FDI’s Forgotten Near-Frenzy

2012 February 9 by admin

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.

Fund Trackers’ Strange Footprint Sightings

2011 December 19 by admin

Going into December dedicated equity fund outflows of $35 billion were double the local currency-oriented bond inflow total which has also waned in recent weeks, according to EPFR. The BRICs including South Africa accounted for half the exit, with ETF selling accounting for one-quarter of India’s loss. In Latin America, Chile and Mexico declines were also due mainly to ETFs, while positive stock allocation has only gone to a handful of countries including Colombia, Poland and the Philippines. On the MSCI Colombia’s and Mexico’s market drops have been limited to single digits, while the sole core gain was Indonesia’s despite currency correction. Frontier funds continue to be shunned with African destinations in particular off an average 25 percent. Kenya has been battered the most as it turned to the IMF for emergency assistance on 20 percent-level inflation and interest rates, while world-beating oil growth story Ghana has sputtered heading into the traditional pre-election high government spending period. In the BRIC category, Brazil and China have each sustained $5.5 billion in redemptions. Holders are skeptical of Chinese central bank claims that lenders and developers can absorb a 20-30 percent fall in housing prices and that local government non-performing credit so far is less than 3 percent. Japanese investment trusts have joined international peers in spurning Brazilian assets despite the removal of capital controls as GDP growth of 3 percent will likely come in at half of above target inflation. Rumors have swirled there that small banks reliant on wholesale lines and domestic bond issuance are in trouble as the Rousseff cabinet continues to shed ministers on corruption charges. Russia had experienced a $1.5 billion exit before parliamentary elections brought ruling party reversal and street protests as yearly capital flight by official estimates could be $80 billion. Public sector wages were raised 6 percent in October, but the largesse did not sway voters who cut the Putin’s United Russia grouping to a simple from a two-thirds majority.

Europe after its solid 2011 start has become a pariah region with even its remaining AAA-rated advanced economy members put on ratings watch. Croatia and Slovenia have been among better frontier performers as elections put opposition candidates campaigning for overdue fiscal and competitive adjustment in office. Zagreb is on track for EU partnership and the new Slovenian leader headed a business with ties throughout the former Yugoslavia. Lithuania, on the other hand, joined the bottom ranks after a bank collapse which resulted as well in closure of its Latvian arm as Baltic solidarity proved double-edged.

Capital Flows’ Capped Wellspring Whirl

2011 October 14 by admin

The IIF’s September Capital Flows survey kept the 2011 total for 30 emerging markets roughly constant at $1.05 trillion while reshuffling the portfolio debt-equity mix in favor of the former, given the push from interest rates on industrial country instruments “cut to the bone.” The 2012 prediction is for the same amount, although with another year of 6 percent-range economic growth the portion will decline relative to GDP to 4 percent. FDI will be almost half the sum at $450 billion, overwhelmingly going to China, whose direct investment outflows at $100 billion also reflect the net creditor status of a large swathe of the tracked universe. In contrast, the MENA and Europe regions have been further downgraded, with the latter hit in particular by stock and bond sputtering in Turkey over its record current account deficit and credit expansion. A secular trend toward greater exposure should not be halted by recent selloffs as sovereign re-ratings will continue to elevate developing relative to developed credits, according to the report. In addition to traditional risk metrics, the emerging world no longer seems as historically prone to crises, while the institutional quality in advanced counterparts cannot be automatically presumed as evidenced by the Eurozone rescue and US budget ceiling debates.

In Asia share allocation will slip from 2010’s $120 billion to $70 billion, but private debt components, equally bank and non-bank, will come to $250 billion. India is alone in running a current account deficit while Indonesia’s FDI has quadrupled since 2009. In Europe Swiss-franc borrowing vulnerability is an obstacle in Hungary, Poland and Romania, and Ukraine remains out of compliance with its IMF program and Russia’s election calendar injects unease even with Putin’s intention to reclaim the presidency. Latin America’s overall “resilience” with net private inflows over $250 billion will be tested by Brazil’s continued capital control use, Mexico’s trade and remittance ties to the US and Argentina’s likely extension of the state intervention model into a second President Fernandez term with worsening external accounts and capital flight already features. Monetary policy in the region could switch toward cuts particularly if commodity prices weaken, which is also a danger for Persian Gulf destinations and South Africa. High oil and metals revenue are needed to sustain infrastructure and social spending, and nonresident bond purchases of $4 billion through the first half serve to offset the perennial balance of payments gap despite their consequences for rand volatility.

In a companion annual update on its stable capital flow and debt negotiation principles the group hails the top information dissemination and investor relations scores of Latin American and other issuers and examines restructuring cases in Greece, Dubai, Iceland and Cote d’Ivoire. In Greece the assessment may be complicated by its own role in offering a reduction menu to European authorities to meet desired private sector involvement. The package calculates the principal and interest haircut at 21 percent in a deeper concession than original French and German bank-backed proposals, and while self-congratulations are in order for following the “good faith” guidelines the episode may be far more involved in terms of potential conflict and Eurozone repercussions.

Fund Flows’ Roped Pool Lane Refuge

2011 June 10 by admin

Through June tracked fund divergence intensified according to EPFR collection as equity outflows at $7.5 billion hit all major regions as debt moved $4.5 billion in the opposite direction with all core countries getting inflows. In the former category Asian dedicated funds represented over half of flight, led by Chinese ETF escape, and Russia reversed a previous positive allocation course with year to date overall capital exit exceeding $30 billion by central bank calculation as inflation hovers stubbornly at 10 heading into the presidential election season. By region only Africa has seen a minor infusion, along with a smattering of frontier and long-established markets in Europe and East Asia. On the bond side Brazil and Mexico have topped the pack with around $1.5 billion each received, with local currency and blended versions fare exceeding traditional dollar and euro-denominated vehicles. Japanese retail investment trusts with assets of $65 billion have become large players in their own right with heavy Brazilian concentration. The fixed-income allocation has been driven by poorer industrial production and retail sales data cramping GDP growth forecasts, exchange and interest rate tightening expectations as commodity price inflation may have peaked this cycle, and peripheral Europe aversion as the Greek default saga lingers and Portuguese 10-year yields score records even as the center-right free market oriented oppositions won a convincing election victory. Spain may soon join Ireland in the ailing more developed contingent with regions declaring their precarious solvency after recent national polls as they breached the 2.5 percent of GDP ceiling agreed with the central government. In Central Europe long considered stability bastions have also lost favor as Poland may have finessed observation of the 55 percent of GDP public debt limit with derivative transactions and the Czech Republic’s ruling coalition continues infighting that compromises promised budget cuts.

For stock funds Korea commitments have waned as the central bank extends rate hikes with household borrowing at 150 percent of income and floating rate mortgages the standard. Africa structures have taken in $35 million after last year’s billion-dollar bonanza but Kenya’s shilling has plummeted to near 90 on double-digit inflation and drought bringing GDP growth under 5 percent. Ghana’s exchange is up over 30 percent but the cedi continues to depreciate as the fiscal deficit overshoot provoked IMF criticism in the latest review of its post-crisis $600 million program. Oil will spur historic economic expansion this year even as fund conduits spring unaccustomed leaks.