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The Gulf’s Painful Petrol Passages

2020 September 21 by

With global headlines focused on Lebanon’s growing economic crisis and the formalization of Israeli-UAE relations, the oil price- and pandemic-induced economic and market fallout in the greater Gulf region may be no less historic or seismic. In Lebanon, the World Bank estimates the port blast caused over USD 8 billion in damages and losses from the destruction of physical capital, trade disruption, and fiscal revenues for the government.  The currency and banking sector have been collapsing for months and Lebanon defaulted on USD 31 billion in Eurobonds in March.  IMF talks on a USD 10 billion bailout were stalled before the blast while the Prime Minister and cabinet resigned a week after the explosion, citing “chronic corruption in politics, administration and the state.” A new Prime Minister has been appointed, but government formation is unlikely to be rapid w the usual party and sectarian infighting as the currency continues to fall pushing inflation into triple-digits and causing further economic and humanitarian pain.

Lebanon led the region and all emerging/frontier benchmarks with +40% stock market performance in USD terms on the MSCI Index as domestic investors seek relative safety for their savings outside property and gold.  Real estate giant Solidere, the biggest and most liquid listing, saw its share price surge more than 150% from the outbreak of demonstrations in October until the explosion that leveled much of Beirut. In contrast, despite strong rebounds over the past few months as oil prices edge up and economies reopen, stock markets in the six-member Gulf Cooperation Council (GCC) are all in negative territory through the first eight months, down an average 12%.  Several of the sovereigns have also been able to tap the international capital markets this year to cover soaring budget deficits, with Qatar and Abu Dhabi raising USD 10 billion and USD 7 billion, respectively, in massively oversubscribed offerings.  Standard & Poor’s expects total government deficits across the GCC to top USD 180 billion this year while average government debt/GDP is projected to increase by a record USD 100 billion on local and international borrowing to reach 18% of GDP, up from 5% in 2019. They are a major weighting in the sovereign JP Morgan EMBI index after it altered criteria to admit high-income countries.

In Kuwait parliament is debating tapping the international markets for the second time ever in advance of late year elections. Government debt/GDP leads the region at 39%, according to Standard & Poor’s.  While the IMF is predicting the economy will only contract a little over 1% this year, the government warned it lacks sufficient liquidity to pay public sector wages after October. The Finance Ministry is preparing to transfer funds from the world’s oldest Sovereign Wealth Fund, the Future Generations Fund, to the General Reserve Fund for budget financing after it reported that total revenue was down 16% in the fiscal year that ended in March.  As the economic downturn takes its toll, parliament responded with changing a 40-year-old corporate bankruptcy law designed to save solvent companies suffering oil price and pandemic stress.  In the past, failure to make debt payments was a criminal offense and meant automatic bankruptcy, which prodded creditor settlements or restructuring in advance.

 In regional giant Saudi Arabia, the IMF expects the economy to contract 6.8% while 2019’s 5.9% of GDP current account surplus sharply reverses to a deficit of 4.9%. Early in the pandemic the Kingdom transferred some USD 40 billion from the central bank to its USD 325 billion sovereign wealth fund, Public Investment Fund, to boost buying capacity for its global portfolio as blue-chip equities around the world sold-off. Monetary Authority foreign reserves hit a 10-year low in June with the price swing in oil accounting for 40% of output. Officials slashed expenditures, suspended cost of living allowances for state employees and even cut USD 8 billion from the Crown Prince’s Vision 2030 program designed to diversify the economy away from oil. In addition, the Kingdom tripled value-added tax to 15%, sending annual inflation over 6% in July as food spiked 14%.

The Saudi stock exchange, Tadawal, ($capitalization) dominates regional bourses and despite advancing more than 5% in August is still trading down 9% year-to-date. Opened to foreign investors with a minimum of USD 5 billion in assets under management in 2015, it was added to the FTSE and MSCI EM indices last year and now boasts over 2,000 foreign investors, up 78% over a year ago, although trading is still dominated by locals. Late last year Saudi Aramco, the world’s largest crude producer, went public, raising USD 25.6 billion, and despite the broader economic downturn another 4 companies have come to market this year with other IPOs waiting approval. At the same time the bourse, which plans to go public, launched its first exchange traded derivative, the Saudi Futures 30 Index Futures Contract based on the MSCI Tadawul 30, and plans to start trading single stock futures next year. Development of Tadawul into a regional market to further attract foreign investors is part of Vision 2030.  On the debt side, FTSE Russell just launched a local currency Saudi government bond index covering both Islamic sukuk and traditional interest-bearing instruments with maturities of over a year. 

Finally, in the United Arab Emirates, stocks have recovered more than 12% in dollar terms on the MSCI Index the past three months but are still off more than 9% year-to-date. The past two decades the Emirates, led by Dubai, have diversified away from oil, with the commodity accounting for only 25% of its GDP last year. However, the shift to reliance on tourism, transportation, and retail resulted in a significant downturn during the pandemic, with Standard & Poor’s projecting the economy will contract 11% this year following anemic expansion of 1.7% in 2019. Dubai’s just-released Eurobond prospectus offering both Sharia complaint Islamic and standard debt surprised investors. It disclosed direct government debt of only 28% of GDP, far lower than private estimates. However, that figure does not include “government-related entities” which Standard & Poor’s last year estimated had debt outstanding totaling more than 50% of GDP. Dubai has not raised funds in the public markets since 2014 and analysts remain wary of data that does not incorporate overall on- and off-balance sheet sovereign obligations and guarantees, recalling that   Abu Dhabi had to bail out its neighbor during the GFC under the crushing load of contingent liabilities.

Overall, the IMF expects the combined drop in economic output across the GCC markets this year to be 7.6%. Banks in the region entered the current crisis far stronger than in 2008 and monetary authorities have provided liquidity and cut rates in line with the US Federal Reserve to support the broader economy. However, as in markets worldwide the end of 6-month loan standstills will hit balance sheets. While oil prices are unlikely to rebound to the USD 80/barrel estimated “break-even” level to cover budgets, the markets undertaking concerted efforts to liberalize, diversify and attract international capital – both portfolio as in Saudi Arabia and foreign direct investment in tax free zones as in the UAE – are likely to rebound more quickly and shake up longstanding industrial/financial sector competitiveness lag and investor access/product lethargy for more upbeat area headlines.

Central Asia-Caucuses’ Seared Stargazing

2020 July 29 by

The World Bank’s Central Asia/Caucasus review depicted “dark skies” for the region with a recession worse than the global financial and subsequent 2015 currency crises. Output will contract almost 2% in contrast with the original 4% pre-virus forecast, with oil and gas exporters Azerbaijan, Kazakhstan and Turkmenistan suffering from the price crash in the commodity accounting for one-third of GDP.  Importers in turn like the Kyrgyz Republic, Tajikistan and Uzbekistan face reduced Russia remittances and supply chain disruptions in Asia and Europe. Armenia and Georgia will absorb tourism blows, and exchange rate impact ranges from the flexible Kazakh tenge hitting new lows to the more stable managed Kyrgyz and Tajik units. In 2019 growth was “resilient” at near 5% in 2019, on wider current account deficits reflecting both import and export squeezes. Fiscal balances will also deteriorate on health and social outlays, and increased retail and mortgage credit has combined with slacker standards under subsidized programs in Azerbaijan and Kazakhstan. Bad loans and liquidity pressures will accumulate as forbearance and central bank support are planned for households and small business. Most countries in the area have banned travel and imposed lockdowns, and Kazakhstan’s central bank hiked rates almost 300 basis points. It rolled out the biggest stimulus at 9% of GDP, and Armenia’s was one-third that size, and the bank urges steps to facilitate medical supplies and treatment. Fiscal space is limited, and deficit widening should be temporary, while monetary tightening may be needed to defend currencies and capital inflows. Outright controls should be a last resort, and macro-prudential policies the immediate resort if outflow tension persists. The region is in line for IMF Rapid facility access to reinforce these approaches, with the Kyrgyz Republic the first recipient of a $120 million line.

The publication also covered the MENA group with “drastic economic decline” in store with the Gulf GDP tumbling 3%., and Algeria, Iran and Iraq are off even further at 5%. Libya’s civil war will produce another 50% plunge, while Yemen’s contraction could tail off at 3% amid cease-fire rumors. Saudi Arabia, where reserves shrank the most to date in March, still has ample fiscal buffers, but Bahrain and Oman are hard-pressed. Regional current account balances will hit a 6% deficit, double the previous surplus. Public wage bills and pensions remain too high Iraq and Kuwait, and tourism declines will exacerbate strains in the UAE and elsewhere. Supply and demand and remittance shocks will batter Egypt, Jordan, Morocco, Pakistan and Tunisia, on steeper budget and trade deficits. Tax relief and subsidies, and rate cuts and direct credit help will drive virus response, but countries already with mixed records under IMF arrangements will struggle to maintain sound macro and structural performance. In Jordan and Lebanon the Syrian refugee crisis compounding their predicament is now a decade old with no end in sight and almost two million in camps and informal jobs between them. The pandemic brings “another vulnerability layer” but ultimately these communities should be integrated into mainstream livelihoods and medical care as emergency phases pass, the document directs.

Iran’s Banking Sickness Swoon

2020 May 21 by

Iran, presumably through the conduit of close Chinese business and diplomatic ties, has been among the earliest and most severe concentrations of the coronavirus pandemic. With tens of thousands of infections and thousands of deaths reported going into the Persian New Year season, parliament shuttered with spread there following local elections where the cleric-led Supreme Council disqualified perceived economic reform candidates. The epidemic and accompanying price crash in oil, the main export subject to US sanctions have dominated the government agenda, despite cabinet ministers in quarantine or already sick.

In an historic move, the central bank formally requested $5 billion from an International Monetary Fund rapid facility to handle the disease fallout, as it approached allied lenders like the Islamic Development Bank and Asian International Infrastructure Bank for help. At the same time it reported a 50% annual jump in banking system lending to fund the fiscal deficit, with President Rouhani’s cleanup and modernization agenda on indefinite hold with the dual sanctions and Covid-19 confrontations. The state-dominated system, with capital adequacy estimated at half minimum Basel standards, and bad loans at one-quarter or more of portfolios, will be pressed further on announced  business and consumer support programs around the health emergency after decades of dysfunction and weakness. The IMF has long recommended sweeping changes in Article IV surveillance reports, and as part of future agreements the agency with Washington’s backing could work with Tehran to promote fixes that could also thaw bilateral relations.

With the Trump Administration further ratcheting up sanctions after formally designating the Iran Revolutionary Guard Corps a terrorist organization, the Institute for International Finance (IIF) projected the economy would decline another 7% this fiscal year ending in March, after shrinking 5% in the period after joint nuclear deal breakup. Oil exports now under total US prohibition after initial waivers for neighbors and Asian countries slid to only several hundred thousands of barrels/day, compared with over 2 million in 2018. Budget figures have not been released for more than a year, but the IMF forecasts an 8% of gross domestic product fiscal deficit. Inflation officially runs around 20% but food price increases are double that level, and the currency is no longer in free fall against the dollar and has settled again toward the 150,000 range, or triple the fixed 42,000 exchange for essential imports under the multi-tier system. The IIF report expects a shift to annual trade deficits amid the continued sanctions squeeze could leave only $20 billion in international reserves by 2024.

The central bank, which has suffered coronavirus deaths among its own employees, offered in March a package of low cost loans to millions of individuals and businesses to cover damages, along with a three-month moratorium on loan repayments. The eligible industries span the spectrum from hospitality and tourism to agriculture, textiles and tourism. The lines were on top of a 30% annual increase in government debt to banks as of December, along with a reported $110 billion in outstanding private sector debt as Tehran pledges sanctions relief to existing large and small firms and support for high-tech startups.

Prior to these stresses, a June 2019 Peterson Institute for International Economics analysis from a former IMF staffer flagged a “slow motion banking crisis.” It described “problems brewing over decades” from state interference, corruption, and missing regulation and supervision. Despite chronic liquidity and solvency pressures, runs have not materialized due to emergency central bank assistance, de facto deposit guarantees, and limited savings alternatives aside from the stock exchange. It registered a triple digit gain through March, but has a narrow free-float for retail investors. The government controls 70% of system assets through “complex ownership structures and interconnections,” and only recently brought unlicensed shadow banks under oversight after several headline failures. In 2018, as President Trump withdrew from the nuclear agreement, Iran’s parliament put the unofficial non-performing loan ratio at 50%. Capital adequacy was only 5% of assets against the Basel 8-10% recommended standard. Against basic banking law provisions, the central bank as a “lender of first resort” has provided large liquidity facilities without collateral. It extends “exceptional regulatory forbearance” instead of demanding recapitalization and restructuring, according to the Peterson Institute research.

International financial reporting standards have been adopted by several listed banks on the stock exchange, and their share prices collapsed with trading suspended after finding fraud and balance sheet holes. The Financial Action Task Force recently returned Iran to its “black list” for failure to pass anti-money laundering and terror funding rules. Iran has asked the United Nations to block US sanctions during the Covid crisis, as the Trump administration recognizes humanitarian exemption and previously approved a dedicated commercial funding channel. It can extend this logic and allow Tehran’s application to the IMF and World Bank as the biggest shareholder for direct lending and technical assistance. Both health care and banking system strengthening could feature on the intertwined agenda, and Washington, in promoting disease control and free-market reforms, can test rapprochement that could broaden through these institutions.

Lebanon’s Delusional Default Designs

2020 May 7 by

Lebanese stocks at the bottom of the MSCI frontier market pack last year continued to slide through March as the interim government prime minister, a former academic, declared the 150% of GDP public debt unsustainable and officially defaulted on a $1.2 billion Eurobond payment. The rest of the $30 billion outstanding, around half the domestic amount, will be restructured as he warned that the “delusion” of choosing between covering imports and reimbursement with thin foreign reserves had ended. Prior to the action the sovereign credit rating was downgraded to near bust “CC,” while index providers weighed expulsion from benchmarks on tightening capital controls with the informal exchange rate reflecting 25% depreciation in the longstanding 1500/dollar peg. The instrument price plummeted toward the 20-30 range and default swaps will soon be triggered as ISDA rules set the clearing auction level. Local commercial banks are the overwhelming holders after a series of central bank high-yield “financial engineering” maintained subscription in recent years. They lost $15 billion in deposits in 2019, and apply curbs on daily withdrawals and may now face balance-sheet write-downs.

 The IMF and World Bank have been contacted for precautionary facilities and technical advice, as a $10 billion previous international aid package remains in limbo pending fresh elections and structural reforms to close the chronic fiscal deficit. The regime set off large scale violent protests with a proposed internet use tax, following an extended failure to collect street garbage and provide reliably electricity through the state electricity company. The government named legal and financial advisers for negotiations, and UK-based Ashmore has a blocking stake in short term maturities with the 75% collection action clause voting threshold for new terms. The true reserve position will drive the process, with Fitch Ratings estimating that it may be $40 billion net negative with lines to domestic banks and other institutions, including satisfying correspondent relationships essential to diaspora business. Authorities had earlier floated a swap to lengthen tenors quickly exposed as unrealistic with interest payments already gobbling up 40% of shrinking budget revenue. The remittance scare with massive unrest also coincided with a Gulf tourism break amid economic worries in that region, and the prospect of another Syrian refugee wave as President Assad and Russia cleaned out the last civil war rebel pockets.

Neighboring Mideast markets were largely trading flat with their own fiscal and current account gaps and mixed IMF program record. Egypt as the sole core universe representative lost luster as last year’s favorite with privatization listings slow to materialize and a regime crackdown on political opponents, reinforced by austerity measures, heightening investor and tourist unease. Jordan has its own teeming Syrian refugee population alongside the legacy of the Palestinian one, with the long awaited Trump administration peace proposal with Israel complicating and narrowing the parameters for an eventual separate state. The King replaced the cabinet after subsidy cut and living cost demonstrations, but it has yet to inspire business and financial community confidence. Tunisia after months of wrangling agreed on ruling coalition formation but the party lineup is volatile as Fund policy items are delayed and missed, with economic “spring” readily cast as a delusion.

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.