Tunisia’s Demonstrated Addled Adjustments

2018 February 4 by

After a 7% MSCI gain in 2016 to match rival Morocco, Tunisian shares were spooked early in January as nationwide protests again erupted on the seventh anniversary of the previous Ben Ali regime’s ouster to coincide with popular anger against staple price hikes to curb the budget deficit under the IMF program, where the second review to release $1 billion was delayed over lackluster results. Security forces arrested hundreds of participants including opposition party activists, as the prime minister acknowledged grievances with insistence that low-income subsidies would be preserved. The Fund compiled a defense of its policies under the $3 billion 4-year arrangement, which succeeded the original Arab Spring one, in the form of a question and answer list admitting “short-term hurt” with fiscal measures against the “unsustainable” wage bill in particular, among the world’s highest, which accounts for half of spending. They also increase VAT on luxury items but keep basic food product protection, with recommendations to place pension and health services on sounder financial footing.  Structural reforms such as state bank and enterprise restructuring have progressed at the same time to enable likely first quarter Board approval of the next installment, the text suggests. Following the pattern in North African neighbors Egypt and Morocco, which recently widened its fluctuation band, the authorities will consider greater exchange rate flexibility and dinar deprecation to aid competiveness, especially with external debt at 80% of GDP with reserves down to three months imports. The official salary adjustment emphasizes voluntary exit and early retirement rather than layoffs, and social spending like cash transfers for medicine and education are maintained while the fuel price hike targets wealthier households, according to the analysis. Anti-corruption and business climate improvement steps are in the mix, with new investment and banking laws despite a controversial amnesty for company and individual repatriation of questionable wealth accumulated under the old government. Financial inclusion is a supplementary focus to embrace micro and small firm credit, digital payment and central scoring and information bureaus. The IMF points out that it charges 3%, half the yield on Tunisia’s 2017 Eurobond, and that 30% youth unemployment is a paramount priority that can best be tackled through the program’s creation of private sector productive jobs.

The month before the EU was under fire for keeping the country on a tax haven blacklist as French President Macron prepared for an end-February trip since special rules remained for exports and financial services. It was named along with fifteen other “non-cooperative” jurisdictions, and the Tunisian President condemned the action as blocking transition to a “21st century state.” The UAE, where shares dropped 1% on the MSCI index last year as one of the few losers, was also on the roster for missing a deadline for tax information sharing. Dana Gas was an exception to the exchange damage, with a double-digit surge on apparent victories in contractual disputes.  It won a $2 billion arbitration claim against Iraq’s Kurdistan region for non-payment, and local courts may uphold its failure to honor a $700 million sukuk which lawyers argue was sharia-non-compliant despite an English tribunal ruling for creditors like Black Rock and Goldman Sachs. Appeals may drag on for years placing deals and the industry at mutual risk pending definitive divinity scholar direction, according to experts.


Iran’s Botched Banking Rescue Roar

2018 January 29 by

The Tehran Stock Exchange’s one-year performance in dollar terms showed an 8% gain into December, one quarter the almost 35% MSCI emerging market surge, as mainly working class protests first erupted in the second city of Mashhad over pocketbook economic and credit hardship. Just before the massive “bread and jobs” rallies the International Monetary Fund in its annual Article IV consultation underscored the urgency of bank bad loan removal and recapitalization, amid preliminary steps to place unregulated lenders under central bank control and shut them down if violating prudential rules. They have been closed suddenly without public notice, and small savers lured by higher rates beyond the mandatory 15% ceiling have lost or been unable to access accounts without a formal deposit insurance system.

Many of these underground providers have ties to the Revolutionary Guard(IRGC), which dominates the economy with major stakes in stock exchange-listed companies, and their collapse coincided with first-ever budget disclosures that it is in line for multi-billion dollar allocations while consumer subsidies face cutbacks to achieve fiscal balance. The IMF mission pointed out that additional government debt to cover bank cleanup will reinforce pressure and recommended ending tax exemptions benefiting the giant bonyad religious foundations in particular. President Hassan Rouhani won reelection campaigning for financial system modernization and integration, but has been stymied by officials and legislators in the revolutionary “old school” Supreme Leader’s camp. Their resistance has delivered a body blow to income improvement aspirations under nuclear deal sanctions relief, which the US may now roll back under the Trump administration’s tougher “decertification” stance. It urged the demonstrators to continue regime confrontation and prepared to reinforce IRGC punishment for military action in Syria and the region, while foreign investors from Asia, Europe and the Middle East focus equally on the banking crisis stalemate.

The President reprised his second term mantra after the protests spread nationwide by declaring the need for “major economic surgery” and referring to illegal credit firms as a “tumor.” GDP growth has rebounded to the 4-4.5% range with oil exports back to capacity, but inflation again is at 10% on higher food and fuel prices while youth unemployment is estimated at double to triple the official 12% level with millions of skilled professionals emigrating for jobs overseas. In the speech he asserted that the government must be accountable for corruption, with state and partially-privatized banks that dominate the $700 billion industry a prime conduit for insider deals resulting in scandals, including popular outrage last year around chief executives receiving hundreds of thousands of dollars in salary. The Fund’s Article IV statement ticked off a series of overdue measures to restore confidence and conform to frontier market norms, including a comprehensive audit and related-party loan bar, and a “time-bound” plan to write off real estate and other dud assets calculated at 20-30% of the total under international accounting standards. It also called for finalizing anti-money laundering laws to meet a Financial Action Task Force end-January deadline, and for a freer exchange rate after it tumbled 10% against the dollar the past year despite central bank intervention.

Since the Joint Comprehensive Plan of Action was inked two years ago lifting cross-border restrictions, almost 300 foreign banks have forged correspondent relations with Iranian counterparts. Chinese trade and development specialists have the largest lines under the Belt and Road initiative, with $25 billion recently committed for energy and infrastructure projects. Russia’s Export-Import Bank signed agreements in early January, and elsewhere in Europe smaller commercial institutions such as in Austria have been most active to avoid remaining US secondary sanctions. However they continue to steer clear of direct and portfolio investment participation as no profits are projected at the main state banks in the latest budget blueprint, after direct borrowing from the central bank rose 15% as of October. Financials, including government-run pension funds and investment companies deep in the red, have long been stock exchange laggards, with price-earnings ratios often below the five times average. Recently a new private bank IPO was completed and ailing Bank Maskan lost its housing monopoly to spur competition, but the balance sheet remains overwhelmingly negative with leading listings Mellat and Tejarat suspended from trading for lacking financial statements as investor protests also grow louder.





Lebanon’s Retracted Resignation Roundabout

2018 January 8 by

Lebanese bond prices stabilized and credit rating agencies delayed action after Prime Minister Hariri returned to his post a month after resigning at Saudi Arabia’s behest over his government coalition with Hezbollah, allied with Iran and Houthi rebels in the Yemen civil war accused of firing missiles at Riyadh. He reprised the “dissociation” stance in regional conflicts despite the alignment in effect the past six years in Syria, against stronger Hezbollah fighter support for the Assad regime now prevailing with Russian air power against remaining rebel pockets. Hariri has dual Saudi citizenship and was briefly detained before flying back to Beirut, raising suspicion he was caught in the anti-corruption net for dozens of royal princes held in the Ritz-Carlton hotel. At home his team had finally passed a budget and forged an agreement for parliamentary elections after a decade hiatus. Tourism increased and offshore oil projects were under negotiation since taking office a year ago, although economic growth stayed at 1.5% under a 145% of GDP world-leading sovereign debt pile, which absorbs almost one-third of local bank assets as the major buyers. One-tenth the budget goes to debt service, and the central bank has resorted to fancy financial engineering to maintain allocation alongside the $7-8 billion in annual diaspora inflows. They are needed also to sustain over $40 billion in central bank reserves to maintain the longstanding 1500 pound/dollar peg. Other fixed dollar relationships in the Gulf have been in the crosshairs with geopolitical fissures, notably in Qatar under commercial and diplomatic boycott which recently extended to Tunisia with refusal of airport access. Lebanon’s scheme is considered solid in the absence of depositor flight, which has spiked rarely during shocks such as the assassination of Hariri’s father and Hezbollah-Israel war outbreak.

Egypt floated its currency after reaching a 3-year $12 billion IMF pact triggering heavy foreign investor bond and stock market inflows, and half the sum has been disbursed so far. Growth improved in the latest quarter to 5%, but inflation soared to 30% with the 50% pound devaluation and electricity subsidy adjustment. The budget deficit hit 10% of GDP mainly due to higher interest payments, as the central bank hoisted benchmark rates toward 20% following “prudent” monetary policy, according to the Fund’s November review. International reserves are at a record $37 billion, double the corresponding 2016 level,  to cover seven months imports on combined remittance, and direct and portfolio investment strides. Gulf allies Saudi Arabia and the UAE in turn extended maturities on $4 billion in deposits coming due in 2018. President al-Sisi has targeted their investors to help develop his new desert “administrative capital,” at an estimated $5 billion first phase cost. Private property firms have purchased land and the Chinese will build a commercial center. However potential Saudi sponsors may be rethinking plans with Crown Prince Mohammed bin Salman’s crackdown on wealthy peers, including globetrotting Kingdom Holding chief executive Prince Alwaleed, with a commanding stake in Citigroup. The attorney-general has signaled minimum $100 billion forfeiture from the hundreds of influential business titans under confinement, as next year’s budget hiked spending for the first time in three years on forecast 2.5% growth aided by the captive payments.


Saudi Arabia’s Veering Vexed Vision

2017 November 10 by

Saudi stocks struggled to stay positive on the MSCI frontier index, where they remain after graduation refusal both there and by rival FTSE, as officials zigzagged on Aramco offering plans and other Vision 2030 elements during the annual Bretton Woods institutions’ gathering and so-called “desert Davos” at a 2-day global investor event in Riyadh. Hundreds of portfolio managers converged on the latter in the hope of securing mandates and insight into the strategy of the $200 billion Public Investment Fund, which plans to double its assets over the medium term through leveraging state enterprise stakes and startup and acquisition deals at home and abroad. It is an anchor in the $100 billion Softbank technology vehicle, the world’s largest, and also revealed ambitions for a $500 billion next decade new commercial and residential zone along the Red Sea called Noem. At the appearances oil diversification was the mantra even with price rebound above $50/barrel and geopolitics was downplayed as a boycott continues against Qatar for allegedly supporting terrorism and Iran, and Yemen civil war intervention results in tens of thousands of deaths from air bombardment and disease and famine. The rejiggering of National Transformation Program deliverables and timetables prepared with assistance from international management consultants was presented as more realistic, despite simultaneous fiscal discipline slippage with the reinstatement of civil servant allowances. The Aramco IPO timetable was extended from next year into 2019, and a local listing now seems preferred over meeting the disclosure and liquidity standards in Asia, Europe and North America after exchanges there plumbed for the business. A private placement cannot be ruled out either to a strategic or financial buyer, with Chinese firms a natural fit under the infrastructure-led Belt and Road initiative. The head of the Capital Markets Authority touted interest in qualified foreign investor and new banking licenses, with respectively 100 applications in for limited stock exchange access and Citibank recently awarded full approval. International activity is only 2 % of the total, but another entry round for smaller institutions is foreseen as development of a second-tier equity market slowly evolves alongside the main Tadawul index. He tried to reassure audiences that the dollar peg will remain indefinitely, while acknowledging interruption in Gulf Cooperation Council banking and monetary union the past decade further stymied by the Qatar split.

Since the Saudi cutoff joined by Bahrain, the UAE and Egypt stocks there plunged double-digits on the MSCI index and the government has drawn on an estimated one-tenth of its $350 billion reserves including the sovereign wealth pool to sustain trade and banking. Cross-border commerce with Iran is up 50 percent in a perverse effect from criticizing previous relations, and Dubai as the regional offshore center has also suffered from suspended contracts and capital and credit flows. Benchmark bond yields stabilized at 3.5 percent after an initial spike on the fallout, as normal reserve assets were roughly doubled to $40 billion using updated IMF methodology. Egypt has benefited from its geopolitical and economic reform choices under a Fund program by comparison, as the central bank  hosted a well-attended reception at the Washington meetings and investment strategists added local Treasury bills to their recommendations, after  long post-Arab spring consideration as an eyesore under the old currency construct.


Saudi Arabia’s Dulled Driving Ambitions

2017 October 2 by

Saudis shares stayed mildly positive on the MSCI index, as another big sovereign bond issue was prepared to avoid dipping into reserves and Vision 2030 economic overhaul targets were pared back amid reports of political purges within the ruling royal family. A modernizing wing could claim traction as women finally won the right to drive autos after years of protest, although it will not take effect until next year as religious conservatives vow to scuttle the decision. Aramco is still plodding ahead on its IPO as oil reserves are audited and balance sheet information may then dribble out once international listing locations are finalized. Only a 5% stake will be offered, but the megadeal has spawned a raft of other Gulf state energy company taps as over 30 IPOs worth $1.5 billion were completed through September, more than in 2015 and 2016 together. By contrast Moody’s estimates another $30 billion in external bond sales after last year’s debuts. Even with petroleum prices at $50/barrel to moderate the fiscal deficit, it will come in around $50 billion on 1-2% GDP growth, as the National Transformation Program Prince Mohammed bin Salman introduced in 2016 with global management consultant advice was forced to “adjust and adapt” after state employee allowances were reinstated. Domestic energy subsidies were to be cut further in July, but officials have turned wary with unemployment at 12.5 percent and opted instead to concentrate on promoting private sector-led industrial projects. Privatization deadlines have also slipped to the end of the plan period although a dedicated agency was created, and foreign ownership was liberalized for the education and health sectors while curbs remain on stock exchange access. MSCI dashed core roster graduation hopes in its last review, when it urged authorities to lift quotas and also modernize law and regulation for investor protection.

On that front with specific application to Islamic finance, the showdown between UAE-based Dana Gas and its bondholders on the fate of a $700 million sukuk is under close scrutiny. The company missed payments in the past on contract arrears in Iraq’s Kurdish province, which recently voted for independence in a referendum, and seeks to unilaterally restructure the instrument on the basis of retroactive noncompliance with Shariah code. Attorneys and religious scholars have waded into the fight waged at London’s Royal Court, with global houses like BlackRock maintaining big positions. The saga has cast a market pall with an issuance halt and higher yields, and after the London battle a UAE tribunal will pass judgment in December. The imbroglio has a diplomatic equivalent with the Gulf Cooperation Council member boycott against Qatar for alleged Iran and terrorist sympathies. Both sides have waged aggressive international media campaigns, and Moody’s calculates a 25 percent of GDP cost since embargo launch in June, with $30 billion in capital outflows including 10 percent banking system deposit withdrawal. Trade dropped 40 percent, with two-thirds of construction materials routed through Saudi Arabia and the UAE for offshore gas and football World Cup projects. US and Kuwait mediation attempts failed, and the sovereign rating outlook turned negative as the agency report cited an indefinite pause in regional infrastructure and capital market development drivers.


Iraq’s Unreconstructed Conflict Model

2017 August 23 by

Iraq’s first $1 billion stand-alone bond was oversubscribed at an almost 7% yield as security forces were poised to retake Mosul from ISIS control and the IMF released another $800 million under its $5 billion multi-year program. In February it issued for the same amount with a US government guarantee at 2%, and a decade ago a $2.7 billion restructuring operation was completed for the post-Saddam era. During July global oil prices also rose $10/barrel, but local investors stayed bearish on equities despite the average P/E ratio at 8 times as the Rabee Securities index slipped 10% in June. State banks are main listings and offer high dividends, with only one-fifth the population having accounts, and fees rather than lending driving income with assets concentrated in Treasury bills amid flush liquidity. The IMF’s review noted fragility and missed targets, with millions displaced by military campaigns and billions of dollars in infrastructure destroyed. The budget deficit was 15 percent of GDP last year, but it is to be eliminated through end-decade to stabilize public debt as the current account also returns to surplus over the period with passage of the defense and humanitarian emergencies. One third of the country, including 250,000 Syrian refugees current receive aid, but internal and external repatriation is unlikely to increase in the near-term even with liberation of Mosul and other cities pending credible rebuilding plans. Elections are due next year and the Finance Minister was replaced after losing parliament’s confidence with the Prime Minister assuming the post. Official debt doubled to near 70% of GDP since 2013, and bond yields spiked to 15 percent before the latest standby agreement was reached. The current account hole was over 8.5 percent of GDP in 2016 and covered chiefly by donor flows, as international reserves dipped to $45 billion or six months imports. The currency appreciated in line with the dollar peg, and credit to the economy was flat with banks’ undercapitalization and double-digit NPLs. Non-oil growth should pick up after ISIS’ defeat, while inflation remains low at 2 percent.

Fund conditions will preserve the dollar-linked exchange rate, as devaluation would aggravate inflation and fail to help exports, but simplify foreign currency allocation and trading procedures to shrink the official-parallel level disparity.  The central bank law will be strengthened with prudential rules to reflect prevailing international standards with outside technical assistance. Along with long-delayed bank restructuring the private business climate is in need of overhaul especially on electricity access and anti-corruption. Program risks are high, the report concludes, with a $7 billion financing gap identified for 2018-19 even under positive direction. Gulf, Asian and Western donors have been approached for additional pledges but regional supporters like Saudi Arabia and the UAE are under pressure to get their own houses in order, as reflected in flat stock market performance while the main core and frontier indices are ahead 15-25 percent. Jordan and Lebanon are also down for the year, with large refugee populations, political infighting and security threats, as “frailty” remains the watchword in the IMF’s view almost fifteen years after the international community’s first Iraq attack rumblings.


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.