Turkey’s Serial Siege Sendoffs

2020 October 4 by

The Turkish lira has lost 20% of its value this year and continues to hit all-time lows as inflation remains near 12% and foreign exc

hange reserves dwindle. The economy contracted 9.9% y/y in Q2.  The trade deficit for the first 8 months of the year surged 69% over the same period in 2019. Imports in August alone rose 21% y/y as Turkish citizens went on a gold buying frenzy, searching for an investment that that will hold its value against inflation. Gold has long been a safe haven for Turkish savers at times of economic, market, and political instability. The trade deficit has pressured the perennial current account deficit already suffering from a widening services deficit on lack of tourist receipts due to the pandemic. To fund it and the budget deficit foreign portfolio inflows have dwindled to record lows, w local debt ownership now less than 5%.

Fitch Ratings has warned that Turkish banks’ underlying asset quality will weaken due to the pandemic but noted that reported non-performing loans will be “flattered” by regulatory forbearance and loan growth.  Lending surged in H1 – 16% in FX-adjusted terms, according to the rater – driven by both Treasury-backed Credit Guarantee Fund loans to SMEs (sp) and retail demand post-lockdown.  Banks are also contending with balance sheet risks from FX lending as the lira sinks.  The central bank, meanwhile, has reportedly almost reached its set limit for Treasury funding after earlier doubling the ceiling to 10% of its balance sheet. 

In geopolitics, the European Union is threatening Turkey with sanctions for its “confrontational actions” in the escalating standoff with Greece and Cyprus over hydrocarbon resources in the Eastern Mediterranean.  French President Macron, along with the 6 other EU “Club Med” leaders, met to discuss the growing territorial tensions which have further derailed Turkish-EU relations already strained over its policy in Syria, military intervention in Libya, and jailing of opponents of President Erdogan. Unless negotiations with Athens resume, the EU is likely to decide on sanctions later this month.

 Longtime Turkish analysts and investors agree the intertwined political, economic, financial sector, and currency situation is nearing a breaking point.  Lack of central bank independence to raise rates to protect the currency also weighs on sentiment, with investors staying away while the benchmark rate is 8.5% on 11.8% inflation. Erdogan’s son-in-law, The Treasury and Finance Minister, insists that the government wants to ensure the lira is competitive to boost exports and narrow the current account gap, but inflation and metals imports spiked as a result. Turkey’s growing alienation from EU and NATO allies at the same time the economy and currency are melting down and banking sector stress grows may finally force a government rethink about more conventional stabilization policies. Technocrats were once able to wow banks and fund managers and win their confidence on monetary policy and bank regulation, but such a shift now is in the hand of family leadership and business/political allies.   

Asia’s Delayed Debt Exits

2020 October 4 by

On the MSCI EM Index through the first eight months of the year, the only three markets in positive territory in dollar terms are in Asia: China, South Korea, and Taiwan.  Their “first in, first out” of the Covid-19 crisis pandemic amid unprecedented low interest rates and expansionary fiscal policies have attracted local and foreign investor interest in both stocks and bonds. Inflows have also been driven by majority weighting on the MSCI EM Index, 65% of the total, and China is half the local bond markets universe, $trillion w Korea another size leader. On the equity index, eight of the ten largest companies are from these three markets, accounting for 27.5%, dominated by Alibaba Group, Tencent Holding, and Taiwan Semiconductor.

All three economies show signs of recovery, spurred by export rebound. The IMF is projecting that China will be one of the few countries to grow this year and Taiwan’s government is similarly expecting expansion, both around 1%. The wealthy nation OECD expects that Korea will outperform its peers and contract only 0.8%.  China and Taiwan have benefited from relatively stable currencies, while South Korea’s won has recovered 8% from its March low and is only down over 2% against the USD this year.

However, not classic sovereign but company/personal debt levels could derail continued early recovery progress.  In all three loan repayment standstills due to expire at end-September are likely to be extended, only to “kick the can” down the road.  As of mid-August, loan repayments worth USD 33 billion were on hold in South Korea, with Fitch Ratings estimating banks had made an additional USD 150 billion in corporate relief loans. Pre-pandemic debt levels in all three markets were worrisome.  Traditionally EM investors assess government debt/GDP as a key factor in investment decision-making, with a 60% level the danger zone.  China, Taiwan, and South Korea all have official, on-balance sheet debt at less than 50% of GDP. 

 Corporate and/or household debt levels are already elevated, threatening the bank and non-bank financial sectors.  According to the Bank for International Settlements most recent data, credit to the non-financial sector as a percentage of GDP is 258% in China and 237% in South Korea.  In Taiwan, household debt/GDP has topped 90% and in South Korea the level is at a record high of over 97%, according to the Institute for International Finance. While in China it is just below 60% of GDP, lending for consumer debt and mortgages has surged in recent year from only 18% in 2008, while outstanding credit card debt doubled the past five years. 

 In South Korea, corporate debt was 104.6% of GDP in Q1, up from 97.2% a year earlier. With record low interest rates, it has surged since them.  In July, corporate bond issuance totaled USD 17.5 billion, up 74% from a month earlier and dominated by low grade issuers more likely to be unable to meet obligations. In China, corporate debt/GDP surged 13%-points in the first half to reach 164.4% according to the National Institution for Finance and Development. In contrast, Taiwan’s local corporate debt remains manageable for now with a large life insurer buying base.  As in China and South Korea, issuance has surged ,through the first five months, doubling from the same period a year ago with risk expected to rise as lower rated, pandemic-hit companies come to market.

 Bond default risk and bank and consumer lender stress are growing. Already this year the banking regulator in China estimated bad loans will reach near USD 500 billion, while it reported that the official level – which does not include debt repayments on  hold – stood at a 10-year high of 1.94% in June.  While onshore local bond delinquencies fell 17% in the first half of the year, the drop came as the government encouraged bond holders to accept payment delays and issuers to find solutions such as extending maturities.   Some USD 500 billion in local bonds are due to mature by year-end, and defaults will be a double-hit to domestic banks, the largest holders of corporate bonds. They   will also derail the massive foreign inflows which have topped USD 66 billion so far this year chasing positive real yields. Last year local corporate bond defaults reached a record high at more than USD 20 billion.

A Special Purpose Vehicle was established in South Korea by the government, central bank, and Korea Development Bank to purchase select corporate bonds and commercial paper to prevent defaults and stabilize the market.  The program is largely focused on A-rated debt but can also buy fallen angels that were downgraded to junk due to the pandemic.  The USD 8 billion SPV, which can be expanded, was established in May and is due to expire in November, although like bank loan standstills, this too will likely to be extended.  While default prospects in Taiwan remain less likely, there is growing worry about pressure on banks from SME sp loans which have grown rapidly in recent years, with loan growth averaging over 6% the past two years against 5.2% for other corporate loans.

While China, South Korea, and Taiwan have attracted interest in recent months on signs of recovery, a second wave of Covid-19 could easily derail investor appetite. Behind the rosier macro-economic data on exports, PMI, low rates, and contained inflation, the already high pre-pandemic debt levels are still rising. Loan repayment standstills will eventually end.  Access to the bond markets for junk-rated, highly leveraged corporates will halt as inability to pay becomes clearer.  The potential debt crisis in the three East Asian economies will be vastly different than the traditional EM sovereign debt crises of recent decades, w a departure from blanket fiscal support during pandemic peak. Household and corporate debt levels of near or over 100% of GDP restrict another wholesale bailout round, as they are first in to attempt cleanup of a long-ignored mess. #KleimanIntCon

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The Fed’s Liquidity Inflow Lament

2020 September 21 by

Pre-pandemic historically, aggressive US Federal Reserve loosening – cutting rates to record lows along with balance sheet expansion – drove investors into emerging markets debt, equity, and currencies in search of yield.  Even after the massive stock and bond selloffs during the GFC and the 2013 “taper tantrum,” fund flows into emerging markets returned within months seeking assets in faster growing economies and offering better returns than in the US and Western Europe. Conversely, a surprise rate hike in the US in 1994 sent funds fleeing emerging economies, resulting in massive foreign portfolio outflows pressuring currencies with some experiencing balance of payments crises. For example, Turkey with inflation running at 150% and a current account deficit of 3.5% of GDP, had to turn to the IMF, while that year ended with the Mexican peso devaluation induced “Tequila Crisis.”  In the mid-1990s, the universe of liquid, “investable” markets was limited, and the peso crisis spread as the relatively small number of dedicated EM investors fled, particularly throughout Latin America.

Today even with central bank benchmark rates in the US, UK, EU and Japan either at rock bottom or negative and as the G-4 monetary authorities massively expand their balance sheets, up by some USD 6 trillion collectively since the start of the Covid crisis, inflows to emerging markets remain subdued. While many stock and bond markets and currencies have rebounded since the sharp early year sell-off, investor commitments to EM remain muted and selective. The MSCI EM Index is up more than 30% from its March low, while the average yield on JPMorgan’s local currency government bond index has fallen nearly 2%.

Economic and financial market crises in global markets have historically resulted in EM central banks hiking rates to stem portfolio outflows and to avoid the associated spike in inflation w currency depreciation. The pandemic has upended the traditional response.  Instead of tightening, monetary authorities have not only slashed rates in an attempt to soften the economic impact of the pandemic, led by Turkey with 1,575 bps. in cuts the twelve months, but some have also turned for the first time to “quantitative easing” unconventional policies.  For example, central banks in Indonesia, Poland, and South Africa are buying government bonds, while their counterpart in Colombia is supporting the corporate bond market.

Through mid-August, emerging market equity funds have recorded outflows of USD 42.2 billion while bond fund outflows top USD 21 billion, according to fund tracker EPFR Global.  The Institute of International Finance, which tracks the 25 largest emerging markets, reports that inflows have rebounded unevenly.  After a record USD 83.3 billion was pulled from EM stocks and bonds in March, net inflows were recorded in June and July, with nearly 90% of the funds directed towards bonds.  Emerging market equity exchange traded products ( ETFs), which account for half of allocation, recorded $2 billion net inflows in July for the first time since January,  while flows to ETF debt products have been “overwhelmingly” directed to hard currency bonds since money began to tentatively return in April, according to iShares. 

As has been the case following every global or EM crisis for decades, the rebound in fund flows  illustrates the changing weight of benchmarks against which to measure fund performance and intense investor scrutiny of debt, deficit, currency, and foreign exchange reserve levels.  China, viewed as “first in-first out” of the Covid crisis, accounts for 20% of the MSCI Emerging Markets Index.  As its economy shows mixed signs of recovery with a relatively stable currency against the greenback and it was added to major bond indices, China has attracted USD 66 billion to its local bond market this year, almost equal to total inflows in all of 2019.  In contrast, Turkey has seen total portfolio outflows of over USD 12 billion this year as the central bank drained FX reserves to try to support the currency before letting it depreciate this month to new record lows. The country’s benchmark index positions are increasingly marginalized, as foreign investors now hold only USD 26 billion in local stocks and bonds, the latter with negative real yields with inflation running over 11%. 

The global pandemic crisis is the first in which both emerging and developed economies are projected to contract. In the wake of the GFC, global GDP was -1.67% in 2009 but emerging markets grew 2.6%.  This year the IMF expects global growth at -4.9%. However, emerging economies are expected to shrink less than advanced ones with a stronger rebound in 2021.  The IMF’s most recent projection is for the former to contract 3% and rebound 5.9% in 2021, while it expects the latter at -8% and + 4.8%, respectively.  As Covid-19 rages, investor re-engagement and a rebound in fund flows to emerging economies will remain subdued in the near-term. Hard and local currency bonds from “safer” investment grade sovereigns and corporates, will lead the rebound. Listed equities in emerging economies, both domestically oriented firms and exporters, will continue to struggle to attract foreign investors on poor virus and cycle bottom earnings.  Double-digit unemployment will spread, while global trade is projected by the IMF to fall at least 10%. Even doing “whatever it takes,” as the ECB promised during the  height of the Eurozone crisis & implied again early this year, the US Federal Reserve and advanced economy counterparts can no longer in lockstep reignite global growth or fund flows to emerging markets.

The Gulf’s Painful Petrol Passages

2020 September 21 by

With global headlines focused on Lebanon’s growing economic crisis and the formalization of Israeli-UAE relations, the oil price- and pandemic-induced economic and market fallout in the greater Gulf region may be no less historic or seismic. In Lebanon, the World Bank estimates the port blast caused over USD 8 billion in damages and losses from the destruction of physical capital, trade disruption, and fiscal revenues for the government.  The currency and banking sector have been collapsing for months and Lebanon defaulted on USD 31 billion in Eurobonds in March.  IMF talks on a USD 10 billion bailout were stalled before the blast while the Prime Minister and cabinet resigned a week after the explosion, citing “chronic corruption in politics, administration and the state.” A new Prime Minister has been appointed, but government formation is unlikely to be rapid w the usual party and sectarian infighting as the currency continues to fall pushing inflation into triple-digits and causing further economic and humanitarian pain.

Lebanon led the region and all emerging/frontier benchmarks with +40% stock market performance in USD terms on the MSCI Index as domestic investors seek relative safety for their savings outside property and gold.  Real estate giant Solidere, the biggest and most liquid listing, saw its share price surge more than 150% from the outbreak of demonstrations in October until the explosion that leveled much of Beirut. In contrast, despite strong rebounds over the past few months as oil prices edge up and economies reopen, stock markets in the six-member Gulf Cooperation Council (GCC) are all in negative territory through the first eight months, down an average 12%.  Several of the sovereigns have also been able to tap the international capital markets this year to cover soaring budget deficits, with Qatar and Abu Dhabi raising USD 10 billion and USD 7 billion, respectively, in massively oversubscribed offerings.  Standard & Poor’s expects total government deficits across the GCC to top USD 180 billion this year while average government debt/GDP is projected to increase by a record USD 100 billion on local and international borrowing to reach 18% of GDP, up from 5% in 2019. They are a major weighting in the sovereign JP Morgan EMBI index after it altered criteria to admit high-income countries.

In Kuwait parliament is debating tapping the international markets for the second time ever in advance of late year elections. Government debt/GDP leads the region at 39%, according to Standard & Poor’s.  While the IMF is predicting the economy will only contract a little over 1% this year, the government warned it lacks sufficient liquidity to pay public sector wages after October. The Finance Ministry is preparing to transfer funds from the world’s oldest Sovereign Wealth Fund, the Future Generations Fund, to the General Reserve Fund for budget financing after it reported that total revenue was down 16% in the fiscal year that ended in March.  As the economic downturn takes its toll, parliament responded with changing a 40-year-old corporate bankruptcy law designed to save solvent companies suffering oil price and pandemic stress.  In the past, failure to make debt payments was a criminal offense and meant automatic bankruptcy, which prodded creditor settlements or restructuring in advance.

 In regional giant Saudi Arabia, the IMF expects the economy to contract 6.8% while 2019’s 5.9% of GDP current account surplus sharply reverses to a deficit of 4.9%. Early in the pandemic the Kingdom transferred some USD 40 billion from the central bank to its USD 325 billion sovereign wealth fund, Public Investment Fund, to boost buying capacity for its global portfolio as blue-chip equities around the world sold-off. Monetary Authority foreign reserves hit a 10-year low in June with the price swing in oil accounting for 40% of output. Officials slashed expenditures, suspended cost of living allowances for state employees and even cut USD 8 billion from the Crown Prince’s Vision 2030 program designed to diversify the economy away from oil. In addition, the Kingdom tripled value-added tax to 15%, sending annual inflation over 6% in July as food spiked 14%.

The Saudi stock exchange, Tadawal, ($capitalization) dominates regional bourses and despite advancing more than 5% in August is still trading down 9% year-to-date. Opened to foreign investors with a minimum of USD 5 billion in assets under management in 2015, it was added to the FTSE and MSCI EM indices last year and now boasts over 2,000 foreign investors, up 78% over a year ago, although trading is still dominated by locals. Late last year Saudi Aramco, the world’s largest crude producer, went public, raising USD 25.6 billion, and despite the broader economic downturn another 4 companies have come to market this year with other IPOs waiting approval. At the same time the bourse, which plans to go public, launched its first exchange traded derivative, the Saudi Futures 30 Index Futures Contract based on the MSCI Tadawul 30, and plans to start trading single stock futures next year. Development of Tadawul into a regional market to further attract foreign investors is part of Vision 2030.  On the debt side, FTSE Russell just launched a local currency Saudi government bond index covering both Islamic sukuk and traditional interest-bearing instruments with maturities of over a year. 

Finally, in the United Arab Emirates, stocks have recovered more than 12% in dollar terms on the MSCI Index the past three months but are still off more than 9% year-to-date. The past two decades the Emirates, led by Dubai, have diversified away from oil, with the commodity accounting for only 25% of its GDP last year. However, the shift to reliance on tourism, transportation, and retail resulted in a significant downturn during the pandemic, with Standard & Poor’s projecting the economy will contract 11% this year following anemic expansion of 1.7% in 2019. Dubai’s just-released Eurobond prospectus offering both Sharia complaint Islamic and standard debt surprised investors. It disclosed direct government debt of only 28% of GDP, far lower than private estimates. However, that figure does not include “government-related entities” which Standard & Poor’s last year estimated had debt outstanding totaling more than 50% of GDP. Dubai has not raised funds in the public markets since 2014 and analysts remain wary of data that does not incorporate overall on- and off-balance sheet sovereign obligations and guarantees, recalling that   Abu Dhabi had to bail out its neighbor during the GFC under the crushing load of contingent liabilities.

Overall, the IMF expects the combined drop in economic output across the GCC markets this year to be 7.6%. Banks in the region entered the current crisis far stronger than in 2008 and monetary authorities have provided liquidity and cut rates in line with the US Federal Reserve to support the broader economy. However, as in markets worldwide the end of 6-month loan standstills will hit balance sheets. While oil prices are unlikely to rebound to the USD 80/barrel estimated “break-even” level to cover budgets, the markets undertaking concerted efforts to liberalize, diversify and attract international capital – both portfolio as in Saudi Arabia and foreign direct investment in tax free zones as in the UAE – are likely to rebound more quickly and shake up longstanding industrial/financial sector competitiveness lag and investor access/product lethargy for more upbeat area headlines.

Africa’s Overlooked Lined Pockets

2020 August 26 by

As official agencies routinely repeat, Covid-19’s impact on trade, tourism and remittances is battering much of the sub-Sahara. The World Trade Organization expects global trade to fall at least 13% this year, while the World Bank predicts remittances to Africa will sink 23%.  International travel has largely stopped. The UN estimates that for every USD 1 million lost in international tourism revenue, national income could drop by 3-times as much on feeder sector unemployment spikes. In Africa the global downturn in most commodity prices has hit exporters, and country-specific black-swan events compound headline misery.

The maritime disaster in Mauritius comes as the eastern region battles “biblical” swarms of locusts. Food insecurity is rising across the continent as the IMF predicts the region’s economy will contract 3.2% this year while the African Development Bank forecast is even gloomier, between 4.9% and 6.6%. Stock markets throughout the sub-Sahara are on average down just over 20% in USD terms so far this year, with tourism-dependent Mauritius underperforming peers with a 40% loss. Cote D’Ivoire, where the economy grew an average 8% in recent years, has lost only 1.3% into an election cycle.

As the world locked down for the pandemic, the G-20 nations offered bilateral debt repayment relief though end-year for the poorest nations, many in Africa, and program extension is likely. The private sector was encouraged to offer a similar standstill, but the Washington-based Institute for International Finance as designated investor body claimed last month that its private financial institution members had not received any formal requests. In Africa of the 25 countries eligible for debt relief, only 4 with commercial bonds so far have requested assistance: Cameroon, Cote d’Ivoire, Ethiopia, and Senegal.(?). 

Kenya, where the worst locust swarms in decades are destroying food crops, has refused debt repayment relief. While accessing IMF rapid funding for the virus, it signaled a debt payment moratorium with official creditors would breach the terms of its outstanding Eurobonds and cut it off from the international market. Last year the country raised USD 2.1 billion in a massively over-subscribed offering in its third foray into the international markets in 5 years. Tourism, remittances and exports account for more than one-quarter of GDP. Ratings agencies have lowered the sovereign outlook to negative, noting the IMF expects the economy to contract 0.3% this year.

The continent’s two biggest markets, Nigeria and South Africa, tapped IMF emergency facilities to help finance their pandemic response. The IMF projects the commodity-exporting giants will see GDP slump 5.4% and more than 7%, respectively, this year. The OECD warns if South Africa is hit by a second wave the economy could contract 8.2%. Exports account for 30% of GDP and tourism nearly 9%, one-third business travelers unlikely to return soon. Last year South Africa’s sovereign rating was downgraded to junk by the major agencies, and the rand has been battered on portfolio outflows forcing the government to tap a USD 4 billion IMF loan. When the pandemic hit it was already in recession and suffering from rolling blackouts due to its debt-laden state-owned power company, with its downturn spilling over to immediate neighbors Botswana and Namibia. Meanwhile Zambia is struggling to restructure external debt and cannot participate in the G-20 debt suspension program because it does not satisfy the IMF’s advance sustainability criteria. 

For Nigeria, the price of oil is critical and the Covid-induced price collapse highlighted continued failure of economic diversification efforts. Oil accounts for 90% of FX receipts and 60% of total revenue, while remittances account for 6% of GDP. Debt servicing takes some 50% of the annual budget.  Nigeria has pledged to unify its multiple exchange rate systems to secure a World Bank loan while the official rate has been devalued twice this year, making debt servicing more expensive.  

Also in West Africa, political protests continue to plague Mali. The IMF has provided debt service relief and USD 200 million in pandemic aid.  Despite the social chaos and downturn in the price of its key export cotton, as a net oil importer the Fund expects the economy to grow 1.5% this year.  Senegal, where remittances account for over 10% and exports over 20% of GDP, embraced the G-20’s debt relief offer. Raters reacted in part with a revision to negative on its sovereign rating outlook despite expected economic expansion this year. Neighboring Cote d’Ivoire carries a “positive” outlook on its sovereign rating from Fitch. However, the agency noted political instability could threaten economic prospects: with only one exception, every presidential election since 1994 has resulted in violence, twice resulting in external debt defaults. Cote d’Ivoire’s economy is slated to grow slightly this year, largely due to comparative domestic demand strength.  Ghana too is expected to record slight expansion this year as it prepares to vote for president in December. While the cedi continues to depreciate, Ghana successfully sold an international bond a month before locking down. Ghanaian exports account for 35% of GDP, one-third oil/fuels, while tourism and remittances together are another 10%.

Recovery across the continent will be uneven. The IMF projects Africa will grow 3.4% next year. The start of the African Continental Free Trade Agreement in January, delayed from this year due to the pandemic, will boost economies as trade rebounds. Tourism dependent countries will remain under pressure well into 2021 absent a global vaccine. Travel and tourism account for more than 10% of GDP in Mauritius, Namibia, and Botswana, and across Africa contributed USD 168 billion to economies in 2019, according to the World Travel and Tourism Council.  Countries in French-speaking West Africa slated to expand this year could rapidly recover. For example, Cote d’Ivoire, where GDP grew 6.9% in 2019 will see  surge 8% or more next year (source).Giants South Africa and Nigeria, with pre-existing conditions including structural, fiscal and debt issues, will lag smaller neighbors, but bleakness will give way to relative bright spots.

Latin America’s Spoiled Pension Ecosystem

2020 August 12 by

The creation of private pension funds in Chile in the 1980s was hailed as the answer to bankrupt public systems under a free-market economic shift. The model, with worker/employer mandatory allocations as a portion of salaries, was adopted across the region and in more than two dozen other emerging markets.  Fund creation and oversight was guided and paid for by the World Bank, USAID, and other donors. Enthusiasm for the concept was so great that funders even discussed outside guarantees for private systems in countries lacking deep capital markets for investment.

The first country to dismantle its private pension pillar for short-term spending was Hungary in the wake of the GFC in 2010. The dozen year-old system was forced to transfer its USD 13 billion in assets to the state to plug the budget deficit, with the move part of broader populist measures taken then. Soon after, Poland’s system was crippled when the state took over and cancelled all government bonds held by the private funds, wiping out half of their assets, to prevent debt from reaching a constitutional limit.

Today in Latin America, governments are facilitating rather than forcing the end of the private system model to allow savers to survive the Covid-19 pandemic.  Despite an emergency aid package worth 12% of GDP including direct payments to the poor, Peru made the first move. As the country locked down, the government enacted legislation allowing savers to tap up to 25% of accounts. Estimates put withdrawals at some 13% of the USD 50 billion that was under management, as more than half of account holders took payouts.

Pioneer Chile followed, allowing up to 10% withdrawals from Latin America’s largest USD 180 billion, 61.5% of GDP, private pension funds.  The move follows months of protests over poverty and social justice prior to the pandemic’s outbreak, including outcry over lack of a public retirement scheme and high fees/low returns for the private funds. Chile will hold a referendum on re-writing the constitution in October. If approved major pension system changes are likely in proposed amendments. 

Elsewhere in the region, Colombia’s congress is considering a bill to allow the unemployed to withdraw up to 10% of savings from the USD 73 billion managed by private funds. Mexican funds are allowing the jobless to take up to 3 months of their last salary, or 11.5%, of their savings from the USD 191 billion system as the President recently guided a higher future employer contribution formula. A record high USD 823 million was withdrawn in June, according to the regulator. The Senate in the Dominican Republic is debating permitting 30% withdrawals, while Brazil is considering allowing workers to make partial withdrawals under its system’s non-compulsory private pillar.

Early withdrawals will help to mitigate the pandemic-induced devastation for thousands of families in Latin America, but the economic and market impact will be felt for years.  Private pension managers are being forced to sell into weak markets to meet redemption requests. Despite some rebound this summer, stock markets across the region are down between 25-45% in USD terms.  Forced selling of assets is pressuring local bond markets at the same time foreign investors have withdrawn.  In Chile, for example, 20% of funds’ assets are in Treasury instruments and under its emergency program the central bank was only permitted to buy central bank and bank bonds.? As debt and deficits soar, there is rising concern about how governments will find buyers as they borrow record amounts..

Fiscal and institutional investor impacts will be felt into the next decade. The countries which allow international investment by private funds will benefit this year from forced selling. As funds sell overseas holdings, currency pressure will ease and current account gaps narrow, with Chile benefiting as foreign assets stand at more than 40% of portfolios.. Longer-term large chunks of the system may erode or be dismantled with assets transferred to the state to meet the needs of retirees. For countries like Peru with a parallel public pay-as-you-go pension scheme, the government is already considering refunding some worker contributions which could bankrupt the system. Private pension funds have been a standout Latin America success to overcome public retirement scheme weakness and build a solid contractual savings base..  With workers drawing down savings today, their private accounts will be inadequate to meet future needs and the states will have to assume the burden as a proven capital markets catalyst decays. .

Central Asia-Caucuses’ Seared Stargazing

2020 July 29 by

The World Bank’s Central Asia/Caucasus review depicted “dark skies” for the region with a recession worse than the global financial and subsequent 2015 currency crises. Output will contract almost 2% in contrast with the original 4% pre-virus forecast, with oil and gas exporters Azerbaijan, Kazakhstan and Turkmenistan suffering from the price crash in the commodity accounting for one-third of GDP.  Importers in turn like the Kyrgyz Republic, Tajikistan and Uzbekistan face reduced Russia remittances and supply chain disruptions in Asia and Europe. Armenia and Georgia will absorb tourism blows, and exchange rate impact ranges from the flexible Kazakh tenge hitting new lows to the more stable managed Kyrgyz and Tajik units. In 2019 growth was “resilient” at near 5% in 2019, on wider current account deficits reflecting both import and export squeezes. Fiscal balances will also deteriorate on health and social outlays, and increased retail and mortgage credit has combined with slacker standards under subsidized programs in Azerbaijan and Kazakhstan. Bad loans and liquidity pressures will accumulate as forbearance and central bank support are planned for households and small business. Most countries in the area have banned travel and imposed lockdowns, and Kazakhstan’s central bank hiked rates almost 300 basis points. It rolled out the biggest stimulus at 9% of GDP, and Armenia’s was one-third that size, and the bank urges steps to facilitate medical supplies and treatment. Fiscal space is limited, and deficit widening should be temporary, while monetary tightening may be needed to defend currencies and capital inflows. Outright controls should be a last resort, and macro-prudential policies the immediate resort if outflow tension persists. The region is in line for IMF Rapid facility access to reinforce these approaches, with the Kyrgyz Republic the first recipient of a $120 million line.

The publication also covered the MENA group with “drastic economic decline” in store with the Gulf GDP tumbling 3%., and Algeria, Iran and Iraq are off even further at 5%. Libya’s civil war will produce another 50% plunge, while Yemen’s contraction could tail off at 3% amid cease-fire rumors. Saudi Arabia, where reserves shrank the most to date in March, still has ample fiscal buffers, but Bahrain and Oman are hard-pressed. Regional current account balances will hit a 6% deficit, double the previous surplus. Public wage bills and pensions remain too high Iraq and Kuwait, and tourism declines will exacerbate strains in the UAE and elsewhere. Supply and demand and remittance shocks will batter Egypt, Jordan, Morocco, Pakistan and Tunisia, on steeper budget and trade deficits. Tax relief and subsidies, and rate cuts and direct credit help will drive virus response, but countries already with mixed records under IMF arrangements will struggle to maintain sound macro and structural performance. In Jordan and Lebanon the Syrian refugee crisis compounding their predicament is now a decade old with no end in sight and almost two million in camps and informal jobs between them. The pandemic brings “another vulnerability layer” but ultimately these communities should be integrated into mainstream livelihoods and medical care as emergency phases pass, the document directs.

The UN’s Sovereign Debt Meltdown Scoop

2020 July 16 by

The UN Conference on Trade and Development (UNCTAD), in a report “From Great Lockdown to Meltdown,” highlighted the developing world’s cramped fiscal and monetary space to tackle coronavirus amid “critical” foreign debt burdens and called for reconsideration of a global restructuring body. The idea had gained momentum through the IMF two decades ago after the Asian financial crisis and its aftermath, but the US Treasury department and major emerging markets were lukewarm, and it was recently revived by academics including Argentina’s now Finance Minister as he proposed separately large reductions and delays in an exchange offer after the Fund declared the $60 billion outstanding unsustainable. Creditor groups spurned these terms and accused the government of repeating a pattern of not negotiating in good faith and sharing information. Economic forecasts were further clouded with Covid’s onset, with officials ordering mass closures and unleashing social spending and business support. In low income countries, the outsize informal sector does not fall under this safety net, and the choice is between starvation and illness, UNCTAD believes. Public and private debt combined is already 200% of GDP for the broad universe, as previously untied aid has fallen and relates to specific environmental and governance conditions. External debt is widely held commercially, and non-residents own double-digit portions of local bonds. Servicing costs roughly doubled to 10% of GDP the past five years, and trillions of dollars come due this year and next against the paltry estimated $20 billion bilateral pause the G-20 agreed mainly for the poorest countries. The first to formally ask was Pakistan in the next income category although it qualifies also for development lender concessional terms, and has also lost access to Gulf remittances and assistance. Outright relief is not on the table, and traditional facilities do not meet the scope and flexibility the unique health challenge requires. With increased Special Drawing Right (SDR) issuance also a non-starter with US opposition, the publication urges an overdue “new deal” starting with longer and more comprehensive standstills as a prelude to actual restructuring on a case by case basis. As a historic precedent it cites a 1950s conference on German war reparations, and targets $1 trillion in cancellation, At the same time through treaty an “International Debt Authority” would oversee the process, to reprise the 2000s push and fill a 75th anniversary gap left from the original Bretton Woods agreements. In an update also released in April the Bank for International Settlements (BIS) showed 5% higher cross-border lending through end-2019, although emerging market lines were up slightly. They were divided evenly between local and foreign claims in major regions, but short-term maturities less than a year at almost $2 trillion were half the former. The highest shares at 60% plus of the total were in China and Korea, while in Poland, Russia and Turkey they were below 50%. Austrian and Spanish banks have majority developing market exposure in global books, and US and UK ones tilt toward short-term credit. Untapped facilities came to $600 billion, one-tenth of the total stock, and the next installment will reveal if they were locked or used for virus lockdown.

The World Bank’s Dark Migration Lens

2020 July 3 by

The April World Bank Migration and Development report predicts that the “long and pervasive” COVID-19 wave will slash remittances 20% to $450 billion this year, although foreign direct and portfolio investment will fall even more, as the population is stranded and hardest hit by lockdown-related job and income loss. Average money transfer cost remains double the 3% goal and the pandemic highlights lack of health care access and a medical professional shortage that could be addressed with easier cross-border movement. Since the Spanish flu a century ago universal economic standstill is unprecedented, with the IMF forecasting 1-2% developing world GDP decline. Through the “lens” of sectors worst affected including tourism, retail, food and manufacturing low-skilled expatriate workers are at risk of widening the unemployment gap over natives after the difference in Europe was 5% during the 2008 financial crash. They are unable to return home with travel restrictions, as the wealth split grows with industrial countries and internal migration continues at over double the international pace. Containment has increased infection odds as governments round them up for camp and shelter placement, the publication points out. Remittances are historically counter-cyclical, but this time home and host countries suffer alike.  Low income ones have the greatest dependence at 9% of GDP, and this year’s drop is across all regions and “especially sharp” in Europe, Central and South Asia and Africa. At source Russia’s ruble is also down against the dollar, and Persian Gulf oil prices are at record lows. Even with a slight projected rebound in 2021 the sum will lag the level five years ago, as fees are stuck and may spike with disease quarantine service disruption. Providers are typically considered “unessential” and migrants often cannot pass due diligence for digital delivery. Basic healthcare availability is likewise skewed according to a survey of 125 countries where only 80 offer full local citizen scope.

Transfers to the Philippines rose at the same clip to $35 billion in 2019, and may now tumble 20-30% from Saudi Arabia in particular. Manila will allow workers to return to the Gulf and China to fulfill contracts, but they have been suspended and eliminated with drives like “Saudization.” Almost 1000 overseas Filipinos tested positive for Coronavirus, and crackdowns have extended to Singapore following a case spike in that community. In the CIS, Ukraine took in $15 billion from Poland, and the Kyrgyz Republic and Tajikistan got nearly 30% of income from nationals in Russia, often in construction. The Russia-Ukraine corridor is under the 3% expense target, with the lowest from Moscow to Azerbaijan. With airport shutdown Central Asian migrants camped out in terminals for weeks in unsafe and unsanitary conditions. In North Africa Morocco and Tunisia can expect 15-20% dips from Europe, as the Middle East has the largest forced displacement tally from conflicts in Syria, Iraq and Yemen. India and Pakistan totals will reduce 20% , and Sub-Sahara Africa faces the same magnitude leading to “further poverty and deprivation,” the analysis notes. Nigeria is the continent’s top recipient with a $25 billion in 2019, but fees from Ghana are the highest globally, and it is also vulnerable to capital outflows with a thin reserve cushion under that lens.

The IMF’s Pernicious Perfect Storm Tracking

2020 June 18 by

The IMF’s spring global financial stability snapshot published around the post-virus virtual meetings described an emerging and frontier market “perfect storm,” with record capital outflows from leveraged and low-rated borrowers inviting a restructuring wave. Global central banks have rushed credit and liquidity relief as their own financial institutions, including asset managers and insurers, are squeezed, as countries in the firing line roll out fiscal and monetary packages and consider exchange rate interventions and restrictions. The government bond stock with yields less than 1% doubled the past year to 80% of the total, as riskier corporate segments valued at  almost $10 trillion sold off across the board. US high-yield default prospects reached 10% as the market closed, as standard commercial paper and dollar funding also evaporated. Equities at overstretched levels were not spared, as earnings per share forecasts went negative. The MSCI index dropped 20% as commodity-producer listings in particular were abandoned with price collapse. By the end of March EMBI spreads were 700 basis points over US Treasuries, on a combined $100 billion in foreign fund outflows for the quarter. China, where the coronavirus bred, was an exception to tighter financial conditions as officials ordered credit support and investors continued to buy securities to match index weightings.

The IMF’s April World Economic Outlook predicted 3% GDP contraction this year, with a probability it could be double that figure with further virus spread and extreme containment measures. With this scenario emerging financial market instability will deepen and “permanently scar” bank balance sheets, the analysis warns. These “cracks” will also appear in developed markets with asset losses and bad loans and pressure low liquidity and profitability. The EM sudden stop and oil price crash is a harder stress test than in 2008-09 with increased leverage and reduced policy space. Big Gulf debt issuers are geared to hydrocarbons; interest rates are already low; and structural budget deficits in Brazil, South Africa and elsewhere are high. Foreign investors in turn are bigger owners of domestic stocks and bonds, and quasi-sovereign borrowers like Pemex will continue ratings downgrades. Shadow banks in China and India are in trouble, and trade finance has disappeared in African economies. Frontier market rollover needs are above $5 billion annually, with Zambia likely the first in regional defaults.

Currency intervention programs are widespread in major developing economies Mexico, Indonesia and Russia to tamp volatility, but longer-term adjustment is recommended after the viral outbreak subsides. Capital controls are acceptable if temporary and transparent, an endorsement reflecting a longtime shift from traditional orthodoxy as the Fund looks to offer its “integrated policy framework.” Sovereign debt managers in turn should prepare contingency plans to complement existing strategies that may involve “preemptive” commercial obligation rescheduling and restructuring. The G-20 has approved an official bilateral standstill still to be defined in detail as to non-Paris Club creditor participation. Multilateral cooperation is through the IMF’s $1 trillion in available nominal resources, but should also embrace home and host country financial regulation and medical trade, with essential supplies open to export and free from price controls to avoid more health complications, the review concludes.