Emerging and Frontier Markets: Economic and Geopolitical Analysis

[LeveragedBuyout]

Moody’s Remains Cautious on Cypriot Banking Sector - Frontier Markets News - Emerging & Growth Markets - WSJ

• 

• September 16, 2014, 1:49 PM ET

Moody’s Remains Cautious on Cypriot Banking Sector
ByJosie Cox

A branch of Bank of Cyprus in Nicosia, Cyprus.
Associated Press
Cyprus may have come a long way since needing a multi-billion-euro bailout to save it from financial collapse just over a year ago, but ratings agency Moody's remains negative on the country’s banking sector.

The agency’s pessimism reflects its “expectation that problem loans will continue to increase over the next 12-18 months, resulting in further losses for the banks and leading to additional capital needs.”

Moody’s adds that, following a cumulative GDP contraction of 7.8% over the past two years, it now expects contractions of 4.1% in 2014 and 2.0% in 2015.

“Although the banking system has made progress in terms of eliminating the domestic controls without experiencing large outflows, cross-border controls are still in place and depositor confidence remains fragile,” Moody’s commented.

 

[LeveragedBuyout]

http://blogs.ft.com/beyond-brics/2014/09/17/sp-venezuela-has-5050-odds-of-default/

S&P: Venezuela has 50:50 odds of default
Sep 17, 2014 1:00amby Financial Times
20
By Eric Platt and Andres Schipani

Another lurch lower for Venezuela: The country’s sovereign credit rating was cut further to ‘CCC+’ by Standard & Poor’s on Tuesday as it grapples with recession, rocketing inflation, dwindling foreign reserves and widespread shortages of goods.

S&P lowered its rating one notch from ‘B-’, which the agency said indicated a “one-in-two likelihood of default over the next two years”.

In its note, S&P said:

The downgrade is based on continued economic deterioration, including rising inflation and falling external liquidity, and the declining likelihood that the government will implement timely corrective steps to staunch it.

Adding:

The rating reflects Venezuela’s higher vulnerability to nonpayment and its growing dependence upon favourable oil prices to meet its financial commitments.

Despite having the world’s largest oil reserves, the country has scrambled to reassure investors it can refinance more than $6bn in debt due this year, according to data from Reuters.

As Caracas Capital Markets said in a note on Tuesday:

Theoretically, with its oil income and $21bn in reserves, Venezuela should be able to pay its debt… but Venezuela must pay off $4.5bn in maturities next month PLUS interest on the rest of $83 billion in PDVSA and sovereign debt. Last month, for example, Venezuela and PDVSA had to pay a total of $732.5m in interest on their dollar debt.

All told, between now and the end of the year, Venezuela has to pay about $7bn in interest and maturities – in other words, almost half of the money they will realize from their oil sales between now and the end of the year, before even paying their foreign oil partners, the 100,000 PDVSA workers, the millions of government workers, much less providing dollars for all of their imports.
​

Over the coming three years, Venezuela has more than $28.2bn in debt falling due, out of a total of more than $80bn.

​

S&P, which maintained a negative outlook on the country’s rating, projects economic activity to contract 3.5 per cent in 2014 while inflation rises to as much as 65 per cent by year’s end.

 

[LeveragedBuyout]

Egypt Rolls Out The Red Carpet But Investors Still Wary - Middle East Real Time - WSJ

• 

• September 17, 2014, 7:04 AM ET

Egypt Rolls Out The Red Carpet But Investors Still Wary
ByNicolas Parasie

Finance Minister Hani Dimian at the the Euromoney Conference in Cairo.
Reuters
Such is the level of confidence of Egypt’s finance minister in his country’s economic turnaround that he advises prospective investors to move quickly because they will be treated on a “first come, first served” basis.

Some of Hany Kadry Dimian’s optimism is certainly warranted: Egypt’s GDP growth is gradually picking up and the economy is showing signs of life again with many observers praising recently-introduced economic reforms and the return to political stability under new President Abdel Fattah Al Sisi.

And with a population of over 80 million, Egypt remains a massive market that will always feature on the radar screens of regional and multi-national companies alike.

But several foreign investors, while acknowledging that positive changes are taking place, remain hesitant and want to see more progress before moving back into Egypt as they are still wary about the difficulty of conducting their business in the Arab country.

“It would not be wise to ignore Egypt but for now going direct, I personally think we can be a little more patient,” said Kaveh Samie, head of Middle East and North Africa for private equity giant KKR. “It will be a massive opportunity in the future.”

Other private buyout funds have also been reluctant to complete deals in Egypt as until last year’s tepid stock market activity and lack of initial public offerings meant they had fewer exit options for their investments.

Wael Aburida, chief investment officer of Bahrain-based Pinebridge Investments, said his firm “was starting to evaluate the situation” and that his focus was on sectors that remain relatively immune to any political transition and are consumer-driven such as food, pharma and healthcare.

Many business people will want to see a prolonged period of stability and the planned reforms to take shape before committing funds to Egypt again.

“The challenge is to start tackling some of the broader bureaucratic hurdles,” said Hisham El-Khazindar, co-founder and managing director of Qalaa Holdings. “And to make it much easier for companies to come in and start projects in this country.”

Underscoring the difficulties Egyptian authorities face in attracting new businesses, Investment Minister Ashraf Salman said an important part of his mandate consists of convincing existing foreign companies in Egypt, including for example Coca Cola, to stay and to enlarge their local presence.

“We have to solve their problems,” Mr. Salman said.

 

[LeveragedBuyout]

Jokowi’s Economic Challenges | The Diplomat

Jokowi’s Economic Challenges
Indonesia’s next president has plans to reform Indonesia’s economy. It won’t be easy.

By Prachi Priya
September 18, 2014

Indonesia’s 2014 presidential election process has been remarkable in many ways. The fact that peaceful elections were held across an archipelago of islands encompassing three time zones is one. And unlike India’s month long process, the world’s third-largest democracy conducted its vote on a single day. Ultimately, voters chose the widely popular Joko Widodo to replace outgoing president Susilo Bambang Yudhoyono, who is finishing a ten-year term.

Joko, known as Jokowi in Indonesia, is seen as a man of the people with no links to either the army or the elites. A former furniture manufacturer, Joko served as mayor of Solo for two consecutive terms before becoming governor of Jakarta in 2012. His clean image and reform programs have made him immensely popular in Indonesia and when he takes office on October 20, it will carrying the hopes of much of the nation.

Yet the road ahead will not be easy. Joko inherits a slowing economy, with GDP growth at a five year low of 5.1 percent (second quarter 2014). Other macroeconomic indicators look equally worrying. The current account deficit has widened to a record 4.3 percent of GDP. The budget deficit is approaching the constitutionally binding limit of 3 percent of GDP and social inequality is on the rise.

Joko has promised to start long-delayed structural reforms and get the economy back on track to a target growth rate of 7 percent. Still, investors remain wary of growing protectionism (including a mineral export ban) and a deteriorating investment climate. While many expect Joko to be the turnaround man for Southeast Asia’s largest economy, he faces enormous challenges.

Fixing the Energy Subsidies

One of the most immediate and pressing issues that will face the new president is the mounting energy subsidy. Fuel prices in Indonesia are among the lowest in the region ($0.56 per liter for gasoline), thanks to heavy government subsidies. The fuel subsidy accounts for 21 percent of government spending and 2.6 percent of GDP. Add the electricity subsidy, and the figure rises to 3.6 percent of GDP. According to the World Bank, “this is more than three times the allocation for infrastructure such as roads, water, electricity and irrigation networks, and three times the government wide spending on health. In addition to crowding out high-priority spending, subsidies disproportionately benefit households at the top of the income distribution.” Rising imports of increasingly expensive oil and declining commodity exports have turned Indonesia’s current account into a deficit since 2012.

However fuel prices have always been a controversial issue in Indonesia. The government has raised fuel prices in the past (2005 and 2008), but this has usually been followed by protests. Fuel prices were raised by 33 percent in 2013, although the government offset the impact with a compensation package to the poor. In fact, it was protests over the fuel price hike that helped topple the Suharto regime. Joko has expressed his desire to reduce fuel subsidies, but it is still not clear whether this will be done in one move or in stages.

Reviving Oil and Gas

Joko’s manifesto details polices to revive Indonesia’s energy sector. With aging oil fields and insufficient exploration and investment in the upstream sector, oil production has been falling since 1995, to half its peak of 1.6 million barrels per day. The only Asian OPEC member until 2008, Indonesia went from being a net exporter of oil to a net importer in 2004. According to the Energy Information Administration, crude oil reserves have fallen from 11.05 billion bbl to 4 billion bbl today.

Indonesia has tremendous potential for oil production, but investors have had to navigate a complex and unclear regulatory framework. Multiple permits are required to start exploration of an oil and gas field and the licensing process is burdensome. Contract sanctity and interference from central and regional governments are other impediments. Joko has proposed to introduce a more efficient production-sharing contract (PSC) structure, flexible fiscal incentives for exploration, deadlines for approving permits, and a streamlined licensing process.

Economic Restructuring

It has often been argued that Indonesia needs to expand its manufacturing base and reduce its reliance on commodity exports. Commodities like coal, rubber, palm oil and mineral ores account for more than half of Indonesia’s total exports, but slowing demand in China and falling commodity prices have been weighing on performance. The weak rupiah lifted manufacturing exports this year but a partial ban on unprocessed mineral exports has offset the impact. What’s more worrisome is the fact that non-commodity/manufacturing exports have not been able to compensate for the decline in commodity exports. The performance of the manufacturing sector has been disappointing, with its share of both GDP and exports falling over the last decade. Reviving the country’s manufacturing sector remains a priority for the new government.

Political Roadblocks

Joko’s greatest challenge will be coalition politics. His party, the Indonesian Democratic Party – Struggle does not have a majority in parliament, and his coalition is 74 seats short of a controlling majority of 281 in the Lower House. Many also believe that former president and party leader Megawati Sukarnoputri retains considerable control over the party and could be a major headache for the President-elect. The result could well be legislative deadlocks and policy logjams.

Jokowi has a clean track record and his meteoric rise at the national level has instilled some hope amongst the masses. However his inexperience in national politics and the constraints of a coalition government may well end up limiting his ability to revive the Indonesian economy.

Prachi Priya is a corporate economist based in Mumbai. She previously worked with an investment bank in Singapore. The views here are her own.

 

[LeveragedBuyout]

News In Charts: Brazil Investor Optimism Resting On Thinning Foundations | Alpha Now | Thomson Reuters

NEWS IN CHARTS: BRAZIL INVESTOR OPTIMISM RESTING ON THINNING FOUNDATIONS
September 18th, 2014 by Fathom Consulting

Ms Rousseff’s political brinkmanship is depriving the Brazilian economy of a credible fiscal anchor, weakening the hand of the next administration – whoever wins October’s election. Meanwhile, the decade-long decline in Brazil’s unemployment rate may be coming to an end, aggravating the economy’s stagflationary dynamics. The recent strong performance of local financial assets has been driven by expectations related to October’s result; as we close in on the election, any further gains are likely to come with elevated volatility attached. Once political considerations move from centre stage, however, investors will need to shift their attention back to a challenging set of ‘initial conditions’: souring domestic fundamentals; Brasilia’s limited policy flexibility; and escalating external macro headwinds going into 2015. In this environment, positive market momentum will become increasingly difficult, if not impossible to sustain.

As we noted earlier this year, investors have been switching back into Brazilian financial assets, encouraged by the rising likelihood of a transition to policies that have a better chance of pulling the economy out of the stagflationary vortex in which it finds itself. The scenario market participants appear to be pricing-in is one in which the balance of incentives for the new government is skewed to delivering a more orthodox, market-friendly set of measures.

In this regard, S&P’s downgrade in March of the country’s sovereign rating to just a notch above ‘junk’ status has arguably made the incentive for Brazil’s next president to deliver even more compelling – whoever ends up winning. At the same time, the timing of this announcement effectively removed the threat of further rating action before October’s election, thereby allowing more room in the near term for the incumbent to concentrate on boosting her chances of electoral success.

A prolonged period of political uncertainty and resultant reform inertia is already doing no favours to Brazil’s fragile economy. But by opportunistically stepping on the fiscal gas pedal, Ms Rousseff may be pushing her luck a bit too far, putting the country’s economic prospects in jeopardy. The administration is effectively moving the policy mix back in the wrong direction, skewing the balance of risks further to the downside.

Fiscal discipline remains elusive…

While Ms Rousseff is still the leading candidate, the polls continue to indicate that the likelihood of an outright victory is getting progressively slimmer. Not only does a runoff now seem inevitable, but the incumbent’s chances are converging with those of her main rival, Marina Silva. The latest polls show that the two candidates are effectively tied for a second-round.

As the pressure builds, the incumbent has resorted to Chinese-style ‘fine-tuning’ stimulus measures aimed at winning votes, rather than pursuing policies consistent with this year’s ambitious 1.9% primary surplus target. Since the spring, she has announced higher welfare payments for low-income families, unveiled initiatives to support the manufacturing industry and promised a rise in next year’s income tax exemption threshold, to name a few. At the same time, the government continues to effectively conduct credit policy through state-controlled financial institutions in the hope of spurring domestic demand through more lending – although, in our view, treating the symptoms will not do much to address the real problem, which is waning demand for credit rather than lack of supply.

We have already expressed our skepticism about the administration’s ability to deliver on some R$45 billion in announced discretionary spending cuts this year. Unfortunately, the latest official data seem to confirm our fears. In July, Brazil posted a primary budget deficit for the third straight month, to the tune of R$5 billion, coming on the heels of a combined R$13 billion deficit for May and June. Growth in tax collection has been slow due to contracting economic activity while expenditures have surged across the board: subsidies, social spending and transfers to regional governments have all moved higher. With the year-to-date primary surplus now well under R$30 billion, fiscal performance in the first seven months of this year has been the worst since 2000, pushing the trailing twelve-month primary surplus to 1.2% as a share of GDP at a time when real interest rates have been on the rise.



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It should come as no surprise that last week Treasury chief Augustin effectively acknowledged that the administration is assessing whether to lower its fiscal target for 2014. This also makes it more likely that the state will need to rely, yet again, on extraordinary revenues in order to have any hope of closing in on fiscal objectives – the government’s latest budget review pencils in around 0.5% of GDP in one-off revenues over the next few months, coming mainly from oil/telecom concessions and private sector tax re-negotiations. Over and above the associated execution risk, this will compromise the quality of fiscal consolidation. But more importantly, budgetary slippage weakens the ‘initial conditions’ facing the new administration by undermining the credibility of Brazilian leaders in the eyes of investors, constraining policy flexibility, crowding out private investment and amplifying the economy’s vulnerability to shocks.

Against this backdrop, while Brazil’s sovereign debt dynamics remain relatively benign, they may be getting nearer to an inflexion point. Public debt-to-GDP is still at low levels, but it has been on the rise this year as low nominal growth and weak budgetary contributions have failed to offset elevated debt-servicing costs. As a result, net consolidated public debt increased as a share of GDP by 1.5 percentage points to 35.1%, and gross general government debt by 2.3 percentage points to 59%, in the seven months to July. The ratings agencies are certainly keeping a close eye on the evolution of these dynamics, rendering the new government’s task of articulating a convincing economic strategy all the more pivotal. Last week, Moody’s – which still rates Brazil two notches above non-investment grade – put the sovereign on negative credit watch and said the economy was unlikely to rebound in the short term, raising the possibility of a downgrade to ‘junk’ status down the road.



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…while the economy is in stagflation mode

Meanwhile, Brazil remains in stagflation mode. GDP growth has been below trend for some time and the economy even entered a technical recession during the second quarter, while leading indicators continue to point downwards. Elevated political uncertainty has caused economic activity, particularly business investment, to stall. Hampered by high inventory levels and political uncertainty, momentum in industrial production has fizzled, registering a contraction of 3.6% in the twelve months to July. Capacity utilization remains on a downward trend, private sector confidence has been sagging for some time and retail sales growth has decelerated sharply, as depicted in the charts below. As a result, expectations for GDP keep getting ratcheted down. Banco Central do Brasil’s latest weekly survey of market economists recorded yet another reduction in the consensus forecast for this year’s growth to 0.48%, while the consensus for growth in 2015 stands at a mere 1.1%.



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The inflation picture has become somewhat more stable following a cumulative 375 basis points of hikes in the policy rate since April 2013. Annual headline CPI now rests just above the 6.5% upper bound of the central bank’s comfort zone, while inflation expectations have stabilised somewhat. But overall price pressures can be expected to remain sticky, keeping the central bank on high alert and interest rates elevated for the foreseeable future. First, non-regulated prices are still running at 7%, driven by strong pressures in the services sector. Second, artificially suppressed administered prices – which make up around a quarter of the CPI basket – should continue to rise on an annual basis well into next year due to base effects; particularly if the next administration embarks on a normalisation of subsidy policy, as widely expected. Third, if prolonged budgetary slippage triggers a loss of investors’ faith in Brasilia’s ability to enforce fiscal discipline, the currency will come under pressure, volatility will rise and inflationary pressures will get amplified as a result.



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…and the labour market no longer is such a bright spot

Against a weak macro backdrop, it was only going to be matter of time until Brazil’s labour market – arguably one of the few economic bright spots available to Ms Rousseff in her campaign for re-election – began to show signs of stress. So far, unemployment has remained well-contained in spite of the slowdown in economic activity. It has been trending down for the last ten years and, at a non-seasonally-adjusted rate of 4.9%, remains one of the lowest in the world, underpinned by a robust services sector. At the same time, real wage growth has stayed positive and is likely to remain so – Ms Rousseff has explicitly vowed to keep increasing the minimum wage by more than inflation, which goes some way to explaining the stickiness of CPI. However, this benign employment picture is starting to look somewhat tenuous.



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From a cyclical perspective, the combination of souring fundamentals and restrictive monetary settings is starting to bite. Job creation has become more sluggish. The twelve-month moving average of new ‘formal’ (i.e. government-registered) jobs, as reported by Brazil’s Ministry of Labour, has resumed its decline this year and is heading to levels last seen during the Great Recession, pulled lower by manufacturing. And as the boost from the World Cup subsides, the relatively positive momentum in the services sector could soon wane. In turn, this has been exerting downward pressure on real wage gains, which slowed to 2.6% in the twelve months to April (the latest month for which there is available data) – down a full percentage point since the start of the year and tracking the deceleration in GDP.



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Perhaps more worrying is the fact that labour market tightness has been underpinned by a sustained contraction in the labour force – potentially a harbinger of weaker trend GDP growth and a higher structural deficit. Both the numbers of the unemployed and those either in employment or actively seeking work have been shrinking: the so-called ‘economically active’ population contracted by 0.8 percent in the year to April, posting its seventh consecutive monthly fall and marking the most sustained contraction in more than a decade. Moreover, this could be more than a temporary phenomenon. Brazil’s workforce has been adversely affected by a declining fertility rate, down by some 30% in the last two decades to 1.8 children per woman, according to World Bank data. Also, an increasing proportion of the young population (18-24 age bracket), which makes up around one sixth of the labour force, has been opting out – in line with Ms Rousseff’s push to get more people into university or training. As a result, Brazil’s labour participation rate has fallen significantly.



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Weak macro to weigh on markets once investors shift their focus away from the politics
Positive sentiment on Brazilian assets has been pinned on high expectations for an improved economic strategy by the new government. While there may well be further gains in the near term, they are also likely to come with elevated volatility attached, in view of how close the presidential race has become. As an illustration, when last week’s polls indicated a pick-up in Ms Rousseff’s popularity the Bovespa fell by 6%; and implied volatility in the Real has bounced meaningfully during the last couple of weeks, as the chart below illustrates.

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Over and above the short-term jitters, however, investors need to remain alert to a disheartening macro backdrop, characterised by a challenging combination of souring domestic fundamentals with escalating external macro headwinds going into 2015 – not least as Fed policy is set to move closer to a phase of rate normalization. As such, the sustainability of positive market momentum for Brazilian assets beyond the near term appears increasingly tenuous, particularly as Brasilia’s policy flexibility is relatively constrained at this juncture. First, further fiscal indiscipline would raise the likelihood of a sovereign downgrade, with severe repercussions across the board. Second, a lower policy interest rate would risk another flare-up in inflation, and in its latest Minutes the central bank indeed indicated no interest rate cuts are on the cards for the foreseeable future. And, third, meaningful structural reforms remain on hold in view of the upcoming election, holding back much-needed investment spending.

Conclusion

Credible fiscal targets form the linchpin of any policy mix that has a chance of success in putting Brazil’s economy back on a virtuous path. They are essential for anchoring the currency, paving the way for sustainably lower interest rates and inspiring investor confidence. With Brazil’s credit rating standing marginally above ‘junk’ status, policymakers’ room for manoeuvre is limited. Ms Rousseff knows full well that what the economy needs is neither opportunistic fiscal props nor distortive interventionist practices, but putting in place the reforms that will drive an increase in domestic savings, improve productivity, enhance competitiveness, inspire private sector confidence and address supply-side bottlenecks which hamper investment, keeping a lid on potential GDP growth.

If fiscal discipline remains elusive, reform inertia persists, the employment picture takes a decisive turn for the worse, and the health of the financial sector is threatened by asset quality impairment, Brazil’s economic fortunes will continue to deteriorate. Moreover, there are significant external macro risks lying ahead. China’s slowdown could still escalate to a hard landing, leading to further erosion in Brazil’s terms of trade; and sentiment on emerging markets could soon succumb further to the potential onset of tighter US monetary settings. Then the Brazilian economy’s back could actually come close to breaking.

This research note is provided by Fathom Consulting. All of the charts below and many many more, covering a range of topics and countries on both the macroeconomy and financial markets are available in the Chartbook to Datastream users at www.datastream.com. Alternatively you can access Fathom’s Chartbook at www.fathom-consulting.com/TR.

 

[Thəorətic Muslim]

@LeveragedBuyout I really hope your a College Econ Professor or a retired one. Even college students don't read this much.

 

[LeveragedBuyout]

@LeveragedBuyout I really hope your a College Econ Professor or a retired one. Even college students don't read this much.

You're close, but that's as far as I'll venture. The more I learn, the more I realize I don't know. Hopefully other users here are benefiting as much from these articles as I am.

 

[Thəorətic Muslim]

The more I learn, the more I realize I don't know.

Well, you're pretty smart then to admit this I'll give you that. Got to edit my setting so i get alerts every time you post.

 

[LeveragedBuyout]

Visas Best Bet to Strengthen Technology in Developing Countries, Paper Argues - Real Time Economics - WSJ

• 

• September 19, 2014, 11:53 AM ET

Visas Best Bet to Strengthen Technology in Developing Countries, Paper Argues
ByIan Talley
The best way to expand technology use in developing countries is to boost local research and development spending, right? Nope. It’s to hand out more visas.

That’s according to a new paper by University of Colorado economics professor Keith Maskus, who argues that allowing freer movement of skilled workers across borders would not only meet United Nation technology targets, but also boost productivity in their origin countries and economic growth more broadly.

The U.N. wants to expand technology use in poorer countries to help accelerate growth and fight poverty.

The paper’s being championed by Bjørn Lomborg, the head of the Copenhagen Consensus Center who’s known for his best-selling and controversial book, “The Skeptical Environmentalist.”

“Instead of trying to take technology to people, what about if we took people to technology,” Mr. Lomborg said in a telephone interview.

The idea is for a regional agreement—such as across the Americas—that allows free international movement for a certain number of skilled workers and managers, such as engineers, nurses or geologists for 10 years.

As the skilled workers move to the higher paying areas such as the U.S. and Canada, they increase their wages and productivity levels. They transfer both to their home countries: first through remittances and then when moving back after their visas expire.

Mr. Maskus finds that a 5% net expansion in visas across the Americas would yield a net gain of around $50 billion over a decade. A 20% expansion, phased in over five years, would net around $180 billion in net gains.

There clearly would be costs.

A 20% expansion in visas across the Americas would likely mean a 200% increase in the current U.S. visa levels, from 65,000 visas to around 260,000. The influx in workers would likely deflate wage levels in the U.S., though higher tax revenues would more than offset those losses. Developing countries would likely lose tax revenues in the short term, but gain from a surge in remittance levels.

But the benefits, Mr. Maskus calculates, would far outweigh the costs. “It is clear that total program benefits far exceed costs for all countries with the exception of Canada,” he writes in his paper.

Mr. Maskus says he doesn’t pretend to believe that such an increase is politically feasible. “But it’s food for thought.”

As President Barack Obama’s decision to delay executive action on immigration shows, it’s a topic that can be toxic.

The professor isn’t alone in arguing an economic case for expanding immigration, however. The U.S. Congressional Budget Office estimated in a report last year that a broad effort to overhaul immigration laws would shrink federal deficits over the next two decades and fuel economic growth.

U.S. Treasury Secretary Jacob Lew said Wednesday that the economic case for changes to U.S. immigration policy “is an extraordinarily powerful one.”

“When you look [at the next] 10, 20, 30 years, and look at what are the things that we could do to grow economic potential in the U.S., I don’t know of any one thing that’s more important than immigration reform,” Mr. Lew said at an event hosted by the UCLA Anderson School of Management.

The visa idea, Mr. Lomborg says, would also help meet the U.N.’s development goals. “Here is a potentially very lucrative opportunity that could definitely be doing a lot of good.”

 

[LeveragedBuyout]

UAE Central Bank Hits Refresh with New Governor - Middle East Real Time - WSJ

• 

• September 23, 2014, 11:51 AM ET

UAE Central Bank Hits Refresh with New Governor
ByAsa Fitch

Sultan Bin Nasser Al Suwaidi, pictured above, has been replaced as the central bank governor of the United Arab Emirates after 23-years in the role.
Bloomberg News
This week’s shake-up at the United Arab Emirates’ central bank could have a big impact on local financial-system oversight, but the ripples might not spread as far as they normally do when a policy-setting chief is replaced.

Sultan Al Suwaidi, the long-serving central bank governor, was replaced by Mubarak Rashid Al Mansouri via a presidential decree. But while the move could result in changes locally, economists say the U.A.E.’s currency peg to the U.S. dollar means new leadership isn’t a harbinger of new monetary policy stances that could affect global currency markets.

“Monetary policy is determined largely by the U.S. given the existence of the peg, so I suspect a change of this type is a refresh rather an a significant policy event,” said Tim Fox, the chief economist at Emirates NBD, Dubai’s largest bank.

Nonetheless, the change does mark a significant new chapter for the central bank. Mr. Suwaidi became governor at the end of 1991. He’s only the second person to hold that position since the central bank’s establishment in 1981.

The U.A.E. was founded in 1971, but didn’t have a central bank for its first decade.

Mr. Suwaidi is also one of the Middle East’s longest-serving central-bank governors. Only Hamood Sangour Al Zadjali, who was appointed to lead Oman’s central bank a few months before Mr. Suwaidi, has been in his position longer.

When Mr. Suwaidi started, the Gulf War had just ended and the main concern at the central bank was a scandal surrounding the Bank of Commerce and Credit International. BCCI, which counted the Abu Dhabi government as one of its biggest shareholders, was shut down in 1991 amid revelations that it facilitated money laundering and other financial crimes.

Back then, the U.A.E. had more foreign banks than local ones, and the focus was decidedly on foreign investment.

Today, local institutions dominate the U.A.E.’s banking landscape, while the central bank’s focus has shifted toward addressing post-financial crisis challenges.

Under Mr. Suweidi’s tutelage during the crisis, the central bank lent $10 billion to the Dubai government to help fix a liquidity crisis caused by its overheating real estate market. Since then, the regulator has tried to clamp down on a resurgence of unsustainable growth, partly by putting caps on mortgage loans and limiting banks’ exposures to construction and other sectors.

Mr. Suwaidi said numerous times in recent years that he was considering retirement, and the end of the crisis may have provided him a window to plot a departure. He couldn’t be reached for comment on Tuesday.

Nasser Saidi, a Dubai-based economist and former Lebanese central banker, said the new governor was inheriting an economy and financial system that have largely recovered and are in a sustainable period of growth with low inflation.

“We had two to three years between 2009 and 2011 where you were living the consequences of both the great financial crisis from outside which impacted access to finance internationally, and then you had to do restructuring internally,” he said. “Those milestones are now behind us.”

Little is known about Mr. Suwaidi’s successor. Mr. Mansouri has been on the central bank’s board of directors since at least 2008. He is also on the boards of the Abu Dhabi Securities Exchange, the local stock-market regulator and Etisalat, the U.A.E.’s biggest telecom operator, which has brought him into close contact with some of the U.A.E.’s biggest power-brokers.

Sheikh Mansour bin Zayed Al Nahyan, the U.A.E.’s deputy prime minister and the owner of England’s Manchester City soccer club, is the chairman of the Emirates Investment Authority, where Mr. Mansouri has been chief executive since 2008. Mr. Mansouri was director general of Abu Dhabi’s pension fund for eight years before that, and had his first government job at the Abu Dhabi Investment Authority in the 1990s.

It’s not clear when Mr. Mansouri is expected to start his new job. A central bank spokesman said the regulator had not been informed of those details. Mr. Mansouri couldn’t be reached for comment.

 

[LeveragedBuyout]

http://blogs.ft.com/beyond-brics/2014/09/23/keeping-track-of-the-em-sell-off/

Keeping track of the EM sell-off
Sep 23, 2014 12:43pmby Jonathan Wheatley

As beyondbrics noted early this month, the recent “dollar surge” and rising US interest rates are already having an impact on EM currencies. Two weeks later and the effects are becoming more pronounced, as the charts below show.

First, US interest rates. This is the yield on 10-year US Treasury bonds this year.


Source: S&P Capital IQ

From 3 per cent at the start of the year, the rate fell to a low of 2.34 per cent on August 28. But it then changed direction and reached a high of 2.63 per cent on September 18 before relaxing to 2.55 per cent today.

The reaction has been striking. As we noted a fortnight ago, some currencies “reacted” in advance. It has, after all, been known for some time that the end of quantitative easing by the US Federal Reserve was nigh. The Fed has now confirmedit will end next month. For those currencies most sensitive to US interest rates – the carry trade currencies of countries with low interest rates – just the knowledge of impending change was enough.

Here is the Polish zloty year to date:


Source: S&P Capital IQ

And here is the Israeli shekel:


Source: S&P Capital IQ

Slower to react were carry currencies with higher interest rates, which could be expected to withstand the prospect of higher US rates for longer. We noted last time that the sell-off in the Turkish lira had barely begun. Look at it now:


Source: S&P Capital IQ

US interest rates can only rise on the assumption that the US economy is finally picking up. That should be good news for EM exporters. But for commodity currencies, the continued slowdown in Chinese growth is of greater importance. Factor in the reduction in the carry trade, and the results are predictable. Here is the Brazilian real:


Source: S&P Capital IQ

The Australian dollar:


Source: S&P Capital IQ

And the Russian rouble, which had its own problems long before US rates came along:


Source: S&P Capital IQ

To broaden the picture a little, here is the Malaysian ringgit:


Source: S&P Capital IQ

The ringgit is no commodity currency but, like the Brazilian real, it is suffering from the after-effects of a huge build up in consumer credit. Household debt in Malaysia was equal to 87 per cent of GDP at the end of last year – more even than in the US – and the currency has depreciated in virtual lockstep with rising Treasury yields, even after the central bank raised interest rates in July.

 

[LeveragedBuyout]

Interesting development, hopefully it's a sign of more to come. G-d knows the region needs this kind of productive investment.

Palestinian Developer in Dubai to Woo Investors - Middle East Real Time - WSJ

• 

• September 23, 2014, 6:07 AM ET

Palestinian Developer in Dubai to Woo Investors
ByRory Jones

The Rawabi project displayed at Cityscape Global in Dubai.
Rory Jones for The Wall Street Journal
New settlements in the West Bank are often heatedly discussed in Dubai. But at the emirate’s showcase real estate event Cityscape Global, it was Palestinian, not Jewish building that was on the tips of tongues.

Rawabi, a controversial housing project billed as Palestine’s first planned city, was this week being sold to Palestinian investors in the Gulf.

The project, which is being developed by Bayti Real Estate and first announced some five years ago, has stalled in recent months due to a dispute over whether Israel will provide water to the more than 700 houses that have already been built, sold and are ready for delivery, according to Shadi Qawasmi, the marketing manager for Rawabi. Those issues are soon to be resolved, he said.

“We have cities in Palestine, but they are all ancient cities,” Mr. Qawasmi said. “They lack what a modern city must have.”

Rawabi is eventually planned to become a town of 26 neighborhoods of 5,000 homes, schools, a business center, medical centers and mosques, all of which is expected to cost about $1 billion. The city aims to be a modern metropolis, complete with retail walks, lush green trails, sport pitches and a Roman-style amphitheater.

Lying 9 kilometers north of Ramallah, the project has so far largely been funded by real estate investment company Qatari Diar, owned by Qatar’s sovereign wealth fund, and through part sales of properties. It is the brainchild of entrepreneur Bashar Masri, the chief executive of Massar international, a part investor in the development.

But Rawabi faces many challenges, not least convincing the Palestinian diaspora to park their cash in a development influenced by Israeli decisions.

“The success of the project depends on selling existing units,” said Mr. Qawasmi. “That’s why we’re here.”

The Rawabi developer says more than 700 houses have already been built.

 

[LeveragedBuyout]

As Frontier Markets Are Reclassified, Investors Should Spread Bets - Frontier Markets News - Emerging & Growth Markets - WSJ

• 

• September 23, 2014, 5:53 PM ET

As Frontier Markets Are Reclassified, Investors Should Spread Bets
ByJavier Espinoza
For Argentina, the pain just keeps growing. On Monday, FTSE Group demoted the country from frontier market status to “unclassified” in recognition of its “stringent capital controls imposed” on foreign investors. The only consolation was that it wasn’t the only country to face a classification downgrade: Morocco was bumped down to the frontier index from its previous status as a “secondary emerging market”.

Both downgrades were the result of specific concerns directly related to the opportunities global investors might find in those nations.


Morocco’s demotion was caused, the FTSE Group said, by its “continued decline in broad market liquidity, below the level sufficient to support sizeable global investment.”

The shifts confirm the fluid status of countries in the emerging markets, says Sebastian Spio-Garbrah, chief analyst at DaMina Advisors in New York. “FTSE’s reclassification affirms the non-static nature of the emerging and frontier markets and the oscillations between the two for countries in transition,” he says.

Investors in Argentina have been cautious for some time, partly because of the nationalization of oil company YPF in 2012, says Asha Mehta, a portfolio manager at Acadian Asset Management. And the downgrade seems to confirm that investors should continue to exercise caution. “That event, coupled with capital controls and the on-going debt repayment concerns, have warranted an evaluation of Argentina’s market status,” Mehta adds.

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Sometimes moves are controversial. Morocco’s downgrade, for instance, was explained largely due to liquidity issues but Matthew Spivack, practice leader for the Middle East and North Africa at consultant Frontier Strategy Group in London, sees many reasons to be upbeat about the country’s long-term outlook.

“Recently, the country secured a $5 billion IMF loan as a result of improvements in the government’s management of the economy,” Mr. Spivack says. “With a narrowing budget deficit, wage growth under control, and a 10.5% increase in foreign exchange reserves, the government has managed to obtain funds to bolster the next budgetary cycle.”

He also says the European Union has “increased its budget for Moroccan aid by 15% from last year to €890 million” for the next three years. “The international funds are essential for supporting the government’s plans to develop infrastructure and attract foreign investment,” Spivack notes.

The two downgrades highlight one of the challenges facing frontier-market investors, as countries work to establish stable and more-mature economies. “Country drivers do tend to be idiosyncratic and country-specific throughout frontier markets, which is one reason why we advocate for a diversified approach to frontier investing,” says Ms. Mehta. “Country risk can be significantly mitigated in this way, and in fact volatility in a diversified frontier portfolio is typically lower than in an emerging one.”

 

[LeveragedBuyout]

Ukraine May Need Far More Foreign Aid to Rescue Its Economy - Real Time Economics - WSJ

• 

• September 23, 2014, 4:30 PM ET

Ukraine May Need Far More Foreign Aid to Rescue Its Economy
ByIan Talley

Ukraine President Petro Poroshenko at the White House last month
Getty Images
Ukraine needs three to four times more emergency cash than the International Monetary Fund currently forecasts.

That’s the view of Lubomir Mitov, chief Europe economist for the Institute of International Finance, a global banking group. “The economic situation has deteriorated sharply; it is close to disastrous,” said Mr. Mitov. “The IMF program has to be redone, has to be extended for three years at least.”

He estimates Ukraine faces a financing hole of $13 billion to $15 billion through next year even if a ceasefire between Kiev and Russia-backed separatists holds.

The IMF earlier this month said the country needs at least $3.5 billion more than originally planned to keep it afloat through the end of next year. That amount could rise to $19 billion if the civil war continues, the fund said. That’s on top of the $30 billion global bailout program the IMF is already spearheading.

But Mr. Mitov, who recently returned from the war-torn country, says the needs are far larger than the IMF’s public assessment.

The IIF expects the economy will contract at a double-digit pace this year, down from its previous estimate for an 8% contraction, based on the presumption of a prolonged stalemate with the separatists. He estimates Kiev’s budget deficit will hit 12% this year and banking recapitalization needs are likely to be more urgent and much larger than the $4 billion detailed by government officials. Major Ukrainian manufacturing infrastructure is damaged or offline, Kiev’s budget is suffering from weak revenues and rising military costs and the country’s devalued currency is still wreaking havoc on the financial system.

All that means the IMF will likely be forced to overhaul its bailout in the near-term, he said, with initial talks are expected at the upcoming IMF meetings in Washington next month.

Many analysts say a decision is more likely after the national elections scheduled for late October.

Mr. Mitov said Europe needs to cover most of the new financing costs, matching its geopolitical rhetoric and trade agreement with cash support. The bulk of Europe’s commitments so far are for project financing, which doesn’t meet Kiev’s near-term cash-flow needs. “This is the time you have to bite the bullet and help them,” he said.

Although numerous economists and analysts say a debt restructuring is needed, the IIF economist said it’s still unclear whether there’s sufficient political will for a voluntary re-profiling — an extension of bond maturities — needed to put the country’s finances back into the black.

 

[LeveragedBuyout]

Costa Rica to Accelerate VAT Reform After Downgrade - Frontier Markets News - Emerging & Growth Markets - WSJ

• 

• September 23, 2014, 11:19 AM ET

Costa Rica to Accelerate VAT Reform After Downgrade
ByMichael J. Casey

Costa Rican president Luis Guillermo Solís.
Dan Keeler, The Wall Street Journal
Costa Rica is accelerating the introduction of a new value-added tax and pursuing other overhauls aimed at improving governance and spurring growth following a credit ratings downgrade last week by Moody's Investors Service, the country’s president said on Monday.

But in an interview, President Luis Guillermo Solís warned that his country’s finances could be detrimentally affected if the U.S. Federal Reserve too abruptly raises rates over the coming year. The president was in New York to address the U.N. General Assembly and meet with investors.

Mr. Solís, who assumed office in May, said the one-notch downgrade of Costa Rica’s rating from an investment-grade Ba1 to speculative-grade Baa 3 should motivate the country’s historically divided legislature to forge a consensus for tax overhaul. Until recently, Congress had resisted his government’s efforts to introduce a bill to migrate a selective 13% sales tax to a comprehensive VAT at the same rate, which aims make it harder to evade taxes and bring in an additional $555 million annually in revenue. On Friday, three days after the downgrade, the government started a dialogue with the legislature’s 13 different parties in a bid to overcome the logjam.

“One of the reasons why Moody’s decided to downgrade us was because the incapacity of governments in the past to agree with the legislature for comprehensive tax reform,” Mr. Solís said in the interview.

In a statement accompanying its ratings announcement Tuesday, Moody’s took issue with persistently high fiscal deficits, which it forecast would reach 5.8% of gross domestic product this year and 6% in 2015 in a continuing increase from 4.5% of GDP in 2009. The deterioration has “materially worsened” Costa Rica’s debt burden, the ratings firm said, noting that government debt-to-GDP is expected to rise to 40% this year, having been as low as 25% in 2008. The Moody’s downgrade puts its rating on par with Fitch Ratings’ BB BBT -0.83% +, also one notch below investment grade, and a notch above Standard & Poor’s BB rating for Costa Rica.

Mr. Solís said that he is also determined to grow the economy into a fiscally healthier state, highlighting $2.4 billion in planned infrastructure expenditures over the next year. With concerns rising that climate change-led reductions in water supply will reduce Costa Rica’s hydroelectricity supply from 90% of all power generation to 70%, the government has plans to develop geothermal power by tapping into the country’s volcanic activity.

To add a targeted two percentage-point increase in the country’s growth rate, bring unemployment down from 9% and poverty down from 20%, Mr. Solís’s government is aggressively pitching to foreign direct investors, talking up the benefits of a relatively well-educated workforce in its traditional strengths such as health sciences and high-tech manufacturing. This comes after some recent exits by foreign companies, including chip maker Intel, which in the spring announced 1,500 job cuts in the country, and textile maker HanesBrands, which said it would relocate its Costa Rican unit to Vietnam.

Mr. Solís said Intel was building a research lab in the country and that various other multinationals were also expanding operations in his country, including consulting firm Accenture, which on Monday announced it would create 330 new jobs in a new financial services and accounting division in the country.

“We are tied into the current global scenario,” he said. “Companies come and go and we have to get used to that and we have to compete in that context.”

He is concerned, however, that tighter monetary policy in the U.S. might disrupt his government’s expansion plans.

“I hope that whatever happens it is done in such a way that it doesn’t impose on us the consequences of abrupt change,” Mr. Solís said of the impact of an expected Fed rate increase on Costa Rica and other emerging-market economies. “We are trying to be sensible about our own policies and it would be terrible if those sensitivities are not supported by the United States and other countries that have such tremendous impact on our economies.”