Iran’s Certified Share Momentum Doubts

2017 August 10 by

The Tehran Stock Exchange rebounded slightly for a 3% gain through July as the Trump administration, after putting Iran “on notice” for possible cheating, certified short-term compliance with the six-nation anti-nuclear agreement at the same time new congressional sanctions were passed to punish companies and individuals involved in its ballistic missile program and Syrian Assad regime support. Earlier the Treasury Department had ordered asset freezes against leaders and organizations accused of “malign influence” in the region. Washington’s actions came against the background of hardliner backlash by the Revolutionary Guard ( IRGC) and religious conservatives against President Hassan Rouhani’s easy re-election win. His brother was arrested on corruption allegations which he vehemently denied, after the President blasted the IRGC’s economic and political dominance as “government with a gun.” Its leadership in turn savaged a breakthrough $5 billion gas deal with France’s Total and China’s CNPC as a “conspiracy” against domestic competitors. The Guard also viewed another waiver in June of Financial Action Task Force anti-money laundering measures as infringing on foreign policy and security as officials pass laws and rules to ensure bank adherence. The country remains on the blacklist but smaller European and Asian lenders have resumed correspondent relationships as they try to puzzle out growth and policy trends into Rouhani’s next reform act, thus far offering confused signals.

GDP growth was a torrid 11% for the fiscal year ended in March with oil export reopening and the non-oil sector up half that pace. according to official statistics. The IMF had estimated real growth rebound over 6%, and to further promote non-commodity sales the government  earmarked a $500 million credit line and signed agreements with Korea’s and Turkey’s state trade banks. EU exports were five times higher than last year from January-April at EUR 3.5 billion, concentrated in iron and steel products with Germany as the leading buyer. China remains the main energy importer and Iran is an infrastructure project target and crossroads under Beijing’s Silk-Road straddling Belt and Road scheme. Chinese state companies are active in mining and transport, and its cars and goods flood Tehran and other cities. The Export-Import Bank extended a $1.5 billion railway loan for fast service between the capital and Mashad, and national network electrification is set by 2025. The country has forged new bilateral commercial pacts with France, India, Australia, Pakistan and South Africa and a port deal with Afghanistan to diversify and deepen traditional ties.

Next fiscal year growth projections are in the 4-5% range, but the expansion will still be unable to overcome lengthy recession from the UN sanctions period and crack double-digit unemployment. Inflation fell below 10% but crept up again to that level in June, on money printing to aid ailing banks, higher energy cost with subsidy reduction and real estate price recovery after years of doldrums. Modest exchange rate depreciation is another factor, and the government continues to delay unification between the controlled and parallel rates for fear of further inflationary fallout. The central bank benchmark interest or return rate under the Islamic system is steep at 15%, reflecting tight monetary policy but also choking industrial investment, which has prompted a business community outcry.

However cuts could trigger another inflation spike when the 40% memory of the early Rouhani Administration is not too distant, and will not unclog the lending spigots as banks grapple with a 12% understated nonperforming ratio. Central bank head Valiollah Seif warned executives before the election that a banking crisis could stymie economic integration and modernization progress since sanctions relief. The March bad loan total was almost $35 billion and will swell as international accounting standards enter into force as of July. The government is debating cleanup alternatives, and may first opt for consolidating leading state-controlled banks as in previous troubles. The stock exchange should see additional offerings with this strategy, such as with the recent $25 million flotation of a Bank Mellat subsidiary. Both local and foreign investors tend to shun this lagging sector, despite bargain valuations against the average six times price-earnings ratio. New London-based funds emphasize consumer goods and e-commerce listings with the well-educated young 50 million population, but a share stumble may be unavoidable without certified management and policy changes in second Rouhani term financial system foundations.





Syrian Refugees’ Turkey Turnkey Track

2017 August 3 by

A three month study of Syrian refugee entrepreneurs in Turkey, conducted by nonprofit research groups with Canadian support and titled “another side to the story,” estimates over 10000 formal and informal startups the past five years with the former accounting for almost $350 million in investment. Three-quarters are “micro” with fewer than ten employees, with average annual revenue close to half  a million dollars dominated by retail and wholesale trade. Owners are well educated with 70 percent holding at least university degrees, and the same portion intends to keep existing operations after the war ends. Language and inability to access credit or official procurement bids are major barriers, but most of the 250 companies surveyed are positive about the future with asset purchase and expansion plans. Almost two million refugees are working age and 90 percent are in urban areas, with the paper focused on Istanbul and the border town of Gaziantep. Public spending for the crisis, mostly funded internally, has been under 1 percent of GDP, and the influx spurred offsetting consumption and infrastructure contributions. Humanitarian exports quadrupled Gaziantep’s trade to $400 million from 2011-15, as prices fell due to increased immigration providing underground labor. While Turkey’s economy is almost ten times the size of other refugee hosts Jordan and Lebanon combined, integration has been “challenging” with Syrians getting only round 15 percent of  75000 authorized foreigner work permits in 2016, with the remaining hundreds of thousands in informal jobs with minimal pay and protection. From January-April 2017 675 new companies started and the Syrian share is 40 percent of all non-resident control, with the southeast and western cities emerging as hubs, according to the leading association of business executives. Owners overwhelmingly found registration “easy” even though only 10 percent have Turkish partners. One-quarter are in manufacturing where the country is competitive in food, machinery and textile exports. Female entrepreneurs concentrate in services including catering, tourism and translation. The typical stay before launch was almost two and a half years, and 70 percent previously ran operations in Syria where they reported three times more staff.

Over 80 percent have home country passports instead of “temporary protection” status that facilitates internal and external travel.  One third of owners speak no Turkish, and three-quarters use the internet for marketing. Almost all respondents had bank accounts but they reported difficulties securing guarantees and credit cards and few took out loans, as compared with 40 percent of all small and midsize firms in national statistics. The vast majority do not receive development or training help from outside organizations, despite initiatives by chambers of commerce, the UN and World Bank. Legal-accounting and technology advice are priorities, but skilled employee availability is sufficient although 15 percent worry about retention with resettlement often shifting personnel. Joint arrangements are increasingly considered permanent as firms envision a long-term presence should peace and reconstruction loom anytime soon. The report urges higher formalization, work permits and  company refugee quotas and a dedicated network of language and professional instruction. It recommends a senior executive mentor program and outreach to the Syrian diaspora in the region and overseas to stimulate venture capital relationships despite frayed diplomatic ones.


Tunisia’s Nascent Neighborly Nod

2017 July 21 by

Tunisian shares turned slightly positive on the MSCI Index at the half-year on the second anniversary of a bloody beachside tourist attack, as the IMF praised the new unity government’s “corrective action” intent in its first checkup on its 4-year $3 billion facility, and strengthened security internally and along the Libya border preempted further incidents. Officials traveled  to Washington to thank the US Defense and Treasury Secretaries for support, with the message that Libyan reconstruction may also be in the frame in selected areas with civil war and ISIS presence waning. At the same time the Fund report underscored the advanced political transition despite economic lethargy and social discontent, with all coalition parties including the labor-union dominated wing pledging reform  and stability to redress budget and current account deficits, state bank dysfunction and runaway youth unemployment amid high university and training qualifications. This year’s GDP growth forecast was reduced to 2.5 percent from the original 3 percent due to fiscal and monetary tightening countering better phosphate exports and tourism. The medium-term aim is to reprise the 5 percent level existing under the previous authoritarian regime, which followed competitive policies tinged with insider corruption now under investigation and subject to asset recovery efforts. A controversial amnesty law would allow reported billions of dollars to be returned at minimum penalty and separate deals have already been negotiated with business executives close to ousted President Ben Ali allowing them to resume local activities. The legislation could be a major issue in upcoming municipal elections, which will also focus on the rural-urban and interior-coast income divide. The budget gap will again be 6 percent of GDP as wage increases in the bloated public sector overtake lower energy subsidies and a one-time 7.5 percent corporate profit charge. Pension fund arrears continue to mount, and financial transactions have also been hit by a special tax.

Inflation should stay under 4 percent despite near 25 percent currency depreciation since the end of 2015 amid double digit current account holes. The benchmark interest rate was lifted 75 basis points to 5 percent, and the central bank reintroduced foreign exchange auctions to bolster market determination. Civil service cutbacks are in store, and new performance contracts should pare state enterprise contingent liabilities. The three big government banks have been recapitalized with fresh management but the bad loan ratio is still 15 percent and resolution procedures are outdated, according to the IMF. An inclusion strategy embraces micro-finance, credit bureaus, digital services and small business access, and bond markets are a priority with yield curve development. The revised investment code will create a one-stop shop for international projects and public-private partnerships, but commercial climate rankings are “poor” on the World Bank and World Economic Forum surveys. Official debt is to settle at 70 percent of GDP by end-decade, but “slippages” have already endangered the goal and “unsustainable” government spending and “inefficient” legal and regulatory regimes impede overall transformation. After a EUR 850 million Eurobond, Qatar loan rollover, and donor pledges external financing is in place until early 2018 when additional sovereign issuance is scheduled which may no longer carry a third part guarantee if revolutionary progress can be consolidated, the findings suggest.


The GCC’s Family Fight Fractures

2017 July 21 by

Qatar shares were down 12 percent on the MSCI index in the first half with banks abandoned in particular as Bahrain, Saudi Arabia and the UAE suspended commercial and diplomatic ties with a US nod due to alleged terrorist and Iran sympathies. The Gulf neighbors issued a list of demands to reverse course, including shutdown of the Al-Jazeera TV network, as royal family members scrambled abroad to press their cases in world capitals. Kuwait, which earlier had pulled out of the joint dollar peg, offered to mediate the dispute as economic and monetary union progress remained on hold with hydrocarbon export price slippage. Sovereign bond yields rose 50 basis points on the rupture as the Al-Thani family moved to reassure the 2 million population that the wealth fund with $300 billion in assets would maintain normal trade and public services and World Cup 2022 infrastructure projects. However essential imports have come by Saudi Arabia’s land bridge and Dubai’s Jebel Ali port as Qatar Airways was banned in the region. The investment authority previously had taken over equity stakes in a half dozen major conventional and Islamic banks, which now may be sold if the crisis lingers, along with flagship real estate holdings in Europe including London’s Shard tower. The 2009 lifeline to Barclays Bank in the UK has also come under scrutiny as its top executives may have misrepresented the deal, according to fraud investigators. They may also consider local misconduct signs in the transaction, after the corruption cloud was finally lifted over the World Cup bid following years of FIFA probes which resulted in mass resignations. US Secretary of State Tillerson, with close personal connections to leaders from his Exxon-Mobil CEO tenure, has also tried to bridge the divide which may extend beyond the short term and place GCC integration in indefinite “limbo,” in the words of UAE’s foreign minister. Tiny Oman has also been put in the crossfire, with its MSCI component off almost 20 percent, as it allies with neither camp in the wake of a Fitch Ratings outlook downgrade to negative with a forecast budget deficit at 12 percent of GDP this year with recession. New taxes and energy ventures should support the “A” rating, but it will follow OPEC supply restraint as bank liquidity is squeezed, the agency noted.

Saudi Arabia in contrast was up 5 percent at mid-year after MSCI mooted a chance for core universe entry in a future review on greater non-GCC institutional investor access. Enthusiasm also accompanied the King’s formal announcement of Prince Mohamed bin Salman, architect of the 2030 reform plan and Aramco proposed IPO, as heir. He is younger generation but a conservative foreign policy advocate who has backed Qatar’s isolation and the Yemen civil war intervention against Iran-aided Houthi forces. Aramco underwriters have already been tapped and foreign listing venues could include New York, London and Hong Kong. A 5 percent chunk will be floated and the Prince estimates capitalization at $2 trillion, although experts believe valuation will turn out to be $500 billion lower if full accounts are disclosed. The frenzy will be at the opposite extreme of syndicated loans, which have fallen 65 percent to under $20 billion, a 4-year low, as external bond issuance tries to crack the traditional fold.


The Arab Spring’s Seasonal Exam Markdown

2017 June 10 by

The IMF completed reviews on the second post-Arab Spring round of programs with Jordan, Tunisia and Morocco, as Egypt awaited a turn after signing its agreement six months ago with stock markets flat to negative reflecting the lackluster reports. Jordan’s economic plight remained “challenging” with 2 percent growth, 4 percent inflation and over 15 percent decade-high unemployment. The fiscal deficit fell to 4 percent of GDP last year, with state utility company losses down, but public debt rose to 95 percent and the current account gap swelled above 9 percent. Geopolitical and security tensions still “impinge” on the medium-term investment outlook, despite additional donor support for refugee hosting, now able to be channeled through a World Bank-led $1 billion concessional platform. The Fund urged further moves against tax exemption and evasion and toward public-private partnerships to reduce budget costs and strengthen infrastructure efficiency. The central bank has hiked rates with foreign reserves slipping below target, as work continues on deposit protection, insurance, bankruptcy and other rules to bolster the business climate. Tunisia also was scolded for its runaway government wage bill elevating debt/GDP to 65 percent as growth doubles to a meager 2.5 percent, “too low” to attack youth joblessness and interior region poverty. The 5-year development plan aims to restore stability and tackle structural barriers through corruption and state bank and enterprise cleanups. Exchange rate flexibility and pension overhaul are on the agenda, and the country could benefit from the G-20 Compact for Africa initiative under outgoing host Germany. At home protests have erupted over proposed “economic reconciliation” legislation that would grant amnesty to illegal fund holders in return for declaring and investing the proceeds, as a “second revolution” has sparked occupation of key mining sites triggering military protection. The new US-trained Finance Minister has yet to win additional backing from Washington, as preparations for the joint commercial summit inaugurated last year stay on hold under the Trump administration.

For Morocco’s $3.5 billion arrangement risks are to the “downside” despite an expected growth rebound to 4 percent with unfinished fiscal and banking sector consolidation. Inflation is in the 1-2 percent range, and corporate and household deleveraging cut credit expansion to 5 percent, as the bad loan ratio neared double digits. Concentration with leading banks chasing the same state company borrowers and cross-border exposure throughout Sub-Sahara networks are major concerns, as the construction industry also heads into a weak period. The current account deficit should be 2 percent of GDP this year with good phosphate exports and tourism and remittance inflows. After preliminary fuel subsidy rollback, budget efforts have stalled and the Justice and Development party after securing an extended mandate in October elections intends to pursue decentralization, civil service salary caps, and better public enterprise governance. Parliament is set to approve provisions for bank emergency liquidity assistance as formal supervisory understandings are forged in the respective Francophone zones with a Moroccan presence. The currency peg is gradually shifting to a fluctuation band, and “e-regulation” is at the center of a campaign to lift the number 70 ranking in the World Bank’s Doing Business publication. Small firm credit access is a priority, and new collateral procedures are designed to unblock traditional financial establishment hesitation, according to the latest Article IV survey.


Iran’s Rouhani Economic Resistance Rut (Asia Times)

2017 May 13 by

After a 5% loss from December to end-March, the Tehran Stock Exchange retraced the previous 79000 point level ahead of May 19 elections pitting the incumbent President Hassan Rouhani against a half dozen approved candidates Hard-liners Ebrahim Raisi, a protégé of Supreme Leader Ayatollah Khamenei, and Mohammed Baqer Qalibaf, the capital’s mayor since 2005 and a contender in the 2012 contest, are positioned as the main rivals after the ruling clerics rejected former President Mahmoud Ahmadi-Nejad’s surprise application for another term. In a televised debate these rivals castigated rising unemployment, officially up 1.5% to 12.5% the past year despite Rouhani’s international nuclear deal for sanctions relief, which restored oil exports to 2 million barrels/ day for estimated 4.5% growth according to the IMF. Their campaign platforms draw on the Supreme Leader’s “resistance economy” concept, spurning Western foreign investment and advocating self-reliance and higher cash transfers to the poor and struggling middle class.

Rouhani has acknowledged slow improvement in living standards since the accord went into effect in early 2016, and lapses in bank and state enterprise restructuring to boost competitiveness. His description at the time of the “golden page” in history was overstated and may be further tarnished should President Trump formally withdraw the US from the six-nation pact, but the stock market is betting he and his team could redouble competitiveness and integration efforts with extended tenure. However even with victory these reform wishes could again be misplaced by populist backlash magnified by the race, as the growing tab to rescue government banks and companies again resuscitates recession fears.

Raisi was appointed to head the country’s biggest charitable foundation, with $15 billion in assets in charge of the holiest shrine in Masshad and close ties to the Revolutionary Guards still under Washington’s commercial and financial prohibitions. An Islamic law scholar, he also spent his career working with the security forces and was a member of the notorious “Death Commission” two decades ago which killed thousands of political prisoners. Supporters tout his experience as head of the religious endowment for charting economic direction that is “pro-people and production” and avoids “social shocks,” according to recent statements. In the past four years of Rouhani’s term the Guards have taken over nominally “privatized” factories and properties, and continue to control large chunks through affiliates of leading stock exchange listings. Analysts attribute their dominance to the “corruption, mismanagement and lack of regulation” which continue to place Iran in the lower tier of the World Bank’s “Doing Business” ranking.

Raisi has seized on the rich-poor gap and 35% youth joblessness to call for a tripling in budget cash handouts, even though fellow conservatives like the parliamentary speaker Ali Larjani remind him no money is available with the chronic deficit and 60% of the population escaping tax. He may turn to the central bank and state-owned lenders as an alternative for resource transfer, but so-called quasi-fiscal activities are already high and explain the 20 percent annual rise in the monetary base jeopardizing the single-digit inflation target. President Rouhani managed to slash the rate from 40% to just over 10% with relatively tight policies, and hailed such achievements as “actions not slogans” in re-election rhetoric. Diversification from hydrocarbon dependence has been another hallmark, and the non-oil current account is now roughly in balance with almost $90 billion in exports for the end-March fiscal year, the Economy Ministry reported.

However bank bad loans following local classification rules remain over one-tenth of portfolios, and proposed cleanup legislation that would stiffen guidelines and grant more independent enforcement and resolution powers are stuck in political limbo. The next government may face an outright crisis with “difficult to address” issues including recapitalization and rollback of targeted lending schemes, according to the Industry and Trade Minister. The overdue reckoning coincides with Iranian bank reconnection to the external SWIFT payments network and applications to reopen branches in Europe in Asia, as smaller counterparts beneath the radar of lingering US sanctions forge correspondent relationships. These ties inject new cross-border risk as the dual exchange rate system also awaits modernization, with such obstacles potentially resistant to near-term change by the surviving reform constituency.





Refugee Compacts’ Salient Solution Crush

2017 April 28 by

A year-long joint global displacement study group by the Center for Global Development and International Rescue Committee cast the issue as a “protracted crisis” and lauded the new aid compact approach with host countries, while urging comprehensive revamp of supporting economic data and policies. Low and middle-income economies host 90 percent of the 20 million refugees fleeing conflict, who are away on average a decade. Only 25 percent are in camps, and humanitarian and development funding and tools have not matched the duration and severity in a “fractured system.” In 2016 governments, bilateral and multilateral agencies and civil society and private sector representatives met at consecutive conferences to channel billions of dollars to Jordan and Lebanon in initial compact pilots, with a separate pledging session for Syria and the region in London and launch of a concessional loan facility led by the World Bank, allocating $700 million to date, with an associated $2 billion poor country refugee influx window. These pacts work with the UN Commission and other performance based deals kike the EU’s EUR 3 billion to Turkey for Syrian repatriation from Greece and select onward resettlement. Education and job creation have been the main goals and the track record is early but standardized methods and outcome measurement are lacking.

The model of a public-private sector implementation board combining political and technical expertise, as adopted for the US Millennium Challenge anti-poverty program, is absent and impedes shared analysis and planning and rapid negotiation and disbursement timeframes can frustrate lasting results. Social service provision must take into account their scarcity for the existing local population, which typically also has steep joblessness. Refugees are often pushed to the labor market “shadows” and children denied school entry. In Lebanon classes are run in shift for citizens and newcomers, with quality suffering for both amid overcrowding. Jordan committed to issuing tens of thousands of migrant work permits in exchange for World Bank cash and EU duty free import access, but the number has not been reached and only 5 percent are to women. The process is bureaucratic and business startup is also “difficult” with minimum local partner and capital criteria, according to the report. The “right actors” have not been at the table, with limited local non-government input and private sector mobilization at home and abroad. They could be instrumental in putting rigorous assessment and procedure in place and creating an inclusive stakeholder mechanism. Basic information gaps endure across the board, from refugee numbers to job and school enrollment, and cost and impact evidence of integration steps is scant and far from the authors’ ideal of an umbrella policy index. The private sector can inject knowhow, resources  and innovation, but collective action like the Partnership for Refugees started under the Obama administration is nascent, with no cross-border coordination capacity. Business and financial firms are equipped to take long-term risk and crisis fundraising could extend beyond philanthropy to commercial sources. Donors could join in sponsoring ventures such as practiced by USAID’s ideas lab. Skills training and infrastructure building are two areas of competitive advantage where compacts could better deliver on promise with enlarged vision scrapping the humanitarian-development divide, the two study backers argue.



Egypt’s Chiseled Church Chastening

2017 April 22 by

Egyptian shares with a slight first quarter bump on the MSCI index recoiled after a spate of Coptic Church holiday bombings claimed by ISIS, as President Al-Sissi fresh from a White House meeting with President Trump who praised his toughness, declared a state of emergency granting security forces more discretionary detention power. The President came to Washington seeking US designation of the Muslim Brotherhood as a terrorist group, as counterparts agreed to expand economic and military cooperation. He freed jailed predecessor Mubarak around the time of the trip, and a $4 billion Eurobond was successfully placed as foreign investors also tiptoe back into local debt lured by tax-free double digit yields. Since signature of the $12 billion IMF loan late last year reserves are up $7 billion to $27 billion, the highest since the Arab Spring. The World Bank and African Development Bank have released tranches as part of the package, but remittances rose 10 percent in the last quarter after an extended fall as workers finally repatriated cash with the official pound float and the dollar rate settled at 16-17. With 50 percent depreciation tourism recovered overtaking safety qualms, and non-petroleum exports jumped 25 percent in January. Despite headline 3 percent GDP growth, the PMI manufacturing gauge continues to contract, and consumers have been whacked by subsidy cuts and 30 percent inflation. The fiscal deficit spurted to 12 percent of output and unemployment is reported at the same figure although stricter estimates near double it. Dollar shortages persist but officials on the bond road show diverted concern by pointing out imminent offshore gas production from a large field. However with the human rights crackdown Western donors will again come under pressure from advocacy groups to withhold promised aid, repeating the pattern from the military coup against President Morsi in the initial post-Mubarak transition.

Algeria, with hydrocarbons over 95 percent of the economy, had earlier widespread civil unrest and terrorism and has struggled to diversify and reduce state control without official outside help. It recently embarked on a high-profile US investment campaign emphasizing modest fiscal, commercial law and currency adjustments as 4 percent inflation may outpace growth. The central bank predicts dinar stability against the dollar at around 110, and greater competitive scope for the half dozen private banks against dominant government lenders, although the Development Bank will continue to concentrate 90 percent of the portfolio toward small business. The Treasury bond and stock markets will be expanded, and insurance under two-thirds public ownership is a leading target for double-digit annual activity increases. In the Gulf the area is also ripe for international penetration as barriers ease and non-resident investors also snap up new sovereign bonds, where they have taken half of recent deals. In the past the pool was small and local banks as primary buyers rarely sold. Now the size is $250 million and large blocks can be purchased and traded with the entry of additional market-makers. Once uniform top investment grade ratings are more diverse, and repos have developed although long-term hedging products are still lacking. Tax-free financial zones have encouraged participation by foreign pension funds and asset managers, but private domestic peers have yet to establish a broader congregation for fixed income following according to industry experts.



Iran’s Goaded Guardian Grimace

2017 March 5 by

Iranian shares seesawed ahead of May presidential elections, with Rouhani seeking a second term, in the wake of venerated moderate Rafsajani’s death and a harder anti-nuclear and terror monitoring and sanctions approach by the Trump administration, which officially put Tehran “on notice” without detailing steps. In December the main US restrictions against prominent state banks and companies, particularly tied to the Revolutionary Guard, were extended another decade, and President Trump attempted to ban immigration from the country in an executive order on national security grounds initially overturned in court. The rising tensions coincided with a positive IMF Article IV report hailing “impressive” economic recovery since the joint agreement reviving global commercial and financial ties, although it cited “urgent” banking reform and stability needs. In the first half of the March 2016-17 fiscal year GDP growth was 7.5 percent but the non-oil component was just 1 percent. Inflation dropped to 9 percent but money supply expanded almost 30 percent with central bank credit support. The current account surplus doubled as a portion of output to 6 percent with FDI in the hydrocarbon, auto and telecom sectors, and exchange rate depreciation continues with the official-market rate gap at 15 percent and unification again postponed. The benchmark lending rate was lowered 2 percent to 18 percent against a reported double-digit bank bad asset ratio, while the fiscal deficit persists at 3 percent of GDP on high subsidies. Capital adequacy was below 6 percent in 2015 and is negative at state intermediaries, with profits crimped by steep funding costs battering stock exchange financial listings. Previously unregulated credit providers are now under the central bank’s sway and pending legislation would update the decades-old enforcement and resolution framework.

Medium-term growth should settle at 4.5 percent but unemployment currently approaching 15 percent will stay steep, the Fund believes. If poor relations with the US scuttle the nuclear pact, recession could resume, and the restoration of correspondent banking ties depends on incipient observance of FATF anti-terror and money laundering standards. The banking system is “fragile” with real estate and public enterprise exposure souring books. Bad loans take a decade to write off and must be fully provisioned, so they are rolled over indefinitely. Only private banks as a small category raise their own money competitively through deposits and interbank lines, and a new corporate insolvency code is required to aid restructuring. The central bank must slash directed credit and gain more autonomy with the elimination of government board seats and inflation-target adoption. The nascent domestic debt market can develop further after securitization of contract arrears, and financial sector initiatives could be underwritten by the sovereign Oil Stabilization Fund. For fiscal discipline cash transfers should be ended for the richest households, and structural reforms can boost the private sector with the low scores in a range of World Bank Doing Business measures. Female and youth joblessness are 20-30 percent and labor and regulatory distortions impede hiring. National accounts lack comprehensive and timely data for investors and multiple exchange curbs prevail beyond the two-tier rate subject to the Fund’s Article VIII approval to retain membership, as doubts linger over nuclear club aspirations.


Egypt’s Frayed Fraternal Bonds

2017 February 20 by

Egyptian stocks continued their comeback after 2016’s near 15 percent loss as a multi-tier $4 billion Eurobond, the first in two years, was three times oversubscribed from a diverse international investor base. The Finance Ministry conducting roadshows pressed fiscal and currency adjustment themes around the $12 billion IMF program, although public debt reduction may not materialize until end-decade according to its presentations. It was able to sell a 30-year piece at almost the same 8 percent yield as a coincident Argentina issue, ahead of planned $20-30 billion mega-placements by Saudi Arabia and Kuwait, where equities have also improved. Inflation blew out to almost 30 percent with de-pegging and tourism has yet to recover from security-related travel warnings despite the cheaper pound. The speculative sovereign credit rating has not budged, and President Al-Sisi continues to crack down on opposition as he tries to convince President Trump, after they struck a relationship during the campaign, to brand the Muslim Brotherhood a terrorist group cementing pariah status. The enthusiastic reception was in contrast with next-door Tunisia, also in an extended Fund arrangement, as it prepares a EUR 1 billion tap following a high-profile investment conference late last year featuring dozens of infrastructure projects. GDP growth should double to 2.5 percent this year, but the chronic budget deficit is above 5 percent with the civil service wage bill out of proportion with regional and global peers. In the US the outgoing Obama administration pledged to sustain economic and military assistance which has focused respectively on enhanced border controls and small business creation. A venture capital enterprise fund was launched early in the Arab Spring and recent emphasis has been in areas like collateral reform to enable easier bank borrowing as state-owned lenders await another possible round of recapitalization. Privatization of the government’s large industrial portfolio has been promised under consecutive IMF programs with limited success, and stock exchange performance has been flat awaiting breakthroughs.

The Gulf has brought excitement with Saudi Arabia’s appointment of an independent boutique underwriting adviser for a slice of Aramco, as the market further opens to outside institutional investors with a stronger regulatory body. The domestic sovereign wealth fund, with $200 billion in assets, will get a windfall from the sale after the central bank just transferred $25 billion under a mandate to increase allocation for local employment and higher return categories. Another external bond operation is in the works, likely in the form of no-interest sukuk, as Riyadh has cancelled around $20 billion in contracts since the oil price and foreign reserve slides. Kuwait was up 15 percent in January on the MSCI frontier index, as its big weighting drew support ahead of inaugural bond and economic diversification initiatives. Bahrain and Oman dipped slightly as the former continues to experience Shia-Sunni clashes, and the latter had a 2016 fiscal gap at almost 20 percent of GDP and resorted to overseas borrowing and its sovereign wealth stash. Gas exploration spending jumped 10 percent for the Kazzan field and defense outlays also rose as the ruling family tries to cap a wellspring of political tensions from discontented youth and migrant workers.