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Central Asia’s Adjacent Agitation Angle

2018 October 15 by

Central Asia and Caucuses markets with close ties were whipsawed by currency and securities selloffs in Russia and Turkey the past month, with the former less severe and mainly due to heightened Western sanctions odds rather than economic policy miscues. Azerbaijan, Kazakhstan and Georgia with internationally traded bonds and stocks suffered damage from the respective lira and ruble declines around 40% and 15% against the dollar this year. Ankara has no formal grouping like the Moscow-led Eurasia Economic Union with a common external tariff, but established a Baku-Tbilisi-Kars rail connection and spearheaded a trade and investment campaign with the “Stans,” including recently opened Uzbekistan after longtime ruler Islam Karimov’s death.

Turkey’s central bank against  President Tayip Erdogan’s wishes hiked benchmark interest rates 6% to stem collapse, while Russia, with budget and current account surpluses and $450 billion in foreign reserves, has not been as concerned about the biggest depreciation since 2016. Russian stocks lost 5% through August compared with Turkey’s 55%, but its local and external bonds were walloped on reports the US Treasury Department may consider stricter asset manager bans under new congressional legislation. Sovereign wealth funds in Azerbaijan and Kazakhstan likely have them in their portfolios as well, but the cross-border fallout was further reaching and mixed with existing banking system, commodity and competitive pressures.

Kazakhstan’s MSCI frontier index component was down only 3% against the composite 15% drop through August, but the currency plunged to 380/dollar into September, around the record low since previous devaluation and flotation. The 15% tenge slide so far this year is in line with the ruble, but local speculators, with their own “carry trade” into high-yield bank deposits, and opposition political parties warning of a crash were also blamed.  Analysts argue it has long been overvalued and should be in the 420 range, and that hydrocarbon and mining export seasonality will bring final quarter appreciation. First half gross domestic product growth was 4% on rising oil prices despite construction and services weakness, with inflation at 6% and the current account in slight deficit. International reserves were $90 billion, with $50 billion in the stabilization fund that can be tapped for exchange rate intervention.

Before the latest tenge scare, the capital Astana celebrated its 20th anniversary and President Nursultan Nazarbaev’s birthday in July with a grand party, where provincial officials offered an estimated $20 million in gifts. Around the same time the state telecoms operator took over the Nordic and Turkish-owned mobile phone leader, a transaction giving it a two-thirds industry share and spooking foreign investors. Critics claim it will hurt competition and new technology and alienate potential buyers, as big government companies are to sell partial stakes on the stock exchange in the coming months. The International Monetary Fund in turn in its September Article IV report called attention to remaining major bank “challenges and risks,” despite billions of dollars in support including for a merger of the top two lenders. The next ranking institution Tsesnabank disclosed a 30% liquid asset decrease, as officials agreed to purchase a 1 billion euro agricultural credit portfolio while the central bank injected another 350 million euros. Its management was reshuffled with the chief executive ousted, and rival Eurasian Bank with almost $3 billion in assets likewise announced a liquidity squeeze. Private sector credit growth has tentatively resumed at a 10% pace, in part driven by the President’s “7-20-25” discount mortgage program unveiled in March, but these rescues reflect IMF views that bad debt resolution and business model overhaul are still lacking.

Azerbaijan’s thinly-traded sovereign debt was unnerved by dual Turkish and Russian economy exposure, and Pasha Bank has an Istanbul subsidiary which issued $25 million in its own bonds this June. GDP growth and consumer inflation are running at 1.5% and 3% respectively, and a strong current account surplus and foreign direct investment inflows continue to back the new dollar exchange rate peg. However the central bank is carefully monitoring local saver dollarization preference, with the deposit ratio currently at 70%, as well as frequent private sector hard currency borrowing. The state oil company has $20 billion in investments in Turkey ravaged by the lira’s meltdown, which will likewise dent tourism numbers into neighboring Georgia that had increased 20% annually, and bleed into external bond prices.

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Papua New Guinea’s Summit Host Submission

2018 October 8 by

Papua New Guinea, after a failed sales attempt two years ago, began a global road show for a $500 million inaugural bond to relieve a chronic foreign currency crunch, as emerging and frontier market issuance vanished in recent months with totals down 20% from 2017’s pace according to transaction trackers. Fund outflows persist for both debt and equity, which have each fallen below $20 billion in the latest data from US-based EPFR. Standard & Poor’s recently lowered the sovereign rating to “B” citing overdependence on hydrocarbons and mining industries, “weak institutions” and fiscal and monetary policy rigidity. Moody’s placed it on negative watch, and the downgrades overshadowed favorable publicity as the upcoming host for November’s Asia Pacific Economic Cooperation (APEC) summit.

Credit Suisse, chosen by the government as a lead underwriter, arranged a $500 million syndicated loan last year for infrastructure, including facilities for the APEC event. In 2016 the World Bank lent $300 million, and double that amount is owed China out of the $2.5 billion foreign debt total. Prime Minister Peter O’Neill and his economic team have scrambled to deal with declining revenue from Exxon Mobil’s flagship $20 billion gas plant, and severe drought and earthquake in succession. The Asian Development Bank, which began disbursing $100 million in support in August, predicts gross domestic product growth around half the original official 3% estimate. The worsening fiscal deficit sent public debt over 30% of GDP, approaching the 35% statutory ceiling. S&P noted that domestic banks had reached internal limits for government bond exposure, leaving the central bank as lender of last resort and forcing offshore borrowing. This recourse is also needed to overcome a backlog of requests under foreign exchange controls the business community ranks as the number one complaint in regular surveys.

The central bank governor criticized these protests in July, with the claim that import orders were met under a “reasonable timeframe” with recovering hard currency inflows from the liquefied natural gas and OK Tedi and Borgera mining projects. The 2018 budget also hiked tariffs on 250 items, with a 25% one introduced for previously exempt dairy products. The ruling coalition at the same time is reviewing the mining code to consider more foreign investor royalties and taxes, despite warnings from the Chamber of Mines and Petroleum that unilateral changes could backfire and put 80% of island exports and 20,000 jobs at risk. It urges devaluation of the local currency, now around 0.4 to the Australian dollar, as another option to gain competitiveness and earnings but the government rejects this route. The Prime Minister and Treasurer blame the predicament on global commodity prices outside their control, as they promote tourism, fishing, forestry and small enterprise diversification and infrastructure public-private partnerships against exchange rate overvaluation arguments. They condemn natural resource contracts predecessors signed as too lenient in allowing proceeds to stay overseas, and stress restructuring will ensure “responsibility” while calling for food import bans to “improve self-sufficiency.”

Better connectivity and transport were priorities ahead of the November APEC meeting in Port Moresby expected to attract close to 10,000 visitors, half the total projected for the year. In preparation a new mining project, Wafi-Golpu was rolled out amid an information campaign to increase direct investment from Australia, China, Southeast Asia, and Japan. Australia’s colonial ties have positioned it as the lead commercial and aid partner, but China’s $3 billion in trade in 2017 and project loans put it in second place. Chinese companies have pumped billions of dollars into copper, gold and nickel ventures, and timber exports are another bilateral mainstay although PNG pledges to phase out tropical logging by end-decade. With the planned 10-year external bond the government intends to extend maturities, while preserving the country’s no-default record. It also has a broader capital markets modernization strategy that includes opening the 15-company local stock exchange to foreign buyers. As preconditions basic securities laws would be revised, and an international bank custodian recruited to provide depository and safekeeping services. Shareholding and governance of the Port Moresby bourse, currently owned by two brokerages, could also be overhauled. Corporate bonds could eventually be added to the mix with initial placement success abroad, which will depend on mining ambiguous investor sentiment already the pattern domestically.

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China’s Belt Hole Punch

2018 October 1 by

Domestic investors continued to dump “A” shares for a 20% loss on the MSCI Index through August as backlash appeared against President Xi’s latest developing world Belt and Road $60 billion multi-year funding package for Africa, repeating a previous bilateral summit pledge. The US criticized the deal as well amid bilateral trade and investment acrimony and warned that sovereign borrowers already tapping the IMF for emergency support could deepen a “debt trap,” even though the Chinese portion is a fraction of the total. On the fifth anniversary of the initiative, a number of studies have offered mixed reviews, with Washington’s Center for Strategic and International Studies examining the half dozen “corridors” and 175 projects to find that they are often bypassed and uncoordinated. The sweep across 80 countries with a $1 trillion goal encompasses both hard and soft infrastructure but lacks definition, as it extends to unrelated athletic and cultural events, according to the review. The analysis tries to reconcile on the ground and strategic outcomes and reiterates that regional land, air and sea connections are well established economic strategies historically promoted by development lenders, and that the ADB has mirrored the approach in the Greater Mekong for example. Subdividing the Asian categories shows an absence of priorities outside Pakistan, and that China’s 30 provinces vie at the same time for program benefits. Geography has extended to the Arctic and outer space without pinpointing borders and locations, and implies that Beijing has less control and vision than described in official media and popular coverage. This gap leaves the field open to the US and other competitors for large-scale alternatives as legislation to create a $60 billion unified development finance agency awaits passage.

In August the manufacturing PMI was 51, barely above neutral, as the currency gained against the dollar with the daily band again subject to the “counter-cyclical factor” used in former periods of stress. The foreign exchange regulator punished two dozen violations, as overseas investors increased their local government debt share to 8% on official agreement to stretch tax exemptions to three years. They are also buying bank bad loans through the Qianhai Assets Exchange as real time delivery versus payment is now in force. According to fund research, two-thirds of international “A” shareholders are in consumer listings and have shunned real estate, where S&P ratings believe debt service capability is at a multi-year low. Cash/short-term debt ratios averaged 125% in the first half, with an estimated $40 billion in maturities over the coming months. Leading developer profits were up 75%, but they have started to shy away from second-tier cities with price declines and resort to heavy discounts to sustain sales. Along with property bubble vigilance regulators have expressed concern over the serial collapse of internet P2P credit platforms and vowed immediate inventory and resolution. While bank non-performing assets are still below 2% by current standards, the central bank has warned of private corporate debt’s rapid rise as industrial profits continued to slow in July. Economic and earnings drag may worsen with the prospect of additional US tariffs on $200 billion of Chinese exports which could force company belt-tightening.

 

 

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Myanmar’s Consecutive Condemnation Cries

2018 September 24 by

The one-year anniversary of the escape of over half a million Muslim Rohingya refugees from Myanmar’s Rakhine State into Bangladesh, with a current total of over 900,000 in the world’s largest camp, coincided with clear United Nations condemnation of human rights abuses as well as investor fears over the economic policy and performance fallout on both sides of the border. The military, which controls major state enterprises, will likely face additional Western commercial sanctions and asset freezes with the UN’s call for investigation of genocidal crimes. Before the report, the government’s civilian head Aung San Suu Kyi gave a speech in friendly Singapore assigning neither the army nor leading officials who have concocted a mix of lower growth, higher inflation and currency depreciation blame for their actions.

China as the top Asian ally has felt the impact of tourism and foreign direct investment slowdown, with a 15% $900 million decline in the last fiscal year, as Myanmar reportedly will slash the original $7.5 billion Kyaukpyu port project in Western Rakhine to $1.5 billion. The Belt and Road venture, with Citic Group as the main developer, was reached with the prior government to speed oil and gas delivery to Yunnan Province. However the location in a conflict zone, and headlines over deep debt and structural failures in neighboring Laos and Sri Lanka prompted a rethink which intensified when Soe Win, a former Deloitte management consultant, became Finance Minister in May. With foreign aid cuts and a record budget deficit to be funded 20% by the central bank, he argued that the transaction had to shrink, as frontier market ambitions were otherwise scaled back despite passage of overdue reforms such as a new company law.

The latest updates went into effect in August and allow 100% international wholesale enterprise ownership with a minimum $5 million allocation. Thai textile firms have expressed interest in diversification with higher domestic production costs, but lawmakers regularly criticize the investment agency for blocking and delaying applications amid land and tax disputes. Electricity and information technology infrastructure are also lacking, and the outdated banking system suffers from limited private and mobile competition and exchange rate restrictions, according to an August Yangon seminar on the economic outlook. A main adviser to State Councilor Daw Aung San Suu Kyi, Australian professor Sean Tunnell, echoed the Asian Development Bank forecast that gross domestic product growth will slip under 7%. Inflation hit 7.5% in the last quarter through July with food crop flood damage and a 5% monthly devaluation of the kyat against the dollar through mid-August.

The budget gap is at a 7-year peak with big losses at one-third of thirty government enterprises, including the power and rail monopolies. Less than $2 billion in concessional debt and foreign assistance will come in this year, and the trade deficit widened to $1 billion from April-July after a 4% of GDP pace in 2016-17. The Chamber of Commerce’s recent business sentiment survey revealed a drop from last year on “unclear economic policies” as the government continues to promise an overarching “Sustainable Development Plan” for long-term vision beyond the Rahkine crisis.

With the currency sliding past 1500/dollar under reserve pressure, the central bank abandoned the daily 0.8% fluctuation band and introduced swap facilities in a stabilization attempt. It injected millions of dollars in liquidity in August as private banks were accused of hording foreign exchange, and diesel and sugar re-exports were suspended to mitigate swings. The Chamber of Commerce unveiled a currency reform blueprint to liberalize access and trading, and central bank technocrats urge a free-float system. However the governor in the post for 15 years, U Kyaw Kyaw Maung, was reappointed in July and has traditionally advocated monetary policy and financial institution caution. Interest rates are still controlled and foreign banks were only recently allowed to offer trade credit, and stock exchange promoters of expanded overseas entry expressed regret at the incumbent’s continued tenure.

Bangladesh’s business and financial communities are likewise outraged at the Rohingya refugee status quo, as they point to hosting and environmental costs in Cox’s Bazar without prospects of voluntary return and fulfilled aid pledges. Foreign investors are net equity sellers ahead of elections which could bring their own standoff, and de-listings without compensation multiplied area upsets.

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India’s Trampled Roaming Turf

2018 September 18 by

Indian shares alone among major Asian emerging markets turned positive in local index terms, as foreign investor net inflows also reappeared in August due to good earnings at a cross-section of top thirty companies, despite  price-earnings ratios outstripping the global average by seven times. As Prime Minister Narendra Modi underscored in his last Independence Day speech before  national elections, expected 7.5% medium term gross domestic product growth in the world’s number six economy was “running elephant” pace, even if consumer inflation was  back to 5% and fiscal and current account deficits were criticized in recent ratings agency and International Monetary Fund reports.

The rupee slipped to 70/dollar, below the level five years ago at the height of the “fragile five” scare, despite central bank tightening and intervention from the $400 billion reserve pile, as bond investors in contrast target India for the largest outflows. They accuse Governor Urjit Patel of erratic and missing communication on monetary and exchange rate policy, with the gap even more noticeable since the June exit of top economic advisor Arvind Subramanian, who returned to a US think tank. On the structural front too, fund managers alternated between skepticism and acceptance of tax and banking sector changes as an underlying allocation rationale. Performance is likely to continuing gyrating into the poll period, without clarity on the Modi first term legacy and future plans, as the broader asset class endures harsher judgment after Turkey’s crisis.

Former Indian officials poked holes in the Modi Administration’s track record, with previous Finance Minister P. Chimdaram faulting demonetization and unified tax complications, with additional rate overhaul from the Goods and Services Council in July, for cutting fixed capital formation below 30% of GDP.  An old economic planning head warned of “populist spending” to derail fiscal responsibility, which could include intact subsidies shielding against higher oil import prices. India Ratings decried a 7% drop in household savings the past five years to 16%, while Moody’s estimated the current account deficit will swell 1% to 2.5% of GDP, half the fraction during the 2013 US Federal Reserve Taper Tantrum. Fitch chimed in that the weaker currency will aggravate banking and corporate stress and repayment risk in view of unhedged borrowing, just as big state lenders began to double bad asset recovery in the first quarter under new procedures. The setback revived momentum for a central disposal agency, with a proposal now circulating for a public-private structure with $15 billion in initial capital that would focus in particular on idle power facilities.

The IMF acknowledged “important” insolvency and foreign direct investment steps in its August Article IV survey but urged greater labor and financial sector ones for productivity and savings. Credit growth was down to 12% annually, amid slow deleveraging and poor governance and inefficiency among the dominant state banks. The Fund urged more private competition, as US venture capital giant KKR launched a local financial services unit with a full small business line. It recommended adherence to the 3% fiscal deficit cap and longer-term public debt reduction to 60% of GDP, and insisted that recent agricultural and housing support be counted on-budget. Further interest rate hikes are in store with “upside” inflation, and could invite future government and corporate bond inflows as foreign portfolio ceilings are in principle relaxed. The 2018 Banking Reform Roadmap is “vague” and board independence and privatization should accompany future recapitalization. Trade, infrastructure and product regimes are also outdated, according to the report.

In the region Malaysia too has been on a relative tear, with an 8% gain since July and $100 million poured into the IShares US-based ETF last week during Turkey’s collapse. Prime Minister Mahathir Mohamed at the 100-day mark put $20 billion in Chinese projects on hold over debt concerns, pressed investigations and asset seizures around the IMDB scandal, and replaced the main sovereign wealth fund board. The growth forecast was slightly pared to 5% with the current account surplus intact, and the central bank eased mandatory hard currency export surrender rules on a possible path to reauthorizing offshore derivatives banned under the previous government. Foreign investors maintain one-quarter local bond ownership as Moody’s Ratings praised fixed-rate Islamic issuance as a sound strategy which can withstand wily old politicians’ uneven policy delivery, with Asia now scrambling for these safeguards.

 

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China’s Multi-Front War Whirlwind

2018 September 11 by

Chinese stocks were at the bottom of the Emerging Asia pack into August, down 20% in local index terms, as the so-called “trade war” with Washington added another 25% mutual tariff blow on tens of billions of dollars in goods. The International Monetary Fund urged a negotiated settlement as it predicted only “limited direct impact” on the economy shaving growth half a percent under a medium-case scenario, while holding to this year’s 6.6% forecast. However the Fund also warned that credit expansion was unsustainable and that tighter global financing conditions posed “downside risk,” as the renimbi continued its 10% slide since April.

The IMF’s Beijing representative described the Yuan as “fairly valued,” even though analysts estimated that depreciation would translate into higher exports with a time lag to offset the tariffs. . US Treasury Secretary Steven Mnuchin raised the stakes with notice that his department was “carefully monitoring weakening” in preparation for another currency manipulation assessment due in October. The dollar is less than a one-quarter weight in the overall daily fluctuation basket, comprised 40% of neighboring emerging market currencies. Chinese officials insist that market forces rule with no competitive devaluation strategy, as the central bank reinstated bank forward position reserve requirements to curb speculation. However the bilateral exchange rate and trade regimes now closely overlap as an overhang on “A” share consideration, despite China’s 30% slice on the benchmark MSCI index, with a clean resolution of cross-cutting issues unlikely to offer recovery prospects in the coming months. As if these battles were not enough to daze foreign investors, whose first half $45 billion in inflows have turned to outflows, another theater opened after Pakistan’s July election brought the prospect of another IMF balance of payments rescue that could also repay Beijing’s Belt and Road commercial infrastructure lending, as the two systems try to reconcile debt workout procedures. US Secretary of State Mike Pompeo, responding to congressional concerns, insisted that a Fund program would not benefit mainland coffers.

Although exports increased over 10% on an annual basis in July, a $30 billion current account deficit in the first half was the sole instance the past two decades as outbound tourism jumped. The official purchasing manager index hit a five month low of 51, and the services optimism reading was the poorest since 2015. Monetary policy was loosened as money market rates fell 200 basis points year to date, and the State Council pledged “more active” fiscal steps short of stimulus. The mid-year budget deficit came in less than 2017’s, as one hundred fixed investment projects were approved worth $40 billion. Local government spending will ramp up in the second half as RMB 1.8 trillion in bond issuance is allowed, in part to compensate for sliding land sales. The Housing Ministry ordered provincial authorities to better manage risks, as the news agency Xinhua tallied 200 property tightening rules across the country to deflate bubbles. With the domestic downturn Chinese institutional investors only allocated $4.5 billion to overseas property in the second quarter, a 45% drop on an annual basis according to global tracker Cushman & Wakefield.

Financial sector troubles continue despite “preliminary deleveraging results” in the government’s view, as the central bank injected a record RMB 500 billion in one-year liquidity. It called for greater small business credit, as regional lenders with 40% of system assets retrench under capital constraints and seek to launch share offerings in Shanghai and Shenzhen. According to the banking regulator only 35% of RMB 250 trillion in assets are onshore, and overseas disclosure is opaque. Financial services overseers were otherwise swamped with depositor protests after 150 P2P lending platforms suddenly closed. Thousands have proliferated to serve an estimated 50 million borrowers, and range from well-known e-commerce units to personally-run pyramid schemes. The asset management association also revealed “lost registration”  with hundreds of private equity and hedge funds that failed to renew registration. The State Council announced further measures against illegal financial firms and activities, after twenty mainstream corporate bond defaults through July, with state enterprises facing a heavy rollover schedule in 2019. Standard & Poor’s Ratings found that over half of investors with put options, mostly in the property sector, exercised immediate repayment rights over that period. The National Development and Reform Commission calculated foreign exchange liabilities were back to 2014’s steep levels, as currency mismatch also prominently surfaced as an element in the belligerent terrain.

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Thailand’s Trade War Tripwire

2018 September 4 by

Two years after a constitutional referendum passed to set the stage for 2019 elections returning civilian rule, amid calculations that the US-China trade war will only fractionally hurt growth, Thailand’s stock market enjoyed political and economic momentum for an essentially flat performance on the MSCI index through July compared to Asia’s 5% decline. According to official estimates the loss of machinery, plastics and vehicle exports in the first tariff waves of the bilateral clash will be readily offset by new Chinese investment into the $30 billion high tech Eastern Economic Corridor in particular, as rice and rubber shipments may also increase. Gross domestic product rose almost 5% the first quarter, and the central bank and International Monetary Fund predict growth toward that figure for the year on a 10% tourism jump through June and public infrastructure spending.

Inflation at 1.5% is at the bottom of the target zone, and the fiscal deficit is manageable at a projected 3% of GDP as poll outlays pick up. In external accounts, the current account surplus, over 10% of GDP last year, is “excessive” in the Fund’s view, but along with intervention from $200 billion in reserves has preserved baht strength against the dollar amid capital outflows. Monetary policy remains neutral, but household debt again swelled in the first quarter to almost 80% of GDP, as the Bank of Thailand governor vowed  to “break bad habits,” which may continue to depress consumption through the military’s promised exit from power.

With renewed activity the Big Four banks announced earnings above estimates to boost share prices, with number one Bangkok Bank profits up 15%. Over half of personal borrowing is for credit cards, autos, and unsecured loans, with mortgages taking another one-third.  A Financial Times Research survey of 1000 consumers revealed that most apply 30% of their income to service debt, and almost half were refused additional credit the past year. Bad assets are only 3% of the total, but the central bank is considering tougher “macro-prudential” measures to ensure deleveraging even as car sales were artificially lifted 20% in the first half by a government tax rebate.

The Thai investor sentiment index compiled by the main capital market organizations improved in June and July despite net portfolio outflows and tighter regional interest rates. Exports continue to advance at a 10% clip, especially electronics and commodities outside immediate trade conflict. Corporate bond issuance increased slightly from January-June, and the Bond Market Association raised the second half forecast by $25 billion. Chinese visitors, who account for one-quarter the total, may stay away after the Phuket ferry disaster that killed 50, but the incident was eclipsed by the soccer team rescue garnering favorable global headlines.

In contrast to Thailand’s streak, the Philippines was shunned for a 15% MSCI Index drop through July as torrid 6.5% economic growth also spurred inflation and current account deficit concerns. The peso is at a dozen-year low at 53 against the dollar, as the central bank begins to hike rates to reach the 4% inflation target. The IMF expects the balance of payments gap to worsen to 1.5% of GDP as a currency drag, along with uncertain remittances from the Middle East. Food and transport costs and 6% peso depreciation hoisted the consumer price index 5.5% in July, at the top end of the central bank’s forecast. The Treasury recently rejected bids on 10-year bonds since yield demands were too high, as President Rodrigo Duterte’s administration continues its $170 billion “build, build, build,” transport program. It will bring the budget deficit to over 3% of GDP, against IMF and ratings agency admonitions. Moody’s warned the fiscal outlook could further deteriorate after the immediate effects of steeper excise taxes fade, and criticized the President’s “contentious law and order policies.”

Revision of the four decade old constitution which imposes a presidential single term limit is another controversy upsetting foreign investors, who according to initial drafts will stay subject to minority ownership of land and local companies. The so-called “charter change” was a centerpiece of Duterte’s original campaign platform nominally intended to create a federal system, but opponents including a former Supreme Court Justice accuse him of a power grab at the same time higher-cost staples and debt are starting to bite and corporate and political governance arouse deeper suspicions.

 

 

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Asian Stocks’ Safety Scramble Scrum

2018 August 28 by

With the negative MSCI showing across all Asian core and frontier stock markets, fund managers began the second half constructing narratives around selected countries’ relative trade and currency war evasion and upbeat economic and financial system health as preferred spots. Specific company size and industries were also promoted, with India on a recent run with embrace of high-tech stalwarts like Tata Consultancy Services and less-followed e-commerce listings without lofty double-digit valuations. Indonesia has enjoyed a foreign investor revival of debt and equity inflows with its domestic consumption-led story, tighter monetary policy, and diminished populist and religious fundamentalist concerns in elections.

Vietnam is coming off economic and share overheating according to the International Monetary Fund’s July Article IV report, and will be a main beneficiary of any successor Trans-Pacific Partnership free trade pact concluded without the US, in the view of think tanks like the Washington-based Institute for International Economics. Kazakhstan as a dual Eurasian destination, and a rare frontier gainer up 3% through mid-year, is likewise on the radar after the s launch of the Astana International Financial Center lured dozens of offshore banks and securities houses ahead of planned state company offerings. These picks carry momentum into the third quarter, but underlying financial sector and structural reform disappointment could still stifle it as investors again rotate toward more familiar and liquid locations.

 

Indonesia’s central bank abandoned its neutral stance, and raised the benchmark rate 100 basis points in consecutive meetings to 5.25% to stem heavy capital outflows in May. It also bought local bonds in secondary markets as yields neared 8%, and intervened from the $125 billion reserve stockpile to support the rupiah as it softened 5% against the dollar. With the moves the growth and current account deficit forecasts stayed respectively at 5% and 2% of gross domestic product. Officials announced measures to stimulate the property market by relaxing the minimum 15% down payment for first time home owners and expanding available credit. Standard and Poor’s Ratings predicted activity would remain flat, but acknowledged potential supplier benefits. On trade Jakarta dispatched a delegation to Washington, which ran a bilateral $13 billion deficit in 2017, to address the threat of duty-preference removal raised by the Trump Administration in April. Garments and rubber are chief targets following a US Trade Representative review which placed Indonesia on a dozen country “priority watch list.”  To maintain international payments balance, Finance Minister Sri Mulyani Indrawati proposed possible equipment import limits for infrastructure projects that may be finalized soon.

The central bank reintroduced short-term 9 and 12-month government paper to diversify foreign investor options as overseas debt hit $360 billion in May, evenly split between official and private. The latter is concentrated in mining, manufacturing and electricity company borrowers, and the debt-GDP ratio is 35%, but over 85% is long term. However Asian high-yield bond rates have gone from 6% to 9% in recent months on leverage worries among Indonesian and Chinese names in particular. Against this background leading Bank Mandiri, despite a 30% first half profit jump, may confront resistance as it seeks $500 million in overseas lines in the near future according to its chief executive.

Indonesia’s credit default swaps spiked to 175 basis points over US Treasuries before settling down and the non-resident local bond share is still almost 40%. Regional elections at end-June were inconclusive as a signal to 2019’s presidential contest, but the incumbent Joko Widodo will likely face a close race as voter sentiment veered away from establishment candidates and family dynasties. Nonetheless former President Suharto’s son Tommy plans to form a new party and enter the competition on a nominal anti-corruption platform.

Vietnam is on track for better 6.5% growth with impetus from the Trans-Pacific and EU free trade agreements, on inflation within the 4% target. However fiscal consolidation must go further to keep public debt within the 65% of GDP legal cap, and credit expansion above 15% is too fast, the IMF survey argues. State-owned banks continue in trouble with low capital and earnings, and bad loan resolution through the central asset management agency can be accelerated. Longer range capital market development, particularly corporate bonds to balance with equities, is also lacking and may damp quarterly enthusiasm, the review cautions.

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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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