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Per its Central Bank (CBJ), Jordan’s net foreign reserves rose 40% in 2009 to a record $10.87 billion–roughly equal to eight months of imports–while deposits in the country’s banking sector rose 11% in December from the previous year’s numbers for that month. The CBJ attributes the growth to its enduring policy of permitting a relatively wide interest rate differential against the dollar in favor of the dinar. Last November, the Bank’s Governor defended the dollar-dinar peg, reiterating that the policy, which was adopted in 1995, is vital in “boosting confidence in the national currency as an attractive tool for deposits.” IMF officials agreed, citing the fact that increased reserves allowed the CBJ to cut interest rates during the economic crisis, inject liquidity into the financial system and push private banks into lowering lending rates to help fuel growth. The rub of the matter, however, lies in the degree to which banks in turn invest the increase in expanding credit facilities. The theory states that if banks cut their interest rates on loans, applications by the private sector to fund new projects will also increase (as well as the finance of exports and the purchase of imports), which consequently spurs investment. However, many experts point out that there has been a paradigm shift in lending such that banks, spooked by risk, will only extend rate cuts to certain clients. Until that paradigm changes, look for output gaps–in Jordan as in elsewhere–to remain relatively high.
Per Abdulaziz Z. Mahasen, managing Partner at Optimead, a Rijadh-based consultancy:
Saudi Arabia, the Arab world’s largest economy, is in no rush to raise interest rates and will keep plowing its oil revenue into kick-starting growth. The kingdom, the world’s largest oil exporter, last year announced that it would spend $400 billion on infrastructure over a five-year period to bolster the economy, the largest stimulus package in the [G20]. The country is allocating almost $70 billion to investments this year, a 16% increase on 2009. Rising oil prices, which have rebounded to about $75 a barrel from less than $35 in February, are also likely to boost growth in 2010].”
The view echoes that of those observers wh0 foresee static rates during the year across the region’s dollar-pegged Gulf economies–Saudi Arabia, UAE, Bahrain, Qatar and Oman–given that historically their tightening has coincided roughly with the Fed’s. Aside from that, however, central bank Governor Muhammad al-Jasser noted to Bloomberg that low inflation and tepid loan demands are not condusive to a rate hike. Credit may begin to flow by the spring or summer, however, as domestic banks especially should have a better handle by then on the increase of NPLs forecasted in November.
Nice article in the FT from a week or so ago by Marios Maratheftis, regional head of research for Middle East North Africa and Pakistan at Standard Chartered Bank, who makes reference to the need for counter-cyclical policies during growth uptrends due to the market’s inherent tendency to underprice risk during uptrends and the subsequent cycle that proceeds whereby overly high credit supplies grow larger by inflating wealth perceptions and further distorting risk ones. The principle is similar, if not exactly defined by George Soros’ ‘reflexivity’ theory detailed in his most recent work. GCC economies fell victim to pro-cyclical measures leading up to the crisis, Maratheftis argues, due largely to the loose monetary standards given their dollar pegs, but responded to, and came away from the shock relatively well compared with developed countries, given a lack of budget constraints and thus an ability to pursue counter-cyclical expansion during 2009 and into this year without added leverage. The lesson?
Pro-cyclicality must be avoided during the next boom and GCC countries should now improve transparency, financial reporting and data availability, by setting much higher standards of governance.
Lost amidst the case for long-term, fundamental-based investing in emerging and frontier markets–namely increased growth potential through consumption underpinned by favorable demographic and wealth-spreading trends, as well as strong fiscal balances expressed through low debt ratios, and in many cases the exporting of increasingly-dear commodities–is the point that in most developing markets, bankruptcy laws are still dreadfully draconian, to the detriment of would-be entrepreneurs. Economist’s Schumpeter from last week, however, argues that this situation may be changing:
Many governments are trying to shake up their lethargic legal systems in order to speed up bankruptcy proceedings. The reforms also touch upon the more fundamental question of trying to save viable businesses from premature liquidation. Dozens of countries are trying to give companies more opportunities to reorganise before they finally reach for the revolver. France and Germany were among the first to do this. But the idea has also spread to eastern Europe and Asia and may even be reaching the bankruptcy-averse Muslim world (last year ten Middle Eastern and north African countries signed a joint declaration on planned reforms).
Why liberalize at all if it may encourage further inefficient profligacy? The answer lies in a paradox of “free” markets, whereby an actor’s freedom to grow, granted by the state, must also be countered, or balanced, by the freedom to fail, i.e. a safety net of sorts. “The best way to get more people to start businesses is to make it easier to wind them up,” Schumpeter states.
Silk Invest pens an engaging piece highlighting the paradigm shift taking place in Morocco, which the investment manager projects “will result in medium term GDP growth of at least 5.5% annually.”
The kingdom has undertaken a number of strategic liberalizations and a revision of its legal framework that investors should now take notice of . . . combined with the modernization of its infrastructure and a new focus on upgrading the educational system.
Central to the country’s vision to become a strategic regional hub in terms of shipping and services is a continuing economic and social “convergence” with the European Union (EU), whereby “the country is benchmarking its ‘openness’ policy on EU regulations and norms.” Negotiations successfully concluded last month between the two parties over agri-food and fisheries, for example, provide evidence of this growing, friendly framework. Moreover, a la its Asian neighbors, Morocco is fervently spreading its influence into resource and demographic-rich sub-Saharan Africa, a sure way to ensure strong future cash flows. “Maroc Telecom and Attijariwafa bank are clear leaders in this trend,” Silk notes. Finally, per Youssef Lahlou, a portfolio manager with Silk Invest’s Casablanca-based office, the country’s real estate sector, “with a shortage of 1.5 million housing units, especially in the low-income and the mid-range segments,” could be prime for a bounce back. “Companies operating in this sector (especially Addoha and Alliance) are set to reap the fruits of the accelerating demand,” Silk writes. One specific facet of this increasing business relates to low cost housing; thanks to economies of scale in production, coupled with government subsidies and tax breaks, developers can make handsome profits. That said, warned Fouad Ammor, a Rabat-based economist, much of the housing may still remain outside of the price range of its would-be inhabitants.
Johan Tazrin Ngo, managing director and CIO of the Kuala Lumpur-based Amara Investment Management, spoke with Bloomberg yesterday about Malaysian equities and his outlook on Asian stocks in general. Malaysian stocks rose 51% in 2009, but actually lagged the MSCI ex-Japan Index, which soared 73%, which suggests it could make a good “laggard” play going forward. That said, Ngo reiterated that Malaysia’s performance above all is correlated with Asia in general, where further gains, he said, will be tied to continuation of the global synchronized recovery and positive earnings announcements going forward (Asia is still 30% below its October 2007 peaks). That said, being a low beta (.38) market Malaysia “will continue to underperform” in 2010. Asia’s continued ride up will not be all together smooth, Ngo pointed out, a la 2009, given the unwinding of stimulating, reflationary measures that will cause a mid-year correction. Templeton’s Mark Mobius, one for one, predicts a more imminent 20% correction for emerging indices–including Asia–, on the basis of IPO-related oversupply.
Per Dubaibeat.com, the Foursan Group, an Amman, Jordan-based private equity firm that already manages the Jordan Fund, announced the launch of its second fund, Foursan Capital Partners I, a multi-country, multi-sector private equity fund that will target investments in “accelerated growth companies in Jordan and surrounding countries in the Levant and North African regions” and is targeting a final closing of $200 million in 2010. Specifically, “the fund will invest in private companies in a range of attractive sectors including financial services, food and beverage, education, aviation, pharmaceuticals and healthcare.”
This on the heels of a report earlier in December in which Imad Ghandour, Executive Director of Gulf Capital, an Abu Dhabi-based PE group, mentioned that there was between $11-13 billion of capital raised by Middle East private equity firms still “waiting to be deployed.”
Per the FT, India-based and listed McLeod Russel, the world’s largest tea producer, bought Ugandan-based James Finlay and its six tea estates for $30m “at the end of a year in which tea prices have reached record levels as poor weather affected crops.” The firm’s hitherto 80 million kilos of annual production (of which 30 million is exported) stemmed primarily from estates located in Assam, West Bengal and Vietnam, and the Ugandan purchase will add between 10-15 million more kilos. “Our strategy, going forward, is that between 20-30% of our total production should come from outside India in the next five years,” remarked the company’s managing director, Aditya Khaitan, back in July.
Tea prices have soared this year–the world price for black tea hit a high of $3.18/kg in September, up from an average price of $2.38/ kg in 2008–due mainly to an abnormally bad drought that hit India, Sri Lanka and Kenya during the first several months of 2009, which underscored the need for diversification. However, as the linked article mentions, “the United Nations Food and Agriculture Organization predicts that tight global supplies should be eased by normal weather patterns in leading producer regions in 2010.” Moreover, the current high prices may understandably cause a relative bumper crop going forward and hence oversupply. That suggests that the spread relating to African tea firms, which the piece notes “trade at a considerable discount to their Indian counterparts,”–is likely to become exacerbated in the near term, making further future takeovers even more likely. “Logically, I would love to go to Africa because it is god’s country for tea. The first focus will be Kenya. Once we go there, we will start looking for opportunities,” Khaitan mused.
JGW
Frontier Markets 