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There is loads of great information and commentary on the entire gamut of emerging and frontier markets over at MyStockVoice.com, headed by a Facebook connection of mine, Paul Harper, whose knowledge of emerging telecoms in particular is probably second to none.
Everyday I try to make it through as much of the Financial Times as I can, and have yet to feel worse off for my efforts. Some frontier-related musings from Monday:
- Per John Dizard, “it’s worth keeping an eye on the continued willingness of the Baltic states to maintain their [Euro] pegs at such a high cost,” especially since “any subsequent revival in their economies as they regained competitiveness would serve as an ominous example for holders of, say, euro- denominated Spanish assets.” Latvia remains the most likely to de-peg, Dizard writes.
- In light of Prime Rate Capital’s announcement that it will launch Europe’s second sharia-compliant money market fund, Sophia Grene pens an informative overview on the “gap” in Islamic Finance and the role that sharia committees or “scholars” play in authorizing and supporting new products. For instance, the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (Aaoifi)–whose board carries “great weight” in the Islamic investment community–was reported as saying a few years ago that 80% of then-current sukuk structures were not Islamic. “Largely as a result of the uncertainty surrounding sukuk’s sharia status, issuance in 2008 was less than a third that of a year before,” Grene notes, and 2009 issuance levels look to be far short of their 2007 peak. Another reason, however, has been issuer default and the lack of established methods of restructuring the debt. Moreover, the lack of a liquid secondary sukuk market has thus far hampered asset managers who wish to buy and price assets. Yet what market there is (caused in part by sellers not keen on the concept’s relative infancy) has been well-received by new sukuk funds such as those run by HSBC Amanah, the global Islamic financial services division of the HSBC Group.
Herewith my May 2009 article for The Business Diary, a monthly Botswana-centered finance periodical that also highlights and features commentary on economic happenings around the SADC region.
I’ll begin posting my contributions shortly after they appear both in print and online. June’s article features an in-depth look at the emergence of private equity in various African countries and sectors. Doing research for the piece opened my eyes to just how sizable PE is becoming in Africa as a whole, a trend that certainly runs contrary to some quotes that I’ve read from some fund managers who are (incorrectly, in my mind) discounting the current demand for risk premia that only Africa can offer. And while Financial Times noted recently that general partners as a whole are having trouble raising new funds, given the robustness in particular of the secondary market, that dilemma need not necessarily apply to emerging and frontier market-oriented firms given the relative lack of retail and wholesale leverage in such regions. In essence, while foreign investment may be fleeing developing markets, economies there are more resilient right now than in the developed world because domestic demand is sturdier.
Saeed Jawed Ahmad, an Islamic banker and investment analyst based in Jeddah, has this to say regarding the “basics of Islamic finance”:
The conceptual difference between an Islamic finance and a conventional finance transaction lies in the fact that in conventional finance, the financial institution generally lends cash for a length of time, often direct to the client or borrower, of course based on a credit rating or evaluation, on the basis that the borrower would return the borrowed amount plus an interest amount. The interest amount and the original borrowed amount is required to be repaid to the lender over the loan period or by the end of the loan period. Thus the transaction in essence is the lending of cash against the return of a higher amount of cash, and not necessarily for a specific purpose. One of the basic ideas behind the interest rate is the time value of the money lent. The excess cash returned to the lender over and above the borrowed amount is considered “riba” in Islamic finance.
In Islamic finance, there is no direct lending of cash against return of a higher amount of cash, unless the transaction is “asset backed” implying that the transaction has to involve the sale and purchase of an asset. In a typical financing transaction, the Islamic financial institution will purchase assets required to be financed by a borrower at a price and sell them to the borrower at an agreed (higher) price allowing the financial institution to make a profit. This purchase and sale of an asset basically renders the financing as “Shariah-compliant.” Islamic Shariah laws allow cash to be lent, but generally only as “Qard Hassan” where only the same amount of cash is required to be returned, if returned at all.
How much was the global economic crisis made possible by a savings glut in emerging countries? While popular sentiment is to lambast securitization, bankers and even capitalism per se, a more nuanced view of the matter (and one widely embraced by economists of varying ideologies) embraces the appreciable role of emerging economies in inflating the world’s asset prices (though to be fair, said economies were awash in private capital flows from more developed nations). And while emerging countries were stung just as hard (if not harder, due to capital outflows) as developed ones from the crisis, their long-term fundamental health is not questioned. Among other changes which will be evident in international finance’s new paradigm, notes Mohamed El-Erian, chief executive and co-chief investment officer of Pimco, the bond investment manager, is that “multiple growth engines, largely from the developing world, will replace the single engine of growth of the US-centric twentieth century.”
One change G20 countries would like to see is a draw down on those very reserves that flowed so freely during the boom times, depressing yields even as interest rates continued to be slashed. The Economist writes this week, for instance, that the IMF’s resources will be increased by $500 billion to $750 billion, and that it will be allowed to issue $250 billion-worth of its own quasi-currency, the Special Drawing Right (SDR), to ease liquidity in emerging and developing economies. In essence, the “fund wants to provide crisis insurance to large emerging economies suffering a temporary loss of liquidity but with basically sound policies.”
The creation of a beefier but gentler IMF will give emerging economies a credible alternative to the practice of building up enormous foreign-exchange reserves. Many countries have done this in the past decade to protect themselves against fluctuations in capital flows or commodity prices. Given the opportunity to insure with the IMF, countries should have less need to insure themselves with vast reserves or to arrange large bilateral swap lines. When emerging economies have reserves worth several hundred billion dollars each, the IMF could not possibly have provided a credible alternative to self-insurance with a kitty of no more than $250 billion.
Yet skeptics worry that the social and political stigma that is (understandably) attached to the IMF may preclude leaders from knocking on its door, even when times are tough:
An almost visceral dread of having to approach the IMF, especially after the Asian crisis, was at least partly responsible for the enormous build-up of reserves to begin with.
Yet Mexico’s recent willingness to open a flexible credit line is perhaps a sign that said stigma has dampened. Gabriel Casillas, an economist for UBS Pactual in Mexico City, said the IMF loan “will in fact increase the central bank’s foreign reserves, giving…more firepower to the Mexican monetary authority to stabilize the currency. “In our view, this could make market participants concerns about Mexico’s foreign reserves level vanish completely,” Mr. Casillas said, adding that he expects the peso to surge against the dollar in the short term.
With cereal prices expected to remain high on the international market, East African Breweries Limited is now diversifying its cereals raw materials to include sorghum. Hitherto the brewer saw the cost of barley and malt rise by about 60% which lead to sluggish earnings.
Earlier this month news that Venezuela’s state oil company was behind on billions in payments to private oil contractors made bond investors squeamish, sending the average yield on Venezuelan bonds (which had fallen 7% since Jan. 9th), to an average yield of 17.4 percentage points more than U.S. Treasuries.
But have the markets overshot? President (for life?) Huge Chávez’s comment recently that Venezuela was well-equipped to weather the global economic storm, despite falling oil prices (oil accounts for 94% of Venezuela’s exports and funds nearly half the government’s budget), was based at least in part on the fact that the country saved at least some of its past oil revenues, and that the Central Bank still has reserves of some $29 billion.
However, a tidbit in this week’s Economist (“Chávez for ever?) suggests there may be more to the story, namely the voraciousness of the country’s private banks for government debt:
[Chávez's] bravado is based partly on the hope that the oil price will rise next year, and the conviction that Venezuela’s private banks will be happy to finance this year’s deficit, albeit at a price. They may well do so. According to one banker, the banks have a “gigantic appetite” for government paper because other lending is even more unattractive. The government caps interest rates, but inflation is running at over 30%.
Credit Suisse seems to agree. The Swiss bank announced last week that Venezuelan bonds would “outperform” after Chavez won a referendum to scrap term limits that would have forced him from office in 2013, noting that the victory gave the government “more room to pursue a set of measures to ameliorate the impact of the decline in oil prices on the fiscal accounts.” Said measures are likely to include the devaluation of the currency to 3.1 bolivars per dollar and a move to keep spending increases below inflation, they said. Chavez pegs the bolivar at an official exchange rate of 2.15 per dollar under restrictions he imposed in 2003.
From Standard & Poor’s “The Outlook”:
The MSCI-EAFE index, a developed international equity benchmark, is now moving in unison with the S&P 500 index 89% of the time, up from 80% on August 31. Similarly, the MSCI Emerging Markets index’s correlation to the 500 has jumped to 81% from only 68% two months ago. Worse yet, the MSCI Frontier Market index, long touted for its ability to ‘zig’ when the 500 ‘zags,’ has seen its 500 correlation surge to 63 percent from a mere 9 percent on August 31.”
MSCI, a New York-based index provider, announced this week that Serbia and Lithuania will join its 19-member Frontier Markets Index after the close of trading on Nov. 25. In addition, Ghana, Botswana, Jamaica and Trinidad & Tobago may also gain “frontier market” status by May 2009, the index provider said. The classification was created by MSCI for stock markets that have less-developed economies and financial markets than emerging markets, and that typically have more restrictions on foreign stock ownership.
Some of these nation’s more notable firms, per Bloomberg, include:
- Lithuania’s AB TEO LT, the country’s biggest communications company, and AB Rytu Skirstomieji Tinklai, the operator of power grids in eastern Lithuania. Shares of both Vilnius-based companies have fallen 40 percent and 51 percent, respectively, this year.
- In Serbia, the Belgrade-based Komercijalna Banka AD, the country’s biggest bank by market value which has lost 71 percent of its value this year, and AIK Banka AD, which has dropped 72 percent in 2008.
Fitch Ratings downgraded the sovereign ratings of Hungary (to BBB from BBB-plus), Bulgaria, Kazakhstan (by one notch to BBB-, the lowest investment-grade level) and Romania (by two notches to BB-plus from BBB) on Monday while warning that the ratings of South Korea, South Africa, Russia and Mexico are also in jeopardy. European Union members Hungary, Romania, Bulgaria and the Baltic states “may not be able to handle their large foreign debt burdens, which could spark financial crises,” Fitch said, adding that problems in advanced economies “triggered extreme volatility in emerging market asset prices” and prompted “liquidity strains”.
It lowered its outlook on South Korea, Mexico, Russia and South Africa to negative from stable, while that of Chile and Malaysia were cut to stable from positive.
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