No More Learning

Foreign ownership has likewise jumped to over 8 percent of the $13 trillion total across the yield curve as other developed market returns are paltry and yen appreciation remains intact.

The 2011 US Treasury cross-border securities survey showed $125 billion going into short and long-term holdings, quadruple the amount of next-ranking neighbor South Korea. There industrial exports have slumped and Samsung in addition took a huge stock market blow on losing a phone copyright case to Apple. Privatization has been suspended on poor appetite and deal controversies heading into December presidential elections, with household debt of 150 percent of GDP weighing on voters. Their attention has been diverted as well by a historic dispute with Japan over an island chain which has yoked burgeoning commercial alliances with nationalist sentiment.





The Andes’ Reshaped Peaks
2012 September 17 by admin

Posted in: Latin America/Caribbean
Peruvian shares looked to stem losses as President Humala’s popularity fell to less than majority approval prompting another cabinet reshuffle which spared Finance Minister Castilla. Community and worker standoffs at mining projects have sparked violence and operating delays, although the 6 percent GDP growth forecast remains intact to lead the region on good agriculture and construction performance. With inflation within the 4 percent range on food price pullback the central bank eased export credit reserve requirements in July and has continued to selectively intervene to keep the sol within 2. 6-2. 7 to the dollar. The policy rate was kept at 4. 25 percent and foreign ownership of local debt tops the EM universe at almost 60 percent even as external bond positions have recently been underweight. A chief cause for the latter has been preference for adjacent Colombia, pushing EMBI spreads to 150 basis points as FDI in oil and metals soared 25 percent in the first half to $9. 5 billion. Resulting currency appreciation has activated a daily $20 million smoothing pool which authorities supplement with regular verbal signals as they reversed monetary course with a 25 basis point benchmark decrease. The shift came as the peso neared the 1,750 mark hurting exporters and slumping consumption brought GDP growth below 5 percent. Financial services expansion may soon slow as well as regulators issue warnings, with Bancolombia ADRs in New York feeling the backlash. With the US free trade pact now in effect, FARC rebels have reappeared with headline attacks on infrastructure and expatriate employees that may foster additional near-term caution, as paramilitary amnesty and fighter demobilization efforts show uneven results. President Santos’s bid for better relations with Venezuelan counterpart Chavez has also stirred controversy as his business and media crackdown endures amid rumors of terminal health heading into October’s election battle with opposition candidate Capriles. He vows to “pulverize” the challenger after receiving consecutive rounds of cancer therapy, as state-dominated television routinely disparages him and the voting commission bars Miami exiles from casting ballots there.

Opinion surveys are roughly split, and the incumbent has resorted again to hefty fiscal stimulus to solidify support with the deficit above 10 percent of GDP. Public debt has more than doubled the past five years as internal and external borrowing is used for pension, housing food and other initiatives to supplement oil proceeds. The government petroleum monopoly PDVSA will issue close to $10 billion in dollar bonds this year to as well satisfy currency demand through the official SITME system. It has started to line up supplemental financing from joint venture partners and Asian development lenders as runaway domestic liquidity, with money supply up over 50 percent, embeds hyperinflation with 5 percent economic growth toward a potential burst of ballot hyperventilation.

Vietnam’s Pinched Wealth Promoters
2012 September 12 by admin

Posted in: Asia
Vietnamese shares halved their 20 percent frontier index gain in the immediate wake of the arrest of a business tycoon whose interests include ownership of the twenty-year old Asia Commercial Bank also held by Standard Chartered, which received central bank liquidity after a brief depositor run. Specifically he was accused of operating unlicensed investment firms as officials try to clamp down on irregular gold, currency and stock trading which have invited factional infighting in the Communist party leadership as Prime Minister Dung abandons his original hands-off economic approach. Executives at shipbuilder Vinashin got lengthy prison terms for mismanagement after the conglomerate defaulted in 2010 with $4. 5 billion in debt in violation of internal and external controls, and the lavish lifestyles of the connected elite have prompted a backlash as GDP growth lags the previous 7-8 percent China-like norm. Bad loans, mainly from state-owned units to directed borrowers, reached one-tenth the total in June, and were concentrated in property, securities and non-core enterprise activities. Moody’s reaffirmed its negative outlook on the banking sector and the IMF calculates the recapitalization cost at 5 percent of GDP. Foreign access is capped at 30 percent of equity, and while the ceiling may be waived in future deals outright privatization of key lenders is not under consideration, especially in view of recent entrepreneurial overreach. Policy rates have come down 500 basis points as inflation dipped to 5 percent, but the credit mess will overwhelm the double-digit target for money supply expansion. The budget deficit goal of near 5 percent of output may also be missed on higher spending, although funding is facilitated by the 2-year government bond yield now at 9 percent. The trade gap has improved on lower imports to join weaker demand for commodity and electronics products in Europe and China. The mogul’s apprehension and bank crisis speculation hammered the prices of US-listed ETFs which are a major conduit, despite progress toward a bilateral free trade agreement under the auspices of the trans-Pacific Partnership to be pushed by Washington at the September APEC summit in Russia.

In contrast with the IPO lethargy in Vietnam and the rest of the region Malaysia has completed several high-profile transactions that may help set the stage for elections due by early next year. Domestic demand has been aided by civil servant and pensioner income hikes, which along with fuel subsidies will keep the fiscal deficit at 5 percent of GDP. VAT introduction has been delayed and good oil has offset electronics export performance, although both public and private debt is up sharply where foreign banks and investors are active. Their government securities holdings have doubled to 40 percent of international reserves in a transformation not formally cited among the Administration’s economic ambitions.

Private Equity’s Affected Africa Affirmation
2012 September 12 by admin

Posted in: Africa
In a paper titled “Embracing the Lion” the African Venture Capital Association and boutique firm Avanz highlight the post-BRIC frontier case, while acknowledging the lagging performance and depth of public equity markets for exit. The document cites low entry costs and penetration at less than 1 percent of regional GDP within the potential universe of 400,000 companies. Over the next five years African economic growth at 5. 5 percent will be double the advanced world’s, and better political stability and commodity and infrastructure management should support the trend. 80 percent of the continent has enacted business reforms, according to the World Bank, and inflation, current account and external debt indicators have all improved markedly the past decade. Demographic patterns including urban and labor force growth will drive middle class creation as education and health strides also raise living standards. FDI was $55 billion in 2010 and over 150 dedicated funds with almost $35 billion in assets have closed since 2002, with the majority in the small $200 million range. In the past five years fundraising has been only 5 percent of the EM total with 2011 bringing in $1. 3 billion, and pan-African vehicles such as from Kingdom Zephyr, Aureos and Emerging Capital Partners have dominated the landscape. Big global players like Carlyle have announced launches and new independent competitors also inaugurated 15 funds last year. Since 2005 managers have invested more than they raised, in contrast with unallocated cash in other regions. The study adds that local pension funds are boosting commitments to the asset class, with Nigeria and South Africa having respective pools of $15 billion and $250 billion. South Africa’s Venture Capital Association put the total at near $15 billion in 2010 at the portfolio cap of 5 percent which was subsequently doubled. Half of funds follow a generalist strategy while the remainder are single or multi-industry specific. Services, chiefly IT and telecoms, have been the most popular targets along with mining projects.

In South Africa the private equity rate of return the past decade at 23 percent has far outstripped the Johannesburg Exchange’s 14 percent. Development finance institutions, like the World Bank’s IFC, have been major fund investors and report similar results. 2011 exits came to $1. 2 billion and ten mainly trade sales have been completed in 2012 through May. The “shallow talent pool” at the company and GP level remains an obstacle to exposure, but the return of the African diaspora to inject entrepreneurship and expertise is a positive signpost. Although public markets are weak “liquidity pockets” in Lagos and Nairobi can be identified as new profit realization outlets as maturity and investment-grade prospects foster a tamer climate, it concludes.

China’s Inward Investment Inversions
2012 September 10 by admin

Posted in: Asia
Chinese stocks stayed lethargic after authorities blamed the European crisis for a 35 percent decline in FDI to $65 billion through July. The setback came on the heels of flat export growth and presumed hot money outflows sending the capital account into deficit, and an EMPEA report charting a two-thirds fall in first half private equity fund-raising to $4 billion. A dozen funds were closed accounting for less than one-quarter the total for the period versus the first half in 2011. Yuan-denominated vehicles were shunned as depreciation against the dollar set in and “challenging exit and regulation” could drive Asia strategy more regionally, the group commented. Emerging Europe picked up the slack with a $2. 5 billion haul concentrated in Poland and Turkey, as the global total hit $17 billion through June compared with almost $40 billion for all of last year. Asian markets continue to absorb 40 percent of deals, but volume jumped double digits in Brazil and the MENA and Sub-Sahara Africa regions. Smaller transactions were preferred as the $100-million plus segment was off one-third. Five of the fifteen biggest ones were in the private investment in public equity (PIPE) category which has gained prominence. Beijing, after raising the qualified foreign investor quota to $80 billion on the Shanghai exchange and relaxing applicant experience and size criteria, has fast-tracked approvals, and the securities commission has moved to lower taxes and delist inactive shares to further lure buyers. However the index is flat with the average company p/e ratio just over 10 on a 2 percent industrial profit plunge through June. Retail account openings are off sharply as representatives circulated an on-line petition to indefinitely suspend IPOs which have poorly performed. Banks have noticeably lagged and are trading at single-digit valuations as monthly credit allocation eases and non-performing portfolios rise. To meet the 11. 5 percent of assets capital adequacy threshold, the state-controlled giants still must mobilize equity and Bank of Communications, with the Finance Ministry and Social Security Fund as major shareholders, proceeded in August with a select institutional investor placement.

2012 GDP growth is now put in the 8 percent range with the PMI reading poised at 50 as the proxy electricity generation number has barely budged. New residential property under construction was down almost 15 percent through July, and retail sales gains flagged. Hopes for a resumed infrastructure push to sustain momentum into the October Communist Party leadership switch were buoyed with planning agency go-ahead for 1500 projects including again in the debt-laden railway system. The separate residential housing campaign has not met targets, and provinces have launched their own building programs to backstop central schemes that may not materialize. Bank reserve requirement cuts have stalled even as inflation dips below 2 percent on agitated investor expectations.

Latin Defaults’ Repeated Loops
2012 September 10 by admin

Posted in: Latin America/Caribbean
As Latin America continues to garner notice for remaining outside the global economic fear epicenter, S&P issued a report showing it accounted for half the 15 emerging market defaults this year, with Brazilian bank and Belize sovereign fights now souring investor attitudes. The speculative-grade non-payment rate was 2 percent for the universe in July, and the region has a dozen ‘weakest links” with B- or lower ratings and negative outlooks with less than 40 percent of followed companies high-grade. The negative bias rose but was skewed by policy risk reflected in Argentina’s expropriation of energy company YPF. LAC has been responsible for over one-fifth of the near $350 billion in global placement through the first seven months this year, and outside Mexico the main export partners are in the Eurozone or other developing economies. According to the Institute for International Finance’s lending surveys conditions remain positive and are aided by domestic consumer demand as an available backstop which can be bolstered by government fiscal and monetary responses. Brazilian utilities have led the recent default wave, and Cemex remains a “weak link” even as creditors agreed to another refinancing after the 2009 crisis deal. Other names in that category include Jamaica’s National Commercial Bank and metal producers in Argentina and Venezuela. Latin American GDP growth will be 3. 6 percent this year, twice the Caribbean’s pace. Exports often represent one-quarter of output and crude petroleum is one-tenth of sales abroad. The Eurozone was the source of 40 percent of FDI, one-third from Spain, and China has jumped to the top ranks as a commodity buyer and project sponsor. The study cites a trend toward resource nationalization in the Andean zone and elsewhere that could reduce inflows at a time when countries must again marshal “countercyclical” tools against slipping industrial indicators worldwide.

Belize’s 2029 “Superbond” went into initial default against this background as officials claimed they “could not afford” a $3 million August payment as the coupon increased from 6 percent to 8. 5 percent under the 5-year old previous restructuring. The Creditor Committee, headed by Greylock Capital, expressed outrage at the par and discount exchange options offered amounting to 45 percent principal reductions for the latter after receiving assurance from the Barrow administration of its “consensual” intent. A sticking point in the negotiations is resolution of the liabilities of utilities nationalized since the original accord which are a major burden at 20 percent of GDP which may affect capacity to pay. Secondary prices dropped to the 30 cents level on the sudden hard line stance, which has also upset bondholders in the Banco Cruzeiro workout overseen by Brazil’s central bank after its June seizure. 90 percent acceptance is needed for a deposit protection fund buyback offer valued in the 45 cent range versus the 60 hedge funds envision in a court cross-claim.

Sovereign Ratings’ Convoluted Convergence Convocation
2012 September 4 by admin

Posted in: General Emerging Markets
The relative developing-industrial market government re-rating in debt repayment ability over time to overlapping agency grades and instrument spreads has been summarized by JP Morgan’s periodic comprehensive asset class update also suggesting intersection in previously distinct political and social indicators. It finds that less than 20 percent of global GDP has AAA status compared with half in 2007 after a “torrent” of developed country downgrades especially in Europe, while EM sovereigns had over 180 upgrades for the period. The latter and fallen Eurozone members have the same BBB in the “jammed” space that includes Ireland, Italy and Spain along with Brazil, Indonesia, and Russia. Over the past 5 years advanced economies’ debt burden has increased by 35 percent, which has been the steady public sector ratio to output for the emerging universe. In 2012 Indonesia, Latvia and Uruguay were promoted to investment grade, while the Mideast and Europe regions have moved in the opposite direction. Most components of the 3 major local, external and corporate bond indices have reached the high-quality threshold, and the US top-grade and EMU benchmarks are only slightly ahead. The work points out that the gap may persist with divergent scores on institutional and governance categories but that they are likewise narrowing and post-crisis slippage has come more from established capitalist democracies. Asia represents one-third of the ten “doing business” leaders on the World Bank’s list, while France and Germany rank behind. The Transparency International average is half the developed market 7. 2 but Iceland, Greece, Italy, Austria and the UK showed outsize deterioration, while peripheral Europe generally tumbled on freedom and openness readings. Social inclusion as measured by the Bertelsmann Transformation Index’s poverty, inequality and safety net elements displays overall gains except for the poorest economies, although over 50 countries present notable political risks with a crowded election calendar over the coming months.

Big sovereign wealth funds in Asia and the Gulf also disclose more with assets under management across the spectrum estimated at near $5 trillion. Their holdings exceed hedge funds and private equity and are about half of official foreign exchange reserves, according to the analysis. The top ten control 80 percent of the pool and reflect commodity and trade inflow accumulations that may slow toward mid-decade, as they face additional demands for domestic rather than cross-border allocation for infrastructure and financial sector support. Long-term “stabilization” versions as classified by the IMF retain 90 percent fixed-income preference which should directly translate into further EM exposure as domestic pension and insurance providers also expand. Latin private pension accounts amount to $650 billion and Europe is fostering second pillar schemes as Asia’s life insurance industry half in mainland China and Taiwan deploys almost $2. 5 trillion in savings for regional bond longevity.

Argentina’s Stalking Stagflation Stagger
2012 September 4 by admin

Posted in: Latin America/Caribbean
Argentine President Fernandez declared a “debt-free” day as the bonds issued from forced bank deposit “pesofication” a decade ago were paid off, as stocks remained down almost 50 percent as the worst MSCI member on a renewed capital control push in that direction and economic stagnation. Official statistics show monthly output falling in the aftermath of drought and restricted Brazil trade as inflation verges on double-digits as compared with private estimates in the 25 percent band. Domestic food costs have spiked and currency depreciation on a faster crawl elevates input expenses and erodes purchasing power. The parallel market has the peso 50 percent weaker than the formal rate just under 5 to the dollar. The primary fiscal balance registers a minor deficit, and the agricultural export tax may go to 40 percent to bring in revenue despite recent reform of corn and soybean production quotas which have long angered farmers. A single permit policy will benefit food giants like Bunge with large operations, and is timed to meet rising world demand reinforced by extreme weather patterns. A previous move to hike the levy sank the president’s popularity to her first term low, and she has also alienated the main labor federation where a wing has split off in protest of real wage lags. Its head accused the government of “looking down on workers” and insisted on representation in the cabinet after organizing a big truckers’ strike. The body endorsed the state takeover of oil firm YPF with the stipulation that layoffs not ensue under the ownership change. A framework for the energy sector was subsequently proposed that will subject private company tariff and investment plans to regulatory approval. Mexican billionaire Carlos Slim converted a loan to partners to an equity stake and other non-Europeans may join the venture as Spain’s Repsol takes its seizure to international arbitration. At the World Bank’s ICSID the country has lost cases but refused to pay awards as the tribunal lacks enforcement capacity. Italian retail bondholders who did not accept defaulted sovereign bond exchanges are pursuing action in that form traditionally reserved for direct investment disputes. In New York holdout funds have won ongoing judgments in their favor and may eventually collect with a novel interpretation of the “pari passu” clause in instrument documentation to block current external debt servicing.

The YPF episode and uneven fiscal adjustment path have also highlighted federal-provincial divisions. Most of the latter run budget deficits and borrow from the central government for 40 percent of debt outstanding. A 2010 program reduced the burden of past obligations as many localities failed to meet the financial ratios contained in a 2004 responsibility law. Buenos Aires province at the center is under stress but has new issuance plans both at home and abroad where fat yields could compensate for the thinner commercial base.

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Egypt’s Modest Morsi Mission Mobilization
2012 August 30 by admin

Posted in: MENA
In an early gesture to reassert civilian supremacy over the military welcomed by investors with good bond auction and stock market results, new Muslim Brotherhood president Morsi demoted the long-serving Defense Minister and army chief of staff to advisers, after keeping technocrats tapped by the previous regime in key economic posts. Prime Minister Qandil is a water expert with an extensive record working with development lenders whose assistance is vital to modernization and domestic and external deficit financing. His team has resumed contact with the IMF on a $3 billion-plus initial loan and received installments of long-promised multi-billion dollar inflows from Saudi Arabia and Qatar after foreign reserves halved to under $15 billion over the post-Mubarak period through July. According to Fund statistics, only half that sum is in actual hard currency with the remainder in gold and securities. The central bank replied that the latest monthly outflow will stabilize after Eurobond and Paris Club debt repayments, as official aid and selective cross-border business deals like a Mobinil recent share sale pick up. The pound has fallen less than 5 percent against the dollar the past year and a half and authorities may relent in allowing greater depreciation to further replenish reserves which must also cover $4 billion in dollar-denominated Treasury bill commitments due in coming months for the 10 percent of GDP budget hole. One-quarter of state spending will go to interest payments under the draft blueprint, and the monetary authority has quadrupled its claims on the government as commercial banks hesitate to raise exposure at 15 percent yields after ratings agency institution and industry downgrades. Moody’s predicts an NPL load toward 20 percent of portfolios by end-2013 as another asset side hit while foreign parents such as France’s Societe Generale may also withdraw local lines.

Inflation had been a rare positive sign in dipping to single-digits, but wheat import prices may again skyrocket with bad crops in the US, Russia and Australia from extreme weather. Subsidy allocations have already doubled absent a repeat of Moscow’s ban as in the 2010 drought. GDP growth will be a sluggish 1-2 percent this calendar year, with the tourism minister expecting only slight improvement and Suez Canal revenue up less than 5 percent on flat global trade. GCC remittances are steady even if members have yet to fully meet funding and project pledges, including for energy development. Shortages persist with the Sinai gas pipeline regularly interrupted by maintenance and attacks which have added to the region’s security hot spots. President Morsi promised to crack down on militants operating in the area after they killed a dozen border guards. Islamic finance may test another boundary as the professional association now projects 10 percent annual growth under the new leadership tendency from about 5 percent of prior total activity.

Romania’s Flouted Flickering Flame
2012 August 30 by admin

Posted in: Europe
Romanian securities briefly paused for relief as President Basecu retained his post on lower than majority turnout on an impeachment referendum, although almost 90 percent voted to oust him. He called the attempt a “coup d’etat” and described the outcome as the “still burning democracy flame. ” The move was widely seen as prime minister Ponta’s retaliation against a corruption conviction for his mentor and a power struggle over judicial control which also raised US and EU concern over the rule of law. To assuage outcry and maintain bilateral and multilateral aid including the EUR 5 billion IMF precautionary standby he promised the European Commission a compromise which would restore constitutional court authority. The president’s popularity rating is below 20 percent, but the interim government until elections later this year has been gripped by party warfare and policy bungling. The budget deficit target of sub-3 percent of GDP went off track as privatization offerings were delayed and state firms began outright liquidation. Economic growth slid to 1 percent on 4 percent inflation and banks have felt the additional brunt of Greek and core European parent damage. The leu dropped through 4. 5 to the euro as the region’s worst performer and the sovereign ratings outlook went to negative as the threshold investment-grade rating by two agencies may erode. As the leadership spat heated up a large Eurobond repayment was due on zero monthly net FDI inflows and a 5 percent of GDP current account gap which may test the 30 billion plus in foreign reserves without tapping the Fund backstop. The Bucharest exchange has been a frontier MSCI laggard and overseas holdings of local debt are just one-third of neighbors at 10 percent. The USL grouping is expected to again dominate in upcoming polls and members have urged repudiation of austerity measures at the risk of repeating historic non-compliance with IMF programs. Many also note that Bulgaria which won EU candidacy at the same time has managed without an outside stabilization pact as it recently re-tapped the sovereign bond market as a standing EMBI component.

Turkey has also drawn envy as the continent’s runaway stock market gainer at 30 percent amid heavy 20 percent overseas ownership of domestic debt now equal to public banks there. GDP growth in a combination of consumption and diversified exports has settled at 2. 5 percent on single digit inflation. The current account deficit has remained around 8 percent on a firm lira and the central bank’s confusing multi-tier monetary policy has earned a reprieve from early criticism with the record to date. Along with portfolio allocation bank and corporate borrowers have maintained access to trade credit and short-term lines abroad despite geopolitical immediate doubts with the surrounding Iran and Syria sagas.

The IMF’s Arab Spring Leaps
2012 August 25 by admin

Posted in: MENA
Mideast stock markets which have mostly struggled this year were buoyed by the resumption of negotiations for an IMF loan by Egypt’s new President Morsi as respective $2 billion and $6 billion programs were inked with Jordan and Morocco. Tunisia too after renouncing resort may consider a facility as the World Bank extended banking sector and job creation assistance. The Islamic party-led regime will increase spending to compensate “victims” of the Ben Ali era and the central bank head, finance minister, and anti-corruption chief have all resigned after challenging reform direction. The sovereign was again downgraded after a US guarantee enabled commercial bond return as equities are off 2 percent through July. The chaos in Libya despite successful elections continues to weigh on cross-border trade while Mahgreb neighbor Algeria may soon offer bourse rivalry with listing and privatization initiatives. Jordan has experienced energy and political shocks following disruption of gas supplies and consecutive cabinet reshuffles as the king and parliament try to agree on updated responsibilities. Morocco has been the laggard with a 15 percent loss on Eurozone export, investment and remittance damage and stubborn fiscal and current account deficits. The royal leadership raised budget subsidies in response to popular demonstrations, and bad weather squelched agricultural output. The currency is pegged to a foreign basket and reserves cover just four months’ imports. A EUR 1 billion external bond was placed in 2010 and with the Fund’s precautionary line a Gulf-directed issue may be attempted. Elsewhere in the region an anti-poverty credit was signed with Yemen after former president Saleh went into exile and Sudan may eventually qualify for help following a north-south deal on oil which may further lift sanctions on Khartoum. However GDP has plunged 10 percent with South Sudan independence and the central bank has turned to gold trading for hard currency. 40 percent inflation has resulted from subsidy removal and pound depreciation and announced public sector layoffs sparked mass protests. The regime headed by accused war criminal Omar al-Bashir has been in power almost 25 years and security absorbs 70 percent of spending.

The IMF’s standby with Iraq was also extended until 2013, which was positive for dollar bonds. Prime Minister al-Maliki likely faces more no-confidence votes as his coalition has yet to find its footing and tensions mount with Kurdistan over oil proceeds and continued civilian attacks following US military withdrawal. Inflation is within the 6-7 percent target range despite dinar shakiness aggravated by dual crises in Iran and Syria. In Egypt the rate was falling from double digits toward that boundary in the aftermath of President Morsi’s nod but imported food costs may again spike. Foreign reserves are half the level they were during Mubarak’s departure and the central bank has become a key domestic debt buyer at 15 percent yields as averse foreign investors ponder the odds Fund talks this time pursue MENA’s agreeable path.

Ukraine’s Golden Harvest Humbling
2012 August 25 by admin

Posted in: Europe
Ukrainian shares trimmed double-digit losses despite drought again stifling output at the world’s number three corn producer as near $10 billion in swap and loan facilities were obtained from China, which the Foreign Minister has hailed as an “El Dorado” new ally. A $2. 5 billion bilateral currency pool will support trade and combined $6. 5 billion in development credit will go to agricultural and energy projects. The infusion came as the $15. 5 billion IMF program showed no sign of reactivation with a mission only returning in September just prior to parliamentary elections. The Article IV consultation summary in July cited “fiscal pressure” from wage and pension increases and state gas company obligations that will send the deficit over 3 percent of GDP. With inflation seen at 7. 5 percent monetary tightening was suggested along with greater exchange rate flexibility to protect reserves under the $30 billion mark at mid-year, when both Eurobond and Russian bank VTB payments were due. The arrangements were subsequently refinanced, but President Yanukovich has urged exit from the “artificial” 8 to the dollar peg as his Party of Regions tries to maintain business backing in a close race with opposition groups according to opinion readings. Former prime minister Tymoshenko’s bloc has won sympathy for her 7-year jail sentence for malfeasance in office widely condemned as politically-based, while voters are also angry over tax and retirement changes introduced since 2010. Avowed communists claim 5-10 percent endorsements on popular dissatisfaction only muted slightly by the afterglow of European football cup hosting, where infrastructure and stadium construction deals went mainly to well-connected insiders. They have also been able to tap $500 million in offshore syndicated loans despite doubts over the estimated $50 billion in public and private external debt owed this year. Second half sovereign installments to the Fund and World Bank are $2. 5 billion, as the government has been unable to sell foreign currency denominated Treasury instruments at home to tackle the hump, according to rater S&P which retains a negative outlook.
To free up space for securities purchase the central bank recently lowered bank reserve requirements, but they have their own reimbursement responsibilities to foreign parents as they struggle with a 40 percent NPL ratio.

Poland, which co-hosted the athletic extravaganza, saw stock gains pause with the admission by the Finance Minister of “serious risks” with GDP growth off to a 2 percent pace and high profile bankruptcies in the construction sector which will not be relieved by state aid. Polimex with EUR 600 million in liabilities reached a standstill accord with bank creditors and bondholders for negotiations until year-end while honoring interest demands. The central bank further raised the ante with warnings about souring household mortgages half in swiss francs. Defaults are only 2. 5 percent of the total but it found that “macroeconomic spillover” could swamp disposable income and consumption on underwater value.

Lebanon’s Numbing Neighborhood Knocks
2012 August 17 by admin

Posted in: MENA
Lebanese shares were down 3 percent on the MSCI frontier roster through July after a sovereign outlook demotion to negative reflecting the economic consequences of internal and cross-border political conflict. The civil war in Syria has reinstated domestic sectarian confrontation as refugees stream in and banks cease operations there, although international advocacy groups accuse networks of aiding the Assad regime and its ally Iran, with a Washington lobby urging an investment boycott in retaliation. GDP there has contacted 3 percent with the budget deficit increasing fivefold, and inflation and currency devaluation are at least 30 percent, according to outside observers. Foreign reserves are not yet at a critical stage as oil and other trade ties endure with China and Russia, the latter with thousands of citizens in Damascus from longstanding diplomatic and personal interaction. The Mikati government had just overcome coalition dissension over the fate of the UN special court investigating the Harriri assassination when street fighting erupted between pro and anti-Assad factions in Beirut and Tripoli recalling past carnage. Parties including Hezbollah have appealed for calm as they try to reach the 3 percent GDP growth forecast this year and keep the budget and current account gaps in check. Remittances and tourism from the Gulf are holding up but government debt persists at 135 percent of output, and commercial banks have reduced exposure leaving the central bank to absorb the slack. Dollarization has risen to 60 percent of deposits with the pound peg intact but assets in Syrian subsidiaries shrank one-third in 2011. As with other food and fuel importers in the region, inflation is a worry and with public sector wage hikes may hit 5 percent. The authorities have no immediate plans for external bond issuance in contrast to pressing past redemptions but CDS spreads have again crept toward 500 basis points on both geopolitical spillover and structural reform stalemate despite preliminary indications of offshore energy finds.

Another policymaking hammerlock and losing bourse can be found in oil-rich Kuwait where the emir suspended parliament in June after it rejected the next development plan and urged greater shariah law application to combat corruption. The body did approve privatization and capital markets oversight laws, but relations with the executive continue strained as the royal family contemplates succession to its septuagenarian leaders. Alone in the GCC the currency is tied to an unknown foreign basket instead of solely the greenback, and banks have been encouraged to participate in a Treasury bond push. However they remain stuck in investment company workouts which have gone multiple rounds as the government refuses a rescue. The investment-grade sovereign rating has been untouched but the wealth fund’s lack of transparency is regularly criticized both by local lawmakers and overseas interlopers.

Myanmar’s Lid Lifting Loops
2012 August 17 by admin

Posted in: Asia
As Myanmar military chief turned President Thein Sein called for “lifting the lid” with the total removal of trade and assistance sanctions, the US responded during a visit by Secretary of State Clinton with provisional financial services and investment authorization, and the World Bank opened a local office with preliminary steps toward clearing $400 million in arrears from past decades’ loans. The caution was reinforced by Nobel laureate Aung San Suu Kyi when she traveled to Europe finally to receive the prize and warned of “opening the right way” after previously noting “reckless optimism” by business executives at a World Economic Forum session in Thailand. After moving to unify the exchange rate and promote banking modernization under a proposed omnibus commercial code, the president signaled to foreign delegations a second reform wave including consideration of stock exchange launch with Japanese help. Agreements have also been signed with all ethnic rebel groups except the Kachin, and 2015 goals were set to slash the poverty rate to 15 percent and triple per capita income. Washington continues to ban imports and impose asset freezes on regime leaders and dealings with the behemoth state oil company will only be allowed under strict reporting requirements. Natural resource extraction will also fall under tighter guidelines soon to be finalized under the two-year old Dodd-Frank law. On a multilateral basis Yangon agreed to join the EITI process which promotes petroleum revenue transparency and is often a precondition for development agency engagement in the sector. A handful of dedicated Indochina private equity funds have begun operations, and noted frontier telecoms pioneer Digicel has a longstanding presence as big multinationals like GE prepare for entry. As official lenders prepare to extend technical capability NGOs like the Soros Open Society Foundation and volunteers including Nobel economist Stiglitz are providing policy advice. California-based Chevron is already in a joint pipeline venture with France’s Total which fell within a boycott loophole and may soon be expanded.

The US-Asean Business Council meeting where Washington’s easing was announced also set its sights on Cambodia where the infant stock market has two listings. GDP growth and inflation which are largely determined by agriculture are both around 5 percent, as textile exports and tourism especially toward the Angkor Wat temple area remain firm. With the fiscal deficit at 6 percent of GDP the IMF cited risk from contingent liabilities under public-private power projects in a recent report. 30 percent credit growth should also be reined in through tighter monetary policy and supervision of the bifurcated banking sector comprising several big and dozens of tiny lenders. The system is highly dollarized and foreign exchange trading must deepen with the greenback initially the denomination option for settling bourse transactions as inaugural investors stake their claims.

South Africa’s Twin Twinge Tweaks
2012 August 14 by admin

Posted in: Africa
South African stocks continued to slump on a gloomy World Bank report citing double damage from the Eurozone crisis and metal export falls for mere 2. 5 percent GDP growth this year against the Sub-Saharan average at twice that result. The country was among the ten most hit by commodity price drops with lagging power and labor capacity aggravating the crunch. Unemployment is stuck at 25 percent and without transfer programs per capita-income would be lower than at independence for the poorest, according to the institution. Despite the jobless rate unions are again pressing for double-digit wage hikes in the latest collective bargaining round versus the government’s 7 percent counter. Inflation is around 5. 5 percent and the central bank shifted its holding pattern with a 50 basis point cut in July to boost domestic demand even as rand weakness begins to separately affect prices. The currency change will also pare foreign investor bond overweight positions needed to balance the 5 percent of GDP current account gap following $2 billion in June inflows. To diversify the base, the Treasury is preparing a debut sukuk aimed at Middle Eastern buyers with Gulf underwriters. The budget envisions $3 billion in medium term placement and the Finance Ministry has promoted the structure as a mechanism for attracting non-Western portfolio and direct investment. The pilot will use the ijara special purpose vehicle method also under consideration in neighbors with large Muslim populations, including Nigeria and Kenya. The latter remains the region’s top performing equity market as the central bank there recently too slashed rates to 16. 5 percent, and the government obtained a $500 million syndicated loan for reserve reinforcement to tackle the 10 percent of GDP current account deficit. The shilling is at 85 to the dollar but expected to depreciate on political anxiety six months before the next presidential elections, with tribal-based contenders closely associated with previous outbreaks of violence. With a break in monetary tightening bank private sector lending should resume and translate to listing appeal, as Equity Bank and Kenya Commercial have moved aggressively into underserved micro-segments and build East Africa-wide networks. Oil discoveries have also been upgraded as the UK’s Tullow operates a joint venture with China’s CNOOC.

The Bank of China just received permission to open a Nairobi office as the triennial Africa forum took place in Beijing with President Hu Jintao pledging “steadfast commitment” along with $20 billion in loans and culture and education exchanges. Bilateral trade was $170 billion in 2011 focused on raw materials from the continent and Chinese low-cost electronics and textile imports. $15 billion in inward investment the past decade has targeted infrastructure, but South African President Zuma at the conference described the long-term pattern as “unsustainable and dictating caution,” a phrase also reflecting homeward truths.

Brazil’s Harried Horizontal Gaze
2012 August 14 by admin

Posted in: Latin America/Caribbean
Despite paltry corporate profits and more scotched IPOs keeping Brazilian stocks at the bottom of the regional pack, central bank head Tombini predicted second half economic and market turnaround accompanied by a “horizontal” top to bottom structural reform campaign to lift administrative and business competitiveness. His declaration came as commodity and consumption setbacks saddled GDP growth in the 1. 5 percent range, and bank lending slowed to a 2-year low as 90-day arrears reached 6 percent of portfolios. With pared benchmark interest rates and riskier categories like auto finance souring private banks retrenched as state rivals particularly Banco do Brazil and CEF were ordered to fill the gap. President Dilma Rousseff has demanded the taps remain open and that high spreads end as borrowers pay an average 25 percent difference. Her approval rating is steady at 75 percent amid the slowdown, corruption trials which will soon put an original key adviser in the dock, and a walkout threat by civil servants pressing wage increases. Their salaries already absorb over 4 percent of GDP, and unions are a stalwart constituency for the ruling Workers Party. An alternative could be tax relief but officials are wary of endangering the traditional primary surplus as contingent liabilities pile up with sporting event and infrastructure-related commitments from development agency BNDES. In external accounts the current account gap has widened on decreased exports while foreign portfolio and direct inflows are on track for $10 billion and $50 billion, respectively. Fixed-income allocation revived toward mid-year as capital controls were eased and real intervention targeted the 2/dollar level. Trade credit has been fully rolled over but buyer appetite has waned for large corporate bond issuers like Petrobras which under a new chief executive has scaled back ambitious investment programs. Japanese retail trusts have reduced interest at the margin, while dedicated US and European funds have overwhelmingly preferred dollar-denominated sovereign instruments. On the equity side while public activity sputters private venture capital continues to flourish as the country ranks only behind the US in attractiveness in industry surveys. In July a $125 million vehicle was raised for internet startups as sponsors look to tap middle-class habits prevalent elsewhere.

Other services providers in the media and telecoms space are seen to benefit from the upcoming World Cup and Olympics splurges, as the current London games are closely evaluated for precedents. A recent research piece from rater S&P summarizing the experience of other hosts found that “cost overruns are a near certainty” as London’s budget has already doubled from the first calculation of $6 billion. Polls show that the $1. 5 billion estimated return from the event is widely doubted, and the agency already discounts completion of all Brazilian projects including airports at this takeoff stage.

South Asia’s Dichotomy Drifts
2012 August 10 by admin

Posted in: Asia
Pakistani and Sri Lankan bonds and stocks moved in opposite directions as the former was up double-digits on the MSCI index amid a sovereign ratings downgrade, while the latter frontier component stumbled as debt was well supported on likely reapplication for IMF assistance. In Colombo GDP growth was off the previous post-war 8 percent pace in the first half as the central bank hiked interest rates and imposed credit curbs, although inflation brushed the 10 percent mark on drought-related food prices and 20 percent currency depreciation after adoption of a free-float. Tourism and infrastructure remain key economic drivers, and international reserves have stabilized around $3 billion to cover 3 months’ imports. Restrictions are in place on banks’ open foreign exchange position as a slight balance of payments surplus is now expected, according to the Fund’s last review of its existing arrangement. The budget deficit is steep at 6 percent of GDP, and the state-run electricity and petroleum utilities have brought in new management and subsidy procedures to staunch losses and stakes may eventually be offloaded on the exchange. Public debt is 80 percent of national income, about half external and one-quarter of that category commercial. Rollover risk is “manageable” Fund staff believe, but short-term exposure exceeds recommended boundaries. The financial sector may be compromised by large government securities portfolios although headline capital adequacy is above the required 10 percent of assets, and a multilateral lender assessment will be conducted by year-end to determine possible priorities for a successor program. In Pakistan that prospect continues to be moot pending tax collection breakthroughs and an end to official upheaval with top figures under corruption investigations and coalition infighting and intrigues. US military aid has been suspended and the future development piece is under interagency study. The low “B” sovereign grade was further punished as CDS is already among the most-distressed spreads. Elections are scheduled for 2013 as the budget gap mirrors Sri Lanka’s but is financed by central bank borrowing in violation of both international standards and domestic statute. A chronic energy shortage and near 15 percent inflation erode private investment and another flooding bout may keep GDP growth at 3 percent.

Falling oil costs may bring current account respite, but law and order and terrorism woes impose additional burdens. The first proposed opening in India of Pakistani bank in decades has been complicated by cross-border security scrutiny despite a bilateral trade thaw. With the Indian finance minister assuming the presidency and Prime Minister Singh grabbing the dual post investors await long-signaled subsidy, foreign access, and land purchase changes as GDP growth dropped to the 5 percent range in the latest quarter. Modest liberalization in the aviation, insurance and retail industries may result even as corporate earnings expectations turn more crustily conservative.

The World Economic Forum’s Reserve Currency Cull
2012 August 10 by admin

Posted in: Currency Markets
The Geneva-based World Economic Forum disseminated the results from an 18-month project on alternative future international monetary system paths which offered no clear winner among the dollar, euro, renimbi and other competing units as they position for the coming decades. The fragmentation highlighted a continued divide between global capital and trade integration and governance structures, and a mooted G-20 attempt at reform in 2011 when France was in charge of the group as the Eurozone crisis took precedence. A western view since the collapse of the Bretton Woods arrangement 40 years ago touts the adjustment benefits of floating exchange rates but many Asian markets in particular continue to prefer close management. These tensions hurt the real economy, according to banking and business executives participating in the study, resulting in disconnect between supply chains and a difficult hedging challenge for small and mid-size firms with limited sophistication. Since introduction in 2001 the euro’s share in reserves and trade settlement at almost 30 percent and 15 percent respectively advanced on the greenback with the yuan also making headway since 2009 with an incremental “internationalization” push. The three rivals now confront fundamental internal debt and growth model revamps that impinge on external financial cooperation and standing, with imbalances often reinforced in cross-regional public and private commercial and portfolio flows. A long-range scenario to 2030 incorporates a range of “multipolar” options including a split into different zones, a G-2 condominium as the Eurozone crumbles, and a heterogeneous world where advanced and developing economies jointly hold sway. The last outcome posits the RMB as the “de facto BRICs currency” with China’s own development bank and monetary fund eclipsing historical predecessors. Its trajectory checks the euro’s rise even as a full-fledged fiscal union is in place then to preserve the area. The report, which draws on meetings in New York, London and Beijing as well as the annual Davos summit, concludes that the road ahead is “rocky” in view of the inability of global institutions to handle “growing connectivity. ” Within the Eurozone the countervailing forces have yet to foster effective dialogue and solutions between key stakeholders, it adds.

In Asia, the yen likewise would be outdistanced as an international unit and Korea and India are also projected as minor players even as won and rupee trading volume continues to climb in BIS surveys. The WEF interviews were completed before Prime Minister Singh assumed the finance post in an effort to combat record bottoms on a combination of confidence and balance of payments factors. The central bank reversed course on an original capital-account opening blueprint by ordering exporters to surrender half their hard currency proceeds as the raj again wielded its license.

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Offshore Capital’s Tax Justice Scaling
2012 August 6 by admin

Posted in: General Emerging Markets
The anti-offshore financial center group Tax Justice Network updated statistics on private banking assets and capital flight showing a combined figure above $20 trillion, with illicit wealth accumulation outstripping official external debt for the past two decades. According to the tabulation, the top 50 asset managers dominated by US and European multinationals and Swiss specialists handle $12. 5 trillion, including estimates for unreported deposits and brokerage and custody holdings which can fall under third-party names. The high net worth segment has recently seen 10 percent annual growth, and most of the ten leading players got government rescue money over the period to tackle crisis instability at the same time they were receiving questionable sums from presumed launderers and tax evaders, the organization contends. Over the 40 years from 1970-2010 cumulative capital outflows and earnings from five regions came to $10 trillion led by East Asia, the CIS, and Latin America. Among individual countries, China and Russia head the list at $2 trillion together, and Argentina, Brazil, Mexico and Venezuela each register $400-500 billion. Kuwait and Saudi Arabia joint wealth flight was $800 billion, and in Sub-Sahara Africa Nigeria is conspicuous at $300 billion. The proceeds parked abroad are multiples of outstanding foreign debt, and must be juxtaposed against relief for all poor countries at a fraction of bailout costs for advanced economy banks since 2008, the research concludes.

In Nigeria the leakage has been most pronounced from the long-corrupt and inefficient oil sector which the Goodluck administration intends to comprehensively overhaul in the Petroleum Industry Bill slowly wending through parliament. Proven reserves of almost 40 billion barrels are triple the continent’s number two source Angola’s, as production amounts to only 2 million barrels/day. Despite the presence of global hydrocarbons giants no new licensing has occurred in five years with the state monopoly blocking decision-making and rule clarity, regular militant attacks in the Niger delta, and domestic refineries operating at half-capacity. Fuel subsidies knock a $15 billion hole in the budget, and the government had to settle for partial reductions after a national strike against greater reforms. The proposed legislation would modernize the tax and royalty regime, commercialize the official petroleum enterprise, and establish a separate regulator. The successor oil firm will be partially listed on the stock exchange, which has maintained gains on the prospects for eventual passage of the law and banking system recovery after another statute shifted bad assets to a central resolution agency. The central bank held the benchmark rate at 12 percent, but stiffened reserve ratios at its latest meeting with inflation stuck at double digits. A sovereign wealth fund was created with an initial $1 billion endowment, but additional Treasury-bill issuance may be needed to cover the subsidy compromise as foreign investors look to fold an overweight position at 15 percent-plus yields.

Jamaica’s Surly Celebration Chant
2012 August 6 by admin

Posted in: Latin America/Caribbean
Jamaican shares stayed at a loss on a EUR 200 million bond maturity due in July as the island marked its 50th independence anniversary with subdued events. GDP growth is barely positive while inflation could touch double digits by year-end, according to the central bank. The fiscal deficit has not budged at 6 percent of GDP as the new Simpson administration tries to revive a lapsed IMF standby arrangement through introduction of food and other taxes. Tourism inflows and remittances were up 5 percent in the first half but the trade deficit ballooned for a 20 percent drop in international reserves to $1. 5 billion. Officials went on a road show to test appetite for potential global debt rollover, but the July payment will instead be aided by local banks that have just organized a central credit bureau to shift toward consumer activity. Foreign investors in the region fear another restructuring round for government obligations that may impose outright haircuts across-the-board in view of the 140 percent of output public debt ratio and neighbor reopening as in Belize. There the high-yield $550 million “superbond” plunged as re-elected prime minister Barrow began renegotiations, reflecting a campaign promise even as the August installment at the step-up 8. 5 percent coupon will be honored. Greylock Capital, which was active in the recent Greek exchange steered by the IIF heads the creditor committee, and talks so far have not included formal interest or principal reduction requests. A key element will be the disposition of liabilities assumed under recent utility company nationalizations for alleged contract performance failures. With additional electricity capacity banana and sugar production have jumped by a third to join steady visitor revenue on a 2. 5 percent growth and inflation forecast for 2012. The sovereign rating remains near default status as debt-GDP is 85 percent, as an even greater load claimed Barbados’ investment grade at the opposite end of the spectrum after a harsh IMF report.

Fund relations are an overriding consideration in the Dominican Republic where bonds have firmed on political continuity which may revive a program. FDI covers the current account gap but budget and power deficiencies linger. Oil price decline should lighten the import bill, as metal exports rise with additional finds. However cross-border funding conditions have deteriorated in the past quarter according to the IIF’s survey of Latin America-Caribbean banks despite increased demand. The overall emerging market index was unchanged at 48. 5 for the fourth negative period in a row. Stricter credit standards have been accompanied by higher NPLs and regional tightening may soon affect trade finance as its independence is muffled by deleveraging and regulatory screams.



The CIS’ Sudden Scent Sensitivities
2012 July 31 by admin

Posted in: Asia, Europe
Central Asia and the Caucuses’ bond burst with the addition of benchmark entrants the past year paused for overdue reflection as near-term direction was affected by political developments in particular. In Mongolia the two main parties roughly split parliamentary elections, reinforcing a breach that widened with the arrest of a former president for alleged corruption he protested with a lengthy hunger strike. After a tense period they agreed to attempt a coalition as trade and fiscal deficits and credit and inflation again threaten to spiral out of control with mining mania. GDP growth continued at 15 percent the first half as loans jumped at almost triple that pace. The current account gap at 35 percent of GDP is still outrun by FDI, but weaker exports with commodity price decline may open a disparity. The budget shortfall is already several times the number foreseen for all of 2012, compared to last year’s surplus at the same time. 15 percent food-borne inflation exceeds the central bank policy rate, and mounting environmental and nationalist concerns have delayed headline metals projects that were also to add heavyweight listings to the stock exchange. Georgia, after admission to JP Morgan’s frontier index, also heads into legislative polls in October with President Saakashvili just reshuffling his cabinet in preparation with appointment of the former interior chief as prime minister and likely successor. Another IMF standby accord was reached to replace the post-Russia conflict one as GDP growth and inflation are both running at 6 percent. The central bank chopped its benchmark 25 basis points in June to aid consumer demand, and the current account deficit improved as officials target a tenfold annual FDI jump to $2 billion. Azerbaijan should soon join the NEXGEM with a $500 million quasi-sovereign railway issue at the lowest investment-grade rating, as a big hydrocarbon find should replenish dwindling capacity which checked GDP growth at 1. 5 percent through mid-year. The Eurovision song contest brought visitor activity but also criticism of the Aliev regime’s crackdown on opponents and protesters. The IMF completed a mission again calling for state-owned dominant bank IBA to be overhauled, as the sovereign wealth fund reported assets topping $40 billion, with the portfolio concentrated in high-rated bonds including a one-tenth emerging markets portion.

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

The Debt Decade’s Redesign Rambling
2012 July 31 by admin

Posted in: General Emerging Markets
As debt continues to outstrip equity in index and fund flow outcomes fixed-income houses have prepared long-term asset class profiles pressing the case for increased institutional allocation. South Africa-based Investec circulated the latest in a series of papers positing scenarios for the next ten years while recapping the past decade’s milestones. Since 2001 local and external public and private debt outstanding quintupled to $8. 3 trillion with the average maturity of the domestic component almost doubling to nine years. For governments internal reliance is now 80 percent and the corporate sector accounts for 40 percent of the total. Annual inflows are up 20 times over the period according to data trackers even as developed country stock grew at almost triple the EM rate at 70 percent versus 25 percent with the post-crisis issuance spurt. Going forward the IMF sees 5 percent growth and an average 40 percent debt-GDP ratio in the developing market universe, and the authors calculate that their sovereign bonds will comprise one-fifth of the global $70 trillion in 2022. The largest sources will be Brazil, China and India with the last’s relative share advancing in particular with Asia half the aggregate. The prediction looks beyond the current steep fiscal deficit and government debt levels that threaten the loss of investment-grade credit status, and multiple corporate foreign defaults following the rupee’s recent plunge and equity correction which compromised convertible bond structures. Outside the BRICs, Mexico, Thailand and Malaysia will each have over $100 billion in capacity, and smaller economies including Ghana, Nigeria, Morocco and Vietnam will be able to lift placement by 60 percent, the review believes. Extrapolating a pattern from Brazil and South Africa private will often equal sovereign size, yield curves will extend another four years, and fixed-rate instruments will represent 80 percent of activity. Foreign ownership portions which are one-third in a present cross-section will remain “steady” but not yet meet the industrial-country norm.

A dozen more members will be added to JP Morgan’s local currency benchmark such as Nigeria, Romania, Zambia and Serbia. Hungary and Poland may graduate to the high-income category, along with Russia and Turkey. On the hard currency EMBI Diversified index the same amount could enter bringing country coverage to 55, with Azerbaijan and Mongolia due soon for admission. In Latin America, Nicaragua and Paraguay could eventually join the roster as “cross-over” buyers with flexibility to move between classes show interest before formal recognition. Depth and liquidity will continue to advance as US and European pension funds remain massively under-invested at an average 2 percent of assets, according to industry surveys. Only 35 percent have EM credit exposure as compared with 65 percent for equity. A one percent US increase would translate into $170 billion in flows against estimated annual sovereign supply alone of $500 billion for the coming debt-dynamic decade.

Cote d’Ivoire’s HIPC Hoop Hurdles
2012 July 26 by admin

Posted in: Africa
Cote d’Ivoire Eurobond prices enjoyed a bump as bilateral and multilateral creditors certified post-civil war progress toward the HIPC completion point, triggering $4. 5 billion in relief for an external debt/GDP ratio fall to less than 20 percent. With the decision a $40 million interest payment resumed in July, along with token coverage of another $90 million in arrears since the December 2010 suspension as the Finance Ministry revealed a comprehensive reimbursement plan would be forthcoming without mention of further reduction from the previous London Club deal. A new poverty reduction strategy was completed which aims to slash the over 50 percent rate especially in rural areas through public-private investments that enable emerging market-status by 2020. GDP growth has rebounded from last year’s 5 percent drop with the medium-term prospect of breaking from the past decade’s “stagnation” according to the IMF. Fiscal performance is “satisfactory” with increased commodity tax revenue as high oil and cocoa prices yielded a near 7 percent of output current account surplus in 2011. The first review of the reactivated support program in May cited pension, civil service and cocoa industry reforms that can further underpin stability, despite continued human rights investigations at home and abroad that breed tension across ethnic and geographic divides. CFA Franc zone peer Senegal, which is under a Fund non-loan policy instrument, also received an upbeat assessment with 4 percent agricultural and mining-driven growth predicted at inflation half that figure. However it noted the new President who beat longtime incumbent Wade faces strong pressure to deliver on job and power generation promises as Europe’s crisis hurts export demand and remittances and Sahel drought punishes farmers. The budget gap will worsen to above 6 percent of GDP as alternatives to costly energy and food subsidies are pursued in the broader context of raising efficiency and transparency as stipulated in Francophone West African codes and by external bondholders.

In the center of the continent oil giant Gabon too belatedly paid a $30 million June coupon after settling a wrangle with a South African construction firm. 5 percent GDP growth is set and a revised mining regime is to be proposed by year-end in a bid for economic diversification which will include tax incentives and state control limits. In nearby Ghana where offshore petroleum finds recently were tapped growth will slip to high single digits heading into close elections with President Atta Mills seeking another term against a perennial rival. Inflation, fiscal deficit and currency indicators worried the IMF in its latest facility check, with the cedi down 20 percent against the dollar on a combination of political and economic fears, including uncertainty in gold prices which had encouraged the coast.

Mercosur’s Misplaced Messy Progeny
2012 July 26 by admin

Posted in: Latin America/Caribbean
As Argentina and Brazil hurl trade barbs and barriers cross-border contributing to double-digit stock market declines, Paraguay’s “institutional coup” which forced disgraced President Lugo, a priest by training who admitted to several illegitimate offspring, out of power a year before his term expires has further soured relations. The former chief executive expressed admiration of socialist policies which tended to align the administration with the leftist extreme although in practice economic management was centrist, but the dismissal has resurrected the continental split over toppling of duly-elected leaders last seen with an ally of Buenos Aires and Caracas in Honduras where the OAS tried to bridge differences with mixed success. The interim President Franco has met with a lukewarm response at home and abroad as the separate frontrunner for next year’s poll is a business tycoon from the resurgent Colorado party which dominated for decades. The ouster coincided with a downcast IMF Article IV report citing recession on lingering drought effects for beef exports which also generated domestic food price inflation. Fiscal and monetary stances were eased to tackle the crisis resulting in a 2. 5 percent of GDP budget gap that was to be covered by inaugural Treasury bond issuance and multilateral credit that may now be inaccessible with the government replacement. The survey points out that tax collection ranks near the bottom in Latin America with no personal income charge and numerous loopholes. It calls on the central bank to adopt formal inflation targeting and be wary of bad loan buildup and deposit diversion toward state-owned institutions. The saga played out as Mercosur counterpart Uruguay regained investment-grade sovereign status and Asuncion had begun to sound out investors and underwriters at the spring Inter-American Development Bank meeting for its own pilot external debt attempt.

As the political drama evolves a new Finance Minister has to tackle exchange rate depreciation momentum as well as chronic poverty which originally propelled Lugo to power.