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The Gulf’s Cracked Finance Facade

2019 January 14 by

Gulf stock markets were mixed, with Qatar, Saudi Arabia and Kuwait with 10-25% gains, Bahrain flat, and Oman and the United Arab Emirates with losses on the MSCI index. The OPEC meeting revealed further fractures as Qatar quit the group, and remaining members no longer in control of world oil price direction geared production toward the estimated $90/ barrel break even for budget balance. On the geopolitical front, Saudi and UAE support for the legacy Yemen government’s fight against Houthi rebels came under US and Europe diplomatic and military challenge, as the UN convened an initial round of peace talks in Sweden. As money managers consider their 2019 regional weighting beyond technical index changes, the International Monetary Fund also came out with dual studies on the financial sector and foreign investment climates. They highlighted gaps with emerging market peers that hamper growth, diversification and inclusion, and the findings reinforce near-term aversion that will persist after reallocations temporarily lift performance.

The IMF paper argues that outside Saudi Arabia financial system development lags economic fundamentals, with dominant banks and missing non-bank institutions like pension funds and insurers. Debt markets are nascent and equity activity is sizable but narrow, with large state companies the main participants. Small business and women’s credit access is minimal, in part due to limited knowledge. Overdue reforms include government bond yield curve creation, tighter corporate governance and investor protection rules, and wider international ownership scope.

 Total Gulf Cooperation Council bank assets are $3 trillion, about 200% of gross domestic product in line with other emerging economies, with the non-bank system share at 20%. The UAE sector is biggest and Oman the smallest, and only Bahrain has both wholesale and retail lending. Islamic finance has grown at a 10% clip the past decade, double the conventional rate, with large company funding the preferred business model. Saudi Arabia is an exception with a half dozen non-bank intermediaries, and aims to place sovereign wealth money in local hands now chiefly placed abroad. It is the leading stock market in terms of capitalization and turnover, but Qatar and Kuwait are ahead in relation to output. The GCC just started to issue government bonds to cover fiscal deficits the past five years, and private activity is negligible at 5% of GDP as corporates tap global markets instead.

Scaled by population, the number of equity listings is particularly meager in Oman, and in 2017 the region had just twenty initial public offerings worth $1 billion. Market concentration is high with banks and state-owned enterprises around half of capitalization, and buy and hold primary investors constrain share free float. Foreign ownership is around 5% overall, with Oman and Saudi Arabia still imposing minority company positions. Household borrowing relies on informal family and work channels outside banks, and 60% of youth have accounts compared with 80% of adults, and small firms get 5% of loans. This inclusion gap is identified as a policy priority, but officials must further expand credit bureaus, overhaul insolvency codes and introduce fintech innovations, the survey insists.

Stock market regulation improvement paved the way for the UAE, Qatar and Saudi Arabia to move from the MSCI frontier to core index, but implementation of governance and protection norms remains “weak.” Debt markets lack repos and competitive auctions, and robust disclosure and ratings systems. Currency instruments have been thwarted by the dollar exchange rate peg, and Bahrain has the only sizable mutual fund sector at one-quarter of GDP. Life insurance is “negligible” as a possible catalyst for long term fixed income allocation, and private pension plans are rare. A partial program to remedy these deficiencies would bring modernization benefits that raise per-capital income growth at least half a percent, the document concludes.

Broader trade and investment criticism was also pointed in a separate study, which noted “limited progress” in shifting from oil exports at two-thirds of the total and integrating into global supply chains. The intra-GCC amount was 10% of non-oil commerce and has further contracted with the Qatar embargo. FDI inflows have “stalled” despite rich natural resource endowments with lagging worker skills and productivity. Outside hydrocarbons they are skewed as a result toward real estate, where slowdown in the Dubai hub in particular may match the faltering financial market foundation.

The Middle East-Central Asia’s Wayward Aim

2018 December 24 by

Middle East and Central Asian financial markets are under immediate fire from souring emerging economy sentiment and the Turkey crisis in particular, and also lag on commodity diversification, fiscal discipline, and private business support, according to the International Monetary Fund’s November review. It pointed out that sovereign bond spreads increased 100 basis points through August to mirror the broad emerging market trend, with distinct Turkish banking and trade linkages. Parent banks in Qatar and Lebanon control over 5% of local assets, and Azerbaijan suffers from reduced import demand with lira depreciation. The US-Europe-China trade battle more generally hurts oil, mineral, auto and textile shipments from the area, and will aggravate gross domestic product growth and current account deficit worries already weighing on investor confidence, the IMF signals.

Gulf oil exporters will see 2.5-3% growth through 2019, but the medium term price forecast is for gradual decline to $60/barrel. Public infrastructure spending is the main driver, including Expo 2020 and 2022 World Cup preparations in the United Arab Emirates and Qatar respectively. Other petroleum powers Iran, Iraq and Libya are under international commercial sanctions or still experiencing internal conflict. The combined current account surplus is estimated at $120 billion, with the capital account also receiving inflows from $30 billion in sovereign debt issuance and Saudi Arabia’s MSCI stock market index upgrade. However state-owned companies face a large $135 billion maturity hump next year to warrant caution, the report stresses.

In Saudi Arabia, the UAE, Kuwait and Qatar the fiscal position is balanced or slightly expansionary, but sustainability will require public sector salary and subsidy cuts and tax collection such as recent VAT introduction. Bank liquidity is better but private credit is “tepid” with 5% range annual growth, on weak construction and real estate demand. Borrowing rates are higher in line with US Federal Reserve moves under the dollar exchange rate peg, and small business access is limited although fintech is opening new channels. Bankruptcy law, corporate governance, and credit bureau overhauls are overdue and local corporate bond market development should be a priority. More than one-quarter of employment is government-related, triple the emerging economy average, and domestic job creation is subject to numerous costs and distortions and poor professional education and training.

Arab world oil importers have double the growth at 4.5%, with Egypt and Pakistan leading the way as domestic consumption and remittances strengthen. Current account deficits still average 6.5% of GDP despite 15% export expansion, and Egyptian tourism has recovered with heightened security and resumed direct Russia flights. However reserves are under pressure in Jordan, Tunisia, Pakistan and elsewhere, with bilateral and multilateral financing needed for support. Banks are “stable and adequately capitalized,” but portfolios tilt toward government lending with public debt over 90% of GDP in half the group’s countries. More than 50% of the total is foreign currency-denominated, and interest payments take one-fifth of revenue. Energy subsidy reform is “critical,” but will worsen double-digit inflation that could spur further monetary tightening. Per-capita income growth has been lower than peers the past decade, and overriding challenges include reducing informality and raising productivity with “downside risks” to the outlook.

Central Asia and the Caucuses growth is also in the 4% range, but the rate will ebb over time from economic partner spillover and soft private investment. Exchange rates appreciated against the Russian ruble to help contain inflation, and allow easing in Azerbaijan, Georgia, Kazakhstan and Tajikistan. The negative fiscal balance improved to 4%, as stimulus programs like Kazakhstan’s Nurly Zhol housing plan end. Positive terms of trade and increased foreign direct investment help oil exporters, but current account gaps will widen in the Kyrgyz Republic, Tajikistan and Uzbekistan. Highly dollarized banking systems in Azerbaijan and Georgia are vulnerable to capital outflows and currency swings, and the region will not reach middle-income status for at least two decades. Officials pledge to slash government control and ownership but advance slowly, such as with the Kazakhstan stock exchange’s partial strategic company sales to maintain a positive MSCI return through October. Armenia and Georgia are among featured reformers on the World Bank’s Doing Business list and stiffer bank regulation has been promoted, but securities market infrastructure and oversight languish to investor chagrin, the survey warns in foreshadowing likely 2019 and beyond performance.

Yemen’s Bank Catastrophe Call

2018 December 17 by

As the US and UK call for a ceasefire and reconsider military support for the Saudi-backed Yemeni government’s campaign against Houti rebels, with fierce fighting now around the strategic Hudaydah port, the UN’s special envoy Martin Griffiths  underscored the scope of “economic warfare” accompanying hunger  for an estimated half the 30 million population. He cited “income famine” with years of unpaid civil servant salaries as split officials and central banks in charge in Aden and Sana’a clash over spending and banking and currency policies. The former, headed by President Abdo Rabbu Mansour Hadi operating from Riyadh, authorized fuel access to only licensed importers in September, while the latter spurned the decree and threatened retaliation against complying businesses, banks and money changers. The actions further reinforced fuel and exchange rate squeezes, as the rial slumped 50% against the dollar between July-September on the parallel market. In the view of experts on the ground such as the Sana’a Center for Strategic Studies, the established financial system and currency are at risk of outright collapse to add to the humanitarian catastrophe, without practical steps and policy reforms coordinated by international development institutions and private partners.

Yemen’s is the region’s poorest economy, and the latest International Monetary Fund projections are stark. Once a promising oil exporter, gross domestic product will contract 3% with the civil war, on 40% inflation from staple scarcity and rial depreciation. The fiscal and current account deficits are each estimated around 10% of GDP, and turnarounds next year are predicated on ebbing conflict. Output collapse since the outbreak of hostilities has been worse than in Libya and Syria, and the Fund notes “urgent needs” for food supply and public sector salary assistance. In the Gulf banking sector broadly private credit is “tepid” with state borrowing demand and commodity-related retrenchment in the construction industry, which was the mainstay in Yemen alongside hydrocarbons and agriculture. Saudi Arabia has provided fuel grants and deposited $2 billion to strengthen the currency, but transaction details are sketchy and confidence and substantive effects are so far minimal. In an October visit, special envoy Griffiths called for a collaborative emergency economic plan between local, foreign and regional parties, concentrated on exchange rate and central bank strengthening.

 The UN humanitarian chief, Mark Lowcock, in turn, emphasized that half the population was in pre-famine condition, and two-thirds were “food insecure,” for a once in a century disaster. The international community has a $3 billion appeal underway, with 70% of pledges met according to the latest tally. The Rethinking Yemen’s Economy project, a network of analysts and business and government leaders funded by the European Union, points out that 90% of products were imported commercially before the war, through conglomerates like the Hayel Saeed Anam Group, which now operates out of the United Arab Emirates. Food is still available, but with destroyed distribution channels and consumer purchasing power costs have skyrocketed. Children suffer the most, with over 2 million “acutely malnourished” and also prone to cholera and other preventable diseases. The World Bank has announced a trade finance facility for food shipments and a war risk insurance mechanism is under donor consideration for other cross-border commercial engagement.

Yemen’s banking system was cut off globally over money laundering and terror funding concerns, before the 2011 version of its Arab Spring precipitated the then-President’s ouster and the chain of events to renewed war. European and American correspondents severed all contact from 2015 and refused to accept physical cash common in business dealings, forcing traders into informal currency houses escaping central bank regulation. International reserves quickly depleted as oil revenue was also diverted through these channels, and the monetary authority became completely dysfunctional when the respective Houti- and recognized government rivals were set up in late 2016. Unified supervisory, liquidity management, and payment capabilities no longer exist, as state-owned and private banks must increasingly rely on the two with their own capital crunch. The UN has convened meetings between the sides outside the country in Jordan and Kenya, but beyond informal contact progress is scant. With the currency literally under the gun, the system may be unsustainable and abolition of the two-tier system, which breeds corruption under the official rate, and a shift to a pegged regime as in the rest of Gulf, is likely another unplanned war legacy.

Iran’s Premium Pressure Valve Valuation

2018 December 10 by

The Tehran stock exchange was up 40% in local currency terms in September, although its annual decline was the same magnitude in dollar terms with the rial’s 75% depreciation, as investors rushed into commodity-linked companies able to raise prices ahead of the US’ final round of resumed energy and banking sanctions. The State and Treasury Departments vowed “maximum pressure” to curb Iranian Revolutionary Guard regional adventurism, and trigger negotiations on a new anti-nuclear and terrorism pact to replace the unilaterally shelved 2015 JCPOA joint agreement. They allowed European and Asian signatories still honoring it to provisionally continue oil imports, with the eventual goal of full cutoff. In a “single biggest action” 50 Iranian financial institutions and their domestic and foreign subsidiaries were designated off-limits, including the central bank and well-known state-controlled commercial lenders Melli, Sepah, Saderat and Tejarat.

 The Brussels-based SWIFT cross-border payments network in turn disconnected the group without naming the specific list, as European backers of a “special purpose vehicle” led by France and Germany scramble to finalize a euro-denominated channel to maintain credit and trade links from the original deal. President Hassan Rouhani hailed this potential opening and continued oil shipments at least in the 1 million barrels/day range, as his government with a new technocrat Economy Minister reportedly organized a dedicated sanctions-busting unit. Rial devaluation leveled off before President Trump’s November order, and stock exchange price earnings ratios hit double digits as retail investors tried to preserve savings and access hefty dividend yields. Outside the blacklisted firms across an industry swathe including construction, insurance, mining and shipping they may still find decent prospects, as the country again girds for self-defined external economic onslaught as a regular Islamic Revolution feature.

This fiscal year first quarter from March to June registered over 1.5% gross domestic product growth, according to official statistics, but the International Monetary Fund now predicts contraction at the same level and an even greater 4% drop next year. Inflation is back in double digits with the rial crash and agriculture bad weather, and is projected to leap from 15% currently to 30% in the IMF’s view, with benchmark Islamic Treasury bill yields already near 20%. The government has set aside $4 billion from the sovereign wealth fund and granted foreign exchange preferences to pay for basic food and medicine, which the US pledges also to exempt from trade prohibition on humanitarian grounds. Reprising a program from previous sanctions and war episodes, citizens will receive baskets of staples that could help tip the budget into serious deficit.  Public debt will reach 40% of GDP, as the current account surplus shrinks with slashed oil exports. The President and his team claim ample international reserves to withstand the crisis, estimated at around $100 billion, and previously shifted to euro holdings, but the exact figure is unknown and access and liquidity could be constrained under the repeated US clampdown.

The bilateral confrontation may further delay compliance with the multilateral Financial Action Task Force’s anti-money laundering and terror funding standards, a gap which keeps big Asian and European banks away regardless of sanctions status. Iran has been on the Paris-based body’s “grey list” pending passage of enabling laws, and the deadline was recently extended again to February 2019. In October, lawmakers over hardliner objections approved drafts by a slight margin, which the clerical Guardian Council headed by Supreme Leader Ayatollah Khamenei then rejected as a Western-imposed regulatory and foreign policy threat. Rumors abounded that agreement could compromise incipient crypto-currency arrangements with Russian and Turkish counterparts to circumvent all forms of monitoring, as private foreign exchange traders facing arrest also dabble in that alternative.  However the odds are brighter for other bank reforms, such as a corporate governance bill to boost supervisory disclosure and reporting. After appointing Economy Minister Farhad Dejpasand when his predecessor lost parliamentary confidence, President Rouhani reiterated that financial sector modernization, including deep and diverse capital markets, was a priority. The stock exchange has an over-the-counter market to aid small and midsize companies which will suffer badly in recession, and he pressed also for more large state enterprise divestitures already at $150 million this fiscal year.  These moves may be incremental, but can serve as a partial sanctions antidote while shifting the domestic narrative to overdue structural fixes that seal investor interest.  

Tunisia’s Smothered Spring Scent

2018 November 19 by

Approaching the seventh anniversary of its Arab Spring leading dictator ouster and restoration of competitive democracy as a standout regional example, Tunisia with a rare initial public offering topped MSCI indices with a near 40% gain through the third quarter despite splintering of the longtime ruling coalition and International Monetary Fund criticism of fiscal, monetary and investment policies. The Fund agreed to release another $250 million under its latest program to bring the total disbursed to half the $3 billion committed in 2016, and the World Bank chipped in another $500 million on its own. The infusion should allow issuance of a delayed sovereign bond, which have featured partial guarantees from the US and Japan development agencies. Washington also launched a dedicated “enterprise fund” for the country, following an earlier post-communist transition model, with the aim of stimulating broader capital markets and private sector development. It may be absorbed or modified in the new development finance corporation Congress recently authorized with $60 billion in available lines, as proponents struggle to justify the track record to date and future prospects.

For the past five years the so-called veteran politician “two sheikhs” from the Islamic Ennahda and secular Nidaa Tounes parties headed a fractious unity government, before their pact dissolved in September over chronic economic policy discord and the unlikely rival popularity of appointed Prime Minister Yousseff Chahed, who holds a doctorate in agribusiness. He and allies moved to form their own “National Coalition” grouping ahead of presidential and parliamentary elections next year, as the two previous parties in charge field their own candidates vying for support from the powerful labor union federation. It opposes Fund nostrums from public finance reform to state enterprise selloff, with large scale strikes scheduled for October and November. They follow protests earlier this year in poorer regions over tax hikes, which were met with harsh security force response as tens of thousands of youth flee for Europe amid 25% unemployment.

Prime Minister Chabed promised this year would be the “last difficult one,” with gross domestic product growth just 2.5% and inflation triple that level in August. The 2019 draft budget foregoes additional individual taxes and halves them for tech, textiles, and drug companies, while raising charges on luxury items and bank profits. The Fund urges fiscal discipline with the deficit at 5% of GDP, and monetary tightening with the benchmark rate negative in real terms. Officials have moved slowly to curb energy subsidies and civil service spending, and the central bank continues to refinance commercial credit expanding at a double-digit pace. Tourism rebounded with a $1 billion 25% revenue jump through September, but it is only two-thirds the 2014 sum before the Tunis Bardo Museum and Sousse beach resort terror attacks.  Public debt is now 70% of GDP, and next year servicing will come to over $3 billion, almost double the amount in 2016 with the dinar’s 20% depreciation against the dollar the past two years, according to Finance Minister Ridha Chalghoum. Occasional intervention stemmed the tide, but international reserves are under four months imports against the backdrop of an almost 10% of GDP current account gap.

Despite a 20% export rise through August driven by agricultural, manufacturing and electrical shipments, the trade deficit hit a 60-year high at $4.5 billion with the currency trading at half the 2010 dollar level. Officials spurn Fund recommendations for more “flexibility” fearing outright collapse, as they imposed temporary import limits and introduced more competitive foreign currency auctions. Bad loans in the state-dominated banking system were close to 15% of the total in the first quarter, and new capital adequacy and collateral rules were recently finalized despite the inability to resolve failed institutions and pass anti-money laundering laws. Credit bureau and payment systems upgrades are pending and a Qatar-owned Islamic bank acquired a local counterpart. Corruption suspicions continue to plague these transactions as the Prime Minister and Anti-Corruption Agency declare “war” on the scourge, with the Energy Minister dismissed in August following an investigation. The tiny $10 billion Tunis bourse was admitted to the World Federation of Exchanges along with outperformance this year, but awaits breakthrough privatizations since a telecoms sale was cancelled with the Arab Spring outbreak as investors search for a next leg bounce.

 

 

 

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The Middle East’s Reshuffled Index Deck

2018 October 22 by

Middle East stock markets outperformed Asian and other regional rivals on the MSCI Index through the third quarter, as Gulf hydrocarbons exporters in particular benefited from rising prices and graduation and entry moves across benchmark equity and debt gauges. Following the recent elevation of Qatar and the United Arab Emirates from MSCI’s frontier to core roster, Saudi Arabia as the Gulf’s biggest market with $500 billion capitalization will repeat the pattern next year. Those three along with Bahrain and Kuwait will also soon enter JP Morgan’s EMBI sovereign bond index after issuing $125 billion combined the past two years, at an estimated 10-15% weighting.

Fund managers increased exposure ahead of the changes to support double-digit gains, and Egypt and Tunisia were embraced respectively for good marks on its International Monetary Fund program and a 40% frontier index-leading advance. However the rejiggering did not alter underlying dynamics of lackluster 3% average gross domestic product growth by the IMF’s latest forecast, and longer-term  equity market losses, often attributed to the lack of private sector competiveness and economic diversification. A World Bank report published over the summer highlighted the Arab world’s absence of a venture capital and business startup “ecosystem,” and urged thorough public and corporate governance overhauls even with favorable short-term investor positioning.

Saudi Arabia, which will join the MSCI top tier in May 2019, was a main focus as analysts unraveled the contradictory implications of Crown Prince Mohammed bin Salman’s future reform vision, indefinite delay of the Aramco international IPO with a shift to state petrochemical giant stake buyout, and diplomatic spats before the disappearance and alleged murder of a prominent journalist in Turkey, most notably in the cutoff of commercial and cultural ties with Canada over criticism of a women’s rights activist’s detention. MBS has plowed $45 billion into a tech fund run by Japan’s Softbank, and announced a bet ten times that size on a state of the art new Red Sea city during his global investor forum debut a year ago. Reportedly he was at the top of the acquirer list as electric car entrepreneur Elon Musk considered New York Stock exchange delisting. In the Gulf Cooperation Council, he spearheaded the blockade to isolate Qatar for presumed Iran sympathies,  as the 15% equity market jump there through September were identical. The fragmentation has hurt GCC corporate earnings barely increasing at a 10% annual pace, and disrupted banking ties as exposure from the neighboring Turkey crisis worsens.

GDP growth will only be in the 2.5% range through next year despite oil price rebound to $80/ barrel, on subdued construction from cancelled infrastructure projects and new taxes and subsidy cuts eroding consumption. Spending rose under revised fiscal targets which still project a 3% deficit, while the current account surplus will reach 10% of GDP as reserves improve to $525 billion. The $250 billion Public Investment Fund, the sovereign wealth vehicle where the Crown Prince seeks to boost assets to $400 billion by end-decade, did not completely draw on its holdings but instead borrowed $10 billion from an international bank syndicate so Aramco, rather than pursuing its landmark flotation, could purchase $70 billion ownership in the Sabic chemical group. Government officials, after touting an IPO in world financial centers, may have balked at rigorous disclosure despite hints in Hong Kong and elsewhere that rules could be adjusted.

Egypt was essentially flat as the top core index regional component through the third quarter, and Saudi Arabia and the UAE represent one-tenth of foreign direct investment and the overwhelming remittances source, which along with tourism doubled the services surplus to $10 billion, according to the latest figures. Exports from the new Zohr gas field should shrink the 2.5% of GDP current account gap. For the 2018-19 fiscal year growth is forecast at 5.5%, but inflation is almost 15% after another round of fuel subsidy cuts at IMF instigation. The central bank maintained an 18% policy rate which originally prompted $20 billion overseas allocation into local Treasury bills, but the amount fell $5 billion in August as President Abdel Fattah al-Sisi further cracked down on military, media and former regime opponents. Ex-President Hosni Mubarak’s sons were arrested for previous stock manipulation to underscore current enthusiasm risks with their own hint of orchestration.

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Iran’s Sanctions Pain Analgesic

2018 October 1 by

The Tehran Stock Exchange Index was up 10% in local currency terms in July for a 25% year to date gain, as retail investors desperate for outlets parked savings there, as the rial lost half its value against the dollar with the first stage of US sanctions reactivation. Valuations with low single-digit price-earnings ratios and double-digit dividend yields were attractive on the $150 billion market to offer the prospect of real returns, after inflation breached 15% in the immediate aftermath of exchange rate collapse as the unofficial rate blew past 100,000 to the dollar.  Oil and steel companies were popular as tighter global supply under Washington’s trade curbs served as share supports. Payment service and pension fund listings also got inflows with renewed external financial system cutoff as a result of the Trump administration’s nuclear pact denunciation.

France and Germany announced a possible alternative to the cross-border SWIFT payments network which could maintain Iranian bank correspondent relationships in euros, and Italy allowed smaller ailing banks to maintain ties as it works to resolve a debt crisis. However the US Treasury Department in meetings with foreign counterparts opposed creation of parallel structures, which will likely take years to launch, and suggested that participants would be at risk of dollar-access bans. China could offer its own workaround in the form of the CHIPS international channel started in 2015 to promote Yuan global acceptance, but Beijing is now ensnared in separate bilateral trade and investment tiffs to forestall action. From a simple money-laundering standpoint mainstream foreign banks are essentially sidelined from engagement since Iran’s parliament has not yet passed legislation to comply with basic Financial Action Task Force rules, with the October deadline for returning to the body’s black list imminent. Conservatives aligned with the religious-directed Guardian Council object that standards will compromise funding for terrorist allies like Hezbollah. President Rouhani and his “moderate” team have failed to win backing for broad banking cleanup and modernization into his second term, and the central bank head and labor and finance ministers were all ousted in August votes of no-confidence as real and monetary economy indicators spiraled out of control.

President Rouhani blamed a US “plot” for street protests and possible renewed recession with oil export and foreign investment curbs, after direct inflows fell short of target in 2017 at $5 billion, according to the United Nations. He announced that 10% will be drawn from the sovereign wealth fund to combat sanctions, and that an anti-corruption bill establishing a dedicated tribunal was a legislative priority to assuage public anger at reports of insider currency deals. A former deputy central bank governor was implicated in illegal transactions, and a trial was televised of importers who benefited from favorable rates. Independent banking analysts called on the administration to continue in this vein and release a list of individual and state business borrowers responsible for the bulk of bad debts put at 15% of the total, but officials have so far demurred. The new central bank head was previously a top commercial bank and insurance executive with no mandate for sweeping change.

The post-sanctions strategy stresses reliance on allies and trade partners in the region and Asia. An Iranian investor and manufacturer delegation visited Syria in August to tout reconstruction prospects as President Assad moves with regime help, reportedly amounting to billions of dollars in military and security assets through the Revolutionary Guard’s overseas arm, to defeat the last pockets of rebel resistance. Iran-China transactions were almost $20 billion in the first half, and export potential to neighboring countries is at the same figure, the Chamber of Commerce calculates. In the first quarter of the fiscal year through July, sales rose 25% to Iraq in particular, and devaluation could further aid competitiveness in the Chamber’s view. Iraqi Prime Minister Haider al Abadi initially agreed to comply with the resumed US clampdown, but shifted course to seek continued geographic and historic ties. He formally requested exemptions from Washington as daily trade in energy and agricultural commodities hit a record $50 million in August, according to bilateral sources. Iraqi depositors also insist that regulators maintain relationships to recover money lost to fraud and depreciation in Iranian banks, which have plagued them as relentlessly as decades of sanctions episodes.

 

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The Arab World’s Entrepreneur Ecosystem Entreaty

2018 September 18 by

MENA stock markets mostly languished through July, with notable exceptions Saudi Arabia and Tunisia up 20% and 40% respectively, as Egypt disappointed as the main core universe component with a 5% loss. Kuwait jumped over 10% on an increased frontier weighting as Saudi shares graduate next year after MSCI’s latest review. Jordan and Lebanon were flat as millions of Syrian refugees stay in place despite the Assad and Russian governments’ hints at safe return and imminent large-scale reconstruction without identified guarantees or funding. Gulf equities are also preparing for competing standard debt gauge entry as JP Morgan finesses criteria for EMBI expansion. A dozen regional economies have yet to create emerging-market caliber entrepreneurial conditions for the “Fourth Industrial Revolution,” according to the latest joint World Bank-Economic Forum competitiveness report. It urges a new generation social contract since commodity riches can no longer support public sector employment and subsidies, amid a demographic youth bulge with still low female labor force participation. The private business enabling environment lags across the board in education, technology and financial sector development. Opinion surveys show around half of respondents decrying income inequality and political governance, and worrying about cyber-attacks and natural resource shortages. The area’s competitiveness index barely budged the past decade, even though Qatar, Saudi Arabia and the UAE rank in the top 30 of 135 countries. Morocco, Algeria and Lebanon slipped the most, and of the dozen pillars measured, only infrastructure and technology showed progress with financial market regression. Gulf Cooperation Council members are behind in training and labor markets, and automation has not translated into innovation. Resource-poor countries like Jordan and Tunisia have better diversification track records, but widespread state intervention in administration and ownership remains an obstacle. Work forces are not equipped for physical, digital and biological overlap that will characterize future business, and traditional bank lending cannot serve emerging entrepreneurs.

Oil and gas exports have accounted for two-thirds of the total, with education quality a key impediment in view of low math and science test scores. Small business credit is limited, with the share at the bottom of all developing regions. Only Africa and South Asia perform worse on the World Bank’s Doing Business scorecard, and high customs and non-tariff barriers hurt trade disconnected from global supply chains. Sound macroeconomic management is a precondition, but micro reforms are lacking from improved logistics to export finance help. Richer countries should liberalize industries for foreign and private entry, while fragile states at the opposite scale should consider dedicated enterprise zones and payments system modernization. Young companies of three to five years are the big job sources and formation rates increased the last decade but still lag the world average, especially when the UAE is excluded. A regional entrepreneur survey last year highlighted market, finance and talent access as the chief priorities for policy and practical steps. Angel investment networks have been launched in the Gulf, Lebanon, Egypt and Morocco to provide seed capital, but cross-border and women’s integration continue to stall and may demand cultural as well as operational transformation, the study suggests.

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Iran’s Capital Markets Deal Bridge (Financial Times)

2018 August 9 by

As the US prepares in August to resume Iran’s commercial and financial isolation after President Trump’s decision to exit the JCPOA six-country nuclear freeze for sanctions relief agreement, Tehran has convened a so-called “economic war” council banning imports and free-market currency trading as the rial‘s collapse reached more than double the official 45,000/dollar rate. European and Asian signatories will be under pressure from Treasury Department exclusion from banking system access to sever energy, trade and monetary ties as a reported fifty multinational firms have already renounced future participation. The Brussels-based cross-border SWIFT payments network is also in the cross-hairs to end Iranian bank membership reopening correspondent relationships with official and private lenders, as local anti-money laundering guidelines were gradually adopted to meet global standards. Washington has already singled out Iran’s central bank, whose head was recently sacked, for supporting military and terrorist action throughout the Middle East, with the leading state-owned banks acting as conduits. The international organization may have little choice to either prohibit or strictly police cash transfers also used for normal export-import business.

However the banking sector, with a double-digit bad loan ratio from ailing government and real estate company borrowers, has struggled since JCPOA to provide routine funding. President Rouhani promised reforms in his second term that have been regularly blocked by conservative lawmakers, including stricter regulation toward Basel III norms, mergers and consolidations, and central agency nonperforming asset disposal. Capital market diversification was another strand but remains a missing link, with foreign investors only accounting for a sliver of stock exchange activity. The free float has been around 20% with badly-managed institutional investors, including religious foundations and elements of the notorious Revolutionary Guard controlling large blocks. The past two years, new domestic retail and wholesale players entered, alongside frontier market funds out of London and elsewhere, in an effort to improve liquidity and governance, and participants could point to incremental progress. Despite the banking and exchange rate dysfunction, the equity and nascent Islamic-style bond markets have rallied, with Tehran’s main index at a record. They are last resorts for savings and economic modernization, and continued international advice can encourage such internal change.

A full world boycott was last in place at the end of the populist free-spending Ahmadi-Nejad presidency, which invited deep recession and runaway inflation. The official and IMF GDP growth forecasts for the fiscal year beginning in March are still in the 4% range, but with currency depreciation and goods shortages the official inflation is back in double digits. Ministry technocrats pledge to maintain budget and monetary discipline, and the central bank bowed to market demands by launching a pilot foreign exchange platform for small and mid-sized enterprises. In external accounts, oil exports will shrink from the 2 million barrels/day before the renewed clampdown, which sparked an offsetting temporary price surge. China and India indicated they will continue imports under credit lines established in their own currencies. Turkey will ignore President Trump’s policy altogether as it continues financial market cooperation established through the Federation of Eurasian Stock Exchanges, originally backed in the early 2000s by the US Agency for International Development to promote common trading and regulatory infrastructure. Along with Russia which recently launched its own ratings agency, Turkish banks and investment firms have lined up to help Iran with an inaugural sovereign bond issue. According to the IMF, Iran’s estimated reserves are $125 billion, but it may need refinancing to clear previous foreign contractor arrears. Western raters have been reluctant to engage under the remaining US secondary sanctions since 2016, and in view of questionable account disclosure and corruption management inviting a low speculative grade.

The country is in the bottom tier of Transparency International Rankings even as the Rouhani administration and average citizens have tried to expose wrongdoing through official pronouncements and messaging apps. The government recently published a list of luxury importers benefiting from the preferential exchange rate, and previously cited unregulated financial firms operating pyramid schemes. The popular encrypted Telegram was blocked for security reasons following Washington’s deal pullout and street unrest, but Iran’s experienced software developers, often touted as public and private equity plays, are devising alternatives. A residual capital market corps of experts from the US, Europe and Asia could help advance corporate governance and financial system diversification principles, and the six parties to the original anti-nuclear pact can agree on a common waiver for such technical exchange as sanctions revive. The effort could work to cultivate a new banking and securities professional class, and pave the way for frontier market entry and recognition when foreign investment is again viable with outside and internal support.

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The Middle East’s Munificent Modernization Script

2018 May 24 by

Middle East markets continued to power ahead despite ratcheted up geopolitical clashes after double-digit first quarter gains on the MSCI Index, as foreign investors bet on economic policy changes amid relative leadership continuity to again justify regional exposure. Egypt perked up after a flat quarter as President Sisi’s unopposed re-reelection coincided with a positive IMF review of the 3-year $12 billion program, which has replenished reserves as inflation finally comes down from 15% on a possible path to the single-digit target. GDP growth was upgraded to 5.5% this fiscal year, but the budget hole will remain steep at 8% despite automatic fuel price indexation, while the timetable for electricity subsidy elimination will extend another five years. Capital inflows support the pound after the Fund-ordered float, and disinflation may spur central bank rate cuts to trigger an equity rally matching frontier counterparts. Next-door Israel in contrast has near-zero inflation with rates on hold, as the shekel has strengthened in similar fashion, without eroding high-tech exports helping to sustain near 3.5% growth. Private consumption is also solid as Prime Minister Netanyahu tries to deflect corruption charges against his family with a campaign to lower living costs, especially housing. Political observers believe the controversial effort to evict African immigrants may have derived in part from the urgency to find affordable space in Tel Aviv and other major cities. The plan, with paid relocation to Rwanda and other countries, met with widespread human rights group condemnation at home and abroad and was quickly dropped.

Lebanon was up 5% on the MSCI frontier index ahead of May parliamentary elections, which will experiment with proportional representation rather than mandatory sectarian allotment. Growth continues at a meager 2% clip with tourism improving, as construction will be boosted by billions of dollars in medium-term infrastructure projects pledged at a Paris donor conference. The budget deficit is almost 10% of GDP, and public debt is over 150% with no end to Syria civil war ripples as the central bank opts for bond swaps with the Finance Ministry. The pound peg to the dollar remains sacrosanct, with enough reserves to meet one year’s imports. Saudi Arabia rose over 10% in Q1 and its currency regime likewise is stable with oil prices nearing $70 dollars/barrel. Foreign investor inflows hit a record on an expected Financial Times index upgrade and further Aramco IPO promotion following a royal family global tour. King Salman and his entourage crisscrossed the US and touted deficit halving to 4% of GDP, although VAT introduction will hike inflation to the same level. Investors are positioning for potential partial stock exchange privatizations which could add free float to nominal $500 billion capitalization and release large blocks to compete with consecutive $15 billion external bond taps. Tiny Tunisia jumped 30% over the period with an FDI and tourism spike despite slow progress on state bank bad loan workout intended to recover $2 billion under the IMF accord. During the spring meetings officials pitched businesses on new public-private partnerships to be showcased at an upcoming conference, and fund managers took note of Fidelity’s increased back-office hub in the country as a rare transition trophy.

 

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