Emerging and Frontier Markets: Economic and Geopolitical Analysis

[LeveragedBuyout]

http://blogs.ft.com/beyond-brics/2014/09/24/brazil-finds-novel-way-to-repair-budget-deficit/

Brazil finds novel way to repair budget deficit
Sep 24, 2014 9:49amby Joe Leahy

What is this? Brazil is withdrawing $1.5bn from its sovereign wealth fund to plug a hole in its budget.

President Dilma Rousseff justified the move saying the sovereign wealth fund was the equivalent of saving for a rainy day – and that a rainy day had arrived. With Brazil’s economy not growing, the government is missing its budget targets.

This from Itaú Unibanco:

In its 4th budget review of the year, the Planning Ministry reduced its GDP growth forecast to 0.9 per cent from 1.8 per cent and lowered expected revenues (net from transfers to state and municipalities) by R$10.5bn. This reduction was partially compensated by an expected withdrawal of R$3.5bn from Brazil’s sovereign wealth fund… Our forecast for the primary fiscal surplus this year is 1.1 per cent of GDP (target: 1.9 per cent of GDP). The bulk of the difference from our forecast to the target is lower revenues.​

Critics argue the sovereign wealth fund would be better used for investment in such a way as to avoid adding to inflationary pressures in the economy.

Marina Silva, Rousseff’s main challenger at elections on October 5, said the use of the fund to balance the public accounts “demonstrates clearly that the government has put at risk the country’s stability and growth.”

However, the government’s use of the funds to plug its budget deficit is unlikely to affect its electoral chances. Brazilian voters appear to be more concerned with jobs than with other macro-economic headlines. And unemployment is the one thing that is still going right for the government, with joblessness remaining low.

This and a determined campaign of attack by Rousseff against her chief electoral rival has helped the incumbent recover lost ground in the polls. This week, polls showed she is now numerically equal with or ahead of Silva in a second round run-off that would take place on October 26 if no candidate wins an outright majority.

 

[LeveragedBuyout]

2014 Tougher for the Balkans–So Far - Frontier Markets News - Emerging & Growth Markets - WSJ

• 

• September 24, 2014, 10:33 AM ET

2014 Tougher for the Balkans–So Far
ByLaurence Norman

EU foreign policy chief Catherine Ashton worked hard to reconcile Serbia and Kosovo.
Agence France-Presse/Getty Images
While 2013 was a year of unusual progress for Serbia and Kosovo — both in developing bilateral ties and in steps towards European Union membership — 2014 has been grueling.

Last December, EU foreign policy chief Catherine Ashton was buoyant about the reconciliation talks between Serbia and Kosovo, its former province that declared independence in 2008. A historic agreement was signed in April 2013 pledging to normalize the situation in the Serbian-dominated northern enclave of country where ethnic Albanians are in a majority.

Ms. Ashton was eyeing a second agreement that could ramp up Pristina-Belgrade ties. There was even talk that Ms. Ashton and the Serbian and Kosovo leaders were in the running for a Nobel Peace prize.

Acknowledging that progress, the EU agreed in June 2013 to start accession talks with Belgrade this year and embarked on a pre-accession accord with Kosovo.

However, so far this year, progress has been sporadic at best.

Elections in Serbia, for the European parliament and in Kosovo have drained some momentum, especially since Kosovo’s June vote has produced three months of political gridlock. A new Kosovo ballot could still be needed. With Ms. Ashton leaving office Oct. 31 with the current EU executive, no second Belgrade-Pristina agreement is in sight.

True, Kosovo and the EU have initialed the pre-accession deal and hope to sign it this year. Serbian Prime Minister Aleksandar Vucic has pushed some unpopular reforms at home to make progress in EU negotiations. But heady talk of completing membership talks within five years has transformed into recognition that the road to the EU is a long slog. Incoming European Commission President Jean-Claude Juncker has said he foresees no new EU members during his five-year term.

Still, there are glimmers of hope 2014 could end on a better note.

 

[LeveragedBuyout]

Argentina’s Trade Surplus Surges to $899m as Imports Plunge - Frontier Markets News - Emerging & Growth Markets - WSJ

• 

• September 24, 2014, 10:53 AM ET

Argentina’s Trade Surplus Surges to $899m as Imports Plunge
ByKen Parks
BUENOS AIRES–Argentina’s trade surplus more than doubled to $899 million in August as a sharp drop in imports more than offset falling exports, according to a government report on Tuesday.

The surplus for the first eight months of the year rose to $5.89 billion, up from $5.39 billion in the same period of 2013.

Exports fell 12% on the year to $6.60 billion in August, owing to a 10% drop in the volume of goods shipped and a 2% decline in prices, according to preliminary data published by the national statistics agency Indec.

Imports fell 20% to $5.70 billion last month, as volumes dropped 16% and prices fell 4%. Analysts say the steep fall in imported goods stems from a recession and a shortage of foreign currency that have led the government to limit imports.

Argentina depends largely on U.S. dollars left over from trade to pay government creditors and buy imported goods it needs. High inflation and a sluggish Brazilian economy have hurt exports this year, while a debt default in July is expected to crimp already-low dollar inflows from foreign investment.

The economy is widely believed to have entered recession earlier this year due to foreign-currency shortages and inflation that some economists say is close to 40%. The economy is expected to contract 2.1% in 2014, according to the latest survey of analysts by FocusEconomics.

In a rare piece of good news, the country’s dollar-devouring energy deficit–the difference between energy exports and imports–shrank 2.5% on the year to $4.92 billion between January and August thanks to a mild winter and weak economy.

But, reports Taos Turner, strong demand for dollars is battering Argentina’s black-market exchange rate, pushing the peso to a record weak level of 15.30 per USD. Scant confidence in government policies and rising expectations for a devaluation are bolstering demand for greenbacks, pressuring a tiny black market where dollars are scarce.

The gap between the underground rate and the official rate, which hovers around 8.43, is almost 82%. The bigger that gap, economists say, the more likely companies are to raise prices, further fueling inflation.

 

[LeveragedBuyout]

http://www.atimes.com/atimes/Middle_East/MID-01-230914.html

Middle East
Sep 23, '14

Erdogan's flying carpet unravels
By Spengler

Turkey's President Recep Tayyip Erdogan has a growing list of enemies. "Among his targets" at a recent address to a Turkish business group "were The New York Times, the Gezi events of 2013, credit rating agencies, the Hizmet movement, the Koc family and high interest rates," Zaman reported September 18. Erdogan earlier had threatened to expel rating agencies Moody's and Fitch from Turkey if they persisted in making negative comments about Turkey's credit.

Turkey's financial position is one of the world's great financial mysteries, in fact, a uniquely opaque puzzle: the country has by far the biggest foreign financing requirement relative to GDP among all the world's large economies, yet the sources of its financing are impossible to trace. I have analyzed sovereign debt risk for three decades - including stints as head of credit strategy at Credit Suisse and head of debt research at Bank of America - and have never seen anything quite like this.

Source: Bloomberg

At around 8% of GDP, Turkey's current account deficit is a standout among emerging markets. It is at the level of Greece before its near-bankruptcy in 2011. Where is the money coming from to cover it?

A great deal of it is financed by short-term debt, mainly through borrowings by banks.

Source: Central Bank of Turkey

Little of this appears on the Bank for International Settlements tables of Western banks' short-term lending to other banks, which means that the source of the bank loans lies elsewhere than in the developed world. Gulf State banks are almost certainly the lenders, by process of elimination.

Recently, as the above chart shows, the rate of growth of bank borrowing has tapered off. What has replaced bank loans? According to Turkey's central bank, the main source of new financing cannot be identified: It appears on the books of the central bank as "errors and omissions".

Analysts close to Turkey's ruling party claim that the unidentified flows represent a political endorsement from Turkey's friends in the Gulf States. Quoted in Al-Monitor, political scientist Mustafa Sahin boasted: "The secret of how Turkey avoided the 2008 global economic crisis is in these mystery funds. The West suspects that Middle East capital is entering Turkey without records, without being registered. Qatar and other Muslim countries have money in Turkey. These unrecorded funds came to Turkey because of their confidence in Erdogan and the Muslim features of the AKP and the signs of Turkey restoring its historic missions."

It seems clear from the data that short-term bank lending and mystery inflows have been interchangeable means of covering Turkey's deficit. When the growth of bank lending slowed, errors and omissions rose during the past eight years, and vice versa.

Source: Central Bank of Turkey

This continuing trade-off suggests that bank lending and mystery inflows have a common origin, presumably in the Gulf States. But it seems unlikely that Qatar is the main source of funds for Turkey, simply because its resources are too small to cover the gap. Qatar shares Turkey's enthusiasm for political Islam in general and the Muslim Brotherhood in particular, but there are alternative explanations. Despite its historical dislike for its former Ottoman overlord and strong disagreement about the Muslim Brotherhood, Saudi Arabia may want to influence Turkey as a Sunni counterweight to Iran's influence in the region.

If mystery attends Turkey's past economic performance, the future is all the cloudier. Erdogan's power rests on his capacity to deliver jobs. The country's economic performance has depended in turn on extremely rapid credit growth, as I showed in a 2012 analysis for The Middle East Quarterly. According to Moody's, 80% Turkish corporate loans are denominated in foreign currency, which bears far lower interest rates than local-currency loans, but entails foreign exchange risk: a devaluation of Turkey's currency would increase the debt-service costs of over-levered Turkish borrowers. Credit to Turkey's private sector is still growing at more than 20% year-on-year, down from a peak of 45% in 2010, but remains extremely fast.

Source: Central Bank of Turkey

Despite the extremely rapid rate of credit growth, Turkey's economy has stalled. Turkey reported 2% annualized growth in real GDP during the second quarter, but a detailed look at the economy shows a far direr picture. Manufacturing and construction are falling while inflation is surging.

Source: Central Bank of Turkey

New housing permits, meanwhile, are down by almost 40% year-on-year for single-family homes, and negative for all categories of construction (measured by square meter of planned new space).

Source: Central Bank of Turkey

The biggest contribution to reported GDP growth during the second quarter came from the finance sector. In short, the central bank is counting the banks' contribution to the lending bubble as a contribution to growth. That is absurd, considering that most of the increase in lending to the private sector is to help debtors pay their interest on previous loans. A fairer accounting would show zero growth or even a decline in Turkey's GDP.

Erdogan's popularity among Turkish voters is not hard to understand: He has levered the Turkish economy to provide jobs, especially in construction, a traditional recourse of Third World populists who want to create jobs for semi-skilled workers. During the run-up to the 2014 elections, construction employment increased sharply even while employment in other branches of the economy declined.

Source: Central Bank of Turkey

Judging from the plunge in building permits, though, this source of support for Turkey's economy disappeared during the first half of 2014.

That leaves the mystery investors in Turkey holding an enormous amount of risk in the Turkish currency. Turkey's currency has fallen by half against the US dollar, cheapening the cost of Turkish assets to foreign investors. The Turkish lira nearly collapsed in January, but the country's central bank stopped its decline by raising interest rates. The lira has been slipping again, and the central bank has let rates rise to try to break the fall.

Source: Bloomberg

Despite the largesse of the Gulf States, Turkey is locked into a vicious cycle of currency depreciation, higher interest rates, and declining economic activity. Turkish voters stood by Erdogan in last March's national elections, believing that he was the politician most likely to deliver jobs and growth. But his ability to do so is slipping. If the Turkish lira drops sharply, the cost of debt service to Turkish companies will become prohibitive, while the cost of imports and ensuing inflation will depress Turkish incomes. By some measures Turkey already is in a recession, and it is at risk of economic free-fall.

That explains Erdogan's propensity to shoot the messengers: the rating agencies, the central bank, and even the New York Times. For the past dozen years he has made himself useful enough to his neighbors to stay in business. His magic carpet is unraveling, though, and his triumph in the March elections may turn out to be illusory much sooner than most analysts expect.

 

[LeveragedBuyout]

http://blogs.ft.com/beyond-brics/2014/09/24/sigh-of-relief-from-mexico/

Sigh of relief from Mexico
Sep 24, 2014 10:16pmby Jude Webber

The sigh of relief coming out of Mexico has been practically audible. “Alleluia!” exclaimed Nomura in a research note.

It’s not so much that there was doubt that growth was really happening, though after last year’s shock slump (GDP expanded a meagre 1.1 per cent overall), taking growth for granted looks ill-advised.

However, the indication that GDP grew by a stronger-than-expected 2.52 per cent in July, the fourth consecutive monthly rise, is a reassuring confirmation that things are on the right track.

As Alberto Ramos at Goldman Sachs put it:

The expansion of activity on July was broad-based: with all sectors recording expansions on an annual and monthly … basis. The secondary sector (industry) continues to perform well; it has now expanded for six of the last seven months.

The acceleration of sequential growth in July corroborates the firming data from other leading indicators and is consistent with our view that after a significant strengthening of the economy’s forward momentum during 2Q 2014, the Mexican economy is likely to expand further during 2H 2014 on the back of firming external demand and recovering domestic demand.​

The market had been expecting growth of 2.38 per cent, so a stronger number only underlines the improving expectations.

Mexico is betting on its ambitious reform programme, and especially the opening up of its long-closeted energy sector, to fuel growth and blast the country out of its three-decades-long rut of below-potential expansion.

Obviously, with the ink barely dry on the laws to implement energy reform, and the labour market still also new, a reform-related growth push hasn’t happened yet. Benito Berber, an analyst at Nomura, reckons that will take until the second half of next year or even 2016 to materialise in a meaningful way. But he notes:

We see a clear shift in domestic demand, which had been the main laggard.
​

The upbeat GDP proxy data, plus strong July retail sales “signals that the economy is finally accelerating strongly. Exports had been the only engine pushing the economy forward so far, but now domestic demand is also picking up”, Berber added.

How much acceleration can we expect? Berber is betting on close to 4 per cent growth year on year in the second half of this year, which is about double the rate seen in the first six months. He also expects 2.8 per cent this year and 4 per cent in 2015. So not bad then – the government is forecasting 2.7 per cent for this year and 3.7 per cent for next.

Economists may be inclined to remain a bit tentative yet, but they – and the government – will be comforted to see growth now looking securely back on track.

 

[LeveragedBuyout]

http://blogs.ft.com/beyond-brics/20...as-restrictions-on-foreign-investment-lifted/

Dar es Salaam hopes for flood as restrictions on foreign investment lifted
Sep 25, 2014 3:28pmby Javier Blas

Tanzania, the best-performing stock market in Africa so far this year, has lifted restrictions on foreign ownership of shares, potentially unleashing pent up demand for companies listed in the small Dar es Salaam Stock Exchange.

The exchange said in a statement released on Thursday that “as per the new foreign investors regulations dated 19 September 2014, there are no longer restrictions for foreign investors to buy shares or bonds at the exchange”.


Source: Dar es Salaam Stock Exchange

The Tanzanian market has until now been off the radar of most international investors, as foreign ownership was capped at 60 per cent of the market capitalisation. Yvonne Mhango, sub-Saharan Africa economist at Reinassance Capital in Johannesburg, said that with “many major names already up to the 60 per cent limit, there has been little ability for foreigners to access the market, and trading volumes have been low.”

The 11-member Tanzania Share Index has gained 73 per cent so far this year, the most among the 17 regional indices tracked by Bloomberg. The exchange, which has a market capitalisation of $6bn, said the new regulations would remove the limit and would require dealers to seek prior “approval to buy shares or bonds for foreign investors”.

Until now, the market has been largely illiquid, with daily trading volumes of just over $1m, with most of it concentrated in four blue-chips: Tanzania Breweries, National Microfinance Bank, Tanzania Cigarette and CRDB Bank.

George Fumbuka, chairman of the Tanzania Stockbrokers Association, earlier this year told beyondbrics that lifting the ownership regulation would “work wonders almost immediately” attracting millions of dollars in fresh capital inflows.

“As soon as investors receive that announcement we’ll receive many, many calls – many [of those already interested] are in America, South Africa and the UK,” he said.

Tanzania appeals to investors for three key reasons. First, it has been growing faster than some of its neighbours, with average growth rates of 7 per cent over the last decade. The International Monetary Fund forecast an expansion of 7.2 per cent this year. Second, substantial new natural gas finds are likely to propel the economy even further ahead, delivering windfalls to the government if production starts in the early 2020s as expected. Third, the country is – following in the footsteps of neighbouring Kenya – readying itself to launch a debut eurobond, likely to run to $1bn-plus and to place the country on the international investment map.

For now, though, the stock market boasts only 11 companies, plus five cross-listings from Kenya, and very little liquidity. The arrival of foreign investors could prompt other companies to list, and boost liquidity – but it could also create a bubble.

The Dar es Salaam stock exchange is the ninth largest by market capitalisation in Africa, behind the local markets of Nigeria, Kenya, Egypt, Ghana, Morocco, Uganda, the regional stock market of West Africa, and Mauritius.

 

[LeveragedBuyout]

http://blogs.ft.com/beyond-brics/2014/09/25/to-survive-donbas-industry-must-stay-in-ukraine/

To survive, Donbas industry “must stay in Ukraine”
Sep 25, 2014 4:33pmby Sergei Kuznetsov

Following the ceasefire between Ukrainian and pro-Russian separatist forces in the Donbas and an announcement by Kiev that it will grant self-rule status to the rebellious territories, the chances are increasing that Ukraine’s industrial heartland will find itself locked in a frozen conflict.

If so, what will happen to the Donbas economy, the source of 16 per cent of Ukraine’s GDP and 23 per cent of its industrial output?

“All sides will be obliged to find an agreement, as Donbas is not economically self-sufficient,” says Aleksei Ryabchyn of the Ukraine Reforms Communications Taskforce, a community of experts created to discuss Ukraine’s reform-related challenges. “This region has always been a part of the industrial cooperation both within Ukraine and between Ukraine and Russia.”

The steel industry, for example, relies on raw materials from neighbouring regions in Ukraine. “In addition, it needs to import 10 to 15 per cent of its high-quality coal from the Rostov region [in Russia] to increase the quality of the metal,” Ryabchyn says.

Most of the iron ore processed by plants in Donbas is supplied from the Kryviy Rih basin in the nearby Dnipropetrovsk region. According to a strategy note from Kiev-based Concorde Capital:

the Donbas is self-sufficient in coking coal and coke, but has no in-house sources of iron ore. The integration of the Donbas region into Ukraine’s iron ore-coke-steel chain is very deep.​

The Donbas is also heavily dependent on exports – it sells about 70 per cent of its products abroad. Ryabchyn says it is losing its traditional export markets because clients don’t want to deal with an unstable and unpredictable grey zone. He says most industrial enterprises in the Donbas have loans from western banks, while their competitiveness depends on western energy-saving technologies.

“I do not see any other reasonable way for the Donbas to exist, other than for it to remain under Ukrainian jurisdiction. Otherwise, this industrial region will die,” Ryabchyn says.

He believes that a shutdown of industry in the Donbas would create enormous social pressure. “We have not yet seen the miners and metalworkers on the streets of the towns and cities. However, discontented workers are a great force that can sweep any government, whether Ukrainian or separatist,” Ryabchyn warns.

Meanwhile, the authorities in Kiev face an urgent need to address the problem of stalled production and shipment of coal in the Donbas as a result of the rebellion.

Alexander Paraschiy, head of research at Concorde Capital, says territories within Donbas that are controlled by pro-Russian forces produce more than 90 per cent of Ukraine’s anthracite. “This coal is used at four power plants outside the Donbas that produce about 14 per cent of electricity outside the region. Other coal types produced in the rest of Ukraine are not suitable for these power stations,” he says.

Paraschiy says that parts of Donbas that are controlled by separatists are not self-sufficient, “either in terms of the production cycle, or from the standpoint of budget revenues and expenses.”

Total net subsidies to Donbas from Ukraine’s budget and industries were 38.6bn hryvnia in 2013 ($2.9bn) or 17 per cent of the region’s GDP. Kiev subsidised both the region’s budget deficit and its coal industry, as well as subsidising electricity and natural gas for local industrial enterprises.

Paraschiy believes that the government in Kiev will not continue to provide such support to the region for fear that political control over it will be lost. “Therefore, this ‘stale’ state of the region cannot last long. It is obvious that the best course of events is the re-integration of the region into the production chain of Ukrainian industry,” he says.

Petro Poroshenko, Ukraine’s president, said in a television interview on Sunday that Kiev would only provide financial assistance to territories that have “raised the Ukrainian flag”.

“Ukraine will finance those areas where there is peace, and where Ukrainian authorities are in power, including local self-governments which have been legitimately chosen,” he said.

Ryabchyn says that restoration of Ukrainian control over rebellious territories is a precondition for obtaining financial assistance for the restoration of the Donbas from western donors. “The west will never be prepared to throw money into a black hole.”

The Ukrainian authorities hope that a significant portion of funding for the restoration of the Donbas will be allocated by western backers. The government plans to hold a donors’ conference in autumn 2014.

“It is quite realistic to think that western aid can be sought. Ukraine has a moral right to demand funding from western countries, as they need to feel guilty about the situation in the Donbas and the Crimea. In fact, countries like the US have violated the guarantees they provided to Ukraine under the Budapest Memorandum [on security assurances], so they have to somehow mitigate their guilt,” Paraschiy says.

 

[LeveragedBuyout]

Myanmar is one of the most under-reported economic (and strategic) opportunities for the United States. Good to see the process of liberalization is continuing, even if slowly.

---

Myanmar’s Central Bank Urges Investors to be Patient - Frontier Markets News - Emerging & Growth Markets - WSJ

• 

• September 25, 2014, 10:00 AM ET

Myanmar’s Central Bank Urges Investors to be Patient
ByShibani Mahtani

Set Aung, deputy governor of Myanmar’s central bank confirmed the foreign bank selection process is still on track.
Reuters
YANGON — Myanmar’s central bank confirmed it will continue to take a measured approach to economic liberalization, despite facing criticism that the country is taking too long to unshackle its financial sector.

Speaking to foreign companies, investors, government officials and others at a conference last week in the country’s capital, Naypyidaw, Set Aung, the bank’s deputy governor, acknowledged that the process of handing out licenses allowing foreign banks to operate is “already a bit late.”

A decision on the licenses, between five and 10 of which will be handed out to hopeful applicants, is expected within weeks, though initially planned for the first quarter of this year. Banks including Australia’s ANZ, Japan’s Mizuho Bank and Singapore’s United Overseas Bank are among the 25 that have applied for a license.

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The central bank, he said, is taking a “cautious approach” — including initially restricting the activities of foreign banks — to suit Myanmar’s macroeconomic environment, which is not fully mature, and has no mechanisms to stabilize it should risk be introduced into the system. Foreign banks, he said earlier, will initially be restricted to just one branch in Myanmar, and will likely only be able to lend in foreign currency, rather than the local Kyat, unless they make the loan through a local bank.

During an interview with the Wall Street Journal in New York this week, Mr. Set Aung elaborated on his comments: “Everything has to be done in sequence. There are no shortcuts … in the financial sector. Without having the necessary functioning markets, you can’t expect the necessary financial instruments to be available.”

But he also reassured investors that the license selection process was on track: “It’s going to be finished as scheduled … by the end of September. As soon as the process is finished, we’re going to make an announcement,” he said.

The Central Bank’s conservative approach, particularly around delaying the entry of foreign banks and initially restricting their activities, has been criticized by foreign investors who continue to complain about the difficulties of accessing capital. Local banks in the country do not have the capacity to support large foreign multinationals, experts say, and many foreign banks currently do not facilitate transfers to banks there, owing to lingering legacy of decades of harsh economic sanctions imposed on the once-pariah state.

The Myanmar government in recent years has taken steps to liberalize its macroeconomic sector, including adopting a managed float for its currency in 2012, and establishing an independent central bank this year.

But the delays and confusion around allowing foreign banks access to the market has invited criticism that the government is pandering to local business interests and taking too long to get basic financial structures in place. Standard Chartered, a bank widely tipped to win a license to operate there, chose not to apply for a license.

Foreign companies “are thinking that perhaps [Myanmar] is a country they don’t want to operate in, given the early stage decisions are taking too long,” said Stuart Witchell, senior managing director at FTI Consulting in Hong Kong, who helps clients entering Myanmar with due diligence and risk mitigation.

Mr. Witchell said he has seen a drop in the number of enquiries to do due diligence for companies in Myanmar, and that banks that had initially asked his firm to monitor the macroeconomic situation there have stopped requesting these services.

“They say that the process could go on forever,” he added, and potential investors are considering other markets in the region instead.

Mr. Set Aung, responding to criticisms, said that people in Myanmar have had “over-expectations” on the pace of reforms.

“Most people don’t really see the invisible reforms but the visible reforms won’t be sustainable unless the invisible reforms take place,” he said.

@Manticore Can you please move this thread to the "World Affairs" section, as its scope extends beyond Asia?

Hungary’s GDP Growth, CPI May Slow Moderately on Russia-Ukraine Conflict - Emerging Europe Real Time - WSJ

• 

• September 25, 2014, 1:21 PM CET

Hungary’s GDP Growth, CPI May Slow Moderately on Russia-Ukraine Conflict
ByMargit Feher

Apples are one of the most affected Hungarian produce by the Russian trade ban.
MTI/MTVA Zoltan Mathe
BUDAPEST–Hungary’s economic growth and inflation may slow moderately as a result of the deepening conflict between neighboring Ukraine and Russia, the Hungarian central bank said on Thursday.

Due to lower Hungarian exports to the two countries engaged in conflict that has seen demand from them fall, as well as the negative impact of Russian trade sanctions on Hungary, Hungarian gross domestic product growth may slow by 0.2 percentage point this year and 0.4 percentage point next year, the central bank said in its quarterly Inflation Report.

The National Bank of Hungary expects this year’s GDP growth at 3.3% and next year’s at 2.5%, including the impact of the conflict.

Additional sanctions that would affect car exports to Russia, a possibility already considered, “would make these figures jump, but we haven’t calculated with such sanctions yet,” said Barnabas Virag, a central bank director.

Sanctions already in place against Russia mostly effect Hungarian food exports there, which accounted for a moderate 0.24% of GDP in 2013. Pharmaceuticals, machinery and vehicles account for 60% of Hungary’s exports to Russia.

Hungary’s headline inflation may slow by up to 0.3 percentage point this year and next year combined unless Hungary manages to sell its foodstuffs on other export markets, Mr. Virag added.

The central bank projects this year’s inflation at 0.1% and next year’s at 2.5%, also including the impact of the conflict.

The central bank’s projections for the effects of the conflict on GDP growth and inflation are preliminary and may revise them as the developments unfold, it said.

 

[LeveragedBuyout]

Turkish Central Bank Holds Interest Rates Steady - Real Time Economics - WSJ

• 

• September 25, 2014, 7:45 AM ET

Turkish Central Bank Holds Interest Rates Steady
ByYeliz Candemir

Turkey’s Central Bank Governor Erdem Basci.
Associated Press
Turkey’s central bank Thursday held all its interest rates steady for the first time since March, as near double-digit inflation and an emerging-market selloff weakening the currency trumped government calls for lower borrowing costs to stimulate the economy.

The Monetary Policy Committee kept the benchmark one-week repo rate at 8.25%, the Ankara-based central bank said in a statement on its website after a regular monthly meeting. The interest-rate corridor also remained unchanged, with policymakers keeping the overnight borrowing rate at 7.5% and the overnight lending rate at 11.25%.

Turkish central bankers’ decision to hold rates steady was in line with the forecasts of 12 of the 13 economists surveyed by the Wall Street Journal. Only one expected a 0.25 percentage point cut to the rate corridor’s ceiling.

“Macroprudential measures taken at the beginning of the year and the tight monetary policy stance started to have a favorable impact on the core inflation trend,” the central bank said. “The tight monetary policy stance will be maintained, by keeping a flat yield curve, until there is a significant improvement in the inflation outlook.”

In August, the Turkish central bank bucked expectations by cutting its overnight lending rate from 12%, yielding to government calls to reduce borrowing costs even as stubbornly high inflation failed to slow in June as expected by policymakers. Since the central bank started cutting rates in April, economists have been warning that a premature easing cycle threatens the central bank’s credibility and inflation targets.

Turkey’s annual inflation rate rose to 9.54% in August, the highest since May and near a two-year peak, from 9.32% in July, as a drought triggered higher food prices. That is almost double the official 5% target, and well above central bank Governor Erdem Basci‘s 7.6% year-end inflation forecast.

The currency also came under renewed pressure starting in late July. The lira weakened about 8% against the dollar as geopolitical tensions triggered by Islamic State advances along Turkey’s border with Syria and Iraq further fueled a broader emerging-market selloff as investors brace for the U.S. Federal Reserve to start tightening its monetary stance next year.

After the central bank’s decision, the Turkish lira extended losses to as much as 1.2% to TRY2.263 a dollar, an eight-month low. Meanwhile, benchmark two-year government bond yields rose to as high as 9.51% from 9.35% before the decision, hitting levels last seen in mid-August.

Turkish President Recep Tayyip Erdogan and government officials led by Economy Minister Nihat Zeybekci have repeatedly urged the central bank to cut interest rates more quickly and support growth in the $820 billion economy.

The pace of economic growth slumped to 2.1% in the second quarter from 4.7% in the first three months of 2014, as domestic demand weakened. While the official forecast for economic growth this year remains at 4%, Finance Minister Mehmet Simsek warned last week that it may be as low as 3%.

 

[LeveragedBuyout]

http://online.wsj.com/articles/kaza...0349853011903034570704580175552710962576.html

Kazakhstan Considers Dollar Bond Comeback
Banks to Test Investor Appetite Next Week

Updated Sept. 25, 2014 12:31 p.m. ET

A fireworks display in Almaty, the capital of Kazakhstan, this month. The central Asian republic is considering issuing a new dollar-denominated bond. Reuters

Kazakhstan is preparing to tap the international bond market for the first time in more than a decade, building on a rush of risky government borrowers that have issued debt in recent months to satisfy investors' thirst for high returns.

The republic Thursday said that it had mandated three banks to arrange a five-day series of meetings with investors, with plans to issue a dollar-denominated bond.

The transaction would be the first such bond from the oil-rich Russian neighbor since April 2000, when it sold $350 million of debt that matured in 2007, according to Dealogic.

Michael Gomez, managing director and head of emerging market portfolio management at Pacific Investment Management Co. in Newport Beach, California, said investors would likely bite, if the price is right.

"We expect the offering to be well received, assuming pricing is appropriate," he said. "Given the turmoil in the region, geopolitics will be a big part of the discussion and it is quite sensible that they are doing a roadshow to make sure the market is properly informed," he added. Mr. Gomez declined to comment on whether Pimco, which had $1.97 trillion of assets under management at the end of the second quarter, would be taking part in the deal.

Other investors said they were drawn by the rarity of this transaction.

"It is a very rare opportunity and the Kazakhstan story is very appealing. Of course we are cognizant of political risks, but generally we're excited about this," said Alex Kozhemiakin, head of emerging market debt at Standish Mellon Asset Management with $162 billion of assets under management.

He said that it was likely that Kazakhstan would target a 10-year maturity with the deal. For that tenor, he said, the country would probably have to offer investors a yield in the region of a little over 4%, based on where debt issued by some state-owned corporates in the region is trading.

Plans for the country to return to the bond market surfaced last year, when finance minister Bolat Zhamishev said that Kazakhstan was aiming to borrow up to $1 billion and asked banks to apply for mandates.

In a June report, ratings firm Standard & Poor's Corp. said it remains cautious. "The economy is vulnerable to external shocks, and little progress has been made in achieving sustainable and inclusive non-oil growth," credit analyst Ana Jelenkovic wrote, revising the outlook on the country's BBB+ credit rating to negative.

But starved of yields on bonds issued by major economies, investors have proven eager to snap up slightly riskier sovereign bonds in recent months, helping a string of so-called frontier markets, considered shakier bets than emerging markets, to sell bonds at cheap rates. The window of opportunity for borrowers is likely to close relatively soon; interest rates are expected to start rising in the U.S. in the first half of next year, pumping up borrowing costs for all types of debt.

In June, Ecuador sold a larger-than-anticipated $2 billion 10-year bond, which printed with a lower yield than bankers had expected, even though the country defaulted on its debt just six years earlier. Rwanda, Ghana, Zambia and Kenya have also issued bonds.

"Investors are certainly looking for ways to diversify," said Souhail Mahjour, a debt syndicate manager at HSBC Holdings HSBA.LN -1.00% PLC, one of the banks mandated to run the Kazakh deal.

Kazakhstan, which is an oil producer as well as a major exporter of industrial metals, uranium and grain, has a Baa2 credit rating with Moody's MCO -1.76% Investors Service Inc. and a BBB+ rating with Fitch Ratings, in line with S&P's. HSBC, Citigroup and J.P. Morgan have been mandated to sell the planned bond.

Investor meetings are due to kick off Sept. 29 in London before moving to New York, Boston and San Francisco and concluding in Los Angeles on Oct. 3, according to a person familiar with the matter. A transaction is likely hit the market early the following week.

—Emese Bartha in Frankfurt contributed to this item.

 

[LeveragedBuyout]

Kenya, Uganda and Rwanda to Upgrade Cross-Border Power Grid - Frontier Markets News - Emerging & Growth Markets - WSJ

• 

• September 25, 2014, 1:47 PM ET

Kenya, Uganda and Rwanda to Upgrade Cross-Border Power Grid
ByNicholas Bariyo
KAMPALA, Uganda–Kenya, Uganda and Rwanda are seeking consultants to conduct a feasibility study to upgrade the cross border electricity grid, officials from the three countries said in joint statement on Thursday, the latest infrastructure drive aimed at fostering economic integration in the region.

The project will involve building a high-voltage power line, running from Kenya’s rift valley, through Uganda to central Rwanda. The officials didn’t indicate how much the project would cost.

Interested companies have until Oct. 7 to submit bid documents for the project, which is expected to boost power export potential in the region, according to Uganda’s Energy and Minerals Minister Peter Lokeris.

“Electricity demand in the region is growing, there is need to revamp the power distribution infrastructure to match generation projects,” Mr. Lokeris said.

Years of sustained economic growth have boosted power demand in the region, straining inadequate existing facilities. Kenya and Uganda are connected by a decades-old power line, which is prone to breakdowns.

Kenya is trying to boost its power generation with a number of geothermal projects in its rift valley, while Uganda is building several hydro power plants along the Nile river.

Kenya, Uganda and Rwanda are also in the process of implementing a Chinese-funded railway project to link their respective economies, which is expected to cost up to $15 billion. East Africa has become a hot spot for foreign investors following the discovery of huge oil and gas reserves in recent years.

Standard Chartered bank said in July that it would more than double its financing commitment for electricity projects in Africa to at least $5 billion to support Power Africa, a U.S.-backed program to boost power generation on the continent.

More than two-thirds of the population of sub-Saharan Africa is without electricity, according to U.S. government figures.

 

[LeveragedBuyout]

Sober Look: Argentina running out of options

THURSDAY, SEPTEMBER 25, 2014
Source: Goldman Sachs
A great deal of hard currency now goes to support domestic importers (that are forced to sell at a loss to keep prices under control) and the country is becoming desperate for dollars needed to import the products the population needs. In the past, some of the greatest sources of foreign currency for Argentina have been grain exports, particularly soy. Except now there is a problem ...


Cash soy prices (source: barchart)

With fiscal deficit growing rapidly and access to international markets shut off due to the recent default, Argentina's central bank has been doing the only thing a central bank can do in this situation - monetize the deficit by printing more pesos. This has resulted in inflation levels of over 36% this summer and probably even higher currently. Not quite Zimbabwe levels yet, but moving in that direction.

In response to such inflationary pressures and fully aware that further currency devaluation by the Fernandez regime is inevitable, businesses and households are hoarding dollars. One US dollar now trades at over 15 pesos in the unofficial ("blue") exchange market - some 80% premium to the official exchange rate.


Source: Dolar Blue
There are no easy answers at this juncture. With foreign reserves expected to dwindle and risks rising of foreign bondholders accelerating full debt repayment - which they can do now that they are no longer receiving their coupon payments - Argentina is running out of options. The authorities are becoming increasingly desperate as Fernandez, in search of someone to blame other than her own failed policies, turns on Argentina's private sector. New legislation that resembles Venezuela's heavy handed socialist style has now made strong corporate profit margins in Argentina illegal.

The Washington Post: - One of South America's largest countries has passed new measures to cap consumer prices of goods, set profit margins for private businesses and levy fines on companies found to be making "artificial or unjustified" profits.

If that sounds like something they would do in Venezuela, well, that's because they already have.

Now it's Argentina that wants to use the heavy hand of the state to grip the invisible hand of the market.
​

Earlier this year hopes were rising for a better future in the post-Fernandez Argentina (see post). Those hopes have now been dashed.

 

[Aepsilons]

Sober Look: Argentina running out of options

THURSDAY, SEPTEMBER 25, 2014
View attachment 86219Source: Goldman Sachs
A great deal of hard currency now goes to support domestic importers (that are forced to sell at a loss to keep prices under control) and the country is becoming desperate for dollars needed to import the products the population needs. In the past, some of the greatest sources of foreign currency for Argentina have been grain exports, particularly soy. Except now there is a problem ...

View attachment 86220
Cash soy prices (source: barchart)

With fiscal deficit growing rapidly and access to international markets shut off due to the recent default, Argentina's central bank has been doing the only thing a central bank can do in this situation - monetize the deficit by printing more pesos. This has resulted in inflation levels of over 36% this summer and probably even higher currently. Not quite Zimbabwe levels yet, but moving in that direction.

In response to such inflationary pressures and fully aware that further currency devaluation by the Fernandez regime is inevitable, businesses and households are hoarding dollars. One US dollar now trades at over 15 pesos in the unofficial ("blue") exchange market - some 80% premium to the official exchange rate.

View attachment 86221
Source: Dolar Blue
There are no easy answers at this juncture. With foreign reserves expected to dwindle and risks rising of foreign bondholders accelerating full debt repayment - which they can do now that they are no longer receiving their coupon payments - Argentina is running out of options. The authorities are becoming increasingly desperate as Fernandez, in search of someone to blame other than her own failed policies, turns on Argentina's private sector. New legislation that resembles Venezuela's heavy handed socialist style has now made strong corporate profit margins in Argentina illegal.

The Washington Post: - One of South America's largest countries has passed new measures to cap consumer prices of goods, set profit margins for private businesses and levy fines on companies found to be making "artificial or unjustified" profits.

If that sounds like something they would do in Venezuela, well, that's because they already have.

Now it's Argentina that wants to use the heavy hand of the state to grip the invisible hand of the market.
​

Earlier this year hopes were rising for a better future in the post-Fernandez Argentina (see post). Those hopes have now been dashed.

This is very disconcerting, indeed ! I remember reading about how Argentina owes $200 million in debt to lenders, and that it was supposed to pay it to the United States' Bank of New York Mellon. But Argentina is paying it through other banks, and this is in violation of court orders.

This is quite saddening to read about.

http://www.ft.com/cms/s/0/9e460b6e-44b8-11e4-bce8-00144feabdc0.html#axzz3EMxEw6lt

 

[LeveragedBuyout]

East African Leaders Convene to Address South Sudan Crisis - Frontier Markets News - Emerging & Growth Markets - WSJ

• 

• September 26, 2014, 5:52 PM ET

East African Leaders Convene to Address South Sudan Crisis
ByDan Keeler

South Sudanese President Salva Kiir met other Africa leaders in New York in an attempt to find a resolution to his country’s protracted crisis.
Agence France-Presse/Getty Images
A group of key East African leaders held a “mini-summit” this week on the sidelines of the United Nations General Assembly meetings in New York in an attempt to find a resolution to the continuing crisis in South Sudan.

Uganda’s President Yoweri Museveni told WSJ Frontiers that he had joined the Presidents of South Sudan, Somalia and Kenya, and the Prime Minister of Ethiopia to discuss finding a solution.

South Sudan has been in turmoil since fighting broke out in December 2013 between government forces loyal to South Sudan’s president Salva Kiir and troops loyal to his former vice president Riek Machar. More than 10,000 people have died in the ensuing civil war and as many as 1.5 million people have been forced to leave their homes.

Repeated cease-fire agreements have failed to hold over recent months, with both sides accusing the other of failing to honor the treaties.

Mr. Museveni, though, is optimistic that the impromptu gathering of leaders in New York will help resolve the crisis. “I think we shall find a solution,” he said. “There will be a formula of sharing power leading to some reforms in the interim period and then eventually going through general elections.”

According to the Ugandan President, the five leaders pledged to reconvene when they return to Africa with the aim of hammering out an agreement that will lead to lasting peace.

Asked if he believed the five leaders’ initiative would succeed in persuading the warring factions to lay down their arms for good, he added: “Yes. They have no alternative. They have to have a win-win solution.”

Video: Ugandan President Yoweri Museveni says East African leaders convened a ‘mini meeting’ on South Sudan in New York.

 

[LeveragedBuyout]

Ugandan President Museveni Sees Deeper Integration in East Africa - Frontier Markets News - Emerging & Growth Markets - WSJ

• 

• September 26, 2014, 5:04 PM ET

Ugandan President Museveni Sees Deeper Integration in East Africa
ByDan Keeler

Uganda’s President Yoweri Museveni: “Africa will be developed by us, not by anybody else.”
Dan Keeler, The Wall Street Journal
Africa is increasingly in control of its own destiny and no longer needs to rely on other countries to promote its economic development, Uganda’s President Yoweri Museveni told WSJ Frontiers.

The veteran leader, who has been in office for 28 years, also laid out his vision for his country as a key part of an increasingly vibrant—and confident—East African trade bloc.

Mr. Museveni, who was in New York for the United Nations General Assembly meetings, left no doubt that he already sees the East African Community, which includes Kenya, Uganda, Tanzania, Burundi and Rwanda, as a coherent bloc and that the future will see only deeper integration.

“It is already an economic union, we have a customs union, we are going into the monetary union and eventually we will become a political federation,” Mr. Museveni said.

Mr. Museveni’s comments come in the wake of a flurry of announcements about deepening regional cooperation, including plans to upgrade the region’s electrical grid and a project to enhancerail transport between Uganda and its neighbors.

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As well as reducing the barriers to cross-border trade, enhancing the role of the East African Community gives the region’s countries greater leverage in negotiations with other countries, Mr. Museveni says.

“Uganda’s population is 37 million. The East African region has a combined population of 150 million—and it’s growing. When we pool our population we create a bigger market, which helps us sell our products but it also helps us negotiate with other markets, such as the European Union and the United States.”

African nations’ increased negotiating power was on display at the U.S.-Africa Leaders Summit hosted by President Barack Obama in Washington in August. During that event, a parade of American companies announced new or increased commitments to investing in Africa, while political leaders such as Secretary of State John Kerry and Vice President Joe Biden attempted to highlight the opportunities that U.S. businesses could seize as they helped African nations develop their economies.

Mr. Museveni, though, believes the most significant outcome of the summit was not the potential American investment in Africa. “The most important contribution to our development was President Obama’s recommitting himself to AGOA [the African Growth and Opportunity Act],” he said.

“Africa will be developed by us, not by anybody else. All we need is market access. That’s what I said to President Obama. Opening your market to our products, that’s the biggest service you could offer to Africa.”

East Africa’s economic development prospects have been boosted considerably recently by discoveries of substantial hydrocarbon resources. Giant gas fields have been found off the coasts of Mozambique and Tanzania and considerable quantities of oil have been found in countries including Uganda and Kenya.

While the potential revenues from some of the new discoveries will swell the region’s coffers, Mr. Museveni played down the significance of future oil revenues for Uganda. “We are going to develop Uganda without oil, but now that we have got oil, it is a good godsend that will quicken the process of development and transformation,” he explained. “But it is nothing more than a tool.”



had been discussing the civil war in South Sudan, while they were in New York for the UN meetings.

“I think we shall find a solution,” he said.