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General Emerging Markets (173)
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Latin America/Caribbean (162)
Iran’s Capital Markets Deal Bridge (Financial Times)
2018 August 9 by admin
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.
The Middle East’s Munificent Modernization Script
2018 May 24 by admin
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.
Egypt’s Secure Election Sieve
2018 March 29 by admin
Egypt’s February external bonds were again oversubscribed, with the 30-year yield falling below 8%, ahead of the end-March election where President Al-Sisi does not even face token opposition, since the lone eligible candidate Moussa is an ally refusing to debate as too much of a “challenge” to the incumbent. Along with jailing political opponents and activists before the contest, journalists have been rounded up as military officers take over large media swathes. The government has also tried to block websites and managed to close hundreds as “fake news and extremist.” It released footage of reported ant-terror raids in the Sinai in a bid for public support, but turnout could lag the less than half of voters who participated in 2014, when the then general got 97% of ballots. Since signing the IMF accord and floating the pound, foreign investors have poured into debt and equity with double-digit returns despite near 20% inflation and the 8.5% of GDP fiscal deficit after fuel, but not more sensitive food subsidy cuts. The recently inaugurated Zohar gas field in the Nile Delta should generate billions of dollars in revenue and cheap energy, and staunch donor Saudi Arabia in March inked a $10 billion deal for a border “megacity” and business zone called Neom Riyadh had previously unveiled at a big 2017 investor conference.
The Kingdom plans to refinance its own $10 billion sovereign loan from 2016 as the budget deficit will still be over $50 billion or 7.5% of GDP this year despite higher oil prices. The public debt cap is set at 30% of output, with the current level approaching 20%, and the petroleum earnings windfall has been partially diverted to the separate $250 billion wealth fund, about equal to the reserve drawdown in recent years. A 5% value added tax was introduced after excise levies went on to soda and tobacco to also encourage healthier lifestyles amid a diabetes alert. To boost coffers, payments have also slowed on outstanding contracts according to export credit agencies, and an initial $15 billion was collected from detained business executives in the Ritz-Carlton hotel accused of corrupt and irregular transactions. Officials claim they will eventually net $100 billion through continuing investigations and control over asset disposition while they are pending. Crown Prince bin Salman embarked on a global financial tour after the action to tout his economic reform agenda and the Saudi Aramco IPO as a centerpiece, which may be delayed into 2019. He has been behind the aerial bombing campaign against rebels in Yemen which has displaced and sickened millions as a world’s worst humanitarian crisis. The central bank is broke, and the Saudis allocated $2 billion in January to relieve currency collapse and mass starvation. Morocco also has a King in charge who has warned of a “political earthquake” if living standards and regional income extremes are not clearly improved under the 5-year development plan. The IMF’s $3.5 billion latest precautionary line was completed to a mixed review. On 4% GDP growth and initial widening of the exchange rate band, the report urged greater flexibility and fiscal and business environment reform to also address social tensions flaring alongside core phosphate exports.
Iran’s Convulsive Currency Crux
2018 March 29 by admin
The Tehran Stock Exchange was on track to close the end-March fiscal year with a 25% gain in local index terms as a remaining safe haven after the commercial currency market, a popular investment alternative, was shattered by a record plunge in February to 50000 rial/dollar prompting officials to shut dozens of dealers and ban imported good greenback use. Central Bank governor Valiollah Seif, after keynoting the Euromoney Iran conference in Paris in the wake of major French oil and auto sector commitments, abandoned business-friendly rhetoric and vowed to work with security forces against “speculators.” The monetary authority issued high-interest bonds in an attempt to divert leftover liquidity, as its own operations came under banking community criticism for uneven intervention following months of bottlenecks in accessing foreign exchange.
A new electronic trading platform to be rolled out is designed to facilitate transactions, but the market has also been spooked by recent national anti-regime protests with thousands of arrests, international nuclear pact doubt as US President Trump calls for renegotiation and stiffer sanctions, and pared Gulf bank ties as a corollary to the Qatar boycott for its perceived Iran alliance. Citizen anger has been directed at Supreme Leader Ayatollah Ali Khamenei and President Hassan Rouhani for religious foundation and Iran Revolutionary Guard Corps (IRGC) economic domination, while lifetime savings have been lost in unregulated financial institutions and social spending continues to decline in real terms amid double-digit unemployment. The President’s second term assigned priority to banking crisis management, and billions of dollars have been released slowly for depositor reimbursement, bad loan reduction and recapitalization. The Supreme Leader acknowledged in a February speech the need for low and middle income earner “justice” but remains opposed to dismantling state and IRGC financial and industrial sector control, including in monetary policy where the government continues to dictate Islamic “return” rates and exchange rate unification is now indefinitely postponed.
Since the currency squeeze the market rate recovered to 45,000/dollar, as the authorities try to prevent inflation worsening from 10% and preserve 4% GDP growth mainly on oil export rebound. According to a University of Maryland-commissioned survey two-thirds of the public consider the economy “bad,” versus half when the six-country nuclear agreement was signed with initial sanctions lifting. The Supreme Leader ordered the Guards and the rest of the military to sell off “irrelevant” assets in January without defining them, and equity investors view divestiture as inextricably linked to greater transparency, free float and corporate governance which can establish Tehran as an accepted frontier exchange and catapult placement in the World Bank’s Doing Business rankings. Their poor management and hard line contributed to a months-long strike at a big steel company listing, where worker demonstrations over unpaid salaries were met with arrests.
The Industry Ministry estimates that $180 billion in foreign direct investment is required to achieve desired 7-8% medium-term growth, but last year only $2 billion was registered. It continues to blame residual US restrictions for keeping multinational banks and their clients away, even though $55 billion in credit lines were recently secured from Europe and Asia, including lenders in Austria, Italy, Belgium, China and South Korea. Iranian banks are fully reconnected with the SWIFT cross-border payment network, and have started to apply global anti-money laundering and terror rules created by the Paris-based Financial Action Task Force. President Rouhani in March urged international regulatory compliance as part of a “modern Islamic system” despite a backlash from conservative lawmakers describing such measures as “disarmament.” He admitted “shortcomings” including tens of billions of dollars in non-performing assets and fraud such as in the 2017 collapse of the Caspian Credit Institute, which helped trigger popular outrage. Separately municipalities such as Tehran have run up huge debts, with the capital’s annual servicing cost at $1.7 billion, according to representatives.
In the first ten months of the fiscal year total loans rose 8% to $100 billion, as the 2018-19 budget extended central bank support for penalty forgiveness of overdue obligations. The housing bank Maskan, the Export Development Bank, and Melli, the largest state-owned unit received capital injections. President Rouhani’s advisers have long advocated much bolder approaches, including a possible joint public-private sector asset disposal agency, but as problems fester their credibility has become a rapidly-depreciating currency.
Iraq’s Stalled Post-ISIS Stake
2018 March 2 by admin
Iraqi bonds and stocks held by specialist foreign investors tried to shake off extended torpor, as a donor conference convened in Kuwait to pledge reconstruction help since Mosul was retaken to finally expel ISIS after a 5-year fight. The World Bank using on-the-ground and aerial drone surveillance estimated initial physical and social rebuilding costs at $90 billion, as roughly half of the IMF’s $5 billion facility agreed in 2016 has been used despite “frail” performance on fiscal consolidation and bank restructuring. Baghdad still owes the conference host $5 billion in compensation from the early 1990s invasion by Saddam Hussein which has been deferred, and other Gulf allies are expected to chip in alongside Asian and European counterparts and Iran.
The US recently provided a Treasury Department guarantee for a sovereign bond issue, but the Trump administration will not offer new economic assistance as it reviews bilateral relations following a tiff over Kurdish region independence where oil reserves are concentrated, and ahead of April scheduled elections where sectarian political divisions and violence again threaten. President Trump’s controversial campaign mantra about “taking the oil” in exchange for continued military support has featured in the debate as production ramps up toward the 5 million barrels/day target for the leading OPEC member. It is also flaring less natural gas to realize a reported $6 billion in lost earnings, and electricity supply has improved with private sector responsibility for distribution. However petroleum exports still account for 90% of government revenue as the security mess and a decades-long legacy of state control hamper normal enterprise and financial sector development. On the stock exchange, capitalized at only 5% of GDP, foreign buying tends to chase the few competitive stocks available, such as Coca Cola’s local bottling unit and number one weighting telecoms provider Asiacell.
Economic growth will be positive in the forecast 2-3% range this year with the better oil picture, and on the assumption that the displaced population of several million citizens and refugees can return to employment. Inflation is subdued with the continued exchange rate peg to the dollar, which the IMF views as “appropriate” for post-war stability as the parallel market premium dropped to 5% with ISIS’ defeat. Double-digit fiscal and current account deficits were the norm during the conflict and are due to narrow to manageable levels, but public debt spiked to 65% of GDP, including external arrears on non-Paris Club obligations and short-term rollovers to state-owned banks in turn funded by the central bank. To curb spending the public sector payroll and electricity subsidies were cut, and the revenue side will be bolstered by new import taxes and tighter customs enforcement. The government will decentralize budget responsibility to provinces and major cities, and has tried to streamline investment approval, with its World Bank Doing Business ranking at 160 of 180 countries, while considering partial privatization for hundreds of officially-run companies from the Saddam era. The onset of 3G in 2015 and the internet’s spread encouraged burgeoning e-commerce, and consumer goods and construction have emerged as diversification plays on big traditional industry names on the stock exchange now in the portfolio of Middle East and Asia-dedicated frontier funds.
The two Rs, Rafidain and Rasheed, dominate the “shallow” banking system with 70% of deposits and half of credit and act as a “drag,” according to the IMF’s 2017 Article IV report. They have not been audited under international standards and are “severely undercapitalized” with double-digit bad loan portions. Anti-money laundering and terror financing rules are absent, and the central bank lacks oversight and monitoring powers and has also been charged with providing small business lines. However in the past two years private competitors have grabbed share from the seven state institutions as Gulf regional banks also acquired local stakes. Traditionally the government giants handled all wages and pensions and trade finance, and without deposit insurance they also enjoyed an implicit guarantee as comparative advantage. A formal scheme is now under preparation, and with US Agency for International Development help a central credit registry is another project which can spur consumer as well as company lending. With stricter prudential rules capital has more than tripled to $7 billion over the ISIS attack period, and intrepid investors in attendance believe such smaller-scale reconstruction may succeed well before Kuwait conference ambitions.
Tunisia’s Demonstrated Addled Adjustments
2018 February 4 by admin
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 admin
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 admin
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 admin
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 admin
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.