Private Equity’s Middling Middle Markets
2012 April 10 by admin
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.
Poor Countries’ Debt Sustainability Releases
2012 March 15 by admin
The IMF and World Bank after a lengthy review proposed revisions to the 5-year old debt sustainability analysis (DSA) format for low-income economies to further break from official external focus to domestic and private sector borrowing access. 75 countries have been covered to date, with almost all “distress” cases designated before the HIPC completion point and concentrated on laggard performers by the institutions’ internal rankings for capacity, growth and policy. The near-term projections have been based on sound methodology but upset by commodity, financial and trade shocks that can come from the broader region or globally. However the post-2008 crisis waves have not brought systemic risks as first feared, due in part to the activation of special development bank facilities that incorporated the DSA measures into design and implementation decisions. The most burdened applicants got grant-only packages, while beginning in 2010 international commercial loans were also allowed alongside bilateral and multilateral support on a selective basis. The shift recognized the “new non-concessional space” left by a decade of debt relief initiative as the domestic-external balance also evolves. The former now accounts for 30 percent of the average total outstanding, and the share has doubled for a dozen countries in recent years mainly to manage higher budget deficits. Rollover pressure can be severe with maturities rare out to 10 years and shallow markets as calculated by turnover and institutional investor participation. Ghana, Kenya and Vietnam have among the top local debt-GDP ratios, often excluding contingent liabilities from state-owned enterprises and public-private partnerships.
Remittances are important to the overall sustainability tally and should be factored into adjustments for lower present value thresholds as a fraction of exports and revenue, the paper suggests. The danger zone remains public debt-GDP in the 40-70 percent range, according to empirical studies. However only a few borrowers in the universe report sizable voluntary bonds and credits beyond 15 percent of GDP, even as the estimated annual infrastructure needs for Sub-Sahara Africa come to $100 billion. In the Caribbean, Dominica and St. Lucia are outliers and in Central Europe Georgia and Moldova exceed the norm. The Georgian President was congratulated for top reformer status in the World Bank’s Doing Business scorecard during a February Washington visit as sovereign debt was included in JP Morgan’s NEXGEM index. Bank of Georgia went to a full GDR London listing around the same time, and economic growth and inflation are both forecast at around 5 percent this year. With overseas commercial exposure at 25 percent of GDP, a full debt servicing assessment may be warranted earlier than the standard triennial timetable to scrutinize rosier views, the document implies.
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.
The World Bank’s Worst-Case Wallowing
2012 January 30 by admin
As President Zoellick is increasingly vocal about urging joint international public and private sector anti-crisis action near the end of his term, the World Bank rendered a grim global economic reading advising developing countries to “prepare for the worst.” Their 2012 GDP growth forecast was clipped to 5.5 percent from the previous 6 percent as all regions “feel the blow” from Eurozone and industrial world debt and banking stress. Fiscal space is far narrower than in 2008-09, with 40 percent of the group running deficits of at least 4 percent of GDP. Monetary policy easing could help where viable but 30 emerging economies have immediate external financing needs above 10 percent of output. Corporate issuance in particular could be compromised as bond spreads widen, and lower commodity prices could damage both company and sovereign balance sheets. The report recommends contingency planning for these shocks alongside the potential fallout from cross-border financial sector deleveraging. Wholesale interbank sources could disappear and bubbles could puncture in locations where credit expansion has been rapid in the post-Lehman period. Current account positions could deteriorate sharply both from reduced trade and remittances as 2011 overall private capital inflows were off 10 percent to just over $1 trillion. This year in the separate categories bonds and loans and FDI are all expected to drop while portfolio equity allocation at $60 billion will remain just half the 2010 level. In the last six months major emerging market currencies have lost more than 10 percent against the dollar, reversing a secular appreciation trend. Raw material values outside oil, especially metals and food have weakened over the past year, generating lower inflation. Energy is subject to higher geopolitical disruption with Arab spring-aggravated tensions worsening in the Middle East. These scenarios could be more severe with a plausible credit freeze in large Euro-area economies, and vulnerability is uniformly greater than during the last episode, according to the outlook.
Fifteen developing nations have public debt-GDP ratios above 75 percent and external financing requirements come to almost $1.5 trillion. The sum has been roughly constant since 2008 with exceptions like India where foreign borrowing has jumped 40 percent as a fraction of output. For Turkey and others also with large current account gaps the situation could be “acute,” while Central and Eastern European bank units dependent on Western parents face commercial and regulatory network retrenchment. Austria’s recent supervisory edict to limit engagement is a “worrying development” as the original Vienna Initiative presence pledge no longer holds, the Bank notes. New IMF and industry surveys show trade finance conditions are again degenerating under market and oversight pressures, and could impede rollover of $1 trillion in short-term debt under a 5-year long rolling crisis.
Capital Flows’ Blocked Blandishments
2012 January 27 by admin
The IIF, while leading private Greek debt restructuring negotiations at an impasse over coupon rates and official creditor burden-sharing, slashed its 2011 and 2012 cross-border capital flow tallies to reflect lingering Eurozone and global throttles. The original $1 trillion expectation last year will come in 10 percent less, and this year’s total will slide another 15 percent to $750 billion for the 30 countries monitored. The “sharp drop-off” began in Q3 and is likely to extend through the first half, with the cumulative revision coming to almost $350 billion, hitting bank lending most by segment and Asia by region. The precipitous fall reflects the pro-cyclical experience of the 2008-09 post-Lehman shock, and the report points out that China slowdown concerns have combined with the euro crisis in recent months. FDI has held up in all geographies over the period, and bond and equity allocation may not suffer as much with the upgrade tendency in emerging market credit ratings. In 2013 flows could recover to $925 billion, still below the 2007 peak both in comparative sums and fractions of GDP. Almost half this amount will be in direct investment form and will increasingly concentrate between developing economies as previous inward and outward capital controls are relaxed. Already Chinese banks may be stepping in as European counterparts retrench in Asia, according to the survey. With the latter’s $5 trillion in claims on all emerging economies, currency zone breakup and other worst-case scenarios would entail “massive implications.” The December loan conditions reading showed clear deterioration with the index below 50 as supply and standards tightened, although trade finance is still available. The GDP growth forecast for the universe was shaved to 5.5 percent, although lower inflation at 5 percent allowing rate easing should keep real yields appealing versus the industrial world. Incremental progress in current account “rebalancing” has been seen with the unwavering appreciation of the Chinese yuan against the dollar, but Gulf oil exporters have been an exception as their joint surplus doubled to $300 billion last year.
Asian stock market inflows were only one-sixth of 2010’s $120 billion, and will only “gradually revive” in the near term. In Europe bond participation will fall one-third, with Hungary, Turkey and Ukraine most at risk with their balance of payments and external funding positions. In Russia annual capital flight after December’s disputed legislative elections may be close to $150 billion, in contrast to Latin America, outside Argentina and Venezuela, which is “holding the fort.” However in the Middle East only official flows will jump noticeably as private investors in Egypt and elsewhere continue to observe the Arab Spring barricades.
2011’s Perfunctory Performance Pedestals
2012 January 6 by admin
In Asia the Philippines exchange joined Indonesia in a late-year barely positive result among core MSCI stock markets down 20 percent. The spurt was attributed to regional reallocation from dominant destinations China and India, and its less correlated standing in the universe as well as steady remittance-aided GDP growth and revenue-driven fiscal strides. However these relative attractions began to wane in recent weeks with record flooding in the southern islands spurring government emergency spending on typhoon cleanup, as rebels long active in the area accused it of negligence. In the Gulf new overseas worker rules are designed to limit future professional labor influx, especially in the service and knowledge industries. While President Aquino faces no upcoming elections and retains solid approval ratings, a decision to prosecute his predecessor for alleged malfeasance in office has drawn fire in particular because former chief executive Arroyo is in ill health and has been denied medical treatment abroad. This pattern is familiar as she had charged her forerunner with embezzlement and he was subsequently found guilty and sentenced to prison. By contrast Indonesia’s President Yudhoyono has maintained political supremacy despite administration corruption incidents as the mainstream opposition remains weak and a landmark infrastructure law was finally passed, which will clarify land use and private participation for a wide range of electricity and transport projects. The package is pivotal to unlocking hundreds of billions of dollars in foreign commercial financing and investment needed by mid-decade, according to official estimates, that do not yet include launch of a much-debated Jakarta subway network. FDI at $20 billion is only half the level of the late 1990s pre-crash, while non-resident holding of local bonds was noticeably trimmed in the last 2011 quarter as central bank ownership jumped.
In fixed-income the EMBI+ chalked up a 9 percent return on the reverse trend with ten major components showing double-digit gains. The main loser was Argentina, which refused to budge as President Fernandez glided to another term, although her revelation of thyroid cancer has now focused attention on potential policy departures under Vice President and former Economy Minister Boudou, who handled reopened bond swap and Paris Club normalization negotiations. Another laggard was Ukraine, where the $15 billion IMF program has been postponed pending gas tariff and other changes, with external assistance needed in 2012 to cover debt repayment and the current account gap. Further Russian state bank lending may not be available with ongoing energy price disputes and street protests against Putin’s rule. Democracy monitors have decried similar tactics by Kiev with the jailing of opposition party head Tymoshenko for purported crimes, as the stock market too ended the year at the bottom of the frontier ranks in a form of exile.
The BIS’s Diabolical Deleveraging Plot
2011 December 29 by admin
The Bank for International Settlements’ end-year quarterly survey for the first time presented a comprehensive matrix of European bank emerging market exposure incorporating local and cross-border elements, with a breakout of short-term and debt securities holdings suggesting the Asia-Pacific region is at greatest pullout risk. As of June, two-thirds of claims there were under one year, and local units accounted for less than half the total. In comparison, Europe and Latin America had higher foreign bank participation as a share of credit outstanding at near 50 percent and 20 percent, respectively, with fixed-income assets at one-fifth and one-tenth of the corresponding portfolios. For the Middle East-Africa, the non-resident lending portion outpaced Asia’s at 75 percent, but vulnerability indicators were otherwise tame. At the upper tier of combined potential flight scores are a number of core recipients including the BRICs, Hungary and Korea. Such borrowers had started to struggle in Q3 on external debt-raising which showed a “marked decline” from China, Russia and elsewhere, and currency and equity derivatives activity likewise retreated in Brazil and South Korea. The EMTA trading figures for the same period chart a 10 percent fall from the year before to $1.75 trillion, concentrated 75 percent in local instruments. Mexican paper topped the list, and corporates were 40 percent of Eurobond volume. Hong Kong, South Africa and Turkey also saw active government debt engagement reaching an aggregate $350 billion. The African portion should be boosted with the launch of JP Morgan’s NEXGEM Index capturing these higher-yielding and less liquid frontier markets, which also transfer existing minor EMBI components from South Asia and Central America/Caribbean.
Ghana and Nigeria sport both domestic and foreign issues which are slated for the roster. The former’s ‘B’ credit rating was recently upheld with a stable outlook despite reservations about fiscal discipline heading into presidential elections. The incumbent is seeking another term and faces the same opponent he barely beat in 2008. Oil-aided GDP growth will drop below 10 percent in 2012 as inflation stays in single-digits. The budget deficit goal of 5 percent of GDP will be missed under the expiring IMF program, which has also breached the commercial borrowing cap with a $3 billion Chinese arrangement. Currency weakness has sparked central bank intervention, but officials are averse to defining a dollar corridor as with Nigeria’s naira where it has been loosened to the 155 range. 7.5 percent growth has been accompanied by 10 percent inflation despite hefty central bank rate hikes. The fiscal gap should remain at 3 percent of output as more money is put into infrastructure, but excludes the bad assets of the AMCON resolution authority which amount to over 10 percent of GDP and are often trapped in transaction indecision.
Capital Controls’ Captive Audience Qualms
2011 December 12 by admin
Post-election Argentina reacting to massive capital flight slapped new regulations on household and corporate dollar purchases as next-door Brazil, which had championed inflow curbs, ordered relaxation of tax and other measures as it too experienced net portfolio investment withdrawal. Buenos Aires ordered that industrial companies repatriate export proceeds and that individuals verify foreign exchange need with tax agency approval, as Commerce Secretary Moreno vowed an informal market crackdown. The central bank must safeguard reserves to repay external debt next year while attempting to maintain a gradual depreciation policy to aid the agricultural trade surplus. Without the interference, the peso would be on track to fall one-third against the greenback by conservative estimates, which also expect GDP growth to descend to 1-2 percent without the same heavy pre-poll fiscal handouts. Energy subsidy rollbacks are already in the works, although President Fernandez insists that the longstanding economic model will continue to stress an anti-poverty agenda. She has remained sympathetic to Venezuelan President Chavez’s economic approach which has reiterated the fixed currency regime and extended a spending spree heading into another election round. Non-oil construction brought 4 percent Q3 GDP growth as consumer staple price controls were also stiffened. Another large sovereign-oil company bond, sending annual issuance to $18 billion, went to market to release hard currency as the centralized SITME platform continued to dribble out normal requests. The opposition may unite behind a youthful popular governor or mayor at a time when the incumbent’s opinion approval is low and his health is in question after a cancer bout.
Asian proponents of access and participation curbs including Indonesia, Korea and Thailand may also modify them under changed forex and debt market circumstances, authorities have hinted. In India the sudden steep rupee plunge prompted a well-established commercial and political lobby to advocate new restrictions, but the government responded instead with additional opening of the retail sector to overseas capital, as it attempted to belatedly honor re-election promises and reinvigorate inward securities and direct investment. In South Africa calls led by ANC activists were rejected as youth wing head Malema was placed on suspension ahead of next year’s key party conference. As with India, portfolio commitments are needed to balance the current account deficit, and local institutions are wary of retaliation as they seek to diversify in BRIC and Sub-Saharan destinations. In Europe Western bans on equity and CDS short-selling have yet to be embraced elsewhere, while Russia has just agreed to 50 percent international bank stakes under WTO provisions as another Putin presidency is slated with privatization and venture capital overtures to accommodating comrades abroad.
Private Equity’s Driven Deal Display
2011 December 1 by admin
The Emerging Markets Private Equity Association reported that Q3 fundraising through 120 sponsors had returned to the pre-Lehman level year to date at over $30 billion, a $10 billion jump over all of 2010. China-focused offerings took three-quarters of the total, while Brazilian ones took a record $4.5 billion. 650 transactions over the period came to $20 billion, and the developing market fraction of the global total is 15 percent. With Europe’s crisis, capital mobilized has dropped under $1 billion there, with only $60 million put into Russia. Sub-Sahara Africa has drawn more at $1.3 billion, quadruple the MENA region attracting $350 million, down one-third from last year. South Africa in turn has taken in just $100 million, one-quarter 2010’s commitment. Asia accounts for the most deal-making with 75 percent of the aggregate, although its activity is less than 10 percent the worldwide sum. China and India dominate, but PE investment as a share of GDP is 0.15 percent and 0.4 percent, respectively. India’s penetration is the highest among major economies, while Mexico’s and Turkey’s rank at the bottom. Turkish companies’ leverage has been a deterrent, with $60 billion in overseas loans due through the middle of 2012, according to the central bank. For the biggest emerging market corporates generally, record international bond payments of $55 billion are owed and recent exchange rate corrections could aggravate the burden.
In Central and Eastern Europe limited partnerships have begun scouting for openings with the likely pullback of Eurozone-based cross-border groups which comprise at least two-thirds of the system in Hungary, Poland, Bulgaria and elsewhere. Originally they had agreed as an extension of EBRD, EU and IMF support to keep their presence and portfolios essentially intact, but parents like Austria’s Erste now clearly intend to repudiate the pledge under earnings and Basel and European supervisor capital-raising goals. The fallout may extend to Spanish giants BBVA and Santander’s operations in Brazil, Chile, Mexico and Argentina. Last year a Brazilian unit IPO had been oversubscribed, but the stock market index and flotation pipeline have since cooled. Euro area bank claims there are almost one-quarter of domestic credit and household debt service levels merit comparisons with the US in the subprime heyday. Number one target China has also come under harsh banking criticism in its first IMF stability assessment as venture firms weigh economic, property, and local government risks. It questioned the oversight and performance of the state-owned commercial behemoths, and cited the system danger of multiple shocks that could include a sudden exchange rate shift which may again be in the startup phase with bilateral and WTO complaints.
Doing Business’ Dutiful Insolvency Drive
2011 November 9 by admin
With the developed world again in debt crisis mobilization mode, the World Bank’s annual Doing Business publication tabulated record insolvency law revisions in thirty countries from the OECD and Eastern Europe/Central Asia, double the number from last year. By region Sub-Sahara Africa showed a breakthrough with 80 percent of members improving their regulatory environment in ten categories. Overall 120 nations instituted twice that amount of reforms for a 15 percent increase, concentrating on commercial startup registration. A new measure on electricity connection access was added. E-government and consolidated small business approaches are now common in both advanced and developing economies with emerging markets Morocco, Latvia, Korea and Colombia among the leaders in broad progress. In Africa the OHADA treaty was modernized for harmonized legal treatment, while at the opposite extreme Caribbean states embraced few changes. In the decade since the ranking began 80 percent of the 180 destinations tracked in on-the-ground micro-surveys have facilitated business launch with one-stop-shops as in Egypt a frequent platform. Malaysia has been a top performer in investor protection, getting credit, and cross-border trading but lags in other areas. In Mexico and elsewhere results can vary at the municipal level, but a 10-day reduction in licensing time can be associated universally with a 0.3 percent GDP growth boost. Ecuador and Venezuela were exceptions in moving toward a more unfriendly climate. Rwanda and Georgia were cited for commitments to reaching a critical “frontier” mass encouraging formal entrepreneurship with outside technical assistance and multilateral support. In the latter, administrative and tax burdens have eased but physical security and infrastructure remain impediments. On the bankruptcy front over 100 countries recognize creditor committees, while 50 feature out-of-court workouts and require expert credentials. Future research will focus on women’s participation and foreign companies’ role in domestic regimes.
The updated review came as the IIF released its Q3 reading on emerging market bank lending conditions modeled on the Fed, ECB and Bank of Japan equivalents. Its index dipped below 50 for the first time on “significant deterioration,” particularly in external fund availability. Europe fell to 45, while credit standards tightened in all regions despite higher consumer and industrial loan demand. Half of banks reported stiffer wholesale terms, with previously unaffected trade finance experiencing pressure. Non-performing assets are due to rise in the final quarter with commercial and residential real estate displaying softness along with other core borrower segments illustrating a range of doing business difficulties.