physical coronavirus’ global explosion was matched in market results and fund flows with the initial blow, with currency, debt and equity indices down double digits, and combined two-month January-March outflows over $40 billion, double the 2008 financial crisis total according to the IIF headline tally. Public and private sector economists scrambled to revise already sober GDP growth forecasts to consensus recession, as the UN postulated a “doomsday $2 trillion hit” for a barely positive 2020 finish. China as the outbreak source was the first to report the scale of simultaneous demand and supply destruction, with fixed asset investment and retail sales both off 20%. S&P Ratings expected further “downside risks,” and the IMF Managing Director Georgieva after an original 3% projection could not define the “far fall.” The parallel oil price collapse with Russia and Saudi Arabia refusing output cooperation was another wrench, with a one-day 30% drop to $25/barrel the biggest in three decades. Big importers in Asia and elsewhere would typically benefit from the move especially if it tips the current account balance, but the likely Covid-19 fallout will negate these effects. The IMF and World Bank jumped into the breach, with respective $50 billion and $15 billion pledges for the disease emergency. Iran, with the largest caseload in the Middle East, asked the Fund for $5 billion for the first time since the 1960s. The US has not relaxed its comprehensive sanctions which exempt humanitarian operations, and it or another country could also block help due to internationally-certified noncompliance with anti-money laundering and terror financing rules. Venezuela was another unusual case seeking to tap the special rapid facility, but the request was rejected on the Maduro government’s non-recognition.

In advanced economies the big guns mobilized unprecedented rate-cutting and bond-buying programs. The Federal Reserve in a rare inter-meeting action slashed the benchmark to near zero and rolled out massive Treasury and other instrument backing. New ECB chief Lagarde after first demurring unveiled a euro 750 billion Pandemic bond purchase expansion, and the Bank of Japan deepened forays into corporate as well as government offerings. Washington extended swap lines with Canada, the UK, and Switzerland as well as into select emerging markets like Korea. China reduced bank reserve requirements twice, and Brazil, Indonesia and Turkey cut rates and intervened in currencies for “smoothing” purposes. Asia as the regional epicenter introduced large fiscal stimulus packages beyond China/Hong Kong. Indonesia offered $10 billion in manufacturing tax breaks and small business loans. Brazil chipped in with $30 billion repurposed from the existing budget, despite President Bolsonaro’s flagrant repudiation of recommended social distancing as he organized political rallies. In Europe Poland and Turkey deferred pension charges and expanded health and infrastructure spending, as the EU created a $35 billion pool and vowed more convergence criteria flexibility due to the catastrophe.  This largesse in turn could accelerate exchange rate depreciation against the dollar, with 20% drops for oil exporters in particular, including Mexico and Russia, Mexican President AMLO has also been widely criticized as a virus doubter as he insists on close embraces with government officials and supporters, while Pemex and the sovereign struggle to stave off ratings downgrade spread.

Corporate Bonds’ Blunted Body Slam

2020 April 16 by

Corporate bond promoters continued to slough off growth, earnings credit downgrade, and tight valuation worries with spreads well under 300 basis points over Treasuries into the first quarter before the covid-19 scare, citing Sharpe ratio return over a decade and Asian company resilience after the last SARS epidemic outbreak to support the asset class. JP Morgan’s annual conference participants favored Latin America with China’s economy retreating, despite a likely Pemex fallen angel rerating and Mexico and contentious sovereign restructuring over Argentina’s $100 billion pile owed more to the IMF than commercial holders. A core industry argument is hiring of dedicated analysts to perform bottom up evaluations, with reduced leverage in financial ratios and risks of massive currency depreciation remote. CEMBI risk adjusted returns were superior in particular the past five years, with liquidity also better than US high yield, according to historic calculations. Lower volatility has come with pension fund allocation, and cross over investors from pure advanced country instruments are now committed. Across major Chinese, Russian, Brazilian and Turkish issuers balance sheet and management fundamentals improved, although profit outlooks may suffer with the coronavirus spread. Ratings trends remain slightly negative, with Indian companies recently following post-sovereign rethinking on growth and competiveness reservations. Argentine names already followed this track, while Ukraine ones could benefit from opposite sovereign upgrade. China real estate was an iffy proposition before the disease pressure, and will fall further into the speculative category unlike steady rating patterns otherwise expected. Primary supply in January and February was strong for refinancing purposes chiefly with surprise pickup in Chile at 20% of the region for anti-unrest increased social spending ahead of a proposed constitutional redraft. Asia tapered as the COVID-19 epicenter, and Russian appetite was solid despite the threat of US and Europe election interference sanctions, while ESG green instruments also featured.

Banks have fallen out of favor in the Middle East and elsewhere, joining previously sidelined Chinese and Turkish ones. Non-bank problems are likewise in the spotlight in India and selectively in Latin America, and hydrocarbons and metals as one-fifth of the CEMBI are under demand squeeze with output and environment caps. Oil and gas suppliers can now be screened on a sophisticated range of operational and carbon footprint metrics gaining institutional investor acceptance. The leading providers have launched stand-alone indices that could be merged over the medium term with conventional gauges and cover both public and private markets, experts believe. On Argentina specialists argue that corporate negotiations on a case by case basis could be smoother than the latest sovereign saga. After the IMF declared the debt load unsustainable, recovery in the 50 cent range may not be assumed, and energy-related issuers will have to take on a new set of tariffs and regulation after the Macri government’s liberalization push.  Brazil should be a better bet with infrastructure and consumer goods’ rebound signs, but a key driver will be changing local capital markets behavior as retail customers switch from banking deposits and Treasuries to private securities preference. Mexico has enjoyed a peso bump with passage of another North America free trade pact, but near recession and President AMLO’s erratic decision making exacerbated jitters, despite top industry association investor relations marks for career professionals.

Frontier Debt’s Exacting Exploration Excitement

2020 April 2 by

Following consecutive years of double-digit gains above the core sovereign bond benchmark, and with crowded trades in the main emerging market local and external instruments, investment houses pre-virus were touting fundamental frontier allocations based on diversification and underlying country improvements. They argue that risk re-pricing can partially offset illiquidity, although the credits have not been tested in crisis and remain outside standard ETFs, Last year’s big winners were Egypt and Ukraine, while Kazakhstan and Kenya lagged the JP Morgan EMBI and GBI-EM indices. A major debt and equity rebounder predicted for 2020 is Pakistan with another IMF program, with inflows into domestic Treasury bills yielding almost 15% as the currency stabilizes. Economic growth will be 2-3% on fiscal and current account adjustments, as double-digit inflation drops from prior depreciation and bad farming results. The balance of payments gap should halve to 2.5% of GDP with import compression, as reserves are bolstered by fresh foreign direct and portfolio investment. The exchange rate stance has moved from pegged to flexible and at 155/dollar currently is roughly fair value. International reserves remain negative on a net basis but Fund injections aim to restore balance, with the government coalition in slight majority in parliament. Tax revenue may reach 15% of GDP this fiscal year on a wider base and with spending cuts almost eliminate the primary deficit. Energy reform will entail costs over time, and anti-money laundering compliance is outstanding to avoid FATF sanctions. Geopolitics is not in the equation, with India again stoking tensions in Kashmir and denying Muslims future citizenship under a proposed law. Daily T-bill market turnover is over $300 million, with frequent auctions and narrow bid-ask spreads compared with frontier rivals, on 10% withholding tax according to JP Morgan research.

In Africa Ghana and Nigeria are back in favor after foreign investors were subject to access and rule changes resulting in the latter’s local index exclusion. Ghana’s twin deficits are under stricter control heading into end-year elections, with a several billion dollar financial sector cleanup consolidating banks and holding executives accountable for crimes and mismanagement. The crackdown suspended bank shares on the stock exchange prompting removal from the MSCI frontier rung, and potential reinstatement awaits the index provider’s next review. Inflation is in single digits as the central bank is poised to lower 15% interest rates. The current account gap is put at 4% this year, but the currency should be steady on external bond inflow momentum and calmer capital flight after successful poll transitions. A good medium term yield curve is offset by thin trading, but authorities are trying to launch derivatives for further liquidity. In Nigeria the reserve drain has bottomed at around $35 billion, and the central bank has turned its attention from currency intervention to reigniting credit and economic growth. It recently barred domestic buyers from high-yield open market operation (OMO) paper so that banks eventually have more room to extend loans especially to non-oil smaller business. Pension funds and corporations shifted their portfolios into other government instruments, and foreign investors now holding half the amount will be the main OMO target to whet their broad fixed income appetite. The naira after previous convulsions should only fall toward 370 over the coming months as import and dealing grips relent from past seizure.

The World Bank’s Empty Shaft Prospecting

2020 March 26 by

The World Bank’s January Global Economic Prospects issued before the coronavirus surge found “marked deceleration” in global growth last year affecting over half of emerging economies, with the average around 3.5% on weak manufacturing. This year’s projection is only 4%, half a point below previous forecasts, as trade will only expand 2% despite the US-China first phase deal. “Subdued” financial market sentiment will continue and flatten commodity prices, and even with monetary easing about one-third of the developing country universe can expect lower growth. In the medium term low income countries will set the fastest pace at 5.5%, but per-capita income and poverty levels will barely budge. High debt and lagging productivity block anti-shock capacity as traditional policy space is thin. Food and fuel cost controls mask actual inflation, and fiscal deficits limit countercyclical spending as tax bases are unable to support investment and social safety nets. Business climate improvement and technology integration are unfinished agendas, as weather emergencies and energy needs demand “green” solutions, according to the publication. China’s expansion will dip under 6% for the first time in three decades, with total debt over 250% of GDP. Both exports and domestic demand are down, and budget and credit measures cannot reverse the trend. The drag contributes to Asian cross-border goods and services slowdown, with construction and tourism softening for the latter. Protectionist levies affected over $1 trillion in world commerce last year, overshadowing a few new bilateral and multilateral free trade accords most notably a Pan-African one.

Over $10 trillion or one-quarter of global debt has negative yields, spurring emerging market borrowing at narrow spreads although lower-rated sovereigns may not benefit. Most currencies continue to depreciate against the dollar, and FDI slipped in all regions through the first half of 2019 outstripped by remittances. Oil was off 10% to $60/barrel, and agricultural and metals values also fell. Commodity exporters grew just 1.5%, half the figure for importers led in Asia by China and the Philippines. Almost the entire pickup this year will come from a handful of major markets, including Brazil, India, Mexico, Russia and Turkey. Extreme poverty defined as living on less than two dollars a day dropped by a billion people in recent decades, but double that number have no basic sanitation access. The infrastructure elements of the Sustainable Development Goals call for unlikely annual investment over 5% of GDP for poor and middle-income economies, with Africa especially at the bottom as conflict and penury concentrate there, the report warns. On purchasing power parity basis China is now one-fifth of world output and integral in auto and other supply chains at risk from further tariff and geopolitical struggles. Emerging market credit booms have been mostly for consumption, and contagion may center on common foreign investor ownership of local bonds. Social unrest and climate change have economic and financial implications across the asset class yet to be calculated, and China’s excessive leverage can best be tackled over time that may not be available. Almost half of developing markets have insufficient reserves, and macro-prudential policies often stifle banking and securities modernization. Output per worker is less than one-fifth the advance economy result, with a century required to close half the gap as another grim reading.

Low Income Economies’ Bottoming Out Bottlenecks

2020 February 28 by

The IMF with a new managing director in place committed to boosting poor country performance, released a mixed annual assessment of 60 members in the category, defined as per capital income under $2700. It covers one-fifth of world population but only 5% of output, with average 5% GDP growth through 2019. Commodity producers lagged more diversified exporters and fragile states were at the bottom. Public debt rose in half the group, and the tax/GDP ratio remains below 15% despite VAT application potential. Bank failures with weak resolution and deposit insurance schemes were a drag, and the longer-term outlook is tied to productivity and business climate improvements along current emerging market standards, the paper notes. It underscores “striking heterogeneity” between fuel and non-fuel commodity frontier market spreads with international financial access. Oil prices rebounded the past year in contrast with the agriculture and metals complex, and half a dozen African sovereigns were repeat bond issuers. Tajikistan, Papua New Guinea and Benin debuted, but half of markets do not receive portfolio inflows and FDI is still the dominant overall source. Remittances and aid increased, but the latter merely retraced previous drops. Growth leaders like Laos and Rwanda benefited from relative diversification and large-scale infrastructure projects, while disaster and war-affected Afghanistan and Mozambique were laggards. Commodity economies have smaller average fiscal deficits at 2.5% of GDP, with tax collection unchanged despite priority status under the Addis Ababa domestic resource agenda. Policy and revenue administration reforms helped selectively, but VAT design and implementation is an outstanding task. On public debt primary and off-budget deficits have been the main drivers, with 45% at high risk or in distress. Non-fuel exporters had the worst current account gaps at 5% of output, often due to capital equipment import surges. International reserves are under the three months trade need threshold, and inflation moderated to 4%, with flexible exchange rate countries easing the most. Interest rate reduction followed, but private credit slackened in one-third the cohort.

On an ominous note, the evaluation cited financial sector difficulties in 40%, double the fraction in 2016. Bank capital adequacy is stable, but bad loans have spiked above 10% in half of countries on a combination of factors, including lower export values and mounting government arrears. Correspondent relationships ended over money laundering and terrorism concerns in places like Nicaragua, Solomon Islands and Nicaragua. Almost 40% of the population now has account access with mobile catalysts, versus over 60% in emerging markets. Only one-tenth if customers have any savings, and private credit to GDP is minimal at 20%. Human capital in terms of education and health is a basic obstacle but labor quality, technology, and the investment climate are broader considerations for infrastructure and World Bank “Doing Business” attention. Power grids and school enrollment have expanded from low bases, with efficiency and results still to be tested. Environmental and China trade risks also cloud the future, with a cross-section of poor economies in the value chain or shipping raw materials for Asian demand. Through the publication date Chinese “A” shares up 30% continued to top the core and frontier MSCI indices, with the so-called “Next 11” barely positive reflecting Fund ambivalence.

Index Performance’s Elaborate Endurance Formula

2020 February 13 by

With a last quarter surge after a rocky start in 2019, the main emerging market stock and bond indices managed 15% gains, largely due to relief from negative economic policy and performance expectations. The US Federal Reserve reversed signaled monetary tightening; Washington and Beijing agreed to roll back retaliatory tariffs in their trade and investment showdown; energy and food price inflation resisted geopolitical and climate stress; and developing country growth was only around half a percent below the magic 5% threshold investors consider fast-track. With this worst-case avoidance including, plunge into advanced economies’ negative debt yields, a handful of currencies were up against the strong dollar, as the Dow Jones Index’s return was double double the MSCI benchmark.

Fund flow numbers for the year were over $60 billion positive and $10 billion negative for the respective fixed income and equity asset classes, with retail support the key driver, according to data trackers. On a regional basis, Asia was the best stock performer as its top export technology was also the leading sector. Europe and Latin America lagged from crises in Turkey and Argentina, while the latter experienced a broader setback as civil unrest over stagnant incomes spread throughout the continent. In structural reform, India as a standout example lost luster as it threatened new taxes and restrictions and grappled with non-bank collapse into Prime Minister Modi’s second term. In China second-tier banks were rescued but wider feared carnage did not materialize, but in 2020 economic and financial sector woes must be handled more decisively if fund managers are to retain faith in immediate fundamentals and the longer term major emerging market story.

So-called frontier markets were more judged on individual merits in 2019, with a mixed outcome. Dedicated mutual funds showed outflows, and their returns exceeded the index on external sovereign debt but lagged the equity core universe. Central Europe had this split result, as Ukraine bonds rallied after presidential and parliamentary elections but stocks slid. In the Middle East, the landmark Aramco oil company flotation valuing it at $2 trillion on the Saudi Arabian bourse grabbed headlines, but attracted only local buyers as foreign ones questioned governance and transparency.  Lebanon was at the bottom of performance ranks as street protests coincided with bank runs, exchange rate depreciation, and possible debt default. In Africa Kenya’s 40% jump was an exception to disappointments elsewhere, including a decline half that size in Nigeria. The region was virtually alone in promoting a breakthrough direct and portfolio investment narrative, as a 40-member pan-African free trade agreement was signed, which will be under scrutiny this year for initial implementation.

While traditional metrics did not meet an affirmative test or got benefit of the doubt last year, the renewed screening bar going forward will be complicated by acceptance of ESG criteria as important allocation factors. Environmental, education, health, and corporate and government integrity issues increasingly feature in analysis, amid launch of new industry associations and category benchmarks. Green bonds, including from emerging markets China, Korea and Brazil, have grown to $250 billion outstanding despite continued issuance classification and cost difficulties, as global mainstream investors pledge higher exposure. The Ebola virus resurfaced in Africa, and the swine flu epidemic in Asia is a lingering concern. In Latin America the Venezuelan displacement crisis reached historic proportion as millions flee economic and social misery for neighbors caught in their own poverty and rule of law vise. For 2020 the United Nations requested over $1 billion in international aid, as a previous appeal for half that amount fell short. December‘s Global Refugee Forum in Geneva urged private finance to help fill the gap, previewing future contours of the emerging market selection matrix. Winners this year could be countries like Colombia, intent on preserving an investment grade rating with fiscal discipline steps and displaced population funding innovation, as the asset class lure turns more creative and insistent.

USAID’s Private Sector Curt Courtship

2020 January 30 by

As the new Development Finance Corporation absorbs its credit guarantee arm and its first leader with a health care investing background promises transformation, AID proper is spotlighting its 50-page private sector involvement strategy as a breakthrough in its own right despite lingering business and financial community doubts. At the outset it acknowledges that donor agencies alone cannot realize the UN’s Sustainability Goals, and that complex conflicts and disasters demand original humanitarian response. The outreach across all programs and project cycles fits with the ultimate aim of self-reliance through market-based solutions and systems to enable country graduation, according to the Administrator. The document cites existing collaborations like the thousands of companies in the Global Alliance and dedicated food and power initiatives accounting for tens of billions of dollars. Joint work applies across infrastructure and thematic sectors like democracy and governance and has been successful in housing and payment pilots in tough locations Afghanistan and Haiti. Partnerships can be formal or informal but depend on mutual trust often lacking with preconceptions about commercial and foreign policy interests. When AID was created fifty years ago private capital was just one-quarter of total low and middle-income economy flows versus 85% today, even though fragile states are bypassed altogether. Over the next decade consumer spending in these place will grow three times faster than in advanced economies, as one-quarter of funds worldwide are managed with environmental and social screens. The private sector creates 90% of developing world jobs and spearheads technology transfer and supply chain integration. It joined with the Agency to promote Digital Principles with over 50 multinational firm signatories, and can help close the women-led business gap estimated at $300 billion annually. In this fashion the government can offer networks, policy expertise and convening power to harness innovation and scale and produce shared knowledge and concept applications. Other financial tools beyond credit authority are available As in Africa and Central America with agricultural lending and resource pooling feasibility studies and test cases can introduce lasting changes, the strategy emphasizes.

While recognizing the importance of due diligence it pledges to honor intellectual property and proprietary information, and avoid potential market distortions. The paper charges all missions abroad and headquarters units with preparing action plans and measuring results, and setting a longer-term evidence and learning agenda. An appendix lists “myths’’ that should be put to rest, including that profit motive is anathema, and that procurement rules bar separate commercial communication. Traditionally the focus was associated with economic growth, but the intent now is to encompass all activities. Despite the bottom-line ambitions in the outline, critics point out that President Trump’s overall aid priorities are for massive cuts and ties to domestic political imperatives. In the Ukraine saga military support has been in the headlines overshadowing an active financial market development program over decades since post-communist independence. Efforts there were often plagued by local corruption and lack of capacity that emerging market investors were quick to highlight as obstacles to be subject to combined crackdown. Privatization through the dormant stock exchange could be a vehicle for engagement proof, but union will be on hold pending the outcome of the simultaneous impeachment ceremony.

US Development Finance’s Forgotten Franchise

2020 January 17 by

The new US International Development Finance Corporation (DFC), merging the foreign private investment promotion agency OPIC with the credit support functions of the main overseas development arm USAID, started in October with rare bipartisan political and consensus emerging market expert backing. Recommendations to overhaul the decades-old model dated back to the Obama administration. It gained momentum under President Trump, who has otherwise moved to cut economic assistance, as a financing and geopolitical competitor to China’s global multi-trillion dollar Belt and Road Initiative. The restructuring doubled OPIC’s original balance sheet exposure limit to $60 billion, and added equity to debt, guarantees and risk insurance in the toolbox to spur direct and portfolio inflows to low and middle-income countries.

A September report by the Washington-based Center for Strategic and International Studies (CSIS) acknowledges that the DFC cannot match China’s policy banks and state enterprises “dollar for dollar” in underwriting infrastructure and natural projects throughout Asia, Africa and Latin America. It advises focus on other potential comparative advantages such as technology transfer, small business funding, and capital market creation.

This last category, concentrating on stock exchange launch and modernization, can be an all-encompassing theme with maximum “bang for the buck.” At the same time, it could revive the US aid establishment’s glory days during the 1990s and early 2000s, when securities market introduction was a priority in post-communist and socialist transition economies in Europe and frontier and developing markets worldwide. Emerging market investors, in search of an underlying story for the asset class into the future, could in turn organize dedicated advisory groups as in the past.

CSIS predicts that internal administration and strategy delays will likely keep annual DFC commitments below $10 billion in the initial phase. It begins with 300 staff and a 90-country portfolio, and a lower minimum US investor participation requirement. A fifteen-member board of directors from the cabinet and outside government, and independent panel of academics and advocates yet to be named, will provide governance and guidance. Inherited operations total close to $25 billion with a roughly even split between regions, and one-quarter in “fragile” states.

From a foreign policy perspective, job creation and private sector growth are priorities in the Middle East and Africa to counter terrorism, and in Central America’s Northern Triangle of El Salvador, Guatemala and Honduras to curb mass migration. In Africa, the intent is to leverage parallel US government programs on power generation and trade.  DFC also has expanded authority to offer technical assistance and local currency debt guarantees and to diversify the range of existing venture capital “enterprise funds.” Earlier versions spurred private equity takeoff throughout Central and Eastern Europe, which in turn spurred European Bank for Reconstruction and Development support for public markets.  

OPIC, over its 40-year life, could claim no net cost to the taxpayer as earnings were returned to the budget, often under risk-averse management as high-return assets subsidized poor country engagement. USAID over the past fifteen years largely abandoned capital markets as a core emphasis, as technical assistance shifted to a small Treasury Department unit promoting government bonds throughout the developing world.

After the fall of the Berlin Wall thirty years ago, the US administrations relied on a private sector ecosystem to advance financial market transformation that has since withered. Wall Street bankers and fund managers took short-term assignments in Europe and elsewhere under a Financial Services Volunteer Corps still in existence, and the Nasdaq dispatched experts and encouraged nascent stock exchanges to adopt its over the counter system, as with the Rasdaq in Romania. After the emerging market term was first coined in the late 1980s, Washington had a roster of brokerage executives on hand to travel to far-flung destinations like Kenya preaching the securities gospel.

The African Development Bank has since launched its own initiative mainly for bond markets, and the continent now has half a dozen regional equity components on the benchmark MSCI frontier stock market index. Performance has been overwhelmingly negative this year, as foreign investors decry chronic liquidity and size constraints. Stock exchanges in East and West Africa have long explored cross-trading and consolidation with little progress, as South Africa remains the runaway depth and diversity leader, according to an annual reference compiled by regional banking giant Absa in collaboration with London’s Official Monetary and Financial Institutions Forum (OMFIF). The continent and other overlooked regions such as Central Asia, where Uzbekistan is in startup mode, could be early targets for DFC “soft” infrastructure help in contrast with China’s approach. The payoffs would come in stock market volume and results reflecting increased private company access to finance in the frontier universe, as well as official reputation and investor coalition revival for an impressive triple bottom line debut.