No More Learning

The bonds issued to support the franchise fell by half to R17 billion through April and looming power shortages for the imminent Southern Hemisphere winter will further hurt borrowers. State monopoly Eskom plans to schedule interruptions as it faces maintenance backlogs and new plant construction delays. Renewable energy got over $5 billion in investment last year but has been slow to join the grid, according to advocates who helped host the 2011 UN climate summit in Durban. The utility’s financial drain weighs on the sovereign rating as the fiscal deficit is stuck at 5 percent on output undermining traditional discipline as overdue health and pension reforms are prepared.

Neighboring Zambia may also have to rethink Eurobond objectives as one agency assigned a negative outlook on copper price correction and “policy uncertainty,” including introduction of capital controls as a nominal tax avoidance measure after kwacha use was made compulsory for routine transactions. Export proceeds above $10,000 must now be repatriated within two months and offshore transfers require full documentation. The Sata administration claims mining group manipulations deprive it of an estimated $2 billion as it also precluded South African bank takeover of a local unit. Foreign investment rose 30 percent to $1. 7 billion in 2012 and has often been accompanied by controversies such as a labor dispute with Chinese operators ending in killing and investigation by the UK’s serious fraud office of London-listed ENRC’s acquisition of metal properties. The President himself with the nickname “king cobra” has been accused of strangling political opposition as the Commonwealth of former British affiliates has recoiled at practices.

The UAE’s Towering Debt Tip-Over
2013 May 29 by admin

Posted in: MENA
The UAE triumphed over MENA stock markets with a 45 percent gain through May after a flurry of big debt restructurings, property turnaround, and repayment of bank funds borrowed after the 2008 crisis. The Amlak arm of Islamic developer Emaar proposed a 15-year loan extension and 30 percent reduction to its creditor committee including Standard Chartered alongside Emirates NBD and other local units. In the biggest deal since Dubai World, Dubai Group also owned by the royal family set final terms for $6 billion outstanding after several lenders initially balked at a dozen year wait for reimbursement. Under the agreement they will get almost 20 cents to the dollar upfront and after the announcement CDS spreads dipped to 185 basis points. The breakthrough overshadowed backlash in the longer-running DW saga with calls for faster asset disposal to meet the 2015 $4. 5 billion deadline. Hotels and casinos are on the block but the government prefers patience to avoid large discounts. The tribunal hearing the conglomerate’s cases intends to handle the remaining load by next year, as Abu Dhabi separately lunched its own legal and regulatory scaffolding for a free zone financial hub. In the tiny Sharjah emirate Dana Gas also completed the final arrangements for rescheduling its $900 million sukuk after Egypt and Iraq did not honor contracts. Banks have been able to issue bonds at oversubscribed 3 percent-range yields as credit growth again picks up marginally after the central bank recently eased mortgage exposure caps. Leading Gulf exchange Saudi Arabia rose 5 percent as the money supply increases at a double-digit pace and the new US-trained capital markets supervisor reportedly prepares direct external opening that could merit MSCI core universe standing. Oil output is down to 9 million barrels/day with the price around $100 as Fitch upheld its AA- minus sovereign rating on an estimated 8 percent of GDP budget surplus and $650 billion in foreign reserves. Food and rent-driven inflation improved to 4 percent as the King embarked on a massive home-building scheme and inaugurated the $10 billion Riyadh financial district which will host a cross-section of domestic and foreign tenants despite steep rents.

Qatar registered a similar advance as it too awaits index graduation, with public sector credit up 30 percent to cover massive hydrocarbon, World Cup, and infrastructure projects. After 6 percent growth last year the budget surplus has evaporated with cost overruns such as with the new $15 billion Doha airport. Rail and subway networks will provide over 100,000 jobs to quell youth discontent, as the sovereign wealth fund takes stakes in a host of industrial and emerging market banks and the government likewise wields influence abroad as the largest bilateral backers of Egypt’s Muslim Brotherhood regime and Syria’s rebels. At $8 billion since President Mubarak was ousted two years ago, the Cairo commitment is roughly double the mooted IMF facility again postponed until parliamentary elections break ground.

Malta’s Ambivalent Anti-Crisis Crusade
2013 May 29 by admin

Posted in: Europe
Maltese bonds and stocks rebounded from immediate post-Cyprus jitters but the offshore center’s struggle was highlighted by the IMF’s annual Article IV checkup flagging “uncomfortably high” public debt and meager growth at less than 1 percent last year. The island’s international banking sector has limited local economy exposure but domestic units are experiencing a construction and real estate nonperforming loan spike. Provision coverage is low and the deposit insurance and resolution frameworks need updating despite solid capital, earnings and liquidity indicators heading into the Basel III regime. The fiscal deficit was 3. 5 percent of GDP in 2012 and sustainability will require government worker and health cutbacks and reduced support for state-owned enterprises especially the airline. Energy outlays are another drain and oil diversification should be a priority according to the Fund. Pension changes including a higher retirement age are overdue and the competitiveness model is too reliant on financial and gaming services ignoring productivity and training gaps and potential EU-wide tax harmonization. The report was issued as Cyprus received the first installment of its EUR 10 billion official package after parliament approved it by only two votes. Output will fall double-digits this year and capital controls will stay in place over the summer on the 85 percent debt-GDP ratio. An estimated 60 percent of the surviving big state bank’s uninsured deposits are slated for recapitalization as accountholder withdrawal continues. With tourist arrivals down 10 percent in March, the current account shortfall will exceed 10 percent of national income as the communist party which lost power vows to press the case for euro exit. Slovenia, another small single currency user, spurned the rescue option after raising $3. 5 billion in a delayed dual-tranche external bond offer. Ratings agency S&P calculates that the entire amount will be needed to strengthen the trio of ailing banks led by NLB which previously failed an unexacting regional stress test. Moody’s slashed the sovereign grade to junk as over half the citizenry in an opinion poll thought a bailout was imminent. Recession lingers with a 5 percent of GDP budget hole, and the new administration’s plan to sell a handful of public firms to bridge it was greeted with investor skepticism in light of former tries stymied by labor and political opposition.

Greece has already admitted the urgency of further capital replenishment after getting EUR 40 billion for a stability fund, as Alpha and NBG seek private investor backing after a government bond rally bringing 10-year yields to single digits from 30 percent a year ago. Hedge funds have poured into high-yield corporate debt as the lottery operator was divested for EUR 650 million in the “first major privatization” according to the Finance Ministry. A law was finally passed to shed tens of thousands of civil servants to comply with Troika demands releasing scheduled aid as shrinking credit still awaits a white knight.

Malaysia’s Reluctant Razak-Edge Margin
2013 May 23 by admin

Posted in: Asia
Malaysian shares and the currency which have lagged ASEAN peers climbed on Prime Minister Najib Razak’s National Front narrow re-election victory after opinion surveys showed an even battle with the opposition headed by former finance minister Anwar Ibrahim which actually won the popular vote. The ruling coalition again lost seats and remains far short of the supermajority needed to enact constitutional changes, and was on the defensive throughout the campaign on ending pro-Malay educational and economic preferences and promoting better relations with ethnic Chinese and Indians. First-time young voters also showed disaffection with the status quo although they did not decisively swing toward challengers unable to articulate clear policy alternatives. In the stretch before the balloting several sideshows emerged with longtime leader Mahathir approaching the age of 90 taunting Anwar to jail him if he took power and the government criticized for engaging Goldman Sachs for $6. 5 billion in private bond deals which entailed $200 million in fees. The firm has ties dating back decades and claims it exercised “high global standards” meriting selection. Two transactions were on behalf of a sovereign wealth fund emphasizing Islamic finance, where a cross-border insurance push is now prominent to supplement banking and securities activity. Takaful operations were recently granted full license to invest abroad after a previous 80 percent local assets mandate. GDP growth supported by domestic demand should be 5 percent this year as electronic exports flag, but budget plans to curb subsidies could dampen consumption and lift inflation to the 3 percent range. The central bank may be forced to tighten as it otherwise considers personal borrowing limits with credit at almost 120 percent of GDP. The current account surplus in turn may dip to 4 percent of GDP on softer commodity earning as plantations begin to send home immigrant labor facing domestic worker backlash.

Indonesia has entered the 2014 election season with no clear successor to two-term incumbent SBY as he tries to clear the sensitive issue of fuel subsidy adjustment from the agenda in advance. The sovereign ratings outlook was cut on the problem’s competing fiscal and inflation pressures and worsening balance of payments figures with a persistent hydrocarbons deficit and an agricultural import surge which prompted quota imposition especially for garlic and onions. Foreign exchange reserves are below $100 billion as portfolio investors hesitate with steep stock exchange valuations and bond market interventions. Golkar party leader Bakrie has stepped into the presidential race on a platform to instill business confidence, but his family-run conglomerate’s track record remains controversial as anti-corruption investigators have yet to capture major suspected cronies. The elusive results there are increasingly contrasted with the Philippines, where President Aquino’s good governance enforcement has been instrumental in an investment-grade designation by a second agency. S&P cited fiscal and remittance prods along with the disadvantage of low per-capita income which could shave future promotion.

« OLDER ENTERIESNEWER ENTERIES »


Management
Research
Services
Blog
Contact
Blog
You are here: Home » Blog

img_researchTags:




Africa (106)

Asia (195)

Currency Markets (9)

Europe (167)

Fund Flows (27)

General Emerging Markets (162)

Global Banking (19)

IFIs (33)

Latin America/Caribbean (156)

MENA (112)

Mexico’s Momentary Modernization Muddle
2013 May 23 by admin

Posted in: Latin America/Caribbean
Mexican shares swooned briefly just before a trip by US President Obama to hail the country’s “moment” as in the popular slogan as the multi-party structural reform pact signed post-election foundered on corruption allegations to stymie banking legislation. The tempest over local vote-buying passed to maintain the agreement especially vital for constitutional revisions accompanying private partnership and tax changes at state oil monopoly Pemex. Domestic demand weakness may limit GDP growth to 3 percent this year as the central bank cut rates for the first time since 2009 despite a food-induced inflation spike to almost 5 percent. The peso continues to strengthen around the 12 to the dollar level as foreign holdings of domestic government bonds have doubled to 55 percent of the total and external sovereign issues for liability management purposes command below 3 percent yields. Currency intervention remains off the table although authorities may consider reactivating a regular options facility. Private pension funds with over $150 billion in assets have moved increasingly into equities where special structured products are available and a trickle of IPOs are in the pipeline after a lengthy drought. Bank listings could be boosted by the new law intended to accelerate single-digit credit growth and small business access. However corporate debt continues to be a rocky area as defaults spread particularly among homebuilders like Homex caught in the aftermath of a subsidized apartment slump. Their problems widened high-yield spreads on JP Morgan’s CEMBI where the overall benchmark is now at 350 basis points over Treasuries.

Brazil’s banks led by state-run units continue to increase lending at an annual double-digit clip and the insurance arm of Bank of Brazil went public in a $5 billion transaction but the stock market remains down over 10 percent on a 12-month basis. NPLs are about 5 percent of the total as household debt stands now at almost half of disposable income and the giant government institutions BNDES and Caixa were recently downgraded by ratings firms on company and individual exposures. President Dilma Rousseff has not formally signaled her desire for another term in 2014 as the economy shows signs of stagflation. GDP growth is put at 2-3 percent this year and inflation at 6. 5 percent in Q1 far breached the target and prompted a return to benchmark rate hikes. In fiscal policy the actual primary surplus may fall to 1 percent of output when adjusted for bookkeeping tactics, and the current account deficit is also up although the capital inflow tax will stay in place according to officials. Neighboring Argentina is also experiencing budget and balance of payment deterioration as it tightens its own capital controls, widening the divergence between the bank and parallel peso values against the dollar under the managed regime. The holdout saga is back in appeals court after a “convoluted offer of more IOUs” was rejected by the plaintiffs in a New York minute.

China’s Affected African Aid Admonitions
2013 May 20 by admin

Posted in: Asia
A comprehensive data base compiled by researchers at the Center for Global Development and William and Mary College attempts through media filings to track Chinese official and private assistance to Sub-Sahara Africa the past decade, with 1700 projects in 50 countries valued at $75 billion. As a non-member of the OECD’s DAC group Beijing has fought greater disclosure moves in arguing that its “South-South cooperation” differs from traditional Western money and technical flows. The difficulty of uncovering information and numbers is compounded by the “labyrinthine network” across multiple agencies and ministries responsible for policy and distribution including the State Council and Export-Import Bank. The giving history dates back decades to post-colonial independence but attention and volume have heightened the past five years. Western and local critics have often hurled charges of raw material exploitation, rogue regime support, unsustainable debt creation, and labor and environmental standard violation which do not “survive scrutiny,” the review finds. Previous annual estimates have been wide-ranging from $500 million to $18 billion in pure development funding alone while the divergence in amounts is magnified with additional forms from companies and financial institutions acting in parallel. The authors quantify these sources under a “vague” category when specific providers are not listed in press accounts. Its effort follows on recent exercises at New York University and the Inter-American Dialogue as well as the Heritage Foundation’s longstanding global investment tally which excludes development finance and sets a minimum $100 million threshold. It tries to eliminate double-counting and rely on Chinese language reporting and notes an upward trajectory since 2006 in both direct government and “unofficial” commitments, with the latter now dominating. The total peaked at $50 billion in 2010 and fell to $35 billion the next year, and comprises grants, loans, guarantees, debt relief, scholarships and training. The average official project size from 2000-10 of $120 million dwarfs the $2 million identified by the US in bilateral terms.

Oil producers Angola and Nigeria have been favorites despite lingering political and security troubles. The former plans to float a $1 billion Eurobond in the coming months after an opposition challenge to longtime President dos Santos’ 2012 election win was rejected on the grounds that only the full parliament can take action. A new mining regime reduced corporate tax and should sustain 8 percent GDP growth on the first budget deficit in five years. Inflation hovers around double-digits and a sovereign wealth fund was launched to great fanfare with the president’s son in charge. Nigeria’s is also underway with a preliminary $1 billion in assets shifted from the opaque excess crude account, as indigenous operators including the big listed Dangote Group look to enter the industry under recent liberalization. The stock market is a top MSCI frontier performer despite steeper P/E ratios at 13. 5, and central bank head Sanusi who has been praised for tackling sector cleanup and inflation will not seek to extend his appointment. Attacks have also worsened from the militant Boko Haram in the north as cooperation founders across the country’s religious split.

Bangladesh’s Cloistered Clothing Destruction
2013 May 20 by admin

Posted in: Asia
Bangladeshi shares continued to lag on the MSCI frontier index following another textile factory tragedy as hundreds of workers perished in a multi-story building collapse just a day after major cracks were acknowledged by the owners and management. The garment industry union again led protests demanding stricter safety standards and enforcement as the prime minister vowed action after visiting the site amid preparation for upcoming elections. Multinational buyers like Wal-Mart who have relocated operations from higher-cost China also reiterated a commitment to facility protection and decent wages under pressure from outside monitoring groups. The calamity occurred on the heels of the IMF’s mixed report on the first year of its standby assistance. For the current fiscal year ending in June GDP growth should near 6 percent on inflation at 8 percent on rough current account balance with steady remittances. The suspended $1 billion Padma Bridge project remains an aid and infrastructure bottleneck until corruption allegations are resolved. VAT passage, subsidy adjustments, and state-owned company audits should bring the fiscal deficit to 5 percent of GDP as non-concessional debt was incurred with Russia for nuclear energy development and a technical committee was established to consider a pilot sovereign bond. Monetary policy has tightened in response to food costs as regulators investigate a large government bank fraud and modernize the primary dealer system to ensure competitionand transparency. Existing practice tends toward “devolvement” with the intermediaries assigned price and volume mandates from Treasury issue organizers. Commercial banks are “under stress” according to the Fund with the average capital adequacy ratio only 4 percent, and NPLs at 15 percent of the portfolio on flat profits. New guidelines will limit stock market exposure to 25 percent of regulatory equity as the Dhaka and Chittagong exchanges get ready for demutualization with Asian Development Bank advice. Foreign exchange rules are under review as the sub-region liberalizes and the central bank will refrain from pegging the taka with reserves over $12 billion or three months’ imports.

Pakistan’s level is below that figure on a heavy $5 billion debt repayment schedule this year as the civilian administration looks to a first post-independence handover in May elections, with perennial candidate Sharif pitted against former cricket superstar Khan appealing to young voters for a new leadership generation. Top economic and financial officials serving on an interim basis have urged the IMF to reconsider a $5-10 billion loan after the previous program lapsed as GDP growth slips to 3 percent on chronic power and security threats. The incumbent PPP may again come out ahead and be forced into a coalition, while returning army head Musharraf still commands a following if he can dismiss power abuse charges. Private sector capital outflows with poor confidence have offset good remittance trends as the business fabric further shreds.



Rwanda’s Misty Sales Swing
2013 May 17 by admin

Posted in: Africa
Rwanda’s maiden $400 million sovereign bond received $3 billion in orders sending the issue yield below 7 percent even though it is $100 million short of qualifying for the benchmark EMBI, donors have suspended 3 percent of GDP in budget support in response to authoritarian and military intervention tendencies, and the IMF’s latest non-program review presented a mixed picture despite headline 7 percent economic expansion. With currency depreciation and bad weather hurting crops, inflation is running at the same number as the current account deficit tops 10 percent of GDP. The government’s development and poverty reduction strategy envisions middle-income status by 2020 with medium-term double digit growth although social and physical infrastructure continues to lag the target. With the Eurobond borrowing, half to refinance previous commercial debt and the proceeds going to the state airline and Kigali convention center, the fiscal gap will hit 7 percent of output and tax collection is only twice that ratio. On monetary policy the central bank has started to tighten while reserve money increases at a 15 percent annual tempo. According to the most recent financial sector assessment bank non-performing loans are low at 5 percent but three institutions account for 50 percent of assets with corporate credit concentrated in construction and housing. Savings cooperatives in hundreds of districts have been brought under supervision and will be consolidated into national units. The nascent stock exchange should see additional listings that can be cross-traded in East African neighbors, and the World Bank’s 2013 Doing Business ranking led the sub-region in 50th place. The IMF concludes that the sovereign debut will not affect overall debt sustainability as management capacity can handle the challenge within improving export performance as diversification proceeds from the narrow agricultural base.

The exchange rate is roughly in line with fundamentals helped by remittance inflows that came to $400 billion for all developing countries in 2012 at an average 9 percent cost according to the World Bank’s migration unit. China, India, the Philippines and Mexico remain the top destinations, while as a share of national income Liberia and Lesotho in Africa are among the leaders. East and South Asia took half the total, with the latter dominated by Bangladesh and Pakistan mainly from workers based in the Persian Gulf. Eastern Europe and Central Asia were one-tenth the total but slipped 5 percent with the persistent Eurozone crisis. US-Mexican movement prevails in Latin America but recent peso appreciation against the dollar has slowed it. The MENA region spiked from the upheaval in Egypt as existing families joined job-seekers abandoning domestic prospects in the mix. Sub-Sahara Africa and Nigeria in particular were flat last year, but the next phase of expatriate mobilization may specifically embrace diaspora bonds where yields can literally be far-reaching.

Central Europe’s Decentralized Bank Planning
2013 May 17 by admin

Posted in: Europe
The IMF while considering or providing renewed support from emerging sovereigns battered by the Eurozone crisis, has released a strategy paper charting a more localized cross-border banking path after the woes of the past decade’s unified structure. It found that one third of the previous funding “boom” evaporated from 2008-12 on shrunken demand and supply as the “centralized” model faded for both balance-sheet and regulatory reasons. The transition toward more domestic capital and deposit reliance is warranted but may go “too far and fast” in eroding intra-group capacity and skirt legacy challenges of high NPL ratios and securities market underdevelopment, the document believes. Throughout twenty countries covered foreign bank ownership ranges from 50-90 percent, due mainly to post-communist privatization where networks were acquired by West European strategic investors. Their presence brought management, technology and diversification benefits but excess credit which rose fivefold to $1 trillion just before the Lehman crash, with the pace fastest in Bulgaria and Ukraine. Where overseas control was greatest as in the Czech Republic and Estonia domestic supervisors were unable to apply countermeasures as half the region also registered 10-percent plus of GDP current account gaps and euro-borrowing exploded at cheaper cost. With reversal came deep recessions but under the Vienna Initiative signed by headquarters executives with the IMF and EBRD parents agreed to maintain exposure rather than exit although official rescues were still required in Latvia and elsewhere. A second pressure wave began in mid-2011 after pan-European stress tests by a new agency and introduction of stiffer Basel III capital and liquidity rules. From then until the end of last year ex-Russia and Turkey lines were cut another $80 billion or 5 percent of GDP according to BIS statistics. Places like Hungary and Slovenia saw the biggest reductions, as credit growth “ground to a halt. ” Outside Ukraine the international presence has stayed intact as asset sales have taken place between no-resident parties, while in Russia smaller retail operations were shed before WTO entry. The analysis concludes that future direction will be guided by self-imposed and external oversight limits to central reach with the post-Cyprus trend toward bondholder bail-in also featuring as unsecured debt expense becomes “permanently higher. ”

Serbia may finally be on track for another Fund arrangement after it was recommended for EU membership with an end-April deal on Kosovo relations which will cede police and judicial responsibilities. The stock market rallied on the breakthrough as inflation may also head toward single digits with the central bank on hold after rate hikes over 200 basis points. The FYR-Macedonia, which has a Fund prequalified contingency line, also won political reform praise as it seeks EU entry and tries to emerge from recession. Albania is also in the queue as it copes with a banking NPL number above 20 percent going into mid-June elections with the opposition Socialists in position to again lead the government after a central coalition party defection.

The East Caribbean’s Fraying Union Label
2013 May 16 by admin

Posted in: Latin America/Caribbean
The East Caribbean Central Bank, which manages the 2. 7 to the dollar currency peg for eight island monetary union members, marked its 30th anniversary with a major report lamenting status as a “microcosm of euro area difficulties” including unsustainable debt, lack of fiscal integration and financial system weakness. It notes social sector strides and “stable” democracies are offset by rising poverty and unemployment and short-term policies that erode lasting economic growth. Although capital accounts are open and a regional government securities market operates through a common exchange customs union and bank and non-bank supervisory norms have yet to be established. Recession has prevailed the past few years and tourism competitiveness could improve. High public debt puts the group among the most vulnerable developing countries and wide of the 60 percent of GDP Maastricht-modeled target. It is evenly split between local and external, with the latter mostly due to the Caribbean Development Bank. Tax revenue is just 20 percent of national income, with many exemptions and insufficient capacity to collect and track VAT. State spending on wages, pensions and loss-making companies is a large budget drag, and half the ECCU—Dominica, Grenada, St. Kitts and Nevis and Antigua—completed loan and bond restructurings the past decade. In the banking sector, foreign owners especially from Canada represent 50 percent of assets and liabilities and intervention was recently required due to the Texas-based Stanford Financial fraud. Indigenous units were also taken over post-crisis as a shared deposit insurance scheme is under study. Credit unions, particularly in Dominica and Montserrat, play a big role and regulation has lagged, according to the document. The insurance industry suffered from the CL Group’s collapse in Trinidad and Tobago with “chronically under sourced” oversight as health policyholders still seek relief. Primary Treasury bill issuance dominates capital markets with secondary trading awaiting a dedicated dealer push. Corporate debt and equity activity is minimal and could rise with links to neighboring Caribbean stock exchanges. Offshore centers are most active in Anguilla, Antigua and Barbuda and St. Kitts and Nevis and have signed tax information sharing pacts with international counterparts but anti-money laundering compliance could go further.

The currency board has brought low inflation and interest rates but excludes lender of last resort scope. The World Bank’s Doing Business rankings score low on credit access, insolvency, and contract enforcement as Grenada embarks on another debt rescheduling exercise after 2005’s hurricane. The prime minister described the load as a “binding constraint” and the haircut on its $200 million bond is expected to approach the 50 percent for St. Kitts and Nevis in 2012. Commercial negotiators include Franklin Templeton, GMO, and T Rowe Price, who will be hard-pressed to demand repayment with the debt-GDP ratio at 100 percent and unemployment at 30 percent even if their position is united.

China’s Rattled Rat Catchers
2013 May 16 by admin

Posted in: Asia
Chinese bank shares continued to languish even as monthly lending topped RMB 1 trillion in March, as regulators demanded further disclosure on broker and investment fund exposure and arrested suspected “rat traders” including a prominent executive who may have skimmed money in the interbank bond market. With local governments tapping the channel bonds now account for one-quarter of credit activity which is “out of control” according to a major local auditor. Fitch Ratings puts their debt at 25 percent of GDP, and the recent sovereign downgrade to AA was attributed to the load although the CDS spread remained relatively unchanged at 80 basis points. Property loans also continue unabated with an almost 15 percent quarterly increase at the end of 2012 as investment was up 20 percent in Q1 on an annual basis with new taxes readily circumvented. House prices rose in 70 cities according to the latest statistics as half of developers have negative cash flow. Under official prodding risky small business lending has spurted as total new financing mainly in the shadow “social category” reached $1 trillion sending credit/GDP to 200 percent. With bank supervisors struggling to devise and enforce curbs the National Reform Commission has stepped into the breach on the interbank bond scandal, with the charge led by a veteran of the post-Asian crisis GITIC collapse where malfeasance was discovered but foreign creditors were also stiffed. The influential Academy of Social Sciences has called for bond-market unification and default procedures, as the central bank head recognized modernization needs as he previewed a wider exchange rate band at the IMF-World Bank spring gathering. International reserves have soared to almost $3. 5 trillion with restored capital inflows as the current surplus should settle at 3 percent of GDP this year. The economic growth pace has stayed under 8 percent as the PMI reading tries to keep above 50. Fixed outlays and retail sales continue double-digit gains but industrial output is sluggish with flat power generation and steel production. Inflation was just 1 percent in March as lower Chinese demand dents the entire commodity complex.

Food price relief should aid the region generally and allow for modest interest rate reduction, while diminished energy imports may help BRIC pole India in particular as it copes with a singular current account gap. In Australia mining projects have been shelved and local dollar inflows are off on the reversal although the 3 percent GDP growth forecast is intact on real estate and construction stability. In Japan consumer sentiment at its highest in five years could be further boosted at the margin although nuclear reactor shutdown had created an indefinite power premium. The yen meanwhile last sank against other currencies by the same magnitude two decades ago as a precursor to emerging Asia’s financial meltdown. The G-20 in a summit communique however supported “Abenomics” reflation intent as members behind the scenes expressed exchange rate target reservations when cornered.

The Financial Stability Board’s Exercise Flab
2013 May 6 by admin

Posted in: IFIs
At the recent Bretton Woods institution gathering the Basel-based Financial Stability Board associated both with the BIS and IMF barely featured after prominent roles in trying to design and harmonize cross-border banking and derivatives regulation and a broader public and private sector early warning system on looming threats. A semi-annual exercise has been conducted since 2009 to identify and prioritize immediate risks but has suffered from numerous procedural and substantive “shortcomings” according to a paper by Canadian academics at the Center for International Governance Innovation who interviewed participants. The Fund’s Early Warning Group which draws on four departments compiles geographic and capital flow data internally and holds external consultations with economists and fund managers to prepare its contributions, while the FSB’s vulnerability analysis unit submits complementary findings under a much smaller staff. They each make a brief presentation to the policy-making IMFC at the spring and fall meetings intended to highlight immediate trouble spots as well as overlooked “tail risks” in the global system. Although conceived as a joint product, coordination has been “scarce” in part due to differences in organizational size and location, the study notes. It also criticizes the ad hoc nature of outside outreach and the absence of written documents and formal country response to findings. Recommendations include clarification of the review’s specific purpose and greater stakeholder diversity for input, along with a benchmark publication that could accompany the global stability report produced by the Fund’s Monetary Affairs specialists. The FSB’s resources should be increased as directed at the 2011 Cannes G-20 summit and it should maintain a Washington presence as with other Switzerland-based multilateral agencies. A consensus should not be the ultimate aim as “productive disagreement” between experts could better inform the debate and stimulate policymaker initiative, the authors conclude.

One area that received attention by African ministers at the April gathering was the rapid buildup of external commercial debt after previous official relief as current and potential sovereign issuers met with investors in separate sessions as Kenya slated a post-election debut and Zambia another $1 billion in government-linked offerings after last year’s pilot. In response the civil society group AFRODAD released a set of guidelines and principles to serve as a “borrowing charter. ” It proclaims that obligations should be sustainable and have political and economic development support, and be transparent and within local contractual and monitoring capacity.
A legal framework should be in place for authorization and limitation, and a discrete debt management office must be responsible under parliamentary oversight. The Finance Ministry and central bank can decide the scope but accounts and information should be subject to independent audit. Project financing should observe environmental and human rights, and both donors and private sources are to treat countries with mutual respect which leaves accountability for repayment and citizen approval during the extended exercise, the network advises.





European Sovereigns’ Sobriety Test Sop
2013 May 6 by admin

Posted in: Europe
Ratings agency S&P emphasized in its annual European sovereign borrowing publication that new commercial exposure will drop 1. 5 percent for the first time since the crisis even though outstanding stock will jump half a trillion euros to EUR 9. 5 trillion this year. In 2012 long-term issuance was EUR 1. 25 trillion for the 45 countries followed, higher than estimated then due mainly to ESM operations and 2013 pre-funding after the central bank committed to unlimited bond-buying. Greece and Portugal managed to retain access and Denmark and Poland went for more than originally thought. In contrast Russia’s appetite was only half the EUR 50 billion forecast, and the UK reduction was similar. Over the coming months EUR 1. 25 trillion will be raised, with fiscal consolidation curbing needs in Italy and Spain while they remain flat in France and Germany. Russia and Turkey however will tap markets for 50 percent more than last year and a “benign” global liquidity backdrop could again aid placement by riskier Balkan and Central European names, including Hungary, Romania, Serbia and Slovenia, according to the outlook. Maturing debt will hit a record EUR 825 billion or 5 percent of the continent’s GDP, and since 2006 the total is up 65 percent. The short-term share is 8 percent and the official one is now 5 percent after EU-IMF support. Speculative-grade sovereigns account for almost 40 percent after demotions and the average rollover ratio is almost one-tenth of the aggregate, with Belgium and Cyprus among the highest in the category, and Estonia and Latvia at the other end with requirements under 2 percent of GDP. Borrowers with small domestic capital markets like Serbia have majority foreign-currency liabilities and with exceptions like Turkey instruments are mainly fixed-rate.

Slovenia has been on the front line after the Cyprus debacle and a failed auction which was later reversed as state banks oversubscribed EUR 500 million in 18-month Treasury bills and the government hired underwriters for an international road show with the investment-grade rating intact. Public debt is 60 percent of GDP, but ailing NLB which failed a previous stress test awaits at least another EUR 1 billion injection to hike the load according to Fitch Ratings. CDS spreads have jumped 50 percent to 350 basis points as new Prime Minister Bratusek, a trained economist, took the helm on a reluctant austerity, recapitalization, and privatization platform. NPLs are 30 percent of portfolios, the OECD estimates and a central asset-disposal arm has been slow to evolve. Since splitting two decades ago from the former Yugoslavia, the scenic Alpine location has spurned foreign direct and portfolio investment opening and allowed plebiscites to overrule official measures. Its stock exchange which is a bottom frontier performer imposed a minimum one-year holding period and the sale of a large grocery chain to a Croatian buyer was refused in 2011 by unions unwilling to experience the jobs and pensions hangover.

Venezuela’s Unripe Presidential Pickings
2013 April 30 by admin

Posted in: Latin America/Caribbean
Venezuelan stocks and bonds shuddered on the challenged squeaker presidential election win of Chavez ally Maduro, whose 1 percent margin belied double-digit opinion survey advantages over opposition candidate Capriles. He took the oath as chief executive but agreed to a recount of disputed ballots which generate a paper trail after automated entry. S&P lowered the sovereign outlook to negative on political risk which could aggravate a long list of economic difficulties including 30 percent inflation, a 10 percent of GDP fiscal deficit and anemic growth lagging neighbors. The successor team has yet to show its hand on currency policy as it experimented with a new auction platform just before the poll but did not reveal the results or future approach, although the rate accepted was widely acknowledged as far below the official 6. 3 to the dollar. Cabinet seats were rearranged as the central bank head viewed as not as ideological was appointed Finance Minister replacing staunch socialist Giordano who will remain a top planner. The shift may usher in a return to dollar bond issuance as a bolivar release valve as championed by governor Merentes in his former post. As interim administration head before Chavez’s death Maduro had suspended a windfall oil tax to encourage joint venture partners as state company PDVSA production continues to slump. Multinationals have been reticent with constant royalty changes and with world petroleum prices and US import demand falling, the Orinoco resource belt attraction has atrophied. The longstanding concessional oil “Petrocaribe” program which gave Cuba alone $4 billion annually may be in jeopardy, as the continent reconsiders diplomatic relationships based on 15 years of bilateral doctrine compatibility and largesse. Cuban president Castro has reacted to the ebbing era by selecting a younger deputy and repeating a reform pledge of small business and tourism opening to double the current 2 percent growth rate, even as offshore oil potential has not translated into finds.

Cross-border trade with Colombia should stay strong notwithstanding the outcome of peace negotiations with the rebel FARC up against a November deadline before the start of the next presidential election cycle. Talks failed twice before particularly over the questions of land redistribution and disarmament. The stock market roused slightly with a round of central bank rate cuts but has been a universe laggard on negative manufacturing results. The sovereign was upgraded to BBB on solid growth, inflation and fiscal performance but returning migrants from Spain could pare unemployment progress and oil and mining FDI may not cover as easily the current account gap this year. In the Andes Peru is still the fastest-expanding economy at 5 percent but the exchange there too is stymied by consumer credit and commodity export worries. Dollar reserve requirements were again hiked to fight sol appreciation, and President Humala’s public approval number hovers at 50 percent on maturing local community- resource extraction firm confrontations.

« OLDER ENTERIESNEWER ENTERIES »


Management
Research
Services
Blog
Contact
Blog
You are here: Home » Blog

img_researchTags:




Africa (106)

Asia (195)

Currency Markets (9)

Europe (167)

Fund Flows (27)

General Emerging Markets (162)

Global Banking (19)

IFIs (33)

Latin America/Caribbean (156)

MENA (112)

Low Rate Debt’s Bungled Bonanza
2013 April 30 by admin

Posted in: IFIs
The IMF’s global financial system survey for the spring meetings cited reduced risk as the Cyprus rescue’s bail-in implications had yet to percolate, as European weakness was again in the forefront with a focus on high corporate leverage especially in the periphery. Among industrial countries Japanese banks’ rapid overseas loan buildup and US pension funds’ reach for yield were flagged. Foreign exposure for Tokyo’s big three is now at 20 percent of the portfolio and alternative investments are 25 percent of historically conservative public plans in a so-called “gamble for resurrection” to match long-term assets and liabilities. Emerging markets have enjoyed a low-rate “bonanza” in the current environment but too much money may be pouring in, the study cautions. Corporate and sovereign bond supply has not yet risen to compensate for the post-2010 drop in syndicated lending, and combined with flat equity issuance has raised company leverage ratios in Brazil, Chile, China and Thailand. In the last five years business foreign currency borrowing was up 50 percent, and it has doubled in the speculative real-estate sector the past year. Asian and Latin American debt-equity levels are 200-300 percent in some cases and one-tenth hard currency-denominated. Chinese companies already face industrial overcapacity, lower profitability and property curbs as all forms of debt finance may be 175 percent of GDP. “Indiscriminate” international demand may have brought policy “complacency” in places like Hungary and Ukraine as spreads have narrowed 400 basis points since 2008 due almost entirely to monetary stimulus and anti-crisis initiatives abroad. With a reversion to standard volatility foreigners could dump 20 percent of bond holdings widening yields 100 basis points. Inflows have supported double-digit annual credit growth in Asia and Latin America with credit-GDP now half the advanced economy average at 70 percent. Household and mortgage versions have spiked in all regions. Asian authorities have imposed macro-prudential limits and supervisors elsewhere should be wary of consumer and corporate buildups, the Fund advised.

As the update was released recriminations continued over the hurried Cyprus operation which will now require the government to sell gold reserves for its contribution share as the EU extends 10 billion euros. The European parliament criticized the Commission for “appalling communication” while monetary affairs head Rehn admitted to dashed hopes for more gradual adjustment and lack of clarity over secured deposits in the exercise. Lawmakers also questioned the absence of any reference to future negotiations with Turkey over the island’s unification. It has diversified exports to the Gulf but still relies on a “global liquidity glut” to cover the chronic current account deficit and maintain 15 percent domestic credit expansion, according to rater S&P. FDI offsets less than one-fifth the gap and one-third of that total went into real estate in 2012, and external financing needs remain above the historic average despite the bond boom, the agency finds.



Credit Default Swaps’ Naked Truth Trail
2013 April 25 by admin

Posted in: Global Banking
The IMF’s April Global Financial Stability Report in the wake of capital controls endorsed for Cyprus’ “exceptional circumstances” directly challenged the preceding ban on uncovered “naked” sovereign CDS which has since shrunk the $3 trillion notional market. The absence of an underlying government debt position does not fuel speculation more than other fixed-income and derivative instruments and the connection between shorting and higher funding costs is unsupported by the research as a “negative perception. ” As they rapidly reflect information overshoot can occur especially in crisis periods, but useful hedging and liquidity capacity is lost with outright prohibition instead of addressing imperfections with greater disclosure and central clearing mandates. Banks and corporations dominate the $30 trillion gross CDS space and in the top 10 sovereigns France, Germany, Italy and Spain have joined emerging economy stalwarts Brazil, Mexico, Russia and Turkey according to NY-based Depository Trust data. Under the EU’s November 2012 rule protection can be bought for 30 countries only if exposure can be “meaningfully” correlated under dealer status. The vague criterion for eligibility has led to participant withdrawal and stress reduction with the ECB’s bond-support program has diminished demand. The European Securities Authority will review the 6-month impact of the directive over the summer and may recommend clarifications and modifications as global alignment evolves on margin and netting procedures. On the other hand parliament members who will debate the findings have also called for outlawing sovereign CDS altogether, which will particularly hurt shallower developing capital markets with fewer short-selling options. The trade association EMTA has already noted a sharp quarterly volume drop outside the region since the European move went into effect and the Greek triggering raised new questions about default definitions and settlement pricing. For that universe spreads have declined post-crisis but commercial and regulatory doubts have deterred investors from reflecting a positive view. The study urges more aggregate data on the field for prudential supervision but sees “no evidence” it is a worse threat than normal bond engagement.

The US Treasury’s latest international exchange rate report in the same vein casts doubt on such “unconventional” policies in view of Cyprus’ forced depositor losses and withdrawal limits. It comments that money market normalization was aided by the ECB’s bond-buying and long-term refinancing operations, with one-quarter of the latter’s 3-year over $900 billion facility recently repaid mainly by healthier banks in the core Eurozone. The 2014 plan for a single supervisor and resolution regime further “eased pressure” but reversals may now loom with the island rescue’s capital flow implications, which has already raised secondary market debt spreads. Bank shares have fallen amid shorting restrictions there too by individual members. With Portugal due to return to commercial borrowing in September as the constitutional court annulled previous austerity moves the government survived another no-confidence vote as the Treasury cited higher periphery “uncertainty” with the obvious obstacles.

China’s Home Wreck Rumblings
2013 April 25 by admin

Posted in: Asia
Chinese property shares led by mega-builder Vanke tumbled and erased Shanghai exchange gains to date as a 20 percent tax was slapped on sales just as the Communist Party Congress opened to formally tap new leadership. The GDP growth target was reaffirmed at 7. 5 percent as PMI readings stayed above 50 especially for services, although officials acknowledged overcapacity in cement and steel and a rise in bank non-performing loans one-third tied to real estate directly and indirectly, including through local government financing platforms which have also moved deeply into bonds. So-called chengtou instruments outstanding are close to 2 trillion yuan, almost one-quarter of the corporate total, and come with a range of coupons and tenors within typical investment-grade ratings. Yields can be double the 4 percent average for higher-return wealth management products, where the regulator has now ordered off-balance sheet disclosure as worries mount about the “shadow” system threat with estimated assets at 40 percent of GDP. Foreign exchange has again become a profit center as capital inflows resumed on expected appreciation, aided by liberalization of offshore renimbi fixed-income quotas and of equity short-selling restrictions, which only affect listed blue-chips in an initial stage. Taiwan has now launched its own version of Hong Kong’s dim sum market as Chinatrust bank issued a Formosa bond to harness mainland currency appetite. Retail savings accounts could reach RMB 250 billion in the medium term on the island, as insurance companies clamor for paper with 10-15 year maturities. The development has shifted attention from lackluster export performance registering 1 percent GDP growth last year, as life companies continued with large portfolio outflows. The Asian and global high-tech sales outlook is brighter for 2013, as lower energy prices should also keep inflation under 2 percent with the central bank on hold.

Hong Kong land had already been subject to cooling measures as stamp duty was added to loan-to-value curbs, as prices have doubled since the 2008 crisis. The clampdown was factored into the stock market which barely budged in anticipation of another raft of mainland company offerings after 2012’s slump. Smaller banks and brokers still awaiting Beijing’s approval to list are in the pipeline, as the center tries to recapture top regional standing from Malaysia. The index has been flat as short-sellers have attacked firms suspected of fraud and questionable accounting, and new corporate governance rules step back on transparency in top executive dealings. The government asserts privacy rights for the change but activists claim conflict of interest and criminal activity will go undetected. With its “prudent fiscal stance” S&P recently re-affirmed the AAA rating, as the new council head unveils plans to use the ample surplus for social spending. He may also introduce additional taxes and a minimum-wage law while honoring the longstanding US dollar peg requiring HK$ 100 billion in intervention the last quarter to protect the structure.

Low Income Countries’ Takeoff Tinkering
2013 April 25 by admin

Posted in: General Emerging Markets
The IMF’s April World Economic Outlook kept Sub-Sahara Africa’s predicted GDP growth this year above the 5. 3 percent emerging market average as it highlighted poor economies’ “dramatically improved” performance post-crisis and explored whether they had attained the “takeoff” point of per-capita income gains of at least 3. 5 percent over 5 years. According to the report developing countries’ medium-term prospects are less favorable due not only to China’s slowdown but supply-side bottlenecks and excess credit expansion. Public debt ratios while below industrial counterparts are rising and have already reached dangerous levels in the Middle East and South Asia. So-called frontier markets in turn lag on the business and investment climate and budget balance from untargeted subsidies, and rely heavily on commodity earnings now on an across-the-board downward cycle. The Fund estimates overall prices will fall 2 percent in 2013 with only metals up while energy and food languish. Natural resource producers have attracted foreign direct and portfolio inflows needed for the breakthrough phase of capital and trade integration but lack the diversification and efficiency strides for a sustained living standard boost. Many are rapidly accumulating debt after a period of official and private forgiveness which could again hurt dynamism as HIPC recipients like Zambia and Bolivia can readily issue external bonds and are now part of JP Morgan’s benchmark NEXGEM index ahead 3 percent through Q1. African weightings outside Cote d’Ivoire are under 5 percent, and the largest constituents for a combined 25 percent are El Salvador and Sri Lanka. Argentina may soon enter as a major chunk as its continued distressed status in the core EMBI brings demotion. The outcome of ongoing litigation is unlikely to restore the minimum 2 percent size for the main index, while a continuing selloff could mar the near double-digit NEXGEM return forecast on gross issuance already over $3. 5 billion.

Belize has led the group so far with 85 percent acceptance of its super-bond restructuring for a modest haircut, while Egypt is at the bottom with a 5 percent decline. Jamaica rallied as a 4-year $950 billion IMF accord is to be finalized at the spring meetings following the second local debt exchange since 2009. The local dollar is off 5 percent against the greenback as reserves teeter at the $ 1 billion threshold despite steady remittances. The Dominican Republic has been in the negative column with Fund talks on hold as the government tries to extract more revenue from mining companies and renew its concessional oil facility with Venezuela under presidential successor Maduro. Pakistan has been flat approaching May elections with former strongman Musharraf in the mix, while Ghana and Nigeria both registered a 1 percent advance. Fitch Ratings lowered the former’s sovereign outlook to negative on the 10 percent of GDP-range fiscal deficit, as the latter’s $1 billion Eurobond offer is slated for the coming months with appetite rocketing.

Currency Fighters’ Battle Fatigue Fits
2013 April 22 by admin

Posted in: Currency Markets
Major emerging market currencies ended Q1 mixed despite the bond flow redirection into local markets, with strength mostly against the euro and yen but leaders up just 5 percent against the dollar. The Thai baht topped the roster as the number two Asian equity performer as well, on the heels of a third ratings agency upgrade to BBB+ as Fitch reversed a previous demotion in the wake of political bloodshed. A $2 billion construction firm ipo captured enthusiasm about post-flood recovery, party reconciliation as the prime minister slowed moves to grant her exiled brother and predecessor judicial amnesty, and a wave of infrastructure “mega-projects” alongside other fiscal stimulus including car sales incentives and minimum wage hikes. Core inflation is below 1 percent and the central bank has been on hold as the current account balance swings between monthly deficit and surplus. With the auto push Japanese manufacturers are looking to rebuild their presence with the timetable accelerated by the weakening yen under the unprecedented monetary easing there. The Mexican peso has been the other outstanding gainer with a surge to 12 to the greenback despite an unexpected 50 basis point benchmark rate cut. Bullish futures bets were up 50 percent in March on the Chicago Mercantile Exchange as President Pena Nieto visited the White House and unveiled anti-monopoly media and telecoms industry steps. A Pemex reform proposal could follow by the end of the current congressional session to sustain early tenure confidence as export and factory indicators continue to decline. After a prolonged period criticizing neighbors’ currency intervention stance, the authorities may be considering daily fluctuation limits, and with the stock market again in the positive column a capital gains tax is on the table as a way to boost short-term collection. S&P raised the sovereign outlook to positive but stipulated the need to far-reaching fiscal overhaul and anti-drug security improvement.

Elsewhere in Latin America, Brazil remained a favorite despite well-established capital inflow taxes and central bank real meddling to keep the rate around 1. 9. With above-target 6 percent inflation the benchmark Selic is due to be raised in a rare regional and global tightening which could further stifle flat GDP growth. The primary budget surplus may fall to half the 3 percent of GDP norm with consumer tax exemptions as the current account gap continues to worsen with Chinese cancellation of a major soybean shipment. Agricultural commodity prices are down and iron ore giant Vale faces back tax claims from multinational subsidiaries. State-owned Bank of Brazil will float its insurance unit in an attempt to revive the flailing stock exchange and also boost its US-listed ADRs. Japanese institutional and retail money meanwhile is expected to resume record allocation with Governor Kuroda’s historic quantitative expansion at home dragging the yen to 100 to the dollar. In Asia in turn another decent spike has come from Malaysia’s ringgit just prior to May elections where the opposition is in formidable combat position.

The US Treasury’s Development Bank Bunker
2013 April 22 by admin

Posted in: General Emerging Markets


The Treasury Department’s International Affairs arm submitted its 2014 budget request to Congress with a $2. 1 billion total for standard development bank appropriation, over half in arrears. The $65 billion IMF quota expansion agreement dating from 2010 which does not involve dedicated money was included and will also be the subject of separate legislation. The accompanying statement ties the measure to maintaining US leadership and veto position there as well as jobs and exports in growing emerging markets. It notes the organization’s “solid” balance sheet with liquid and gold reserves above the $140 billion credit outstanding mainly in Europe, and the lack of default throughout its 70-year history. Letter-writing campaigns by interest and lobby groups have conveyed a similar message and reiterate that almost all other G-20 members have stumped up under the pledging and governance formula which will marginally shift financial and oversight responsibility to developing economies. The biggest piece asked is $1. 3 billion for the World Bank’s poor-country IDA window, which had a $15 billion portfolio in 2012 for 150 projects half in Sub-Sahara Africa. The Treasury Secretary asserts that the arm leverages congressional contributions a dozen times and aids security objectives by tackling extremism’s “root causes. ” $185 million is demanded for the parent institution to meet previous capital increases with the observation that it supports “core values” like private sector competition, transparency, and universal education and health access. The regional development banks would get $100-200 million each if approved, with the largest chunk to go to the AfDB’s concessional facility which focuses on post-conflict rebuilding and regional infrastructure networks. They focus on agriculture and environment operations which would receive additional commitments through global food production and alternative energy programs outlined in the proposal. Multilateral debt relief is pegged for $175 million and bilateral technical assistance $25 million, including for harmonization of East Africa’s government bond markets.

For MENA a small grant capacity would be established under the auspices of the Deauville partnership for policy innovations such as Tunisia’s recent launch of a one-stop investment authority. Through the State Department the Obama administration offered the country a guarantee to enable sovereign bond issuance, and Jordan is next in line to tap such backing after Morocco managed an offering on its own. Egypt finalized a new sukuk framework to appeal to Gulf and Asian buyers but continues to rely on individual placement chiefly to Qatar, which just announced another $3 billion order after the previous $5 billion. Libya may also come forward as cross-border commercial and diplomatic ties slowly heal after their respective strongman ousters. Corporate external debt has been absent from the area despite the record Q1 $100 billion pace worldwide, one-quarter from debut and half from high-yield names. Asia has dominated activity, but GCC state-linked borrowers have risen above the parapet including from besieged Bahrain and Dubai.











The IMF’s Wasteful Energy Whimper
2013 April 18 by admin

Posted in: IFIs
After consecutive G-20 summit calls to phase out fossil fuel subsidies, the IMF in preparation for its spring gathering completed a study on economic costs and reform experience to serve as a catalyst, especially with increased developing country fiscal and power constraints. It finds that cheap energy stimulates overconsumption, hurts investment and job creation and extends carbon-based reliance, but that price adjustments from support removal often result in popular backlash with poorly-designed exit steps. Transfers come both from tax relief and budget outlays and may not be captured in national accounts. State-owned oil companies are frequently loss-making and do not face private competition, and the subsidy array can comprise gasoline, diesel and kerosene. Electricity and natural gas are also protected but coal less so, as the global pre-tax toll amounted to half a trillion dollars or 2 percent of government revenue in 2011. The oil-exporting MENA region accounted for half the pre-tax total, while Asia and Europe-CIS took 35 percent. Latin America and Africa’s combined portion was 10 percent, but the top three countries in absolute terms underpricing through taxes are the US, China and Russia with spending over $900 billion. Although Sub-Sahara Africa’s burden is smaller on a worldwide basis, its power production costs across a 30 country sample are much steeper, reflecting broader infrastructure and industry disadvantages. Budget and efficiency gains are clear from overhaul along with environmental and health benefits, according to the paper, which also notes that current policies favor upper-income groups. Gasoline coverage is the most regressive and is rarely targeted and can encourage cross-border smuggling as in Nigeria. Social spending from savings could go to education, sanitation and employment training, and in many cases expatriate workers receive access eroding domestic economic impact.

Based on twenty reform efforts across the emerging world, the authors draw common conclusions to guide the next round expected again to be endorsed as a priority by participants at the upcoming Bretton Woods institutions’ meeting. Lack of information and administrative capacity are typical obstacles, and success is aided by good growth and inflation performance before changes. Interest groups from the urban middle class and business community can be powerful opponents and should be directly engaged as part of an extensive stakeholder consultation process. They must fashion a comprehensive long-term plan setting a timetable and quantifying likely effects and safety-net measures, and avoid the temptation to focus on early easy “wins” that soon encounter wider roadblocks. The Philippines and Turkey were two examples where advance communication and planning facilitated lasting consensus, the Fund believes. Improving state enterprise governance and moving to automated cash or voucher channels are also important parallel initiatives. The availability of alternative energy sources can promote a switch as with Indonesia’s kerosene conversion to liquid gas. An independent body should handle technical pricing decisions and full liberalization should be the eventual aim even if existing motion is idle, the document urges.

Central Europe’s Rapt Resigned Fate
2013 April 18 by admin

Posted in: Europe
Central European bourses were split in Q1, with core members Hungary and Poland down double-digits while Bulgaria and Romania had strong frontier showings. Budapest was transfixed by central bank moves following top economic adviser Matolcsy’s takeover as he purged senior staff prompting the resignation of the deputy governor just before her term ended. S&P shifted the outlook to negative as he assumed the post and pledged to uphold “conventional” monetary policy resulting in an interest rate cut to escape recession. However he also introduced a multi-billion dollar discount lending and foreign exchange conversion scheme to aid small business which has a 25 percent NPL ratio and readily tapped Swiss franc and euro facilities during the pre-2008 heyday. It has since been shunned by banks already under fire from heavy taxes and the prime minister’s stated desire to achieve local majority ownership with rumors of threatened nationalization entering next year’s election cycle. The dominant domestic player OTP, a major share listing, reported profits only due to subsidiary performance in Russia and Serbia. The new financial transaction levy has only brought in half the revenue estimated on lower activity and Italian cross-border groups have expressed pessimism over future presence with one chief executive describing operations as a “nightmare. ” The budget deficit should come in under the 3 percent of GDP needed to avoid EU fund suspension and international investors remain content to keep their 40 percent stake in Treasury bonds given the low yields or crisis odds in the adjoining Eurozone. The IMF recently warned that “fickle” market sentiment could turn to outflows and spark forint depreciation and instability, but with program negotiations abandoned the message got little attention. Poland on the other hand reaffirmed its intent to engage with the region more deeply by joining the euro, provided the usual 2-year “waiting room” period is waived to deter zloty speculation. The currency has weakened on central bank easing to lift anemic 1 percent-range GDP growth in line with the rest of Europe’s slump. The Warsaw exchange after years of battling for area supremacy is in talks with Vienna on a tie-up as bank and privatization sales have so far met with lukewarm response. Private pension funds may be directed more toward equities should the government follow through with a proposal to take Treasury bonds for budget deficit reduction.

Romania managed an almost 10 percent gain for the quarter as it tried to fulfill remaining conditions on its extended Fund precautionary arrangement with divestiture of a state railway despite implication in Cyprus’ bank seizures and capital controls. Tens of thousands of workers relocated there and shuttered Bank of Cyprus had a local affiliate. Bulgaria was ahead 20 percent on the MSCI index although the May presidential election is a tossup and the shelving of Greece’s leading banks’ merger could resign the ailing system to further damage.

South Africa’s Development Bank Dabbling
2013 April 15 by admin

Posted in: Africa
South African shares stayed at the main market rear as the BRICS annual reunion in Durban was unable to finalize capital and management arrangements for a joint development bank, although a shared $100 billion currency pool was agreed. Rivalry with the traditional industrial-country influenced Bretton Woods institutions was downplayed as participants cited trillions of dollars in unmet infrastructure needs as the prevailing rationale, despite state-run lenders for that purpose among the five members. The initial size proposed in the $50 billion range was just over double Brazil’s BNDES portfolio last year, and ignored the local DBSA’s difficulties in extending the cross-border electricity grid with monopoly Eskom’s shortages at home which have ravaged the mining sector along with strikes. Contingent liabilities for the government’s power, road, and airline holdings jumped 20 percent the past fiscal year and sent CDS spreads to 175 basis points, with the sovereign rating already on the downgrade brink for subpar growth and budget results described as “non-delivery” by S&P. Finance Minister Gordhan warned interest payments would soon be greater than important health and security outlays, and global houses have moved underweight on local bond positions which have leveled since entry into the biggest benchmark index. Stubborn inflation above 5 percent limits the central bank’s maneuver room as the current account deficit at 6. 5 percent of GDP hurtles the rand toward 9. 5 to the dollar as the worst-performing currency. Despite hosting the event, President Zuma with the re-election season approaching criticized the wave of low-cost Chinese imported goods undercutting domestic shops as “unsustainable. ” The opposing Democratic Alliance has shown broader support in early soundings and a new party has been launched by disgruntled former ANC activists. The youth wing has now been purged of the top rung after the expulsion of its militant leader who stirred mine-worker anger and currently awaits trial on money-laundering charges.

With these pre-occupations the President did not weigh in strongly on the constitutional referendum in Zimbabwe, which got 95 percent approval to keep intact double-digit stock market gains. The draft changes were completed two years behind schedule and would allow octogenarian President Mugabe in power since independence to run for two more terms. The MDC headed by government co-chair Tsvangirai appealed for backing as a compromise document, which will also bolster parliament’s role and resources even as the finance minister reports empty coffers. Earnings from the Marange diamond fields have eluded tracking and are expected to be channeled to rural ruling party constituencies once a new poll is announced. Strong-arm tactics were employed during the charter voting as observers were detained, but the EU relaxed aid and commercial sanctions in the aftermath as signaled while preserving them against Mugabe and his allies personally. Despite passage he may still fear fate as an ex-president given the recent example of his former colleague in Zambia facing trial for corruption in the softer infrastructure.

The BRICs’ Enduring Edifice Cracks
2013 April 15 by admin

Posted in: Fund Flows
EPFR’s Q1 fund flow data showed the BRIC theme with a $775 million net outflow, continuing a 2-year aversion, as the frontier and newest CIVETS-MIST acronym packs registered an average $1 billion inflow. Brazil, Russia and India were down almost $3 billion, while China was near $2 billion positive.