General Emerging Markets

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The UN’s Sovereign Debt Meltdown Scoop

2020 July 16 by

The UN Conference on Trade and Development (UNCTAD), in a report “From Great Lockdown to Meltdown,” highlighted the developing world’s cramped fiscal and monetary space to tackle coronavirus amid “critical” foreign debt burdens and called for reconsideration of a global restructuring body. The idea had gained momentum through the IMF two decades ago after the Asian financial crisis and its aftermath, but the US Treasury department and major emerging markets were lukewarm, and it was recently revived by academics including Argentina’s now Finance Minister as he proposed separately large reductions and delays in an exchange offer after the Fund declared the $60 billion outstanding unsustainable. Creditor groups spurned these terms and accused the government of repeating a pattern of not negotiating in good faith and sharing information. Economic forecasts were further clouded with Covid’s onset, with officials ordering mass closures and unleashing social spending and business support. In low income countries, the outsize informal sector does not fall under this safety net, and the choice is between starvation and illness, UNCTAD believes. Public and private debt combined is already 200% of GDP for the broad universe, as previously untied aid has fallen and relates to specific environmental and governance conditions. External debt is widely held commercially, and non-residents own double-digit portions of local bonds. Servicing costs roughly doubled to 10% of GDP the past five years, and trillions of dollars come due this year and next against the paltry estimated $20 billion bilateral pause the G-20 agreed mainly for the poorest countries. The first to formally ask was Pakistan in the next income category although it qualifies also for development lender concessional terms, and has also lost access to Gulf remittances and assistance. Outright relief is not on the table, and traditional facilities do not meet the scope and flexibility the unique health challenge requires. With increased Special Drawing Right (SDR) issuance also a non-starter with US opposition, the publication urges an overdue “new deal” starting with longer and more comprehensive standstills as a prelude to actual restructuring on a case by case basis. As a historic precedent it cites a 1950s conference on German war reparations, and targets $1 trillion in cancellation, At the same time through treaty an “International Debt Authority” would oversee the process, to reprise the 2000s push and fill a 75th anniversary gap left from the original Bretton Woods agreements. In an update also released in April the Bank for International Settlements (BIS) showed 5% higher cross-border lending through end-2019, although emerging market lines were up slightly. They were divided evenly between local and foreign claims in major regions, but short-term maturities less than a year at almost $2 trillion were half the former. The highest shares at 60% plus of the total were in China and Korea, while in Poland, Russia and Turkey they were below 50%. Austrian and Spanish banks have majority developing market exposure in global books, and US and UK ones tilt toward short-term credit. Untapped facilities came to $600 billion, one-tenth of the total stock, and the next installment will reveal if they were locked or used for virus lockdown.

The World Bank’s Dark Migration Lens

2020 July 3 by

The April World Bank Migration and Development report predicts that the “long and pervasive” COVID-19 wave will slash remittances 20% to $450 billion this year, although foreign direct and portfolio investment will fall even more, as the population is stranded and hardest hit by lockdown-related job and income loss. Average money transfer cost remains double the 3% goal and the pandemic highlights lack of health care access and a medical professional shortage that could be addressed with easier cross-border movement. Since the Spanish flu a century ago universal economic standstill is unprecedented, with the IMF forecasting 1-2% developing world GDP decline. Through the “lens” of sectors worst affected including tourism, retail, food and manufacturing low-skilled expatriate workers are at risk of widening the unemployment gap over natives after the difference in Europe was 5% during the 2008 financial crash. They are unable to return home with travel restrictions, as the wealth split grows with industrial countries and internal migration continues at over double the international pace. Containment has increased infection odds as governments round them up for camp and shelter placement, the publication points out. Remittances are historically counter-cyclical, but this time home and host countries suffer alike.  Low income ones have the greatest dependence at 9% of GDP, and this year’s drop is across all regions and “especially sharp” in Europe, Central and South Asia and Africa. At source Russia’s ruble is also down against the dollar, and Persian Gulf oil prices are at record lows. Even with a slight projected rebound in 2021 the sum will lag the level five years ago, as fees are stuck and may spike with disease quarantine service disruption. Providers are typically considered “unessential” and migrants often cannot pass due diligence for digital delivery. Basic healthcare availability is likewise skewed according to a survey of 125 countries where only 80 offer full local citizen scope.

Transfers to the Philippines rose at the same clip to $35 billion in 2019, and may now tumble 20-30% from Saudi Arabia in particular. Manila will allow workers to return to the Gulf and China to fulfill contracts, but they have been suspended and eliminated with drives like “Saudization.” Almost 1000 overseas Filipinos tested positive for Coronavirus, and crackdowns have extended to Singapore following a case spike in that community. In the CIS, Ukraine took in $15 billion from Poland, and the Kyrgyz Republic and Tajikistan got nearly 30% of income from nationals in Russia, often in construction. The Russia-Ukraine corridor is under the 3% expense target, with the lowest from Moscow to Azerbaijan. With airport shutdown Central Asian migrants camped out in terminals for weeks in unsafe and unsanitary conditions. In North Africa Morocco and Tunisia can expect 15-20% dips from Europe, as the Middle East has the largest forced displacement tally from conflicts in Syria, Iraq and Yemen. India and Pakistan totals will reduce 20% , and Sub-Sahara Africa faces the same magnitude leading to “further poverty and deprivation,” the analysis notes. Nigeria is the continent’s top recipient with a $25 billion in 2019, but fees from Ghana are the highest globally, and it is also vulnerable to capital outflows with a thin reserve cushion under that lens.

The IMF’s Pernicious Perfect Storm Tracking

2020 June 18 by

The IMF’s spring global financial stability snapshot published around the post-virus virtual meetings described an emerging and frontier market “perfect storm,” with record capital outflows from leveraged and low-rated borrowers inviting a restructuring wave. Global central banks have rushed credit and liquidity relief as their own financial institutions, including asset managers and insurers, are squeezed, as countries in the firing line roll out fiscal and monetary packages and consider exchange rate interventions and restrictions. The government bond stock with yields less than 1% doubled the past year to 80% of the total, as riskier corporate segments valued at  almost $10 trillion sold off across the board. US high-yield default prospects reached 10% as the market closed, as standard commercial paper and dollar funding also evaporated. Equities at overstretched levels were not spared, as earnings per share forecasts went negative. The MSCI index dropped 20% as commodity-producer listings in particular were abandoned with price collapse. By the end of March EMBI spreads were 700 basis points over US Treasuries, on a combined $100 billion in foreign fund outflows for the quarter. China, where the coronavirus bred, was an exception to tighter financial conditions as officials ordered credit support and investors continued to buy securities to match index weightings.

The IMF’s April World Economic Outlook predicted 3% GDP contraction this year, with a probability it could be double that figure with further virus spread and extreme containment measures. With this scenario emerging financial market instability will deepen and “permanently scar” bank balance sheets, the analysis warns. These “cracks” will also appear in developed markets with asset losses and bad loans and pressure low liquidity and profitability. The EM sudden stop and oil price crash is a harder stress test than in 2008-09 with increased leverage and reduced policy space. Big Gulf debt issuers are geared to hydrocarbons; interest rates are already low; and structural budget deficits in Brazil, South Africa and elsewhere are high. Foreign investors in turn are bigger owners of domestic stocks and bonds, and quasi-sovereign borrowers like Pemex will continue ratings downgrades. Shadow banks in China and India are in trouble, and trade finance has disappeared in African economies. Frontier market rollover needs are above $5 billion annually, with Zambia likely the first in regional defaults.

Currency intervention programs are widespread in major developing economies Mexico, Indonesia and Russia to tamp volatility, but longer-term adjustment is recommended after the viral outbreak subsides. Capital controls are acceptable if temporary and transparent, an endorsement reflecting a longtime shift from traditional orthodoxy as the Fund looks to offer its “integrated policy framework.” Sovereign debt managers in turn should prepare contingency plans to complement existing strategies that may involve “preemptive” commercial obligation rescheduling and restructuring. The G-20 has approved an official bilateral standstill still to be defined in detail as to non-Paris Club creditor participation. Multilateral cooperation is through the IMF’s $1 trillion in available nominal resources, but should also embrace home and host country financial regulation and medical trade, with essential supplies open to export and free from price controls to avoid more health complications, the review concludes.

Private Investor Associations’ Halting Healing

2020 June 11 by

First quarter emerging debt and equity market results were as grim as the global coronavirus swept through Asia with other regions now in the crosshairs, with investors dumping positions to cover portfolio losses elsewhere and fearing intertwined health, economic and financial disaster. The main indices showed double digit declines as key currencies depreciated by the same magnitude against the dollar; agriculture and metals joined oil in commodity collapse; and remittances, tourism and foreign direct investment halted along with portfolio inflows. Fund data estimated combined securities outflows in the $100 billion range for the period, a record in absolute terms and swifter reversal than during the US Federal Reserve taper tantrum five years ago and the 2008-09 world financial crash.

With indefinite supply and demand virus-related shutdowns adding to previously-predicted domestic demand and export weakness, economies are expected to contract across the fifty countries and the main MSCI and JP Morgan indices to be negative this year. Stocks have given back most of their gains the past two years, as sovereign and corporate defaults cascade. Frontier market issuers like Zambia have already signaled restructuring, and high-yield company non-payment is on track to double for 5% of the total. Both retail and institutional investors will continue to exit through active and exchange-traded funds. According to fiduciary and risk management guidelines, they must leave when local bourses curb dealing hours or countries limit foreign exchange access, as in post-pandemic cases throughout Asia and Africa. Rumors of widespread capital controls, formerly endorsed by the International Monetary Fund as a temporary emergency measure, reinforce private commercial pullout, as official sources scramble to plug the gap and provide disease help.

Dozens of countries are in negotiations with the Fund for rapid and standard facilities, and it may ultimately marshal most of its $1 trillion in reserves, Managing Director Georgieva pledges. The World Bank Group has headlined a multi-year $150 billion commitment, including through its IFC arm for trade finance and capital market development. Other multilateral and regional lenders, including new actors like the Asian International Infrastructure Bank (AIIB), are also weighing in with billions of dollars in infrastructure and social support. Increased bilateral lines come from aid agencies and central banks, with the Federal Reserve introducing a repo arrangement for emerging market counterparts to borrow against US Treasury bill holdings. Banks and fund managers, through industry associations like EMTA for debt, the Institute for International Finance, and EMPEA for private equity, have not begun to channel and organize their own response as individual members reel from the immediate calamity and longer-term asset class stress.

The emerging and frontier market allocation rationale has always been high risk-reward, with the prospect of eventual convergence toward advanced economy living standards aided by government and corporate institutional reforms and industry competitive openings. In recent years returns and growth have been lackluster, with stagnant productivity gains and currency and trade battles heightening business and financial sector controls and protectionist sentiment. This year, three decades after launch of the asset class, longtime observers were originally hopeful that economic model revamping and further integration, technology and sustainability pushes would herald renewed embrace within updated globalization. The Covid pandemic and foreign investor retreat have delayed but not scuttled this vision. Lockdown strategies, fiscal and monetary policies and central bank quantitative easing have all converged and globalized. Developing economies must be more wary of increased budget deficits and exchange rate pressure with interest rate reduction to revive confidence, and recognize the need to deepen government bond markets to facilitate primary and secondary buying. Building on these pillars and previous commercial and structural intentions, health interventions and international fund manager organizations working with the IMF can restore participation and performance foundations, so that 2020 may end as it began on an optimistic note.

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.