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Mongolia’s Roughshod Rescue Refrain

2018 August 14 by

A year after the international community assembled a $5.5 billion emergency package, Mongolian stock and bond performance reflected debt crisis escape, but “more downside than upside risks” persist according to the IMF’s July program review. The lender released another $35 million of its $435 million 3-year facility on “good progress,” as it urged further  steps to strengthen fiscal, balance of payments, banking sector and investment climate positions. The stock exchange index is down 5% to outpace MSCI-tracked frontier markets, and external bond yields at 400 basis points over US Treasuries were firm against general asset class selloff as Fitch Ratings upgraded the sovereign to still speculative “B.” It also elevated two state-owned banks, while noting lingering weakness with the reported 8.5% bad loan ratio as comprehensive asset quality and stress testing unfold.

Ulan Bator was briefly in the geopolitical limelight as a possible host for the inaugural US-North Korea summit, but was sidelined by Singapore’s all expenses paid bid with state of the art infrastructure.  The Fund  report too seized upon positive headlines, including 6% first quarter growth and a 10% international reserve increase to $3.25 billion, but pointed to “core vulnerabilities” such as high commodity reliance, public debt and bank recapitalization needs.  The next parliamentary elections are in 2020, when corruption accusations between the main parties and runaway voter spending are also likely to intensify, the analysis suggests.

The World Bank predicts 6% growth this year on construction and manufacturing around the Tavan Tolgoi (TT) coal project, while agriculture has yet to recover from the harsh past winter. Another phase of the giant OT copper mine will go on line in the medium term to further expand exports, as the Bank recommended greater economic diversification and productivity gains. Foreign direct investment was $400 million in the first quarter, but strong domestic demand worsened the current account deficit and inflation, now at 8%. The central bank regularly cut rates the past year but may turn more cautious, especially as it applies more stringent loan provisioning rules to identify bank capital and liquidity gaps. Corporate credit extension was flat in recent months, following years of double-digit upticks.

Fiscal policy was mixed in Fitch’s view, as “rapid improvement” with revenue up 25% through May is offset by “structural reform delays” leaving government debt at 85% of GDP. Fuel subsidies and family social transfers have not been adjusted, and infrastructure concessions and discount mortgages are large liabilities. The Development Bank’s portfolio has not been audited and fully incorporated into the budget, and non-political oversight is lacking. Its overseas borrowing can repeat depreciation pressure on the currency, which has steadied the past year.

Both Fitch and the IMF argue that bank cleanup over the next six months will determine the vitality of policy and practical turnaround. Officials will present a detailed bad loan resolution strategy and introduce new collateral enforcement and bankruptcy procedures. They may propose a central disposal agency and macro-prudential curbs on household credit, with almost half in default danger at debt-service to income ratios above 60%. The Financial Action Task Force also criticized lax anti-money laundering practice, and without action the country could be “grey listed” and cut off from overseas correspondent relationships.

The threat comes as Prime Minister Ukhnaa Hurelsukh broke ground on an oil refinery financed with a $1 billion soft loan from India under a campaign to forge links beyond traditional international mining company and China-Russia partners. The project was broached during a 2015 visit by Prime Minister Narendra Modi, and follows decades of aborted domestic building efforts.  The Indian delegation in pointed reference to regional rivals described a “spiritual alliance,” and the plant will eventually boost national output 10% according to government estimates.

In June Mining Minister Sumiyazabar Dolgorsuren proposed an initial public offering on local and overseas markets for up to one-third of state company TT shares, reprising previous attempts which valued the transaction at billions of dollars. Underwriters were originally named, but the deal was abandoned when both the government and coal prices collapsed in 2016.  Canadian-owned operator Erdene at the same time became the first cross-listed play on the Mongolian stock exchange with a small $1.5 million capital raising, as more modest feats may have to satisfy fund managers into the IMF program’s second anniversary.

 

 

 

 

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Asia’s Scarce Safety Stopgaps

2018 August 2 by

At end-June Emerging Asia slightly outperformed the MSCI benchmark with a 5% loss lower than other regions, but all core and frontier markets were in the red. On the former index Indonesia and the Philippines dropped 20%; Korea, China “A” shares and Pakistan were off 10-15%; and India, Malaysia and Thailand fell 5-8%. On the latter Vietnam, Bangladesh and Sri Lanka had single-digit reversals, with Vietnam’s the least at 2%. On the main gauge only Turkey’s 30% plunge was worse, and of the fifty exchanges tracked in total, less than half a dozen had positive results.

According to fund data providers foreign investor outflows were heavy in May and June, although net equity inflows were $35 billion at mid-year. Allocation is a multiple of bonds for the first time in years with higher global interest rates, as portfolio managers target companies with earnings above economic growth that can also endure the region’s cascading trade and currency upsets with the US administration and dollar. However into the second half all sectors from consumer goods and financials to manufacturing and tech exports will stay under pressure, as geopolitics also weighs with Beijing-Washington confrontation and the unresolved Korean peninsula standoff.

China’s index and the renimbi stumbled to erase momentum from “A” share addition, as officials reported that just one out of almost 300 qualified foreign institutional investors put in money in June. The currency softened 3% against the dollar, with new export order contraction and the manufacturing PMI at 51.5 over the month. With international reserves steady at $3 trillion, analysts speculated that depreciation may supplement the bilateral tariff retaliation strategy, but offshore state and private corporate debt is also near $1 trillion and such a move hurts repayment capacity. Property developers that issued $100 billion in bonds from January-May are already under instruction to slow borrowing, and their shares have lagged the market for months. The government has enlisted seven agencies to combat price and sales “irregularities” as it tries again to damp industry “overstimulation.” Bank research increasingly describes an outright bubble, with values doubling the past two years in second and third-tier cities, and the clampdown is expected to reduce GDP growth to 6.5% or below in the second half.

Although the central bank urges stock market calm and rejects comparison to the 2015 scare, a leaked state think tank report warned of “financial panic” with leveraged funds back in force. Monetary policy pledges “prudent and reasonable” credit growth, as the reserve requirement was again cut to release $100 billion in liquidity nominally for debt-equity swaps and small  business lending. Investors remain wary over bank health, with the state enterprise liability/asset ratio unchanged at 60% despite double-digit profit increases. The bear market infected neighboring Hong Kong “H” listings as well, and muddied Xiaomi’s much-touted IPO there at the end of the period. Taiwan also fell into the negative column on trade war high tech supply chain damage, as the President’s popularity continued to erode halfway through her term.

Indonesia was forced to raise benchmark rates to defend against rupiah weakness and capital outflow as President Jokowi began to gear up the reelection machinery with appeals to economic policy and religious moderates. India’s President Narendra Modi too prepared his extended bid as the rupee neared a record low 70/dollar with a rising oil import bill, and the central bank intervened with its hundreds of billions of dollars in available reserves. Although valuations dropped from lofty 20 times earnings levels, major family-owned companies are in debt restructurings under new insolvency procedures designed to clean up bank non-performing portfolios and high-level corruption around credit decisions, with success still elusive on both fronts. Korea enjoyed a bump with the launch of “reunification funds” before sentiment receded with renewed name calling by  Pyongyang, and Thailand received international community support for its daring soccer team cave rescue which did not translate into equity buying. Pakistan after a first quarter bounce continued its drag into July’s national polls, with former Prime Minister Nawaz Sharif sentenced to a decade in prison for embezzlement. The country is trying to avoid the confinement of another IMF program, as Asia’s escape routes for shaken shares are set to narrow the rest of the year.

 

 

 

 

 

 

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Asia Local Bonds’ Trade Tantrums

2018 July 26 by

The Asian Development Bank’s mid-year local bond publication described unfavorable yield, debt, currency and trade trends through May, as market size in nine countries increased only 1 % in the first quarter to almost $13 trillion, 70% from China. Benchmark rates rose everywhere except China’s as the central bank cut bank reserve requirements, and all currencies dipped against the dollar aside from Korea’s as pre-summit rapprochement with the North bolstered the won. Indonesia, India and the Philippines also tightened monetary policy, with the region’s corporate and household debt buildup “exacerbating risk,” according to the ADB. Credit default swap (CDS) spreads widened in most markets as a broader sentiment indicator, and foreign ownership fell across-the-board as early year portfolio inflows turned to outflows. Emerging market turmoil outside Asia, notably  in Argentina and Turkey,  injected volatility and the trade battle between Washington and Beijing against the backdrop of scheduled Federal Reserve rate hikes will continue to “adversely affect” economic and financial conditions, the survey warned.

The respective government and corporate markets were $8.5 trillion and $4.2 trillion at end-March, with the bond total equal to 70% of gross domestic product. Issuance was off 10% for the second consecutive quarter, mainly due to phasing out of Chinese local government refinancing. Indonesia’s near 40% international ownership portion was pared most on “vulnerability concerns,” followed by reductions in Malaysia and Thailand. As the rupiah depreciated Indonesia’s central bank lifted the policy rate 50 basis points in two meetings as yields on the 2-year benchmark instrument spiked. Malaysia hiked 25 basis points as early as January ahead of elections, and the Hong Kong Monetary Authority was forced to intervene under the currency board regime when the local dollar weakened. China defied higher yields as growth is set to moderate to 6.5% this year in the ADB forecast, and Bloomberg’s Global Bond Index announced the addition of Yuan-denominated sovereign and state bank offerings. According to the document world economy “momentum” explains upward rates more than inflation, which is projected at a relatively stable 3% in developing Asia in 2018 and 2019

In April Indonesia, Malaysia and Thailand experienced bond and stock outflows, and India and the Philippines were bottom currency performers on worsening current account deficits. Indonesia’s CDS premium jumped 35 basis points on financial risks, while Malaysia’s bump was primarily on political uncertainty as the historic opposition party administration took power. The ten ASEAN bond markets at close to $1.5 trillion combined led first quarter growth at an over 3% clip, with Thailand’s largest $365 billion one driven by corporate activity. Malaysia continued to dominate the no-interest Islamic sukuk space, with $200 billion outstanding or 60% of the total.  Singapore mounted a state company infrastructure push in its $285 billion market, and Vietnam as the smallest at $50 billion had the fastest 8.5% uptick on a central bank placement program to sterilize foreign reserve inflows. Korea’s second ranking $1.2 trillion corporate segment was popular with foreign investors, as geopolitical tensions faded with a landmark meeting between the two Korean leaders.  Philippines’ issuance shrank the most in the first quarter, down one-third to $6 billion, after a large retail buyer outreach the previous three months. However intra-regional local currency transactions doubled to $11 billion for the period, 80% of them from China and Hong Kong in their respective denominations, but also including Thai baht power company ones from Laos.

From January-April in contrast external bond hard currency volume in dollars, euro and yen was up 12% over 2017 to almost $120 billion, with only Korea and Malaysia declining. China approached 60% of the total, but offshore activity was flat with access curtailed for riskier names under Beijing’s deleveraging campaign. The ADB noted that after floating $25 billion in “green” bonds last year Chinese emphasis is on carbon emission control projects, and new certification principles under consideration in ASEAN should expand this version regionally. In Korea banks and insurers were large participants, Indonesia placed sukuk abroad, and a Vietnamese corporate returned to the market for the first time in five years. With sudden interest there, the securities regulator in Hanoi imposed a margin lending policy, aimed at individual investors requiring a 60 minimum deposit, as Asian bonds otherwise feature less margin for gain into the second half.

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Central Asia’s Belt-Road Divots

2018 July 20 by

A new International Monetary Fund research paper predicts “massive” investment inflows into the Central Asia-Caucuses (CCA) from China’s Belt and Road Initiative the next decade, while citing a long list of banking and capital market, fiscal and monetary policy and trade and business environment changes needed to handle the influx. External sovereign bond performance from the eight countries surveyed, including Azerbaijan, Kazakhstan, Georgia and Tajikistan, was sluggish in the first half as investors soured on illiquid frontier market plays with higher global interest rates, and recognized the area’s continued currency, commodity, remittance and debt shocks. The Fund noted strides since 2014 in economic diversification and integration, exchange rate flexibility and private sector-led growth, but called for greater tariff and non-tariff “opening up” beyond World Trade Organization membership and capital account liberalization. It urged financial sector and structural reforms to improve the lending and infrastructure foundation for “full benefits” under BRI and other cross-border projects.

Regional cooperation has also come through the Eurasian Economic Union (EEU) with Russia and other pacts, but low scores persist on trade intensity measures such as openness and value chain participation. Exports concentrate in a few products, with a decade-long import compression trend among both oil consuming and producing countries. Despite aggregate $350 billion GDP in the eight markets, intra-CCA commerce around 10% of the total is “low by international standards” due to administrative and currency restrictions. Average tariffs rose from the previous 4% when Armenia and the Kyrgyz Republic joined the EEU, and Kazakhstan and Uzbekistan ban and impose quotas on a wide range of items. The BRI, already with $10 billion in investments, has been underutilized as a commercial corridor into Europe’s supplier network, according to the report. The WTO in turn has yet to admit Azerbaijan and Turkmenistan as members, and the region has not implemented the 2017 facilitation agreement on customs automation and simplification.

Capital inflows have been flat the past decade mainly in the form of foreign direct investment, and energy exporters Azerbaijan and Kazakhstan also receiving a modest portfolio version are the overwhelming targets. While Armenia and Georgia lifted exchange controls, they remain in place across the CCA, especially with underlying bank fragility and high dollarization ratios. Fiscal deficits reached 5%, and public debt 50% of GDP in most of the group in the 2014-16 crisis period, and tax and spending adjustments are mixed while binding credible “rules” institutionalizing them are absent. Government wage bills and subsidies are bloated, and public investment lacks efficiency and productivity tests for BRI projects to assess merits and limit liabilities. Interference continues in exchange rate and monetary policy, as most of the profiled countries are reluctant or do not have technical capacity to allow respective free-float and inflation-target regimes. The central banks carrying out these functions are often not independent or transparent in practice, and local currency use can be discouraged by prudential rule distortions.

Bank asset quality and competition were weak before the latest balance sheet scare, which prompted large-scale rescues and restructurings. Azerbaijan’s biggest state-owned lender is in voluntary debt rescheduling equivalent to 9% of GDP, and Kazakhstan’s two leading units merged in 2017 after the government injected billions of dollars in capital and liquidity support. Bad loan ratios encompass a wide range from 5% in Georgia to 50% in Tajikistan under local classification criteria, and financial inclusion lags other developing economies, with commercial bank household deposits at 30% of GDP. Regular surveys reveal scant saver trust and borrower applications due to steep interest rates and paperwork requirements. Credit growth has sputtered since 2015, and correspondent relationships were also severed with foreign counterparts on creditworthiness, integrity and business size concerns, with US providers entirely pulling out of the Kyrgyz Republic. The non-bank share of financial system assets is small with “underdeveloped to nonexistent” stock and bond markets, as operating and supervisory frameworks do not meet emerging market standards. Kazakhstan’s launch this year of the Astana International Exchange to remedy these defects is “ambitious” in view of outstanding governance issues and rival regional hubs in Asia and the Middle East with better frontier investor records, the report suggests in a likely preview of second half  disappointment.

 

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The Rohingya Crisis’ Brooding Business Agenda

2018 July 13 by

The UN’s Refugee Agency’s (UNHCR’s) annual global forced displacement trends report, released on World Refugee Day, focused on the additional 650,000 “marginalized and stateless” Muslim Rohingya expelled from Myanmar into Bangladesh from mid-2017, bringing the year- end total to almost 950,000 housed in the world’s largest camp in rural Cox’s Bazar. They face “increased protection risks” during the May-September monsoon season from natural disaster and disease, aggravated by overcrowding and aid delivery coordination difficulties listed in a separate analysis by Washington based advocacy group Refugees International. The Bangladesh government has floated a proposal to relocate part of the population to Bhahshan Char Island off the Bay of Bengal coast, also a vulnerable climate zone.

The UN points out that over half of the latest Rohingya refugee wave, which followed previous ones in 2016 and in the 1990s and 1970s, is children under the age of 17, and that women and girls often experience sexual violence. Back in Myanmar’s Rakhine state an estimated 125,000 are internally displaced (IDP) in camp detention the past five years, while less than 500,000 remain in the northern part under “entrenched discrimination and denied human rights.” Myanmar ranks as the number four home country for refugees globally, with only Afghanistan at number two with double the exodus at 2.5 million exceeding it in Asia. Almost 1.5 million Afghans have fled to neighboring Pakistan over decades of civil war, and Iran hosts just under 1 million. In Southeast Asia advanced emerging markets Malaysia and Thailand have also received large Rohingya contingents fleeing by boat, and a new study co-authored by the US-based Center for Global Development (CGD) and Tent Partnership for Refugees finds them mostly in urban areas with ready employment and supply-chain access to local and multinational business.

In 2017 the world’s displaced total reached another high of 68.5 million, with 20 million other and 5.5 million Palestinian refugees over several generations. Developing nations are host to 85%, with Turkey at the top of the list with half of Syria’s 6.5 million uprooted, and Uganda a leading destination for multiple African crises. The Rohingya exit was “particularly rapid,” as hundreds of thousands arrived over three months. The Asia-Pacific refugee population is 4.2 million, and it is already under a “protracted situation” where at least 25,000 are in place in an asylum country for a minimum 5 years, and the life-saving emergency has passed without a long-term solution. Return and resettlement are options, but came to less than 1 million for both categories leaving local integration as a main emphasis, promoted by best practices to be finalized in a new UN Global Refugee Compact this year. They include full citizenship, education and employment opportunities even as Asian hosts currently impose curbs on political and poverty grounds. The trends report noted that the region had IDP return successes in the Pakistan and the Philippines last year with around 300,000 going home in each country, but warned that their security was still “hazardous.” It added that international protection was especially difficult to obtain in Japan and Korea, where initial asylum approval rates are less than 10%, while applicants from China still had almost 100,000 claims outstanding worldwide. Regional anomalies were cited as well, such as Indonesia’s only 25% female and Tajikistan’s entirely male refugee groups, and Afghanistan’s nearly three-quarters versus Nepal’s 10% children’s share.

The CGD-Tent survey confirmed across a sample of two dozen host states that 60% were in urban locations, and half working age. Of the latter, one quarter are in the biggest cities where multinational companies typically operate and can offer thousands of local jobs and supplier relationships. Malaysia has more than 50,000 urban refugees, while Thailand is at the opposite end with less than 7000 under the research classifications, although both have over 2000 registered foreign direct investors.  In Bangladesh, Chittagong, a city of 4 million is relatively close to Cox’s Bazar and the giant Kutupalong-Balukhali camp. However proximity is just a “first step,” since labor, skills and legal restrictions are common which keep refugees in the low-paying informal economy at best. The paper urges the business community to demonstrate with pilot projects and “policy voice” potential bottom line and host community returns, with East and South Asia immediate test cases for more compassionate and commercially-minded Rohingya treatment.

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China-India’s Big Bet Boomerang

2018 July 6 by

China after adding MSCI Index “A” shares plunged into the negative column for a greater loss than India into the first half close, as the Washington-based Institute for International Finance reported $12 billion in major market stock and bond outflows in May, two thirds  from Asia. The World Bank updated its 4.5% emerging economy GDP growth forecast to warn of “considerable downside risks” in trade, fiscal and monetary policy and geopolitics, and projected around the same annual expansion through end-decade. Fund tracker EPFR tallied respective equity and fixed income foreign investor inflows through May at $50 billion and $20 billion, off 2017’s frenzied pace. In private equity, industry association EMPEA reported low $7 billion first quarter fundraising, although Asia was the preferred region.

The European Central Bank contributed to pullback sentiment with its declaration to end bond-buying by year end. Meanwhile Japan committed to ultra-loose liquidity through 2019, with inflation still less than 1% and private consumption flagging. International Monetary Fund Managing Director Christine Lagarde reinforced caution in a speech on “damaged” business confidence, while the UN’s Trade and Development Agency noted flat foreign direct investment in the developing world as the overall figure dropped almost 25% to $1.5 trillion in 2017.  Emerging market observers at the G-7 meeting in Canada were aghast at the unleashing of retaliatory tariffs within the group as a harbinger of fuller scale export and supply chain chokeholds, as energy import costs also spiked with oil at $75/barrel. China remained locked with Washington in a bilateral commercial and technology dispute with mirror image countermeasures, as the IMF predicted growth slowdown to 5.5% over the next five years with a “high quality” consumption-led shift that will shake up the current share listing range.

The Fund predicts 6.6% growth this year, and the manufacturing PMI index remains positive over 50 despite only a 6% fixed asset investment increase from January-May, the slowest in almost three decades. Retail sales rose 8% in May, the worst showing in fifteen years, and the import was double the export uptick. Producer price inflation topped 4% on higher world commodity values as reserves are steady above $3 trillion, and the Yuan was one of the few emerging market currencies to stay firm against the dollar. To encourage further allocation the foreign exchange regulator eased qualified foreign investor repatriation and lock-up periods, as the securities overseer worked to launch a Shanghai-London Stock Connect over the coming months.

Banks are reportedly in line for initial public offering approvals to mobilize $15 billion in capital as they again dominate total social financing, while property developers have started to trade at discounts to book value as 40 second and third tier cities announced new speculative crackdowns. The Paris-based Organization for Economic Cooperation and Development in a separate analysis pointed to their “mounting refinancing needs until 2020,” with traditional bank lending unlikely to fill the gap. A dozen listed companies have already defaulted on bonds as an estimated RMB 20 trillion is due over the next twelve months, according to information source Wind. With the crunch ratings agencies Standard & Poor’s and Fitch revealed plans to establish fully-owned Chinese arms to meet demand after two decades in joint ventures.

India’s growth will surpass China’s at 7.3% this fiscal year, after a first quarter reading nearly half a point higher on strong public sector spending. However imported oil costs sent inflation toward 5%, as the central bank incrementally lifted rates despite an overall neutral stance. After $4 billion in portfolio outflows through May, the Reserve Bank governor embarked on an international media campaign citing medium term liquidity drain from the unwinding of Federal Reserve Treasury bond purchases. Moody’s Ratings in turn expects the fiscal deficit to stick at 3.5% of GDP, and the current account hole to worsen to 2.5%. State-owned banks remain a sore spot after $130 billion in bad loans were declared in Q1 under stricter norms, which require big borrower resolution plans within 180 days and possible implementation of new bankruptcy procedures. With the corporate mess lenders are trying to bolster retail business, where fintech and inclusion are jointly promoted by the government and private sector, with the aim of rivaling Chinese competitors under sudden investor and regulatory scrutiny in these areas to their short-term disadvantage.

 

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Pakistan’s Third Strike Depreciation Drive

2018 July 1 by

Pakistan stocks and bonds tried to shake off the third rupee devaluation since December as it touched 120/dollar for a 15% drop over the period. Foreign reserves are down to $10 billion or two months imports on a 5% of gross domestic product current account deficit, swelled by equipment imports under China’s Economic Corridor energy and infrastructure projects and sliding remittances.  The interim government recently borrowed more through Chinese banks and the bilateral central bank swap line to bolster the position and repay foreign debt, as the business and financial communities brace for possible reapplication of an International Monetary Fund program after July elections. Caretaker Finance Minister Dr. Shamshad Akhtar urged “immediate corrective measures” to restore debt and balance of payments sustainability, as Moody’s kept the low “B” sovereign rating on both credit and political risks. The PML-N party in power under Prime Minister Nawaz Sharif had basked in the glow of IMF exit and easy global bond access before the ouster on corruption charges, but his successor faces immediate cash and economic policy credibility crises that will leave foreign investors, already net equity sellers, on edge.

The World Bank predicts a near 1% GDP growth slowdown to 5% next fiscal year, as inflation veered toward that figure in May. The budget deficit could be 6.5% of GDP when the 2017-18 year ends in June, and the Bank expects fiscal and monetary tightening ahead. Massive government borrowing lifted public debt to 80% of output, and interest payments exceed development and defense spending. Meanwhile tax collection remains meager, and a future IMF arrangement will insist on more progress widening the base and targeting wealthy evaders. In external accounts, even with 15% export growth in mainstay garments and other sectors, the trade deficit was $35 billion through May, while $2 billion in foreign direct investment was the same pace as the previous year. Worker remittances were slightly up to $15 billion over the past ten months, but are projected to flag from the Gulf in particular. Higher imported oil and natural gas costs will add pressure, and gross foreign debt nearly doubled the past five years to $90 billion, over 300% of exports according to the central bank.

After tapping Chinese sources for billions of dollars in bridging facilities, the government announced in May a $200 million syndicated loan with United Arab Emirates banks. Benchmark global bond prices have fallen to new lows with the squeeze, with the 2027 issue below 90 cents. Separate plans for an inaugural Chinese renimbi-denominated “Panda” and individual investor “diaspora” bonds are also on hold, until a new debt management team is in place and current turbulence in world financial markets subsides. After the policy rate was hiked 50 basis points in May, domestic borrowing will in turn be more expensive.

Sri Lanka, where the Morgan Stanley Capital International frontier index fell 2% through May, also experienced currency weakness, despite good marks on fiscal targets under its IMF accord and GDP growth rebound to 3.5%. The central bank, which is to gain more independence and an inflation-targeting framework under a new law, continues with coordinated depreciation to try to overcome external debt at 60% of output and a heavy 2018-19 amortization schedule. Higher oil prices will boost the current account deficit and shave reserves to around five months imports, and previously loose monetary policy will likely be reversed to damp import demand and support the rupee.

Bangladesh has better 7% economic growth, lower debt and a narrower current account gap, but the IMF’s latest Article IV report warned of “slow progress” with the Rohingya refugee influx creating the world’s largest camp. An emergency international appeal of almost $1 billion is designed to obviate budget strain, as the monsoon season begins further threatening lives and shelter. Interest rates were recently cut as authorities seek to curb almost 20% annual private credit expansion through macro-prudential measures. They have also upgraded cyber-defenses after $80 million was stolen from reserves in 2016, and are considering recapitalization of state-owned commercial banks ahead of possible partial sale. However such long-overdue changes will have to wait until scheduled end-year elections with uncertain opposition party participation, as the subcontinent endures further depreciation of actual and political currencies.

 

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ASEAN’s Malaysia Maelstrom Milage

2018 June 19 by

The shock victory and anti-corruption and economic policy cleansing promised by Malaysia’s opposition alliance roller-coasted stocks  before a slight MSCI index gain, and cast a shadow on  ASEAN peers the Philippines and Thailand with their own political and fiscal battles under overall asset class retrenchment. The International Monetary Fund chimed in with caveats at a Singapore event marking a decade since the 2008 financial crisis, as it called for “budget and monetary buffer rebuilding” with  capital outflows. On the positive side, exchange rates are more flexible and reserve coverage is above the adequacy standard, but Asia’s current account balance is down the past decade amid higher external and public debt, which has jumped 15% to 60% of gross domestic product with average fiscal positions now in deficit.

The Fund’s Deputy Managing Director Tao Zhang noted a “striking increase” in corporate and household debt over the period and urged targeted macro-prudential measures. He also warned of higher inflation through rising oil and other commodity import costs, and the unfinished financial inclusion agenda with “large disparities” in automatic teller and formal banking access across the region. His speech put the Asia-Pacific behind Sub-Sahara Africa on mobile transactions and urged stronger credit bureau and payment system infrastructure to tap unreached customers.

Foreign investors , who own over one-quarter of Malaysia’s local debt and equity, had already trimmed exposure before the election on steep valuations over 15 times earnings. They joined in an immediate 5% forward ringgit selloff as a party coalition, led by former President Mahathir Mohamed, other than the ruling UNMO won a parliamentary majority for the first time since independence. When last in office during the 1990s financial crisis, he lambasted “unscrupulous” currency traders and imposed capital controls, and fund managers turned skittish fearing a reprise. The party manifesto hinted at possible currency intervention, while assigning the central bank responsibility for reviving “international market value.” However Mahathir signaled a hands-off approach in early finance minister and other appointments based on track records rather than ethnic or crony ties as in the past.

On the Kuala Lumpur Stock Exchange consumer goods listings were buoyed by the incoming administration’s promise to abolish the goods and services tax, while maintaining fiscal discipline through cutting unspecified project spending. Prime Minister Mahathir after reassuming power ordered a raid on his predecessor Najib’s residence, and barred him from leaving the country as the government tries to recover billions of dollars allegedly siphoned from the 1MDB sovereign wealth fund. The Belt and Road relationship with China will in turn be reexamined on suspicion that $30 billion in agreed bilateral transport financing posed a debt trap that could presage Chinese asset seizure as in Sri Lanka. The East Coast rail link to Singapore, underwritten by China’s Export-Import Bank and estimated at half that sum, will be scrapped as “economically unviable” although it would have created tens of thousands of jobs according to a Mahathir adviser.

The political earthquake resounded in Thailand, where street protestors demanded an end to four years of junta rule as the timetable for February elections next year was again in doubt. General Prayuth Chan-ocha, who heads the military government, may be positioning to stay in charge under a nominal civilian regime, as next generation activists organize new parties. GDP growth at 4.8% in the first quarter was the fastest in five years on healthy exports and tourism, although private consumption and investment were weak. Inflation is only 1% with the benchmark interest rate on hold, but foreign investor capital market confidence  turned bearish in May with a 75 index reading.

Philippines’ GDP growth came in at 6.8% on President Rodrigo Duterte’s 15% infrastructure spending push under the $180 billion “Build Build Build” program, but double-digit credit expansion also lifted inflation above 4%, triggering a 25 basis point rate change. The trade deficit swelled on equipment imports and remittances slipped in a lethal peso depreciation combination, down 5% against the dollar this year. The setbacks hurt the President’s popularity rating currently at 70%, as ratings agencies cited overheating and governance worries despite low external debt.  Standard & Poor’s upgraded the outlook to positive, as international fund managers reserve such small market ASEAN judgment with building tensions.

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Iran’s Stifling Sanctions Soundtrack

2018 June 6 by

Following a currency crash and ban on parallel market trading in April that ravaged stock-market listed banks reporting a combined $4.5 billion in losses, the sector braced for further damage with President Trump’s decision to resume primary sanctions and scrap nuclear deal participation. They will target the central bank to block dollar access and cross-border correspondent relationships which had proliferated with Asian and European banks the past two years after the system rejoined the SWIFT payments network. In his second term Iranian President Rouhani had bad loan cleanup, officially at $25 billion or 10% of the total, as a priority following a 2017 International Monetary Fund report calling for a” comprehensive asset quality review and recapitalization plan.” He and a team of technocrats tried to pass legislation in parliament to strengthen independent supervision and modernize management and disclosure practice, but it was routinely sidetracked by conservative opponents eager to maintain insider state control and credit provision.

GDP growth is put at 4% for the fiscal year ended in March, despite oil shipments of 2.5 million barrels/day and non-oil exports each generating around $50 billion, following months of protests over poverty and unemployment and labor strikes over unpaid salaries. Although international reserves are over $100 billion, capital flight in the first quarter of this year, mainly through informal hawala channels, may have been $30 billion as the rial lost one-third its value against the dollar before the government imposed a single 42,000/dollar rate and barred individuals from holding more than 10000 euros. It introduced a new foreign exchange trading platform but has yet to define rules for business use, as companies continue to tap underground networks for funding needs as well as for money laundering and speculation. According to the central bank the net capital outflow in the first half of the last fiscal year was $6.5 billion as foreign direct and portfolio investment barely materialized despite the former’s $100 billion medium term goal.  The shunned Revolutionary Guard, whose stock exchange listed construction arm just announced 40 mega-projects to support the “resistance economy,” is still dominant across a range of industries as the World Bank Doing Business ranking is stuck at 125th place.

Fiscal and monetary policies have squeezed middle class households that placed their faith in Rouhani’s reform agenda and improved living standards with the six-nation 2015 sanctions lifting. The latest budget blueprint showed the military and tax-exempt bonyad religious foundations with the largest chunks, as food and fuel subsidies are curtailed and public investment for infrastructure is only 3% of GDP. High interest rates cap fixed investment at 20% of GDP, and the central bank recently floated bonds at 20% yields to try to soak up liquidity from the foreign exchange market. It now claims fluctuations will be limited to 5% annually without detailing intervention strategy or earmarking reserves, further eroding strained credibility prompting calls for governor Valy Allah Seif to resign.

Under compromise proposals for lawmaker consideration this body would not be autonomous but overseen by a “high council” of senior cabinet ministers and politicians. Moves toward Basel III and international financial reporting standards are on hold, as supervisors step back to deal with previously unlicensed credit providers run as pyramid schemes. They seized and merged several into new entities like Ansar Bank that will fall fully under prudential rules. Big banks like Sepah had to dramatically raise capital to meet a stiffer 10% of assets threshold in effect since 2017, as all of them on the Tehran stock exchange were ordered to retain profits. In a vicious debt triangle, commercial lenders owe the central bank hundreds of billions of dollars from decades of emergency lines, while the government owes them $15 billion for past budget borrowing. To clear the arrears and restructure ailing units new bonds are likely to be issued which would be placed with captive pension funds and other equally unhealthy and poorly managed institutional investors. The final workout tab could be $200 billion, and the current 35-strong sector could consolidate into a dozen groups, according to experts, with President Trump’s repeated sanctions now sharpening the blow.

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Asia’s Green Bonds Green Light

2018 May 30 by

On the eve of its annual meeting, the Asian Development Bank, which has issued its own “green” bonds for clean energy projects, circulated a lengthy report from the ASEAN+3 local currency initiative calling for wider embrace of this structure to meet long-term low-carbon infrastructure funding under the UN’s Sustainable Development Goals and national plans. The Chinese government, which is furthest along in the region as a main component of the estimated $180 billion global market, sponsored the research to help bolster neighbors’ “modest” participation a decade after the European Investment Bank’s inaugural placement. In 2016 the mainland’s renimbi-denominated volume in the instrument was $35 billion, and elsewhere only Japan and Korea managed over $1 billion while Malaysia, the Philippines and Thailand had only single issues. Beijing has clear guidelines set by the National Development and Reform Committee, but “low awareness’ due to the lack of country policy and investor understanding is the prevailing trend in Asia where green bond markets are “immature” in comparison with Europe and North America, according to the analysis. It recommends an array of demand and supply promotion steps to create a viable project pipeline, which is the “binding constraint” since financing separately should be available.

Worldwide the buyer base is divided between traditional and environmental, social, and governance-oriented “impact” investors, with the latter taking half of recent activity in sample deals. Major providers like MSCI and Bloomberg have launched dedicated green share and bond indices, and stock exchanges in Shanghai, Shenzhen and Singapore designate these listings. The London-based International Capital Markets Association developed voluntary principles, and India is the only other example beside China in Asia of mandatory standards. Commercial banks are the leading names and the most common form is general obligation rather than project-specific. Green bonds carry marginally higher costs up to seven basis points due to stricter reporting requirements, but yields are ultimately identical to conventional offerings, market players believe. Among emerging currencies the Chinese renimbi dominates with a 10% global share as of June 2017, but the World Bank’s International Finance Corporation private sector-affiliate has also been active in Indonesian rupiah, Turkish lira, South African rand, and Brazilian real. The China Development Bank has been a top single name, and the asset class features prime credit ratings and average 5-10 year maturities which have catalyzed “tremendous” growth amid securities industry recognition of greater climate and fossil fuel risks.

A G20 study group in 2016 identified barriers which were repeated by ASEAN+3 investors and regulators, particularly the absence of shared definitions and norms. Asian issuers prefer official over industry direction, and await bond market linkage with Paris Agreement carbon reduction targets, possibly with new sustainability mandates for institutional managers. They noted faster approvals but the process can still lag conventional access, especially with controversies over “greenwashing” as natural resource lenders try to burnish poor environmental records. Regional representatives are observers for the Green Bond Principles first announced five years ago on proceeds use and disclosure, but they remain fluid and complex and the Chinese and Indian models do not reflect capacity and practice in other countries. Korea’s Hyundai Capital completed an electric vehicle flotation and Malaysia a solar plant sukuk, but East Asian banks have broadly avoided engagement. Responsible investing assets in Asia ex-Japan are miniscule at $50 billion or 0.2% of the total, and only a handful of houses have signed the UN’s Principles in that field. Green bond funds do not exist, and the proposed $2 billion pool between Europe’s Amundi and the World Bank unveiled at the Spring Meetings will likely dwarf all near-term potential launches combined.

The ADB calculates Southeast Asia’s infrastructure bill at almost $200 billion through 2030 and asserts that green versions are “well suited” to normal project and public-private partnership bonds. It urges “national inventories” of potential ventures, tax incentives and credit enhancements, and technical assistance and outside auditor fee coverage to advance the agenda. The central bank and securities supervisors can ensure financial institution exposure both as issuer and investor if they design an instrument regime and lower capital set-asides for such risk, the report argues. It envisions a cross-border green professional network to “scale up” this segment by finally planting roots, within fertile existing local currency bond size at trillions of dollars.

 

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