No More Learning

The publication urged greater signature of free trade pacts with North America, the EU, and Asia as well as within MENA to promote agriculture, manufacturing, services and energy. Business climate reforms such as simpler regulation and anti-corruption rules should be priorities and the absence of export finance is glaring especially for smaller firms, although Islamic-based products are evolving. In the main four target economies big companies could access facilities for as low as 30 basis points before the recent post-crisis squeeze from bank consolidation and stricter Basel standards and credit deterioration to junk status. Donors have expanded liquidity and risk insurance lines in response, but the pool must compete with other regions and structural and technical obstacles remain in the absence of collateral, bankruptcy and dispute resolution procedures. Factoring is another underused tool and the study recommends following the online platform established by Mexico’s development lender for member suppliers submitting invoices. With long-term finance lacking as domestic bond markets are shallow governments and outside agencies can offer guarantees, and the offshore centers of Bahrain, Dubai and Doha could facilitate cross-border remittance-backed transactions. In Islamic techniques murabha installment sales and salam advance payment for future goods may be well-suited for routine commercial needs alongside the burgeoning no-interest sukuk debt space, where shariah interpretations from the Middle East and Asia continue to clash.

Deauville-related destinations do not feature in the regular emerging market EMTA surveys, which showed a 2012 15 percent volume decline to $5. 5 trillion as local and Latin segments stayed most popular. In Q4 domestic turnover was $815 billion for two-thirds of the total with Brazil and Mexico leading followed by Russia which inaugurated direct clearing and settlement channels. The remaining 35 percent external activity was split evenly between sovereign and corporate, with Argentina and Ukraine registering rare major appearances in the first category. Argentina’s continuing court battle with distressed funds and Ukraine’s opportunistic re-opening of a previous placement despite scant prospect of IMF standby renewal spurred trading. Poland and Turkey were also overall favorites, as CDS dealing shrank 25 percent the past year with Europe’s imposition of shorting restrictions according to the long conducted tabulation of over fifty banks and investment outfits.

Dubai’s Islamic Hub Hullabaloo
2013 March 22 by admin

Posted in: MENA
UAE shares were up 25 percent through February, far outpacing low single-digit Gulf gains elsewhere, as the market became the main regional destination and debt restructuring and sukuk activity further progressed. The electric utility followed the sovereign with an oversubscribed fixed-rate issue at a yield around half previous levels as overall GCC shariah-compliant volume is projected to double to $35 billion this year. The emirate plans to standardize the field though legal and religious support so it becomes a global center to rival Kuala Lumpur, and to join Abu Dhabi in reclaiming the top GCC spot taken by Saudi Arabia in 2012. As with diversion of banking and financial services flows since the Arab Spring investors and underwriters expect Egypt, Morocco and Tunisia to target sukuks there as they finalize borrowing frameworks. On the quasi-sovereign workout front the Dubai Group which is the ruler’s personal vehicle tabled a $6 billion deal with banks on an overall $10 billion debt pile after they rejected a 20 cents on the dollar offer. ICD seeks refinancing for $2 billion due in August, with stakes in the Emirates NDB bank that will soon repay government crisis lines and in Emaar Property which has reported good earnings on a pickup in top-end sales. The central bank has retreated from strict mortgage lending curbs designed to avoid another bust, as the UAE oil capital reactivated a 5-year 90 billion program for housing, infrastructure and leisure projects. The announcement came too late however to salvage the prospects of Abu Dhabi-based construction giant Al Jaber Group which must reschedule $4. 5 billion in obligations to local and international holders. Consumption and fixed-investment recovery should again bring 4 percent GDP growth to the Emirates as fiscal space increases social spending, and higher exchange turnover could merit the elusive MSCI upgrade to core status at the next review.

Saudi Arabia is likewise in the graduation mix should direct foreign allocation be authorized as a new regulatory head was appointed. Qatar too must lift ownership limits, as its sovereign wealth fund recently agreed to pursue a credit rating to quell contingent liability doubts surrounding the AA grade and reported 50 percent of GDP net debt burden. Abu Dhabi’s Mubadala has already obtained one, and Qatar Holding has insisted its balance sheet is not leveraged despite expensive acquisitions abroad including in Barclays and mining giant Xstrata-Glencore. Foreign direct and portfolio commitments were estimated at $20 billion in 2011, and the upcoming World Cup host outlays could equal that sum. The disclosure effort is at the opposite extreme of Libya’s, where the new head of the LIA with supposed $60 billion in assets is “in limbo” on tracking investment and settling claims. On the second anniversary of the rebellion against Gaddafi the entity remains stymied in actions against advisers for derivatives and other losses as the justice wheels grind slowly at home and overseas.

Kenya’s Ponderous Poll Judgment
2013 March 22 by admin

Posted in: Africa
Kenyan shares stayed in the MSCI frontier lead pack after initial upset over a delayed presidential vote count and ballot disqualifications, as the son of independence fighter Kenyatta got just over 50 percent to avoid a runoff and stressed political reconciliation and unity despite his Hague indictment for inciting tribal violence at the last contest. The wealthy landowner and former Finance Minister was believed to vastly outspend rival party alliance leader Odinga, who will proceed to challenge the outcome, aided by international observer doubts about fairness, through procedures established after 2008’s deep dispute. On the diplomatic front, countries like the US and UK recognized the results with the stipulation that the new government head could be held at arms-length while under investigation, although charges against an alleged accomplice were dropped by the tribunal. His running mate Ruto was also implicated, and previously left a ministerial post on mismanagement reports. As the transition proceeds GDP growth and inflation should both be around 5 percent, and the central bank should claw back interest rates another 100 basis points. Agriculture and tourism should do well even though flower exports were stunted by the election during the peak shipping season, and financial services could benefit by Odinga’s defeat as his platform suggested rate ceilings for borrower relief. Housing credit has been on a tear, with the World Bank’s IFC affiliate just providing additional lines, and cross-border retail expansion is a prominent trend with supermarket Uchumi now cross-listing in Tanzania and Uganda. During the campaign both contenders agreed to boost the minimum wage and cited the need for better tax collection as spending will automatically increase under more decentralized executive and legislative functions accompanying previous constitutional changes. The public debt/GDP measure approaches 50 percent, but a $750 million pilot external sovereign foray is in the works amid a continental rush to market. It may contain special features as Kenyatta pioneered a tax-exempt local infrastructure bond as Finance Minister. He may also continue outreach to the Horn of Africa, in Ethiopia, Somalia and the Sudans, to bolster commercial and banking ties outside the East African Community.

South Africa is at the opposite point on the spectrum as a bottom core universe performer entering its own election period, with President Zuma now facing opposition from a new splinter group launched by a celebrated anti-apartheid figure who later worked at the World Bank. The economy is the overriding issue as growth and fiscal outturns both disappointed, the current account gap swelled to 7 percent of GDP, and the rand crashed through 9 to the dollar. Portfolio inflows in the last quarter were off sharply, as negative ratings watches from all three agencies may remove Citi World Bond Index eligibility. The President’s rhetoric prefacing a BRICS summit accusing Western firms especially in the mining sector of a “colonial” approach may continue to sway their judgment.

Bangladesh’s Pesky Post-Independence Shackles
2013 March 20 by admin

Posted in: Asia
Bangladeshi shares were alone in MSCI frontier Asia losses through February, as both major political parties united in condoning massive protests shutting Dhaka and other cities against the “lenient” life sentence for an Islamic leader convicted of crimes during the independence war with Pakistan four decades ago. Participants have demanded the death penalty and advocate curbs on the biggest fundamentalist grouping which is an ally of the opposition BNP. The confrontation came after intense negative international publicity over garment factory fires with substandard working conditions, and a year into an IMF arrangement which was recently modified after missed targets. In the last fiscal period economic growth was 6. 5 percent on 7. 5 percent inflation, as the budget gap was 4 percent of GDP. On the external front, gross reserves reached $12. 5 billion but the non-concessional borrowing cap was breached with new energy and infrastructure debt with the currency “broadly stable” against the dollar, according to the Fund’s recent snapshot. Electricity and fertilizer subsidies are due for removal and medium-term tax revenue is seen at 12. 5 percent of GDP after VAT law passage. State-owned firms will be audited, and the government will distinguish between its ownership and oversight functions for commercial banks as stock market exposure is limited to one-quarter of regulatory capital. Electronic trading was introduced for Treasury bonds and Sukuk rules will be modernized. New loan classification and provisioning guidelines went into effect, and with recent cases of fraud and misconduct the central bank assumed power to remove chief executives. After taking a Russian commercial credit for nuclear power development, sovereign bond issuance may soon follow, with an official committee charged with analyzing and verifying debt sustainability.

Sri Lanka already embarked on that path to great success and its rating was just affirmed after demurring on another IMF program. GDP growth for 2013 is set again at 6 percent as inflation remains in single digits. The central bank has reversed course and loosened slightly but heavy T-bill placement will be needed once more to cover the persistent budget hole, with the foreign ownership ceiling at 12. 5 percent. Currency depreciation should help exports but the current account deficit will be around 4 percent of output. Banks may tap the international bond markets in the near future, and FDI should exceed 2012’s $1 billion as agricultural drought ends and tourism training efforts are realized. However the Rajapaska administration goes before the UN Human Rights Council in March for its treatment of rebel Tamils during the civil war amid allegations of fresh harsh behavior toward the courts as a chief justice ruling against the family was summarily dismissed. Lawyers protested the move and the political opposition condemned “violations” of the constitution and rule of law. Colombo is to host the Commonwealth summit in the coming months where freedom in the Anglophone world is celebrated with often muffled cheers.

Central America’s Off-Center Sentiments
2013 March 20 by admin

Posted in: Latin America/Caribbean
As the Inter-American Development Bank annual meeting convened in Panama, previous pariah Honduras joined the recent isthmus issuance parade, despite last-minute controversy over an undisclosed court case which prompted underwriter withdrawal. The yield was lifted to 7. 5 percent for the $500 million sale on possible sovereign exposure from a decade-old claim against a state-run company which was omitted from the prospectus. The buyer base was split 75 percent-25 percent between the US and Europe and was unperturbed by ratings outlook downgrades to negative on poor fiscal and current account indicators and populist appeal surrounding imminent elections to find a permanent successor to the interim president after an army coup. Government debt was slashed two-thirds under the HIPC program but has since rebounded to 35 percent of GDP on heavy domestic borrowing. The murder rate leads the sub-region with drug and gang violence, and a private-sector model city scheme which garnered attention in development circles was ditched amid allegations of payoff demands. The maiden bond effort was also little disturbed by next door Belize’s second restructuring, where coupons were cut and creditors insisted on stricter procedural and substantive covenants, and another renegotiation launched at the same time by tiny Grenada as another commodity and tourism exporter. The premium pricing was at odds with Paraguay’s 4. 5 percent debut, with a balance of payment surplus and small budget deficit. Double digit GDP growth should follow last year’s drought-induced recession there, as inflation fell to 4 percent under the targeting scheme of the central bank, which was recently recapitalized. The Colorado party candidate, a business executive, is ahead for April elections after former President Lugo, a practicing priest, was forced from office over personal misconduct charges. He has advocated revenue deal revisions with Brazil over the shared hydro-electric dam, and a commercial and services push alongside traditional agriculture.

IADB host Panama stands out as an investment-grade credit, as economic growth could again hit 10 percent on Canal and infrastructure activity, with overheating elements also generating 5 percent inflation. Independent monetary policy does not exist with dollar use and the fiscal stance is guided by a responsibility law. Cargo passage earnings were up 5 percent in 2012, and a 15 percent toll increase just went into effect on an improving global trade outlook. Dollarized El Salvador lost it prime rating post-crisis, and is still grappling with anemic 1 percent GDP expansion on chronic budget and trade deficits. Remittances may jump 5 percent-plus from the 2. 5 million workers in the US as construction revives, but positioning has begun for polls a year away with the rightist Arena party currently favored for presidential return. With expatriate support, external bonds have outperformed the index so far as the country is also part of a select aid Partnership for Growth with Washington where government and business representatives try to establish bilateral equilibrium.

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Hungary’s Crusty Constitutional Capers
2013 March 18 by admin

Posted in: Europe
Hungarian shares joined Central Europe core index constituents in the losing column as the Economy Minister assumed central bank leadership with a strident government support stance and constitutional revisions compromising judicial independence as well were re-inserted against US and EU outcry. The forint again fell to the 300/ euro level on telegraphed monetary easing and deployment of foreign exchange reserves recently boosted by an external bond issue for use in a small business currency conversion program modeled after the fixed Swiss franc household mortgage transfer. Prime Minister Orban’s party has only 25 percent approval heading into next year’s elections, and previously backed off on interference when a new IMF program was under negotiation which has since been abandoned. GDP fell 3. 5 percent in the last quarter, and credit was down at double that pace as bank taxes were extended indefinitely and the administration affirmed a goal of ending foreign dominance. Tighter fiscal policy should keep the deficit within the 3 percent cap to avoid Brussels possible sanctions, although foreign investors have lightened local bond positions with peripheral Europe redeployment and the absence of an institutional backstop in place following pension fund takeover. Introduction of a new auto model may revive moribund production and municipal debts will be absorbed in a central scheme as the populist platform is burnished for upcoming polls. Poland too cut rates steeply at 50 basis points as the economy turned in its worst post-crisis performance on lagging consumption. The zloty has been off against the euro despite Fitch’s recent positive ratings outlook revision. Public sector debt is near the 55 percent of GDP statutory ceiling and the financial services regulator has relaxed mortgage loan-to-value limits. The Warsaw exchange under new management seeks to promote privatization offerings to raise state revenue and corporate governance as it downplays regional hub ambitions. It had hoped for cross-listings from Prague but the environment there remains muted from continuing investigations into utility heavyweight CEZ and further recession predicted in 2013. Euro-skeptic Vaclav Klaus exited the presidency and was succeeded by a more mainstream politician as currency intervention is still an active option with the benchmark interest rate effectively zero.

In the nearby Balkans bourses in Romania and Serbia had double-digit advances the first two months as they courted Fund and EU partnerships. In the former local bond yields touched a record low after inclusion in JP Morgan’s index quadrupling the overseas ownership level. The current precautionary standby was stretched to mid-year, and GDP growth may be clearly positive this year on German supply chain exports despite a persistent 4 percent current account gap. Serbian talks commenced with reaffirmation of central bank autonomy and Kosovo concessions but have since been waylaid by a scandal implicating the prime minister which may force fresh elections. The sovereign borrowed commercially last year despite near 15 percent inflation and a 60 percent government debt-GDP ratio with global buyers’ strong liquidity-nourished constitution.

Malaysia’s Opposition Challenge Churn
2013 March 18 by admin

Posted in: Asia
Malaysia stocks stayed lethargic pending imminent elections, where the opposition three-party alliance headed by former Prime Minister Anwar with one-third of seats vowed to “conquer” the dominant National Front with its anti-corruption employment creation platform. It plans to add a million jobs through reduced immigrant labor reliance mainly from Indonesia and to end racial discrimination against ethnic Indians and Chinese. Under its leadership government contracts would no longer be reserved for Malay-owned firms under longstanding preferences. The ruling coalition remains ahead in opinion surveys although it may suffer further losses after 2008’s surprise debacle. Domestic demand from infrastructure and consumer spending will again bring 5 percent GDP growth this year, at the cost of a chronic fiscal deficit hurtling toward the overall informal 55 percent of output public debt cap. Food and fuel subsidies have been untouched and the project pipeline under the signature Economic Transformation Program has propelled fixed investment to almost 30 percent of GDP. Double-digit annual credit expansion chiefly for personal and mortgage borrowing has raised the outstanding amount to 115 percent of GDP and disintermediation toward private bonds has been notable particularly in the fixed-rate sukuk market. Banks have been big buyers of the paper to keep business relationships and diversify assets, as they also extend their networks regionally. Government-linked funds like Khazanah hold large banking and unit trust stakes and promote tax incentives for Islamic finance. Bank capital adequacy was 15 percent and non-performing assets were under 3 percent according to the latest yearly figures. Deposits cover 85 percent of total funding and ringitt accounts do not operate offshore except in the Labuan island center, which has an active takaful insurance segment. The securities regulator honors IOSCO principles and has recently added frameworks for ratings agencies and investment advisers as the RAM now grades ASEAN and global issuers alongside its domestic franchise. In a financial system review just published the IMF and World Bank urge insolvency law passage in the absence of a formal re-organization process, as well as clarification of government guarantees for infrastructure debt which pose contingent budget liabilities.

Indonesian stocks have fared better through February despite a similar combination of credit and election jitters in addition to corporate governance and balance of payments woes. The Bumi saga in London reached a crossroads as the Bakrie family slate of directors was approved, defeating a challenge from the Rothschild consortium. The terms of trade shock has subsided as commodity exports pick up, but weakness has dropped the rupiah toward 10,000 to the dollar. Despite 5. 5 percent GDP growth on solid domestic support foreign investors have trimmed bond positions on the continued inability to remove fuel subsidies taking one-tenth the budget. The Finance Minister who endorsed reform has been nominated for central bank governor in a move seen to appease vested business and voter interests he confronted too clearly.

India’s Superrich Irreconcilable Ironies
2013 March 15 by admin

Posted in: Asia
Indian share foreign institutional investors who have been heavy net allocators joined domestic counterparts as chronic sellers in blasting the next fiscal year budget outline, where Finance Minister Chidabaram proposed a 20 percent surcharge on high-income taxpayers to fund a 15 percent social spending increase within the 5 percent of GDP deficit target. Economic growth for the latest quarter at 4. 5 percent was the slowest in a decade, although modest improvement in food inflation allowed the central bank to tweak the benchmark interest rate 25 basis points. The trade gap hit a record $20 billion in January as the current account shortfall is stuck at 4-5 percent of output. After missing this year’s goal privatization proceeds will again be limited as recapitalization of state banks proceeds to meet Basle standards. Guidelines have been finalized for new licenses likely to go to arms of family-run conglomerates, as foreign banks like Barclays and RBS pare networks under continued constraints. Private Axis Bank prepared a $1 billion offering which may now be available on a third stock exchange, MCX-SX, which will trade a comprehensive product range, including derivatives. On the fixed-income side interest rate swaps have been popular with a gross notional value outstanding of almost $700 billion, drawing official reservations about the innovation in the aftermath of a ban on offshore “participatory notes. ” In the February budget non-resident taxation which can apply retroactively as in the Vodafone case was left an open question, stifling a rebound the first two months on the Mauritius bourse.



Politics overshadowed the exercise with the approach of 2014 elections as the Congress party finally tapped Rahul Gandhi as his mother’s successor to lead its campaign. He has been a lackluster speaker and his effort was squashed recently in Gujarat state with a resounding victory for the opposition BJP. His rhetoric has sharpened with calls for “revolution” through decentralization and transparency which can appeal to middle-class voters who have participated in anti-corruption street protests. In poorer areas the platform stresses more “inclusive” growth and citizen protection. Andhra Pradesh in the south is a battleground, where the micro-finance sector has been reformed after farmer suicides under harsh collection methods. A lending rate cap was imposed which keeps the current rate at 25 percent versus the 40-percent plus level two years ago. With the transition doubts money continues to pour into gold which represents a large import chunk and has maintained value in rupee terms as compared with constant exchange rate fluctuations.

Pakistan is also struggling under the weight of leadership instability after another round of terrorist attacks and daily violence heightened rumors of a military takeover prior to upcoming elections. The Supreme Court which continues to spar with the president ordered the prime minister’s arrest on corruption charges. Power shortages are more acute as the rundown of international reserves prompts pleas for IMF program renewal despite lack of tax collection progress especially on wealthy landowners.

Mali’s Malignant Sahel Streak
2013 March 15 by admin

Posted in: Africa
Following French military intervention in the north against Islamic and tribal rebels international donors met in a hastily-arranged session to offer resumed economic aid, including a rapid credit facility from the IMF to succeed the previous derailed program. An Article IV update was prepared which underscores the depth of output, fiscal, banking system and agricultural damage already in train with the army’s earlier coup and regular government interference. The Finance Minister has stayed in office and presided over 1. 5 percent GDP contraction in 2012 as a drought accompanied security deterioration to leave one-third of the population in food distress on inflation over 5 percent. Mining and cotton exports held up, but $250 million in central bank reserves were tapped to keep the current account deficit to 7. 5 percent of GDP as $60 million in bilateral and multilateral debt arrears accumulated. On the fiscal front banks agreed to roll over $275 million in treasury bills issued through the West African regional exchange as northern networks absorbed physical losses with NPLs before provisions at one-fifth the portfolio. In 2013 central bank accounts will again be accessed to cover the balance of payments hole as a mobile phone auction will raise additional budget revenue. Increased social spending is needed to handle almost half a million displaced people from the fighting while tax collection lags at just 15 percent of GDP. Defense will remain the largest outlay along with basic education, followed by public administration. Energy prices will adjust more to international levels and miners may face a higher profits levy, and future external funding will be mainly grants. The state housing and development banks could be sold or shuttered, and the foreign-dominated system may be at risk from exposure to other government-run borrowers even as the new $10 million minimum capital standard is met. Micro-finance institutions should be better monitored and the central credit register expanded to include small and midsize firms, the Fund advised. The return of normal weather and launch of another gold project this year are positive for the outlook, but the political transition is fluid, with an international force due to replace the French while attacks continue, and the uncertain timetable for fresh elections.

Elsewhere in the zone Cote d’Ivoire is again experiencing ruling party defections after completing a third sovereign bond swap, and presidents have been under armed assault in Guinea-Bissau and the Central African Republic. Senegal under new leadership has pursued a debt strategy of lengthening local maturities as a second external issue is sidelined with the area’s troubles. Former president Wade’s supporters have been reluctant to embrace the Sall team and insist on maintaining showcase projects and food and fuel subsidies. A controversial statue celebrating African independence by North Korean architects could remain prominent in the absence of the original grand designs.

Bulgaria’s Electric Grip Gripes
2013 March 12 by admin

Posted in: Europe
Bulgarian securities sold off as Prime Minister Borisov resigned and withdrew his party from the government after facing violent street protests against an electricity price hike for Czech Republic-owned utility CEZ. In a last-ditch attempt to appease popular backlash from years of austerity moves to avoid IMF resort, he rescinded the increase and dismissed technocrat Finance Minister Djankov, a former World Bank executive responsible for the Doing Business publication. GDP growth was positive last year on relative budget balance but pre-election spending and lower EU grants had begun to upset 2013 fiscal plans, which rely on reserves to support the currency board arrangement. External public debt is low at just 20 percent of GDP after payment of a maturing Eurobond, but per capita-income remains at the bottom of new entrants and non-performing loans in the foreign-dominated banking system are almost one-fifth the total. Credit expansion is under 5 percent and with headquarters paring local lines a “deposit war” in 2012 swelled accounts at double that pace. In regular economic monitoring Brussels has warned of potential weakness spread by the heavy Greek bank presence in particular in addition to continued underperformance in anti-corruption efforts. Recent state enterprise privatizations involving Russian bidders have aroused suspicion and criminal and terrorist gangs still roam as evidenced by a headline-making bomb attack on Israeli tourists. Prague in turn reacted angrily to the scapegoating of its biggest listed stock exchange firm which was previously accused of monopoly behavior on power costs. Recession lingers there on zero interest rates as the central bank thus far refrains from currency intervention. New president Zeman will appoint a board member in 2014 and will prioritize recovery policies. The current account deficit improved to 2 percent of GDP in 2012 on steady exports and reduced imports, as VAT hikes may send inflation toward 3 percent.

Romania was admitted to the EU at the same time and depends on an IMF precautionary facility which was extended three months to achieve government-run firm divestiture targets. The budget gap came in under the Maastricht 3 percent of GDP goal on 5 percent inflation due to fuel price adjustments. The thinly-held local debt market should be catalyzed by future incorporation into the GBI-EM index as the overall EMBI-originated complex marks two decades of benchmarking. According to sponsor JP Morgan the across-the-board sovereign and corporate size is almost $10 trillion and the 70 countries represented are mostly investment-grade. Growth and debt dynamics far outpace the developed world and combined foreign exchange reserves are $8. 5 trillion accounting for three-quarters of the global amount. Post-crisis net private financial inflows have been $2 trillion and per capita income has almost tripled since the early 1990s to $7,500. Competitiveness and social indicators place many developing economies in the leading ranks and anti-poverty progress has been notable although the Millennium Development Goal challenge into mid-decade requires a jolt.

The Capital Ecosystem’s Unfit Survival
2013 March 12 by admin

Posted in: Fund Flows
The McKinsey Global Institute used its 180-country proprietary capital flow database to warn of an unhealthy “ecosystem” with the cross-border total down 60 percent the past five years as post-crisis correction overshoots. Financial assets went from $200 trillion to $225 trillion over the period, but have fallen 45 percent as a chunk of GDP with annual growth crawling at 2 percent. Emerging market depth at 150 percent is under half the advanced economies’ 400 percent as loan, stock and bond market development lags. The holding pattern may stifle business investment and homeownership. International allocation has fallen from its $12 trillion 2007 peak mainly due to Eurozone bank retrenchment, and within Europe the ECB and other public institutions now account for most of the activity. Under additional regulatory strictures commercial banks have shed $725 billion in assets chiefly from foreign operations. The 2012 estimate for inward developing world direct and portfolio investment was $1. 5 trillion, while the outward sum was $1. 8 trillion increasingly in “South-South” direction, according to the research arm. FDI was off 15 percent last year, but represented 40 percent of global capital commitments as a “stabilizing influence. ” Current account imbalances which contributed to debt buildups have also improved, with previous deficits particularly pronounced in peripheral Europe and the US. Emerging economies can reset integration with corporate bond and small enterprise access pushes to meet trillions of dollars in equipment and infrastructure needs. Policymakers can restrain balkanization tendencies by completing the Basel III agenda, including for bank resolution and derivative clearing, while removing geographic restrictions for pension and insurance fund engagement. Low yields and growth for industrial countries will propel emerging financial market resort in the coming decade where trading is “shallow and illiquid” and can hurt both public and private equity strategies without greater attention to fostering “new models and skills,” the institute remarks.

A separate study by a group of business executives under the auspices of the Washington-based CSIS urges a private-sector based development approach to catalyze momentum, with financial and technical assistance going to promote entrepreneurship and trade. US government aid agencies would place economic growth at the mission core, and support corporate partnerships and bilateral and multilateral investment treaties. Financing mechanisms at AID and OPIC could be overhauled to serve these priorities, with the latter independent profit-making institution able to provide equity for its own account as with G-7 peers. An additional $350 million should be found through cost savings and efficiencies to aid commercial climate reform and small firm credit access, and low-income country targeted efforts like the African Growth and Opportunity Act could be expanded to other duty-free sectors, the panel believes. It backs capital increases for the official international lenders, as the Treasury formally submitted a $65 billion IMF quota request again to Congress from the 2011 G-20 agreement which has since barely evolved.





The Caribbean’s Dastardly Debt Do-Overs
2013 March 6 by admin

Posted in: Latin America/Caribbean
Jamaica, which was the only MSCI frontier stock market down in January, was further maligned with a sovereign rating default designation as Prime Minister Simpson proposed a second local debt exchange to restart an IMF standby arrangement after the 2010 $8 billion lower-interest longer maturity operation accepted by banks and securities dealers. She cited a “dismal future” with 55 cents of every budget dollar earmarked for service at the current 140 percent debt/GDP ratio.
The Finance Minister repeated the previous line of no principal haircut although net present value terms classify the deal as distressed as benchmark yields neared double-digits. The domestic dollar lost 5 percent against the greenback in the last quarter as recession continued and less than 1 percent growth is expected this year at the bottom of regional ranks. External bond spreads are at 625 basis points over Treasuries on the assumption they will again be spared from restructuring although internal foreign-currency instruments are included. Foreign reserves fell 40 percent in 2012 to just over $1 billion or four months’ imports as remittances barely budged. The fiscal deficit exceeded the 5 percent of GDP target and the current account gap is double that measure on inflation in the 6-8 percent range. A tax package introduced in parliament, which the opposition described as “massive and iniquitous” will raise costs as the public sector will face wage and payroll cuts in an effort to bring the debt-output number below 100 percent by end-decade. The repeat swap follows the recent completion of Belize’s super bond write-down, as the basic coupon was slashed to 5 percent and the “step-up” to 6. 75 percent from 8. 5 percent after the government originally presented a demand for 75 percent reduction that was met with hedge fund outrage. Officials calculate $250 million in savings over the next decade, and secondary prices rose to 60 cents on the agreement. An immediate coupon payment is due as GDP growth is estimated at 3-4 percent on good North American tourist volume despite a murder saga implicating a US expatriate computer tycoon. FDI covers the current account deficit and the budget hole is small by sub-regional comparison as investment houses again recommended a “market-weight” position for the high-yield issue.

Neighboring Costa Rica in contrast has received heavy allocation from abroad prompting the imposition of capital curbs to stem currency appreciation as it prepares another $1 billion external bond placement. The economy will again expand 4 percent on both manufacturing and services pillars on inflation projected around the same level. Major tax reform is on hold with general elections a year away and public debt may soon touch 50 percent of GDP. Foreign firms repatriating profits have caused modest current account deterioration, but nature tourism remains a big offsetting draw for return vacations.

Korea’s Wan Warrior Weave
2013 March 6 by admin

Posted in: Asia
Korean President Park was inaugurated as she tapped a dovish think tank head for Finance Minister who may advocate fiscal and monetary stimulus as GDP growth sputters at a 1-2 percent pace on dented domestic and external demand. The stock market was at Asia’s rear on $2. 5 billion in foreign investor outflows in January as bonds were jarred as well by official saber-rattling over possible “hot money” taxes to brake currency appreciation now particularly pronounced against the yen on Japanese prime minister Abe’s ultra-easing thrust. The government also suggested it could limit state bank and company borrowing abroad as a major corporate issuer. The G-20 meeting declaration was mixed on the regional ramifications of Tokyo’s exchange rate policy, as Seoul reported a monthly export decline even though products do not directly compete for global share. Household debt remains high to stifle domestic consumption as the President pledged mortgage relief along with pension and child care support as an immediate budget priority. Heavyweight exchange listings like Hyundai Motor and steelmaker Posco predict double-digit sales declines as the average p/e ratio drops to 8. 5, just as the chaebol have been mandated to raise dividends under the new administration’s “economic democracy” campaign. Payouts are roughly half the emerging market norm at 1. 5 percent and giants like Samsung sit on large cash reserves. Activist investors have begun to challenge the return in an effort to elevate overall corporate governance, while Samsung executives reply they are saving for acquisitions like recent purchases of European semiconductor producers and for negative won shifts like the 20 percent rise against the yen since last year. The central bank continues to intervene to pre-empt a break through 1000 to the dollar as it points out the anti-inflation benefits ofcurrency strength with CPI under 3 percent. Analysts also cite possible safe haven cross-border channeling for the upward trend as tension with North Korea resumes following missile tests with reach now extending to the Western US. President Park, whose father was a staunch anti-communist general, had indicated potential overtures toward the young leader in Pyongyang during her run which may be indefinitely sidelined with the North’s continued militancy and reported willingness to help other rogue regimes including Syria’s Assad.

Japanese prime minister Abe has been mired in a separate confrontation with China over small disputed islands which contributed to a record trade deficit and last quarter recession. On a visit to Washington he held out the prospect of resolution to safeguard commercial and diplomatic ties as an early cleanout of the central bank board was orchestrated to proceed with expanded asset-purchase plans. Foreign bond buying proposed during the contest for LDP party return has been ruled out in the near term as private sector securities appetite turns to home with expected steeper yields and the upcoming end-March fiscal year traditional repatriation. However both retail and institutional interest is still keen for hard-currency emerging market instruments as Uridashi for the local market should again conquer $20 billion.

Colombia’s Wafting Wake-Up Scent
2013 March 4 by admin

Posted in: Latin America/Caribbean
Colombian shares lagged regional peers even as lead listing Ecopetrol’s capitalization became the continent’s largest, bumping Brazil’s state oil contender Petrobras, as the central bank which just appointed new board members again lowered interest rates on 2-3 percent GDP growth and inflation. Finance Minister Cardenas vetted the candidates as he resorted to verbal intervention to halt peso momentum to 1750 to the dollar after anti-appreciation operations through the oil reserve fund. Exporters have called for the resumption of capital controls attempted during the previous Uribe government, as President Santos grapples with a coffee growers strike from weaker Arabica sales abroad. Tax reform will reduce the levy on foreign fixed-income inflows, and private pension schemes remain confined to mainly domestic allocation in portfolio guidelines. As guerilla negotiations continue a mining project attack may induce direct investment caution as a new royalty regime for the industry is set. Macro-prudential limits have also been placed on bank open foreign exchange positions, as private sector powerhouse Bancolombia with New York ADRs completes further cross-border expansion, and securities brokers come under their own scrutiny following last year’s Interbolsa failure which froze the payments system. The IMF and World Bank concluded in a recent financial sector assessment that credit institutions “appeared sound” with one-fifth of assets in government paper and customer deposits covering two-thirds the balance sheet. Stricter capital adequacy rules go into effect soon as the average ratio stands at almost 14 percent, and NPLs are just 3 percent. European deleveraging has a negligible impact as Spain’s Santander sold its local network to a Chilean buyer leaving only BBVA with a tiny presence. However consumer borrowing has grown at a double-digit pace and non-mortgage loans now represent one-third of outstanding credit as household income may have plateaued. Corporate concentration is also high according to a stress test which urged tighter exposure ceilings. The unified financial services regulator acted promptly to close the insolvent broker-dealer several months ago, but the staff still lacks independence and legal protections. It has adopted the IOSCO principles, but along with the professional self-regulatory body could strengthen oversight over collective investment, risk management, and shareholder rights the study believes. A brief liquidity squeeze during the recent episode underscored gaps in contingency lines which the central bank could address with repo facilities available to all intermediaries.

In Chile economic overheating concern is in marked contrast as share prices are propelled by 5 percent GDP growth on unemployment at the same level, a 40-year record. Outside of commodity exports domestic consumption continues to jump at a 6-7 percent annual clip, including for imports which could send the current account deficit over 3 percent of GDP. The central bank has refrained from exchange and interest rate changes as pre-election jockeying begins with the immediate previous president the preferred flavor.

Africa’s Newfangled Novice Nods
2013 March 4 by admin

Posted in: Africa
The next wave of African sovereign debt candidates may experiment with different forms and structures, according to underwriters and rating agencies, as retail and institutional demand has raised dedicated monthly fund flows to near the $1 billion mark with index providers preparing a range of fresh tracking benchmarks. Zambia previewed the rage last year after its $750 million 10-year Eurobond as the state energy company and city of Lusaka came forward with plans, despite headline tax and labor fights with foreign food and mining groups and a law banning foreign currency use for everyday transactions. Angola will follow a private placement managed by Russian house VTB with a public one soon after completing its IMF program, as the state oil monopoly’s quasi-fiscal functions begin to show in the budget. Hard currency payments will go through local banks under revised arrangements which can foster transparency and financial sector development, as GDP growth hit 8 percent in 2012 on single-digit inflation. Petroleum output is almost 2 billion barrels/day, and infrastructure spending may cause a slight fiscal deficit. Tanzania may pursue the same selected private buyer route in the absence so far of a credit rating. Its financial adviser has proposed a non-standard floating rate instrument as it races East African Community neighbor Kenya for pioneer status. A Fund standby facility was recently signed as power sector problems threaten to drag public debt past 45 percent of GDP. Fuel import costs could aggravate the current account gap although the shilling has been relatively stable on occasional central bank intervention. Commercial borrowing for energy industry rehabilitation has touched the recommended cap within $2. 7 billion in total obligations or near one-tenth the economy’s size. A debt management office will be created within the Finance Ministry, and pension fund revamp should deepen corporate and government fixed-income activity. A separate report by Standard and Poor’s postulates the likelihood of sukuk debuts in Nigeria and Senegal with large Moslem populations after a 2012 South African treasury effort. It notes that unrated Gambia and Sudan regularly float short-term shariah-compliant paper in their own markets, and that an expected inaugural global attempt by Egypt in the coming weeks will focus attention on the segment.

Nigeria has enjoyed a bond bonanza as yields have dipped to 10 percent after inclusion in the JP Morgan local index, the IFC launches a 5-year naira issue as a supranational benchmark, and an imminent Eurobond intends to target the diaspora community. The central bank reported $13. 5 billion in gross foreign portfolio inflows last year, triple 2011’s amount, as the naira settles around the 155/dollar level. The currency was shunned in the post-2009 crisis as a narrow corridor was maintained and a one-year holding period was slapped on government securities. Officials have rejected reconsideration of controls while admitting old monetary pressure worries.

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The Frontier’s Unfolding Rave Formation
2013 February 27 by admin

Posted in: General Emerging Markets
The MSCI Frontier Index’s almost 8 percent January gain was five times the core market upswing, as half the constituents rose double digits with only Jamaica down for the month. Battered 2012 European exchanges led the charge, with Bulgaria and Ukraine ahead almost 30 percent and Serbia and Slovenia up over 10 percent, as the Eurozone crisis took a breather and IMF relationships were restored in importance. All Gulf markets entered the positive column with the UAE still on top with a 15 percent jump. Dubai managed another sovereign sukuk despite the unraveling of a $10 billion restructuring deal for a major government-owned group as banks balked at receiving the offer’s immediate twenty cents to the dollar. In the broader Mideast Jordan and Tunisia each advanced 5 percent as the former signaled it would follow Morocco in a proposed Eurobond placement and the latter began talks on a precautionary Fund facility before the killing of an opposition party leader re-ignited unrest. African members continued a winning streak with Kenya and Nigeria surging 60 percent and 75 percent respectively over one year. Recent addition Zimbabwe joined the frenzy (+25 percent) as a revised constitution was agreed before another likely round of presidential elections that will solidify power-sharing while indemnifying post-independence strongman Mugabe against criminal prosecution. The central bank in turn has accepted outside technical assistance to re-establish stability after revealing it had just several hundred dollars left in operating accounts. In Latin America-Caribbean Argentina and Trinidad escaped last year’s negative performance and Jamaica too could rally if an IMF pact can be signed after an extended suspension on fiscal deficit and structural reform misses. Buenos Aires’ single-digit valuations have been cited by mainstream fund managers already heavily positioned in Brazil, Mexico and Andes listings.

In Asia Vietnam (+20 percent) has embarked on state bank and communist hierarchy cleanup including arrests of accused corrupt executives and officials, as political dissidents have also received long prison sentences despite international outcry. A central asset management unit will consolidate bad loans estimated at 15-20 percent of the total as credit and GDP growth slow to a 5 percent clip. Inflation is back in single-digits offering scope for further modest interest rate reduction, as FDI and remittances send reserves to the $30 billion level covering three months’ imports. The currency has been stable after depreciation and listed company foreign ownership limits may be raised as many eye opportunity in next-door Myanmar. After passing a new investment law replacing 1980s norms the central bank will soon get formal independence as it moves from a prevailing deficit financing role. Last year commercial bank deposits jumped despite the meager 10 private credit/GDP figure as an ATM network spread. Both Japanese and multilateral help is now engaged in stock exchange development as dedicated Mekong-area funds line up to flag progress.



Venezuela’s Currency Platform Dive
2013 February 27 by admin

Posted in: Latin America/Caribbean
Venezuelan bonds continued as the main EMBI year-to-date positive performer after President Chavez ordered a long-awaited one-third devaluation from his Cuba sickbed bringing the official value to 6. 3 to the dollar, as the SITME trading platform was also disbanded leaving no hard currency outlet other than the capital control authority which has dribbled out only $75 million daily. The resulting dollar-denominated oil windfall could halve the fiscal deficit to GDP ratio, but will aggravate near 30 percent inflation and imported goods shortages as well as the bottom line of consumer goods multinationals still operating there, including giants like Colgate. Domestic debt outstanding also falls by 30 percent in international terms as that route may be preferred for sovereign and state petroleum enterprise borrowing. The central bank and finance ministry announced the changes under the temporary chief executive capacity of Vice President Maduro who has been in charge since the mid-January absentee inauguration. The opposition labeled the moves “economic destruction” as representatives continue to call for Chavez’s resignation and new elections on constitutional grounds. Military leaders have not intervened outright in the succession issue, as comparisons are increasingly drawn with Cuba’s transition where power was unilaterally transferred. However the island’s Communist party brass recently agreed to future term limits and elevating a younger generation in the hierarchy. It may also seek alternative concessional oil providers to Caracas’ Petrocaribe scheme, with Angola reportedly a primary target. In the region Ecuador may be worth courting as President Correa cruised to re-election on the slogan of “hope replacing despair. ” Other candidates include a banker and former general, but with government revenue tripling over his tenure social spending has cut the poverty rate to 25 percent. While cracking down on the courts and media, he has hinted at a return to external bond markets after deliberate default as $3. 5 billion in Chinese loans are to be repaid with natural resources. His campaign rhetoric regularly lambastes “savage capitalism” although the US dollar has been in use for over a decade.

In Andean contrast the sol grab is pronounced in Peru as direct and portfolio investment pour in and central bank intervention at almost $1 billion a week in mid-January turns more aggressive. The foreign share of local government debt is 60 percent, and appreciation may hurt exporters whose shares have suffered under Lima exchange retreat so far in 2013. Although economic growth tops the continent at 6 percent, the current account deficit has doubled to 4 percent of GDP and annual credit expansion has been 20 percent. Bank reserve requirements have again been raised and no new global bonds will be issued this year. On the political front President Humala retains 50 percent popularity despite local community mining project disputes as he favors a “balanced” platform protecting the poor while propelling a commodity boom to rival nearby Chile’s.

Iraq’s Bell-Ringing Blast Effect
2013 February 22 by admin

Posted in: MENA
The Baghdad stock exchange after a 10 percent 2012 decline started the year with a record $1. 25 billion phone company offering which could join with additional cellular company mandatory floats to triple capitalization to $15 billion. The Asiacell transaction was the Middle East’s largest in five years and oversubscribed by Gulf investors alongside the Qatari government-controlled parent. Rabee Securities which targets foreign business was the main underwriter and a Kuwait bank local unit will be custodian after HSBC decided not to provide the service. Mobile penetration is already 75 percent of the population, but the additional listings will diversify from bank domination with thin liquidity. GDP growth will be in double-digits in 2013 on oil production comeback according to the IMF although the central administration and the Kurdish region continue to argue over the decision-making and royalty split. The former is under coalition and sectarian attack with the authoritarian bent of Shia Prime Minister Malaki, who has held the post since 2006 and accelerated an opponent purge since the departure of US ground troops. His Finance Minister’s bodyguards were arrested in an alleged plot, and the civil war in next door Syria has widened clan strife. The Kurds face their own fallout from the conflict as President Talabani who has maintained warm international ties is ill and may resign.

Iran on the other hand has opened a $1 billion trade credit line with Damascus as its bourse is on a 40 percent 6-month tear with a rush into companies such as in petrochemicals benefiting from currency depreciation. The Export Development Bank is under US sanctions for military support and will back consumer good shipments. A separate accord covered energy cooperation as Syria’s central bank reserves are estimated to have fallen two-thirds to the $5 billion range since 2011. The Iranian rial in turn has plunged 50 percent against the dollar since a global commercial and financial embargo was tightened, resulting in the reported resignation of monetary officials. The Health Minister was also dismissed amid controversy over medicine shortages and pricing, and the second phase of subsidies reform was suspended in view of administrative bottlenecks and fear of aggravating 25 percent inflation partially fueled by the massive cash handout component. Bond issues will absorb liquidity, as food costs are up 40 percent on annual basis. According to the IMF and World Bank the economy shrank slightly last year and the 2011 result was recently revised down to 3 percent. President Ahmadinejad, who ends a disputed second term in the coming months, visited Egypt after a long bilateral estrangement to offer assistance and advice as Cairo tries to assemble a coherent transition model with foreign reserves below the critical three months imports threshold. Islamic-style sukuk issuance has been approved to fund the 10 percent of GDP budget gap as pound pushback under the new auction system rings alarms.

Loan Officers’ Altered Mood Mooring
2013 February 22 by admin

Posted in: General Emerging Markets
The IIF’s latest quarterly poll of 150 worldwide emerging market bankers, modeled after the US Federal Reserve’s regular sentiment survey, charted a return to a barely favorable 50 lending condition reading after a year below the cutoff. Both domestic and international aspects brightened, particularly in Europe and Latin America, while Asia benefited from a trade finance thaw. However the outcome was mixed as all regions except Africa-Mideast reported an increase in bad credit laying the potential for future pullback. Europe’s indices began to converge after badly lagging for consecutive periods on open-ended central bank support, although standards remain tight with real estate supply and demand among the most difficult. Latin America’s break from monetary tightening was noticeable, but was offset by decreased local funding in the MENA sub-region. Sub-Sahara Africa’s trend was “impressive” for a first-time over 50 result although external provision was still constrained and could worsen over the coming months under the fallout from Western anti-terror operations in Mali and the surrounding Sahel. Oil-producing locations are also under scrutiny from the major security breach in Algeria which involved hostage kidnapping and killing. The attacked facility was a joint venture with state hydrocarbon monopoly Sonatrach, which has raised money abroad and is the best-known listing on the dormant stock exchange. The ruling party there has battled its own insurgency for decades after annulling an election won by the Islamic Front in a precedent now closely watched for parallels with current Egypt strife. The vulnerability was exposed as new energy exporters like Ghana have created fund structures to overcome the past legacy of industry corruption and opacity which lost Nigeria an estimated $30 billion over the past decade. President Mahama won a full term in December under a framework that safeguards 30 percent of revenue for infrastructure, education and power development. A separation petroleum commission is responsible for licensing and regulation as earnings came to 7 percent of GDP the first year of production. Economic growth was 7 percent in 2012, but the fiscal deficit overshot at over 9 percent of GDP on election spending and a 35 percent higher wage bill. Utility subsidies and currency depreciation were a drain, and the West Africa Gas Pipeline was out of operation. The administration has a medium term budget gap goal of 3 percent but has not indicated specific steps.

Kenya, which was a top frontier stock market last year, is now in its own poll run-up as indicted ethnic violence instigators Kenyatta and Rutu team on a Kikuyu-Kalenjin ticket against Prime Minister Odinga from the Luo tribe. Sporadic land skirmishes have again erupted amid fears of greater bloodshed before the March event. The gloom overshadowed launch of a long-planned small business tier of the Nairobi Exchange for companies with at least $1 million in assets and 100 shareholders intent on mutual reward.

China’s New Year Blast Bleats
2013 February 18 by admin

Posted in: Asia
Chinese shares entered the new year period in bullish spirit up 20 percent from last year’s low, as official GDP growth and PMI indicators returned to the respective 8 percent and 50 percent-plus ranges despite the record central bank cash injections to meet personal holiday and lingering system liquidity demand. In December banks provided only one-quarter of financing now half-controlled on an annual basis by alternative bond, trust and wealth management channels. The big 4 share of the former which may reach the trillion yuan mark in 2013 has in turn dropped to 40 percent, as second-tier lenders have moved aggressively into high-yield and local government business. 20 provinces again set fixed investment growth targets above 20 percent according to reports as central authorities following the recent leadership reshuffle try to tilt toward consumption support. The central bank has warned of a short-term debt hump equivalent to 50 percent of GDP stemming from the post-crisis stimulus programs along with a maturity mismatch for longer-range infrastructure and housing projects through “shadow” sources in particular. Although declared non-performing assets amount to only 1 percent, total on and off balance sheet exposure could come to several times economic output, analysts calculate. The IMF estimates trust industry size at 5 trillion yuan through a combination of licensed and unmonitored institutions often offering products analogous to the “toxic” collateralized debt obligations which precipitated the 2008 US crash. Banks have packaged such instruments at a multiple of that amount to evade general quotas and specific property company prohibitions. Separate non-payment episodes at trust Three Gorges and Huaxia Bank have highlighted dangers, and brokerages have in turn received almost RMB 2 trillion in accounts from the originators for an additional layer of fiduciary complexity. Local governments have tapped this capacity in hiking 2012 bond activity 150 percent to RMB 650 billion as overall debt topped RMB 9 trillion by private and public tallies. One-third of interest and principal due may have been rolled over as three-quarters of facilities were rescheduled with stricter future guidelines at Beijing’s urging, according to international media.

Corporate bond data trackers classify 75 percent of issuers as government-backed to some degree, and foreign investors prefer these names although they returned to mainland and Hong Kong high-yield real estate developers in January with $3. 5 billion through ten placements. Global funds put $550 million in Chinese bonds for the month, half the total for all of 2012. 10-year yields for top-rated firms are near 5. 5 percent, and small companies continue to account for less than one-tenth of volume. Without the public guarantee, creditor wariness persists in view of the recent workout experience which imposed large haircuts as in the case of fraud-ridden Sino Forest. In the trust sector, participants with long memories may recall the comparable GITIC saga during the Asia financial crisis which created its own fireworks burning extended hands.

Latvia’s Guarded Peg Protectors
2013 February 18 by admin

Posted in: Europe
Baltic markets stretched their winning streak as restored investment grade borrower Latvia repaid the IMF’s 2008 crisis lifeline early with proceeds from a December dollar bond, and Russian depositors transferred accounts from Cyprus now in the process of seeking its own rescue. GDP growth last year at 5. 5 percent was the EU’s best, on “remarkable” export performance in the Fund’s view on new market and product forays. Unemployment dipped below 15 percent but is still long-term structural in nature with a large informal economy and skill gaps. Consumer price inflation which spurted on tax increases subsided to 1. 5 percent, and the fiscal deficit is below the 3 percent Maastricht criterion with euro entry on track by mid-decade. Banks’ return on equity was 10 percent through the last quarter with NPLs at 12 percent concentrated in the household sector. After the liquidation of two institutions overall credit is contracting as Scandinavian parents continue to pare subsidiary lines. The loan-deposit ratio fell 85 percent from its peak to 175 percent, and non-resident now exceeds private resident deposit size with recent 20 percent “historic” expansion from CIS relocation away from “stressed” centers. Although capital adequacy is double the Basel 8 percent minimum, the regulator recently found deficiencies in a mid-size offshore money specialist. The economy, which shrank 25 percent over 2009-10, will slow modestly on a current account gap of 3. 5 percent of GDP this year, according to the organization. FDI should advance, but high external debt remains a “significant” risk. Single-currency adoption could begin in 2014 and erase the chance of a speculative attack as spread throughout Central Europe five years ago. The benchmark interest rate could fall further from the current 3 percent as banks gain access to ECB liquidity. International reserves at EUR 5. 5 billion satisfy import cover but a heavy medium-term external repayment schedule requires over half that amount. The Fund advocates “vigilance” in light of 2008’s 40 percent reserve depletion when Russian accountholders fled. It also cites vulnerability from “reputation risk” associated with anti-money laundering weakness, and regulators have promised to address these issues while strengthening foreign-directed prudential norms generally.

On the restructuring front sales for Citadele and the Mortgage and Land Bank have been attempted and assets recovered from Krajbanka. State development units will be merged and the successor institution will not compete commercially. Pension and tax reforms will phase out toward 2015 and must be modified longer-range, and family and transport subsidies should be better targeted, the agency believes. A fiscal discipline law enshrined in the constitution is a top priority, and double-taxation treaties await clarification. Work incentives are lacking in the labor market, and insolvency court “abuse” is a problem in the absence of a cash flow test. Central governance and reporting for state-owned firms despite intentions must be established with a legislative peg, the report adds.

EU Insurers’ Long-Term Lurch
2013 February 11 by admin

Posted in: Europe
As net inflows briefly resume to EU peripheral bonds, an institutional investor council chaired by insurance giant Swiss Re under the auspices of the IIF with $20 trillion in combined assets issued a plea to redress longer-range post-crisis allocation obstacles. Financial repression steering funds to governments has been encouraged by Basel and Solvency directives and can act as a tax with negative real interest rates. One-third of treasury securities are now held on public balance sheets in advanced economies hindering proper price discovery. Regulatory reforms have created perverse incentives though a shift from equity to “safer” fixed-income and portfolio diversion to less-monitored and capital-tied alternative channels. Bank, insurer, and pension fund treatment still occur in uncoordinated “silos” which promote extra-territorial and competitive overreach, the group asserts. The new Solvency II mandated higher set-asides for infrastructure and private sector bonds than may reflect default experience and worsens the term asset shortage and duration mismatches. Current capacity is estimated by experts at 20 percent under future investment needs. EU energy, transport, and information technology projects will demand EUR 2 trillion over the next decade at a time of traditional sponsor deleveraging. A dedicated bond market as described in a recent European Commission report could be launched with supporting performance indices and tax exemptions to meet the challenge. Aging populations both in the industrial and emerging world could be trapped in an indefinite low-yield environment eroding household and retirement system values. The financial transaction tax due to go into effect in 2014 will raise around EUR 40 billion but also shave regional GDP by half a point. Liquidity will disappear especially for derivatives and the ultimate cost will be reflected in even lower real returns. The unilateral nature of the decision by officials without consulting stakeholders follows a pattern already experienced with Greece’s sovereign debt restructuring with back-dated collective action clauses. Good-faith negotiations should honor the principles contained in the IIF’s decade-old code of conduct and the IMF should fully consider the input of private creditors in conducting the signature sustainability analysis.

The workout saga has now spread to Cyprus with insolvent banks post-haircut as deposit growth was flat in 2012. The EUR 15 billion-plus rescue request is close to total GDP and approval has been postponed until after February presidential elections.