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FT noted this weekend that “one counter-intuitive pick” among commodities [for investors looking for portfolio protection against an oil supply crisis] may be aluminum,” production of which is “notoriously energy-intensive (roughly 15.7 Kwh of power is required to make a kg of aluminum from alumina (derived from bauxite), which translates into 40 percent of the cost).” At the same time, the Middle East accounts for 9 percent of global aluminum production, “so any further unrest could lead to disruptions to supplies.” Moreover, analysts note that as base metals from tin (+~91%), nickel (44%) and copper (36%) have surged YoY, aluminum (22%) has lagged. As it is global demand growth is robust enough (+17% annually in 2010 and expected to see 7-8% growth this year per Russia’s RUSAL, the world’s largest producer) to counteract impending production restarts: Barclays, for instance, expects “Chinese output to rise to record levels by Q311 as current price levels drive restarts and new capacity.” Nevertheless it projects the overall stock-to-consumption ratio (7.4 wks 2011F) to remain fairly sticky given demand pressures and the aforementioned energy cost headwind. Finally, some opine that as larger investors and even proposed-ETFs increasingly enter the market, further supply disruptions could ensue as the physical material is stored away in warehouses or as inventory.
MENA CDS activity of late is eerily reminiscent of the risk “contagion” caused by investors questioning Dubai’s debt-servicing capabilities in late 2009 when [irrational] fear spilled-over to Abu Dhabi as well even though the latter’s fiscal integrity was never seriously in question, a fact later confirmed when it underwrote a bailout. But if such objective measures are largely ignored in the market of default probability perception, perhaps it should come as no surprise that more nuanced, subjective ones such as the differences between the historical, social and economic dynamics of say, Saudi Arabia versus Egypt, also fail to be carefully analyzed. Even The Economist’s latest stability rankings, for instance (see chart)–the result of ascribing a weighting of 35% to the share of the population that is under 25; 15% to the number of years the government has been in power; 15% to both corruption and lackofdemocracy indices; 10% for GDP per person; 5% for an index of censorship and 5% for the absolute number of people younger than 25–seem inadequate. An accompanying piece, for instance, notes that in Saudi Arabia (whose marginalized Shia population is, unlike in Bahrain, a relative blip) the unity of unrest seen elsewhere may be structurally unlikely: ”Building an opposition movement is difficult in Saudi Arabia. [While] grievances are plenty: about living standards, poor schools, lack of jobs, the government is adept at using repression, propaganda, tribal networks and patronage to divide and weaken any opposition. Middle-class liberals are wary of democratising steps that might give more power to anti-Western Islamists. State-backed clerics have denounced the Egyptian and Tunisian protesters, and issued fatwas against anything similar in Saudi Arabia. Only in the [admittedly oil rich] eastern province—home to a large Shia population—is there much tradition of protest. But community leaders there are cautious, and desperate to avoid any accusations that they are a ‘fifth column’ for Iran.” Barclays too notes that addressing how immediate tensions in the region may unfold is at least partially dependent on a given military: ”Bahrain’s military is almost entirely composed of Sunnis and there is a significant foreign element in the ranks as well. Hence, they may be more willing to brutally suppress dissent than their Egyptian counterparts and the regime may not be as concerned about possible splits within the officer corps,” it wrote to clients. That said, perhaps such “nuance” is just noise from the collective market’s point of view. The real concern for Saudi Arabia may not be the emotional state of its Shias but rather the physical soundness of the 18-mile-wide strait Bab el-Mandab.
Expectations of further front-loading of rate hikes—The Bank of Thailand began normalizing its monetary policy when it raised the benchmark interest rate by a quarter of a point to 2.25 percent on Jan. 12 following a similar increase in December, and many analysts now project a cumulative 75bp rise during the remainder of the year—have in turn flattened the front-end of the NDIRS (non-deliverable interest rate swap) curve. Moreover, because the floating legs for Thai rate swaps are derived from both interbank rates as well as forward dollar/baht market rates, front-end rates have been under added pressure (in a rising rate environment) as the central bank’s recent round of three and six-month currency forward purchases (to sterilize spot buying of dollars, more evidence that in fact EM bond flows are stickier than equities regardless of inflation) has drastically narrowed the gap between the 6m fixing rate and policy rates. In sum, spreads between 1-2 and 2-5 year swaps have tightened considerably this month while domestic bond yields have also increased in kind, reflecting what analysts term “rising but manageable” inflation pressures given that food and energy prices may be contained going forward by favorable (cooler and wetter than normal) weather patterns and the government’s use of an oil levy fund, respectively. Interestingly, the aforementioned rise of short-end swaps may already be “overdone”, per Lum Choong Kuan, head of fixed income research at CIMB Investment Bank, especially if the market has overshot on its rate normalcy projection. That said, movement in the 6m fixing rate may not be done, and as such swap spreads have room to tighten further. Rahul Bajoria, an analyst with Barclays, mentions for example that “the rise in the fixing rate may continue in the coming weeks as Thai asset managers, who invested heavily in FX-hedged, short-term Korean bonds, are likely to repatriate those investments, given that the attractiveness of Korean money market investments has declined significantly.”
Vietnam’s effective dong depreciation of 7.2% last week (combining a new reference rate of VND20,693 per dollar versus the prior-VND18,932 and a narrowing of the trading band to +/-1% from +/-3%) will help balance FX demand and supply onshore per analysts since spot will drift closer to the open market rate. That said, FT noted today that ”the dong hit a new low of 22,000 against the dollar in the black market, more than 6 percent below the official exchange rate” while Bloomberg reported a rash of dollar buying by companies looking to finance their imports, suggesting omni-present concerns with the government’s ”growth mania” that one analyst likened to “dancing on a razor blade.” The battle is a psychological one that hitherto has failed to be adequately addressed as four consecutive devaluations in 15 months have damaged credibility; remember the observation awhile back that Vietnam must import in order to export. Against that backdrop a devalued dong helps exporters but not before it slams the value of imports: the country’s customs trade deficit of USD12.4bn in 2010 was higher than forecasted and will widen this year to roughly USD14-15bn per Barclays, some 20 percent higher than the bank’s analysts initially projected just two months ago. And while FDI (Vietnam remains an attractive venue for developed country-based corporations to spread their wings) and remittances into Vietnam (projected to be just shy of USD18bn in 2011) remain “supportive”, the level of FX reserves underpinning the overall balance of payments is deteriorating: according to Reuters, quoting a state-run newspaper, reserves were “more than USD10bn” at the end of 2010 compared with USD16bn in 2009 and USD26bn in 2008.
Likewise the central bank’s rate tightening (interbank lending rates up 2 percentage points with base and discount rates at 9 and 7 percent respectively unchanged but likely to move up in the near term; VinaCapital writes for instance that “an increase in the State Bank base rate” will help counteract the aforementioned import price pressures) to date will not meaningfully impact inflation (now 12.2%) which has trended upwards since October. Analysts with Credit Suisse, for one, argue that devaluation is just making the problem worse: “according to the regression-based analysis we conducted, official devaluations can worsen the inflation problem, even though in practice a significant number of people already transact in USD and exchange the VND at an unofficial rate. This partly reflects the fact that food contributes to over 40% of the CPI basket and that people are likely to still continue conducting transactions for food in VND. Amid rising commodity prices, this devaluation can deliver an additional blow to CPI inflation, which can further reduce the trust in the currency if not properly complemented by a credible stance to bring up interest rates to fight inflation. To be sure, we think devaluation is needed in the longer run to help the trade balance, but this should come after the policy authorities have brought down inflation to a manageable level.” To help do so the government will need to curtail both excessive credit (30% last year, above the target of 25%) and money supply growth (25.3% versus a target of 23%) which in turn will depend on the degree that the country’s top rulers are willing to make a break from high-growth policies that are taking it, per some observers, down the very path that devestated so many Asian Tigers in the late 90s when countries “ramped up growth rates and flooded their economies with easy credit only to trigger a financial crisis that swept the region and forced the restructuring of scores of state-backed conglomerates.” With pundits pointing to a second, five-year term for Prime Minister Nguyen Tan Dung when the National Assembly meets in May, Vietnam’s economic fate may depend on whether the Politiburo truly becomes more prudent and less starry-eyed. Yet plenty are pessimistic. “The best intellectual talent in this country is pulling out its hair at the moment,” lamented one observer to the WSJ.
Against the backdrop of rising global uranium consumption fueled by in part by growing developing market demand (founded on the pragmatic approach of delivering relatively eco-friendly power on an adequate scale) and projected by the World Nuclear Association to reach 91,537 tons by 2020 and 106,128 tons by 2030 (increases of 33 and 55 percent respectively from last year), Vladimir Shkolnik, chief executive of Kazatomprom (fully-owned by the domestic sovereign wealth fund Samruk-Kazyna) announced at the beginning of the month an expected 10 percent increase in uranium production this year.” Per Reuters Kazakhstan (the world’s leading producer with an expected market share of 30%) holds more than 15 percent of global uranium reserves and says that it could raise production to more than 25,000 tons (from a planned 19,600 post-increase) by 2015–placing it only behind Australia in terms of known reserves. Meanwhile, in the past year swap prices have risen from $41.50 to $73.00 and per underlying dynamics such as Russia’s wont to let the HEU accord expire and a 20% increase (at least half of which will come from China) in the number of reactors built worldwide, “prices could increase significantly” per market leader Cameco, especially if oil prices indeed climb as some anticipate. Moreover, per Felix Zulauf, head of Zulauf Asset Management in the latest Barron’s roundtable, the upward price pressure could be somewhat secular rather than cyclical in nature: “uranium production is growing, but slowly. Annual production . . . meets only 60% of demand; the rest is met from utility stockpiles or decommissioned nuclear weapons. Production will increase over time, but it could take 10 years or more until it is sufficient to meet demand.” The recent price ramp-up has obviously attracted attention: analysts note that for the first time in almost four years, the spot and term prices trade at parity and that in January alone, the spot price increased US$10.50/lb, the largest monthly increase since June of 2007, while the term price jumped US$8/lb, its largest single move since June 2008.
I maintain that the underlying impetus driving the coup in Cairo relates principally to the price of food and specifically to that of wheat (Egypt is the world’s biggest importer); while certainly the littany of grievances in Egypt touched upon poverty, unemployment, cronyism, corruption and an overall lack of legitimate political opposition, as The Economist noted back in 2005 “Egyptians have tended to shrug off electoral shenanigans and police hooliganism as part of their lot. [Decades] of one-party rule, mostly under martial law, have left the country socially atomised and sceptical of even the possibility of effecting change.” Wheat price volatility, by contrast, is a fairly new but increasingly sinister phenomenon (the rolling standard deviation of percentage changes in the price over twelve months has trended up from about 5% during the 1980s and 1990s to about 15% today; see chart left), especially for a government whose fiscal deficit as a % of GDP has consistently widened over the past few years in an effort to subsidize costs and thus somewhat neutralize per capita inflationary effects on the average citizen who devotes roughly forty percent of his income to food (bottom right).
With shrinking world food supplies in the near-term, increasingly unpredictable weather patterns and the expected secular rise in Asian food (and specifically meat) consumption one may question to what degree this dynamic is priced into budget projections (i.e. for Arab policy makers set on further subsidies), the yields demanded by creditors or even sovereign default protection. Barclays wrote today for instance that Egypt credit spreads “rallied following the announcement of President Mubarak stepping down, with 5y CDS tightening to about 320, a level not seen since the beginning of the protests on 25 January. Investor perceptions of a potentially improved longer-term outlook for Egypt (in terms of social stability) in a post-Mubarak era may continue to support momentum for Egyptian spreads to tighten at this stage.” The contention here, however, is that social stability and fiscal/food policy is hopelessly intertwined, in Egypt and elsewhere. Yet even putting aside the vexing conundrum of who or what exactly will now follow in Mubarak’s footsteps, the interim period is not likely to be kind for fiscal prudence (increased spending is correlated with social unrest) and thus inflation, which at 10.8% y/y already trumped consensus. Barclays, for one, advises clients to “scale back into short credit positions” on any further spread tightening.
My contribution to this month’s Business Diary Botswana which now operates out of both Harare and Lusaka as well:
Zambia’s plan to issue USD$500MM in sovereign paper to finance infrastructure—Absa analysts wrote last month that the government “intends to forge ahead with plans to issue its maiden Eurobond [in early 2011] once it has obtained a sovereign rating”—comes on the heels of Nigeria’s initial foray into international debt markets in late January in which the continent’s most populous nation received orders equaling more than two times the amount of debt sold, attracting buyers from 18 countries in Europe, the U.S., Asia and Africa, despite fairly ardent reservations from certain international investment houses and fund managers regarding its fiscal profligacy. A windfall oil revenue account set up under former President Olusegun Obasanjo, for instance, fell from $20bn to a recent estimate of roughly $300MM, while FX reserves dropped from USD42bn in January 2010 to USD33.1bn by November, marking the second consecutive annual decline (reserves were roughly USD53bn year-end 2008) as the Central Bank of Nigeria (CBN) continued to defend its preferred level of USD/NGN150. Citing the above, along with increased “political risk” ahead of this April’s elections as well as high inflation underpinned by rising food costs and a 2010 fiscal deficit of 6.1% of GDP compared with 4.8% targeted, Fitch Ratings lowered Nigeria’s sovereign credit outlook to Negative (BB-) in October, though S&P maintained its B+ “Stable” outlook primarily on the back of the country’s strong external debt (2.4% of GDP). Moreover, the Financial Times noted, “the country’s ratio of oil production to oil reserves is very low (2m barrels per day from 36bn in reserves), so it is a safe bet that petrodollars will keep flowing well beyond the 10-year lifespan of the bond.” With this in mind, the paper’s ultimate 7 percent yield looked reasonable in comparison with Ghana’s 2017 paper (rated B)—which couponed at 8.5%, now yields 6.3% and is considered the region’s defacto sovereign benchmark—and per some analysts may even look “dear” sooner rather than later. “All expectations are for a rally in the Nigerian Eurobond in the months to come, perhaps when the uncertainty of elections is seen to be less significant,” mused one Standard Chartered banker. For their part, Nigerian officials couldn’t have been happier. “This is a major success and milestone for the country and economy,” Finance Minister Olusegun Aganga gushed to reporters from his office in Abuja. “[The country will now have a] transparent and internationally observable benchmark against which international investors can accurately price risk.”
Relative to the squabble surrounding Nigeria’s fiscal soundness, Zambia’s impending auction should be somewhat tame as “lofty commodity prices should support the case for a relatively low interest rate” per one commentator in regards not only to Zambia but to Tanzania, a rapidly emerging gold producer. But this outlook may be particularly true for Zambia, Africa’s largest copper producer (responsible for roughly 9 percent of total world exports) given the recent run-up for industrial metals while precious metals such as gold and silver have seemingly paused for breath. Copper specifically has been buoyed by both demand and supply fundamentals—China’s consumption of the metal has tripled in a decade to an estimated 6.8 million tons in 2010, according to CRU, a metals and mining consultant that projects due largely to the accelerating urbanization of central and western China (in addition to the continued development and refinement of ever-burgeoning coastal giants) the country is on pace to almost triple its annual use of copper to 20 million tons in 25 years—more than the world produces today and setting the stage for a potential global shortage of 11 million tons a year by 2035. And while the People’s Bank of China (PBC) has acted increasingly hawkish regarding inflation—“reserve requirement ratio (RRR) increases have triggered fears that the Chinese authorities are about to significantly accelerate policy tightening, which could lead to a sharp slowdown in domestic credit and consequently overall economic growth,” wrote one credit analyst, the overall global macro landscape is such that both demand and supply should be running in somewhat opposite directions for the foreseeable future. On the demand front the U.S., the world’s second largest copper consumer behind China, continues to stabilize as economic data in late January showed that showed the country’s GDP grew at a rate of 3.2% for the fourth quarter of 2010 and 2.9% annually, its biggest rise in half a decade. Moreover, VM Group, a London-based metals, energy, agribusiness and renewals consultancy, wrote to clients recently of the expectation of a supply squeeze in the medium term adding further support to copper’s overall return dynamic over the coming year: “Dominating copper’s allure are its supply-side shortfalls, which are now well established. Mine supply has not kept pace with demand for many years, nor has it responded with alacrity to the meteoric price rise, implying that structural difficulties exist.” To that end “the world refined copper market is expected to have a 500,000-metric-ton to 600,000-ton deficit in 2011, even with a significantly weaker demand scenario,” according to metals strategists with JPMorgan Securities Ltd.
Moreover while Nigeria’s history of ethnic-fuelled political violence and current macro story (namely inflation) give some investors serious pause, Zambia in contrast is a study in economic soundness and stability. Absa noted in its year-end Emerging Market Quarterly for instance that FDI inflows—which reached record levels totaling USD4.3bn (27% of GDP) in 2010—more than doubled the total FDI inflow of USD1.8bn in 2009 and should be underpinned in 2011 by further investment—as well as “improved private consumption and infrastructure spending will result in growth of close to 7% in 2011 from an estimated 6.6% in 2010.” Of note, Chinese investment in Zambia (which has swelled by over 400 percent since 2004) is expected to more than double to $2.4bn in 2011, driven mainly by investments in mining and manufacturing, trade minister Felix Mutati reported last month. Meanwhile, Vancouver-based First Quantum Minerals Ltd. will invest more than $1bn in a copper mine (with three open pits) and smelter project in Zambia’s Northwestern province that will be commissioned by the end of the year, probably produce copper over 20 years and create about 2,000 jobs, per the firm’s president Clive Newall, who noted that the company will also build a new hydropower station near the mine to ensure continuous supply of electricity. And although the upcoming October presidential elections between the MMD’s President Rupiah Banda and the opposition PF’s Michael Sata should be closely contested, “Zambia has had peaceful elections since becoming a multi-party democracy in 1991,” analysts note. Inflation, meanwhile, is likely to pick up some due to higher expected energy costs, infrastructure and social spending inherent to the government’s continued fiscal expansionary stance as well as the natural effect stemming from stronger domestic demand. Yet Zambia’s fiscal deficit, at just above 3% of GDP in 2010, is among the lowest in Sub-Sahara Africa And while rising food inflation (which accounts for 57% of the consumer basket) is likely to cause CPI to spike going forward, analysts note that large domestic food stocks mean inflation could remain anchored within single digits, although it accelerated already to 9 percent in January on an increase in grain prices, acting Director of the Central Statistical Office John Kalumbi announced. Yet the inflation dynamic and the resulting pressure on sovereign borrowing costs is admittedly a nuanced one. As one report noted, “for outsiders that balance between moderate inflation that stimulates healthy bond yields, and runaway price increases that damage overall economic performance, will be crucial.” To that end, “there’s been a huge amount of policy accommodation in Africa, and understandably, a reluctance to roll that back very quickly,” said Razia Khan, head of Africa research at Standard Chartered in London. “But at the same time the inflation outlook is not going to be that favorable. The big question is ‘Do domestic yields rise fast enough to compensate for that or not?’ If it’s not the case, you’re not going to see sizeable investor interest.” Regardless, the eventual issuance of Zambian sovereign debt is yet another cause for celebration as it will accelerate the maturation of domestic capital markets, in turn making state and ultimately corporate balance sheets all the more autonomous. And as Ashmore Investment’s Jay Dehn reiterated, “sovereign yield curves help corporates to price bonds, [and] in turn [will unlock] Africa’s huge medium term growth potential.”
In speaking to Georgia’s relatively rapid transformation since the Rose revolution of November 2003 (what will history coin Egypt’s?), The Economist noted last summer that ”Georgia’s modernisation was vigorous, even brutal. Gia Sulkhanishvili, a businessman and a former student of [philosopher Merab] Mamardashvili, says: ‘The government took an axe to the Soviet practices and destroyed the environment which bred nepotism, hypocrisy and idleness.’ The change is all the more startling when Georgia’s fate is contrasted with that of other former Soviet republics, including Russia. ‘As in Russia, there were laws in Georgia, but then there were informal rules which trumped them,’ says Mr Sulkhanishvili. ‘Those rules are largely gone.’” While Silk Invest wrote several months later that the country is now “growing out of adolesence,” citing in particular the “geopolitical advantage” of its rail network which “forms a key section of the Transport Corridor Europe Caucasus Asia (“TRACEA”), forming the link which remains the shortest route between the Caspian and Black Seas,” this growth story cannot come soon enough for reformers who are anxious to make up for lost time and opportunity. When the purported model is “Switzerland with elements of Singapore,” you know someone means business.
As is often the case rapid frontier growth can be best played through the financial sector; Bank of Georgia has slumped hitherto in 2011 (down 4% roughly after a 143% spike in 2010) but remains an attractive long-term story. VTB Capital, an investment bank, notes for instance that the overall economy’s robust 2010 gross output (estimated at 6.5%) as well as a the firm’s 36% market share translated into a 19% YoY loan portfolio increase and a 39% YoY rise in loan demand last fiscal year–effectively a return to pre-crisis levels. With growth likely slowing to around 4-4.5% in 2011 analysts there foresee a reversal from last year where corporate loan growth outpaced retail given the latter’s “low penetration ratio”. Likewise, the inflow of corporate deposits (up 54% YoY) was approximately twice that of retail (which yield more); and though the resulting overall customer account increase of 58% puts a short-term pressure on net interest margins, said funding base “supports the bank’s further expansion in 2011.” Finally, asset quality metrics continue to trend downwards: provisions declined to 7.0% of the loan book, from 8.3% in 3Q10 as NPLs dropped to 4.6% from 5.9%. Add to this picture the spectrum of yet untapped investment banking and insurance segments–VTB notes that management sees Aldagi (the firm’s wholly-owned subsidiary and the country’s largest insurance company in Georgia) as “becoming more important as a result of the robust insurance market growth on the back ofsignificant underpenetration (according to state officials, around two-thirds of the population does not have insurance cover) with the major emphasis on medical insurance (which accounts for around 70% of services across the sector).
Per African Alliance Securities, ”political risk insurance and trade credit insurance will play a major role in Rwanda’s strategy to become a middle income country by 2020. Coupled with the country’s aggressive business reforms, this specialty insurance is expected to increase Rwanda’s already impressive FDI and export volumes.” Said reforms have been robust and the overall operating environment transparent enough that Nairobi-based ATIA, the continent’s only multilateral political-and credit-risk insurer, plans to make Kigali one of three new office destinations in 2011 as it expects to boost premium income between 30-50 percent. To that end, the World Bank recognized Rwanda last fall as the “second most improved business reformer over the past five years,” while ranking it 58th in its 2011 Doing Business Rankings, an accolade that should bode well if it’s to realize the IMF’s lofty growth projections of 8% annual growth within three years. As far as share trading, the country’s exchange (RSE) opened Jan. 31 and was christened by the IPO of Heineken’s Rwandan unit known as Bralirwa which generated USD$80m against $29.5m projected for the 25% of government shares that were offered and joined Kenya Commercial Bank and Kenya’s Nation Media Group as the only other listed companies. Per African Alliance, “currently seven credible regional and local brokers are registered and more are likely to come into the market as RSE gains momentum with more listings both locally and regionally.” Banque de Kigali, for instance, the country’s largest bank by assets and which would likely be under Barclays’ auspices by now had it not been for Lehman, plans to float a 25 percent stake in an IPO by May or June. Other impending listing, per analysts, include shares of cement-maker Ciments du Rwanda Ltd, Rwanda Commercial Bank and the government’s sale of its 10 percent stake in mobile operator MTN Rwanda as well as its 20 percent stake in the country’s biggest insurer, Sonarwa (Societe Nouvelle d’Assurance du Rwanda) in which Nigerian firm IGI owns a 35 percent stake.
Indonesian government bonds (INDOGB) delivered a total return of 28% in 2010 from rates (23%) and FX (5%). The front-end of the curve, however, looks especially vulnerable as Bank Indonesia’s (BI) recent 25bp rate hike looks to [finally] mark the end of a hitherto dovish monetary policy in the face of three consecutive months now of rising inflation expectations. Barclays, for one, expects headline inflation to rise to 7.5% in Q1 (the latest 7% y/y inflation in December breached the 4-6% target) ”given high global food commodity prices, persistent wet weather and recent IDR weakness.” And while BI’s latest statement mentioned the additional need to “strengthen the rupiah exchange rate,” which in theory would help shore price pressure short of policy rate meddling, analysts note that “strong domestic demand means that the current account surplus will shrink in 2011 to 0.5% of GDP from 1.1% last year, providing lesser fundamental support for the rupiah.” Further complicating that dynamic is the possibility of government capitulation on fuel subsidies in March which would be inflation-positive but otherwise currency-negative; regardless, headline inflation is such that most banks are looking for three further BI rate hikes (75bp total) as well as some form of additional capital controls (likely only extending the holding period for central bank notes, or SBI to three months from one, however) and it is unclear to what extent this is already priced in.
Moreover, JP Morgan points out that the INDOGB trade “still retains a certain charm”. For one, a growing supply thanks largely to domestic banks aggressively cutting their bond portfolios in order to support credit growth can effectively be sterilized by the government’s cash surplus (recent trends have seen the government consistently deliver realized budget deficits far lower than planned ones as it undershoots on expenditure disbursals). Second, high yields coupled with a growing sense that policy tightening is now receiving deserved attention and the relative lack of onerous capital controls seen elsewhere may see offshore investors increasingly up-duration and support the long-end of the curve in an overall flattening effect. This effect will be augmented if in fact headline inflation is tamed as the year progresses; to this extent, long-end investors should eye the quality of the impending spring harvest season and the aforementioned March fuel-subsidy decision vis a vis headline inflation as well the state of underlying, core price pressures to monitor the BI’s effectiveness. Finally, consider the below “Big Mac” chart from The Economist on inflation which measures the gap between a country’s average annual rate of burger inflation and its official rate and thus implies the degree to which a given government is understating “true” inflation. Was BI right to be dovish after all?