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Iran’s Certified Share Momentum Doubts

2017 August 10 by

The Tehran Stock Exchange rebounded slightly for a 3% gain through July as the Trump administration, after putting Iran “on notice” for possible cheating, certified short-term compliance with the six-nation anti-nuclear agreement at the same time new congressional sanctions were passed to punish companies and individuals involved in its ballistic missile program and Syrian Assad regime support. Earlier the Treasury Department had ordered asset freezes against leaders and organizations accused of “malign influence” in the region. Washington’s actions came against the background of hardliner backlash by the Revolutionary Guard ( IRGC) and religious conservatives against President Hassan Rouhani’s easy re-election win. His brother was arrested on corruption allegations which he vehemently denied, after the President blasted the IRGC’s economic and political dominance as “government with a gun.” Its leadership in turn savaged a breakthrough $5 billion gas deal with France’s Total and China’s CNPC as a “conspiracy” against domestic competitors. The Guard also viewed another waiver in June of Financial Action Task Force anti-money laundering measures as infringing on foreign policy and security as officials pass laws and rules to ensure bank adherence. The country remains on the blacklist but smaller European and Asian lenders have resumed correspondent relationships as they try to puzzle out growth and policy trends into Rouhani’s next reform act, thus far offering confused signals.

GDP growth was a torrid 11% for the fiscal year ended in March with oil export reopening and the non-oil sector up half that pace. according to official statistics. The IMF had estimated real growth rebound over 6%, and to further promote non-commodity sales the government  earmarked a $500 million credit line and signed agreements with Korea’s and Turkey’s state trade banks. EU exports were five times higher than last year from January-April at EUR 3.5 billion, concentrated in iron and steel products with Germany as the leading buyer. China remains the main energy importer and Iran is an infrastructure project target and crossroads under Beijing’s Silk-Road straddling Belt and Road scheme. Chinese state companies are active in mining and transport, and its cars and goods flood Tehran and other cities. The Export-Import Bank extended a $1.5 billion railway loan for fast service between the capital and Mashad, and national network electrification is set by 2025. The country has forged new bilateral commercial pacts with France, India, Australia, Pakistan and South Africa and a port deal with Afghanistan to diversify and deepen traditional ties.

Next fiscal year growth projections are in the 4-5% range, but the expansion will still be unable to overcome lengthy recession from the UN sanctions period and crack double-digit unemployment. Inflation fell below 10% but crept up again to that level in June, on money printing to aid ailing banks, higher energy cost with subsidy reduction and real estate price recovery after years of doldrums. Modest exchange rate depreciation is another factor, and the government continues to delay unification between the controlled and parallel rates for fear of further inflationary fallout. The central bank benchmark interest or return rate under the Islamic system is steep at 15%, reflecting tight monetary policy but also choking industrial investment, which has prompted a business community outcry.

However cuts could trigger another inflation spike when the 40% memory of the early Rouhani Administration is not too distant, and will not unclog the lending spigots as banks grapple with a 12% understated nonperforming ratio. Central bank head Valiollah Seif warned executives before the election that a banking crisis could stymie economic integration and modernization progress since sanctions relief. The March bad loan total was almost $35 billion and will swell as international accounting standards enter into force as of July. The government is debating cleanup alternatives, and may first opt for consolidating leading state-controlled banks as in previous troubles. The stock exchange should see additional offerings with this strategy, such as with the recent $25 million flotation of a Bank Mellat subsidiary. Both local and foreign investors tend to shun this lagging sector, despite bargain valuations against the average six times price-earnings ratio. New London-based funds emphasize consumer goods and e-commerce listings with the well-educated young 50 million population, but a share stumble may be unavoidable without certified management and policy changes in second Rouhani term financial system foundations.

 

 

 

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Syrian Refugees’ Turkey Turnkey Track

2017 August 3 by

A three month study of Syrian refugee entrepreneurs in Turkey, conducted by nonprofit research groups with Canadian support and titled “another side to the story,” estimates over 10000 formal and informal startups the past five years with the former accounting for almost $350 million in investment. Three-quarters are “micro” with fewer than ten employees, with average annual revenue close to half  a million dollars dominated by retail and wholesale trade. Owners are well educated with 70 percent holding at least university degrees, and the same portion intends to keep existing operations after the war ends. Language and inability to access credit or official procurement bids are major barriers, but most of the 250 companies surveyed are positive about the future with asset purchase and expansion plans. Almost two million refugees are working age and 90 percent are in urban areas, with the paper focused on Istanbul and the border town of Gaziantep. Public spending for the crisis, mostly funded internally, has been under 1 percent of GDP, and the influx spurred offsetting consumption and infrastructure contributions. Humanitarian exports quadrupled Gaziantep’s trade to $400 million from 2011-15, as prices fell due to increased immigration providing underground labor. While Turkey’s economy is almost ten times the size of other refugee hosts Jordan and Lebanon combined, integration has been “challenging” with Syrians getting only round 15 percent of  75000 authorized foreigner work permits in 2016, with the remaining hundreds of thousands in informal jobs with minimal pay and protection. From January-April 2017 675 new companies started and the Syrian share is 40 percent of all non-resident control, with the southeast and western cities emerging as hubs, according to the leading association of business executives. Owners overwhelmingly found registration “easy” even though only 10 percent have Turkish partners. One-quarter are in manufacturing where the country is competitive in food, machinery and textile exports. Female entrepreneurs concentrate in services including catering, tourism and translation. The typical stay before launch was almost two and a half years, and 70 percent previously ran operations in Syria where they reported three times more staff.

Over 80 percent have home country passports instead of “temporary protection” status that facilitates internal and external travel.  One third of owners speak no Turkish, and three-quarters use the internet for marketing. Almost all respondents had bank accounts but they reported difficulties securing guarantees and credit cards and few took out loans, as compared with 40 percent of all small and midsize firms in national statistics. The vast majority do not receive development or training help from outside organizations, despite initiatives by chambers of commerce, the UN and World Bank. Legal-accounting and technology advice are priorities, but skilled employee availability is sufficient although 15 percent worry about retention with resettlement often shifting personnel. Joint arrangements are increasingly considered permanent as firms envision a long-term presence should peace and reconstruction loom anytime soon. The report urges higher formalization, work permits and  company refugee quotas and a dedicated network of language and professional instruction. It recommends a senior executive mentor program and outreach to the Syrian diaspora in the region and overseas to stimulate venture capital relationships despite frayed diplomatic ones.

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Tunisia’s Nascent Neighborly Nod

2017 July 21 by

Tunisian shares turned slightly positive on the MSCI Index at the half-year on the second anniversary of a bloody beachside tourist attack, as the IMF praised the new unity government’s “corrective action” intent in its first checkup on its 4-year $3 billion facility, and strengthened security internally and along the Libya border preempted further incidents. Officials traveled  to Washington to thank the US Defense and Treasury Secretaries for support, with the message that Libyan reconstruction may also be in the frame in selected areas with civil war and ISIS presence waning. At the same time the Fund report underscored the advanced political transition despite economic lethargy and social discontent, with all coalition parties including the labor-union dominated wing pledging reform  and stability to redress budget and current account deficits, state bank dysfunction and runaway youth unemployment amid high university and training qualifications. This year’s GDP growth forecast was reduced to 2.5 percent from the original 3 percent due to fiscal and monetary tightening countering better phosphate exports and tourism. The medium-term aim is to reprise the 5 percent level existing under the previous authoritarian regime, which followed competitive policies tinged with insider corruption now under investigation and subject to asset recovery efforts. A controversial amnesty law would allow reported billions of dollars to be returned at minimum penalty and separate deals have already been negotiated with business executives close to ousted President Ben Ali allowing them to resume local activities. The legislation could be a major issue in upcoming municipal elections, which will also focus on the rural-urban and interior-coast income divide. The budget gap will again be 6 percent of GDP as wage increases in the bloated public sector overtake lower energy subsidies and a one-time 7.5 percent corporate profit charge. Pension fund arrears continue to mount, and financial transactions have also been hit by a special tax.

Inflation should stay under 4 percent despite near 25 percent currency depreciation since the end of 2015 amid double digit current account holes. The benchmark interest rate was lifted 75 basis points to 5 percent, and the central bank reintroduced foreign exchange auctions to bolster market determination. Civil service cutbacks are in store, and new performance contracts should pare state enterprise contingent liabilities. The three big government banks have been recapitalized with fresh management but the bad loan ratio is still 15 percent and resolution procedures are outdated, according to the IMF. An inclusion strategy embraces micro-finance, credit bureaus, digital services and small business access, and bond markets are a priority with yield curve development. The revised investment code will create a one-stop shop for international projects and public-private partnerships, but commercial climate rankings are “poor” on the World Bank and World Economic Forum surveys. Official debt is to settle at 70 percent of GDP by end-decade, but “slippages” have already endangered the goal and “unsustainable” government spending and “inefficient” legal and regulatory regimes impede overall transformation. After a EUR 850 million Eurobond, Qatar loan rollover, and donor pledges external financing is in place until early 2018 when additional sovereign issuance is scheduled which may no longer carry a third part guarantee if revolutionary progress can be consolidated, the findings suggest.

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The GCC’s Family Fight Fractures

2017 July 21 by

Qatar shares were down 12 percent on the MSCI index in the first half with banks abandoned in particular as Bahrain, Saudi Arabia and the UAE suspended commercial and diplomatic ties with a US nod due to alleged terrorist and Iran sympathies. The Gulf neighbors issued a list of demands to reverse course, including shutdown of the Al-Jazeera TV network, as royal family members scrambled abroad to press their cases in world capitals. Kuwait, which earlier had pulled out of the joint dollar peg, offered to mediate the dispute as economic and monetary union progress remained on hold with hydrocarbon export price slippage. Sovereign bond yields rose 50 basis points on the rupture as the Al-Thani family moved to reassure the 2 million population that the wealth fund with $300 billion in assets would maintain normal trade and public services and World Cup 2022 infrastructure projects. However essential imports have come by Saudi Arabia’s land bridge and Dubai’s Jebel Ali port as Qatar Airways was banned in the region. The investment authority previously had taken over equity stakes in a half dozen major conventional and Islamic banks, which now may be sold if the crisis lingers, along with flagship real estate holdings in Europe including London’s Shard tower. The 2009 lifeline to Barclays Bank in the UK has also come under scrutiny as its top executives may have misrepresented the deal, according to fraud investigators. They may also consider local misconduct signs in the transaction, after the corruption cloud was finally lifted over the World Cup bid following years of FIFA probes which resulted in mass resignations. US Secretary of State Tillerson, with close personal connections to leaders from his Exxon-Mobil CEO tenure, has also tried to bridge the divide which may extend beyond the short term and place GCC integration in indefinite “limbo,” in the words of UAE’s foreign minister. Tiny Oman has also been put in the crossfire, with its MSCI component off almost 20 percent, as it allies with neither camp in the wake of a Fitch Ratings outlook downgrade to negative with a forecast budget deficit at 12 percent of GDP this year with recession. New taxes and energy ventures should support the “A” rating, but it will follow OPEC supply restraint as bank liquidity is squeezed, the agency noted.

Saudi Arabia in contrast was up 5 percent at mid-year after MSCI mooted a chance for core universe entry in a future review on greater non-GCC institutional investor access. Enthusiasm also accompanied the King’s formal announcement of Prince Mohamed bin Salman, architect of the 2030 reform plan and Aramco proposed IPO, as heir. He is younger generation but a conservative foreign policy advocate who has backed Qatar’s isolation and the Yemen civil war intervention against Iran-aided Houthi forces. Aramco underwriters have already been tapped and foreign listing venues could include New York, London and Hong Kong. A 5 percent chunk will be floated and the Prince estimates capitalization at $2 trillion, although experts believe valuation will turn out to be $500 billion lower if full accounts are disclosed. The frenzy will be at the opposite extreme of syndicated loans, which have fallen 65 percent to under $20 billion, a 4-year low, as external bond issuance tries to crack the traditional fold.

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Saudi Arabia’s Wobbly Wellspring Tap

2016 October 26 by

Saudi Arabia’s debut external sovereign bond size surpassed Argentina’s return by $1 billion at $17.5 billion for this year’s and the historic record, and was four times oversubscribed for a 3.25 percent yield, just 25 basis points above peer investment-grade rated Qatar. The 30-year sold more than the 10-year maturity with the paucity of positive return long-term global alternatives, and 5 billion was immediately funneled to local banks to relieve liquidity strains. Officials signaled on the road show a $10 billion annual borrowing program, as they presented a 200-page prospectus detailing the 70 year oil reserve supply and economic diversification and rationalization under the King’s next decade transformation strategy. The proceeds will only cover one-third of the current 15 percent of GDP budget deficit with petroleum prices still under the $60 per barrel break-even, and central bank holdings have fallen $100 billion the past year to cover the bill as plans to cut public sector wages and flagship infrastructure projects are slowly applied. The state oil behemoth Aramco may float shares in the medium-term under the modernization and transparency campaign, and foreign institutional participation will soon be expanded, but the stock market was relatively unmoved by the existing and prospective securities wave and remains at a discount to the MSCI average. The iShares ETF is off double-digits as investors complain that both companies and the government continue to lag on account and information disclosure. Domestic interest rates at 2 percent are almost triple the 2015 level and could rise further with Federal Reserve tweaking under the dollar currency peg. Gradual energy and utility subsidy adjustments have ratcheted inflation to 5 percent on 1 percent GDP growth.

 UAE equities were ahead 5 percent on the MSCI index through mid-October, but banks are in a similar squeeze on hydrocarbon and fiscal retrenchment, with loans due to increase just 5 percent annually. Government deposits can contribute one-third of institution funding, and it has unveiled a big housing push to sustain momentum. The tougher climate sparked the First Gulf-National Bank merger, the largest consolidation since the 2008 crisis, which will still leave the ruling family in control. Bad loans are 5 percent of the total, and real estate and construction account for 30 percent of portfolios, and reported capital adequacy is 15 percent of assets, 3 percent over the minimum. The non-oil PMI manufacturing gauge is well over 50 and growth should come in around 2.5 percent in 2016, but consumer sentiment is lackluster in advance of scheduled VAT tax introduction.

Qatar shares were marginally positive with its rating superiority over Saudi Arabia and 2022 FIFA World Cup preparation moving full steam for 3 percent growth. Organizers are portraying the event as a diversification showcase beyond sports into education, finance and culture. Debt issuance will slow in 2017 as the projected budget gap halves to 2 percent of GDP with a new airport tax bringing in revenue. A $9 billion Eurobond went smoothly in May but may not be repeated next year as domestic banks provide lines. Al-Jazeera TV closed its US operation and followed other state entities in slashing jobs, including museums which could not compete with athletic attractions.

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The Middle East’s Blowout Bellicosity Bill

2016 September 28 by

On the eve of the UN General Assembly’s special session on large refugee movements, the IMF updated its tally of MENA region civil and ISIS-related war costs, underscoring enduring conflict over one-quarter of the post-World War II period. Their underlying economic, political, social, demographic and religious causes are “deeply entrenched” and average episodes have lasted a decade. Currently 10 million refugees are in the area and mainly hosted in neighboring countries, with the Syria and Iraq influx swelling populations in Jordan and Lebanon and stretching budgets and infrastructure. Almost 2 million have reached Europe and 3 million are in Turkey and the immediate humanitarian emergency has morphed into a long-term development crisis requiring fresh donor funding and government policy reforms, according to the working paper. After four years of fighting Syria’s GDP is half the pre-war sum, inflation topped 300 percent and the currency is one-tenth the previous value, and growth has also been shaved 1 percent next door with housing expense skyrocketing in border zones. Total factor productivity has collapsed with the human capital toll in Syria alone at 6.5 million displaced and 500,000 killed, with 50 percent unemployment and 20-years reduced life expectancy. The statistics from Iraq and Yemen are equally “dramatic,” with their respective poverty rates at 25 percent and 50 percent. In Lebanon informal labor force entry depressed wages and arrivals overwhelmed public services with only one-third of refugee children able to attend school. A Syrian think tank estimates physical damage near $150 billion, a multiple of 2010 GDP, and in Libya oil output plunged to one-quarter of capacity with shutdowns and blockades, leaving a 45 percent of GDP current account deficit from former surplus. Jordan’s exports to Europe have suffered, and crime and insecurity have spread throughout the region, and affected tourism in Egypt and Tunisia outside the immediate frontlines. Human traffickers operate large smuggling rings diverting border protection, and FDI has been unable to return to pre-Arab Spring levels. Financial sectors have been hollowed out with deposit runs, asset crashes and capital flight, and the Syrian bad loan ratio was already 35 percent as of the most recent 2013 figures.

Social cohesion and institutional quality measures have slipped with only small minorities “trusting” the political and economic systems in opinion surveys. Central banks and finance ministries have lost authority and tax and payments network control, and international banking practice has further eroded their capacity by severing suspect correspondent relationships. Fiscal deficits have “ballooned” to averages above 10 percent of GDP, and monetary policy has been forced to step into the breach with government financing. International reserves are almost exhausted in Yemen and were halved in Libya as a portion of imports. Even with peace agreements, history shows the conflict cycle often repeats in the near-term and debt distress and fragility linger, with recovery taking decades. State intervention in wartime circumstances is hard to unwind, and reintegrating refugees is slow with the tendency toward prolonged absence and desired resettlement abroad. Working rights and private sector strengthening are important pillars of successful strategy the World Bank and IMF plan to support with increased technical and concessional assistance, along with possible debt relief aid the area’s unrelieved misery.

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The Middle East’s Sanded Ratings Edge

2016 August 18 by

Standard & Poor’s mid-year MENA ratings report noted a one-notch average long-term foreign currency downgrade to “BBB” the past year, with the GDP-weighted mark influenced by the fall in regional powerhouse Saudi Arabia. Net energy importers Jordan, Egypt, and Lebanon were unchanged, but their outlooks went negative. Among exporters Oman and Bahrain were also demoted, while Abu Dhabi, Kuwait and Qatar are still rated “AA.” The Brent crude barrel price is estimated at $40 this year and $50 in 2017, pressuring fiscal and external accounts. GCC budget balances went from a 9 percent of GDP surplus in 2013 to the same size deficit today, and ratings stability has only been preserved in places with large backstop asset holdings. The agency emphasized that none of the dozen sovereigns covered had strong institutional and economic policy performance. Lebanon’s and Jordan’s negative outlooks,  with one-third odds of outright downgrade over the next six months, were due to political and geopolitical instability and high debt burdens, while Egypt’s before the IMF rescue was from fiscal and international payments imbalances. Gulf combined deficits of $100 billion, over 9 percent of GDP, require “unprecedented financing” though debt issuance or investment income access, and strategies will affect monetary policy although dollar pegs should stay intact over the near term. Sovereign wealth funds can only be used for savings in Qatar’s case, so it resorted early to cross-border borrowing. Bahrain is the debt placement leader at 12 percent of output, but Abu Dhabi floated $5 billion in two operations in May and Saudi Arabia received a $10 billion syndicated loan. Global market volatility into the second half could frustrate further activity as domestic bank deposit growth has “slowed dramatically” from the recent double-digit clip, with tighter liquidity in Saudi and UAE institutions in particular, S&P commented. It expects net asset positions to decline sharply, at 90 percent for Oman with Bahrain already a net debtor, as creditworthiness is at its “lowest ebb” in fifteen years.

Stock market performance has been flat to negative at the same time as foreign investors stay away out of caution and participation limits. The Saudi Capital Markets Authority announced another opening stage to funds with only $1 billion in assets by year-end, but sentiment was gloomy with a near 10 percent drop on the MSCI Index through July. Consumer spending flagged in the first quarter and hospitality outlays during Ramadan were down, according to hotel operators. Bank deposits fell 3.5 percent in May, and the loan-deposit ratio was lifted to 90 percent to spur credit to scant result. Mosque terrorist attacks and costly intervention in the next-door Yemen civil war, drawing condemnation from human rights groups, have further dampened the mood. In Dubai 250 private companies have closed or exited with cutbacks or unpaid invoices, as state-linked entities face $20 billion in medium-term debt repayment originating from the 2009 crisis. Property values could dip 15 percent by next year with oil services, tourism and banking slowdown and restored Iran links cannot bridge the gap, experts warn. Tunisian shares also slipped from good early year returns as the prime minister, a US-trained economist, lost a vote of confidence as democratic and employment trends showed opposite ratings.

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Egypt’s Serial Adjustment Agitation

2016 August 5 by

Egyptian stocks rallied on submission of an estimated 3-year $10 billion IMF loan request after the government denied such recourse on consecutive occasions, with the MSCI index climbing almost 15 percent through end-July and the decision also staving off further currency devaluation. The pound stumbled to 12.5/dollar on the informal market amid a squeeze forcing state banks to limit travel deposit withdrawal and credit card use abroad, as the central bank spurned an outright float but hinted at another 5-10 percent depreciation.  Despite the trend, the current account deficit is the worst in three decades at 6 percent of GDP as the real effective exchange rate is 20 percent higher, tourism is down 40 percent and remittances and official transfers from the Gulf flag. The non-energy trade deficit shrank on dollar curbs, but only half the Q1 $5.5 billion shortfall was financed by FDI. External borrowing has turned to Saudi Arabia and the UAE as well as China, which extended a $1 billion credit after President Xi’s visit. Reserves are over $16 billion, but the negative errors and omissions category reflects large informal currency and oil transactions. Gulf allies undergoing their own fiscal and structural reforms have prodded President Al-Sisi to strengthen efforts slated as core conditions of the IMF package. The budget deficit is again in double digits and VAT application, fuel subsidy cuts, and capital gains levy reintroduction are likely near-term steps. With tight monetary policy to subdue 12 percent inflation, domestic debt expense may also rise and the emphasis will be on expanding the investor base through foreign investor-specific sukuk and conventional issues. International participation was 25 percent of the local T-bill market before Mubarak’s resignation, and has since been absent. Fund managers complain of erratic tax treatment and secondary trading, and authorities intend to open another channel through the stock exchange to boost liquidity. A tender went out for a possible global bond placement in the second half which would ride the momentum from an approved Fund relationship, expected before the October annual meeting in Washington. It would join Jordan, Morocco and Tunisia in the post-Arab Spring stable, which all experienced Q1 GDP falls to 1-2 percent. Morocco’s advance the previous quarter was 5 percent on good agricultural rains, but since downgrade to MSCI’s frontier list stock market performance has been solid, with a 15 percent gain so far this year.

Egypt and North African neighbors are on the geopolitical front line as well with the security and refugee repercussions of Libya’s collapse, as US warplanes began to bomb ISIS strongholds there. Western donors hope the pattern of Iraq’s retaking of Mosul can repeat after it fell to the militants two years ago. The Prime Minister vowed to complete the process in coming months as a centerpiece for a $2 billion pledging conference in July which got North American, Gulf and EU commitments. According to reports 3 million citizens are displaced and the country hosts 250, 000 Syrian refugees. When fully recaptured, control over oil wealth may again be in dispute with the Kurdish regional authority that has fielded large groups of fighters, and constitutional haggling is set to resume in another prolonged battle.

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Iran’s Benighted Bank Anniversary Era

2016 July 22 by

The Teheran Stock exchange was up 20 percent on the local index from January to end-June as the one-year mark of the nuclear freeze for sanctions elimination deal was reached, with bank performance lagging on limited removal of internal policy and external boycott obstacles. US and UK Treasury Department representatives have tried to reassure Iranian counterparts of business resumption scope with reconnection to the SWIFT global payments network, but specific guidelines have not been offered as Washington’s dollar system ban legislation awaits reconsideration and possible renewal after year-end expiry. Mid-tier European banks have participated in recent transactions like the EUR 50 million takeover of a listed detergent producer, and large global groups may step into the proposed Boeing sale of jumbo jets approved under waivers, but signoff on clear entry remains blocked by national restrictions and multilateral reservations about counter-terror financing through the FATF inspection body. Iran’s new parliament, with a large bloc of moderate economic reformers according to reports, has passed legislation to be more compliant but still rejects the notion of foreign oversight. It has also adopted provisions to advance a sharia-based debt market through near-term government issuance to cover contractor arrears, which will also be paid from unblocked reserve accounts under the Geneva accord.

The dozen listed Tehran state and private commercial banks, with combined assets at 40 percent of the $500 billion sector total, have reported declining profits and outright losses on a 30 percent interest margin squeeze, despite progress in selling noncredit holdings under new central bank rules. The latter have included real estate investments, where developer and residential prices have recovered slightly.  Tight fiscal and monetary policy and poor business and consumer sentiment linger under recession. Real interest rates are steep with inflation at 9 percent and the lending benchmark reduced to 18 percent in June. Reported NPL ratios average 15 percent and provisioning has been lax under local application of dated Basel I capital adequacy and prudential standards. Long-term deposits are less than 30 percent with the existing ban on above one-year acceptance which experts expect to be lifted post-sanctions. Informal intermediaries have been outside supervisory jurisdiction and outcompeted on return and service. A valuation discount prevails where the price-earnings level is under the current 7 times on the Tehran exchange, and the financial sector is just 2 percent of GDP as compared with services at 50 percent and oil at 15 percent.

The IMF in April estimated growth this fiscal year at 4 percent on single-digit inflation, and it urged greater central bank independence and monetary discipline to accompany foreign investor opening. The president and religious Expediency Council choose the governor, who is but one member of the dozen-strong Money and Credit body dominated by other ministries. They are supposed to follow money supply and other targets set in the 5-year development plan, but studies show they are regularly missed as with the 5 percent overshoot of 25 percent expansion since 2011. The big three state-run banks Mellat, Saderat and Tejarat, where direct government ownership was spread to other official funds with 2009 “privatization,”  account for two-thirds of exchange-listed assets and are in the worst shape by standard financial and operating measures according to brokerage reports working to convince overseas fund managers to sanction allocation.

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The Gulf’s Impaired Vision Correction

2016 June 12 by

Gulf stock markets stumbled through May as attention turned to record debt-raising despite ratings downgrades with lower oil prices and rising budget deficits. GCC bond issuance and syndicated loans should each come to $50 billion this year, S&P estimates with Qatar already placing a $9 billion issue and Saudi Arabia interviewing underwriters for a reported $15 billion tap. The MSCI Saudi reading was down 5 percent despite the eventual prospect of an Aramco mega-offering as proposed under the “2030 Vision” prepared in tandem with management consultants. It foresees the private sector as the main economic driver, and aims to reduce youth unemployment to single digits and increase female participation. The minority stake state oil company sale would require decisive valuation and information for its vast holdings, with initial calculations in the trillions of dollars. The proceeds would go for economic diversification, as the main public pension fund also transforms for this purpose while traditional reserves, currently under $600 billion and losing $10 billion monthly, will continue to cover fiscal and import needs. The stock exchange has also engaged HSBC to prepare its own listing, a decade after Dubai completed an oversubscribed $400 million one. Prince Mohamed, in charge of the economy portfolio from the younger royal generation, also engineered the appointment of a new oil minister and central bank governor to promote the blueprint. The sovereign rating was bumped a notch but is still in the AA category enabling quick global syndication of a $10 billion credit in April. It decreased US Treasury assets to $120 billion last year as the 12th biggest owner, while Gulf countries control a combined $300 billion to recycle petrodollars and maintain the currency peg reiterated as sacrosanct.

 Local banks welcomed the external access with their liquidity squeeze as construction and supply firms run into trouble with the oil crash. The Binladen group shed one-quarter of its 200,000 workers on project pullback and steelmakers announced $2 billion in debt restructurings. The $8 billion Ahab workout from 2009 continued to drag on with the latest setbacks, as a court tribunal will process creditor claims that could only get 25 cents to the dollar, although the executive in charge still faces cross-border seizure actions. The UAE received its own non-payment blow when Malaysia’s 1MDB reneged on $1 billion owed out of a $3.5 billion guarantee total. The sovereign wealth fund absorbed mark-to-market losses as the bond price tumbled to 85, and CDS quotes for both the countries jumped in response. The default occurred at the same time the Emirates pledged another $4 billion in aid to Egypt, which replenished reserves to $18 billion and preempted renewed IMF program talk. However Cairo must repay $2 billion to Qatar and the Paris Club in the coming months, as dollars remain short despite the recent devaluation. According to reports parallel market operators have gone into Libya for even higher margins, with informal rates 3 times the official 1.4/dollar one. The central bank, which has just been recognized by a precarious unity government, bans commercial banks from dealing as it tries to preserve $70 billion in reserves amid the bleak civil war and looting vision.

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