Turkey’s Power Projection Pushbacks
2012 April 27 by admin
Posted in: Europe
Turkish stocks finished Q1 with a solid European showing after drifting on continued confusion over political and geopolitical stands and monetary and exchange rate policies as prime minister’s Erdogan’s health also invited doubts with scarce public appearances. Diplomats have led the charge to sanction and oust the Assad regime as Istanbul hosted an international meeting of ‘free Syria” groups and supporters considering weapons aid. The military at home again came under condemnation from the ruling party after alleged coup plotting as human rights abuses during its time in government decade ago were recalled with victims still seeking compensation. The grip on journalists which has included fines and detentions relented on EU criticism as writers investigating the ties between the government and the Gulenist Islamic school movement were let out of jail just before facing trial. Exposure of the relationship provoked a purge of the police and judicial ranks as new intelligence service heads were also installed. Skirmishes with Kurdish forces resurfaced and officials were drawn into a rancorous debate in France over legislation marking Armenia’s World War I losses and purported Turkish ethnic brutality often labeled genocide. 30 years after the army changed the charter constitutional reform remains a major agenda item despite the absence of a super-majority to facilitate a possible switch to a powerful presidential system. In the regional stakes, relations with Iran have cooled as it still backs Damascus and companies and banks are pressured to join the oil and financial embargos against its nuclear program and NATO maintains an important base as airstrikes are contemplated against Tehran. Its stock exchange has dipped on the tighter sanctions which have pummeled the currency and prompted the central bank to lift benchmark rates to 20 percent as a string of planned privatizations otherwise drains liquidity.
Turkish monetary head Basci has stood by the unorthodox approach using multiple tools in an effort to slow double-digit credit growth and reduce inflation to the 6 percent target, and added a twist as the weekly repo moved from a quantity to price model and then was suspended. Consumer lending has dropped markedly at 20 percent rates, which have also managed to curb import demand to tackle the 10 percent of GDP current account gap. A firmer lira has diminished the intervention need for dipping into reserves, which now cover only 4 months of goods purchase. Heavy domestic debt redemptions were successful over the quarter while foreign issuance diversified to the Samurai market. Although economic growth will halve from last year to around 4 percent, unemployment is under 10 percent. The primary surplus has upheld fiscal discipline in the absence of a responsibility law despite sudden attention to the glaring lack in other realms.
Cuba’s Papal Blessing Blemishes
2012 April 27 by admin
Posted in: Latin America/Caribbean
Cuban debt saw rare actions in the exotics market as the Pope visited the island to encourage religious revival and was warmly received by the Castros at the same time Venezuelan benefactor Chavez underwent further anti-cancer treatment as opinion polls showed him tied with unified opposition candidate Capriles for the October presidential contest. The closed-end Miami-based Caribbean Basin fund which has targeted a post-US trade embargo for decades with investments in cruise lines and food companies, also enjoyed a brief pop as the visit triggered Washington discussion of further restriction removal with educational, family and remittance connections already flowering. According to outside observers GDP growth should be 3 percent this year after the leadership sanctioned individual private business launch to absorb the shedding of hundreds of thousands of state employees at loss-making firms. Smallholder agriculture could also receive credit and equipment inputs under the changes in an effort to revive commodity exports that have concentrated on nickel and recent discovery of offshore oil. Services, in particular medical professional deployment is the primary balance of payments support, offsetting a large bilateral goods deficit with Caracas. Chinese loans are available for commercial purchases, and Brazilian joint ventures operate in the tobacco and ports sector. While Havana has dismissed relation with the “colonial” Bretton Woods institutions with their historic Western dominance it has edged closer to regional lenders including the new “Bank of the South,” Andean Investment Fund and Caribbean Development Bank. Although not a member of the OAS democratic club, many members have urged participation and dialogue at periodic Americas summits such as April’s Colombian one. Cuban officials have reportedly sought technical advice in such areas as currency and pension regimes in an effort to control retirement costs and manage an eventual switch from the artificial “convertible peso” pegged at par to the dollar for tourist use. According to end-2011 statistics 350,000 citizens applied for a business license but most kept their state jobs against the goal of half private sector transfer by mid-decade.
Longer-term recovery is likewise elusive in neighboring Haiti despite strides the past year from the epochal earthquake, the IMF finds in its latest snapshot. GDP growth at 5.5 percent in FY 2011 was equal to the previous period’s contraction as inflation dipped to single-digits and fiscal and external positions strengthened. The currency has firmed against the greenback despite the financial system’s 60 percent dollarization level, but the tax revenue-output ration remains barely above 10 percent. Despite almost $1 billion in external debt relief, domestic arrears have accumulated and further liabilities will mount with Treasury-bill issuance. A new central bank law attempts to promote central bank monetary policy independence after long evading ruling power endorsement.
Saudi Sukuks’ Well Gusher
2012 April 24 by admin
Posted in: MENA
Saudi Arabia blazed onto the Islamic debt scene with a Gulf-leading $6.5 billion in issuance in Q1, with the sudden entry of banks and utilities as Western-sourced project and syndicated finance vanished. One-quarter that amount came from a two-tranche state electric company instrument that was heavily subscribed from regional investors at a 150 basis point premium over the mid-swaps rate. The global total for the period was $45 billion, already half 2011’s overall activity, according to industry trackers. The UAE continued to be prominent despite headline rescheduling attempts by additional government-linked groups following the DW package. Family groups are tapping the market for the first time, and Abu Dhabi Oil diversified with a direct placement in Malaysia. However Dubai World’s Drydocks unit sought refuge in bankruptcy court as creditors took a hard line, and the parade of names in search of refinancing now includes the airline and its duty-free shops. Yields on the HSBC Gulf sukuk index had dropped to 4.5 percent at end-March but have since crept up as oil prices have moved in the opposite direction. Both the Saudi and UAE stock markets have jumped 20 percent, behind only Egypt, and the former may join the MSCI roster this year with a formal opening to qualified international institutions and individuals. The dual Emirates exchanges missed the last promotion chance to the core universe, but are working on infrastructure and short-selling issues that may allow admission. Smaller area bourses have lagged, with Kuwait, Oman and Qatar in negative territory while Lebanon and Tunisia were flat. Despite the carnage in next-door Syria, a Lebanese Eurobond was well bid by banks and expatriates, and Tunisia’s government has secured a US bilateral guarantee to facilitate possible near-term external debt rollover. It can back a $500 million placement following a Treasury bond operation of that size with Qatar. The Islamic-party headed administration has emphasized job creation and capital mobilization efforts and has invited outside advice and support for small business startups as untangling of the previous Ben Ali legal and illegal holdings slowly proceeds.
Egyptian stock performance has veered to the top from the bottom of the pack, although the early year 40 percent surge has faded. The central bank has laid the foundation for its own sukuk thrust as Treasury auctions fail and longer-term yields approach 17 percent. Foreign reserves are off 60 percent since Mubarak’s resignation to a critical import coverage level, and a diaspora launch of special certificates of deposit is designed to gather funds with talks over a $3 billion IMF loan at a stalemate pending the outcome of Muslim Brotherhood-military jockeying for power and scheduled May presidential elections Withholding tax may be modified to stimulate domestic debt inflows while other stimulus is off the table with promised subsidy reductions to bring the fiscal deficit under 10 percent of GDP.
Indonesia’s Bashed Bric Hurl
2012 April 24 by admin
Posted in: Asia
Indonesian shares finished a lackluster quarter as the BRICS summit passed in New Delhi with no invitation for group entry and mass protests erupted against long-telegraphed fuels subsidy cuts to keep the budget deficit at 2 percent of GDP. Investors were already dubious about premium valuations over the regional norm and the corporate governance defects highlighted by the board of directors fight in major listing Bumi Coal where the family owners sidelined international outsiders. The cooking oil and petrol transfers absorb one-fifth of spending, and the government wants to use the proceeds for infrastructure after passing landmark land access and power and transport sector changes while better targeting help for the poorest. Inflation may double to 7 percent with the shift, on a more modest 6 percent economic growth forecast. Wage demands have risen in advance with sporadic labor unrest, and President Yudhoyono in the final stages of his second term has publically endorsed their cause. Consumption may flag under these conditions as the current account heads toward a deficit and the capital account inflows pause from their recent record pace. Commodity export prices are off with the country a net petroleum importer and relying on heavy equipment purchase abroad. Foreign holdings of local debt may dip below their post-crisis 30 percent share as the central bank continues to purchase large amounts for system stability and liquidity management purposes. An external sovereign bond was easily placed in January, and private direct and portfolio investors are asked to provide one-quarter the estimated 2 trillion rupiah funding envelope for electricity, port, and road projects through 2015. A March review by rater S&P points out that energy tariffs are “low, inflexible and non-transparent.” The PLN monopoly unilaterally renegotiated contracts, which as a whole are poorly enforced according to the World Bank’s Doing Business measure. The new land acquisition statute is designed to slash costs and timing, and infrastructure guarantee and public-private partnership mechanisms have been upgraded.
Domestic state banks remain the dominant long-term money source, and the burgeoning Islamic sukuk market is well suited for risk-sharing as an alternative. The agency predicts FDI in these critical sectors could double as a share of GDP to 4 percent with “efficient administration,” but notes that lasting confidence will entail a series of policy and practical steps. The neighboring Philippines under President Aquino likewise unveiled a PPP push as the fiscal gap continues to come in under 3 percent of GDP. It has signed on to the US government’s Partnership for Growth aid effort which emphasizes power supply revamp, and exchange-listed privatizations are foreseen in the mix. Overseas worker remittances are intact as anti-corruption moves try to break from the past and prove their firmness.
Greater China’s Hard Land Lumps
2012 April 18 by admin
Posted in: Asia
Hong Kong shares slackened on the dramatic arrest on bribery charges of the Kwok brothers whose firm has controlled a commercial and residential land empire for decades, just a week after self-declared populist Leung was elected chief executive in a tightly-managed race following a scandal involving the previous candidate Henry Tsang which flaunted ties to the island’s wealthy. Widening income inequality and poverty have suffused political debate amid the post-crisis property boom, and the new leader has promised to confront tycoons’ power despite his early role in supporting breakneck housing expansion. Developer stocks have long been under the microscope as the Monetary Authority attempts to brake lending alongside Beijing’s existing curbs that were reiterated at the latest gathering of top officials before the upcoming reshuffle. The enclave still suffers from a shortage of affordable flats underscored by the saga of Mr. Tang’s illegal wine cellar which itself was bigger than typical units. The economy may only grow 1 percent this year on re-export retrenchment as the outgoing government tries to find additional revenue for small-business and social spending. The soft patch and rich-poor divide have resurrected calls for universal voting and re-examination of the dollar peg as the renimbi again noticeably slips against the greenback for the first time since the mid- 1990s Asian financial crisis. In Taiwan following the re-election of President Ma electronics and manufacturing sales are also drifting and to pay for fiscal stimulus his team may impose capital gains tax. Investor wariness increased over the move in the wake of sudden Chinese naval activity in the area and several mooted joint banking ventures across the strait. Oil import costs further hamper prospects and the central bank may consider cuts in already low benchmark rates.
On the mainland the future politburo composition is in doubt with the unexplained purge of Chongqing boss Bo amid coup and Mao-era Cultural Revolution return warnings. The military has gotten a hefty budget rise and citizen revolts against provincial official land grabs and arbitrary treatment have brought in consensual replacements. Hong Kong brokers who have been idle even with reduced lunch breaks enjoyed a burst of activity with China Minsheng Bank’s $1.5 billion capital raising, although it is believed to have large local government loan exposure which regulators wish to extend without write-downs over the medium term. One-fifth of these portfolios at close to $300 billion have been improperly classified in the safest category, they stipulated at the same time. Municipal pension funds have also been criticized for riskier allocation against established guidelines, and authority to issue debt will be confined to pilot efforts as debris is cleared from the hidden crash.
Mauritius’ Offshore Center Vertigo
2012 April 18 by admin
Posted in: Africa
Mauritian stocks continued lethargic as the global business corporation sector absorbed the implications of the Indian budget which seemed to herald further offshore-registered investor tax scrutiny for both current and past allocation. Tourism has already slowed on Europe’s troubles, putting the 4 percent economic growth forecast in jeopardy on inflation around the same level, with inflows also needed to bridge the 10 percent of GDP current account deficit and keep international reserves at just 4 months’ imports above the danger zone. Good share performance last year brought portfolio infusions spurred as well by capital gains levy removal, although the budget gap swelled toward 5 percent of output. With private credit demand slumping, special state loan facilities for small business could be activated, adding to the fiscal weight of numerous government-run enterprises which represent 15 percent of GDP. Interest rates are marginally positive, and rupee appreciation against the euro and pound has eased. Officials have unveiled an infrastructure upgrade program consistent with reducing public debt to 50 percent of national income by end-decade, and are considering pension revamp and steps to regain lost standing in the World Bank’s Doing Business rankings. Banks are well-capitalized and profitable, boosted by the recent advent of deposit insurance but ties to non-resident borrowers and related insurers remain murky, the IMF finds in its latest Article IV review. The central bank and securities market regulator should better pool risk information given lenders’ large government debt holdings and their status as big exchange listings, it suggests.
South Asian entities concerned about Gulf exposure during the Arab spring have looked at relocation to the island, but Dubai, with UAE stocks up double-digits, has offered reassurance of political and financial stability despite on-line petitions against the ruling family and debt rollover concerns still focused on the shipping unit of DW and other shaky issuers. The DIFC is seeking a loan to cover upcoming $1 billion bond redemption and the free trade zone is likewise in talks with a bank consortium to repay a $2 billion sukuk due at year end. Emirates NBD, the chief domestic creditor, has itself just floated $1 billion in 5-year dollar bonds after placing a smaller debut note in the yuan-denominated Hong Kong dim sum market. They were priced at 350 basis points over mid-swaps, reflecting an investment-grade rating and contrasting fortunes with Bahrain, where CDS rates are higher and an investment firm has just defaulted as violent demonstrations recur. Offshore banking operations have diverted to safer regional jurisdictions, and without oil the fiscal deficit on a bevy of social spending promises will hit 8 percent of GDP as the center tries to hold.
The Vienna Initiative’s Extended Strains
2012 April 10 by admin
Posted in: Europe
As official and private sector parties grapple with a specific formula to adapt the 2009 Vienna Initiative’s voluntary bar on bank cross-border “disorderly unwinding,” separate working groups have reported on NPL and Basel III-related complications still frustrating Emerging Europe operating and resolution frameworks. The bad loan average tops 10 percent, which is probably understated due to missing data and low estimates, and is worst in the Southeast and Hungary with its additional Swiss franc mortgage load. Payments have been adjusted without interest capitalization, and portfolio sale and collection outsourcing are infrequent. A half-dozen countries have revamped business and household bankruptcy procedures and introduced out-of-court settlement, but they are the exception. Collateral enforcement is cumbersome and lengthy, personal insolvency is unrecognized, loss provisions are not tax-deductible, prudential loan classification is suspect, and distressed-asset markets are lacking, according to regional experts. Banks hesitate to take action on their own fearing competitive ramifications, and confidentiality and secrecy custom and practice inhibit progress. The BIS standards will go into EU capital adequacy and liquidity directives that for Central and Eastern members must accommodate high foreign ownership stakes, shorter-term wholesale liabilities, and less-advanced money and bond markets. Tier-one equity is typically good with limited hybrid resort, and minority interests when consolidated at the group level increase the capital cushion. The analysis suggests foreign currency risk be explicitly included in set-asides, and that the small-firm impact of ratios must be weighed as an overriding factor. Liquid assets should be broadly defined, and parallel macro-prudential measures harmonized between home and host jurisdictions. The new European Banking Agency should assume a lead technical role, and the so-called counter-cyclical buffer could be modified in light of emerging market member differences. The supervisor “colleges” should be regularly convened under its auspices for information-sharing and rule alignment, the paper advises.
The research points out the difficulties’ lingering toll on economic growth, which is anemic outside “overheating” Turkey. There Citibank is shedding ownership in giant Akbank, a main exchange listing, to meet post-rescue US Federal Reserve demands. In Hungary, Austrian parents continue to report network shrinkage and losses, although Raffeisen spurns talk of the need for a capital increase with overall pre-tax profit. In their outlying realms headquarters executives have tried to convince investors the situation has bottomed, especially when compared to Spain’s severe periphery case, where the government may again inject cash to salvage the property-stuffed cajas. Russian state banks in turn may be on the acquisition march westwards toward troubled pockets after earlier buying their own Vienna outpost in the wake of a record $7 billion sovereign Eurobond placement. 1000 investors participated with a 30-year tranche available for an extended pan-European bet.
Private Equity’s Middling Middle Markets
2012 April 10 by admin
Posted in: General Emerging Markets
The Emerging Market Private Equity Association released 2011 fund-raising and deal-making totals showing continued BRIC and large vehicle concentration, with smaller destinations and capital size still overlooked. Its slice of the global new commitment pool was 15 percent at almost $40 billion, a multi-year high, with LPs seeking long-term exposure that may be confined through listed shares. Asia and specifically China has drawn three-fifths of the amount, with renimbi-denominated offerings the majority from dedicated sponsors prompting over $15 billion in allocation. India took in almost $3 billion and penetration at 0.3 percent of GDP is double China’s. Brazil funds were all mobilized locally and represented near 20 percent of the aggregate at $7 billion. Each launch was $1 billion-plus, reflecting a preference for larger deals which extends to the broader universe, where average GP scope was twice 2010’s at $300 million while the number of entrants fell 20 percent. Median investment size was $15 million, although Brazil’s was triple that figure. Russia/CIS and MENA were still stifled by regional crises with respective tallies of $135 million and $425 million. Sub-Sahara Africa’s total slipped from $1.5 billion the previous year, with South Africa absorbing about one-third. The US and Europe remained the world leaders, with the former’s $95 billion in inflows far outpacing other developed markets. The trade group argues that Brazil and China are not at “saturation point” with unmet mid-market needs, and recalls the multi-regional push accompanying the $65 billion collected pre-crisis in 2008 that could reactivate over the medium-term.
Asia-sourcing and demand will continue to drive country and company stories in the coming months as the hard versus soft-landing debate coincides with Beijing’s party leadership transition. India may allow more favorable tax treatment for authorized venture capital operations in the latest budget, and Korea after spurning foreign involvement with controversies over bank and high-tech acquisitions following its late 1990s crash is revisiting the position so Seoul can claim world financial center status. Frontier backers like Franklin Templeton and Leopard Capital are promoting potential in Indochina and elsewhere, with Cambodia, which carries a B sovereign rating, joining Laos in stock exchange opening as an exit. This ignored swathe offers faster 5-plus percent GDP growth and Bangladesh, Sri Lanka and Vietnam are mid-size weightings on the MSCI benchmark index. To beckon foreign investors Dhaka has removed capital gains tax, and development lenders have a big portfolio of reconstruction projects for Sri Lanka’s war-torn north. Nepal and Papua New Guinea after civil strife feature energy and mining endowments and working equity markets that may pass private fancy.
The West Bank-Gaza’s Bleary Blockades
2012 April 4 by admin
Posted in: MENA
Despite a blip in Palestine Stock Exchange interest mainly from Gulf investors exiting Egypt, the World Bank’s annual West Bank and Gaza donor report underscored the severity of “fiscal crisis” with a recurring $1 billion deficit only half plugged by aid and commercial bank borrowing. The double-digit growth pace from a low base will not repeat as Israel’s access and trade restrictions remain intact, and business and regulatory reforms languish especially around land registration. The Palestinian Authority’s wage bill rose 5 percent in 2011 on greater security force employment. Tax and customs revenue collection were below target, as cumulative domestic debt reached over $1 billion, “at the limit” of available supply. Capacity may be further constrained by proposals to impose capital gains and savings account levies alongside ongoing efforts to overhaul payer exemption and reporting practices. The public pension system is currently insolvent, and steps to eliminate arrears and introduce “parametric changes” were missing in recent years. The civil service takes half of regular spending, with salaries absorbing twice the MENA average as a fraction of national income. Reconciliation between the respective governing parties in the twin territories as outlined by their leaders could reduce overlap, but administrative structures are unwieldy despite data and information processing strides, the document comments. The combined West-Bank Gaza economy will increase 7 percent in 2012, with per-capita incomes around the end-1990s level. Gaza construction spurted after blockade easing with first assistance-related and then private-sector equipment let in, while the West Bank’s pillars are defense and government. Unemployment continues at 25 percent, and after the initial wave, few Israeli investment restrictions have been loosened. Border closures and limits on dual-use items with potential military application extending to telecommunications are external obstacles, but dated and inconsistent internal company and transactions laws are also market-unfriendly.
The monetary authority which is assuming central bank functions is moving to impose Basel II standards, and non-performing loans are under 5 percent of the total. The formal payments network is unable to transfer Israeli shekels into Hamas-controlled Gaza which “strengthens unregulated money changers,” in the paper’s view. Electricity, water and sanitation are critical unmet infrastructure needs demanding $500 million in funding. Energy disruption has begun to affect Israel as well with the damage to Egypt’s gas pipeline contributing to $4 billion in economic losses, according to the Finance Ministry. Bond yields have risen on tensions with Iran as foreigners have dumped short-term Makam holdings now subject to tax. With 2 percent inflation, benchmark rates have stayed the course with the shekel flat against the dollar. Projected GDP growth is 3 percent, but the OECD recently criticized high public debt and poverty ratios which restrict industrial and labor maneuver.
The IDB’s Forked Road Determination
2012 April 4 by admin
Posted in: Latin America/Caribbean
The Inter-American Development Bank’s annual meeting report on “Forking Paths” matched participant sentiment as souring on stalwart destinations Brazil and Mexico was offset by clamor for infrequent capital market players including South America’s poorest economy Bolivia, which tapped underwriters for a $500 million sovereign bond not attempted for almost a century. The dichotomy elaborated 2011’s theme of One Region, Two Speeds, with average 3.5 percent GDP growth a fluid forecast depending on European crisis and China slowdown outcomes. For commodities, metal more than agricultural prices are likely to fall, while the composition of capital inflows as heavily banking and portfolio-related is also worrisome given historical crash tendencies despite improved oversight and macro-prudential efforts. Fiscal space is constrained to address emergencies as structural deficits are higher than in 2008-09, and inflation-targeting regimes have become confused with central banks’ profusion of direct and indirect tools that have tightened policy since the original episode. Foreign reserve increases have translated into lower external debt ratios, but private sector balance sheets may be leveraged. European bank pullback is mitigated by the local retail base, but asset shedding to meet stricter minimum equity standards could have “significant effects.” Often these institutions hold large positions in domestic debt markets and selloffs could suddenly raise borrowing costs at home and abroad, the survey warns.
Brazil continues to raise the currency war cry with extension of the 6 percent tax to 5-year fixed-income flows, as jaded investors seek proof through public pension and other reform initiatives that the strategy is not diversionary. Mexico has benefited from a contrasting hands-off stance on the peso that has been the year’s top performer and US rebound, but the election cycle has begun as foreign ownership is 40 percent of long-term bonds. A PRI presidential victory remains consensus opinion despite gaffes by standard-bearer Perez Nieto, but parliamentary control could again be fragmented. Argentina’s moves against oil giant YPF and to revamp the central bank law to allow greater reserve access have further alienated investors betting on a softer line after President Fernandez’s re-election and health scare. While regional sovereign ratings are flat overall, Bolivia is among a handful going to market with a positive outlook. Costa Rica, El Salvador, Guatemala and Trinidad and Tobago all plan external issues after a lengthy pause. New Guatemalan President Perez Molina must roll over an outstanding instrument due next year, and has emphasized pro-business and anti-crime approaches. Trinidad and Tobago’s Stabilization Fund has $4 billion on hand from energy proceeds, but a $500 million tap is in the works for diverging hydrocarbons and financial services ambitions.