You are currently browsing the monthly archive for May 2009.

  1. Behold the “negative basis trade,” per John Dizard: “You can own a corporate bond, or emerging market sovereign bond, buy default protection on the paper with CDS, and collect interest payments for taking no risk. That’s right: because CDS prices are depressed, relative to the comparable bonds, you can collect money for taking no risk.”
  2. Per Riccardo Barbieri of BofA-Merrill Lynch, “as long as [oil] prices rise only moderately from here – say, revisiting the $80 a barrel level by year-end, this would not pose severe risks for the advanced economies, while the emerging ones would be able to tolerate even higher levels, say, $100, in due course.”
  3. David Pilling notes that “Vietnamese exports have been fairly resilient. While economies such as Singapore and Taiwan have seen declines of 30 or 40 per cent in shipments, Vietnam was down a modest 3.7 per cent in the first four months of this year against the same period in 2008.  Economists think Vietnam might be benefiting from a new Wal-Mart effect by which western consumers switch from expensive branded products to cheaper goods in which countries such as Vietnam excel.  Last month, the port at Ho Chi Minh City was so busy it was backed up with ships. ‘They’re not producing i-Pods and laptops; they’re producing T-shirts and shoes,’ says Jonathan Pinkus of Harvard University’s Kennedy School of Government.”
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Interesting tidbit in CityWire regarding the Advance Frontier Markets Fund (AFMF) managed by Progressive, a fund of funds specialist that focuses on underdeveloped markets.

“Launched in 2007, AFMF initially withstood the onset of the credit crunch. However, the intensification of the crisis last summer led to a sudden withdrawal of liquidity from frontier markets, and AFMF’s net asset value dropped sharply. The share price decline was aggravated by the loss of its premium rating and move to a large discount.

AFMF’s portfolio is comprised of investments in over 20 funds. While a few may be familiar to investors, such as the Investec Africa fund, most reflect the diligent work of the Progressive team in finding specialist managers working in the countries in which they are invested. For example, none but the most determined investor is likely to have discovered the Avaron Balkan fund or the IMARA Zimbabwe fund.”

Given the tepid economic recovery and continuing lack of liquidity in most frontier economies, it will be interesting to see if fund of funds experience a relative boon given their ability to further spread risk for investors looking to gain at least some African, Asian and Gulf exposure while prices remain so unduly dampened.

A recent study published by the International Institute for Environment and Development (IIED) at the request of UN Food and Agriculture Organization and International Fund for Agricultural Development (IFAD), confirms the fears of many critics that land deals in Africa and Asia may in practice be little more than “neocolonialism”.

The report found that many countries do not have sufficient mechanisms to protect local rights and take account of local interests, livelihoods and welfare. A lack of transparency and of checks and balances in contract negotiations can promote deals that do not maximize the public interest. Insecure local land rights, inaccessible registration procedures, vaguely defined productive use requirements, legislative gaps and other factors too often undermine the position of local people.

Both The Economist and the Financial Times have weighed in on the issue, underlining the social and economic concerns such deals raise for local farmers, but also highlighting the tangible benefits that domestic markets, habitually lacking in capital and technological prowess, stand to gain long-term.

It would be graceless to write off in advance foreign investment in some of the most miserable places on earth. The potential benefits of new seeds, drip-feed irrigation and farm credit are vast. Most other things seem to have failed African agriculture—domestic investment, foreign aid, international loans—so it is worth trying something new. Bear in mind, too, that worldwide economic efficiency will rise if (as is happening) Saudi Arabia abandons mind-bogglingly expensive wheat farms in the desert and buys up land in east Africa.

The muddled conclusions are, in my opinion, a testament to the fact that such deals are theoretically virtuous but all too often inefficient and probably harmful in practice. Per the Economist, for instance:

Most deals are shrouded in mystery—rarely a good sign, especially in countries riddled with corruption. One politician in Cambodia complains that a contract to lease thousands of acres of rice contains fewer details than you would find in a house-rental agreement. Secrecy makes it impossible to know whether farms are really getting more efficient or whether the deals are done mainly to line politicians’ pockets.

Richard Ferguson, formerly of Nomura Holdings in London, succinctly notes that we must examine the motives underlying the deal to fully appreciate what its effects will likely be:

To decide whether the acquisition of farmland in emerging economies can be categorised as “beneficial foreign investment” or a form of “neo-colonialism” we need to distinguish between the underlying motives which drive much of the current investment across the industry. The biggest supply issue in farming is not the availability of land; instead it is the limited supply of competent managements who can manage increasingly complex industrial farms. Long-term investors in the sector understand these complexities and, consequently, make their investments with a view to upgrading infrastructure, enhancing staff skills, introducing capital and so on over an extended period. In this case a long-term approach to investment returns is the norm given the unpredictability and volatility which will always characterise the industry. A less measured approach, which could fall under the “neo-colonialism” banner, is where investment is made in a haphazard manner with little thought to the long-term management of the business. It remains to be seen whether Chinese and Gulf state investment in the sector falls into this category.

Yet regardless, land deals or “grabs” are not going to go away, for the simple reason that their emergence is a natural, inevitable consequence and response to market inefficiencies, notably the world’s food-market turmoil of the 2007-2008, when the index of food prices rose 78% and food stocks slumped. Throw in trade bans and other protectionist policy imposed by grain exporters to keep food prices from rising locally, and it is no wonder that many nations with the means felt obliged to take matters (i.e., the land and means of food production itself) into their own hands). More power to them.

The “solution”, therefore, ought to lie not in the overarching condemnation or the abolishment of the entire concept of food and land outsourcing, but rather in the adoption of greater transparency through stricter standards or even codes of conduct of deal making. Simply put, it is the interests of both the seller/lessee-government (see Madagascar) and the buyer/lessor nations, corporations and sovereign wealth funds (SWF) to negotiate more synergistic deals that unequivocally reflect not only the true costs involved, but also entrench what short and long-term benefits are to be realized, and by whom. Accordingly, enforcement mechanisms must be in place such that aggrieved parties may pursue appropriate remedies.

So, in broad terms, how can such land deals be improved upon?

  1. Fairer terms for “smallholders”: This is not simply out of largesse or equity, however–there is a practical incentive for lessors as well–poor terms often lead to local opposition so fierce that some deals cannot be implemented. Economist notes the Saudi Binladin Group had to put on hold a $4.3 billion project to grow rice on 500,000 hectares of Indonesia, while China found itself postponing a 1.2m hectare deal in the Philippines for similar reasons. Such delays impinge on returns and also reflect badly;
  2. Benefits should be shared among locals: This involves not only lessors utilizing at least a percentage of local workers, but also lessees creating appreciable social safety nets for displaced farmers or adversely affected communities;
  3. Abide by national trade policies: In other words, exports are put on hold or severely limited if the host country is suffering a famine or natural disaster. Such events could be hedged by lessors through insurance or contingent deals with other exporters;
  4. Enshrine the technological commitments and know-how that foreign firms must transfer: Too often it is just assumed that the benefits of new seeds and farming techniques will be automatically transferred in such deals. But given human nature, and moreover the business sense and proprietary instinct of the companies involved, there is nothing natural about just giving something away. Thus, checks and balances must be in place such that local farming industries can immediately realize the benefit of foreign expertise, capital and equipment;
  5. Mandate organic farming? It has been suggested by some that if proper care is taken, then outsourcing of farmland can improve not just its efficiency but can also provide livelihood and better wages to hundreds of thousands of poor agricultural laborers in these third world countries like Sudan.

Interesting article from April 24th’s Investment Dealers’ Digest (IDD) regarding Houlihan Lokey (“From Century City To Baghdad”, subscription required), a middle-market investment bank whose restructuring practice has given it an international reputation, and whose decision to rebuff various bulge-bracket suitors over the past decade or so now looks increasingly prudent.

In addition to working with the Russian government on its Soviet-era debt, as well as with the Seychelles, the firm’s sovereign advisory services team is in the midst of helping Iraq ease its debt burden, and has been successful with 42 creditor nations, through meetings and negotiations with various creditors’ central banks, ministries of finance and ministries of commerce.   Bankers are now working on the closing phase with eight nations, the article states.  “There is a lot of traveling to different capitals,” notes Derrill Allatt, a managing director.  “We have had success. There was an agreement with Tunisia 10 days ago.”

Creditors, he states, fall into different categories: Paris Club and non-Paris Club nations, as well as Gulf Coast countries.  Iraq’s Paris Club debt was cured five years ago, and thus the firm now advises on money owed to non-Paris Club nations such as Turkey, China and Hungary (so far $25 billion of non-Paris Club debt has been cured).

“Every country has its own concerns and interests. Quite a lot [of the creditor nations] are understanding,” says Allatt. “Often you work day and night to get things resolved. You just have to work through it until you have an agreement.  Given the way the world economy is I’d expect our business line to keep growing.”

Following the defeat of the Tamil Tigers’ (LTTE) 26-year insurgency in Sri Lanka, the Colombo Stock Exchange (CSE) surged, with the All Shares Price Index (ASPI), which tracks the movement of all the stocks listed in the CSE, recording its sixth highest daily percentage growth in history, and the Milanka Price Index (MPI), composed of 25 select equities, realizing its fifth highest percentage growth in history. Meanwhile, volume during the week reached the four highest number in history. While there was some profit taking on Friday, the ASPI gained 20% for the week (4.21 points) to end at 2,146.73 while the more liquid MPI gained 34% (8.25 points) to close at 2,466.90. Both indices are now up over 35% for the year.

Not surprisingly perhaps, some of the week’s biggest gainers were in tourism, lead by Miramar Beach Hotel (up 33%), Taj Lanka Hotel (22%) and John Keells Hotels (19%). The biggest gaining sector was the diversified one, lead by John Keells, which deals in ports, tourism, retail, food and beverages, financial services and property and is considered by analysts as a proxy for investment in the country, per news reports. Despite the profit taking on Friday, Geeth Balasuriya, research manager at Acuity Stockbrokers, doesn’t see the upward market trend abating quite so quickly. “We expect the positive sentiment to continue into the short to medium term,” he surmised.

Sri Lanka, for various reasons, is an overlooked market, but given civil stability that should quickly change. Its population roughly equals that of Australia, for example, and per capita income is nearly double that of India. Billions of dollars spent containing the LTTE can now be funneled for other purposes, pundits note, and rebuilding the nation’s infrastructure should be on top of the list. IMF funds and those from the Tamil diaspora must also be taken into account, and firms in India will likely receive the bulk of any contract work. Additionally, tourism to the island can be expected to explode, especially given some 350 sq km of beaches and hill stations, cities and historic sites. Finally, a hitherto underutilized port–the port of Trincomalee, which lies on the main shipping lanes–can be used to complement Colombo, observers say, and also compete with Indian ports.

According to Trade Arabia, a news source, the Qatar construction sector is poised to grow by 17.6% YOY in 2009, as “gas revenues continue to provide the country with ample funds to re-invest into infrastructure development and construction projects.”

A byproduct of this trend will be a “spillover” into the country’s real estate market, which contributes roughly 10% to Qatar’s GDP, theorizes Muteab Al-Sa’aq, chairman of Trance Continent, a trade-show organization.

In addition to housing units and public installations, Qatar has also seen growth in office space market due to increased demand among global oil and gas companies, the banking and financial services sector, and government ministries and agencies, [Al-Sa’aq] pointed out. Growing tourism has also prompted Qatar to invest in the development of hotels and resorts, with figures released by the Qatar Tourism and Exhibitions Authority (QTEA) estimating a total investment of $17 billion into tourism infrastructure to support the anticipated 400 per cent rise in hotel capacity by 2012. Al Saaq said brand new residential towers were being delivered in and around Doha, with projections of 9,000 new apartments to be available by 2010, while 80,000 new hotel rooms will be finished by 2016. Development at this astounding pace is precedent to the potential of Qatar’s property market despite the challenge of the present economic slowdown. As correction envelopes the region’s real estate sector, “we are expecting Qatar to lead the way as the centre of development for major industries in the Middle East,” he added.

Nice aside in FT’s Lex Column yesterday regarding its reservations towards sukuk—Islamic bonds:

Islamic finance is beset by uncertainties. One is how the claims of sukuk holders stack up against those of other stakeholders in the event of default. Last week’s default on a $100m sukuk bond by Investment Dar, a Kuwaiti investment company that owns half of Aston Martin, the UK sports car maker, will be a test case. Courts in general must decide if sukuk – whose returns are based on an ownership claim on assets rather than cash flows – should be lumped in with bonds or be treated more like equity.

Islamic scholars, meanwhile, must agree standards for sharia compliance. Uncertainty on both fronts partly explains why the spread on HSBC’s leading sukuk index remains at four times pre-crisis levels, compared with three times for its conventional Gulf counterpart. Until a more mature regulatory and legal environment emerges, investors who do not face religious restrictions would be wise to stay on the sidelines.

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.

Egypt’s benchmark CASE 30 stock index, the EGX 30, gained 2.2% yesterday, primarily on the strength of its telecoms and specifically rumors that a row  between Mobinil shareholders will soon be resolved.  Orascom Telecom (OT) and France Telecom have been engaged in battle over their joint holding in Mobinil–one of three mobile operators in the most populous Arab country–since the two sides went to court in 2007.  OT had previously stated that it considers the deal ordered by an international arbitration court in March to sell its 28.75% stake in Mobinil to France Telecom “null and void” after the French company failed to meet a deadline to transfer certain funds in time.

The telecom sector is of particular interest to investors looking to add Egyptian exposure.  Egypt’s Minister of Investment declared this week that the  sector grew by 14% Y-OY in the third quarter of the current fiscal year, which ended in March. The sector contributed less than 3% to GDP, while the number of internet users increased to 13 million.  And last week Telecom Egypt announced a surprise 72% rise in net profit for the first quarter, a better than expected result that shocked traders.

According to Business Monitor International (BMI), Egypt’s mobile subscriber market grew by 9.6% in the third quarter of 2008.  Including inactive mobile users, which all three of Egypt’s operators are assumed to have, the total Egyptian mobile customers expanded to 42.275m at the end of September 2008–equivalent penetration rate of just over 53%.  Moreover, it envisions a total market of over 59m mobile customers at the end of 2009– equivalent to 74% penetration.

“Prepaid services,” it states, “will continue to drive market growth in the immediate future, and this phenomenon is expected to put downward pressure on operator average-revenue-per-user (ARPU) levels. However, recent developments, including Mobinil’s launch of 3G services in September and Vodafone’s November announcement that it was preparing to launch Apple’s iPhone 3G, should help to boost the market for mobile internet and data services. This in turn will help to stabilise falling ARPU levels.”

Interesting piece in this week’s Economist regarding the lack of correlation among central and Eastern European economies during the credit crunch:

Tarring all with the mistakes of overheated Latvia, chaotic Ukraine or debt-sodden Hungary makes no sense. Nor does lumping together rich and poor countries, or those in the European Union and those outside. Exchange-rate regimes vary: two countries are in the euro; five countries have pegged their currencies to it; others float.

So far at least, speculators who counted on contagion toppling countries like dominoes have little to show for it, while those who bet the other way have juicy gains. Poland’s stockmarket is up by nearly 40% since its low in February, Hungary’s has risen by half and Russia’s by nearly 90%.

Poland received a $21b credit line from the IMF this month and is widely considered the region’s most resilient, partially due perhaps to the fact that domestic demand makes a relatively larger contribution to the economy. Polish firms make up a sizable chunk of certain frontier ETFs.

That said, one looming in the Polish economy (and most likely other central and eastern Europe nations) is the lack of commercial credit being extended by banks, which are 80% foreign-owned and have a 67% market share. Consequently, industrial and commercial companies find themselves delaying their payments to supplies (causing a cash-flow conundrum), while drawing down their deposits in order to fund operations, meaning banks are under continuous pressure to strengthen their capital bases while their owners are less than anxious to pour more money in.

JGW

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