The CIS’ Sudden Scent Sensitivities

Central Asia and the Caucuses’ bond burst with the addition of benchmark entrants the past year paused for overdue reflection as near-term direction was affected by political developments in particular. In Mongolia the two main parties roughly split parliamentary elections, reinforcing a breach that widened with the arrest of a former president for alleged corruption he protested with a lengthy hunger strike. After a tense period they agreed to attempt a coalition as trade and fiscal deficits and credit and inflation again threaten to spiral out of control with mining mania. GDP growth continued at 15 percent the first half as loans jumped at almost triple that pace. The current account gap at 35 percent of GDP is still outrun by FDI, but weaker exports with commodity price decline may open a disparity. The budget shortfall is already several times the number foreseen for all of 2012, compared to last year’s surplus at the same time. 15 percent food-borne inflation exceeds the central bank policy rate, and mounting environmental and nationalist concerns have delayed headline metals projects that were also to add heavyweight listings to the stock exchange. Georgia, after admission to JP Morgan’s frontier index, also heads into legislative polls in October with President Saakashvili just reshuffling his cabinet in preparation with appointment of the former interior chief as prime minister and likely successor. Another IMF standby accord was reached to replace the post-Russia conflict one as GDP growth and inflation are both running at 6 percent. The central bank chopped its benchmark 25 basis points in June to aid consumer demand, and the current account deficit improved as officials target a tenfold annual FDI jump to $2 billion. Azerbaijan should soon join the NEXGEM with a $500 million quasi-sovereign railway issue at the lowest investment-grade rating, as a big hydrocarbon find should replenish dwindling capacity which checked GDP growth at 1.5 percent through mid-year. The Eurovision song contest brought visitor activity but also criticism of the Aliev regime’s crackdown on opponents and protesters. The IMF completed a mission again calling for state-owned dominant bank IBA to be overhauled, as the sovereign wealth fund reported assets topping $40 billion, with the portfolio concentrated in high-rated bonds including a one-tenth emerging markets portion.

However on the domestic market government bond auctions continue to fail or attract minimal bids at 3 percent yields below inflation. Longstanding CIS destination Kazakhstan as well came under recent multilateral criticism for bank restructuring delays as its sickest member BTA prepared to present a second round of draconian bondholder haircuts. Local investors have steered money into equities up over 20 percent on the MSCI index as agricultural prices are set to also spike on drought conditions which may further parch the landscape.