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Financial Times noted on Thursday that Bahrain, which is heavily dependent on its financial services sector, will sell nearly $800m worth of bonds in order to finance house building projects and bolster the island’s beleaguered economy. Moreover, other Gulf countries could be next in line, as Dubai, Oman and Saudi Arabia will all be running deficits in the coming year. However, the paper writes, Bahrain “has far smaller foreign currency reserves than its more hydrocarbon-rich neighbors.” Moody’s lowered its outlook on Bahrain’s debt rating to negative back in January, and several Bahrain-based firms have been downgraded or put on negative watch. That said, “most of the 400 financial institutions in Bahrain are offshore and unlikely to need state support.”
Heeding the call of analysts, Botswana’s central bank cut its benchmark interest rate on Friday by 1% to 14%, as inflation fell from 13.7% to 12.8% and appears likely to continue to rapidly move towards the bank’s medium-term objective range of 3-6% in 2009. Botswana, the world’s largest diamond producer, has been especially vulnerable to falling demand for the valuable mineral in its two largest buyers by volume, the U.S. and Japan.
Dubai’s property companies will probably be the first to get support from the emirate’s $10 billion bond sale, according to Nasser Bin Hassan al-Shaikh, director general of Dubai’s Department of Finance. U.A.E.’s central bank purchased half of a $20 billion note issued by Dubai to provide the emirate with funds needed to meet its financial obligations. That said, analysts are skeptical whether the cash injection will be anywhere near adequate in light of the fundamental problems of the real-estate and banking sectors. In fact, Dubai rents are expected to fall as much as 40% in high-end areas this year, said one commentator. Per Bloomberg, Dubai’s property industry is slowing after a five-year boom as banks cut back on mortgage loans and speculators leave. Real- estate prices have fallen 25% in Dubai from September’s peak and 20% in Abu Dhabi. As such, many property companies are looking to sell stakes in “non-core” units in order to raise cash as the property market slows.
Bloomberg reports that new accounting rules will allow Banco de Chile, the country’s second-largest lender, to boost dividend payments. The International Financial Reporting Standards that have applied to Chilean banks since Jan. 1 eliminate monetary adjustment charges among other changes, according to a report by Celfin Capital. These changes, which will be partly countered by lower loan growth and inflation estimates for 2009, should result in the bank paying out higher amounts of dividends in forthcoming years,” per analysts.
Business Daily Africa reports that the cost of credit in Kenya is “likely to remain high” despite measures taken by the Central Bank of Kenya’s (CBK) to spur commercial banks to lend. Such monetary policies included lowering the amount of cash that banks are required to hold in its coffers (from 6% to 5%), as well as the launch of credit bureaus. Nevertheless, the CBK issued a report indicating that commercial banks had raised the rates at which they lent to borrowers by an average of 1.7% last year, to an average of 17%. “Banks will be a lot more cautious and prudent this year,” said James Macharia, NIC Bank’s managing director, who underscored the fact that the risk of unemployment impacting consumer business of various commercial banks, and the potential increase in defaults on loans already issued, forces banks to take a more prudent stance towards lending.
Speaking of NIC, last week the bank reported a 41% jump in annual pretax profit to 1.484 billion shillings ($18.66 million). The bank increased its branches to 12 in 2008 and is the process of acquiring a 51% stake in Tanzania’s Savings and Finance Commercial Bank. Macharia attributes the bank’s success in the current economic climate to its diversification of services. “We are somewhat insulated from the rest of the world in light of the weak transmission mechanism between our financial system and that of developed countries,” he noted. Moreover, the bank’s loan book recorded a 35% growth to 30 billion shillings mainly driven by the Bank’s expanding market share. Deposits closed the year at 35 billion shillings, reflecting a 42% increase over 2007.
One commentator today noted that “in many ways, what’s happening now across Eastern Europe – including Russia – is reminiscent of the Asian economic depression that began in Thailand in July 1997.” Foreign currency loans taken out during the boom years through 2007, when economic growth averaged more than 5% (“mainly from Austria and other EU members that included leveraged mortgage loans tied to low interest rate currencies like the Swiss franc”), coupled with precipitously falling local currencies and low currency reserves, has spelled disaster for even Eastern and Central Europe’s largest economies, which serve as core manufacturing hubs for Western Europe, as well as for Balkan states and the Baltic Republics. The IMF, which has already bailed out Latvia, Hungary, Serbia, Ukraine and Belarus, warned last month that bank losses may widen as “shocks are transmitted between mature and emerging market banking systems.”
One reason to bet against a complete and utter collapse of the East, however, is the fact that the de facto foundation for the EU–Germany and, to a lesser extent, France–have quite a vested interest in its survival and long-term health. Over 25% of Germany’s exports head to Eastern Europe, and particularly in regards to those countries that are already part of the single currency euro-zone–continued solvency is a must for the Euro’s continued viability and also for its members relatively low financing costs.
Moreover, some commentators say the fear of collapse is overstated. Concerns that east European borrowers will default on foreign-currency loans, triggering bankruptcies among western lenders that have caused a sell-off of emerging- market assets are “overdone,” said a UBS report published on Tuesday. Per the report:
More than half the outstanding short-term external debt is owed by larger countries such as Russia, Poland and Turkey, which are less impaired due to a lower rate of leverage in the economy and better growth prospects. [However], smaller economies such as Lebanon, Latvia, Estonia and Bulgaria face the highest repayments in the coming 12 months, each at more than 40% of their GDP.
Standard & Poor’s, while admitting that the effects will differ country-by-country, warned of especially dire consequences for the Baltic’s Latvia, Estonia and Lithuania, as well as Bulgaria, Hungary and Romania. S&P contrasted their positions with that of the Czech Republic, Poland and Slovakia, for instance, which it argued are better placed to emerge “stronger and more competitive” from the crisis.
With this in mind, punters interested in the Polish or Czech debt market, or even its default swaps, may be rewarded. The cost of protecting payment on Poland’s debt has risen more than six times in the past six months, credit-default swaps show, which is roughly the same as on contracts linked to Serbia, which is rated three levels below investment grade at BB- by S&P. And both Polish and Czech government debt, among the highest rated in emerging markets, has already been downgraded by bondholders.
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.
Despite posting a 39% increase in net earnings to Sh1.03 billion in 2008, Kenya’s NIC Bank opted to offer a lower dividend to its shareholders of Sh0.25, compared to Sh0.80 the previous year–a sign that the bank is keen on retaining cash, as well as a realization that the coming year will be hard one for their shrinking loan books, according to analysts.
The bank’s plan to retain most of its profits comes on the heels of an “acquisition spree” last year, when it purchased a brokerage firm and a stake in Tanzanian bank. A lower dividend, coupled with the issuance of a bonus “scrip” or capitalization issue (one share for every 10 ordinary shares held), will cushion capital reserves through earnings retention, said NIC’s chairman, James Ndegwa.
The Emirates interbank offered rate (Eibor) has eased to 3.10% from 4.20% at the start of the year as liquidity within the banking system has increased. Yet a lower Eibor is not necessarily a sign that things have improved, warned Marios Maratheftis, Regional Head of Research at Standard Chartered bank. “Banks are putting their money in the interbank market, driving the interbank rates down. [A lower Eibor] is a sign that liquidity is there but it is trapped,” he said.
Analysts thus argue that the Eibor should be lower, citing the fact that in spite of the reduction, a wide gap remains in comparison to the repurchase rate set by the UAE central bank, which last slashed the repo rate on January 19th to 1.00% from 1.5%. “One of the solutions is to inject additional liquidity so that banks do not need to compete for deposits and liquidity also eases,” said Maratheftis.
Fitch Ratings opined this week that Kuwaiti banks’ indirect exposure to the stock market, in the form of loans to troubled investment companies and lending for the purchase of shares, is “significant” and may lead to future asset quality problems, rising impairment charges and declining profitability. Moreover, a slowdown in the real estate and construction sectors in Kuwait also has the potential to undermine asset quality, Fitch said. The warning comes on the heels of Fitch’s decision last month to downgrade the Long-term Issuer Default Rating (IDR) of Global Investment House, the largest investment company in Kuwait, to D, following an announcement by the firm that it had defaulted on the majority of its financial obligations.
Kuwait Finance House, Commercial Bank of Kuwait and National Bank of Kuwait reported a decline in net income of 46.3pc, 16.3pc and 6.7pc respectively in the fourth quarter of last year.
JGW
Frontier Markets 