2013 April 18 by admin
After consecutive G-20 summit calls to phase out fossil fuel subsidies, the IMF in preparation for its spring gathering completed a study on economic costs and reform experience to serve as a catalyst, especially with increased developing country fiscal and power constraints. It finds that cheap energy stimulates overconsumption, hurts investment and job creation and extends carbon-based reliance, but that price adjustments from support removal often result in popular backlash with poorly-designed exit steps. Transfers come both from tax relief and budget outlays and may not be captured in national accounts. State-owned oil companies are frequently loss-making and do not face private competition, and the subsidy array can comprise gasoline, diesel and kerosene. Electricity and natural gas are also protected but coal less so, as the global pre-tax toll amounted to half a trillion dollars or 2 percent of government revenue in 2011. The oil-exporting MENA region accounted for half the pre-tax total, while Asia and Europe-CIS took 35 percent. Latin America and Africa’s combined portion was 10 percent, but the top three countries in absolute terms underpricing through taxes are the US, China and Russia with spending over $900 billion. Although Sub-Sahara Africa’s burden is smaller on a worldwide basis, its power production costs across a 30 country sample are much steeper, reflecting broader infrastructure and industry disadvantages. Budget and efficiency gains are clear from overhaul along with environmental and health benefits, according to the paper, which also notes that current policies favor upper-income groups. Gasoline coverage is the most regressive and is rarely targeted and can encourage cross-border smuggling as in Nigeria. Social spending from savings could go to education, sanitation and employment training, and in many cases expatriate workers receive access eroding domestic economic impact.
Based on twenty reform efforts across the emerging world, the authors draw common conclusions to guide the next round expected again to be endorsed as a priority by participants at the upcoming Bretton Woods institutions’ meeting. Lack of information and administrative capacity are typical obstacles, and success is aided by good growth and inflation performance before changes. Interest groups from the urban middle class and business community can be powerful opponents and should be directly engaged as part of an extensive stakeholder consultation process. They must fashion a comprehensive long-term plan setting a timetable and quantifying likely effects and safety-net measures, and avoid the temptation to focus on early easy “wins” that soon encounter wider roadblocks. The Philippines and Turkey were two examples where advance communication and planning facilitated lasting consensus, the Fund believes. Improving state enterprise governance and moving to automated cash or voucher channels are also important parallel initiatives. The availability of alternative energy sources can promote a switch as with Indonesia’s kerosene conversion to liquid gas. An independent body should handle technical pricing decisions and full liberalization should be the eventual aim even if existing motion is idle, the document urges.
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.
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.
2011 October 21 by admin
The IMF’s September Global Financial Stability Review in a somber tone specifically cited the onset of increased emerging market risk since 2008 as an overlooked contributor, with the “export” of credit risk to global investors with Chinese property companies an important element. It noted that as portfolio and bank-related versions again dominate capital inflows in most regions, volatility and outright flight could again ensue and that corporate external debt in the “search for yield” could be ripe for mispricing and deficient due diligence. Issuance in the asset class at over $150 billion already will hit another record this year, with cross-over demand from US high-yield a major impetus, particularly for neighboring Latin American allocation. Speculative participation is near one-third the total, and accounting and fraud scandals as in Sino Forest’s default could be looming. In China’s case companies have also gone offshore not only to tap cheaper funding with the assumption of yuan appreciation but to escape tighter domestic prudential regulation through administrative and monetary policies. Rapid loan growth there and elsewhere like Brazil and Turkey, especially to households, may invite danger based on recent historical experience, and stress test models point to rising NPLs. Asia could see the greatest spike followed by EMEA, which has so far borne the brunt of the Eurozone crisis, but Latin America will not be spared although its comparatively harsher blow could come from falling commodity prices in a terms-of-trade shock. Bank capital adequacy may be insufficient to absorb these swings, and economic conditions may be less favorable to immediate redress than during the post-Lehman period. The accompanying World Economic Outlook publication has cut developing countries’ GDP growth outlook, and structural fiscal deficits remain large amid climbing inflation and leverage and often “stretched” securities market valuations. Capital controls that have proliferated as an anti-overheating and exchange rate management tool may be “of limited use” in the current risk-averse and pressing financial institution oversight environment, the authors recommend, with “time running out” to properly mobilize political will and policy priorities.
A separate chapter in the document probes hundreds of long-term institutional investors about their post-crisis lessons and preferences, and underscores an emphasis on sovereign credit quality and instrument liquidity and “back to basics” derivatives approach for straightforward hedging. An “ongoing” trend toward emerging market diversification has resumed with equity ahead of debt, but with discrimination rather than a homogeneous segment view. A complementary focus in the alternatives category is commodities and infrastructure, although the ability to exit in all these areas is a lingering impediment that could be further spotlighted with the launch of the latest round of stricter insurance and pension fund guidelines for Europe’s single market as monetary integration otherwise may slacken.
2011 October 5 by admin
In response to France’s call as current G-20 chair for insight and recommendations on the overlap between commodity and financial markets and in particular the impact on price volatility and food security several task forces have reported back with proposed measures. Since 2008 the GSCI Index aggregating energy, agriculture and metals has doubled and assets under management through ETFs and dedicated funds and accounts have reached almost half a trillion dollars. By volume gold listings are the top exchange-traded products and in the US the CFTC regulator had concluded after oil investment investigations that stricter position limits could be needed affecting both industry and portfolio players. Developing and industrial country officials have met twice on the subject and asked groups like the IIF and IOSCO to weigh in on aspects from better data and information to anti-speculative and stabilization mechanisms. The securities supervisors have endorsed greater transparency and access and margin controls in principle without stipulating specific steps. The bankers’ trade association has spurned allocation restrictions while citing overwhelming evidence that swings results from underlying physical imbalances and that “long” index tendencies offset the short price-fall hedges of end-users. The World Bank agreed in a June report that the empirical case for defining and dampening so-called commodity “financialization” was weak and that exchange practice in Chicago and elsewhere for spot and futures activity also introduces distortions. Increased correlation between asset classes throughout the past five year crisis period has heightened correction severity generally. Emerging economies led by China have become leading raw material consumers, and food availability has been impaired by poor harvests and distribution channels as well as competing demand for grain-based fuel. Export bans in Asia and Europe have also hindered supply, while “resource nationalism” changing mining rules for foreign producers has affected metal values.
Developing countries acting through UNCTAD have nonetheless insisted on stricter financial intermediary oversight and an outright ban on proprietary dealing in the commodities space and urged reconsideration of 1980s vintage global price-stabilization arrangements which unwound at the time of the debt crisis which then almost sank major banks. The UK and EU are reviewing their approaches with the MiFID guidelines on cross-border investment likely to incorporate specialist adjustments for derivatives exposure and reporting. The World Bank’s IFC arm has meanwhile sponsored an agricultural risk management instrument that will allow up to $4 billion in farmer hedging, following President Zoellick’s prompt to “better use and not block markets.” As with the Basle III capital and liquidity standards the IIF has warned of higher costs and “unintended consequences” from new rules that may match commodities’ sudden sweep.
2011 August 1 by admin
As European governments individually and collectively scramble to overcome liquidity, rollover and other risks associated with classic debt crises, the IMF lauded emerging market lessons in a regular roundup of compliance with the so-called best practice Stockholm Principles. In particular capital inflows have extended local currency maturities over the past decade, causing “less severe stress” in the immediate post-2008 crunch. The average sovereign bond tenor is 4 years, and floating and foreign currency-linked versions account for under 20 percent of the amount outstanding. Non-resident holdings have grown from one-quarter to one-third of the total, as net credit rating changes have been overwhelmingly positive in contrast with advanced economies. The paper urges low-income countries to embrace such steps as they become increasingly eligible and equipped for commercial borrowing. In the Lehman bankruptcy wake foreign buyers “abruptly departed,” compelling issuers like Hungary, Poland and Mexico to resort to shorter-term and adjustable placement features. In Central Europe the primary dealer auction process was also modified, syndicates were supplemental agents, and calendars were accelerated. Liability management operations were mounted to smooth repayment and yield curve characteristics, and cross-border investor diversification was emphasized with outreach to Asia and the Middle East. Over-reliance on outside appetite should be avoided however as put into “sharp focus” by current euro area emergency facilities to Greece, Ireland and Portugal. The entire portfolio should be subject to mutually-reinforcing sovereign and financial sector balance sheet worst-case scenarios as outlined in guidelines dating from the 1990s Asian financial crisis. A low rollover profile is welcome and has distinguished UK requirements from continental Europe. In cases like Chile and Russia national wealth funds can be tapped for additional liquidity, and retail and institutional investors can be further targeted through smaller lots and innovations including inflation-linked paper.
Brazil and Mexico had managed to lengthen maturities and also offer a range of exchange-traded and over-the-counter derivatives for hedging prior to the 2009 squeeze. Turkey’s finance ministry has actively run debt exchanges, and even irregular sponsors like the Philippines have recently completed large longer-dated swap exercises. The analysis concludes however that the proposed Basle III regulatory changes beyond capital for liquidity and leverage ratios could “create problems” in countries where debt markets are thin especially in relation to banking size. Repos and secondary activity could be constrained, and financial institution warehousing of safe instruments could interfere with normal lending patterns. Before the euro-zone crisis worsened the BIS estimated that over EUR 1.5 trillion would be needed to meet the new standards that no longer hold sympathy for ailing banks as well as nonbanks which could be hostage.
2011 May 25 by admin
The World Bank, under the auspices of its chief economist well-known in Chinese policymaking circles, published the first in a coming series of long-range Development Horizons studies predicting multi-currency use in 2025 based on emerging market-led commercial and financial “poles” guided by the BRICs. Developing countries now account for half of international trade and one-third of their FDI is “South-South.” Two-thirds of official foreign exchange reserves are outside the industrial world, and related sovereign wealth funds are among the largest institutional investor sources. Borrowers such as Chile, Turkey, and Brazil command lower spreads than European counterparts, yet since the collapse of the Bretton Woods system 40 years ago no reserve currency from these jurisdictions has entered the mix with the dollar, euro, yen, and pound, and the IMF-created SDR likewise lacks such a component. Over the next decade and a half emerging economies’ GDP growth over an average 4.5 percent will be double the advanced country norm, and the half dozen biggest ones will power the majority of global output. They have moved to the faster trajectory initially through total factor productivity — in land, labor and capital — gains that may soon join with innovation strides, as “rebalancing” occurs through switches from external to domestic demand. In China consumption will rise to over 50 percent of GDP during the period, with Latin America’s share already at 65 percent. Cross-border M&A from emerging market firms was one-third the world figure in 2010, and many active acquirers are able to tap billions of dollars through international bank loans and debt and equity financing, as well as access comparable sums in local capital markets. The net creditor position of major EMs will exceed $15 trillion under the study’s baseline scenario, setting the stage for a multi-polar monetary system to accompany trade and investment flows.
The renimbi will likely feature at the forefront of new entrants, according to the authors, as convertibility restrictions are progressively removed. Commercial trade settlement and bilateral and multilateral central bank arrangements have proliferated under incremental liberalization, and the currency could first be adopted as an Asian standard before receiving more widespread acceptance. The yuan could join with other emerging market units in a redefined SDR with the endorsement of G-20 Fund shareholders, who could also encourage private circulation of the synthetic denomination as an alternative to national and regional offerings. In this more diverse future, however, the preponderance of developing countries with their small heft will remain at risk of foreign currency mismatches and vulnerabilities even as the “fortress dollar” cedes impregnability.
2011 April 15 by admin
The April IMF Global Financial
Stability Report highlighted advanced economy bank and sovereign debt overhangs
as lingering perils, but also cited generic and country-specific emerging
market capital flow complications as nascent risks. In the US, Europe and Japan deleveraging has been slow
and capital raising for euro area banks in particular has lagged. Short-term
bond rollover requirements following state rescues there are heavy, and asset
quality in property and government paper portfolios continues to slide and will
be underscored by the latest stress testing round. European sovereigns have
become a “high-spread” asset class, sidelining the traditional investment-grade
investor base and placing the central bank in an unaccustomed buyer role that
for commercial and prudential reasons cannot be sustained indefinitely. Annual
interest costs in the 20 percent of revenue range are onerous and Treasury and
JGB yields will also inevitably rise from historic lows, especially as worries
mount about long-term fiscal paths. Corporations, especially small and midsize
firms, and households with job and housing value losses are also under unabated
balance sheet pressure. Against this background foreign direct equity and
lending lines to developing economies have been flat while securities
allocation dominates. This group has a combination of slimmer output gaps and
inflation spurts that warrant monetary tightening; G-3 quantitative easing
shows “little evidence” of triggering the liquidity wave, according to the
Fund. In its view emerging market corporate access may be overdone, as
lower-rated names tap local and external debt channels. Leverage is above
historic averages and a small interest rate shift could endanger servicing
capacity. For stocks, systemic bubble scope is “remote” but valuations in many
cases are frothy.
The MENA geopolitical spillover
may have industrial world effects with $350 billion in bank exposure to the
region by BIS data, and petrodollar recycling to key financial centers likely
to follow alternate patterns short of outright disruption. State-owned banks in
large markets like Brazil and China have been on a credit tear. more than
doubling operations from the early crisis period through end-2010. Wholesale
borrowing rather than deposit buildup has facilitated expansion and possible
overheating should concern supervisors. On other topics, Dubai’s debt workout
after a prolonged saga still leaves risk management and transparency gaps, and
ETFs which have mushroomed to over $200 billion for the emerging market
universe may introduce fresh distortions and threats to orderly well-monitored
transactions. They also insert another level of legal, policy and counterparty
complexity that could frustrate simple bets on next-generation business
superpower status, the review cautions.
2011 April 7 by admin
Just prior to its April
all-member session, the IMF’s policy and strategy arm circulated a draft design
for determining the nature and sweep of acceptable capital inflow controls
following a charge from the last G-20 summit where industrial and developing
country representatives recognized their reality but split on their application
and definition. The paper distinguishes the measures from conventional economic
policy and prudential supervision elements to embrace targeted administrative,
tax, or oversight action, and further notes potential permutations between
residents and non-residents. It cautions that they not divert from underlying
needed shifts in exchange rate level and the fiscal-monetary stance which can
achieve global “rebalancing,” and that the overriding financial stability goals
be clearly identified to shape a proportionate response. In an historic
retrospective current emerging market portfolio investment may be at a record
in terms of quarterly advances, driven by both push and pull and cyclical and
structural causes. In the post-crisis timeframe local debt concentration has
been particularly prominent, with the foreign share of government securities in
double digits and corporate paper also getting attention. US and European
mutual and pension funds have been active buyers of longer maturities, and
Japanese retail players have also entered. The allocation will be “persistent
and strong” into the future, with the recipient countries’ solid growth and macroeconomic
management, financial system modernization, and institutional investor moves
from asset class underweighting. Bond and stock prices have jumped the past
year but bubbles, as calculated by traditional valuations, have not yet
appeared. However credit growth may be too rapid in Brazil, Turkey and
elsewhere, and in Asia especially authorities have resisted currency
appreciation and interest rate “normalization” in light of money and
commodity-influenced inflation creep. The budget position has likewise stayed
expansionary, and the use of short-term inward capital curbs has been to “mixed
effect,” with still attractive returns confining the limits to “marginal”
However uncertainty has spiked
around the potential intensification and reclassification of existing regimes
and “abrupt announcements” which have angered and surprised participants
accustomed to relatively open and smooth official communication. The practice
guide suggests that price-based approaches are more transparent than procedural
ones, and that costs in terms of compliance and enforcement could hurt
securities market building. A 40-country exercise found that only one-quarter
met the mooted requirements for justifying control measures. Brazil’s
representative at the Fund immediately blasted the norms as undue interference
as the central bank exercised its prerogative to extend the 6 percent inflow
levy for up to 2-year company loans.
2011 March 18 by admin
The BIS in its March quarterly
publication marked the “end of a high capital inflow period” in Asia and Latin
America at the same time cross-border lending rose over $150 billion, or 6
percent, through end-2010 to all emerging market regions including
previously-shunned Europe. Exposure in the troubled MENA area had also
increased particularly at UK and French banks, although at less than 3 percent
of their worldwide book. For the group, inflation has intensified with rapid GDP
and commodity price increases as “gradual steps” tighten monetary policy. Among
the BRICs, only Brazil’s interest rate is positive at 5 percent, while the rest
have negative real benchmarks that discourage savings while currency
appreciation is also resisted with reserve accumulation. The global stock of
claims topped $30 trillion as of last year’s Q3, in comparison with the
pre-crisis apex of $35 trillion. Non-bank lines representing one-third of the
total are typically less volatile than interbank ones, according to the review.
Over half the developing economy expansion went to the Asia-Pacific, with $40
billion alone to China, well
above the combined sum to India,
Korea and Taiwan. In
Latin America as a whole, the record upswing for the period at $45 billion just
bumped China’s, with two-thirds going to Brazil, followed by Mexico and Peru
around the $4 billion mark. Europe improved for the first time since 2008, with
Russia up $10 billion after seven quarterly declines, beating usual favorites
Poland and Turkey. However Hungary
activity fell 2 percent at roughly the same clip as average peripheral Europe
engagement, although Ireland’s
sank 5 percent as it headed for an IMF-EU bailout. Saudi
Arabia and South Africa
were the main Middle East-Africa recipients, while together Egypt and Tunisia credits outstanding were
only $50 billion.
Developing country international
bond issuance was constant for Q4 at $40 billion, but emerging Europe slumped
while Asia transactions doubled. Latin America
and MEA, respectively, advanced and dropped 10 percent. On derivatives, the
Asian contingent of Hong Kong, India and Korea saw 15-25 percent growth in
equity index futures. Korean share contract trading has remained vibrant
despite the imposition of currency forward restrictions and reactivation of
bond withholding tax. The central bank has again hiked the benchmark rate 25
basis points, as officials intervene to support the won after selloffs in the
aftermath of trade partner Japan’s natural and nuclear disasters. The country
had already been facing a nuclear threat from the North as the fallout spreads
from dual sources.