Author: Carolyn Cohn

Just as Hungary is worrying foreign investors with a plan to help households laden with foreign currency mortgages – likely to prove expensive for its banks – its trade bank has come up with an interesting structure for a planned bond.

State-owned Eximbank has been holding a roadshow this week for a two-part bond, with one part of the bond guaranteed by the World Bank’s risk insurance arm, Miga.

It’s unusual for Miga, which has been operating since 1988, to guarantee sovereign debt.

The Miga-guaranteed bond tranche will have a top investment grade AAA rating, while the other part of the debt will have a BB+ rating, in line with the rating for Hungary.

The guarantee is likely to make the higher-rated bond tranche appeal to the sort of investors who would normally be unlikely to touch Hungarian debt with a bargepole.

The yield will be lower than on a normal Hungarian bond, but investors will be hoping for a yield pick-up over other high-grade borrowers, like Germany.

It’s a similar structure to the U.S. guarantee for a dollar bond from Tunisia last year, following the ousting of president Zine El Abidine Ben Ali in 2011. The bond was issued at record low yields for Tunisia, due to the guarantee.

Another country that could benefit from a highly-rated entity to guarantee its debt would be Egypt and many investors reckon Washington might be willing to do exactly that, given it refrained from calling the army’s ouster of President Mohamed Mursi a coup. Such a  guarantee would help the country in its desperate hunt for hard cash though it has been promised aid by Saudi Arabia, Kuwait and the United Arab Emirates.

But analysts are doubtful the world, or the United States is ready for a U.S.-guaranteed Egyptian dollar-denominated bond just yet.

According to Florence Eid, chief executive of consultancy Arabia Monitor:

This has occurred in the past…going forward this may occur again but we do not think Egypt will issue Eurobonds in the current environment given the elevated credit spread premium on Egypt. Also, with the below-market funding provided by the GCC, the need for such new international issuance is diminished.

Political risks appear to be rising in emerging markets, but how do you measure them?

Protests in Egypt – leading to the ousting of a second president in as many years–  Turkey and Brazil have caught investors on the hop this year, causing the kind of market volatility that emerging market bulls had been saying were a thing of the past.

Political risk didn’t go away, so it turned out, it just took a breather, while at the same time spreading to countries like Portugal and Greece.

Market players often use credit default swaps as a proxy for political risk, as they measure a country’s likelihood of defaulting on its debt. Egypt’s five-year CDS hit record highs earlier this week following mass demonstrations, but they fell on Thursday after the army removed Islamist President Mohamed Mursi, as investors hoped for a more business-friendly environment.

But investors find CDS a clumsy and risky tool, that can be easily influenced by other factors, like liquidity or the credit quality of your counterparty. Renaissance Capital measures per capita GDP against government type since 1950 to show the similarities between Egypt in 2013 and Turkey in the 1970s, before Turkey’s 1980 military coup, which was followed by democratic elections only three years later:

A middle class with improving incomes is more likely to demand and get democracy.  For a country with Egypt’s per capita GDP, it is more likely that a country moves from autocracy to democracy, than from democracy to autocracy.

That move to democracy is likely to keep investors on the sidelines, however, as long as the situation remains uncertain. Renaissance says Africa funds are likely to stick with sub-Saharan Africa and Morocco, and keep clear of Egypt.

That’s the case for Africa fund manager Alexander Trotter of Fulcrum, who is underweight Egypt because of the political turmoil, despite the country’s attractions as an industrial centre, a so-called “Manchester of the Middle East”:

We are very bottom up, finding stocks where we think there is value. But at times, politics can dwarf all that.

Middle East countries which are energy exporters have better investment ratings than  oil importers in the region, Fitch says, and that gap is widening.

Paul Gamble, director in the sovereigns group at Fitch, told a briefing this week that the ratings gap has never been bigger and that:

If you look at the outlooks, it has the potential to widen further.

The energy exporters – Bahrain, Kuwait, Saudi Arabia, Abu Dhabi and Ras Al-Khaimah – all are rated investment grade by Fitch. Saudi Arabi’s rating has a positive outlook while the others have at least a stable outlook.  Of the energy importers, meanwhile, two are on negative outlook – Egypt and Tunisia – while Morocco, Israel and Lebanon are stable. Only Israel and Morocco are investment grade.

Many of these countries may be too dependent on their energy sectors. But most energy exporters have based their budget calculations on a low price for oil, giving them room for manoeuvre if oil prices do fall, Gamble says:

The buffers are huge …budgets (are) based on unrealistically low oil prices

So despite a huge social spending boost following the Arab Spring uprisings, most Gulf oil powers can still boast healthy surpluses – the Saudi surplus this year is estimated at over 7 percent while Kuwait’s will be a whopping 20 percent for the financial year that started in April, analysts polled by Reuters predict.

Bahrain has been more optimistic on the oil price, however, with a budget based on oil at $120 a barrel, Gamble said – oil is currently trading around $104.

Fitch is due to review Bahrain in the next couple of months, after affirming the country’s ratings last July. Gamble pointed out, however, that the country’s BBB rating was already the lowest among its energy-exporting peers.

Israel started producing gas this year but Gamble said the country would not gain fiscal revenues from production until 2016, while the country is not likely to start exporting before 2017, beyond the rating agency’s forecasting horizon.

First, some good news – eastern European banks are relatively profitable. Austrian bank Raiffeisen, which is heavily involved in the region, published a report at the weekend which showed:

In terms of growth and profit, the banking sectors in the CEE (central and eastern Europe) region continue to outperform their Western European counterparts.

Real loan growth in the region’s banks, which includes Russia and Ukraine, was 21.8 percent between 2010 and 2012, Raiffeisen says, while euro zone banks’ real loan growth was negative over the same period.

The IMF said something similar this month, pointing out that for the five largest banking groups in the region, their businesses in eastern Europe were substantially more profitable than those in the West.

That might go some way to explaining why banking stocks in emerging Europe have outperformed broader indices, in contrast to the euro zone where they have been underperforming.

But here’s the bad news – not everyone is repaying their loans. Both the IMF and Raiffeisen point to high levels of non-performing loans,  particularly in southeastern Europe. The NPL ratio in that region rose to 17.3 per cent in 2012, from 14.5 per cent in 2011, Raiffeisen says:

The high NPL ratios in Hungary and Slovenia still have a significant negative impact on the entire CE-region, overshadowing the stable or declining NPL ratios in the Czech and Slovak banking sector.

Erik Berglof, chief economist at the European Bank for Reconstruction and Development, which last week slashed its emerging Europe and North Africa growth forecasts, was also concerned. At the bank’s annual meeting this weekend in Istanbul, he said:

“We are watching some countries in southeastern Europe, Slovenia is also a part of this story and Ukraine and Moldova – there is not much reason for optimism.”

 

 

 

Rwanda is planning to launch its debut $400 million 10-year Eurobond today, less than a decade after it was torn apart by genocide. It is the latest chapter in the story of African bond issuance which has stepped up in recent years, exploiting investors’ hunger for yield.

The bond may yield well above 7 percent — attractive at a time when Italian 10-year yields, one of the riskier punts within the euro zone,  have fallen below 4 percent.  Frontier markets broker Exotix has the Rwandan deal as one of its five fixed income trades to watch. Their analysts say:

Rwanda’s economic fundamentals are not that bad, but potential bond investors will be concerned about aid dependence.

Growth is strong and public debt is moderate, Exotix says, but Rwanda’s current account excluding aid totals 20 percent of GDP, compared with 10 percent if one were to include donors’ assistance. Rwanda’s debt is likely to yield much more than Senegal or Zambia, at 7-8 percent, Exotix adds, as the country’s rating of single-B is one notch lower.

Along with sovereigns such as Angola, Kenya and Nigeria expected to tap the international debt market this year, Exotix is on the look-out for Nigerian banks, after Fidelity Bank said earlier this month it was planning a bond:

Nigeria’s banks will increasingly tap the Eurobond market in the future, in order to diversify their funding base and increase their liability maturity, allowing them to increase the proportion of longer-term loans in their portfolio. We expect that a combination of historically low yields and high investor appetite for emerging market debt will generate ample demand for new issuance from this largely repaired
sector.

Fixed income analysts at Barclays also like the look of African dollar debt. In  a recent note, they  recommend buying issues from Angola and Tanzania (both are private placements but investors say they are traded), as well as Ivory Coast, which is once more paying its debt coupons.

The rising yuan, which hit its highest last week since China’s FX market was set up in 1994,  should boost demand for China’s offshore “dim sum” bond market, and Africa may join in the action.

Trade between China and Africa totaled $200 billion last year, and Standard Chartered expects that to hit $325 billion by 2015, so it makes sense for African governments and companies to hold assets denominated in the renminbi, or yuan as the currency is also known.

Nigeria for instance said in 2011 it would start to hold yuan in its central bank reserves, and Standard Chartered analysts said in a note that Nigeria and Tanzania’s central banks each bought 500 million yuan of a 3.5 billion yuan dim sum bond launched by China Development Bank last July. Standard Chartered says:

As the use of the CNY (yuan) as a trade-settlement currency becomes more widespread, more African central banks are likely to look to diversify their foreign exchange reserves to include the CNY.

 For now, dim sum bond issuance by African governments or corporates outside of South Africa or Nigeria is not likely until the market has deepened and broadened enough to foster significant appetite for African debt denominated in the CNY from Singaporean and Hong Kong investors, who account for around 80 percent of demand in the dim sum market.

 

There’s been plenty of bad news for heavily indebted Greece in the past three years – the banking crisis in neighbouring Cyprus being the latest of the country’s woes – but not all the news is gloomy.

MSCI’s Greece index was one of the developed world’s best performers this year, according to the index compiler’s quarterly survey, giving returns of 14.02 percent.

Morgan Stanley is one bank to have grown more enthusiastic about the troubled euro zone peripheral economy.

In a note out today, its analysts say:

We are more constructive on Greece than consensus expectations. A recovery hasn’t started yet, but soft data are becoming less bad, as the shocks that hit the Greek economy – including euro exit worries – are starting to dissipate, and bank deposit flows now look fully stabilised.

Morgan Stanley says Greece is likely to show some moderate growth in early 2014, after shrinking 4 percent this year. The country has also beaten its fiscal targets in the first couple of months of 2013, and is likely to maintain a budget surplus, the bank says. Price competitiveness has improved due to large wage cuts and labour market reforms, it adds:

By the end of this year, the competitiveness loss experienced since 2001 – when Greece joined the euro zone – will have been recouped entirely, judging by current trends. And from that point onwards, competitiveness levels are likely to improve further.

Greece has held onto its place in the euro zone but that didn’t stop Russell Indexes from downgrading the country’s stock market to emerging market status last month, citing rising risks and falling liquidity, and MSCI could follow suit. Yet this may attract more risk-hungry emerging market investors. 

Frontier markets broker Exotix has extended its reach to Greece and Cyprus, and was also relatively sanguine today.

Exotix economist Gabriel Sterne said in a note that the Cyprus bail-out with its hit for bank depositors will have a negative long-term impact on risk aversion towards countries like Greece, but the impact will be “not a marked one”.

Nigeria has said it plans a sovereign dollar bond this year, only its second, but could the country’s “bad bank” beat the sovereign to it?

Nigerian state-backed bad bank AMCON was talking to debt investors on a non-deal roadshow in London on Tuesday morning, as it looks to fill a 5 trillion naira  ($31 billion) refinancing gap. It was the second leg of the tour, after the bank visited the west and east coasts of  the United States last week.

AMCON, which was set up in 2010 to absorb the debts of crisis-ridden banks in Nigeria,  reported a 2.37 trillion naira loss at the end of last year. But AMCON’s finance director Mofoluke Dosumu told investors this morning that the losses were not ongoing:

It’s not an operational loss, rather the mark to market of various investments.

The appeal of any dollar bond from AMCON for investors starved of African debt is that it would likely offer a higher coupon than Nigeria, yet the debt carries an explicit sovereign guarantee – a concern for investors burnt by situations such as the payment standstill in 2009 of state-owned Dubai World.

Mustafa Chike-Obi, ceo of AMCON, told Reuters that the bank would probably follow up on the non-deal roadshow with a deal roadshow in the third quarter, encompassing Germany, Dubai and Singapore.

Chike-Obi said the bank spoke to 26 investors on the U.S. leg of its roadshow.

The interest was uniformly very, very high. You had people like Goldman Sachs, who said if we came up with a $2 billion bond, they would be interested.

But the sovereign is still likely to be first off the blocks — it said earlier this month it would issue a $1 billion Eurobond before the end of September.

We recently discussed the kind of threat rising U.S. Treasury yields pose to  emerging debt.  JP Morgan is now advising investors to cut holdings of sovereign dollar bonds to marketweight from overweight. And it suggests doing that by reducing exposure to the riskiest (and usually the highest-yielding) emerging markets, listed on its NEXGEM sub-index.

These bonds, with high yields and low credit ratings, basked in the glow of investor appetite last year when U.S. and German bonds were yielding next to zero and the  euro zone looked in danger of falling apart. Emerging debt issuance last year topped $300 billion while junk credits such as Zambia and Guatemala saw massive demand for their debut bond sales.   (Sales of junk-rated corporate bonds likewise boomed in the yield-seeking frenzy).

But with frontier markets now accounting for more than 75 percent of net new sovereign issuance, some jitters could be growing. Even Angola, which issued a private placement last year, is now in JPM’s  EMBI Global index , though analysts think a recent private placement from Tanzania may not make it. Crucially, returns on emerging dollar bonds are among the worst of major asset classes this year at minus 2 percent (compare that to 9 percent gains on the S&P500)

Risk isn’t all bad though – JPM suggests staying overweight emerging market corporates, even though in this market too, junk-rated issuers have been increasing their share.  Returns on the CEMBI (corporate emerging bond index) are just above flat for the year but JPM reckons that EM corporate bonds’  ”relative value remains attractive against U.S. credit”.

And among those frontier sovereign bonds, JP Morgan advises holding on to Angola and Sri Lanka but to cut Gabon, Iraq and Mongolia’s development bank.  It also suggests an overweight on Venezuela but to sell Ukraine – struggling to agree an IMF deal  and  Argentina, where the risk of default remains.

Emerging market issuers have been busy this year, but investors aren’t getting much of a return, as rising Treasury yields steal their lunch.

Joyce Chang, head of emerging markets research at JP Morgan, told the Emerging Market Traders’ Association yesterday that:

Returns are lacklustre, barely breaking positive territory.

This despite the fact that there has been $62 billion in emerging market issuance in the first two months of the year, compared with last year’s record totals of $333 billion.

The problem is that improving U.S. growth prospects and expectations that the Federal Reserve will take the brake off the money-printing pedal have improved the investment and yield appeal of developed world assets.

As Chang said:

It seems the Ben Bernanke plan is working.

Ten-year Treasury yields have risen as much as 40 basis points this year, breaching 2 percent last month. Emerging sovereign debt spreads have widened 30 bps in that time. High-yield issuers have been out in force as result, with emerging market high yield issuance of $26 billion this year already close to full-2012 levels, according to Chang.

Unfortunately I couldn’t stay long at EMTA – sorry about the coughing fit, everyone – but Maarten-Jan Bakkum, emerging markets strategist at ING Investment Management, also said U.S. Treasuries were a worry. Emerging equities too have disappointed this year, with returns barely in the black.

On a visit to the Reuters building yesterday, Bakkum, who is neutral on emerging markets, said:

 Rising U.S. yields are potentially a big problem for flows to emerging markets. They reflect the better growth environment and increase the chances that the Fed will take liquidity off the table. You can expect more nervousness in emerging markets.

Turkey took another step in the currency battle this week, cutting two of its three main interest rates to prevent speculative flows, yet also raising reserve requirements to cool domestic loan growth.

Policymakers in both the emerging and the developed worlds have been keeping monetary policy loose to stop their currencies rising to uncompetitive levels, even though G20 finance ministers last weekend said there would be no currency war, and made a commitment to refrain from competitive devaluations. The mood does appear to be softening, with the Fed’s minutes yesterday showing a number of officials think the central bank might have to slow or stop buying bonds.

The latest rate move by G20 member Turkey was largely expected, but it still took the lira to a low for 2013 on Thursday – aided by the Fed minutes – and took two-year Turkish bond yields close to record lows.

The Turkish central bank, however, wants its moves to be seen as policy tightening because of the reserve requirement hikes, according to Tim Ash at Standard Bank.

This is a hugely complex monetary policy framework, but they seem to feel comfortable making minute adjustments here and there across the range of tools to get to their objectives…guess it’s like baking a cake and figuring out what shelf to put it on, how hot the oven should be, and maybe how long to bake it for… but this is like a new mix that no one has ever used before, and maybe they are cooking two different cakes in the same oven, a souffle and perhaps a nice date and walnut number…

Thailand, meanwhile, kept rates unchanged at 2.75 percent yesterday, fending off government pressure for a cut to curb those same pesky speculative flows. But with price pressures seen rising later this year, some analysts are talking about a rate rise there.

Analysts at Capital Economics are less convinced:

Many now believe that the next move will be a rate hike. In our view, though, the global recovery is likely to falter and put rate cuts back onto the table. Note that the manufacturing sector accounts for some 40 percent of Thailand’s GDP and export weakness would quickly feed into this sector.

Over to Latin America, where expectations are pretty clear cut for a 25 basis point rate cut in Colombia on Friday to 3.75 percent, to spur growth in the region’s fourth largest economy.

And for next week, economists will have time to mull things over – the only emerging economy to decide on rates is Angola.

Mobile phone bills and beer consumption patterns are used by investors to assess how fast bank accounts are likely to grow in Africa, but what did investors count to gauge trends before there were mobile phones?

The answer? Cattle, bicycles, radios, founder of Zimbabwean telecoms company Econet Wireless Strive Masiyiwa told an Economist conference on Africa this afternoon. Masiyiwa said he researched ownership of these status items to assess the five-year demand for mobile phones in Botswana when he successfully bid for a mobile phone contract from Botswana’s government.

His forecasts, more optimistic than the other bidding operators’, still turned out to undershoot by hundreds of thousands, Masiyiwa said, adding that official data from organisations such as the World Bank also tend to underestimate Africa’s growth potential.

 We need to have the confidence to review some of this (official) data ourselves, particularly when it doesn’t make much sense.

Nick Blazquez, President for Africa for drinks company Diageo, told Reuters that Africans were drinking everything from  cheap keg beer to Johnnie Walker King George V whisky at $400 a bottle.

“We are seeing premiumisation at all price points,” Blazquez said, as consumers move from illicit concoctions to the well-known brands at one end of the market, and are trying the top-brand spirits at the other end.

Blazquez said 10 countries in Africa accounted for 80 percent of the profitable market in both beer and spirits and Diageo has a presence in most of them.

So where is there room for growth? Blazquez said Angola and the Democratic Republic of Congo were countries where “we would like to get more participation”.

When the banks won’t lend you money, head for the international debt markets.

Western European banks have been withdrawing funds from emerging Europe because of capital issues at home for the past few years, alarming international lenders so much that they formed the Vienna Initiative to help the region.

But those corporates that couldn’t borrow have been making use of the red-hot emerging corporate bond market instead.

Panellists speaking at the Emerging Market Traders’ Association annual corporate debt forum yesterday said emerging corporates will still rush to the debt markets this year, after record levels of issuance last year, even though the pace may be a little more subdued.

According to Polina Kurdyavko, fund manager at BlueBay Asset Management, caution in the financial sector means that:

Banks are more selective who they lend to.

They’re prepared to lend to the big energy companies like Brazil’s Petrobras or Russia’s Gazprom and also to the lesser-rated companies to whom they can charge high lending rates, Kurdyavko told the audience of emerging market specialists.

But the borrowers in the middle have been left with fewer borrowing options.

As a result, Kurdyavko said:

BB to BBBB names without bank funding – these are some of the corporates we have seen on the bond market.

Kurdyavko said she was currently overweight on BB-rated emerging corporate borrowers, while Milena Ianeva, head of EMEA corporate credit at Barclays, liked short-dated debt from BBB borrowers.

But corporate debt issuance won’t fill the bank lending gap, according to a note from David Creighton, CEO of emerging market fund manager Cordiant. He wrote:

The fall in bank lending is a major issue for the thousands of mid-cap and large companies who cannot tap the capital markets and will remain reliant on lending from international banks… Banks have also been leaning more towards shorter-term loans. A lot of businesses are finding that what is on offer isn’t a fit for their needs.

Israeli markets cheered election results today, with stocks rising 1 percent and the shekel edging up towards recent nine-month highs. Right-wing prime minister Benjamin Netanyahu claimed victory, but his Likud party and ultra-nationalist allies Yisrael Beitenu lost ground to a new centrist party. Final results are expected tomorrow.

Voters seem to have concentrated on domestic issues, including the state of the economy, but foreign investors tend to look at the geopolitical risks, and these appear to have lessened.

Punters have been removing their bets on an air strike on Iran, particularly since the re-election of Barack Obama as U.S. President in November. The chance of a strike on Iran by the U.S. or Israel by the end of the year has fallen to 23.1 percent today, according to online exchange Intrade.com, compared with around 35 percent shortly after the U.S. election, and a high of 60 percent in October.

Political risk analyst Alastair Newton at Nomura also thinks chances of a strike have diminished. He writes in a note today:

Although Israel’s stated policy on Iran is unlikely to shift significantly whatever the make-up of the next government, securing the necessary support in the security cabinet for a strike now looks like a much harder task than would have been the case had Mr Netanyahu won a clear majority.