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Asia Local Bonds’ Yanked Yields

2018 April 20 by

The Asian Development Bank’s March regular survey of nine domestic bond markets, with insights from the last quarter of 2017 through February, alerted the region to higher long-term government yields and private financial stability concerns around global central bank liquidity retreat and economic growth uptick. Market size topped $12 trillion at year-end, and mainland China accounted for half of final quarter issuance as the government-corporate split stayed 65%-35%. It is 70% as a portion of East Asia GDP, and net overseas investor inflows were strong, with Malaysia in particular benefiting while Korea was the exception with outflows. From December- February 10-year instrument rates rose everywhere but in Vietnam’s smallest $50 billion. market.

The report suggested that Japan’s March decision previewing 2019 monetary policy “normalization” with the US and EU would reinforce this trend, alongside the region’s steeper 3% inflation forecast with another year of 6%-range output expansion. It noted that 2-year yields briefly fell with portfolio rebalancing, and that Malaysia’s foreign ownership share increased to 30% as the central bank hiked rates in January. Tightening will support currencies but hurt stocks as valuations also adjust to better reflect corporate earnings, and investors “closely monitor” listed company debt-equity ratios. The ADB warned at the same time that rapid corporate bond and household loan accumulation could dent consumption and balance sheets and pose financial crisis risk, while global trade is also under an internal and external competitive and policy vise. It urged greater deleveraging and anti-inflation stances for more solid medium-term bond markets even as the current “foundation” is intact, and cited studies associating private debt overhang with asset price and growth collapse.

China is 70% of the total outstanding and quarterly growth has been around 5% as officials impose credit restraint, including a local government placement ceiling. Second place Korean activity was flat after the central bank lifted the policy rate in November. Thailand is ASEAN’s largest market at $350 billion, with Malaysia slightly behind as the Islamic sukuk leader at 60% of its volume often for infrastructure projects. Indonesia is half as large at $185 billion, with shariah-compliant central bank bills a main offering. The Philippines $110 billion market increased most among the group in the final 2017 quarter, with retail Treasury bonds diversifying from traditional institutional auctions. Corporate activity is minimal there as well as in Indonesia and Vietnam at amounts under $30 billion. On an annual basis East Asia’s local currency pile was up 12%, with Indonesia’s 40% foreign share the highest after another BBB sovereign ratings upgrade in December. At the other extreme international ownership is just 3.5% in China, and 11% in Korea, where outflows spiked on end-year maturities and rate hike expectations.

Cross-border transactions in local currency, mostly from China and Hong Kong topped $4 billion in the last quarter, with the Korea Development Bank the single biggest name active in multiple denominations. The Government of Laos completed a $450 million operation in Thai baht and the hydroelectric Nam Ngum 2 Power Project tapped the same pool as the country accounted for 15% of the total. Malaysia’s Maybank sold $150 million in Chinese renimbi and Hong Kong dollar bonds, and Singapore dollar and Philippine peso-denominated ones from other jurisdictions also featured.

Emerging Asia issuance in G-3 currencies was a record $350 billion last year, up from $215 billion in 2016.  The dollar was the 90% choice, and Chinese companies led the pack with $225 billion outstanding although most ASEAN members also participated. China completed a $2 billion sovereign dollar issue, the first in fifteen years, without a credit rating. In China and Korea banks and real estate firms were the most prominent by sector, while Malaysia stood out as a decliner with its ban on offshore ringgitt trading. Spreads were unchanged between prime and low-rated companies over the period, but in a cited initiative Thailand’s securities commission introduced new investor protections in case of default. As the size spectrum from China to Vietnam announced annual borrowing plans, several bilateral and multilateral cooperation pacts on information sharing, trading and currency settlement were inked, according to the review. They may as well be precautionary, and a form of joint leverage against the ADB’s predicted financial version.




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Asean’s Split Sentiment Sentry

2018 April 6 by

ASEAN’s main stock markets were mixed heading into the first quarter close, with Thailand and Malaysia at the front with respective 10% and 5% gains, and Indonesia and the Philippines behind with average losses over 5% on the MSCI Index. Currencies started the year strong, but in February the prospect of multiple US Federal Reserve rate hikes and trade spats sparked regional local bond selloff, with $3 billion in outflows. Politics has injected its own volatility with Malaysia’s yet to be scheduled poll inviting fresh vitriol between the ruling and opposition parties,  Indonesian and Thai candidates positioning for 2019 elections, and Philippines President Rodrigo Duterte slamming critics and rejecting UN sway over his bloody anti-drug trafficking campaign. At the same time inflation and possible overheating have become concerns with faster 5% range growth, as banks also widen the credit spigots amid business and household debts drawing rating agency unease.

Malaysian Prime Minister Najib Rezak will call elections before the end of April with his Barisan Nasional coalition vying for another 5-year term. Allies in a longstanding tradition have gerrymandered voting districts to improve their odds, but the rival Pakatan Harapan pulled in his predecessor Mahathir Mohamad to join forces with jailed head Anwar Ibrahim to mount a stiff challenge in a race hinging on the economy. The opposition has hammered away at the Prime Minister’s responsibility over the $600 million missing in the 1MDB fund scandal, with heated rhetoric accusing him of “bankrupting” the country. It advocates elimination of the recently-imposed goods and services tax and toll road fees, which the Finance Ministry claims would open a $150 billion budget hole.

The ringgit is steady around 3.9/dollar with the central bank on hold, after $1.5 billion in net portfolio inflows so far this year. Foreign direct investment was $10 billion and reserves passed $100 billion in 2017, and World Economic Forum competiveness standing rose two places. The International Monetary Fund recently outlined Malaysia’s track toward “high-income” status, and the Prime Minister’s adviser pointed out that debt/GDP was below the statutory 55% level despite the opposition’s “insolvency” charge. Public and private sector forecasts are for another year of 5-5.5% growth and subdued 3% inflation on an ample current account surplus compensating for uneven domestic demand. However a bitter campaign will reduce the likelihood of future economic policy consensus, as Moody’s Ratings in a March banking system report continued to flag high household leverage and souring commercial real estate loans.

Indonesia may re-run the 2014 presidential sweepstakes as General Prabowo Sabianto of the Gerindra party has reportedly sounded out colleagues as well as Islamic activist organizations kept at a distance by the Jokowi government. The incumbent’s opinion popularity is solid, but he again will fall short of the 7% growth target, with Coordinating Minister Darmin Nasution previewing a first quarter under 5% figure. Finance Minister Sri Mulyani Indrawati acknowledged a softer rupiah below 14000/dollar and $3 billion reserve dip in February, but cited favorable tax revenue and current account trends. Stocks trade at a hefty 17 times price-earnings ratio with a bare profits increase, and foreign investors otherwise trimming local bond exposure may have stalled the pace with inclusion in a benchmark Barclay’s index. The President and his team are aggressively pitching infrastructure projects to fund managers at home and abroad to reverse output slack, and will turn to banks for above 10% annual loan expansion, including through new fintech providers, after years at a single-digit clip.

Thailand’s ruling junta has yet to formally fix a date for long postponed election return as the central bank signaled a growth upgrade to over 4% on good tourism and manufacturing numbers, aided by a 10% predicted rise in Asian neighbor inward direct investment. Exports are set to increase 7% to sustain the large current account surplus fueling baht appreciation alongside capital inflows. The Philippines in contrast ran a $2.5 current account deficit in 2017, and the peso is ASEAN’s worst performer despite frontrunner 6.5% growth. The central bank tightened monetary policy, but not headline interest rates as inflation nears the 4% upper band goal. Investor consensus holds that both the economy and the President’s temper may be overheating, but the dizzying cross-country rotation may spin again toward mid-year

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The Asian Development Bank’s Indochina Bond Barrage

2018 March 16 by

While Cambodia and Myanmar, despite logging high-single digit GDP growth, have been off mainstream investor radar screens as they face possible US and EU human rights sanctions, the Asia Development Bank issued bond market guides charting potential allocation paths to join the rest of the region’s $10 trillion local currency volume. The studies were conducted under the auspices of the Asean+3 (China, Japan and Korea) Bond Forum, and update their 2012 series with the intent of mobilizing an estimated $1.7 trillion in annual infrastructure funding. Japan’s Nomura Research Institute worked with government-regulatory officials and banks, brokers and stock exchanges in the two countries as they position for near-term launch and takeoff that could follow Vietnam’s more advanced development charted quarterly in the ADB’s on-line tracking service.

Cambodia’s Financial Sector Development Strategy through 2020 envisions government bond issuance, and an interbank money market already trades negotiable certificates of deposit. In 2017 the securities commission finalized rules for corporate bond “qualified buyer” professional institution eligibility, although payment is still physically by check as opposed to electronically in the real-time international standard. The central bank is to take the lead with regular open market operations through designated primary dealers, according to provisions agreed last June. Equity and fixed-income tax incentives were introduced in 2015 which slash the company profit levy 50% and reduce investor withholding over three years. Early this year official decrees are due for credit rating agencies, corporate placement application and disclosure and bondholder representation.

The securities regulator is independent but answers to the Economy and Finance Minister as Chair, who is mainly responsible for the current draft government bond guidelines. The Ministry will finalize primary sales procedures, while secondary trading is overseen by the supervisory authority and stock exchange, which lists five companies. Non-resident firms cannot yet offer debt, although both dollar and rial-denomination will be allowed in the 2018-2020 trial period. Foreign investors get the same withholding tax rebate as domestic counterparts, but currency controls may limit fund repatriation. Documents are published in both Khmer and English, and the future framework assumes overseas wealthy individual bond market participation. A trust law is under preparation to bolster investor protection, and debt securities will be subject to a stock exchange entry fee at 0.1% of the total amount.

The ADB recommends creation of a yield curve, and a capacity building program to spread specialist and public knowledge, with bond market inauguration. Corporate governance from audited statements to management reporting is still lacking, and accounting and custody should convert to international standards. The planned 2019 timetable for pilot government activity will release “pent-up” local demand among insurance and pension funds in particular. A new asset class will be created, which could appeal also to Korean investors with its joint venture stake in the Cambodian stock exchange.

Myanmar is further along on bond market development with technical advice from Japan’s Daiwa Institute of Research, with the government floating bonds since the early 1990s and recently selling 2-5 year Treasuries under competitive auctions. The Myanmar Economic Bank and Stock Exchange are the authorized dealers, with the central bank previously handling direct financial institution transactions. The original government securities act dates back to 1920 under English law, with a more modern code passed in 2013 with powers split between the monetary and exchange supervisory bodies. Corporate bonds are not yet available, and non-residents will not be able to issue under the proposed template. The Finance Ministry has a debt management unit, and in line with International Monetary Fund preference Treasury bills and bonds are equally divided in the total, although without existing benchmarks.

The 3-month interest rate was between 7-9% the past fiscal year, and the 5-year yield was 9.5%, and private enterprises and individuals are big buyers. Default will be covered under the new Companies Law, and credit rating and corporate governance systems are in formation. Repos are used and borrowing and lending may soon be approved to avoid settlement failure. Taxation “lacks clarity” and foreign investors await specific local debt and equity access parameters. The guide predicts “much change,” including municipal bond creation, over the next 1-2 years, with the caveat that sound fiduciary practice may still not apply outside this confined sphere.


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China’s Wagging Tail Risk Tide

2018 March 9 by

Entering the Lunar Year of the Dog Chinese and Hong Kong shares slumped on local and global fears after 2017 calm, despite top-level official assurances at the Davos World Economic Forum of financial risk management and rapid “high-quality” growth embracing anti-poverty and pollution priorities. President Xi, who had made a splash at the event the previous year with his call for open markets and free trade, left the publicity wave to his US counterpart this time,  although President Trump was hard pressed to explain the commingling of “America first” solar panel tariff imposition and global commercial cooperation. “Xi thought” was formally enshrined in the constitution in a more dramatic achievement, even as Development Commission planners warned of possible “black swans” accompanying predicted 6.5% plus expansion. The composite PMI index was near 55 at year-end, but private consumption and investment were up just over 5%, as state-driven fixed asset allocation continued to contribute 60% to annual growth. Industrial production and retail sales rose 6% and 9% respectively in December, as the average company liability/asset ratio stayed 55%. After a 3.5% jump against the dollar extending a strong run within the slim daily fluctuation band, the Yuan lost ground in early February after foreign reserves were reported above $3 trillion. According to the Washington-based Institute for International Finance capital outflows were only $60 billion, and the figure was further helped by other currency appreciation against the greenback. The foreign exchange regulator vowed to crack down harder on underground banks moving money abroad after conducting raids to gather “hundreds of billions of RMB.” Other popular channels include multiple-card cash withdrawals through Hong Kong; $200 billion in offshore dollar bond issuance last year; and an estimated $3 trillion in wealthy individual accounts in Singapore and elsewhere.

Total bond maturities will be $400 billion in 2018, as regulators push deleveraging and stricter disclosure to pare excess debt. Regional bank frauds were uncovered to stiff fines, and Fitch Ratings noted that balance sheet coverage of wealth management products will hit capital as thousands of system transactions were found questionable. With the unconventional borrowing route under pressure companies have turned to traditional IPOs, which doubled to 450 hauling in RMB 230 billion last year, as authorities continue to promote state enterprise debt-equity swaps to stave off restructuring and closure. Profits increased 15% and over one thousand “zombies” were closed according to government statistics. Almost $1 trillion in overseas assets could also be repatriated for support, although they now serve a dual function in aid of the Belt and Road program, where 90% of contractors in Asia and Europe were Chinese as calculated by think tank research. The first OBOR bond was placed domestically to finance cement plant equipment purchased at a 6.5% yield and was oversubscribed, as S&P Ratings forecast local government instrument defaults with the pile at RMB 16.5 trillion at year-end. Construction firms have sued municipalities for non-payment, as the real estate sector is due to soften with new buying and leverage curbs going into force. In Hong Kong, which the Heritage Foundation again ranked the freest economy in the world, private home prices have soared close to 500% the past fifteen years, as the monetary board must both defend the peg against capital exit and property overheating burns.


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South Asia’s Bulging Belt Lashes

2018 February 24 by

China’s multi-trillion dollar hard and soft infrastructure investment Belt and Road Initiative (BRI), officially entering its fifth year, was again in the spotlight at the Davos World Economic Forum, where Asian portfolio managers tried to assess stock market recovery prospects in major recipients Pakistan and Sri Lanka in particular. Their MSCI component indices lost 21% and 1% respectively in 2017 as all other Asian exchanges tallied double-digit gains. A recent paper by the Washington-based Center for Strategic and International Studies (CSIS) noted that Beijing loaned Colombo $1.3 billion for a port multilateral development banks refused, and then took an 80 % equity stake in lieu of unpaid interest as part of an $8 billion portfolio in the country ahead of 2019 presidential elections. Pakistan’s traditionally close commercial and diplomatic ties, especially as the US plans to cut back on economic assistance in anti-terror cooperation protest, have strengthened with a $60 bilateral aid and building program.

However Sri Lanka’s high debt, along with corruption scandals and political standoff, forced recourse to the IMF in 2016, and Pakistan is expected to return there imminently without additional backstop from more cash-strained Gulf donors. Currencies have plummeted in both places to aggravate food and fuel-price driven inflation, and the BRI cannot mask leadership doubts and fiscal and monetary policy lapses.

The CSIS analysis points out that Chinese projects barely benefit local contractors, as their own companies get 90% of funding. State-owned construction firms in particular, at seven of the world’s ten largest in 2017, can draw on massive size and subsidies. From 2000-2014 development bank credit totaled $350 billion, three quarters on commercial terms, with focus on the power and transport industries.  In contrast with Western providers China’s approach is “centralized and flexible,” with unified agency decisions and relaxed environmental, social and governance standards. Natural resources are accepted for payment instead of cash, and capital outflow restrictions are not as strict for BRI deals, according to the document. It adds that large infrastructure schemes are unlikely to be completed on time or budget, and typical Chinese labor over-reliance will spark backlash.

In Davos Pakistan’s Prime Minister Shahid Khaqan Abbasi dismissed debt trap concern over the Economic Corridor with China, which he insisted would proceed under mutual “sustainability” principles and was designed to stimulate all foreign investment with energy and security improvements. However in December water authority officials scuttled a proposed $15 billion dam project over Beijing’s onerous financing demands, and railway deals in Karachi and elsewhere were also put on hold. In January the government’s own debt policy statement acknowledged deterioration in external servicing ratios across-the-board as the total hit $85 billion, versus $15 billion in foreign exchange reserves covering just three months imports. After successfully placing Eurobonds in conventional and sukuk form late last year, rating agency Moody’s warned that further rupee depreciation and the persistent 3-4% of GDP current account deficit would hurt “affordability.”

In Switzerland the Prime Minister spurned the prospect of immediate elections and IMF program application, as he previewed a tax amnesty to extend collection beyond the current less than 1% of the population and restrain public debt buildup at the 65% of GDP danger zone. He pointed to information technology as an emerging domestic demand driver buttressing traditional garment exports and remittances for 5% predicted economic growth this year, according to the World Bank. Double-digit credit increases and good monsoon rains should support near-term performance, but analysts caution that capital account trouble could materialize under currency flight and debt reimbursement pressures.

Sri Lanka’s official growth forecast is for the same pace, as foreign direct investment was estimated to double to $1.5 billion in 2017 amid good agriculture and tourism earnings. Going into February parliamentary polls President Maithripala Sirisena and his minority party are struggling with popular outcry over tax hikes and 8% inflation, with staple coconut prices doubling. The IMF arrangement aims to limit the fiscal gap to 5% of GDP, which the central bank has historically bridged through money printing. Domestic debt maturities peak this year and foreign ones over 2019-22, according to experts, but the President announced in January that he did not have a detailed accounting for $60 billion or 90% of previous external loans, a claim that stretched both credulity and comfortable Belt size.





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Kazakhstan’s Sullied Diplomatic Splash

2018 February 17 by

Kazakhstan’s MSCI frontier stock component, after a 70% gain, and dollar bond prices at 130 cents both sputtered into 2018 as President Nursultan Nazarbaev marked twenty-six years at the helm with high profile foreign investor energy and banking clashes despite a triumphal US visit. In Washington President Trump dismissed corruption and money laundering references to the long reign with his own campaign under the microscope for Russia and neighboring ties, and in New York while chairing the monthly seat rotation on the UN Security Council, the Kazakh chief was praised by Secretary-General Antonio Guterrres for Central Asia development and anti-terror initiatives focusing on infrastructure and drug crime. While there Wall Street money managers also probed details of scheduled sovereign wealth fund partial state enterprise sales to include the airline and natural resource holdings.

European counterparts had previously joined the parade after the EU inked a Partnership and Cooperation Agreement, which aims at bilateral “WTO-plus” free trade slashing both tariff and non-tariff barriers. The pact came on the heels of the country’s 15 place jump on the World Bank’s Doing Business ranking, despite staying in the bottom quartile of Transparency International scores. The European Bank for Reconstruction and Development also signed a new 3-year program memorandum stressing small business and privatization support. However these official achievements were blemished by simultaneous private antagonism after the local unit of US electricity operator AES was seized for one dollar, and Bank of New York Mellon was forced to freeze $22 billion or half of Kazakhstan national fund assets to satisfy a possible Moldovan oil and gas investor claim. At the same time banking instability at home spiked when the ninth largest institution, RBK, was rescued after a depositor run for reported fraud, at an estimated initial $1.5 billion tab. The sector was still coming to grips with the forced merger of the two state behemoths Halyk and Kazkommertsbank, as bad balance sheets linger a decade after the original crisis despite the President’s positive diplomatic headlines.

In his January state of the nation speech President Nazarbayev repeated financial system cleanup and anti-corruption priorities without hinting at an executive succession preference or timeframe, even though parliament in principle gained relative power under 2017 constitutional amendments. He continues to dismiss cabinet members and prime ministers at will, and unilaterally decided on an alphabet switch from Cyrillic to Latin script creating widespread academic and professional confusion. After Kyrgyzstan’s President reportedly insulted him the border was closed temporarily, and Astana delayed its neighbor’s membership in the Russia-led Eurasia Economic Union. Last year GDP growth came in at 4% on 7% inflation, and the central bank recently reduced the base rate to 9.75% as the tenge firmed around 325/dollar. Oil price rebound spurred a 25% trade and an almost 10 million barrel/day output rise, with Kazakhstan now the top over-producer in the OPEC and allies’ global agreement. The Economy Ministry said hundreds of projects were completed under the 5-year privatization plan, as the new Astana International Financial Center based on advanced economy legal and operating standards began registering companies in partnership with the Shanghai Stock Exchange and NASDAQ.

The dedicated offshore framework must contend with the harsh image and arbitrary rule displayed several months ago in the AES saga, where the Fortune 200 power company was stripped of control over two hydro-facilities run since the 1990s. It spent hundreds of millions of dollars installing a state of the art electricity grid only to have a contract compensation clause ignored, when the government demanded ownership and offered one dollar for alleged violations instead of the $90 million AES calculates is due. The debacle was soon followed by the wealth fund asset freezes in the US and Europe in long-running Moldovan investor actions against the state, after it confiscated petroleum fields in 2010. The plaintiffs won a $500 million international arbitration award and tried to enforce payment in Belgian and Dutch courts with Kazakhstan filing counterclaims, and they threaten to pursue future compensation in the giant Kashagan tract if the damages are not met. With over $20 billion in reserves off limits, the Nazarbayev administration will have difficulty mustering additional bank rehabilitation lines, and financial markets will remain wary pending development of a successor plan emphasizing instead governance and management overhaul. .




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Indonesia’s Flailing Floor Plans

2018 February 10 by

The Jakarta Stock Exchange’s tragic floor collapse, injuring visiting high school students, prompted management promise of an immediate “audit” into its cause at a time when investors are probing 2017’s lagging 20% MSCI Index gain against regional counterparts. While they do not consider the incident a possible metaphor for outright cratering, this year’s political, economic and banking system path will remain bumpy to block outperformance. Output passed $1 trillion, but 5% growth is below the 7% President Jokowi pledged after winning office. He faces re-election in 2019 and provincial polls this June, with rating agency Moody’s noting the calendar’s “likely slower reform momentum.”  Rival Fitch upgraded the sovereign to BBB in December and praised monetary policy limiting volatility and capital outflows, but also cited poor government revenue collection and lingering “structural weakness.”

The President brought the Golkar party into the ruling coalition to advance his anti-corruption and infrastructure development agenda, and parliamentary speaker ally Setya Novanto now confronts bribery charges along with other members of the legislative and commercial elite. He has used several ruses to evade trial, although his behavior follows a 2015 pattern when a tape recording exposed an extortion attempt toward miner Freeport McMoRan.  Jokowi was already in political peril after his protégé lost the Jakarta governor’s race amid allegations of Islamic blasphemy, as religious controversies continue to interfere with economic modernization initiatives including industrial sector external opening. Conservative clerics and protectionist advocates oppose further foreign entry into banking, where the ownership cap is 40%, despite administration overtures to China and Japan in particular.

The government and the World Bank forecast 2018 GDP growth to repeat above 5%, after commodity export recovery and increased capital spending offset tepid consumption last year. The trade surplus from coal, natural gas and palm oil sales hit a five year high at almost $12 billion, expanding reserves to $130 billion to cover eight months imports. The budget deficit came in barely under the statutory 3% ceiling, as Finance Minister Sri Mulyani Indrawati admitted tax targets were too ambitious to raise inflows to 15% of GDP, subpar by emerging market standards She said stricter enforcement, combined with simpler filing procedures, would not relent during the election season, and claimed that the broader anti-bureaucracy campaign at the core of Jokowi’s blueprint led to a 12% FDI jump in rupiah terms in the third quarter of 2017.

However natural resource nationalism is a pervasive influence smothering technocrat reassurance, and continues to scuttle multinational company plans. US miners Newmont and Freemont had to sell stakes and expand local investment, and state-owned Pertamina swallowed foreign energy assets. To fund these acquisitions, Indonesian public and private firms have accumulated foreign debt, which was up 9% to $350 billion or one-third of GDP last year according to the central bank. The government had $60 billion in bonds outstanding, 40% of the Emerging Asia total, as of last June and state enterprises have jumped in with rupiah-denominated “Komodo” issues to pay for deals and infrastructure projects the budget does not cover. The President’s $350 billion road, water and oil and gas development package quickly reached domestic limits with credit rising annually at a below 10% cautious pace, despite benchmark interest rate cuts through mid-2017. Banks were burned previously by state-directed corporate and personal lending, and are working to strengthen franchises with inflation in the 3-4% range and the currency steady at 13,500/dollar under regular intervention and tight trading rules.

The Financial Services Authority head Wimboh Santoso, formerly with the IMF, is now on a mission to attract additional outside Asian bank lines and presence to fill the gap, and the central bank recently opened a representative office in Beijing toward this end. The 40% international ownership lid dates from 2012, when Singapore’s DBS tried to gain control of high-profile Bank Danamon and was rebuffed.  Japan’s MUFG in December agreed to buy it in progressive slices, first at 20% for $1 billion with an eventual goal of a complete takeover at $6 billion, provided Indonesian regulators waive the limit as they have for smaller deals. Santoso will decide the parameters and timeline and said he expects a “quantum leap” in products and services for approval, in contrast with the Jokowi era’s small financial sector date.


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Asia’s Fleeting Triumph Trundle

2018 January 21 by

Emerging Asia core stock markets outperformed Europe and Latin America ones in 2017 with a 40% gain, above the benchmark MSCI index 35% advance, with Pakistan’s over 25% drop the sole loser. China “A” shares jumping almost 50% as they prepare for a larger weighting were the main turnaround story and driver, followed closely by South Korea’s 45% shaking off the North’s bellicosity to herald the new administration’s chaebol and consumer debt cleanup. India was next at 35%, ahead of ASEAN markets where Thailand led (+30%) and Indonesia, Malaysia and the Philippines finished in the 20-25% range.

Among frontier exchanges Vietnam’s 60% surge was more than double the index, while Sri Lanka was flat and Bangladesh rose 15%.  The universal upswing was supported by headline GDP growth and earnings exceeding expectations, and positive trade and capital flows overcoming gloom from US and Western government protectionist sentiment and incremental monetary tightening. However on entering 2018 banking and foreign investment clashes in regional linchpin China again weighed on the outlook, while fund managers positioning for more selective returns began to dissect neighbors’ underlying economic and financial system diversification and overhaul in view of political and practical limitations.

China’s December official manufacturing PMI was over 51, but masked a meager 5% rise in private fixed asset investment, a one-year low.  Both the local and offshore renimbi were up 7% against the dollar in 2017, but the foreign exchange body SAFE started the new year with stricter individual bank card holder caps on domestic and overseas dollar withdrawals, with the latter set at $15,000 annually. The National Development and Reform Commission in turn issued a directive mandating on-line registration of all cross-border deals above $300 million, and requiring approval for “sensitive” media and defense-related transactions regardless of size. The capital exit crackdown was coupled with foreign investor overtures, including temporary tax exemption for “favored” sector allocations such as in mining and technology in response to President Trump’s global corporate tax cut. The Commerce Ministry promised to speed financial services opening after a bilateral summit agreement , but the banking regulator still will not allow international ownership of domestic units over 20% for a single shareholder and 25% generally. Washington signaled its disappointment with access by refusing the proposed Ant Financial takeover of MoneyGram on reciprocity and national security grounds, as the Treasury Department’s CFIUS panel flagged account piracy and cyber-espionage potential.

The Central Economic Work Conference met to endorse the “Xi-nomics” mix of progress and stability and the medium term 6.3% growth target, as state-owned forms announced double-digit profit increases for the year. However the private sector China Beige Book pointed to retail industry revenue and cash-flow weakness which will delay “old economy” displacement, especially as commodity sector companies such as steel once more ramp up capacity and production contradicting previous pledges. Central bank head Zhou in his message vowed to maintain prudent monetary policy, as big state lenders were poised to enjoy an interest windfall from a 2% available reserve requirement cut around the Lunar New Year, which will not apply to smaller competitors whose shares plunged. The Finance Ministry offered its own mixed signals in describing the “illusion” of Beijing continuing to absorb local government debt, which reached $2.5 trillion in November, as over half of current bond issues roll over old obligations under the existing program.

Korea’s 10% currency appreciation against the dollar topped the region, and it was the only country to raise interest rates to try to slow accumulation of personal debt now the highest in the OECD.  India reprised 6.5% growth in the last quarter but worse 5% inflation came with it, and Prime Minister Modi’s ruling coalition lost ground in his home state of Gujarat and now faces a dedicated opposition Congress Party with Rahul Gandhi officially elected leader. In ASEAN Indonesia moves into 2018 split between prominent infrastructure building forays abroad, with state company issues of rupiah-denominated “Komodo bonds,” and religious and anti-corruption infighting at home, with President Jokowi’s key ally the parliamentary speaker facing graft charges. Vietnam managed successful IPOs, most recently of a popular brewery, but has struggled with corporate debt placement. It may soon tap the Asian Development Bank for help in a snapshot of Emerging Asia’s uneven financial market path despite 2017’s linear rally.





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Mongolia’s Daring Debt Dash

2018 January 15 by

Mongolia was lauded for more “durable than anticipated” 3% GDP growth in 2017 in December’s first review of its $400 million IMF program, following an $800 million 5-year external bond return in October where the 5.5% yield was half the previous peak. Since the May rescue commodity exports have picked up to China in particular with mine closures there and its ban on North Korea coal imports, and boosted budget revenue in local currency terms with the weaker exchange rate against the dollar. “Investor confidence recovery” with the successful international issuance will boost the balance of payments and reserves, and fully cover 2018 maturities and refinance more expensive domestic debt.

However both the Fund and frontier market fund managers continue to be wary as political and banking sector complications dilute the upbeat narrative. The new government elected in July lost a confidence vote ousting the Prime Minister, who was then replaced by his deputy while the Fund’s health check was delayed. Bank credit growth is still at a runaway 20% annual pace, with large foreign exchange exposure and 7.5% bad loans pending the results of an overall asset quality audit by the central bank. Despite headline economic strides, on structural reform the IMF report assigned a “mixed” score, as regional peers Azerbaijan and Kazakhstan not under the lender’s thumb likewise have rebounded from crisis but remain ambivalent near-term bond bets.

Mongolia’s coal, copper and gold price jump from Chinese demand stoked 5% first half GDP growth, but construction has been negative for four years with excess real estate inventory. The windfall produced a budget surplus through September, but scheduled social and civil servant handouts will result in a deficit, as the 2018 blueprint adopted by parliament could send the overall gap close to 10% of GDP, according to President Khaltmaa Battulga, who vetoed it as against the Fund arrangement. Growth is slated at 4.2% amid introduction of a progressive income tax, but the President lambasted “inefficient investment projects” pushed by the opposition People’s Party which holds 65 of the 75 seats. A fiscal stability law envisions end-decade balance, but the IMF warns that the government wage bill compromises the target and threatens medium-term sustainability with public debt already at 85% of output.

Inflation was over 8% in October, and monetary policy has reversed course toward easing with a 100 basis point benchmark rate drop to 11%. The Fund urged the central bank to go slowly on cuts as the recent reserve buildup to $2.5 billion on a stable tugrik may not last. The Bank of Mongolia has regularly dipped into the stash for intervention, even though its currency powers are murky and shared with the Finance Ministry. An updated organic law is to clarify the Bank’s independence and regulatory authority more broadly, but in the meantime its hands are full with the asset quality exercise conducted with accountants Price Waterhouse Coopers. It will screen bank business plans and apply stress tests, with capital holes to be remedied by the end of next year when deposit insurance is due to start. Among outstanding challenges the financial sector agenda is “most important” and funding decisions should not tilt to favored shareholders or jeopardize the public sector balance sheet, the Fund evaluation concluded.

Azerbaijan came in for separate caution under a December Article IV survey with stagflation ending  as the hydrocarbon and service industries revive, but banking sector restructuring “ still incomplete.” Inflation will be near 15% in 2017 after exchange rate depreciation, and increased fiscal spending should be reined in by clear rules before 2019, it recommended. Privatization has drawn foreign investor interest in real estate, and external debt remains minimal at under 20 % of GDP. Fitch Ratings expects positive growth in 2018 muddied by “continued bank asset quality pressure” despite the bad loan cleanup at IBA. The rater was also skeptical about the Halyk-Kazkommertsbank consolidation as the biggest government-owned lender in Kazakhstan following the initial stage of operations merger in December. Foreign exchange positions may deteriorate as local depositor tenge sentiment continues to swing as measured by dollarization levels, and international bonds were shaken by a New York court ruling freezing central bank reserves in an investor dispute while the overall system is in knots.



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Nepal’s Framed Frontier Expedition

2018 January 1 by

After disappearing from early emerging market investor radar screens in the 1990s with a prolonged plunge into civil war and political instability, followed by an epic earthquake and border closure with traditional  ally India two years ago, Nepal completed local and national elections won handily by the Leftist alliance of the nominal Communist and Maoist parties. According to initial results they took control of six out of seven provinces and 70% of parliament, crushing the Nepali Congress formerly in power and an array of fringe opponents including anarchists and royalists. Workers abroad in the Middle East and Asia, whose remittances account for one-third of output, did not vote despite court authorization, but likely would have reinforced the pro-left margin since their campaign focused mainly on infrastructure development and economic modernization rather than revolutionary rhetoric.

Following provisions of the new constitution no-confidence motions, a staple of the previous system which resulted in endless cabinet and government reshuffles, will not be allowed for two years to offer unaccustomed calm. Lowland Madhesis among the country’s poorest continue to advocate for more rights and support under the charter, but the incoming administration due to be headed again by veteran Prime Minister K.P.Ohli has vowed to be more inclusive both toward ethnic and income groups and subcontinent neighbors. In his 2015 term in he signed trade and investment agreements with China, and recently signaled a stalled hydropower joint venture may go ahead to diversify from historic Indian dominance. In his victory speech he promised “never witnessed private sector cooperation” alongside a higher social spending agenda, as the sleepy Nepal Stock Exchange index stayed flat post-poll awaiting concrete economic growth and reform breakthroughs.

Nepal’s Chambers of Commerce and Industry have been dubious in the absence of an “implementation framework” for the socialist economy enshrined in the constitution, amid talk of double taxation at the federal and provincial levels to cover increased social welfare payments. Ohli and his team plan public-private partnerships for large projects and small business, commodity and tourism promotion without specifying policies, as capital flight may spike while the vacuum lasts according to critics. They also worry about an expected rise in domestic borrowing, which has been capped at 5% of GDP annually, and favoritism toward cooperatives associated with ruling coalition leaders. Independent economists argue that the government should focus on better managing earthquake reconstruction after 650,000 homes and over one-third of output were destroyed, the World Bank estimated. In December it approved a $300 million credit to follow on the $200 million in the event aftermath, and pick up the pace for the over 350,000 residences still slated for rebuilding. They urge renegotiation of ventures such as the $2.5 billion dam suspended with the Chinese over contract irregularities on more concessional rather than commercial terms, even though foreign debt is low unlike other low-income economies, in the view of the IMF’s latest Article IV report this March.

The Fund described Nepal as “trapped in a low growth and investment equilibrium,” with GDP expansion averaging 4% the past decade as a regional laggard. Inflation and the fiscal deficit are under control, but state banks and enterprises got almost 2% of GDP in equity support in recent years which should be curbed, the analysis advised. Decentralization under the new constitution could raise budget risks, and without electricity tariff adjustment power supply will stay compromised, it added.

On monetary policy the Indian rupee peg was praised as a “transparent anchor” as demonetization fallout continues to hit local households and firms, but it has been “overly accommodative” with annual credit growth reaching 30% to spur recent tightening. The central bank introduced an interest rate corridor in 2016 to keep medium term inflation within the 7% target range, and uses repos as a liquidity instrument, with banks experiencing shortages around the election period. Financial sector reform was jointly identified as a priority by the Fund and regulatory officials, with plans to modernize prudential standards and enforcement for lending, securities and insurance. On the stock exchange in December the government revived a pledge to divest its 35% ownership and finalized rules for margin trading, but frontier market investors after decades out of the action will hold off at least another few months for clearer weather to mount a daring expedition.




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