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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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The Yangon Stock Exchange’s Anniversary Angst

2018 January 1 by

The Yangon Stock exchange added a fifth telecoms firm listing and launched on-line trading  to mark its second year since opening, but the local index was stuck at 475 capping a year of foreign investor disappointment despite passage of a new companies law that will eventually allow access. The Rakhine State crisis, as it is called in official media since the Rohinga population is not formally recognized, has blemished the civilian government’s reputation as the accounts of hundreds of thousands of refugees fleeing to Bangladesh describe human rights abuses warranting UN investigation and possible donor aid cutoff and trade sanctions. ASEAN’s recent Philippines summit suggested that while the region may continue its “non-interference” stance the US and Europe will likely take punitive action. President Trump and his Secretary of State Rex Tillerson have been famously at odds over their personal relationship and diplomatic direction, but were united on a strong warning to Aung Saung Suu Kyi that ethnic cleansing reports should be verified and met with economic and military consequences.

The IMF in a November Article IV visit cautioned GDP growth would come in around 6% for the 2016-17 fiscal year , with bad weather hurting dominant agriculture and construction project slowdown. It added that the tourism and investment impact of the humanitarian emergency had yet to be felt and may be “localized,” and cited risks “tilted to the downside” from banking sector and other uncompleted reforms. They have prevented global value chain integration and poverty reduction notwithstanding the refugee scrutiny, and the Fund urged a “well-sequenced second wave” of liberalization and infrastructure development for viable frontier market status.

Growth above 6.5% is projected next year on inflation at the same level, and the current account deficit should shrink 1% to 4% of output. The shortfall has been covered chiefly by foreign direct investment, and reserves at three months imports and the exchange rate are “broadly stable,” according to the report. Critics believe that FDI has been sluggish since the National League for Democracy assumed a parliamentary majority in the civilian transition early in 2016, and then unveiled a dozen-point economic plan with scant detail. The Fund estimates the sum at $4-5 billion this year with large data gaps, after a previous spurt on one-time hydrocarbon and telecoms ventures.

The army, which still controls one-quarter of legislative seats, key security ministries and strategic state enterprises also holds sway over economic policy, described as “sick” by the chief advisor to the former junta Dr. Myint. He has expressed skepticism over meeting the end-decade per capita income target of $1,800 and even catching up and competing with poverty stricken socialist neighbor Laos. His vision is  private-sector led with a defined social safety net for the disadvantaged, in contrast with the “low delivery and expectations” he associates with  Aung Sung Suu Kyi’s administration. Ruling party leaders like U Lay Nyint on the Economic Committee have urged farm export diversification and central bank independence under internal “frustrations,” while asking the international community for patience under existing political and technical limits.

Amid fanfare last week President U Htin Kyaw signed the long-awaited updated Companies Act, replacing century-old provisions, enabling a 35% foreign ownership stake in domestic counterparts and authorizing trading on the Yangon Stock Exchange. It modernizes corporate governance and minority shareholder rights, with an automated registry to be in place with Asian Development Bank assistance. Previously only selected industries like building materials and car distribution were open to outsiders, and a companion 1940 law barred non-resident equity sales. However officials indicated that implementation rules could take another nine months, and lawyers representing overseas investors lamented “missed opportunity” from the delay.

The same pattern applied to new central bank rules for “overdraft” loans, 70% of the $9 billion total, which are made on preferential terms or indefinitely rolled over to lock in customers. Originally they were to be cleaned up under a six-month deadline, now extended to three years, since executives from the industry’s two dozen institutions raised the specter of widespread runs with an immediate crackdown. Amid the standoff, five new state sector-specific lenders in farming, mining and tourism were approved to worsen allocation to favored clients. The central bank itself is forced to finance the near 5% of GDP budget deficit, as an historic  hostage to financial system inertia alongside the stock market.


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The Asian Development Bank’s Yield Chase Chastening

2017 December 18 by

The Asian Development Bank’s November local bond monitor covering the third quarter in nine East Asian government and corporate markets showed “strong” 11.5% annualized growth to $11.5 trillion in total, but also pointed to higher yields and foreign capital outflows at the end of the period amid lingering qualitative and quantitative liquidity concerns. Advanced economy central bank balance sheet normalization and increased global GDP expansion have not affected financial market stability, but “potential risks” encompass monetary policy and structural features, including the lack of hedging instruments. China continues to dominate regional markets with a two-thirds share, and bond size to GDP is now 70% with Korea and Malaysia leading the pack under that measure. October international selloffs were pronounced in Indonesia and Thailand, as East Asia still struggles to diversify the investor base, according to the report. A periodic liquidity survey found an even split between countries improving and stagnating with Hong Kong, Vietnam and Singapore in the former and the Philippines in the latter. The ADB warned that dealing amounts and spreads suggest longer-term bottlenecks which could aggravate overseas sentiment turn as the current return “chase” abates.

Vietnam was the exception as 2 and 10-year government bond yields fell after a central bank rate cut. In China deleveraging raised costs beyond developing Asia’s better growth outlook, with the ADB prediction at 6% this year on 2.5% consumer inflation. The marginal uptick has not punctured the simultaneous stock market rally, with emerging Asia up 35% on the MSCI index as world interest rates and volatility remain low on “solid” corporate earnings, particularly in the technology sector. Foreign ownership of local debt jumped to 40% in Indonesia after a sovereign rating upgrade, and most currencies depreciated slightly against the dollar outside a 1% Malaysian ringgit gain.

Domestic bond issuance rose 4% from the second quarter, and Korea solidified its number two position as the market approached $2 trillion. Malaysia and Thailand are next at $300 billion in size, with Islamic sukuk 60% of Malaysia’s total. Indonesia and the Philippines are in the respective $200 billion and $100 billion ranges, and Vietnam is the smallest at $50 billion with a negligible corporate segment, which is one-third overall activity on average. China, which just opened the government market, has the lowest non-resident share at 3% followed by Korea at 10%, where portfolio outflows accompanied military threats from the North. Chinese firms led in regional cross-border placements with $1.5 billion, while Malaysia’s Maybank and national mortgage company Cagemas had the biggest single transactions in Chinese Yuan and Singapore dollars. East Asia offerings in the dollar, euro and yen reached $250 billion through the third quarter, already 10% ahead of full year 2016, with China and Hong Kong sponsors accounting for 75% of volume.

Bond market-related policy and regulatory shifts were notable over the period, including repo launch in the Philippines; a cooperation pact between securities supervisors in China and Singapore; foreign company authorization for Thai baht-denominated issuance; and approval of a medium-term capital market development plan in Vietnam. They were incorporated into interviews with fixed income sales and research desks, asset managers and strategists, and official overseers across the nine economies to determine prevailing liquidity conditions. By turnover ratio only Thailand, Hong Kong and Indonesia were over 0.5 for the quarter as active markets, while bid-ask spreads reduced 5 basis points. Average government bond trade size decreased from a year ago to $5 million, with tightening most prominent in China and Korea, the largest markets, due to respective non-bank crackdown and geopolitical drags. Respondents also highlighted structural weaknesses in rank order, from the lack of derivatives and private institutional investors to onerous custody and settlement and tax treatment. Malaysia was singled out as scoring well overall but damaged by recent offshore currency hedging restrictions. Withholding tax is steepest in Indonesia and the Philippines at 15-20%, while Vietnam is in the earliest stage of derivatives development. On the corporate side, secondary markets do not exist in Philippines and Vietnam and liquidity is otherwise “subdued.” Transparency has improved with available and accurate pricing and financial data through dedicated platforms, but capital and access controls are uneven and may become choppier should bond performance sour in coming months and further compromise category outcomes, the survey implies.


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The Rohingya Crisis’ Regional Doubt Reverberations

2017 November 29 by

While President Trump’s maiden Asia voyage focused on the headline themes of bilateral China relations, North Korea standoff, and trade pacts, the unrelenting Rohingya flight from Myanmar into Bangladesh, with over half the estimated 1 million population exiting so far, was also on the diplomatic and economic agenda as a long-festering regional issue. Washington is reconsidering   easing of commercial and financial sanctions late in the Obama administration as refugee advocacy and human rights groups press the State and Treasury Departments for renewed punishment of documented military abuses under the nominal civilian leadership of Nobel laureate Aunt Sang Sue Kyiv. Natural resources under army-controlled companies remain a taboo area subject to strict reporting requirements, but US investors began to join European and Asian counterparts in exploring consumer and real estate ventures in particular. Private equity firms tentatively moved into position for promised stock exchange expansion and liberalization, after a trio of initial listings sparked new frontier market interest.

Despite another year of expected 6-7% GDP growth, these calculations are now indefinitely sidetracked with continued financial sector policy delay and inconsistency, compounded by international community condemnation of the reported Muslim expulsion campaign by the majority Buddhist population. The massive spillover into Bangladesh, following previous waves there and throughout South and East Asia, has raised investor questions about simmering ethnic and religious divides and long-term handling of the humanitarian turned economic development emergency. They come against the backdrop of MSCI stock market performance reverting to its pre-2008 peak, and preference turning to countries better equipped to sustain gains with inclusive business friendly outreach.

Bangladesh, up 6% on the MSCI frontier benchmark through October, won widespread acclaim for agreeing to host another 500,000 Rohingya crossing the border since August in addition to the 100,000 already in the Kutapalong refugee camp for decades. The move softened Sheikh Hasina’s reputation for intolerance toward the political opposition, as domestic supporters glorified her as the “mother of humanity.” She approached donors in Geneva for pledges to build the world’s biggest refugee facility, and her Finance Minister requested World Bank concessional loans at the October annual meeting, with hundreds of millions of dollars to be mobilized in the first phase. However Dhaka has severely restricted non-government organization education, health and housing provision and the refugees’ freedom of movement, including to work or to enroll in local schools. Food prices have jumped in the vicinity, with the arriving Rohingya denied permission to apply their agricultural skills.

On the subcontinent India and Pakistan have also absorbed large Rohingya communities. Shares in the former have been at the bottom of the MSCI core universe since their return, with a 25% loss through October after Prime Minister Sharif was ousted on corruption charges while staying at the helm of his Muslim League-Nawaz party. The Rohingya integrated into the majority population, but remain economically marginalized and may be at increased risk with the chance of another balance of payments crisis forcing IMF rescue, according to observers. The Chinese Economic Corridor has injected billions of dollars in infrastructure stimulus to prevent recession, but added external debt to the existing heavy load on more expensive commercial terms. India on the other hand recently threatened to expel 50,000 Rohingya on national security grounds, citing a possible repeat of the nascent rebel movement claimed by Myanmar’s military to justify its scorched earth tactics. However the stance also fits with the Hindu fundamentalism promoted by Prime Minister Modi and his allies, which was largely ignored by investors as growth was chugging along at 7%, but may now be seen as stoking communal tensions and swallowing reform oxygen with the slowdown to 5% and portfolio outflows.

Indonesia and Malaysia have been equity market laggards, with advances just above 10%, as the Rohingya question comes into play more prominently in relation to identity politics and economic access. The race for Jakarta governor was plagued by Muslim-Christian friction and Investment Minister Tom Lembong decried “rising tribalism” as religious activists insist President Jokowi take a tough line with Myanmar. In Malaysia officials unveiled a generous pre-election budget with growth exceeding projections at 5.5%, but their treatment of Rohingya refugees in detention centers is believed to be opposite and smother available job prospects key to transforming their plight to productive ends.


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Central Asia’s Prickly Business Reform Prize

2017 November 17 by

The 15th edition of the World Bank’s Doing Business report, which surveys tens of thousands of entrepreneurs, lawyers and accountants for on-the-ground insight into commercial and regulatory conditions across a dozen categories, showed Uzbekistan as one of the top ten reformers the past year among the 190 countries tracked. The favorable publicity was soon overshadowed by the fallout over an immigrant’s truck attack in New York City, but extended a record of top sub-regional performance as Azerbaijan, Kazakhstan, Mongolia were also cited for annual strides. Kazakhstan’s number 36 ranking was just behind Russia, while Tajikistan was at the bottom of the pack in 123rd place. In the neighboring Caucuses Georgia is a perennial rule change frontrunner, and in the top 10 of the overall ease index led by advanced and big emerging economies New Zealand, Singapore, Denmark and Korea.

Uzbekistan’s new President Shavkat Mirziyoyev unleashed a reform wave after decades under the authoritarian control of Islam Karimov, including freeing the currency, and courted foreign investors at September’s UN General Assembly meeting. He spurred advances in half of the World Bank’s focus areas, such as a “turnkey” electricity connection at the state utility and faster construction permit approval. His government acknowledges short-term adjustment costs and recently admitted the longtime 7% growth target may not be reached. The International Monetary Fund reinforced this wariness in its companion economic update issued during the October annual meeting, as it listed “deep-rooted”  banking system, fiscal and monetary policy and private sector development weaknesses  offsetting  relative micro-level company progress.

In the 2016-17 reporting period, property rights strengthened in Kazakhstan with public disclosure of ownership around Almaty. In Mongolia a new movable property law went into effect allowing leases and titles as collateral to be entered into modern registries. Azerbaijan clarified corporate governance and transparency norms to include multiple board service, executive compensation, and formal independent audits. Kazakhstan’s stock market was a top 40% gainer on the MSCI frontier index through October, aided by expanded shareholder lawsuit scope for investor protection. Uzbekistan also introduced on-line tax payment, and Georgia further increased creditor insolvency power. Tajikistan, despite its ranking in the lower half of all countries, updated labor practice by raising minimum severance pay for dismissal and simplified business licensing. Azerbaijan’s banking crisis, where state giant IBA is in debt restructuring estimated to equal one-tenth of GDP as smaller competitors try to recapitalize, sparked a flurry of improvements in credit reporting and bankruptcy reorganization.

After 2.5% growth in 2016 another 1% pickup is forecast for Central Asia and the Caucuses this year and the medium term trend will be 4-4.5%, around half the early 2000s average, according to the IMF. Hydrocarbon exporters Azerbaijan, Kazakhstan and Turkmenistan have stabilized with higher world prices and decent agriculture and construction backstops, but were urged to further diversify. Oil importers could see 4% growth in 2017 on Russia remittance rebound and boosted gold output in the Kyrgyz Republic. However financial sector damage lingers beyond Azerbaijan, as Kazakhstan merged the two largest banks and injected 4% of GDP this year, and Tajikistan’s government mounted a similar bailout. Consolidation has also taken place in Georgia in the face of steep bad loan ratios, while credit growth is flat or negative with the exception of Turkmenistan, where the rapid pace invites “future quality risks” in the Fund’s view. Azerbaijan and Kazakhstan issued foreign debt to cover fiscal deficits, and despite drastic exchange rate adjustment, such as with Uzbekistan’s official and parallel rate unification where the som lost half its value against the dollar, the region’s current account gap will improve only “gradually” from last year’s 6.5% of GDP. With the currency no longer the monetary policy anchor, central banks were encouraged to adopt inflation-targeting and more liquid and longer-term local Treasury bonds. With a nod toward the Doing Business attention, the Fund outlook praised “comprehensive initiatives” on competitiveness and the commercial environment, but lamented the lack of state enterprise privatization and anti-corruption and foreign investment promotion steps otherwise. It warned that “complacency” in headline reform movement may hamper fits with China’s Belt and Road and other global integration programs where rulebooks call for more thorough trade and financial reorientation.



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Iran’s Currency Run Unraveling Pose

2017 October 27 by

Iran’s currency, which had gradually moved over the past year in official and parallel markets from 30,000 toward 35,000 to the dollar, immediately tumbled past 40,000 and the Tehran stock exchange index also shed 2% ahead of President Trump’s new sanctions on the Revolutionary Guard (IRGC) and declaration to the US Congress to decertify nuclear accord compliance. Equities had been up 10 percent in the first half of the fiscal year from March to September, and the influential Planning and Budget Organization chief, Mohammad Baqr Nobakht, a close economic adviser to re-elected President Hassan Rouhani, had ruled out devaluation before the financial market rout, which may have been triggered by other factors beyond Washington’s harder line that could target IRCG-controlled listed companies it accuses of “confiscating wealth.”

The central recently cut the benchmark deposit rate to 15% as inflation hovers around 10%, and customers scrambled into foreign exchange, also buoyed by demand around the Kurdish independence referendum in northern Iraq. The move was also precipitated by continued delay in unification of the dual exchange rate system, despite repeated promises to the International Monetary Fund and correspondent Asian and European banks which now conduct business since the country rejoined the SWIFT payments network. Reinforced US secondary sanctions could scupper these ties, but frozen financial sector reform is an equal threat especially since it is a centerpiece of President Rouhani’s second term agenda.

The IMF in its latest World Economic Outlook forecast GDP growth around 3.5% this year and next, as oil production ramped up to almost 4 million barrels/day within OPEC agreed limits for a 4.5% jump in the first quarter. Agriculture came in under that number, and industry including mining and construction showed the same performance, while services like hospitality and retailing surged 8%. Tourism boomed the past fiscal year with a 50% visitor rise to 6 million, and officials plan to triple the influx by 2025. Reported unemployment is 12.5%, and the youth figure is double that amount according to national statistics. The current account balance is solid with non-oil foreign trade increasing 5%, and exports to Russia a whopping 35%, in the first half. Foreign debt is low at $9 billion, with one-third short-term, and Vice President Eshaq Jahangari put FDI inflows at $15 billion since the nuclear deal went into effect in 2016.

Central bank governor Valiollah Seif projects trillions of dollars more in investment over the coming decade, as $20 billion in credit lines were recently signed with big Chinese and Korean and mid-size Austrian and Danish banks.  A study last year by global consultancy McKinsey estimated $1 trillion in additional output in the next twenty years, tapping into the 80 million young, educated and tech-savvy population often cited by the few foreign portfolio managers who have started dedicated funds. Iran advanced seven spots in the World Economic Forum’s 2017-18 Global Competitiveness Index, at 70 out of 140 countries, on incremental infrastructure and regulation improvements. Housing may finally be in recovery after a long recession with 9% sales growth in September in Tehran. The state-owned mortgage specialist Bank Maskan plans to finance an ambitious 1.5 million homes in the coming years, and slashed the discounted borrowing rate to 7.5%., while other commercial banks have shunned exposure under 12-year repayment terms.

The IMF in an October visit praised moves to crack down on previously unregulated “shadow” lenders which evaded rate caps, following the summer decision by the Paris-based Financial Action Task Force to allow further time for anti-money laundering rule adoption. A ratings agency established by the central bank and Economy Ministry is to publically reveal general balance sheet  risk ratings for the sector, with $700 billion in assets, this month. Iran’s thirty-five banks currently have capital adequacy ratios between 6-10%, as they struggle with double-digit bad loan loads and prepare for eventual Basel III prudential standards. Leading executives from fully private competitors calculate that only half the current system will survive under a cleanup that may cost in the $100-billion range in the initial phase. Foreign investors bypass these listings even as their trading rose 25% in the year through August, according to the securities supervisor. The country’s leadership nightmare may not come only from President Trump’s “bad deal” interpretation, but currency and share slides reflecting monetary and financial system inaction.


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