No More Learning

Double digit inflation and current account deficits which have drained reserves to less than three months imports are lingering concerns and the 2010 fiscal responsibility law has yet to be honored. The Ulan Bator stock exchange has deepened a technical and cross-trading arrangement with the UK despite the otherwise uncharted vast tract.

Zimbabwe’s Menacing Monitor Muddle
2013 July 31 by admin

Posted in: Africa
Zimbabwe’s stock market remained a frontier favorite through June climbing 40 percent on the MSCI index, despite President Mugabe’s orchestration of quick end-July elections leaving the opposition with a narrow campaign and vote preparation challenge window. According to outside observers voter rolls are replete with dated and false names and the Finance Minister is struggling to raise the $100 million funding to ensure bare logistics. The opposition headed by prime minister Tsvingarai under the post-2009 coalition enters with a “heavy heart” and claims to be at a structural disadvantage particular in rural areas which have long been a Mugabe party stronghold. The contest follows a constitutional referendum in March which was also subject to fraud allegations but passed overwhelmingly and will in theory better balance executive and legislative powers under a criminal amnesty for past officeholders. Foreign investors who have been relieved by compromises struck on the indigenization program believe that the event nonetheless will avoid the depth of previous bloodshed, and note that the IMF coincidently has agreed to a staff-monitored arrangement through end-2013 that could bolster the external position. With debt at 90 percent of GDP, half in arrears, the “distress” classification applies with $1. 5 billion owed to the World Bank and African Development Bank. Reserves are only sufficient to pay for one week’s imports, with the current account hole at 25 percent of output despite rising diamond, gold and tobacco exports. The inability to procure fertilizer and equipment hurts the agricultural harvest, and an estimated 1. 5 million citizens get food assistance from aid agencies. The economy will grow again around 4. 5 percent this year with inflation under control with dollar and rand use, but public finances remain precarious with hundreds of millions of dollars in unmet supplier bills and lagging mine revenue although the budget is near primary balance. Banking sector cleanup is another large cost with recapitalization still needed in many institutions after 2012 shutdowns. The loan-deposit ratio is at 90 percent with NPLs in double-digits and half the industry below the prudential liquidity standard.

In a pre-election move the government has demanded lower borrowing rates and service fees which may further undermine stability, according to the Fund. Pilot Treasury bill issuance has resumed but the Chinese Export-Import Bank continues to be a major source for infrastructure projects. The temporary staff agreement features a commitment to diamond dividend transparency with less than 10 percent of the 2012 budgeted item realized. Although international bodies attempt to track compliance with human rights and commodity norms inspection and valuation responsibility will remain in domestic hands. To normalize relations with bilateral and multilateral creditors commercial credit cannot be more than 3 percent of GDP over the monitoring period as monthly $150,000 IMF reimbursement tackles the poisonous past.

Corporate Defaults’ Dreary Drumbeat
2013 July 31 by admin

Posted in: General Emerging Markets
The drought in external corporate issuance in May and June, after a record $200 billion volume prior to the Fed’s tapering talk and bond outflow frenzy, has been accompanied by a predicted doubling of default rates to around 5 percent of the total, as ratings downgrades now also outstrip upgrades. High-yield names which accounted for one-third of activity in the first half are likely to be shut out of the market for the rest of 2013 with existing debt service of only $25 billion due but the load spikes next year. In the meantime Brazil’s OGX has followed Mexican homebuilders into restructuring as creditors weigh local insolvency provisions which seem to favor banks over bondholders. In Europe a Hungarian telecoms firm and another Kazakh bank are in trouble while in Asia Hong Kong and Chinese property companies remain under the gun as prices dip to 75-80 and into the distressed category. In the US almost $1 billion in combined dedicated ETF launches took place before exits leaving the CEMBI down at a higher spread than its sovereign counterpart as the cross-over junk bond market also folded. According to the TRACE system weekly dealing of $5 billion has scrambled to keep up as Dodd-Frank restrictions ban prop desks and require higher capital provisions for inventory. The year-end forecast is in the $250 -$300 billion range and debuts which numbered over 100 through July will be scarce. Financial and hydrocarbon placements have dominated by sector and may not be able to resort to domestic sources for operating and expansion needs. European risks are prominent in Ukraine with the balance of payments squeeze on continued IMF program suspension, in Russia with the breakneck consumer lending pace, and in Turkey with private sector long-term debt of $150 billion a multiple of international reserves by the latest central bank data. Brazilian high-yield paper has sold off from contagion and industry weakness with anemic GDP growth there and utilities are also shunned in Argentina and Venezuela on political doubts. Asian commodity and infrastructure firms are reeling from China’s slowing and fiscal restraints on big projects.

Middle East and especially Dubai quasi-sovereigns have held up on property recovery, low immediate repayment obligations, and investor base diversion from regional turmoil. Egypt has again plunged into disarray after President Mursi was toppled by the army and replaced with an interim technocrat-led government with a former World Bank researcher as Finance Minister. IMF negotiations will stay on the “back burner” according to officials with Gulf neighbors pledging new support at triple the $4 billion facility originally under consideration. The Sawiris family running Orascom as a premier global debt and equity listing endorsed the ouster as a signal to resume investment at home after prolonged policy indecision and judicial investigation into previous transactions. Insider suspicion has turned to business executives associated with the Muslim Brotherhood who have been slapped with asset freezes as the revolution wields another blow.

UNCTAD’s Unbound Value Chains
2013 July 23 by admin

Posted in: General Emerging Markets
UNCTAD’s 2012 World Investment Report charted a global FDI “sharp decline” of almost 20 percent to $1. 35 trillion, although developing economies for the first time took over half as trade overwhelmingly goes through integrated value chains. This year’s result should be flat as the total continues to reflect the mid-2000s pre-crisis average, pending the release of record multinational firm cash piles. Asia and Latin America accounted for $600 billion of the $700 billion sum as Africa was steady at $50 billion, and European transition countries received $90 billion. The BRICS themselves were sources for $150 billion or one-tenth the world aggregate, with China ranking just behind the US and Japan. Developed nation inflows fell one-third, with North America, the EU and Australia all off. Offshore financial center-based allocation was again high at $80 billion, with a multiple of that figure channeled through anonymous tax-advantaged special purpose vehicles singled out for greater scrutiny and transparency at the June UK-hosted G-8 summit. Foreign affiliates of global enterprises had $25 trillion in sales and $1. 5 trillion in income and represented one-quarter of “greenfield” projects. South Asia and the Central America/Caribbean regions lost ground, while low-income destinations like Cambodia and Myanmar improved. Russia provided 90 percent of outbound FDI in the former CIS, and Korea was the top investor in landlocked developing countries. Financial services have been a growth area in the poorest states, while Trinidad and Tobago with its energy riches was a prime island target. Governments were “more selective” with regulation and screening and industrial policy application, with particular focus on cross-border mergers and acquisitions, the agency wrote. Over 20 percent of deals were withdrawn mainly in the extractive sector, as “investment protectionism” heightens in the absence of a shared G-20 commitment and definition. Only 20 new bilateral treaties were signed, the lowest in 25 years although sustainable development provisions now routinely feature. Almost 60 arbitration cases were filed in contrast, the highest annual load to date.

Value chains control 60 percent of international trade and multinational headquarters set the supplier and reporting relationships. Per-capita income growth in their locations tends to exceed the geographic average, but lower end assembly operations limit the effect. Transfer pricing practice can also stifle gains and working conditions may be dangerous, as illustrated by fires and building collapses in Bangladesh textile factories. Potential bases must offer both good physical and “soft” infrastructure like trained workers and cooperative bureaucracy, but domestic hubs should insist on strong environmental and social protections in the bargain, the UN arm recommends. The findings coincided with US President Obama’s unveiling of new external climate change initiatives just prior to an African trip to promote additional business and banking ties. His proposals aim to refine agreements with big polluters China and India to cut carbon emissions and advance solar and wind alternatives as elements of more neighborly behavior.

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The IMF’s Regional Arrangement Disarray
2013 July 23 by admin

Posted in: IFIs
The IMF, after clashing in particular with European partners over debt crisis rescues there, released a policy department paper attempting to chart cooperation strategy with regional financial arrangements also in effect in Asia, Latin America and the Middle East over past decades. Together they comprise the so-called global financial safety net which G-20 leaders endorsed in 2011 when outlining a broad set of joint principles to align conditionality and pricing while acknowledging the Fund’s senior creditor standing and surveillance sweep. Since 2008 the EU has introduced new mechanisms and East Asia has strengthened its currency swap network as former CIS countries inaugurated their own stabilization programs. Older regimes include the Latin Reserve and Arab Monetary Funds which remain tiny at under 0. 5 percent of member GDP. By comparison the Eurozone’s ESM amounts to 5 percent of output, and features precautionary and adjustment lines modeled on IMF precedents. Most area facilities are instruments of international law and short-term in nature, although they can be renewed and Asia’s Chiang Mai Initiative presumes a Fund agreement. Before the burden-sharing with Brussels, the main regional experience dated to Mexican assistance under NAFA in the mid-1990s, when the US Treasury Secretary also needed a comfort letter from the Managing Director to draw on the bilateral Exchange Stabilization Fund. In recent years the IMF’s financial split has been over 50 percent in Hungary and Romania and 20 percent or less in Greece and Latvia. In Spain its role was confined to banking system technical assistance, and it also advises regional counterparts on issues like bond market development. The “troika” relationship with the European Commission and Central Bank has become more structured so that macroeconomic frameworks can be approved in advance of country discussions and negotiations, but conflicting mandates and views continue to present “challenges,” and such consultations do not exist elsewhere, the analysis finds. It recommends possible refinements of the current “flexible” partnership approach to enshrine Fund independent monitoring on debt sustainability and improve information and reporting procedures. Eventually detailed memoranda of understanding could be reached on a mutual and case-by-case basis, with the respective division of responsibilities and resources available for public inspection within the realm of confidentiality respect.

Internal reports especially on spillovers could be shared with staff working on these parallel constructs, the department urges. The paper circulated as slowing emerging market economies marred the mid-year growth outlook as asset class contagion spared few major components. The EMBI was down 10 percent with only Ecuador a major gainer at 7. 5 percent. The core MSCI equity listing was off by the same degree with Indonesia, Malaysia, and the Philippines slightly ahead. The frontier segment was affected but still up almost 8 percent overall, with half the markets just in single digit loss territory and some Gulf, European and African ones with 40 percent arks in the arrangement.

Brazil’s Punted Performance Patterns
2013 July 19 by admin

Posted in: Latin America/Caribbean
Brazilian share and debt results took the rear of major market indices through mid-year as the President’s approval rating also halved on political and economic disturbance and the billionaire Batista empire headed for a record default, again sending corporate above sovereign spreads as issuance and liquidity froze in the recently-prized asset class. The MSCI and EMBI entries were off 20 percent and 10 percent respectively, as the currency dipped to 2. 2 to the dollar despite numerous interventions and expected benchmark rate hikes which could bring a double-digit level by year-end. Investors dumped state and private banks exposed to Batista’s EBX Group, with the development lender BNDES the most at risk with a sum equal to 5 percent of regulatory capital. Another billionaire’s aggressive investment bank BTG is also on the hook for emergency funding injected the past several months, and Banco do Brazil which just listed its insurance affiliate has been the top underwriter of company external dollar bonds. Inflation was close to 7 percent and the manufacturing PMI was flat in June with consensus GDP growth at 2-2. 5 percent this year. The primary budget surplus is officially put at 2 percent of GDP and Finance Minister Mantega, who has been rumored for dismissal, has reiterated that additional social and infrastructure spending to quell discontent will be met with revenue rises, including a proposed “wealth tax” on high-income earners. BNDES’ dividend policy has been altered to facilitate fiscal goals as the President underscored “responsibility” as a centerpiece of reform initiatives, including a referendum on legislative reorganization, to be debated in advance of 2014 elections where her voter intent is now 30 percent, down from 55 percent. She still polls ahead of likely rivals but favorability decline was far steeper than for predecessor Lula, who retains an emotional connection to the Workers’ Party rank and file. Violent street protests across the country during an important pre-World Cup competition highlighted anger both at sports versus public services priorities and Dilma’s technocratic orientation, and she cancelled an overseas trip to “better hear” popular views.

Turkey’s Prime Minister Erdogan however condemned park opponents spawning a national movement as troublemakers and tools of a “speculative lobby” as the capital markets board launched a sweeping investigation into the post-demonstration selloff saddling the stock exchange with a 10 percent first half loss. The crackdown followed previous controversy over a new law punishing negative financial commentary as an offense which officials had described as overblown but may now be put to the test. The central bank for its part has been probing new intervention limits to halt the lira-dollar declines at 2 with $5 billion in monthly sales. Tourism that would otherwise benefit from the cheapening along with diversion from Greece and Cyprus has been spooked by the confrontations both in major cities and beach resorts as the decade old Islamic-led conservative civil and monetary model is set adrift.

The World Bank’s Scorched Scoring Terrain
2013 July 19 by admin

Posted in: IFIs
As an independent panel criticized and recommended new direction for the World Bank’s decade-old Doing Business rankings, the fresh leadership under President Kim began releasing the Country Policy and Institutional Assessment (CPIA) scores used to determine credit and assistance to the poorest countries under the grant-heavy IDA window. The outside review responded to numerous member complaints over lack of consultation and legal system divergence, and it found that the methodology was too reliant on attorney input and aggregate results were misleading. A revised version should break out individual categories with equal weight and allow government feedback to correct or reinforce findings for the record. The CPIA for its part was confidential until five years ago and divides along four themes: economic, structural, social and public sector. The Africa outcomes for 40 members were just released with 2011 data putting the average at half the 6 maximum, with 15 fragile states like Zimbabwe at the lower end and a better performance by “non-resource rich” ones. Macro-economic stability gets the top marks and official governance the bottom. On trade, non-tariff barriers have worsened as services engagement increased, while the region is under-banked at fewer than 20 percent of the population compared to double that figure in Asia and Europe, despite the spread of mobile technology. On the health front, maternal mortality remains severe, and clean water access is sporadic. On public administration quality and accountability results were below 3 as only one-quarter of the group improved over the tracking period.

Senegal and Tanzania, which have issued external sovereign bonds and were selected as stops along with South Africa for a US presidential visit, have been ahead of the pack in anti-corruption and transparency measures while lagging in other areas. The IMF circulated June program reviews with specific cautions as additional commercial borrowing is contemplated. Senegal’s political and security conditions are “tense” with the approach of local elections and armed rebels in Mali, and continued investigations into alleged wrongdoing under the previous regime. GDP growth is put at 4 percent this year despite uncertain cereal and groundnut prices and the enduring Eurozone crisis. The fiscal deficit target of over 5 percent of GDP may not be reached with state electricity firm troubles and gaps in new VAT application. Another Eurobond may be tried to lengthen the debt maturity profile and pay for flood damage to infrastructure. Tanzania’s reserves were drained to support the currency before Fund help as the economy should expand 7 percent in 2013 aided by natural gas discovery. Headline inflation has reverted to single-digits on reduced money growth although government worker wage pressure persists. Power company reform and exchange rate flexibility are priorities, and banks are liquid and profitable, according to the document. With the debt-output ratio at 45 percent the risk of distress is low, but private-placement investors in the inaugural bond would still prefer a public rating however searing the exercise.



Africa’s Next Generation Power Trip
2013 July 18 by admin

Posted in: Africa
US President Obama aided Sub-Saharan frontier markets adjusting to global commodity and monetary pullback with energy and trade initiatives during his first multi-country swing in a “new partnership” to target the region’s leading GDP growth pace and match recent Chinese commercial inroads against the former colonial European powers. The Power Africa plan seeks to double electricity access through adding 10000 megawatt capacity in six initial countries over the next five years. The facilities will draw on both traditional and alternative sources and government agencies led by OPIC and the Export-Import Bank are to provide $7 billion in funding with an equal commitment over the period by private direct and portfolio investors including Symbion whose plant in Tanzania was chosen for the launch. Dedicated transaction units will be established in Washington and on the ground and will also advise on natural resource management for onshore and offshore hydrocarbon discoveries. The simultaneous free trade effort focuses on the East African Community with a “globalized middle class” and combined output of $80 billion. Through the AGOA duty-preference scheme and normal channels it intends to almost double exports to the US and will also work to facilitate intra-regional business. A bilateral investment treaty will be considered and technical assistance will strengthen local banking and industry associations. As AGOA’s renewal approaches in 2015, capital market linkages which were previously overlooked could enter into provisions, especially with the continent’s representation in standard benchmark securities indices since the program began in 2000. As an example, Nigeria came to market with a $1 billion sovereign bond for infrastructure needs at the same time as the President’s visit, and months after it was included in JP Morgan’s domestic GBI roster. The issue yield was almost 6. 5 percent, reflecting a 200 basis point premium for the African complex since April lows allowing a dramatic debut by aid-suspended Rwanda. That paper is now trading at 8 percent, a level that the central bank governor acknowledged as prohibitive had it been demanded in May. The Nigerian deal was four times oversubscribed and the well-regarded Finance Minister, who was a candidate for World Bank president, went on to Beijing afterward to raise another $3 billion. At mid-year equity gains slipped to 10 percent on the MSCI index as petroleum sector reforms remained under debate with world prices skittish on both demand and supply doubts.

Ghana and Kenya also have imminent debt offers and are Power Africa pilot countries with their stock markets up 45 percent and 25 percent respectively. President Obama skipped them both on his journey this time as he headed to South Africa. Kenya’s president faces an international war crimes tribunal and Ghana’s still confronts claims his party stole 2012 elections. South African bonds were unmoved upon arrival as ailing post-apartheid hero Mandela was placed on life support and the investment grade sovereign rating also dimmed amid perennial electricity crisis defying official solution.

Iran’s Rowhani Rowboat Leaks
2013 July 18 by admin

Posted in: MENA
The Tehran stock exchange continued its double-digit advance as perceived reformer Rowhani, with a sudden youth and former “green” movement surge from the last contest, secured a 50 percent first presidential ballot victory over Guardian Council-approved rivals who all lamented the economy’s deterioration in public debate. Oil import and investment sanctions were recently buttressed in the US to bar use abroad of the rial, which halved against the dollar before the election, and have contributed to recession with surviving factories at 50 percent capacity on inflation independently judged at 40 percent. College-educated youth unemployment and central bank borrowing to cover the budget deficit have jumped, with limited privatization of state firms geared to insider deals with security forces. Price/earnings ratios are around 5 with petrochemicals the top performer while mining and auto manufacturing have been battered. Cement producers benefited from a 20 percent authorized charge hike which may soon apply for drug makers as well. Rowhani got triple the votes of the runner-up and supporters of withdrawn candidate Aref swung overwhelmingly in his favor as the veteran cleric easily overtook the capital’s mayor who portrayed a technocrat image. He was a nuclear negotiator a decade ago and got his law doctorate in the UK and is an ally of former president Rafsanjani who advocated economic and diplomatic opening during his tenure. The parliament approved the budget before the race projecting a 40 percent drop in petroleum revenue and a second phase of subsidy overhaul which will emphasize direct cash transfers. The chamber of commerce announced that two-thirds of the country’s 6000 manufacturers were headed toward insolvency as small bazaar merchants also close under an additional 30 percent tax. The monetary base is up 30 percent annually on record central bank liquidity injection, and agricultural underinvestment has thrown an estimated third of the population into food insecurity. Labor unions continue to be muzzled although workers have begun to air grievances despite the risk of firing and prison sentences.

Iraqi stocks and bonds in contrast have dimmed after the glow of a big telecom IPO and renewed bombing and sectarian strife following US troop exit. The Sunni-Shia divide has worsened with the nearby Syrian bloodshed and provincial elections favoring prime minister al-Malaki’s coalition did not foster reconciliation. A new oil delivery pipeline through Jordan is set for completion at mid-decade and the government seeks parallel transit via Saudi Arabia. Headline inflation is around 2 percent as credit feels an anti-money laundering squeeze. Flush Saudi banks are considering a presence but face continued fallout from family conglomerate defaults early in the crisis. The Algosaibi Group involved over $5 billion in exposure and court deliberations on alleged fraud in multiple jurisdictions. It has just presented another restructuring offer intended to tap fresh money as recent concentration rules will prod lending to smaller companies despite their establishment rejection to date.

The IIF’s Capital Tide Tug
2013 July 8 by admin

Posted in: General Emerging Markets
The Institute for International Finance’s new executive team raised this year’s thirty country capital inflow forecast $30 billion from January’s to $1. 15 trillion, although 2014’s projected slide is of equal dimension and would be the lowest since 2009. Both “Fed fear” and slacker GDP growth are to blame as reinforcing push and pull factors, with US Treasury buying to taper in the second half and commodity setbacks adding to “limited” domestic demand support. Debt, equity and currencies are off double-digits since May on $25 billion in tracked fund outflows. With output up less than 5 percent on average MSCI universe single-digit p/e ratios are at a wide historic discount to advanced economy companies, but state-owned listing dominance also hurts profitability. Monetary policy normalization could be rocky as foreign money is often large to domestic market size and interest rate shift precedents from a decade and two decades ago illustrate the potential exit toll. Countries with negative international investment positions could be most exposed, including Poland, Turkey and Morocco, the update suggests. In the separate categories both FDI and bond allocation will be softer at roughly half and one-third the totals. Share purchase is set to decline 30 percent to $90 billion, while bank lending will increase slightly to $145 billion. Outward portfolio investment is a recent overlooked positive phenomenon with an estimated $1 trillion now directed “South-South” by private and sovereign wealth sources alongside the traditional foreign reserve recycling. By region Asia’s share has receded from the previous half on lower China and ASEAN direct and securities engagement partially from diversion to Japan under the Abenomics program. The $250 billion combined current account surplus has halved from five years ago, while outbound FDI in the natural resource and other sectors will be $175 billion in 2014. Europe has been helped by the ECB’s liquidity and debt backing but net bank repayment continues outside Russia and Turkey. Ukraine could be most at risk with sustained resident capital flight, a quasi-fixed exchange rate and “inconsistent” policies unless IMF assistance resumes. Hungary and Poland’s local debt is 40 percent foreign- held, and private pension curtailment could leave slack upon withdrawal.

The non-government model’s pioneers in Latin America in turn increasingly deploy assets abroad after portfolio ceilings were lifted. In Peru for example the cap was recently hiked to one-third the total as these holdings come to $15 billion or 8 percent of GDP, the IIF reports. Uruguay has appeared as a high-yield treasury destination despite imposition of a 50 percent reserve requirement. In MENA Egypt’s prospects remain “challenging” with the Muslim Brotherhood unable to restore confidence or Fund credit, while in Sub-Sahara Africa Nigeria’s surge may have come partially at South Africa’s expense. It joined the JP Morgan local currency index, and despite similar inflation problems labor confrontation has not been as conspicuous although terror attacks carry their own brutality.

China’s Brooding Brinksmanship Lesson
2013 July 8 by admin

Posted in: Asia
Chinese shares touched bear-market turf on single-digit valuation with mid-sized banks abandoned as the central bank allowed interbank rates to quintuple to 25 percent before declaring liquidity support for “deserving” institutions. The vise was reportedly designed to slow shadow financing expansion and reliance which has sent the debt-GDP ratio over 200 percent, and followed erratic bond auctions and default incidents signaling broader troubles. Listed companies themselves are prominent in entrusted loans and bankers acceptances which doubled in Q1 to $250 billion as the dominant informal wealth management products came under regulatory ceilings and inspection. Local government exposure through traditional and new channels poses a threat at the same time after the national auditor estimated their total debt at $2 trillion at end-2012. According to the survey ten provincial capitals owed more than revenue excluding guarantees which potentially worsen the burden. Ratings agency Moody’s cited negative implications and recalculated central government contingent liabilities at 40 percent of output. While China Everbright felt the squeeze and was unable to honor a $1 billion obligation, the big four state giants did not escape difficulty rumors with withdrawals at ICBC also complicated by a network glitch. Bad asset management company Cinda indefinitely postponed IPO plans under the circumstances as the Finance Ministry-created vehicle still holds legacy positions from the late 1990s Asian crisis. In mid-June the State Council which sets monetary policy reaffirmed interest and exchange rate liberalization and capital market deepening goals without specific timetables. The money supply continues to swell 15 percent annually, but the PMI has again dipped below 50 as economic growth may just nudge 7 percent. Housing prices rose in May in almost all the 70 cities tracked, but portfolio inflows and the trade surplus are softer following an official crackdown on fake invoicing. The yuan appreciation authorized prior to a bilateral presidential meeting in California may extend through mid-July’s regular Dialogue in Washington, but is widely expected to converge with the prevailing global weakness trend already reflected in foreign fund outflow numbers.

Hong Kong in particular has suffered from dual repatriation from the mainland and back to the US as the Fed may soon stagger quantitative easing. In the past five years loose industrial world policies have generated a $150 billion windfall that in turn has translated into bond and stock performance and record property credit gains. Profit downgrades are now double upgrades on the exchange after the long-awaited Galaxy brokerage IPO in May was disappointing. Renimbi-denominated dim sum bonds had begun to recover on $5 billion in issuance with dedicated ETF launches planned before a sudden freeze. Opening of a commodity hedging and trading platform to rival Singapore’s based on insatiable Chinese appetite has also foundered, and with real estate prices above the Asian financial crisis peak, the footing may again be slippery.

Currency Intervention’s Uninterrupted Craze
2013 July 5 by admin

Posted in: General Emerging Markets
As currency reversals bled into local bond auctions, with failures in Russia, Korea, Colombia and elsewhere interventionist tendencies were reasserted across a range of stalwarts led by Brazil and Indonesia but encompassed all regions and smaller advocates. Brazil’s regular swaps came to almost $7 billion in the May-June month as it also sold spot dollars, raised the benchmark interest rate to 8 percent, and removed inflow taxes on fixed-income and derivatives. The Treasury also conducted debt buybacks, and indicated remaining corporate short-term borrowing limits could soon end as the stock exchange was down 25 percent after postponement of a big cement form IPO. Indonesia’s overnight rate was likewise hiked, as the central bank bought secondary market bonds continuing to absorb the slack as foreign investors dumped $1. 5 billion in early June. Foreign reserves cover over five months’ imports, and the fuel subsidy reduction just ordered to large protest response in the pre-election period is designed to curb both inward energy appetite and the budget deficit. Indian reserves of almost $300 billion have also been deployed to keep the rupee above 60/dollar, as every 10 percent currency fall raises the current account gap and inflation an estimated half a percent. State banks were also directed to sell dollars and the FII debt gap was lifted $5 billion to $30 billion even though the original quota is unused. In Europe Russia and Turkey have been in the market daily for regular $200 million-plus operations, while Poland and Romania involvement has been more modest. In Asia the Philippines and Thailand central banks had agents unload hard currency, while in Latin America Colombia slashed regular dollar purchases and Peru shed USD certificates as the sol hit a 2-year low. Mexico has notably refrained even as the peso dropped with foreign ownership of domestic debt at $135 billion. With the onset of Japan’s record easing retail investors there in the Uridashi and toshin segments had begun to pile into Mexican assets after traditional overweighting in Brazil. Trust holdings had quadrupled to $4 billion in May before the correction, when yen resurgence eliminated previous gains. While the Mexican authorities stay hands-off they have a facility to activate and can also draw on bilateral US Federal Reserve swap and IMF contingent credit lines for balance of payments support.

South Africa’s rand may test the post-Lehman nadir as the worst performer both due to its own weakness and as a liquid proxy for the broader universe.
Despite popular calls full-scale intervention has not been mounted although the previous removal of portfolio outflow restrictions on banks and pension funds may be revisited. The stock market is off 20 percent as bond inflows sputter despite recent addition to premier world indices like Citigroup’s. A sovereign downgrade to junk would force disqualification and the short-term debt/reserves ratio is 60 percent with rolling electricity shortages jolting rollover scope.

ETFs’ Milestone Outflow Marker
2013 July 5 by admin

Posted in: General Emerging Markets
ETFs led the debt and equity surrender from mid-May as they accounted for 30-70 percent of outflows from the BRICS supplemented by Indonesia and Mexico, with the New York Stock Exchange giant Vanguard MSCI index fund with $40 billion in assets experiencing heavy losses and volatility as many new bond vehicles scrambled to honor redemptions. The structures have become a decisive force since 2008 with retail investor entry as they mark two decades since introduction with US expansion to $1. 5 trillion overall for one-tenth of traditional mutual fund size. Of the 1000 registered only around 50 are actively managed and the passive varieties offer a range of leverage and shorting features. Three sponsors control 80 percent of the market, and households attracted by low costs have put in hundreds of billions of dollars according to industry sources. EM-specific figures show that the inflows accelerating since last fall when the Fed’s quantitative easing was extended have been erased one-third for bonds and two-thirds for stocks, with the former likely to catch up as US high-yield also folds. Shorting has already risen to one-quarter of that asset class, as NAVs across-the-board display record standard deviation for traders employing quantitative strategies. While institutions use ETFs and public mutual funds, the outflow magnitude the past few months could be far greater through private account and balance of payments data which is only loosely tracked or appears with a lag. ETF equity flight of $25 billion since February is only a portion of the over $200 billion the IIF reported in 30 countries from 2010-12, while the debt figure was five times higher. In the corporate category in particular, monthly issuance has slowed to a fraction of the previous $30 billion average pace, with lower-rated borrowers essentially shut out. Even at better grades including for quasi-sovereigns Moody’s has warned of governance and domestic financial market constraints deserving overdue attention. In Asia in particular China’s money market squeeze has cast a further shadow over China property company external paper where yields and default rumors spiked following last year’s curbs. In the region consumer credit has mushroomed as a share if GDP across the ASEAN bloc with Malaysia’s 75 percent at the top but still paltry in comparison with Korea’s $1 trillion total.

The corporate default rate hit 10 percent in 2009 as many balance sheets took currency and earnings as well as derivatives hits after assuming indefinite appreciation cycles. Big names like Cemex had to restructure with government aid, and India restricted foreign access with large state bank and family conglomerate exposures. Turkey was in difficulty as international banks reduced syndicated and trade lines but only recently have major firms tapped the global bond market on the back of the consensus investment-grade rating now in abeyance as popular disquiet dispels that sense.

Cote d’Ivoire’s Restive Reconciliation Pose
2013 July 2 by admin

Posted in: Africa
Cote d’Ivoire bonds looked to resume momentum after 2012’s tear as local elections were held under heavy security after launch of a national reconciliation commission, and annual GDP growth could again be at 8-9 percent as half of outstanding external debt arrears comes due after a $10 million down payment last December. Foreign commercial obligations to Standard Bank and Sphynx instrument holders were again restructured after the HIPC completion point was reached a year ago. Another stab at cocoa sector reform resulted in a new minimum price and stabilization fund replenishment as the government otherwise plans to reduce company ownership by one-quarter through consolidation and privatization including in key banks. This year mining and hydrocarbons should join agriculture commodities in a 5 percent export rise although the current account deficit will slightly worsen. Inflation will double to 3 percent on a 12 percent credit jump as the primary budget balance also turns negative. Domestic borrowing through the regional bourse will help cover projects like a hydroelectric dam already getting Chinese loans once arrears there are likewise settled. A new mining code is under preparation, as the harmonization of trade and transparency rules proceeds in the CFA Franc zone. A medium-term debt strategy will be presented in the coming months which will emphasize concessional and internal reliance and critical infrastructure needs. Insurers and cross-border investors will be targeted for higher allocation after Chinese Ex-Im Bank agreed to finance port and electric grid rebuilding. The area progress came as Mali now facing its own civil war received the first installment of international aid and Tuareg fighters in the north struck a tentative accommodation with the Bamako authorities. The French began to withdraw anti-terrorist troops but left open a return option as fresh elections are to be attempted in the near future.

Anglophone neighbor Ghana has long been courted by China and other big emerging economies like Brazil and Turkey but recently reacted to popular backlash with the arrests of hundreds of individual gold miners. It hired underwriters for a $1 billion second-time sovereign bond but the World Bank’s IFC arm postponed a local cedi issue as short-term interest rates skyrocketed on the 12 percent of GDP budget overrun. The current account hole is of equal magnitude and the currency has retreated against the dollar for over a year as reserves are below the sensitive 3 months import threshold. Fuel subsidy paring will aggravate 10 percent inflation as offshore oil production lags original projections and overseas partners balk at rule changes. ECOWAS power Nigeria plans its own $1 billion Eurobond as the Finance Minister embarked on a June roadshow with global investors still overweight domestic paper following incorporation into benchmark indices. Enthusiasm has however been muted by brutal attacks from the Boko Haram as well as renewed threats by MEND insurgents following demobilization to attack pipelines and publicize corruption and poverty wounds.

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Central Europe’s Pilfered Pension Pillars
2013 July 2 by admin

Posted in: Europe
As EU officials underscored the continued hold of 30 banking groups on over half of regional assets and the BIS reported another quarter of cross-border pullback, IMF research dug further to scrutinize emerging member ties and the missing insurance and pension fund capital market support for alternative funding. It found that the 20 percent drop in external positions of Austrian, West European and Scandinavian parents since the crisis had largely been filled with domestic deposits except in a few cases like Hungary, Latvia and Slovenia. Only Austria’s Erste, Raiffeisen and Volksbank had subsidiaries worth more than 30 percent of the consolidated balance sheet and M&A activity was down one-third in 2012 although Polish and Russian institutions were prominent buyers. Regulatory and central bank dictates will further accelerate repatriation and safe asset preference as new capital and liquidity ratios and the single banking union enter into force. Specialty infrastructure and trade lines and small company borrowers will suffer most from retrenchment as home and host country supervisors continue to clash over risk weightings and resolution procedure. Capital market development could promote rebalancing from foreign reliance on overdue improvements, the paper contends. In private pensions early pioneer Poland has the largest pot equal to 15 percent of GDP with 5 percent-plus return and contributions rates over a dozen years. Romania and Slovakia enacted reforms after 2005 with less impressive results. Life insurance accounts for over one-fifth of premium income in 10 countries tracked and should translate into longer-term securities demand and annuities business diversifying from the current portfolio concentration on liquid government bonds and term deposits. The typical equity allocation ranges from 10-25 percent and corporate bond annual issuance for the group is only around $10 billion. As a trading and investment channel the Warsaw Stock Exchange’s $200 billion capitalization dwarfs neighbors’ combination. Fixed-income would benefit from local credit ratings agencies and euro entry to reduce currency risk and foster bourse consolidation. Governments should be careful not to arbitrarily cap pension manager fees while they consider the scope for introducing structured products like infrastructure bonds even though Brussels has been lukewarm on the idea, the document concludes.

Poland’s zloty debt has also been popular with foreign investors who control almost 40 percent of the amount outstanding as the currency and economy continue to slide. The PMI is below 50 on projected 1 percent growth bringing modest benchmark rate reductions. FDI covers over half the current account hole unlike the meager $3. 5 billion 2012 figure in Hungary, where the Orban administration has added taxes on absorbed municipal loans to the panoply of bank headaches. To stay outside the excess deficit sanction it retains the option to raise and indefinitely extend the special levy imposed on taking office. The new transaction charge has been passed on to customers aiding fee revenue amid otherwise paltry profits.



Tunisia’s Importuning Immolation Pact
2013 June 26 by admin

Posted in: MENA
Tunisian stocks were ambivalent as a 2-year $1. 75 billion IMF standby was reached by the Islamic party-led government just prior to full-fledged elections which will also determine backing for a new constitution, as immediate actions are unlikely to retrieve the lost investment-grade rating or redress 35 percent youth employment which continues to stoke security and social tensions. Religious-secular divisions have worsened since the killing of an opposition political figures= and a militant influx from Libya with the Kaddafi regime’s overthrow, as 4 percent GDP growth expected this year has not met the pre-revolution norm on food-driven inflation at 6. 5 percent in Q1 with persistent budget and current account deficits. Public debt is 45 percent of GDP as US and Japanese loan guarantees enabled international capital markets access and central bank refinancing jumped 50 percent in 2012. Non-performing loans especially at key state lenders are around one-fifth the total and deposits have been flat despite a 12 percent average capital adequacy ratio. With Eurozone pickup and resumed mining exports the balance of payments should improve, while bank recapitalization and overdue payment clearance are domestic priorities. On monetary policy the recent tightening course should continue on lower local bond issuance as the additional consumer exposure reserve requirement will be cut from 50 percent to 30 percent. The three main public banks will undergo strategic and operational audits as a separate asset management company is created for bad tourism-related debt transfer. Wage and subsidy reductions are designed to curb spending as consumption taxes and stamp duties introduced several months ago raise revenue. The two decade-old investment code, which has attracted minimal value-added assembly operations, will be overhauled with World Bank technical assistance amid a general review of competition law and customs regulation. With the Fund infusion reserves will cover over 4 months’ imports, and year end sukuk placements could bring further long-term resources alongside official partners with legislative passage.

Pakistan securities have rallied in contrast as Nawaz Sharif takes the helm for the third time with close IMF and Gulf ties to secure emergency lines to meet import and foreign repayment needs. The sovereign rating is in the distressed “C” category on 3 percent GDP growth and inflation double that level. Tens of millions of citizens live in poverty and malnutrition and lack electricity also unavailable in the commercial hub Karachi. Saudi Arabia which has been a major donor has been approached for a $5 billion concessional credit for budget and power support pending resumption of a Fund arrangement which previously lapsed on failure to raise tax revenue-GDP from the 10 percent range. On the diplomatic front, the administration also hopes to slash the defense burden with assignment of “most favored nation” status to India to boost instead the meager $2 billion in bilateral commerce as the nuclear rivals otherwise skirt self-destruction.

The World Bank’s Diminished Prospect Diatribe
2013 June 26 by admin

Posted in: General Emerging Markets
The World Bank shaved its developing region growth forecast to 5 percent in the mid-year global economic prospects publication with East Asia and Sub-Sahara Africa at the high end while citing bank distress, output gaps and commodity reversals as major constraints elsewhere. Monetary tightening may be needed against incipient credit bubbles and current account deficits, and faster rebalancing is urgent for China’s “unsustainable” fixed investment. Structural reforms in regulation, enforcement, education and health must be “prioritized” especially with agricultural, metals and energy export slides and potential quantitative easing pullback. The additional liquidity from low industrial country interest rates has generated only 4 percent of GDP in net capital inflows in comparison with the pre-crisis 7 percent. With unwinding debt-service costs and defaults will rise and growth could decline half a point. In recent months cross-border bank lending to emerging Europe and MENA has recovered as private funding heads toward $1. 2 trillion this year. Outward south-south allocation will also be steady at $375 billion with trade up 15 percent in Q1. Official development assistance in turn fell 4 percent in 2012 especially from peripheral Europe sources as the 0. 3 percent of national income share remains less than half the Paris Club goal. Remittances outside Europe have increased for a $400 billion total in 2012, outpacing all capital inflow categories except FDI, as strong Latin America numbers from the US were undermined in Spain. In Brazil, India, Russia and South Africa recent growth has lagged the boom due to outstanding supply-side obstacles. In Asia the yen’s initial sharp depreciation upset currencies but few neighbors compete directly with their goods and their manufacturing chains tied to Japanese exporters could ultimately benefit. A near-term 100 basis point spike in advanced economy yields could lead to almost double that elevation for emerging markets according to historic data. In thirty five low and middle income nations gross government debt is above 50 percent of GDP and twenty have private external exposure over 30 percent. In China, Malaysia and Thailand domestic corporate and household debt ratios approach or exceed 100 percent and represent “great risk” the Bank warns.

Jamaica and Pakistan are in the most vulnerable official group as the former just resurrected a suspended IMF credit and the latter pursues the same course. Jamaican foreign bonds have thus far escaped restructuring despite a wave of Caribbean sovereign haircuts and Pakistan’s returned President Sharif intends to borrow further in advance of Fund talks to settle state electric company arrears aggravating shortages. Power curbs are also an overriding issue for South Africa as Eskom is shunned by domestic and foreign lenders, and mining production is already stifled by strikes and hefty union wage demands. In the immediate 2008 crisis phase rolling blackouts compounded output losses with Q1 GDP growth performance under 1 percent the worst since as commodity and currency prospects decline.

The Baltics’ Querulous Euro Queue
2013 June 24 by admin

Posted in: Europe
Baltic stock markets were buoyed by EU approval for Latvia to follow Estonia into the euro as Brussels hailed the “entry and not exit queue” although 60 percent of Latvian opinion is currently against joining. Popular grumbling was again reflected in a strong local election showing by the pro-Russian Harmony Center party which controls Riga, as the ECB also warned of fast growth in non-resident deposits from the broader CIS accelerating after the Cyprus debacle. $500 million was added in Q1 to this pool which accounts for half the system total, although supervisors recently imposed stricter capital and liquidity requirements with the buildup. They as well introduced anti-money laundering rules in response to watchdog criticism and negative headlines over the Magnitsky fraud case in Moscow, which spurred US sanctions over human rights and judicial abuses. GDP growth has declined from last year’s 5 percent on softer exports, but domestic demand remains supportive after the post-2008 rescue internal devaluation process which reduced labor and overhead costs. The IMF ended its presence in the capital as the investment-grade sovereign rating was restored and fiscal and inflation performance reverted to the Maastricht criteria. Euro opponents note that Estonian prices doubled after admission and that the country cannot afford that risk as the EU’s third poorest after Bulgaria and Romania. Both Estonia and Lithuania, which lingers in the ERM “waiting room,” were up around 10 percent on the MSCI frontier index through mid-June. The new Lithuanian coalition government has promised to tackle double-digit unemployment and keep the budget deficit at 3 percent of GDP with help from state company dividends and divestitures. The minimum wage was hiked 20 percent this year despite the slim odds of repeating 2012’s excellent harvest with agriculture an export mainstay.

Bulgarian stocks have rallied 50 percent as the incoming Socialist-led government headed by a former Finance Minister reiterated anti-corruption and structural reform commitments within the context of preserving the currency peg and fiscal discipline. The banking sector, with high non-performing loans and Greek ownership, continues to suffer after imposition of an interest tax and FDI is skittish after the Czech utility CEZ’s license was cancelled and a state railway sale was postponed. GDP growth will be only 1 percent in 2013 but the current account deficit has come down to minimal levels as foreign reserves dipped to $12 billion in Q1 after Eurobond repayment. Romania managed a 5 percent gain as the European Commission recommended removal of the excess deficit procedure and the currency held relatively firm despite global flight with the minor foreign ownership position. Both JP Morgan and Barclays included local debt in benchmark indices, and the central bank is set to cut rates despite a GDP growth upgrade to 2. 5 percent. Other Balkan exchanges were mixed, with Croatia ahead on July EU accession and Slovenia off slightly as the former prime minister was convicted of bribery and officials scrambled to counter bailout talk by again lining up regional buyers for a retail store chain.

The Middle East’s Mechanical Morose Murmurs
2013 June 24 by admin

Posted in: MENA
Mideast stock exchanges were depressed even before general market selloffs as MSCI’s decision to finally graduate the UAE and Qatar to the core universe was offset by Morocco’s frontier demotion and Egypt’s teeter again on that precipice on liquidity and foreign exchange squeezes. The junior party in the Islamist-headed coalition has threatened to leave over food and energy subsidy rollbacks demanded under the IMF accord as the Q1 fiscal deficit came in at 2 percent of GDP. The support takes 15 percent of public spending and the government plans to redesign programs to target the poorest. Economic growth may almost double this year to over 4 percent on agricultural rebound, while external accounts continue to languish from the Eurozone crisis. Phosphate export prices remain low, but FDI recently increased on a large dairy firm deal. The central bank has maintained the 3 percent benchmark rate on subdued inflation and championed a securitization law for state and corporate sukuk issuance. Local mutual funds with $30 billion in assets are eager for the instruments and foreign investors after subscribing a late 2012 Eurobond should join if the BBB rating stays for the new class. An initial placement program is set at $1. 5 billion as a larger package was also signed with the Islamic Development Bank through mid-decade designed to fall within the 60 percent of GDP self-imposed official debt limit.

Jordan and Lebanon were likewise off 5 percent through June as the former received a second $400 million installment of its Fund standby and the latter ended a political impasse with a compromise Sunni prime minister. King Abdullah unveiled his cabinet several months after parliamentary elections featuring loyalists and technocrats as he sought Western and Gulf assistance to handle the influx of 500,000 Syrian refugees. The US also agreed to guarantee a planned external bond as in Tunisia’s previous case in a $1-2 billion range to redress the almost 15 percent of GDP current account gap. Repeated disruption of Egypt’s Sinai gas pipeline has been replaced by expensive imports as regional energy cooperation is slim despite a $4 billion Israeli-Palestinian venture scheme announced by former British Prime Minister Blair in critical sectors. Lebanon’s recession lingers with the conflict next door on a disappearing primary budget surplus and double-digit inflation. Bank deposit growth is at a 5-year low as another round of polls is due soon which could extend the traditional sectarian and ideological standoff.

Israeli shares have stumbled on popular protests against austerity moves to restrain defense and social outlays amid a 4. 5 percent of GDP fiscal deficit as the debt restructuring saga of the Dankner family conglomerate weighs on a cross-section of major listings. The tycoon controls IDB but also obtained relief from Bank Leumi on his leveraged empire before widespread business and financial community criticism forced a harder line. In outgoing gestures central bank chief Fischer exhibited interest and exchange rate activism even though the exchange’s MSCI Europe bid was halted.

Egypt’s Morsi Plea Rejections
2013 June 19 by admin

Posted in: MENA
Egyptian shares and the pound were down double-digits as parliamentary election scheduling was further complicated by a Supreme Court finding that current representation was unconstitutional, as millions of signatories demanded another presidential election on the first anniversary of Morsi’s narrow Muslim Brotherhood win. The two-year IMF negotiations for an almost $5 billion credit remain snagged, although officials contend they have prepared subsidy and tax plans to meet requirements and that Fund administrative and technical delays were to blame. The budget deficit ballooned to 10. 5 percent of GDP in the current fiscal year as Treasury auctions continue to fail on lackluster appetite and 15 percent yield insistence. Gas shortages are widespread as the government has accumulated arrears on fuel imports, with FDI on hold in light of investigations and reversals of previous privatizations where the state was ordered to buy back control but lacks the money with public sector debt/GDP at 80 percent. Qatar has lifted reserves over $15 billion with a near $3 billion bond 18-month bond purchase at a 3 percent coupon. The central bank has held steady on 8 percent inflation as NDF values project the currency at 7 to the dollar at a discount to the spreading black market. The IMF’s latest regional review put economic growth at 2 percent on the same current account gap/GDP figure as almost one-fifth of the population faces “food insecurity” according to the UN. Bank and sovereign ratings have been slashed to CCC as officials have requested payment relief on essential commodity imports. Former president Mubarak’s trial is due to resume in July with the US closely monitoring the proceedings as it released $1. 5 billion in annual military aid despite the sentencing of non-government organization workers including the son of the outgoing Transportation Secretary. Another cabinet reshuffle appointed an Islamic scholar as Finance Minister who will explore potential sukuk placement in Asia and the Gulf. With the diminished police presence a crime wave has gripped Cairo and Alexandria, which are largely bypassed by mainly Russian tourists heading to southern beach resorts.

Russian shares are also in the cellar despite low single digit P/E ratios and bond auctions there have featured uncompetitive bids by banks and institutions worried about 2 percent growth and 7 percent inflation amid falling world hydrocarbon prices. Since granting direct OFZ access non-residents have been cautious in contrast to early speculation that their portion would spike to 30 percent of the total. The central bank has eased incrementally as it transitions to new leadership, while President Putin’s assertion of dominance at the helm sent an economic adviser into exile as a prominent blogger critic awaits trial. In foreign policy military and energy interests continue to back Syria’s Assad even as thousands of Russians living in Damascus and elsewhere have fled. The wealthier have preferred relocation to Dubai, which received the same influx after the Cyprus carnage.

Brazil’s Tax Dodge Drift
2013 June 19 by admin

Posted in: Latin America/Caribbean
Brazilian shares and the real were stuck in their slump despite the surprise removal of the 6 percent tax on fixed-income inflows as its champion Finance Minister Mantega pointed to less flush global liquidity condition than during the 2011 imposition. The levy endures for company short-term borrowing and may be reactivated without notice reflecting policy doubts that along with fiscal relaxation contributed to an S&P sovereign outlook downgrade. Annual GDP growth is under 2 percent with all categories outside agriculture showing poorly in the latest report. Inflation is above target at 6. 5 percent in part due to currency pass-through as the central bank hiked rates another 50 basis points to 8 percent and is set to sustain that course in the coming months. The current account deficit is at 3 percent of output with FDI wavering to cover it. The primary budget surplus under standard accounting may drop to half the traditional 3 percent as government infrastructure projects attempt to lay the groundwork for consecutive global sporting events and lift the fixed investment rate to 20 percent of GDP. The World Cup will require $15 billion for facilities and transportation and private firms have shied away from participation with regular rule changes. The $6 billion offering of Banco do Brasil’s insurance unit has not reversed the sour exchange mood toward headline listings like Eike Batista’s OGX which has lost 90 percent. His empire extends to the beef industry where a large proposed merger will load up on additional debt. State oil titan Petrobras has also borrowed heavily abroad as it plans to auction off offshore pre-salt layer exploration rights Production after hitting 2 million barrels/day continues to decline as the new chief executive appointment by the President defends ambitious medium-term fundraising and exploration strategies. Banks have sold off after a 25 percent jump in small and midsize company bankruptcy filings in the first quarter under the 2005 “judicial settlements” regime. The Caixa Economica official network also experienced a brief run on rumors of a shutdown in the popular Bolsa Familia cash transfer program which includes 50 million citizens. Citigroup sold its consumer finance operation to private sector leader Itau as the US backed the Brazilian delegate’s ascendancy to WTO head over a Mexican candidate.

The Mexican peso was as well in the firing line as it breached 12 to the dollar and long-term bond yields jumped as crossover junk investors north of the border in particular shed positions. The outflow swamped the $2 billion Japanese retail players have plowed in as Q1 portfolio allocation was half the 2012 level on a 2 percent of GDP current account hole. Domestic demand weakness will keep economic growth from the original 5 percent forecast but structural reform optimism has revived from a passing spat between the ruling PRI and other parties with the financial package slated for a summer legislative wrap.

The Andes’ Dizzying Descent Demons
2013 June 17 by admin

Posted in: Latin America/Caribbean
Peru was the worst Latin American core universe performer through May with a 20 percent decline with Colombia almost at the same level as the two struggled with economic reversals at home and the diplomatic and trade fallout from the disputed presidential election and tentative transition to the Maduro administration in Venezuela amid potential hyperinflation. Lima reeled on below 5 percent GDP growth as commodity exports sank 10 percent and the sol hit a 2-year low against the dollar, jeopardizing foreign investors’ 60 percent ownership of local debt. Banks which have stoked consumer lending were battered in particular with the 40 percent dollarization in the system and central bank reluctance to intervene although reserve requirements were recently loosened. The current account deficit is near 5 percent of GDP as inventories and government and private investment continue to shrink. With the traditional growth engine stalling President Humala has hardened his rhetoric toward energy and mining multinationals and hinted at nationalization of Spanish firm Repsol’s domestic assets. His opinion favorability has dwindled to 45 percent on dented business confidence as in another pattern resembling Argentina’s a powerful spouse positions to succeed him for a second term. Colombia peso is down this year almost equal to 2012’s 10 percent appreciation as the monetary authority ended previous daily dollar purchases and the private pension supervisor delays rules to encourage additional overseas holdings. Oil and coal exports have slumped on strikes and lower world prices as Q1 output growth faded to 4 percent on poor industrial production and retail sales. President Santos’ negotiators have launched further peace talks with the rebel FARC as the state tries to extend it presence to isolated rural provinces with the support of external aid organizations. The family Grupo Aval conglomerate listed its banking arm through New York ADRs as the Finance Ministry pledged to weed out brokerage misconduct after a failure last year uncovered massive money laundering.

Venezuelan bonds, after a huge rally as ex-President Chavez exited the scene, have fallen on the benchmark EMBI as his successor’s economic policies are unclear and the OAS and judicial bodies will consider ballot integrity and recounts in the less than one percent margin win over opposition challenger Capriles. US Secretary of State Kerry met with the Foreign Minister in a rare meeting and finance officials have signaled an imminent road show to improve relations with global investors still awaiting details of sovereign borrowing and currency trading arrangements. Although the current account surplus is back on petroleum proceeds capital flight still reduces reserves and recession has set in after the election-related spending binge. 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.