No More Learning

Widespread staple shortages including of electricity and toilet paper have contributed to 35 percent inflation and oil monopoly PDVSA remains in difficult discussions with minority partners in joint ventures to secure additional funding. The exchange rate in turn could move to crawling peg under an update to the SICAD platform which has matched President Maduro’s thus far splintered perception.

Asia’s Simmering Small Exchange Smash
2013 June 17 by admin

Posted in: Asia
After pacing the region for the past year the Philippines and Thailand succumbed to individual jitters and broader equity flight paring gains to slightly positive as residual enthusiasm turned to long battered developed Japan on reflation bets. In the other area giant China stocks have been off 5 percent despite the strongest renimbi fix versus the dollar at 6 just prior to a regular bilateral summit in California dominated by cyber-security rather than currency and trade issues. Total social financing from banks and non-banks stands at 200 percent of GDP according to Fitch Ratings but fell sharply in May coincident with GDP growth softening to 7-7. 5 percent. The new central bank head foreshadowed further interest rate liberalization as his securities counterpart overhauls IPO rules to unlock months of company backlog. Inflation is below target at 2. 5 percent, but authorities remain reluctant to inject liquidity as they try to tackle property overheating and industrial overcapacity. Solar firm subsidies and aggressive expansion were in the headlines as the US and Europe pursued unfair competition actions and debt repayments were halted to foreign holders. The Philippines’ Q1 economic growth mirrored the mainland’s at almost 8 percent on the heels of attaining investment-grade status. The agencies cited better governance and tax collection which should enable the 2 percent of GDP fiscal deficit goal with a primary surplus. President Aquino’s position was reinforced by his coalition’s recent romp in Senate elections mobilizing support for new central bank and mining laws. Worker remittances from the Gulf and other regions continue to boost the peso, which has been among the few overweight recommendations by sell-side houses as officials signal selective rate reduction. The Thai baht however outperformed through May as it hit a 15-year high against the dollar before a 25 basis point benchmark cut as additional capital controls were debated. Foreign bond investors with a 10 percent stake joined the exit rush soon after amid disappointment that infrastructure projects may not be in place for the 5 percent growth forecast. Consumer credit is also rising 20 percent annually and venerated Thai tycoons have been involved in leveraged takeovers reminiscent of the pre-Asian crisis period. Major Bangkok exchange listings have touted cross-border plans for Myanmar, which just hosted a World Economic Forum meeting where Nobel laureate Aung Sung Su Chi announced her 2015 presidential candidacy and financial service providers complained of approval delays and technology lags.

Indonesia and Malaysia were previously sidelined as the former resorted to heavy rupiah intervention on a chronic current account gap aggravated by a temporary Chinese ban on coal imports, and the latter bred political animosity as a ruling party victory was challenged by numerous irregularity charges. Indonesian inflation is due to reach high single digits on fuel subsidy removal, while Malaysian transfer programs have resisted change despite perennial policy blueprints underscoring the shaky public debt foundation.

The EU’s Exasperating Excess Exclamations
2013 June 12 by admin

Posted in: Europe
Hungary and Poland revived their candidacies for medium-term euro entry as the European Commission released them from the excess fiscal deficit procedure delaying consideration and imposing fines at readings over 3 percent of GDP following the original Maastricht criteria. Budapest had triggered possible suspension of cohesion aid last year but the gap came in at 2 percent despite continued Brussels criticism of foreign bank and direct investment taxes indefinitely continued beyond the initial expiration date. A financial transactions levy has since been added raising only half the budgeted amount as the EU prepares a regional counterpart for securities and derivatives activity. Growth has turned positive on inflation under 2 percent, but the debt-GDP and loan-deposit ratios remain stuck at 80 percent and 110 percent respectively. The central bank has been in rate slashing mode under new leadership on persistent overseas bond and currency inflows, although 10-year auctions at record yields below 5 percent have encountered difficulties amid presumed forint overvaluation. Its latest stability report highlighted a spike in non-performing loans to almost 20 percent of the total despite a raft of company and household foreign exchange conversion and repayment rescheduling schemes. Industry losses were $700 million in 2012 with Q1 profit at exchange heavyweight OTP down 10 percent. The government has pointed to a solid reserve position at $35 billion and trade surplus in extending hard currency relief to small business heading into the 2014 election period, which helped lift sentiment to a 2-year high as resort to an IMF backstop remained off the table.

Warsaw in contrast renewed its contingency line as the zloty was off 5 percent against the euro and soft retail sales and construction cut the 2013 growth forecast to 1 percent. Interest rate easing has not pulled equities from their slump despite $5 billion in offerings this year to pace Central Europe and spur multinational banking groups to establish underwriting arms. Private pension funds with $85 billion in assets have been reluctant to re-allocate to stocks and especially the one-quarter of listings from elsewhere in the region in view of traditional guidelines and reductions in state contributions to the system to meet deficit targets. Participants fear Hungary’s nationalization precedent and increased funding pressure as in Portugal where 90 percent of the pool goes to government debt needs through 2015. State-run companies there have already reneged on derivative contracts as the economy has shrunk for ten consecutive quarters and 85 percent of the population seeks renegotiation of the troika arrangement. Both the main banks BCP and BPI must repay immediate post-crisis capital injections as corporate NPLs top 10 percent. Depositors panicked after the Cyprus freeze by shifting cash from accounts to vault safekeeping as they were burned by a widely-seen “playing with fire” approach.

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European Central Banks’ Stability Stretch
2013 June 12 by admin

Posted in: Europe
With longer-term EU debate swirling on common banking union twenty years after the “single passport” concept was introduced, research by the Polish central bank and New York-based Center for Financial Stability attempts to rank the 27 member individual supervisors’ current contribution to system protection and reporting. It divides the group into euro and non-euro users and devises an engagement index to measure analytical and infrastructure work beyond traditional monetary policy. Subcomponents include the definition and publication of financial stability reports, cooperation with ministries and parliament, and micro and macro prudential oversight to promote sector health and knowledge. Only the four representatives from France, Germany, Sweden and Latvia do not have this explicit legal mandate, which has usually been strengthened since the 2008 crisis and is described in both broad and narrow terms which can include asset bubble and non-bank contagion monitoring. Risk buildup can encompass numerous causes from negative economic shocks to participants unable to honor obligations. Just one-third of the group releases regular indicators following IMF methodology, although the same number provides their own statistics. Over half conduct and disclose the results of stress tests, with the highly ranked Czech National Bank assessing quarterly. Almost all circulate periodic stability reviews and bulletins, with Cyprus an exception which may have deterred earlier collapse notice spurring outside rescue and stiff depositor charges. Payments network and capital and liquidity rule responsibilities are routine but industry modernization and reform are often carried out with other government arms and indirect tasks like consumer rights may not be covered. The majority of central banks prefer a separate department for coordinating these issues working closely with the line regulators. Out of a maximum 10 score, the average was in the 7 range where the periphery countries now experiencing major stress congregated. Among the top ranked were Slovakia, Lithuania, and the Netherlands while France and Italy were the worst. The paper concludes that existing gaps complicate the challenge of launching the Single Supervisory Mechanism where the ECB may be stretched in its capacity and purview.

Sovereign debt restructuring is another topic where Europe may be preparing a different approach in view of difficulties with market-based procedures cited by both official and private parties during the Greek workout and subsequently in an April IMF Executive Board paper urging reconsideration of recent practice. A European crisis resolution facility established by treaty or EU directive has been urged as a continental version of the global SDRM proposal floated a decade ago to stiff opposition, and the existing ESM pact could be amended to address the power of holdout creditors who received full payment on foreign law bonds while the domestic ones were reduced 75 percent. The submission argues that relief has been “too little and late” and often continues unsustainability, and that collective action and official sector involvement problems remain unsettled.

The African Development Bank’s Live Transformation Circuits
2013 June 10 by admin

Posted in: Africa
On the eve of its annual meeting in Morocco and 50th anniversary in 2014, the African Development Bank tabled a 10-year strategy after numerous consultations emphasizing the environment, infrastructure, agriculture, and regional integration within the context of private-sector led growth and better official and corporate governance. Future financing will stress new methods and partnerships to solidify the continent’s “transformation” over the past decade as a world GDP increase leader and FDI recipient equal to individual BRIC countries. However may states remain fragile with high raw materials dependence, poverty and inequality, youth unemployment and food and water shortages. A “green” shift is overdue as ecological use will double in the next 25 years, and power, sanitation and transport upgrades could lift annual output 2 percent on $100 billion in investment needs. Intra-African trade has doubled to over $100 billion the past five years on $4 billion in Bank-backed cross-border projects, but regulatory barriers continue to impede physical linkages. Midsize firms comprise only one-fifth the workforce as the “missing middle” is pervasive in business and finance. Venture capital, leasing, bonds and equities, credit bureaus and export loans can help fill the gap, and the AfDB can offer its own guarantee and insurance facilities. Public financial management in such areas as debt strategy, fiscal decentralization, and natural resource negotiation should be a priority over the next decade along with skills, training and technology transfer to match global standards. Progress in attaining the 2015 Millennium Development Goals has been sporadic, with half the world’s poor now in Africa after more dramatic Asia breakthroughs. Economies like China can share their experience and also act as long-term investors for climate and social purposes. Sovereign wealth funds in a half-dozen places including Botswana, Mauritius and Nigeria can join efforts supported by the Bank’s AAA rating as other multilateral bodies including the UN and African Union collaborate.

The document was circulated as Ghana which was the pioneer sovereign bond issuer after getting debt relief previewed a $1 billion return in the coming weeks, despite fiscal and current account blowouts and a benchmark interest rate hike over 15 percent to bolster the crumbling cedi. The budget deficit will approach 10 percent of GDP in 2013 on double-digit inflation and a negative ratings outlook. Oil production has not met the original forecast and falling prices are also hurting nearby exporter Gabon, where dollar-denominated yields halved to 3. 5 percent after late coupon payments. Growth and the current account surplus there remain strong, but the opposition continues to sporadically challenge the legitimacy and wealth of the Bongo regime. Nigeria too is expected to tap the external debt market soon as Zenith Bank listed London GDRs. Local paper has seen profit-taking after insertion in the JP Morgan index, and watershed power industry privatization has been overshadowed by the government’s emergency declaration in the north against Boko Haram militants trying to radically transform income and religious tolerance.

India’s Indexed File Markings
2013 June 10 by admin

Posted in: Asia
As rater S&P gave one in three odds of imminent investment grade revocation, Indian inflation-indexed debt was revived on GDP growth at a paltry 5 percent the past fiscal year which helped bring WPI under that level. About $3 billion in 10-year instruments will be auctioned over the coming months which protect coupon payments unlike the previous late 1990s design. The innovation follows a withholding tax cut to 5 percent from the former 20 percent to sustain foreign inflows which have also been strong into equities which are positive through May despite countervailing domestic investor flight and a crackdown on high-speed algorithmic trading. The regulator will audit these firms biannually and they must report software problems immediately or face suspension. On a sector basis, infrastructure has again grabbed headlines as widespread power outages recur and banking has been prominent with a spike in nonperforming loans among big state players as private conglomerates apply for licenses to enter the field under recent liberalization. The India-born ex-chief executive of Citigroup has joined a local team for the prize, and the big listed family groups like Reliance and Tata are also in line. After the telecoms payoff scandal which nearly toppled the government the Finance Minister promises a corruption-free transparent process for final awards expected in 2014 just before the next election round. The ruling coalition has launched an ad campaign in advance touting anti-poverty and income strides, as the opposition BJP remains fractured and unpopular as evidenced by poor showings in provincial polls. Prime Minister Singh after winning a second term has been broadly criticized for lack of leadership at home and a visit by his Chinese counterpart in May failed to yield diplomatic breakthroughs. India runs a large bilateral trade deficit and mainland cross-border investment pledges have come to less than $1 billion on perennial delays and disputes. However with commerce due to reach $100 billion by 2015, several Indian banks have opened Chinese branches after mutual supervisory approvals. After passing legislation on retail joint ventures and insurance dozens of bills are still stuck in parliament to otherwise overhaul FDI, which is regularly subject to retroactive tax claims as in the $2. 5 billion Vodafone case.

With the lackluster economic growth figure commentators have urged technocrats in charge to devise a fresh model to avoid backsliding to the crisis-riddled “Hindu rate” two decades ago. The search extends to other regions notably with Brazil’s struggle for a post-Lula path as a senior finance official recently resigned in protest over interventionist policies. QI GDP was up only 0. 5 percent and above-target inflation prompted a 50 basis point benchmark rate hike on investment still under 20 percent of output despite massive infrastructure building needs. In the period oil giant Petrobras managed to borrow over $10 billion abroad but that tab’s color code has been flashing.

Global Capital’s Latent Lab Transformation
2013 June 4 by admin

Posted in: General Emerging Markets
The World Bank’s Global Development Horizons series extrapolating developing country trends to 2030 detailed two “economic laboratory” scenarios for savings and investment which envision an average 90 percent contribution to global growth, with the group also representing half of trade activity and generating 60 percent of jobs through services. Currently their domestic saving/GDP level is 33 percent and 45 percent of the world total. Under a rapid convergence path with institutional and structural progress financial markets in big emerging economies and the Middle East will attain development comparable to the 1980s US, the publication posits. In fifteen years, $150 trillion or half the global capital stock will be in developing nations but income inequality may still be pronounced internally without education or anti-poverty programs. Sub-Sahara Africa with its youth bulge will be the only region where savings continues to increase beyond that time as Asia, Europe and Latin America taper. China’s holdings will top the charts at $9 trillion followed by India’s $1. 5 trillion, and they will drive almost 40 percent of gross investment in the coming decades concentrating on infrastructure where the annual bill will exceed $850 billion. The non-industrial portion of capital flows will double to 50 percent, but no single country will dominate and South-South direction will be a major private and official channel. With greater integration global monetary policy must be “adjusted” to reflect bilateral and multilateral coordination challenges, regardless of eventual currency composition as the renimbi and other units assume larger roles. Alignment of international banking regulation will remain important but securities market promotion and financial system diversification are at early stages in many countries lagging projected household and corporate demand, the research concludes.

Chinese officials have promised an “operational plan” for capital account convertibility by year-end and imposed stricter rules for bank foreign exchange exposure. In the local government sector the regulator announced outstanding loans were 15 percent of the total and banned bond guarantees. Ratings agencies expect an NPL rise as balance sheet deterioration may also come from wealth management products at one-tenth of assets. The PMI is stuck in the 50-51 range as GDP growth slackens to 7. 5 percent despite a 5 percent April home price jump. The World Bank along with its long-term perspective issued an immediate warning on likely Asian asset bubbles from Japan’s landmark quantitative easing, despite repatriation extending from the end-March fiscal year. Institutional investors polled intend to maintain current allocation strategy and insist incremental moves abroad will be hedged with record yen volatility. Retail emerging market flows through trusts are expected to jump around $10 billion annually but appetite has been mixed with heavy Brazilian focus resulting in disappointment. Neighboring Australia had been a popular developed-world commodity currency play until the central bank cut rates placing the local dollar under the microscope.

Korea’s Brooding Ballistic Responses
2013 June 4 by admin

Posted in: Asia
Korean stocks continued to struggle despite good first quarter 3. 5 percent GDP growth as relentless won appreciation to the 1000 per dollar line raised export fears alongside the geopolitical ones with the North threatening further missile launches and dismantling border joint ventures. Japanese ties were also frayed as the yen’s double-digit plunge under Abenomics was aggravated by his military honors at a World War II shrine amid a sharp bilateral tourism drop. President Park began a US visit to re-affirm security and trade alliances and maintain foreign capital inflows on slipping conglomerate earnings following Woongjin’s bankruptcy just as she entered office. Electronics could accompany construction and shipbuilding into the doldrums as the president unveiled $15 billion in budget stimulus before her trip raising public debt above 35 percent of GDP. It targets job creation and subsidies but spurns additional housing breaks with family debt already at 150 percent of income. With this load the central bank will stay cautious on reducing rates even as Tokyo’s record easing solidifies the zero bound there. A handful of Seoul analysts argue that retail and institutional money could shift into won assets to bridge the currency differential but trust and life insurer data have yet to show allocations. Through the end-March fiscal year insurers’ 45 percent weighting in JGBs was unchanged and they demand hedging facilities for any move abroad. For individual participants in the toshin and Uridashi segments other Asian markets are more popular and diversification to Europe and Latin America is also a prevailing trend. They are also wary of regular Korean intervention and taxes and inflow restrictions which complicate returns alongside the historically tense relationship.

The rivalry extends to Indochina where both countries have deployed stock exchange and development agencies for financial sector technical assistance. Vietnam is the only MSCI frontier index member with solid gains this year as credit growth is in single digits with state banking cleanup receiving attention at minimum 10-15 percent NPL levels. GDP growth should again be 5 percent on inflation around 7 percent allowing for further benchmark interest rate cuts. With foreign exchange reserves replenished to $25 billion dollar and gold flight has abated and annual commercial external debt repayment is only $150 million. Aid, remittances and FDI continue to offset the trade deficit, and the Vinashin default and recent sovereign downgrade have faded from memory as investors await fresh issuance. In Myanmar securities market launch is part of broader reforms including monetary authority independence and private commercial bank opening. The central bank will use Treasury bills to manage liquidity and end budget deficit financing. China and Hong Kong have been the major backers of oil and gas projects with the military-run state monopoly but the lifting of sanctions and a new investment regime will spread the takeoff base.

Argentina’s Historic Holdout Histrionics
2013 May 30 by admin

Posted in: Latin America/Caribbean
As Argentine stocks and bonds firmed awaiting the US Appeals court verdict on distressed fund exchange instrument repayment and pari passu clause interpretation, Moody’s released an overview of the past 15 years’ restructuring experience highlighting the case’s singularity. It found typically rapid workouts without creditor coordination difficulties or litigation in 35 examples across all emerging market regions. Only 3 other offers, in Cote D’Ivoire, the Dominican Republic and Russia took more than a year to complete, with civil war delaying the first and official lender negotiations slowing the last two. Creditor participation averaged 95 percent, with only Dominica confronting holdouts who later agreed to join. Outside Argentina just four court complaints were filed for the same number of countries, and litigation was not continuous. The complexity may have contributed to regular disputes, as the swap featured 150 bonds, and a half dozen governing laws and currencies and a diverse retail and institutional investor base. The default and 70 percent loss imposed correlates with a longer closing time. One-third of the deals had collective action provisions and exit consents for majority decision, with the latter changing non-financial terms in the tendered paper. As to the current battle with Elliott Management which again rejected an offer along 2010 lines in light of the “lock law” barring improvements, observers continue to predict a negative ruling which may be mollified by staggered repayments excluding full past due interest. The option of establishing offshore routing for existing bondholders to avoid collection may not be available with covenant and logistical constraints, and a Supreme Court petition would likely be denied in the absence of constitutional issues unless the US executive branch would insist on the sovereign immunity and other determinations. Washington has already split engagement as it supported Argentina’s original New York filings but votes against development bank loans for investor-unfriendly policies which are also the target of legislation which advanced in the past Congress to ban capital market access altogether. Diplomatic protests have been lodged recently over President Christina Fernandez’s push for stricter media and judiciary control ahead of October elections, and the lack of progress on resolving YPF claims a year after Spanish assets were expropriated. Joint venture talks by oil giant Chevron have foundered on the impasse and environmental damages it faces in neighboring Ecuador.

The company intends to raise funds through tax amnesty promoting capital repatriation as foreign reserves dip below $40 billion with continued flight. The informal market peso premium has been double the official setting as lower soybean prices may dent the trade account. The primary budget surplus has disappeared and privately-forecast inflation is above 25 percent as the Commerce Minister admitted it as a “problem. ” Reporting will not change soon to satisfy IMF statistical objections and a decade of Paris Club obligations remain outstanding as the stage fighting endures.

South Africa’s Unsecured Loan Lemmings
2013 May 30 by admin

Posted in: Africa
South African shares continued to sputter and the rand breached 10 to the dollar as mine workers entered wage negotiations with hard compensation and nationalization tracks and African Bank and other unsecured lenders reported record impairments on downscale household lines. The industry’s main union demands a double-digit salary hike far outpacing the government’s inflation plus 1 percent deal last year. Another round of strikes has begun after recent violence as ANC ruling party activists press a “radical economic shift” to lift the 10 percent black ownership stake. The renewed confrontation comes as precious metals which account for over half of exports experience sudden world price reversal which could aggravate the 6. 5 percent of GDP current account deficit, although lower oil import costs will steady the balance. Through April $12 billion in bond inflows have poured in to bridge the divide, a clip equal to all of 2012 which Finance Minister Gordhan regularly cites as a monitoring priority. The central bank is expected to ease on 3 percent Q1 growth and CPI inflation at 5. 5 percent under a revised method with business and consumer confidence in the doldrums. In addition to the uncollateralized credit deterioration, mainstream mortgage activity is flat after a decade-long boom as the big four banks suffered high single-digit default rates. 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.

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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.

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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.