Pakistan’s Supreme Dilemma Dare
2012 February 21 by admin
Posted in: Asia
Pakistani shares stayed detached from the rest of Asia’s run-up as the IMF, which dropped its stand-by arrangement on poor tax compliance, sounded the Article IV report alarm on “considerable downside risks” mirroring the political standoff between the Supreme Court and government over corruption charges and military infighting over fighting the internal and cross-border Afghan insurgency. The prime minister has been held in judicial contempt as President Zardari struggles to complete his term on ill health and slim parliamentary party control. Relations with the US have soured after Bin Laden’s elimination, with a NATO report now citing collaboration between the armed forces and Taliban, and the former ambassador to Washington under house arrest for allegedly warning of a civilian overthrow plot. Bilateral security aid, which was previously under scrutiny for accounting irregularities, has been frozen pending a joint State-Defense Department policy review. Over the upcoming election cycle, new economic assistance proposals will remain sidetracked such as import duty relief and additional risk guarantee and venture capital support from OPIC, which is to be reorganized into a Cabinet-level Trade ministry under an Obama Administration initiative. In the past fiscal year GDP growth of 2 percent was three times under the threshold need to absorb fresh labor market entrants. Double-digit inflation persists and poverty incidence is “worrisome” as the central bank has become too “accommodative” on budget deficit financing, according to the Fund. It has spent $2 billion in reserves in recent months propping up the rupee as the external account deteriorates. This year’s GDP expansion should be 3.5 percent on 12 percent consumer inflation, but slower remittances and IMF reimbursement will saddle the balance of payments and the fiscal gap will not meet the 5 percent of output goal “absent corrective measures.”
In its recommendations the lender urged continued post-program monitoring and tax base broadening which could include allowing provinces to raise revenue. Monetary tightening and additional exchange rate flexibility are overdue, and bank supervisors lack sufficient independence as they try to cope with higher industry NPLs. Power shortages are still a critical bottleneck and plans to develop hydro-electric projects are on hold pending rule changes and international commercial and official loans. Investors have exhorted the authorities to copy lessons from the region’s other Muslim giant, Indonesia, which was just awarded another top-notch sovereign upgrade after distressed status a decade ago post-Asia crisis. The economy is advancing at a 6.5 percent clip on consumption and commodity exports and has just passed a long-awaited infrastructure facilitation package designed to trigger a $150 billion building wave in the next two years. However graft and violence pose literal roadblocks there too as a major oil refiner also defaulted on an external bond as a supreme challenge, promoters admit.
The Baltics’ Beguiling Bragging Rights
2012 February 21 by admin
Posted in: Europe
With the rest of Europe foundering Lithuania started the year with a major issue and Estonia reaffirmed its euro entry decision as Latvia exited its IMF program with good marks and welcomed further formal monitoring. Unlike cross-border owners elsewhere Scandinavian giants like Swedbank reiterated their intention to keep operations in place to participate in recovery and apply debt workout expertise. Norway’s sovereign wealth fund hinted at greater sub-regional public and private equity exposure in a continued diversification strategy, and pioneer managers like East Capital highlighted smaller company healthy earnings as near-term portfolio favorites. In their final review Latvian officials stressed the intention to meet stricter revised EU stability and growth pact criteria for single-currency eligibility by 2014. Fiscal and inflation performance as well as business, labor and education conditions will be improved, despite the temporary deposit and payment freeze imposed by Krajbanka’s malfeasance and shutdown which also affected foreign units. GDP growth could halve to 2.5 percent this year on “trading partner stagnation” as the current account reverts to slight deficit. Inflation should drop from 4 percent to 2.5 percent as nominal wages continue to shrink with unemployment at 15 percent. The budget gap will narrow to 3 percent of GDP on better tax compliance, a financial stability levy increase, cuts in central and local government spending, and social security adjustments. A top priority is “fighting the grey economy,” according to the letter of commitment even though the revenue result is “uncertain.” A fiscal responsibility law will enshrine medium-term discipline despite calls on state coffers to honor Krajbanka’s obligations and assist Baltic Air alongside commercial investors. These stakes will be sold off in future privatizations under an overall government enterprise good governance thrust which could place private pension funds in an enhanced oversight role.
Domestic borrowing will preserve benchmark maturities and combine with a return to international capital markets that began with a June 2011 Eurobond in an attempt to minimize rollover risk. The narrow band exchange rate will stay intact until Euro adoption with interest rates converging toward ECB levels. Higher bank capital standards will follow new EU regulations and consumers and supervisors will receive additional powers and protections. Troubled institutions from the 2008-09 period will continue along their resolution path with the Mortgage Bank to be divested and replaced with a s single development lender and Citadele to get final bids by the end of Q1. The residual Parex Bank is still the subject of numerous lawsuits and criminal inquiries against the former majority shareholders. International hedge funds have accused the government of bungling investigations and harming their interests in a record unworthy of boasting.
China’s Shrill Shanghai Hub Hullaballoo
2012 February 20 by admin
Posted in: Asia
Chinese shares joined other large market laggards with a roaring start to the Year of the Dragon on a break in foundering macroeconomic data and a slew of securities initiatives aimed at domestic and foreign investors. The main regulator highlighted a push to restore confidence at the annual Communist Party financial work conference with plans for new IPO procedures and retail account protections, while hinting at enlargement of FII quotas. Previously the National Social Security Fund announced increased equity allocation and local government pension plans may also be authorized to participate directly. Liquidity injection through robust money supply and bank lending figures supported enthusiasm, and Hong Kong was reassured that the “door would open wider” for smaller state firms to list there. The outreach came as renimbi deposits in the offshore center began to fall as appreciation was seen to crest and dollar safe haven switching jumped with the spreading Eurozone crisis. The planning agency along with Shanghai authorities then revised their global hub outline for mid-decade to include yuan clearing and trading as a core business pillar through establishment of benchmark rates and derivatives. They reiterated plans to attract foreign listings as an “international board” is soon to go operational although issues of broader capital account and currency convertibility were unaddressed. Among innovative products ETFs and REITS will be tested, and partnerships will be explored with overseas exchanges following agreement among BRIC members to cooperate on information and access provisions. In Beijing, where all the industry supervisors are based, officials vowed to strengthen standards while ensuring that prevailing risks, including in property and provincial loans, were “controllable.” State lenders with single-digit price-earnings valuations reported good profits, and according to the BIS have deepened trade and syndicated credit penetration in Asia in particular with European escape.
They made headlines with arrangement of a $1 billion facility for Reliance Communications run by Indian billionaire Ambani. His prominent group aided in obtaining another early-year turnaround for shares there with a $2 billion buy-back as the rupee rebounded to the high 40s against the dollar with minor monetary easing on steady inflation and exchange opening to foreign individual investors. Non-resident Indians have poured money into high-yield bank deposits, and FDI liberalization resumed with a modified plan for retail chain entry after the original design met with small trader and opposition party outcry. With GDP growth slipping to 7.5 percent, officials intend to rein in the fiscal deficit which has regularly exceeded responsibility law bounds. As the second Singh administration winds down, fresh physical infrastructure and anti-corruption overhauls have been signaled with all suspect telecoms licenses being revoked in a repudiation of past prerogatives.
South Africa’s Mooted Mandela Moment
2012 February 20 by admin
Posted in: Africa
South African shares pared their double-digit gain on anxiety over a weekend “nationally important” announcement inviting rumors of new capital controls or mine nationalization, despite the ANC’s rejection of such policy at its latest gathering in favor of gradually higher taxes or state control. President Zuma, after unveiling record infrastructure spending despite the 5 percent of GDP budget deficit to combat 25 percent unemployment, instead revealed a fresh currency design that will replace game animals with portraits from the life of apartheid opponent and former two-time president Mandela. While the change was popularly applauded in honor of the nonagenarian hero, the inconsistency and secrecy surrounding it repeated a frequent business community criticism of the government at a time when the rand in particular now around 7.5 to the dollar is regularly buffeted by both domestic and global risk sentiment. The ruling party tried to strike a compromise with militants over commodities expropriation, but industry leaders remain wary especially after the launch of a public exploration company last year and labor union insistence that pension funds take more activist controlling stakes in big private multinationals. FDI is lackluster in the sector, where the country ranks just a few notches above neighbor Zimbabwe in international attractiveness comparisons. The macro-economy for engagement is likewise ambivalent with GDP growth due to fall under 3 percent this year and inflation currently at twice that figure leaving the central bank 5.5 percent benchmark rate intact. With close Eurozone links and a recent sovereign downgrade external commercial borrowing will be kept to a minimum, as contingent liability stress from the state power utility also mounts. At the ANC’s founding centenary officials again embraced the causes of anti-corruption amid headline scandals and of education reform after an applicant stampede to get a university place, but participants also widely noted the vast unfinished agenda to attain better living standards.
Namibia, which has a rand peg and was recently reclassified as an upper middle-income country, is also under harsher investor scrutiny after its maiden sovereign debt issue in 2011. Mining earnings from diamonds, uranium and other endowments will bring 4 percent GDP growth, but international reserves are below the minimum threshold three months’ import cover and the jobless rate is 40 percent. Fiscal stimulus may be too expansionary according to the IMF, and housing prices which were up 20 percent last year mainly from cross-border capital flows may place the South African-dominated banking system under pressure. Although the securities market is tiny, non-banks have proliferated and a consolidated supervisory agency awaits additional enforcement powers to display its own metal bearing.
Romania’s Chafing Chill Wind
2012 February 15 by admin
Posted in: Europe
Romanian bond issuance was doubled in January as authorities grappled with weeks of worker anti-austerity hostility amid record low temperatures and snowfall. The creaky coalition government may have to activate its IMF precautionary line and face another round of no-confidence votes as GDP growth could halve to 1 percent on slumping exports, 70 percent headed to the EU. The World Bank may chip in $1 billion in budget support tied to further privatization, labor and energy sector efforts as bank lending, dominated by foreign-owned units remains flat. Higher portfolio inflows will be needed to bridge the stubborn current account gap and were urged by famed Franklin Templeton equity fund managers hired to oversee listed state investment pools. The banking system is likewise under strain in Bulgaria which entered the EU at the same time as non-performing loans are 15 percent of the total. Greek parents own the biggest operations and regulators have tried to calm withdrawal fears by citing their continued profitability. A coal industry strike was settled as a minority stake in the state energy company is to go on the block by year-end. A sovereign Eurobond issues is slated for the coming months, and the country offers a precedent for GDP-linked paper that may feature in an eventual stinging private creditor “haircut” for Greece under negotiated non-default swap terms. The so-called Troika insists on a nominal 3.5 percent level coupon to promote debt sustainability as they mull a second bailout package before a steep looming March commercial repayment. They have however split on the possibility of the ECB absorbing losses under equal treatment practice, which the IMF has posed as a workout element. Athens even under caretaker technocrat rule has routinely missed key deficit and structural targets, and the Germans have floated the idea of an external fiscal overseer with new elections scheduled for April.
Peripheral bond panic is now entrenched in Portugal, which like Greece was in the emerging market category pre-euro, as 2-year yields were 20 percent before central bank buying. In an historic twist Brazilian investors and advisors have flocked there to share their experience and scout prospects. Angolan banks linked to its long-serving president have acquired assets as the incumbent may be closer to designating a successor after naming the state oil monopoly head as a key economic planner. The country entered an IMF program after the 2008 crisis, mirroring the path followed by Hungary which has reaffirmed second rescue intentions with dilution of financial supervisor consolidation plans despite Article IV report reference to “ambitious objectives” that may clash with the arrival of “adverse scenarios,” especially if mainstream political and policy tendencies are cast as enemies.
Egypt’s Ponderous Pound Pounding
2012 February 15 by admin
Posted in: MENA
Egyptian shares retraced half their 2011 index drop as parliamentary elections entered consecutive phases with predicted Muslim Brotherhood dominance and talks resumed with the IMF on a $3 billion loan which may come with lighter conditions but no longer the no-strings package dangled in the immediate aftermath of Mubarak’s overthrow. Since then foreign reserves have more than halved to $16 billion on capital outflow, poor trade and tourism earnings, and central bank currency defense to keep the pound in the 6 to the dollar “stability” band. With only enough on hand to cover several months’ imports, non-essential goods buying will be limited. The fiscal deficit is running at double-digits as a fraction of GDP as the government turns to the World Bank, other development lenders and GCC sovereigns for support. The last group has put money into domestic Treasury bills but auctions continue to be undersubscribed as yields long ago breached 15 percent, and buyers insisted on a switch to dollar-denominated issuance. Local banks have increased their exposure 50 percent over the past year as deposits barely rose. Public sector borrowing has sent overall debt to 80 percent of GDP as officials contemplate new versions including diaspora and sukuk bonds to meet rollover requirements. Recent Fund analyses have highlighted exchange rate and institutional investor rigidities that may presage policy shifts and reprogramming on these fronts as the basic economic model is in flux with the gradual military handover. Although the army has chipped in with a $1 billion contribution from its assets to the reserve position, property and other deals completed under the previous regime have been annulled by courts as prominent business executives, including the head of lead privatization adviser EFG-Hermes, have been barred from leaving the country pending investigation.
Tunisia too is scrambling to maintain its longtime dinar peg as it faces a $650 million Eurobond redemption coming off recession and a 7 percent of GDP balance of payments gap. Unemployment is near 20 percent and 200 foreign-owned companies closed last year, according to the chamber of commerce. To mobilize funds a $500 million T-bill placement is set with Qatar as a $20 billion infrastructure and social spending plan presented at the Deauville G-8 summit still awaits pledges. Like its North African neighbor flotation of Islamic paper at home and abroad is actively under consideration. However the IMF in its latest review of pioneer Malaysia, which managed a record $2 billion external sukuk in 2011, noted that the segment was “unlikely to be spared global shocks.” International banks have not pulled back from there to the same extent as in the MENA zone hanging from slender pegs.
FDI’s Forgotten Near-Frenzy
2012 February 9 by admin
Posted in: Fund Flows, General Emerging Markets
UNCTAD’s January update hailed a 15 percent global FDI rise to $1.5 trillion, half going to developing and transition economies in a record high. Developed world performance was mixed with Greece and Germany down, but Italy and France receiving a boost. Latin America outstripped Asia’s total by $10 billion at $215 billion as flows increased at 4 times China’s pace. Indonesia, Malaysia, Thailand, Brazil and Colombia experienced spikes in their respective regions. Natural resources drove the Latin story with continental reach achieved with large market establishment and expansion. Offshore Caribbean centers also benefited from safe haven wealth allocation over the crisis period, which diverted interest from Europe outside big energy cross-border deals in Russia, according to the Geneva-based UN agency. The Middle East-Africa continued to fall on political and social unrest, although Saudi Arabia and South Africa hosted new projects. M&A has surpassed greenfield activity as the major catalyst, and 2012’s picture is of “cautious optimism” looking at underlying GDP growth and multinational company cash flows. About a dozen transactions in the $5-10 billion range were completed in emerging markets, and the pattern should continue and deepen over the medium term, the review predicts.
Colombia’s oil boom has coincided with President Santos’ entry into office and restoration of the sovereign investment grade rating which recently enabled 30-year bond reopening at an unprecedented 6 percent yield. Three-quarters of buyers were from the US, as European and Asian investors also focus on portfolio and mining investment potential. GDP growth is officially set near 5 percent, although inflation has also slipped to the upper-end target prompting another 25 basis point central bank rate bump. A minimum wage hike will soon kick in to maintain price pressure, but is part of labor reforms slowly eroding traditional double-digit unemployment which fueled crime and security problems. The free trade agreement finally approved in Washington late last year should favor fresh participation, and stands in stark contrast to the stance in adjoining Venezuela, where President Chavez has reacted angrily to international arbitration awards with plans to exit the World Bank’s dedicated tribunal. Exxon won a near $1 billion judgment over seized property as one of numerous petroleum company claims against the government, despite the original demand running 5 times that amount. The pullback was widely seen as a pre-election gesture as he also reshuffled the cabinet to tilt toward military and ideological loyalists. For the first time the opposition appears to be unifying around a candidate to be formally tapped in February primaries with Miranda governor Capriles in the lead. Bond prices rallied on the prospect of a credible Chavez alternative, although he still wields the administrative and budget tools to ensure powerful direct investment in his voting future.
Myanmar’s Muddy Modernization Maw
2012 February 9 by admin
Posted in: Asia
A cascade of Western officials and investors, including hedge fund titan George Soros, visited long-shunned Myanmar as a diplomatic thaw was signaled and the IMF released a detailed report on recent economic performance and immediate challenges. Democracy campaigner and Nobel peace prize recipient Aung San Suu Kyi remains free from house arrest and will run in April elections after her party abandoned its previous boycott stance. A mass amnesty for other political detainees has ensued and a cease-fire was signed with a major ethnic rebel group. The new head of the military government has been praised as a “genuine reformer,” and international commercial sanctions are under review in Washington, Brussels and Asian capitals and could be lifted later this year. Representatives from the Korea Stock Exchange, which has offered funding and technical assistance throughout Indochina, have launched consultations with local counterparts as the Fund urged comprehensive banking overhaul including interest rate liberalization, collateral strengthening and rural network extension. Other overriding structural imperatives are state enterprise privatization and currency system unification which can improve fiscal and monetary balance, according to the mission. GDP growth is 5-6 percent on inflation around the same level, as natural resource exports should continue to benefit from the removal of restrictions. FDI has pushed the parallel exchange rate up one-third the past two years with current and capital account curbs still in place. The central bank was given initial autonomy, but has few tools for liquidity management and could consider pilot Treasury bond issuance. The budget deficit is close to 5 percent of GDP and should shrink with natural gas project revenues. Tax simplification is overdue and government-owned companies are a costly drain. The business climate suffers from lack of infrastructure and smaller firms are at a competitive disadvantage with licensing requirements and narrow credit and market access, the Article IV picture concludes.
Asian frontier followers cite the precedent of minerals powerhouse Mongolia, which led all stock exchanges in 2011 with a triple-digit advance, in an attempt to sell the transformation story. GDP growth there was 20 percent in the latest quarter, and soon the biggest coal mine will go public with shares allocated to all citizens as general elections approach. A stabilization fund has been established to smooth the commodity cycle which ended formerly in a 2008 bust and bank failures that ushered in emergency multilateral assistance. As with Myanmar, China is the key resources customer, and complaints have become more heated about corruption and environmental damage surrounding joint ventures. Thousands of Chinese work at the giant units in the Gobi Desert as enthusiasm for prospects aided by operator hype and employment urgency may not suddenly dry.
The Maghreb’s Simmering Pot Straddle
2012 February 6 by admin
Posted in: MENA
In North Africa as Morocco and Tunisia attempt Islamic-party led nonviolent economic comebacks, attention has also focused on Algeria where the powers in control for decades have fought an ingrained insurgency often compared with the current battle in Syria. There the international community has withdrawn energy, tourism and banking ties as an Arab League mission seeks a phased Assad regime transition as in Yemen’s case in order to avoid full-scale bloodshed as erupted in Libya. The exchange rate was officially devalued as the central bank spent billions of dollars in initial defense. Non-essential import curbs have been introduced, and personal currency access restrictions remain in place. Private banks dominated by Lebanese-owned units are now authorized to offer pound transfer, but speculative trading is outlawed. Prominent business executives allied with the government have been subject to asset and travel freezes abroad as the stock exchange lies dormant and GDP may be shrinking at a double-digit pace. Monetary officials claim to be prepared for a “long crisis” and “painful sanctions,” but will not disclose their reserve position despite previous reporting.
Algeria’s holdings in contrast have ballooned to $175 billion or 3 years of import coverage on a 30 percent oil and gas revenue windfall in 2011. However setbacks in the public investment program dragged GDP growth to 2.5 percent on 5 percent food-driven inflation. Banking system liquidity also contributed, on “very expansionary” fiscal policy, according to the IMF’s annual review. Post Arab-Spring spending was up 50 percent on civil service wage awards, small enterprise assistance and capital outlays which lag the original infrastructure blueprint. The budget deficit was 4 percent of GDP, but hydrocarbon stabilization fund savings will keep public debt low. The dinar depreciated slightly but broadly reflects fundamentals, the analysis asserts. The central bank continues to absorb excess liquidity through two facilities, but should as well consider hiking benchmark rates to buttress the managed float currency regime, it suggests. Medium term official finances could worsen on commodity correction as deficits would be met exclusively through government borrowing as the current account balance turns negative. Better tax administration and targeting of social transfers can aid the budget, and after this year’s minimum salary increase labor policy should focus on redressing 20 percent youth unemployment. Subsidies and debt rescheduling for designated small and midsize enterprises should not be permanent budget features, the Fund recommends. State-owned banks still account for 90 percent of the sector which lacks a central credit registry. Only a half-dozen stocks are listed on the tiny exchange, which may benefit from connections under discussion with Francophone West Africa’s regional counterpart. A distressed asset management company in formation to take long non-performing loans may also help with modernization as the main post-independence party otherwise clings to old methods.
Argentina’s False Positive Pivots
2012 February 6 by admin
Posted in: Latin America/Caribbean
Argentine bonds roller-coastered to the top of the EMBI charts as President Kirchner’s thyroid cancer scare proved to be misplaced post-surgery and months of post-reelection capital flight abated with a stiff crackdown on dollar circulation and industrial and consumer imports. Sniffer dogs have been deployed to detect undeclared greenbacks heading across the river to Uruguay during the Southern Hemisphere summer, and the trade blocks are designed to preserve the surplus under literal fire from a prolonged drought savaging corn and soybean crops. The immediate post-crisis 2009 harvest was destroyed by such natural disaster as the administration moved to hike export taxes, angering the ruling Peronist party’s key farmer constituency. The agricultural lobby has since reconciled with the government, which is now under pressure from anti-mining groups to suspend projects for alleged environmental harm. Provincial authorities recently took action against a Canadian-owned gold venture in response to protests, while national ministries have been reluctant to alienate new investors although they advocate a tougher stance against longtime oil giant YPF controlled by Spain’s Repsol. Higher energy prices which will further bite with subsidy removal have drawn popular criticism, especially since they conspicuously affect inflation officially claimed to be at 9 percent versus the 20-25 percent presumed by outside estimates. Statistical credibility was openly challenged by the IMF after technical assistance providers found continued GDP growth and price measurement misalignment with international standards, and placed Buenos Aires on six-month notice to improve data or face consultation cut-off. Private analysts who court fines and criminal investigation for such actions have also begun questioning fiscal accounts amid suspicion that the primary surplus has disappeared. Capital outflows have been reduced to several hundred million dollars monthly as the peso’s imputed value hovers at 4.75 given heavy central bank intervention.
GDP bond warrants will not pay out this year as growth will slide to 2-3 percent, based on consensus projections. This kicker may feature in the Greek swap that is often stacked against Argentina’s precedent, with commercial creditors pointing out that the EU’s Eurostat is a more reliable output monitoring source. However a parallel is also drawn with the official sector’s arbitrary negotiating approach and deal terms which resulted in a decade-old exile from international fixed-income markets. Holdout funds that have gotten billions of dollars in New York and London court judgments but been unable to collect have raised the stakes in Washington by obtaining passage of legislation to withhold multilateral and duty-free aid pending satisfaction. President Kirchner, who announced unemployment at a record low after her brief debilitating bout despite widespread belief it is stuck at double digits, has nonetheless spurned such chinks in the longstanding model.