You are currently browsing the monthly archive for January 2011.

The protest-induced EGX30 plummet–Egypt’s stock index is now down 21% in two weeks after hitting a nineteen month low today–and corresponding 150bp spike in the yield sought by sellers of default protection (now 390 from 240 pre-Tunisia) is a sign, per Citigroup, that “the risk premium that investors require to hold Egyptian assets is likely to remain higher than it was.”  That said, from an investor’s point of view the current kerfuffle in Cairo, Alexandria and Suez (among other cities and towns) threatens to mask an underlying macro story whose forward progress hitherto (see statistics, right) and future potential remain as bright as the lack of political certainty is now gravely dim.  To that end, one observer noted, “the private sector in Egypt today is the largest employer in the country,” opining that this very state-detachment may in time help fuel the continued rise of “a lower middle class that maybe in five to ten years, assuming growth rate continue at a decent level, can graduate into … a middle class.”  Yet issues of rampant sectarianism and the effects of a chronically neglected educational system loom and act as a legitimate hindrance to the possibility of Egyptians, in the words of one author, “res[uming] their historic role as cultural and political trendsetters.” 

Nevertheless the FT writes today that the ultimate legacy of this latest bout of Arab unrest may just be the demise of tawrith, or inherited rule.  This shouldn’t necessarily come as a surprise:  The Economist noted last summer that “Egyptians may be renowned for being politically passive, but the rising generation is very different from previous ones. It is better educated, highly urbanised, far more exposed to the outside world and much less patient. Increasingly, the whole structure of Egypt’s state, with its cumbersome constitution designed to disguise one-man rule, its creaky centralised administration, its venal, brutal and unaccountable security forces and its failure to deliver such social goods as decent schools, health care or civic rights, looks out of kilter with what its people want.”  But what it does point to is a drawn-out resolution since “Egypt’s security forces, better equipped and trained than Tunisia’s, can probably crush the protests…but the government is already under pressure from Western allies to enact democratic reforms.” 

With the aged and ill-Hosni Mubarak on the way out, his son Gamal’s once-certain succession suddenly in question (allegedly several key military members were against him from the beginning), and the Muslim Brotherhood unacceptable to many (including Western donors), only Mohamed El-Baradei, the Nobel Prize winning former UN civil servant who headed the International Atomic Energy Authority, remains, though constitutional hurdles have made the possibly of his ascent hitherto impossible.  Add to this the seemingly neverending inflation story (yearly inflation from Dec 2009 to Dec ’10) averaged 11.1% y/y, the highest rate among MENA countries), which stands to get worse before it gets better due not just to government-mandated wage rises, but also to bread subsidies which are due to get more expensive since (per Barclays) “the global wheat balance has tightened in recent months as adverse weather conditions have lowered production prospects, especially in high-quality wheat grades.”  All of this throws a wrench into market bottom-feeders, though on a long and liquid enough timeframe the issue may be moot.  Myriad quality names–Egyptian Telecommunication, Commercial International Bank of Egypt and Orascom Construction, Elswedy Cables Holding and Al Ezz Steel Rebars, for instance–remain the foundation of a growing, diversified economy with tremendous upside potential.


In detailing Nigerian President Goodluck Jonathan’s recent People’s Democratic Party (PDP) primary win, making the so-called “accidental president” the odds-on favorite to win April’s poll, The Economist frets about his profligacy–a once $20bn pot of windfall crude revenues  in 2007 is suddenly worth about $300m, with “nothing to show for it,” for instance, per one Lagos-based analyst.  Moreover the FT noted last week that many investment houses shared the same sentiment while explicitly shunning the country’s debut eurobond.  “Why does a country that relies for 90 percent of its income on oil, which has seen a big rise in price, need to run down its FX reserves,” mused one.  Against this backdrop the country’s 2010 fiscal deficit worsened to 6.1% of GDP from 3.3% in 2009, missing the state’s target of 4.8%.  That said, a la fin the $500m issue was more than 2x oversubscribed, and pricing, which translated into a yield of 7 percent, was within government targets, per beyondbrics.  So is this just another case of the sheer seduction of 150m people coupled with 36m barrels of proven oil reserves–a neat combo platter of global macro themes, namely favorable demographics consuming more while credit liberalizes for domestic firms and burgeoning EM demand and production factors squeeze energy supplies and prices going forward?  And are Nigeria’s reserves destined to recoup themselves once delegates stop getting greased and arrears are cleared to multinational JV partners?  Maybe, maybe not.  Shell’s recent asset divesture should raise red flags since it is a testament not only to stricter state terms with foreign firms, but also to the relative volatility of Nigerian oil volumes, which admittedly saw a 400kb/d recovery last year from the beginning of 2009 but could be destined to falter again in the impending election run-up (and subsequent violence?) much as they did in both 2003 and 2007.  To that end, the threat of violence is greater than ever according to some geopolitical analysts given the lingering and ever-widening rift within the PDP itself which could exacerbate regional, religious and ethnic tensions.  But on these issues reasonable minds disagree, which of course, is what makes a market.  In October Fitch lowered its sovereign outlook to Negative (BB-) from Stable, citing heightened political risk, the drop in FX reserves and the depletion of oil savings.  But at the same time S&P affirmed its ‘B+’ rating with a Stable outlook, highlighting “a strong external and fiscal balance sheet and noting that it expects a better budgetary performance ahead,” per Barclays.  Additionally, advocates argue, the country’s total debt ratio remains low at 16.5% of GDP, and growth–expected to exceed 7% in 2011–is still nowhere near its potential given capacity constraints such as a Flinstone-era electricity grid that will soon be privatized.  Moreover FX reserves, they point out, still cover roughly 15 months of imports (a “comfortable” amount, per analysts) and should stablize post-election.

Pakistan’s impending 13-fold rise in sukuk sales in 2011 will go towards financing a budget deficit expected to range anywhere between 6-8% of GDP (versus the government’s 4% target) depending on how much oil prices rise.  And per a Bloomberg piece from earlier in the week, even that may not be enough to soak up the huge cash inflows waiting to be deployed by Islamic funds and banks.  “The government has relied too much on the conventional debt market without realizing how much liquidity is in the Shariah-compliant industry,” opined Sajjad Anwar, one fund manager.  Yet as The Economist points out, there is very little happening on either the fiscal or monetary front to suggest that Pakistan’s economy is not in fact “slouching towards another financial crisis.”  Fiscally the situation looks as dour as ever: prime minister Yusuf Raza Gilani’s 180 on a short-lived 9 percent price increase in fuel gave his beleaguered PPP party a lifeline, but in the process made it look both spineless and shortsighted since the reversal “robbed the exchequer of 5 billion rupees ($58m) a month” and also further infuriated the IMF, essentially biting the hand that feeds it.  In the meantime donors have pledged just a fifth of what is needed, per estimates, to address this past summer’s flood devestation, while tax revenues remain one of the lightest in the world.  Against this backdrop inflation continues to spiral (average inflation rate is 15 percent over the past three fiscal years), tempered only by a hitherto robust rate of remittances.  Nevertheless Pakistan’s central bank increased its key policy rate to 14 percent in November, the third consecutive hike in six months due primarily to government borrowing from the State Bank of Pakistan which in turn obliges by printing new rupees, and will likely raise that by 50 basis points when it meets next on January 29th.  And many observers opine the spiral is destined to accelerate: current inflationary pressures in the agriculture sector, which accounts for roughly 21% of GDP, can be traced back to a PPP decision in 2008 to sharply raise the price it paid to farmers for wheat to encourage supply growth; “The bottom line is inflation is here to stay for at least the next two years,” said Sakib Sherani, a former senior economic adviser to the government.   Thus, against the backdrop of rising rates, inflation and fiscal uncertainty, it will be interesting to note the spread investors require for Pakistan’s sukuk offerings over that of say, Malaysia’s, the regional defacto benchmark (given in part its liquidity) which has rallied ever since Europe debt worries temporarily subsided and expectations grew of impending debt restructuring among certain state-owned firms in Dubai.  As Josh Brolin’s character from the Wall Street sequel would say, only “more” may be enough.

Macro Man’s observation relating to the lack of consistency between spot prices and the spread between the front and 5th futures contracts (and the resulting implication that “much of what [is going on in] food inflation and non-core CPI [in emerging markets] is going to be far from a passing problem like [it was] in 2007-2008”) is likely to give fits to EM central banks such as the Bank of Thailand, which last week raised its benchmark interest rate for the fourth time in seven months and signaled it will boost borrowing costs further to contain inflation.  Taken in tandem with rising raw material prices, which ultimately wreak havoc on margins, the largest minimum wage increase since 1993, higher pay for civil servants and continued robust domestic demand, a somewhat secular rise in food prices should contribute to at least one more BOT rate hike in the coming months and also lend support to further currency appreciation even at the expense of slowing export momentum.  Barclays, for instance, expects USD/THB to “head down to 29.0 in 12 months.”  Yet rising rates and inflation–a thorn for equity markets as a whole–may be a blessing for some firms.  As Chaiyaporn Nompitakcharoen, an investment strategist with Bualuang Securities told Bloomberg, “banks and commodity shares are good inflation plays for investors.  Net interest margins are widening as most lenders raised loan rates at a faster pace than deposit rates.”  Moreover, he said, Thai Vegetable Oil, the country’s biggest soybean supplier, and Charoen Pokphand Foods, the largest producer of animal feeds and meat, will have higher earnings on increased commodity prices.

Is the CDS spread between Tunisia and Morocco justified?  Against the backdrop of debt downgrades from both S&P and Fitch, the cost of insuring five-year Tunisian sovereign paper against default rose to 190 bps earlier this week, some 30 bp clear of Morocco with whom it largely trades in step.  While the country’s political situation admittedly looks precarious–analysts note that although the constitution decrees that a temporary president must work towards presidential elections within a period not exceeding 60 days, opposition leaders view said timeframe as inadequate and prefer a transitional government that would draft a new constitution in anticipation of democratic elections–Barclays notes, for instance, that although “a prolonged transition could negatively affect economic growth” given a weakening of the country’s current account (FDI down) and fiscal deficits (outlays to repair infrastructure, appease social and inflation-related tensions), the latter compares quite favorably to those of other MENA countries and to that of Morocco in particular (2.6 versus 4.5% of GDP in 2010), while public debt–at 47% of GDP–remains “one of the lowest levels in the region” and roughly in line with Morocco.  Additionally, food inflation is much more rampant in Morocco than in Tunisia, having accelerated 6.7pp in the past three months; moreover, this trend will likely persist and should put further pressure on subsidy costs going forward, which increased more than 140% in the first nine months of 2010, per analysts.

Keep an eye on the Lao Security Exchange, which per reports hopes to raise $8bn in stock and bond sales in order to generate investment into the country over the next five years.  The market opened last week and lists only two companies (Electricite du Laos Generation or EDL, a unit of the state-owned power producer which overseas investors are limited to a cumulative 10 percent stake, and Banque Pour Le Commerce Exterieur Lao or BCEL, the state controlled lender whose shares are verboten to foreigners), but as Templeton’s Mark Mobius noted, the admittedly woefully underdeveloped communist country and subsistence-farming oriented economy still offers “valuable opportunities” in industries from construction to banking as it increases its infrastructure investments.  For one thing, future consumption will be underpinned by the purchasing power parity (PPP) rise of a population of roughly 7 million people, 40 percent of whom are under 15 years old and currently earn only $2.6 per day on average (as an example of how explosive this kind of low-base growth can be, consider Vietnam, where GDP based on PPP/per capita trebled since 1995 after rising roughly 5x since 1980).  For another, the country has several heavy and hungry hitters with skin in the game–Beijing is covering 70 percent of the project investment for a high-speed railway link (to this end, watch if and when domestic Lao cement producers ever list shares or raise debt, since domestic cement is cheaper to produce but will be dear for years to come), for instance, while also building up resort, hotel and casinos along border areas for its growing base of tourists and also joint venturing in order to secure access to raw materials such as iron ore.  Thailand, another source of tourism, will also purchase 95 percent of the electricty generated by the country’s initial $1.3bn hydroelectric and World Bank supported-dam, one of many dams which could ultimately allow Laos to become “Asia’s battery”.  To this extent, “Laos is fast establishing itself as one of the principal territories in the South-East Asian region for large scale and innovative hydropower project financings,” according to Allen & Overy’s Ben Thompson.  Finally, watch for a potential secular rise in mineral/metal prices (copper, gold and silver specifically) and its related dealmaking to support Laos’ future economic development.

Light blogging for a couple of weeks while I’m in Beijing.  I actually need a VPN to even write here and also to access something like Facebook.  Happy New Year, and in the meantime, here’s an interesting Economist chart I happened upon while on the plane.


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January 2011
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