MENA

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The Arab World’s Smudged Small Business Patchwork

2020 March 5 by

 Amid the hype over Saudi Aramco’ s 1.5% sale as the $25 billion world’s largest IPO corralling institutional and retail investors toward the the target $ 2 trillion valuation, an IMF paper laments “patchy progress” among twenty Arab countries in small and midsize enterprise capital markets access. This category is a “cornerstone” accounting for 90% of regional business as a major job and output source, but governments continue to lag in finance, training and infrastructure support. Regulatory, tax and governance frameworks are tilted in favor of large state-owned firms to stifle commercial and funding competition, and higher employment and growth trends will depend on overdue corrections. The analysis does not touch on Aramco, where banks offered retail investors subsidized loans and the wealth fund reached out to Gulf counterparts as an allied group, as an example of headline stock exchange listing advantages with swift inclusion in the core MSCI Index. It also came in the wake of an estimated $45 billion in area sovereign debt issuance, now one-third of the JP Morgan benchmark, as budget deficits soar despite recovering hydrocarbon export prices amid “piecemeal” SME  efforts, the report argues. As formal employers, the sector’s share is already 50% in Iraq and Lebanon and the informal one is greater throughout the geography. Women’s entrepreneurship is only 15%, less than half the world average. Bahrain, Egypt and Morocco have dedicated overall strategies, and three-quarters of the area has established credit bureaus and guarantee schemes. The former cover both individuals and companies, and the latter are often donor-backed with mixed public-private shareholding and presume modernization of insolvency laws. Arab private investment at 15% of GDP is behind emerging economies elsewhere, with small customer bank lending just 7% of the total versus 10-15% ranges in Asia, Europe and Latin America. An increase could lift growth 1% annually and create 8 million jobs over the next five years, the IMF projects.

The region ranks poorly on the World Bank’s Doing Business scorecard, and labor productivity and technology such as broadband are inferior. Research spending and innovation has not kept pace with peer economies, even as the 2018 Arab World Competitiveness Report shows interest in ecosystem development. It finds that early-stage startups lag low-income Africa, despite three-quarters of survey responses endorsing entrepreneurship as a career choice. In governance rankings weighing regulatory quality, rule of law and corruption the majority of countries “deteriorated the past decade.” Procurement and tax procedures are arbitrary, with small firms refusing government contract bids and prone to fiscal evasion.  On finance demand can be better mobilized through literacy and securities market promotion than direct government backing, which should concentrate and general education and infrastructure. Malaysia’s SME master plan through end-decade is featured as a model, which integrates licensing, registration and export match-making in a customized platform. Guarantees are only a partial tool and should be transparent on budget expense. An EU study of hundreds of thousands of small firms concluded that non-financial advice on risk management and networking ultimately raised growth and productivity, and that the group was often too diverse to clearly quantify costs and benefits in a sewn-up case.

MENA’s Capricious Capital Flow Flare

2019 December 26 by

The IMF’s Middle East and Central Asia October economic snapshot highlighted changing capital flow patterns from direct to portfolio inflows in recent years, with pronounced global financial market sensitivity regardless of oil prices. Five countries—Lebanon, Morocco, Pakistan, Qatar and Saudi Arabia—took two thirds of cross-border securities allocation and bank lending, and one-third went for sovereign borrowing mainly to close fiscal deficits. From 2016-18 the broad region accounted for 20% of the emerging market total, quadrupling its share over a decade. Oil exporters have dominated Eurobond issuance with $75 billion from last year through the first half of 2019, while bank flows are above other geography averages despite severed correspondent relationships in Iran and Yemen. For oil importers, current account gap financing is a major driver, despite outstanding foreign investor access and ownership limits as competitive disadvantages. Inflexible exchange rates can also heighten volatility, and the lack of local institutional bases for liquidity and size, and weak corporate and government transparency, can spur large crisis outflows according to a Fund “push-pull” model. Its research also found relative “decoupling” from geopolitical tension despite a spike in a “social unrest index” of protest and strike media coverage.

OPEC has been unable to control this year per barrel oil value fluctuations between $55-75, as hydrocarbon exporter growth is forecast at 1.5%, although the pace should double in 2020. Reduced productivity and FDI dampen output and the Gulf will expand less than 1%, with Kuwait, the UAE, and Qatar looking to sporting and tourism events for boosts. Iran is in “steep recession” and will contract almost 10% under pervasive US sanctions. Algeria, Iraq and Libya are in conflict, and regional non-oil growth is lackluster with narrow private sectors. Commercial banks are adjusting to real estate declines, as state-owned system restructuring is long overdue. Bahrain and Oman have thin fiscal cushions and may need neighbor support, while civil servant wage bills and subsidies are too generous everywhere. Consumption and value-added taxes should be introduced, and procurement processes overhauled. Structural reforms and securities market modernization in particular, could lift GDP half a point annually, with partial sale of designated “strategic” enterprises an untapped revenue and efficiency source. A headline transaction is the 5% IPO of Saudi Aramco listed on the local stock exchange as a 600-page prospectus attempts to lure foreign investors with flush dividend and earnings projections.

Oil importers can expect “tepid” recovery with 3.5% average real growth, on inflation “at bay” outside Egypt, Pakistan, Sudan and Tunisia. Despite solid inward remittances, current account deficits and external debt will together be $250 billion, or 150% of reserves. Lebanon is currently in political and financial crisis against this backdrop, as the pegged exchange rate and bank rollover of state debt through complex “engineering” may be exhausted. Primary fiscal balances are negative across the board, and off-balance sheet liabilities are often untracked. Jordan and Tunisia have large refugee populations with international aid only partially offsetting budget costs. Like Egypt they are under traditional IMF programs to stabilize fundamentals and foster “inclusive” economies with a mixed track record. Egypt’s reserves were replenished and the fiscal deficit cut from double digits, but the 700,000 annual job creation goal remains elusive as a successor arrangement is also pending.

Tunisia’s Overdue Aid Revolution

2019 December 13 by

Since instigating the Arab Spring in 2011, Tunisia has been held up by the international community, which plowed in billions of dollars in aid under standard bilateral and multilateral programs, as a rare political model of competitive democratic elections even though economically it has been stuck in a lost decade of stagflation. That disconnect helped explain the runaway 70% victory of a total outsider, retired professor Kais Saied in the October presidential election after his predecessor died in office. He had no party and limited campaign appearances, and his vague platform called for Tunis to devolve more power to localities and later for a popular shift “from frustration to work” in the inaugural speech. Voters rejected a business executive as savior as opponent Nabil Karoui spent time in jail on corruption and money-laundering charges and could not expand his personality-driven movement beyond parliamentary seat gains.

 The legislative polls around the same time, with ministries and state largesse to be handed out, will more decisively drive the economic and financial system agenda, but the Islamic-leaning coalition Ennahda did not win a majority as the main secular rival Nidaa Tounes was shellacked. Negotiations on a working government arrangement could be prolonged and a recipe for gridlock, as another International Monetary Fund adjustment program disappoints and public debt exceeds 70% of gross domestic product. After attempting coordinated “Marshall Plans” targeting fiscal and banking overhaul and corporate and official governance in the early post-Arab Spring period, the US, EU and Asia have slashed commitments and gone their separate ways. With Tunisia supplying ISIS fighters and facing its own terrorist challenge after bloody tourist attacks, money and focus were diverted to security issues. No new initiatives will accompany the latest election round, as opinion surveys show longing for the last decade’s dictatorship when growth was double and unemployment half current trends. In the vacuum the global business and financial communities can step up, and offer to act as standing advisers to help avoid looming crisis and pave the way for mainstream emerging market entry.

The IMF predicts 1.5% growth this year, half the original forecast, and 2.5% in 2020 on estimated 30% youth unemployment. The second quarter showed a broad-based output drop across agriculture, construction, textiles, and mining despite tourism recovery. Inflation is almost 7% and the benchmark interest rate is 1% above that level. The budget deficit is due to come in at the lowest since 2011 at 3.5% of GDP, with debt-servicing one-fifth and the public sector and enterprise payroll 40% of the budget. The government took out a $3 billion Fund loan in 2016, with another $500 million disbursement scheduled soon. The powerful labor union federation extracted wage increases from its leverage over the political process and continues to lead widespread strikes. Its hiring demands and sit-downs have brought the state-owned phosphates producer in Gafsa, accounting for 10% of exports, to the brink of collapse. The group fights partial privatization on ideological grounds dating from the post-independence era from France, despite desperate plant modernization and fiscal revenue needs.

International financial institutions have long criticized the inefficient and unproductive official sector and thin private competitive and capital base, as first half debt principal repayment jumped 50% to $1.2 billion, according to the Finance Ministry. Poverty is stuck at 15% despite higher social spending, and $1 billion will be borrowed domestically and $3 billion externally next year, including another planned $750 million-plus Eurobond after one in July at a 6.5% yield. On the brighter side the currency stabilized against the dollar and euro heading into elections, and foreign direct investment rose 15% to $400 million in the first half as the government promotion agency unveiled a digital platform. In contrast portfolio inflows were down one-third as Tunisia’s MSCI index frontier stock market component was slightly negative through September.

Stock exchange capitalization is a paltry 20% of GDP versus 70% in neighboring Morocco, and former Finance Minister Jaloul Ayed is among critics of the lack of capital market deepening and reform, including development of secondary Treasury bond trading. Officials came to  Washington several years ago under a regular US-Tunisia Economic Council meeting intending to tap global banks and fund managers for long overdue internal modernization and cross-border integration, but the agenda was overwhelmed by State Department counterterrorism concerns, and gatherings have since been shelved. In additional financial sector areas, from bank privatization to anti-money laundering after the country was recently removed from an international watch list, reimagined assistance can again lift revolutionary spirits and tangibly raise trust in improved living standards. According to studies only 30% of the population still believes in that promise, and market progress after years of neglect could boost investor and citizen confidence.  

Lebanon/Turkey’s Rearguard Refugee Roundup

2019 October 4 by

Media and law enforcement reports that thousands of Syrian refugees in Lebanon and Turkey, out of the millions fleeing there from the 8-year civil war, had been forcibly relocated or detained heightened investor aversion amid recession, monetary and political risks. Through August their respective stock markets were down 4% and 21% on the Morgan Stanley Capital International Index, as Fitch downgraded Lebanon’s sovereign rating to “CCC” near-default with officials scrambling for more “financial engineering” to manage the 150% public debt/gross domestic product ratio.  The Istanbul government threatened to remove up to half a million unregistered Syrians before an end-August deadline and take them to permitted provinces and border areas, as rumors circulated  that ethnic Uighurs could also be deported at China’s behest.  

Turkey hosts the largest population escaping the Assad regime conflict and claims to have spent over $35 billion on processing, infrastructure and social services since 2011. It signed a euro 6 billion deal with the European Union in 2016 to prevent onward migrant movement, as aid groups cite evidence that refugees have been returned to Idlib, the last opposition city holdout, in violation of international law. President Recep Tayyip Erdogan’s party lost the rerun of the Istanbul mayor’s race in part due to opinion surveys showing discontent with the influx amid economic slowdown.

 In Lebanon refugees do not have the same rights to education and employment and children have joined parents in low-wage underground farm and factory work. Output will again contract this year around half a percent, with cement and car sales dropping 25% from January-July although tourist arrivals remained positive. The forecast does not yet incorporate the fallout from creeping Hezbollah-Israel reprisals as the Netanyahu administration tries to curtail the Iran ally’s military presence next door, where it is a member of the government coalition often against budget and state enterprise reforms.

Positive GDP growth in 2020 depends on fiscal, structural and banking sector adjustments that can also release over $10 billion in aid pledged at a Paris conference. The cash budget gap this year is estimated at 8% of national income with accumulated arrears to official and private contractors, according to a September Institute for International Finance(IIF) analysis. Banking deposit interest and individual income taxes were hiked, and lower oil import prices should reduce government electricity company losses. Next year value added and fuel levies will rise, and an independent tribunal is to fight chronic tax evasion. Interest servicing should decline with this consolidation and less pressure from the near 15% local currency yields the central bank offered in direct commercial bank deals over the summer.

 The IIF believes this “feedback loop” could bring 2.5% economic expansion at around the regional average, especially if accompanied by monetary easing with the 1500 Lebanese/US dollar peg intact. In the past month banks attracted $2.5 billion in non-resident deposits to lift foreign reserves above $30 billion, but the high interest rate choked domestic credit at the same time, with construction and real estate portfolios souring. Capital adequacy and liquidity are solid, but bad loans are 11% of the total in International Monetary Fund classification, twice the central bank’s figure. Resident capital outflows run at an annual $2 billion, and the current account deficit is a whopping 20% of GDP. Exports are mainly gold and jewelry, and improved tourism earnings will be offset by weaker worker remittances from elsewhere in the Middle East. Benchmark 10-year Eurobond yields reached 13% recently on the ratings and geopolitical downgrades, and near-term normalization awaits convincing breaks with decades of competitive and corruption stalemate, the IIF notes.

In Turkey almost one-third of the outstanding $350 billion in foreign currency debt, two-thirds in private company hands, comes due over the next year. Borrowers rely on cross-border rollovers of bank trade credit rather than diaspora lines, and they were routine until the 40% lira depreciation and President Erdogan’s erratic economic and foreign policy moves the past year. With recession cramping imports a rare current account surplus was achieved, but investor anxiety has spiked with the abrupt sacking of the central bank head after he refused to modify the prevailing 25% interest benchmark. His replacement rapidly cut the rate 425 basis points and signaled more reductions to follow, with inflation still in the 15-20% range, in another suspect engineering feat.

Iran’s Raucous Sanctions Romp

2019 September 27 by

After a 20% gain in the fiscal year first quarter ending in June, the Tehran Stock Exchange local index added another 5% through August in the face of  US “maximum pressure” sanctions banning all global oil and banking engagement, as the government hailed decelerating currency and economic slide. The market seemed to shrug off Persian Gulf military alerts on seized oil tankers amid reports a secret trading unit was in place to continue exports to China, India, Syria and Turkey. Analysts estimate that up to 500,000 barrels/ day can be sold in comparison with the previous peak five times that amount, despite Washington’s claims of shutoff campaign victory. The Oil Minister Bijan Zanganeh preserves total deal confidentiality as “war information,” as daily inquiries reportedly arrive intended more to glean intelligence than to arrange shipments. July’s official sales tally was 100,000 barrels/day, an 80% decline from the same month in 2018, as Supreme Leader Ayatollah Ali Khamenei lashed out at the Trump Administration’s “economic terrorism.” He acknowledged that “easy income” from crude oil was no longer viable, and urged domestic goods and services diversification and higher productivity.

Vice President Eshaugh Jahangiri recently told business executives that the past year’s shock from sanctions and poor policy had worn off, as central bank head Abdolnasser Hemmati cited new rial stability at around 120,000 dollar on the parallel market, a 40% recovery over the past year. A secondary regulated foreign exchange hub for non-essential imports was launched in July to relieve pressure, and the Iranian cabinet approved legislation to redenominate the currency by eliminating four zeros and renaming it the toman. This process is well established in emerging markets to engineer a one-time devaluation and attempt to dampen future inflation expectations, with the current rate at 40%. Under the plan 10 rials will equal one toman, and the administrative and printing costs for the transition are put at $150 million. Despite these changes, the government continues to crack down on unauthorized “enemy” dealers, with the judiciary arresting dozens who could face execution. Leaders at Iran Revolutionary Guard Corps-controlled Bank Ansar were implicated in speculative schemes, amid other major financial sector corruption cases targeting the former chief of Sarmayeh Bank and labor minister, who received millions of dollars in loans without collateral.

The minister was a well-known Reformist party lawmaker and so-called “aghazadeh,” roughly translated as “child of a noble.” This bloc is a main pillar of support for President Hassan Rouhani, but its standing has waned ahead of parliamentary elections scheduled in six months. A candidate recently lost the deputy speaker race, and a conservative cleric ousted the chair of the national security and foreign policy committee from that group. In Tehran municipal contests in July, the Reformists in charge had a mixed showing on just 10% voter turnout. Opponents accused them of “poor performance “in a sign their legislative majority could fade next February as another movement, Iran Revival, embraces the political and economic overhaul mantle.

Gross domestic product is down 5% and forecast to be barely positive next year, with the International Monetary Fund projecting just 1% growth into 2024. Economists note a 2% decline in private consumption as a relative bright spot, as stock pickers target household plays such as Seamorgh, a poultry company, and Bank Pasargad, a privately-owned retail lender as compelling alongside the bargain five times average price-earnings ratio on the exchange. Futures and options trading began the past year, and a “prime” listing tier will soon be inaugurated with a minimum 25% free-float and formal corporate governance and transparency score, according to management. Securities depository information through July shows financials, chemicals and autos as the most actively traded sectors, often through ETFs investment houses with overseas experience pioneered. Large scale state enterprise divestiture could be on the table as well as a stock market driver in the near future, as Iran’s Planning and Budget Organization issues a blueprint for further constraining deficits after citizen subsidy rollbacks. While foreign borrowing fell 5% in the end-March quarter to $9.5 billion under US prohibition, domestic debt through Islamic Treasury bills as a fresh channel has spiked, while the government turns to barter to settle private sector arrears under self-inflicted maximum fiscal pressure. 

Tunisia’s Testing Turnaround Trickle

2019 August 10 by

Tunisia joined other Middle East frontier markets Jordan, Lebanon and Morocco with flat to negative results on the Morgan Stanley Capital International Index through mid-year, as the composite gauge was up 8.5%. Despite billions of dollars in international community support since the Arab Spring eight years ago, it has not escaped lackluster 2-3% gross domestic product growth and now heads into another election cycle with political party unity also stalling. Tourism has recovered from a spate of bombings, but recent terrorist attacks on police posts renewed fears at the same time the over 90 year old president was rushed to hospital before his term ends in November. If incapacitated, the octogenarian parliamentary speaker would assume the position. Legislative polls are slated for October, with the Ennahda wing of the splintered ruling coalition pulling 15% in opinion surveys, and the prime minister’s new party only single digits. An outsider wealthy media executive is ahead in popularity, but may be disqualified since no candidate can use foreign funds. The election code also bars challenge to the basic tenets of the 2011 constitution enshrining secular principles and women’s rights, and strict Islamic candidates have complained.

The IMF in June released another $250 million slice of its latest 4-year $3 billion program, amid “high risks to socially-balanced economic stabilization.” It noted energy price hike backsliding after union and business protests last year, with the powerful workers’ federation a main political force. Its strikes stifled phosphate exports, as official unemployment is over 15% and an estimated 30-40% for youth. Inflation and the central bank policy rate are both around 7.5%, with credit growth also at that pace in the first quarter. The fiscal deficit is under 5% with public debt above 75% of GDP, as dinar depreciation swells the latter. The 11% current account gap in 2018 was the highest in decades as agricultural, electrical and textile exports slumped, leaving reserves under less than three months import cover. Medium-term growth could reach 4-5% with the external payments balance halved under an optimistic reform and donor aid scenario, but the immediate picture is grim. Europe slowdown will further dent foreign investment and remittances, as debt peaks at 100% of output at end-decade, the Fund predicts. It warned against civil servant salary hikes in election promises and further state enterprise borrowing, as value added tax is due to rise 5% inviting popular anger.

 On monetary policy the central bank aims for positive rates after inflation, and has reduced commercial bank refinancing. Capital adequacy is sufficient, but the bad loan portion nears 15% and liquidity ratios are strained. Tightening and exchange rate weakness will continue, with the latter at risk of overshooting with more competitive interbank auctions. Small business funding remains constrained pending credit register and collateral changes, including implementation of a new secured transactions law promoted under a US Agency or International Development initiative. Future donor support is a key variable, especially from the Gulf as it tails off from the immediate Arab Spring aftermath, and sources reevaluate investment prospects, the Fund comments.

A Saudi Arabia Article IV consultation at the same time listed domestic priorities that have assumed urgency in the past decade of actual or threatened regional ruling regime overthrow. The IMF calculated mere 2% growth this year on double-digit unemployment, and worsening fiscal and current account balances. Deflation has set in and credit growth will be in single-digits, as banks grapple with deteriorating loan portfolios and capital markets are unable to fill the funding hole. The sovereign wealth Public Investment Fund has successfully borrowed tens of billions of dollars in high profile external debt operations, but the demonstration effect ended there amid longstanding official and corporate governance doubts. The so-called Vision 2030 has yet to take shape amid chronic internal labor and private sector deficiencies, according to the analysis.

The richest sovereign wealth fund and another Tunisia backer, Abu Dhabi’s ADIA, published its 2018 annual report in July estimating lower 5% yearly returns. Its Middle East/ Africa portfolio was 7% of the total, with developed equities outstripping by 10% emerging market ones as the largest exposure. Allocation responsibilities remain split between internal and external managers, who have begun to follow environmental, social and governance criteria. Tunisia’s anti-corruption efforts still lag as measured in the Fund checkup, testing investor eligibility and patience election reshuffling has yet to grasp.

Iran’s Battered Bank Switch Spirits

2019 July 28 by

Amid worsening stagflation, currency depreciation and the comprehensive US sanctions campaign moving the past month from oil to other exports and Supreme Leader Ayatollah Ali Khameini’s multi-billion dollar religious foundation controlled assets, the Tehran stock market index recently reached a record 240,000 after poultry and chemical company initial public offerings. In dollar terms it still had outperformed the Morgan Stanley Capital International Frontier Index at the end of April with a 7% loss versus MSCI’s 12% on an annual basis, with  price-earnings ratios at eight times or half the broader emerging market universe average. In the earlier stages of the Trump Administration’s self-described economic “maximum pressure” for renegotiation of the anti-nuclear pact, banks long struggling with undercapitalization and double-digit bad loan portfolios were still relative stock exchange buys. President Hassan Rouhani had campaigned on a re-election platform of modernizing and strengthening the sector, including through more independent central bank oversight and capital market diversification.

 In March four banks linked to the powerful military were merged, following a move last year to bring unregulated credit providers, some associated with the Revolutionary Guard (IRGC), under supervision after poor practice triggered depositor runs. Toward the end of the last fiscal year through March system deposits rose one-third to over $150 billion at the prevailing exchange rate, with even Ansar Bank, newly targeted by Washington as IRGC-owned, reporting steady inflows. However the full onslaught since, including the Guard’s official designation as a terrorist organization placing financial institution holdings at greater risk, has reinforced the domestic “resistance” revolutionary philosophy originally driving bank nationalization four decades ago. Instead of recognizing and incrementally addressing a “slow motion crisis,” in the words of a June analysis from the Washington-based Peterson Institute for International Economics, the regime has indefinitely shelved reform. It will be difficult to revive even after the siege passes, and may invite outright collapse that neither the Rouhani nor Trump administrations planned for in ratcheting the confrontation.

Iran’s official statistics reported that gross domestic product shrank 5% last fiscal year and inflation was almost 40% in June, with staple food and medicine prices rising even more. The International Monetary Fund and World Bank predict worse output contraction and 50%-plus inflation this year, in part due to nonstop currency devaluation. The government rate is around 40,000 for defined essential imports, and the parallel one it has tried to muffle with dealer raids has fluctuated between three and four times that level in recent months.

 Oil sales with the end of waivers to US allies were an estimated 500,000 barrels/day in May, one-quarter the total after ramping up in the immediate aftermath of sanctions relief two years ago. The Treasury Department added steel shipments to the prohibited list, in a push championed by White House national security hardliners when separately applying tariffs on China. Unemployment figures have not been updated, with the youth rate already 30%, as big European carmakers Daimler and Peugeot shut local operations. France, Germany and the UK devised a non-dollar alternative payment structure, Instex, to allow cross-border commerce, but it has not yet been tested and will focus initially on pure humanitarian transactions.

The Peterson Institute paper points out that inflation is also due to 20% annual money supply growth, mainly from central bank liquidity injections to state and private lenders over the past year’s sanctions-aggravated crunch. Its lines also fund the budget deficit, estimated to exceed 3% of GDP this year in contrast with previous balance. Central bank head Abdolnasar Hemmati has considered issuing bonds to outside retail and institutional investors as another outlet, as he also received new authority several months ago to experiment with open-market operations in monetary policy. However his priority now is on tightening the central bank’s grip on the payment and foreign exchange systems, and wholly or partially state-run institutions to overcome US pressure magnifying the “bad situation already” into 2018 according to the Peterson research. Capital adequacy at 4% of assets is half the Basel recommended standard, and nonperforming loans are conservatively estimated at 20-30% of the total if international classification norms apply. Iran has relatively low domestic debt at 30% of GDP, and critics argue that it may be able to throw money at the problem, as reform chances are also thrown away for the foreseeable future in the renewed sanctions squeeze recoil.

Sudan’s Dire Deployment Design

2019 July 5 by

After ousting three-decade ruler Omar al-Bashir and beginning negotiations for civilian government transition with demonstrators loosely grouped under a “professionals association,” Sudan’s generals reverted to their harsh stance against opposition forces with widespread attacks and killings. Reports circulated of sweeping arrests and dozens of bodies dumped in the Nile River by the military’s notorious Rapid Deployment Force, also recruiting soldiers for Gulf allies’ fight against the Houthi rebels in Yemen. Saudi Arabia and the United Arab Emirates had pledged $3 billion in assistance to the interim regime before the crackdown, with the budget coffers empty from years of subsidies and underwriting the army and intelligence apparatus. The estimated deficit at 20% of gross domestic product was plugged by central bank lines, releasing a liquidity wave and 50% inflation.

The independence of South Sudan providing 75% of oil revenue, with China as a prized customer, and years of US sanctions imposed after Darfur atrocities otherwise decimated the economy. Banks are near collapse amid a draconian hard currency shortage, as the sovereign is cut off from traditional multilateral funding with its poor human rights record and accumulated $50 billion arrears. Commercial debt is in default trades on “exotic” secondary markets at pennies on the dollar. Holders envisioning eventual global financial reintegration under a peaceful post-Bashir succession had begun organizing a creditors’ committee, before the latest events pre-empted near term “Nile Spring” political and business reforms.

At the same time Khartoum confrontations worsened the International Monetary Fund came out with a dire Article IV consultation on South Sudan, which still must regularly transfer a portion of oil earnings north under the autonomy agreement. It has been in civil war along ethnic lines since 2013, with 40% of the population displaced internally or fleeing to neighboring countries as refugees. Since independence in 2011 real income is down 70%, and a tentative peace agreement signed in late 2018 for power-sharing between the President and Vice President and their rival factions has not yet been implemented under a May deadline. Output shrank over 20% the past three years, although oil production recovered to 150,000 barrels/day early in 2019. In fiscal year 2017-18 almost all petroleum earnings went to repay Sudan and collateralized loans from China and elsewhere. Central bank borrowing covered the budget deficit, as arrears increased an estimated 3% of GDP.

Exchange rate depreciation continues, as commercial banks must surrender holdings in multinational company and international organization “special accounts” to the central bank. The parallel market dollar premium over the official rate was 80% in April, and South Sudan is in “debt distress” with external and domestic backlogs. With peace and a national unity government growth could reach 3.5% this fiscal year, under the reopening of damaged wells that can increase output to 200, 00 barrels/day over the next five years. However the state oil company Nilepet has no financial statements so balance sheet and operating performance is unknown, according to the Fund review. It urges currency market liberalization, bank recapitalization, and economic diversification in agriculture/fishing, and officials agree in theory but insist on gradual moves to cushion volatility with the security situation likewise fluid. The South’s evolution may have presaged Khartoum’s backward slide, and argues against quick reform breakthroughs as Chinese and Gulf companies try to maintain investment values.

In Yemen where Sudanese forces enlisted for combat with the Riyadh-backed internationally recognized government in Aden, a May meeting in Jordan under UN auspices with Houthi representatives over budget and central bank conduct broke down in discord. The Houthis control Hudaydah port, where fierce clashes erupted until a cease-fire. It is a critical food import hub generating tens of millions of dollars in annual revenue. Aden authorities insisted they should be in charge of the money with better administrative capacity to pay overdue civil service salaries, and that Houthi central bank official appointments in the area were illegal. The sides tried to strike a compromise text, but in the end took no action other than to commit to further dialogue. The Sana’s Center for Strategic Studies, whose experts attended the Amman sessions, pointed out the meager result may have been a reflection of the UN Special Envoy having only one dedicated economic staffer amid broader conflict resolution demands, as both Sudans threaten to repeat the pattern.   

Bahrain’s Contradictory Conference Agendas

2019 June 22 by

Bahrain stocks, on a 20% roll through April on the MSCI Frontier index, looked for further grounding as the oil and offshore banking hub will host a regional economic development conference with the long-awaited US aid and diplomatic blueprint for Mideast peace as a centerpiece. It was chosen in part as a relative success story with commodity diversification after launching a global financial services sector decades ago recently reinforced with a new bankruptcy law and full foreign ownership scope. The state aluminum company is a heavyweight accounting for 5% of GDP, on 5% unemployment with two-thirds of workers in the private sector. A government fund offers loans to startup small businesses, as migrants are increasingly steered to low-wage jobs nationals shun. However official positions continue to pay a premium and the Shia majority demand entry as a chronic source of sectarian violence and tension against the ruling Sunni elite. Oil is still half of exports and two-thirds of budget revenue, as last year’s deficit topped 10% of GDP, with neighboring Saudi Arabia leading a $10 billion rescue to seal the hole. A 5% value added tax was introduced in the package, but corporate and income levies and utility subsidy cuts are largely off the table for fear of social unrest. The island ranks high in the Gulf in the World Bank’s Doing Business list with manageable bureaucracy, but education and skills training lag for technical services professionals, according to human resources surveys.

In May MSCI began elevating Saudi stocks to the core index, but large global funds hesitate to raise exposure beyond a fraction of assets, with price-earnings ratios at 20 times and lingering human rights and geopolitical concerns. BlackRock and HSBC unveiled dedicated vehicles at an April gathering in Riyadh, which marked the end of boycotts since the killing of international journalist Khashoggi. It was organized in part to drum up excitement for the Aramco $12 billion external bond instead of the original equity placement, with the proceeds to go toward buying a 70% stake in listed petrochemical giant Sabic. The offer was ten times oversubscribed, but the price fell soon after launch as overseas debt hit 30% of GDP. With the load accumulating local retail investors are new targets for sukuk issuance despite unfamiliarity with the product. With Gulf sovereign bonds now in the benchmark EMBI index after an admission wheeze by sponsor JP Morgan, attention has turned to the trade’s other side, with portfolio managers taking short positions in Oman and Qatar in particular as well in credit default swaps.

Jordan shares were slightly in the red through May, after the country met with donors in London and agreed to extend the $725 million IMF program another year. The King dismissed the previous prime minister and cabinet last June after anti-austerity street protests, and despite a tax amnesty the fiscal deficit will come in over 4%, with public debt at 95% of GDP on continuing state electricity and water company losses. A 10% current account gap leaves usable reserves at $15 billion, and dependence on $10 billion in bilateral and multilateral lines through 2020 alongside Eurobond taps. As host to a million and a half refugees outside the original Palestinian displacement, it looks to an unlikely conference breakthrough to create an alternative   economic and political stability hub.

Iran’s Offsetting Oil Anguish Salve

2019 May 19 by

The Tehran Stock Exchange local index hit the record 200,000 mark despite harsher US sanctions aiming to eliminate oil exports and branding in full the Revolutionary Guard (IRGC), which controls listed companies accounting for an estimated one-fifth of the economy, as a terrorist organization. Investors preferred equities over the battered currency and gold markets as they sought refuge from deepening stagflation, with gross domestic product down 4% on 30% inflation through the last fiscal year ending March, according to government figures. The International Monetary Fund predicts greater output contraction over the next year to 6% as consumer prices rise 40%. Oil earnings fund around half the budget, with last year’s deficit at an historic $15 billion. The central bank, which has just begun formal open market operations, is responsible for 20% money supply expansion to further embed inflation, as it tries to kick-start growth and ensure banking system liquidity.

 Economic and financial sector health is at its worst since 2012, when previous global as opposed to unilateral sanctions pushed Tehran into relief talks with outside powers in exchange for nuclear weapons development monitoring. While Washington has withdrawn from the deal, Europe and Asia are still in, as they look for cross-border payment structures to allow continued trade without drawing US Treasury Department ire. France and Germany championed a special-purpose vehicle for barter exchange in essential goods, but it not yet in effect and may be confined to highly-restricted humanitarian purposes with the Trump Administration’s intended ban on all oil exports and Revolutionary Guard-connected transactions. Iraq is the only country to get permission for a waiver on petroleum shipments, and China and Turkey criticized the decision and may phase them out over time, but their banks and companies are clearly in enforcement cross-hairs. The Bank of Kunlun, a well-known Chinese intermediary, has already faded from the scene, and policy banks leading the bilateral Belt and Road initiative are also on the alert. However domestic retail investors have factored in these outside worst-case scenarios and see local currency value only in shares, with the rial in parallel trading free fall toward 150,000, compared with the 42,000 official rate, after the IRGC’s terrorist designation.

Iranian oil sales through March plunged around 60% from the 1.5 million barrels/day projected in the budget, before the Trump Administration’s zero target was finalized. Non-oil exports slipped 6% to $45 billion, reversing the previous year’s 12% increase. The squeeze’s fiscal hole is exacerbated by widespread tax evasion, estimated at 30-40% of the eligible base according to a parliamentary commission. It also jeopardizes the traditionally positive current account balance and international reserve position, which analysts believe is now below $75 billion, with only a fraction held at home immediately accessible and liquid. Iranian officials claim the stash is ample and that their heavy crude is not readily replaceable by major Gulf producers, and secret transaction channels are in place for backup. However recession was reported across the board in the last September-December 2018 quarter, including agriculture, mining and industry, which plunged 9%. Flooding the past month added economic damage with losses put at $2.5 billion, and catapulted meat and vegetable prices 100% into the Persian New Year, government statistics showed.

The World Bank’s Middle East/ North Africa outlook released for the Spring Meetings forecasts another year of near 4% contraction, a 5% of GDP fiscal deficit, and slight current account surplus. It will be the only country in the region in recession, with unemployment also expected to worsen to 15% on youth joblessness double that figure. Multilateral agency observers cite promised banking sector reforms, including central bank monetary policy conduct through benchmark Islamic finance instruments, bond and interbank market deepening, and stricter independent regulatory oversight as pathways out of crisis. They have long advocated exchange-rate unification, shelved indefinitely a year ago when emergency import measures and an informal dealing crackdown were imposed when the US left the nuclear agreement. Iran’s Budget and Planning Organization head admitted in April that the “ approach is not working” with fraud and embezzlement and offshore flight allegedly pervasive. The multi-tier system may be simplified in an open electronic platform, as central bank governor Abdolnasser Hemmati also points to “psychological factors” in currency panic due to linger without broader economic policy sanity.