Latin America/Caribbean

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China’s Latin America Litter Litany

2019 March 17 by

China’s MSCI Index comeback, with double-digit gains through February, continues on strong foreign investor inflows. Morgan Stanley and Citigroup predict over $100 billion in allocation this year, even if “A” share weightings only increase incrementally. According to data trackers, around $10 billion went into equities in January, and the Shanghai exchange this week notched the biggest daily rise since 2015 and is up almost 20% for the first two months. Lunar New Year retail sales climbed only 8.5% on an annual basis, the worst performance since coverage began in 2005, and with US trade tensions the current account surplus was barely positive in 2018. However gross domestic product growth is expected to continue in the 6.5% range as the government again opened the fiscal and monetary spigots short of “flood-like” stimulus. It will likely widen last year’s 4% of GDP declared budget deficit, and total social financing hit a record RMB 4.5 trillion in January with a raft of new state bank facilities directed at small business in particular.

The enthusiasm sloughs off research such as respective Morgan Stanley and China Beige Book criticism that the economy is in “long-term decline “ and published national account numbers are “garbage.” It ignores the first offshore state company bond default in 20 years when Qinghai  Provincial Investment Group failed to pay $10 million due in Hong Kong, and stock exchange price-earnings ratios tipping again into double-digits toward recent averages. Retail investor margin loans have resurfaced as a catalyst, and any Beijing- Washington trade truce may prove short lived as President Trump extended the March negotiating deadline. With Venezuela’s eruption spilling over into neighbors, emerging market investors increasingly are wary about China’s large Latin American footprint as a new risk. Bilateral policy bank loans to Caracas totaled almost $70 billion the past fifteen years, according to a database compiled by the Washington-based Inter-American Dialogue. Internationally-recognized President and opposition head Juan Guaido pledged to honor outstanding obligations estimated at $20 billion for principal alone, and Ecuador as another major recipient just agreed on an International Monetary Fund program to be able to settle its own oil for credit ledger, but both contingencies could further erode Chinese financial system and fiscal discipline commitments.

In 2018, the China Development and Export-Import Banks lent over $7.5 billion to Latin American and Caribbean governments and state-owned firms, outstripping activity through the World Bank and Inter-American Development Bank. Venezuela took $5 billion, around two-thirds the sum, and Ecuador and Argentina, which received a record $50 billion IMF rescue last year, each got $1 billion. The Dominican Republic’s electric utility borrowed $600 million, with the regional sector focus as in the past on energy and infrastructure. The arrangements do not attach policy conditions but require Chinese contractors and equipment, as in Argentina’s railway and Ecuador’s earthquake reconstruction. In Venezuela its stake increased in oil output, as the Maduro administration announced the drilling of several hundred wells and a joint venture between the state monopolies CNPC and PDVSA.

Chinese facilities are on commercial terms, but in Ecuador’s case the interest rate was half the 11% through standard global bond issuance. With Venezuela’s additional funding last year, Beijing stipulated an end to a previous principal payment grace period, implying a country exposure limit even before the confrontation between National Assembly leader Guaido and incumbent Nicholas Maduro over presidential legitimacy. Elsewhere dams in Argentina were caught in corruption allegations, and a Bolivian one was halted after lack of local community consultation, the Inter-American Dialogue finds. These projects are under pressure to improve risk assessment and preparation, especially since they were rejected on environmental and social grounds by other development lenders. Latin America’s relationship to the multi-trillion dollar Belt and Road Initiative is also an open question, as Beijing emphasizes closer strategic areas geographically. Argentina and Ecuador reportedly wish to renegotiate loan terms, and Brazil’s new President Jair Bolsonaro campaigned on a platform of reducing oil company Petrobras’ Chinese bank ties. The big four state commercial banks at the same time have been more active in co-financing transactions and specialist funds, as the Asian International Infrastructure Bank also considers regional participation. The review suggests Chinese finance will turn more cautious, and investor sentiment as well, under near-term mounting losses.

Brazil’s Gentle Jair Jeers

2019 February 11 by

Brazilian financial assets extended their late year tear as President Jair Bolsonaro was sworn in January 1 with harsh condemnation of previous “socialism” and a series of executive orders eliminating alleged vestiges in the Agriculture, Education and Labor Ministries. Economic policy chief Guedes, trained at the free-market monetarist University of Chicago and a successful banker and think tank founder, has presented a wide ranging public finance cleanup agenda including fiscal and pension reform, tax simplification and statutory central bank independence. State enterprise privatization will return to the mix, with Electrobras and other utilities likely up first for partial sale. The social security package, covering 40% of government non-discretionary spending, has not yet been finalized and may still incorporate elements of former President Temer’s doomed proposals. Congress with 30 parties is back in session in February, and the new team estimates support from 300 deputies, short of the two-thirds required constitutional amendment majority. The budget deficit and debt/GDP ratios were 7% and almost 80%, respectively in 2018, with sluggish 1.5-2% growth due to continue on below target 4% inflation. The benchmark 6.5% rate will stay on hold as a new central bank chief enters in March. Currency strength around 3.6/dollar should further constrain prices, but may cramp exports as a slight 1.5% of GDP current account gap is projected for the year. FDI inflows continue healthy at 4% of output, with $375 billion in reserves offering ample short-term debt repayment. China takes one-quarter of mainly agricultural overseas sales, and President Bolsonaro campaigned on a tougher trade and investment line against Beijing involving “all-front pressure” in admiration of the US Trump administration stance. He pointedly did not invite Cuba and Venezuela to the inauguration, but also vowed to stay out of Western-backed climate and migration pacts.

Mexico under AMLO’s fresh direction also enjoyed an initial honeymoon on anti-corruption and drug prospects, and renegotiation of the North American free trade zone within tentative border immigration understanding with Washington over Central American asylum-seekers. However manufacturing and non-manufacturing PMIs dipped below 50 in November and December, as investment was off 3% in the third quarter. Inflation was stubborn above 4.5% with the policy rate at 8.25%, and investor confusion mounted on mixed energy overhaul and public consultation signals. AMLO scrapped the modernized Mexico City airport following an informal referendum, and at first refused to honor infrastructure bonds issued before proposing partial reimbursement. The government once again hedged the international oil price, and increased Pemex’s budget almost 20% within an overall 2.5% of GDP deficit and primary surplus. Sporadic shortages resulted from truck instead of pipeline fuel delivery at home to avoid gangs, and the extent of Pemex-private sector joint ventures is still unclear. The President imposed wage restraint, taking a 60% cut on his own, but civil servant unions protest and filed lawsuits against the move. Colombia’s President Duque likewise basked in the immediate afterglow after assuming the post with the same 2.5% of GDP fiscal deficit aim, before tax reform legislation was watered down to yield half of original revenue. Business and Treasury bond levies will ease, but the Venezuelan refugee influx with President Maduro’s disputed re-election is a worsening charge on regional coffers and diplomacy.

The Americas’ Migration Caravan Careening

2018 December 10 by

The Americas’ Migration Caravan Careening

With the recent US and Brazil elections in part fought on immigration policy the Washington-based Inter-American Dialogue and partners issued separate reports on Venezuela and Central America flight with original economic and financial recommendations alongside traditional diplomatic and humanitarian ones. Caracas’ rarely updated official statistics acknowledge inflation will exceed the IMF’s 1,000,000% prediction, as 2.5 million or more than 5% of the population have already left for neighboring or overseas destinations, especially Colombia and Peru. Decades ago the roles were reversed when more democratic and wealthy Venezuela was host to refugees from armed conflict and human rights abuses. The Colombian influx along the border is now 5000/day and they have been granted temporary protection and education and work access. An earlier wave was mainly trained professional, but the latest are poor and middle class citizens escaping widespread hunger, violence and economic collapse. With these conditions, an estimated $1 billion in remittances is literally a lifeline, an amount just above the $900 million bond repayment from the state oil company in October to avoid formal default and Citgo operations seizure following creditor US court judgments. Around 350,000 Venezuelans have sought asylum worldwide as persecution victims but the rest should not be deported under the Cartagena Declaration which allows broader circumstances, according to the analysis. Brazil Chile, Ecuador and Peru also authorize temporary visas and public services use, but asylum claims are badly backlogged and another system has yet to emerge to “regularize” status.

 Arrivals often have urgent food and medical needs which the UN and other donors are unable to fund, and sleeping on the streets without shelter aggravates their plight. Columbia has started to implement infrastructure and social support for its own internally displaced under the rebel peace accord, but cost and political resistance currently prevent extension to refugees. Caribbean islands in contrast never signed treaties or operate under foreign law, so Trinidad and Tobago and Curacao do not offer safe haven. The paper urges common processing standards and burden-sharing, and an immediate aid conference led by the Inter-American Development Bank which can mobilize novel private sector funding. It foresees pilot bonds in these host established emerging markets where local and foreign investors could receive refugee community utility income streams and tax incentives in possible structures. Venezuela regime asset seizure for corruption and mistreatment could also feature in the mix, and tap expertise from a dedicated World Bank program for targeting proceeds.

In Central America, and the Northern Triangle El Salvador, Guatemala and Honduras in particular migration overwhelmingly to the US has doubled to 4.5 million the past two decades. Insecurity due to crime and extortion is a chief driver as well as lack of formal private sector work given the commodity and unskilled labor-based economic model, a separate document argues. Nicaragua is again a source with battles between the Ortega government and protesters, but the regional flow may be in secular decline as increased deportations under stricter Trump Administration policy join with improved domestic business outlooks in Costa Rica, the Dominican Republic, Panama and elsewhere. The research advocates increased financial sector focus on this population from conventional banks to specialized credit providers and investment funds, so that an intermediary and product caravan matches the human one.

Latin America’s Smaller Election Turf Battles

2018 November 5 by

Election attention this year and next in major regional markets Colombia, Mexico, Brazil and Argentina has also prompted an investor scan of under the radar contests throughout less followed locations from Central America to the Southern Cone. Previously assumed outcomes are often in doubt as voters express desire for serious change against an anemic economic growth backdrop even with partial commodity export rebound. In Bolivia President Morales may run for a fourth term after the constitutional court cleared the way, with the opposition perennially divided. Growth may meet the 4.5% target at the cost of runaway credit expansion and dual fiscal and current account deficits. Loose liquidity has combined with an overvalued currency in the IMF’s view, but the 5%-plus budget and balance of payments gaps respectively eliminated public employee bonuses and international reserves. Government debt is 40% of GDP and the Morales administration continues to siphon state bank deposits for infrastructure and social spending. The Dominican Republic is gearing up for 2020 polls with President Medina in contrast facing legal hurdles to another run. Ratings agencies maintain sovereign “BB” grades with a stable outlook despite lack of fiscal reform momentum, since tourism and remittance-backed growth is in the 5% range. The island was added as a fractional component in JP Morgan’s local bond index and it recently switched Chinese diplomatic ties from Taiwan to the mainland to open a big foreign aid and investment channel. Energy-stoked inflation remains a threat with the central bank policy rate over 5%, and oil imports also contribute to a small 1-2% current account deficit offset by solid remittance flows from the US which should support the peso around 50/dollar.

Uruguay’s presidential election is this year, and second quarter growth was just half a percent on export and tourism fallout from Argentina’s crash, exacerbated by exchange rate overvaluation. Earlier drought hit agricultural output, and a railway connecting Montevideo with other key stops may not be completed as planned. Inflation will stay close to 8% through 2019, and despite a primary surplus the budget shortfall is 3% of GDP. Paraguay in comparison is on track to near 5% consumption and fixed-investment driven growth, at half its neighbor’s inflation rate at 4%. Costa Rica’s fiscal plan to lower the 70% of GDP public debt is under debate after an early year Moody’s downgrade. It would introduce value added and adapt capital gains taxes, and add individual and corporate income levies. Civil service wages may be capped on 3% growth, as the government resorts to stopgap borrowing to address strike grievances. Inflation is also 3% with currency depreciation as the central bank tries to prevent a fall to 600/dollar. Panama uses the greenback, and its MSCI frontier stock market component was down almost 40% through the third quarter. Canal volume was solid despite the global trade standoff, and the budget is relatively balanced as opposed to sizable deficits in previous years. Growth should come in at 4% with slowing construction, but the Cobre Panama project should go ahead after negative Supreme Court decisions complicating it amid the private banking reputation hangover from the “Papers” revelations which damaged regional political leaders.

Colombia’s Brimming Border Insecurities

2018 September 11 by

Colombian shares led Latin America with a 10% gain through July, as President Duque took office on a pledge to rework the FARC rebel peace pact, as members of their new political party won parliament seats. He refused to consider a similar accord with the rival ELN until they abandon violence, as his sponsor former President Uribe was forced to resign from the Senate to face charges of aiding paramilitary gangs. President Santos finished his term with abysmal opinion ratings on perceived guerilla negotiation economic policy mishandling, with growth stuck at 2-3% on a chronic current account gap and public-private infrastructure partnerships slow to materialize. However before leaving he granted temporary residence and work permits to half a million Venezuelans roughly doubling the internal population, and covered health costs while appealing for international assistance. The US chipped in $60 million for humanitarian support to the region now hosting 1.5 million Venezuelan refugees, with experts predicting the number to double as President Maduro further squeezes the opposition and economy after narrowly escaping a drone attack. The assassination bid delayed new currency issuance as existing denominations cannot keep pace with estimated 1,000,000% year-end inflation, according to the IMF. The government long ago stopped updating statistics, but the fiscal deficit may be 30% of GDP and foreign reserves may be totally exhausted beyond minimal external debt and essential import payments. The sovereign could be removed from the JP Morgan benchmark index on both default and future tradability risks, as existing US Treasury Department curbs could imperil restructurings for new paper. Any workout will bump against parallel sanctions against Russia’s state energy giants with controlling stakes in oil fields, as well as Chinese bilateral lending in the $50 billion range. An IMF program is off the table since the socialist regime renounced relations over a decade ago, although Colombia with a backup credit line has requested a dedicated refugee facility which could partner with the World Bank’s concessional middle-income country pool for this purpose.

The UN Refugee agency urges that designation so that asylum and protection treaties signed by neighbors apply, with the 30-year old Cartagena declaration designed for Central America’s war exodus potentially a cross-border cooperation model. Latin America’s safety nets and infrastructure are more advanced than in other developing regions hosting displaced groups, with Colombia also able to share funding and service experience from handling its 15% relocated domestic population. Chile and Ecuador could also be eligible for the World Bank’s discount window, and the Inter-American Development Bank could establish an umbrella fund to meet objectives in a comprehensive framework, as recommended by the proposed Global Compact on Refugees. The US Agency for International Development head recently visited Colombia to underscore crisis priority, as the new unified Finance Corporation moves through congressional passage to modernize the bilateral toolkit. OPIC’s investment ceiling will double to $60 billion as it is equipped to take equity stakes alongside existing debt and risk guarantees. It could help launch refugee-specific pilots to prepare for a time when Caracas’ leadership will shift ideological for diplomatic and investor solidarity as stagnation and starvation drone on relentlessly.

Haiti’s Refueled Rage Resignation

2018 August 21 by

Haiti’s Prime Minister Lafontant resigned before a legislative no-confidence vote as violent protests erupted over a 40% fuel price hike President Moise’s government introduced under the six-month old IMF staff monitored program. The unrest is estimated to cost 2% of GDP, equivalent to projected growth improvement this fiscal year, as the restored police force with the exit of UN troops last year struggled to quell the rioting. Subsidies take one-tenth of public spending and the wealthy receive a large share, and adjustments intend to free cash for social and infrastructure needs. Venezuela’s $300 million bilateral aid for these purposes disappeared with its economic catastrophe, and the President has been unable to deliver on the promise of “shovel ready” projects since winning office with only 20% electoral turnout. The petroleum discounts also encouraged smuggling to the Dominican Republic on the same island, and the President’s party could not beat a censure motion in parliament with its political weakness. He also vowed steady electricity supply, and the Fund in a June visit noted reduced state monopoly losses with the budget deficit shaved to 2%of GDP despite Hurricane Matthew rebuilding costs. Double-digit inflation was already forecast before subsidy withdrawal, and the current account gap will rise on higher capital and consumer goods imports amid flat FDI and remittances. Officials have backtracked on the original plan to maintain tourism inflows in particular at risk if commercial destruction continues. They are expected to unveil a smarter package in content and communications to pave the way for renewed IMF credit, after the previous facility expired with prolonged presidential poll standoff. Haitians granted temporary US protection after fleeing in the aftermath of the 2010 earthquake are due to be deported soon, and the Trump Administration has not targeted the government for additional aid like in the Northern Triangle of Central America where families escape corruption and security threats in waves. Nicaragua may join El Salvador, Guatemala and Honduras at the epicenter as President Ortega unleashes a crackdown on opponents including the church claiming human rights abuses and unpaid social security benefits.

Cuba is contending with its own popular backlash as it moves to recognize private property under a constitutional redraft, but published hundreds of pages of new rules for business operation and taxation. The non-state sector comprises thousands of restaurants, taxis and other product and service providers that employ 15% of the work force. Owners must now open a special bank account for income tracking, and additional bureaucracy will slow consolidation trends that could potentially pose competition to government companies. A non-Castro is at the helm for the first time since the revolution but has yet to articulate a detailed economic platform, as technocrats appear sidelined from major posts. Both Port au Prince and Havana after absorbing aid blows from Caracas will reassess relations with Brazil after October elections there, with the major candidates offering thin foreign policy views. Former President Lula, who championed their cause, remains in prison on embezzlement and the contenders are focused on law and order and economic recovery issues at home, after a massive truckers strike and indicators pointing to possible recession repeat after a fresh team tries to lift the air of resignation.

The East Caribbean’s Test Tube Tsunami

2018 August 14 by

With continued economic and banking strains the past decade in the six island East Caribbean Currency Union, with a joint central bank and currency peg, an IMF working paper applied stress tests to model major shocks on the interconnected financial system, which revealed that a regional crisis could trigger the collapse of half its lenders. Bad credit is down from the peak but still one-tenth the total and provisioning lags while good deposit growth has created excess liquidity. The sector averages 150% of GDP, with St. Kitts and Nevis and Montserrat at double the proportion, and Grenada, Dominica and Antigua and Barbuda at or below the norm. The 35 institutions are evenly split between local and foreign-owned, mainly from Canada. Interbank exposure has dropped in recent years, but sovereign debt holdings are 15% of assets in some members and close ties are common with non-bank credit unions, insurers and pension funds. In St. Vincent and the Grenadines they control 10% of deposits, and wholesale withdrawal carries risk. These relationships are not simulated in the disaster scenarios with the paucity of information and data, and the exercise also excludes global groups that would depend on their parent for support in the absence of separately-capitalized area subsidiaries. The East Caribbean Central Bank has limited lender of last resort capacity and deposit insurance is lacking. After calculating isolated bank failure and severe individual country and regional output contraction that could result from tourism scares or natural disasters, the research finds that 10 institutions would be insolvent in the direst case, as undercapitalization and heavy public debt portfolios play out. The results are an additional warning to foreign frontier bond investors after serial restructurings in Grenada, and planned haircuts and swaps now in neighboring Barbados. If an IMF program accompanies the workout as in Jamaica, the process can be further complicated and lengthened with authorities there conducting two exchanges over the course of consecutive arrangements. In the broader region, calls have circulated for sovereign wealth fund formation to act as contingency buyers, as the latest Invesco survey of the field identifies 2% emerging market debt allocation. It points out that equity and alternative investments in turn are fast expanding categories, as managers look to increase returns after mixed records the last decade.

According to fund trackers retail and strategic investor bond outflows accelerated at the end of the first half, and are larger than during the Taper Tantrum five year ago. ETFs are 15% of the former, and dedicated manager cash positions remain steady at under 5%. Even though sovereign wealth vehicles as a group may level off in the near term, Norway and others maintain big exposures at 15% of the fixed income bucket. Foreign ownership of local bonds stands at a 25% average, and frontier name participation in Central and Latin America, like Costa Rica and Ecuador, may be stretched in the view of major market-making firms. In mainstream instruments technical indicators suggest excess weightings in Mexico, Russia, South Africa and Indonesia as the respective regions endure practical stress tests the IMF may help cushion in financial and research terms.

 

 

Argentina’s Rough Repeat Reentry Paths

2018 July 13 by

Argentine stocks and bonds tried to recoup big losses at mid-year after turning again to the IMF for a 3-year $50 billion standby program, and gaining readmission to the MSCI core index starting next May following capital market modernization steps. Massive portfolio outflows began in April to shake the peso, and the central bank proved unable through intervention and interest rate hikes to halt double-digit decline against the dollar and its head resigned with Fund recourse. Local and foreign investor lack of monetary policy confidence was apparent for months after inflation persisted at above target 25% and a neutral to easing stance was pursued nonetheless. Fiscal credibility was also in question with likely overshoot of the 3% of GDP deficit goal on spending plans ahead of 2019 elections, with President Macri widely expected to eye a second term. With access to multilateral credit lines, including from the World Bank and Inter-American Development Bank, he can meet the $20 billion external financing hump over the next year and a half, but near-term growth is set at less than 1% under ambitious budget and exchange rate blueprints. They envision a primary surplus and subsidy and provincial transfer cuts, and regular $5 billion incremental boosts to $25 billion in net reserves while steering inflation toward 20%. Central bank autonomy will be reinforced under new legislation, and the Treasury will conduct continuous currency auctions as domestic bond LEBAC stock is reduced. The policy rate will rise to 40% by year end for peso stability and then can relax for slight depreciation against the dollar, assuming pass-through inflation is on track toward moderation and fourth quarter union wage settlements do not upset the mix. Austerity will combine with agricultural drought for technical recession, and Brazil’s outlook as a leading export destination has soured at the same time, with the pre-election 2018 growth forecast recently halved to 1%. A baseline scenario projects no commercial borrowing except through public-private infrastructure projects, as buybacks retire more expensive debt. The current account gap will remain high over the medium term, but level off at 4% of GDP with import compression, according to initial calculations.

Brazil as well fell from grace as stocks went negative through May, as the central bank defended the real through swaps after a long respite and the benchmark rate cutting cycle bottomed. A national truckers strike over increased fuel costs tested investor patience over smooth inflation and political transitions. A large fiscal adjustment is need to restore the primary surplus and social security solvency and cap ballooning public debt, and Lula whose administration bequeathed the mess, remains the presidential favorite while in prison on a corruption conviction. Right winger Bolsanoro and leftist Silva are next, each with 15% in opinion surveys, but “none of the above” respondents are an unprecedented chunk. The candidates attack establishment taint and pledge wholesale reform but have been careful not to propose draconian spending curbs and state enterprise privatization to appeal to swing and young voters. In the balance of payments FDI at 3% of GDP has more than covered the current account hole, but a market-unfriendly election result could interrupt the inflow and unleash corporate remittances to tarnish that silver lining.

 

 

 

 

 

Barbados’ Motley Default Crew Crucible

2018 June 25 by

After her party’s sweeping election victory taking all seats in parliament in a repudiation of the government’s economic mismanagement, including failure to modernize sewage treatment as it leaked into tourism spots, Prime Minister Motley bowed to the inevitable with an intended IMF program and debt restructuring. Last year’s emergency fiscal plan showed meager results as ratings agencies kept the near default CCC sovereign grade, and commercial banks were forced to raise bond exposure on incremental central bank deficit financing withdrawal. Two thirds of the debt is domestic, but international bond prices almost halved following her announcement with the likelihood of a haircut coupled with thin liquidity. Analysts shifted course after originally predicting the Jamaica model would be followed and spare foreign obligations. Its bonds and stocks have languished too this year, with the latter down 5% on the MSCI frontier index. Trinidad’s component in contrast was up 10% through May on higher energy export value, although it is at risk from Venezuela’s mass exodus with Tobago just a short boat trip away. Both neighbors are at least growing unlike Barbados, where output shrank half a percent on an annual basis into the poll period. The Fund in its latest Article IV report projected 1% medium term expansion with the reported 135% of GDP gross debt, reserves at less than two months imports, and “lingering uncertainty.” The current account gap remains at 2-3% as planned hotel and oil facility privatizations are delayed. The 2017 adjustments were geared toward tax increases while state enterprise reform lagged, according to the review. Government borrowing was almost half of GDP the last fiscal year and bank minimum allocation was hiked to one-fifth of deposits in January as private sector credit was flat. Bad loans are in high single digits and profitability is minimal, but capital adequacy at 20% of assets is a shock absorber. The public wage and pension bills are crushing and job and benefit cuts are overdue and social safety nets must also be better targeted in the future, the Fund observed. Fifteen companies and funds receive most of the transfers which are almost 40% of total spending, and the national social security scheme runs large arrears and has disproportionate government bond holdings.  The insurance sector is stagnating, offshore business registration should be more closely monitored, and the longstanding currency peg may be in question with evidence of overvaluation, it added.

The Caribbean does not feature as a preferred venture capital destination in the latest industry statistics and rankings compiled by EMPEA, which had Asia and Latin America ex-Brazil in the top 5 spots. The former took 90% of Q1 $7 billion fundraising, and disclosed transactions for the period were a record $17 billion. E-commerce deals were one-third the total, with fintech just behind as a popular play. Impact investment vehicles gathered $200 million through a half-dozen offerings, although 80% of LPs surveyed specifically weigh environment and social factors in allocation. Emerging markets represent one-tenth of global subscriptions and 15% of company activity, while private equity penetration rates remain negligible at under 0.5% of GDP across the geographic range.

 

Venezuela’s Refugee Wave Window (Financial Times)

2018 May 24 by

Emerging market fund managers still investing in Venezuela are no longer just focused on debt restructuring scenarios heading into May elections in the wake of self-inflicted economic collapse, as over 1 million migrants and refugees have already fled to neighboring countries to roil their financial markets with prospects of millions more to come, according to a study by the Washington-based Center for Strategic and International Studies. Over 500,000 Venezuelans are in Colombia in advance of the presidential race there, 250,000 each are in Ecuador and Panama, and 150,000 in both Chile and Peru, and 50,000 in Brazil. Latin American stock markets outperformed rival regions on the MSCI index through the first quarter, but the influx’s humanitarian and fiscal costs have yet to fully register.

The UN refugee agency officially declared a crisis and called on regional governments and international development lenders to exercise individual protection and share the funding load. The Inter-American Development Bank and World Bank are gearing up for infrastructure and social support, but established  public-private sector arrangements like the cross-border Latin America Integrated Market (MILA) stock exchange between Colombia, Chile and Peru could also create specific capital market instruments to foster refugee employment and business creation upon arrival.

Colombia has an estimated 50,000 Venezuelans daily pouring into border towns like Cucuta to meet daily food and health needs or to stay indefinitely. In addition, it has an unresolved legacy of internal displacement as the peace accord negotiated by outgoing President Santos with the guerilla FARC goes into effect, under the general principle of exchanging army demobilization for peaceful civilian return with promised job training. However the fiscal rule in place limits the deficit to 3% of GDP this year, and the front-runner in the end-May presidential contest, Ivan Duque from ex-President Uribe’s party. has signaled a harsher stance toward former rebels. The current account gap is at the same level placing pressure on the sovereign rating, despite higher foreign direct investment in the oil industry. Growth and inflation are in the 3% range, as central bank easing is set to continue. A second round runoff is predicted with more centrist opponents who have tried to co-opt Duque’s business-friendly platform, and forced migration will be likely sidetracked as a priority during the leadership transition as headline movements demand action.

Chile is host also to Haitians who fled the poorest nation in the hemisphere after the 2010 earthquake and subsequent hurricanes, and moved further south after deportation efforts in Brazil in particular. It has traditionally attracted seasonal low-wage workers from neighboring countries, but a permanent presence has posed cultural and labor market challenges. President Pinera, in his second term, promises to revamp the economic model in a free-market and socially-responsible balance, in part to salvage his popularity which previously suffered under an image of wealthy elitism. Refugees outside Santiago seek employment in the copper mines with keen competition and few protections, and like the middle-class students protesting under the previous administration seek wider university access for advanced education and skills. With 3.5% predicted GDP growth and negligible inflation, the solid investment-grade credit rating is intact, but Chile will be a test case for a future “melting pot” demographic and productivity engine.

Peru was the Andean stock market champion with a 10% first quarter gain as President Kucyzynski, implicated in the continent-wide Odebrecht scandal, resigned and was replaced by a technocrat successor and cabinet. Amid the political jockeying before his departure, plans to deepen MILA exchange ties, originally described to MSCI when it threatened frontier index demotion, were shelved and asset managers expect new President Vizcarra and his team to restore momentum. Ecuador takes in the Pact’s largest Venezuelan group after Colombia, and intends to reenter the MSCI frontier gauge and consider new local and global financing sources as President Moreno breaks with his socialist predecessor on fiscal discipline and investor compatibility. He plans to again tap global bond markets and renegotiate Chinese debt terms, and may even consider an IMF program to smooth fundamental and structural shifts including on refugee absorption.

As the international aid and diplomatic communities mobilize to address the systemic Venezuelan exodus, financial markets looking for fresh impetus could act with the same urgency to adapt solutions. On the MILA, listed companies could readily issue securities aimed at local and overseas buyers to expand refugee-related capital, hiring and supplier relationships benefiting host economies. Unlike governments and development lenders, this platform could  generate longer-term commercial flows so far absent in the” burden-sharing” mix, and offer a more optimistic prosperity prescription to shape the regional debate