You are currently browsing the monthly archive for March 2011.

Woe is the EM central banker; as RBI’s Dr. Subir Gokarn pointed out in Wednesday’s FT, for instance, the delicate balance between “keep[ing] inflation in check by containing the potential spillovers from food and energy prices, while minimising deviations from a sustainable growth trend” has rarely been so harrowing.  For the Central Bank of Turkey (CBT), the foundations underpinning 8.4% annualized real growth last year have paradoxically also pressured a rapidly ballooning current account deficit (roughly -48.6bn USD in 2010 versus -14.0bn in 2009) as Q4 private sector credit extension surged (41% y/y) and has remained above 40% in the first two months of 2011–well above the government’s 20-25% y/y guidance and despite reserve requirement increases.  This ‘monetary normalization lite’ underscores the degree to which lira depreciation remains the Bank’s primary tool (rather than rate hikes which invite capital flows, not to mention political scorn in an election year) to reverse the CA deficit bulge, since the alternative would be to raise real rates and encourage portfolio financing (which saw record flows in 2010) of the very deficit officials purportedly seek to address.  The Bank’s policy has also been helped hitherto by falling inflation which slowed to only 4.2% y/y in February, a record low.  Yet against the backdrop of the CA breakout and secular lira fall this magic act cannot last forever.  Barclays notes, for instance, that low inflation last year “was driven largely by base effects (tax increases early in the year)” while projecting that headline as well as core prices would respond sharply going forward–to 8% by July and then “to about 7.5% by end-year, much of it depending on local harvest dependent developments in unprocessed food prices.”  Said occurrence, however, coupled with a CB new governor this month and a further entrenched AKP by summer, may finally create the perfect recipe for bona fide monetary hawks to spread their wings, which in turn would theoretically signal an end to the lira’s nearly four year fall from grace.  Payer swaptions, which pay a fixed rate while receiving floating, seem a sensible way to play this envisioned outcome, especially since the market’s current 125bp hike expectations seem low.


Fascinating piece regarding the volatility of certain, newfound Southeast Asian stock exchanges, including Laos’ Vientiane-based bourse which surged 86.5% within the first two and half weeks of trading back in January before dropping 17.4% in the four days thereafter.  Leopard Capital’s Douglas Clayton notes that thin volume and uncertainty among investors regarding the valuation of the two listed firms–Electricite du Laos Generation (EDL) and Banque Pour le Commerce Exterieur Lao (BCEL)–remains the chief culprit.  Meanwhile, to the south “Cambodia’s economic recovery continues to gain momentum,” the firm notes in its latest newsletter, “ramping up from a flat 2009 to grow by 5.5% in 2010 [and a projected] 6-7% in 2011.  Core sectors reasserted their strength last year and are posed to build on these gains in 2011: garment exports surged 26% to a record $3 billion; tourism roared back with 16% growth in arrivals, rising to 2.5 million; Agriculture kicked back in across several sub-sectors with rubber topping growth for the sector at 43%, bringing output to 50,000 tons.”  Clayton et al. await the imminent opening of Cambodia’s own exchange in July in which Telecom Cambodia, Sihanoukville Autonomous Port and Phnom Penh Water Authority will all float–though several kinks have yet to be addressed which should leave most investors with pause.  For instance, while analysts expect that unlike with Laos there will be relatively fewer regulations vis a vis foreign equity ownership–yet another cited reason fueling the hitherto mentioned volatility–some “have expressed concerns over vague market regulations in relation to accounting standards, among other issues.”  Moreover, though Laotian officials ultimately opted for equities to be listed in kip rather than dollars, investors flinched when the Securities and Exchange Commission of Cambodia (SECC)–against a strong case not to do so, as laid out in February by the WSJ–chose to do the same with the comparatively weaker riel, a fledgling currency of sorts (though admittedly, in absolute terms the riel has increased in volume over the past five years) that may have interminably fallen prey to the dollarized pit of no return which causes Cambodia to essentially sway in the wind of U.S. monetary policy according to the IMF’s Nombulelo Duma.  That said, dollar settlements will be permitted for up to three years, though what that will effectively do for the country’s quest to de-dollarize is anyone’s guess.  History suggests the process already “is not easy” since it, per Duma, “requires persistence in reducing inflation and stabilizing macroeconomic policy.”  Even “experts” a la Mervyn “the Swerve” King can attest to just how tedious an affair that can be.


A recent article in The Economist noted the growing divergence between container and bulk shipping; while container volumes and shipping rates are trending back towards their pre-crisis peaks against the backdrop of projected annualized global trade growth of 8-10 percent in 2011 (though whether said predictions came before the recent oil spike is highly dubious), bulk capacity is expected to double the rise in freight volumes.  Fitch reiterated several of these points while assigning DP World (DPW)–the world’s fourth-largest container terminal operator with the widest geographical spread of any of the leading operators, with operations in Latin America, Africa, the Middle East and Asia (and whose parent finally wrapped up debt restructuring)–its IDR and senior unsecured ‘BBB-‘ rating, while also noting that “export-led growth in the emerging economies” should particularly suit it “given its bias towards emerging markets which account for around 75% of its trading volumes” (to this end, expect further movement on the South American front).  Chief executive Mohammed Sharaf thinks the region’s recent unrest could ultimately bolster business even as the immediate consequence saw the firm’s equity diverge downwards some 8x versus global port peers despite the fact that Middle East and Africa (ex-UAE) represents only 8% of DPW’s gross capacity.  Either way the long-rumored London listing is now back on track (the impetus presumably being the aforementioned debt deal), though Morgan Stanley pointed out that last month that “it is unclear if the free float will increase with Dubai World selling down its stake.”  Moreover, an eyebrow raising piece in the FT Friday noted the “psychology” underpinning the latest exodus of Gulf wealth into Swiss, UK and more safe-haven, liquid assets: “local equity markets are the main victims–as family offices are among the main active investors and traders in listed companies.”  If oil and fear spike again, even container-shipping should pause, and volume-challenged equities would be especially vulnerable.

Though Etisalat remains in our view the head and shoulders frontier market telecom equity to hold from both a value (2011e EPS of 6.8x is a 30% discount to EEMEA peers at 9.6x/3-year average of 10.4x per Morgan Stanley) and growth standpoint (despite the latest Zain-pullout) given its relatively high EBITDA margin (despite intense pressue from du), wide geographical footprint (though its foothold in Saudi Arabia remains the foundation) and strong net cash position, Egypt’s hitherto distressed domestic sector presents its own opportunities.  Ahead of tomorrow’s stock exchange reopening, and while reiterating his long-term confidence in Egypt to Bloomberg yesterday, Templeton Asset Management’s Mark Mobius underscored telecoms in particular as one of his favorite sectors.  To that end, both Orascom Telecom (OT) and Telecom Egypt (TE), which trade at a relatively low 7.3 and 8.5x earnings respectively and are down 16.2 and 11.3 percent YTD, look attractive at current levels.  In regards to the latter, wholesale services–including bandwidth capacity leasing to ISPs, and national and international interconnection services–continue to be the crucial growth driver as declining retail revenues are likely indicative of an increasingly competitive landscape (though while the firm’s fixed subscriber base declined to 9.3 million, from 9.6 million at the end of 2009, the market share for data subscription now sits at 63% versus 61% at the end of 2009).  While overall revenues grew by 4% y/y in 2010 (4x estimates), for instance, full year wholesale revenues for TE grew by 18% YoY to EGP 4.9 billion, representing 48% of total group revenues.  Finally, the company’s net cash position is strong, rising to EGP 4.1 billion (from EGP 1.4 billion at the end of FY2009) and leading the Board to recommend a cash dividend of EGP 1.3 per share–equating to a dividend yield of 8% and a payout ratio of 67% (versus 74% in FY2009).  Meanwhile, the former continues to be considered a strong value play by many analysts given its leading position in core markets aside from Egypt such as Algeria, Pakistan and Sub-Saharan Africa.  That said, J.P. Morgan noted last month the firm’s equity remains “very speculative” given the uncertainty underlying the current row in Algeria.

Broadly speaking The Economist noted last week that governments throughout the Middle East, in addition to their traditional subsidies undercutting food and fuel inflation, are now going above and beyond in a rather cynical attempt to “buyoff economic discontent” and perhaps also halt local bourses’ YTD decline.  Yet as the accompany chart shows, ensuing fiscal positions are anything but uniform.  Import covers for oil importers such as Eygpt and Tunisia, for instance, should be watched closely.  On the other hand, despite the relative enormity of its SAR135bn (USD36bn, 8% of GDP) package to tackle structural challenges facing the economy, including unemployment, housing, education, and general household welfare announced earlier this month, Saudi Arabia’s “largesse” may in fact be cost efficient if for no other reason than rising oil prices (Economist notes that “each $1-a-barrel increase in the price of oil adds about $3 billion to the Saudi treasury, implying that the increase in oil prices this year could add roughly $100 billion to revenues; in turn, net foreign assets (NFA) rose 7.4% y/y in January which analysts see averaging 4% annually this year) will offset much of it: nonetheless, analysts with Barclays project that “the package will increase spending by 14% and will reduce the fiscal surplus from an original forecast of 6.4% to 2.6% of GDP” while “raising the fiscal breakeven oil price of Saudi Arabia to around US$79 b/d (up from US$69.1).”  Moreover, they point out, “implementation risks [of the fiscal package] are non-negligible if not accompanied by additional legal and regulatory changes (notably on the housing front), and significant improvement in the efficiency of public spending.”  Notably, “the problem of [a] supply shortage of lower and middle income housing” will likely lead to “continued short-term pressure on property prices, particularly for developed land and apartments,” despite a 40% capital injection into the country’s Real Estate Development Fund (REDF), whose mandate is to provide interest-free loans to help citizens construct their own homes and/or purchase apartments, guarantees for housing loans given by commercial banks to citizens under certain conditions, and finally additional funds pledged to the General Housing Authority “to speed up the awarding of housing units to needy families.”  With this in mind, Saudi banks remain an attractive sector, especially since M3 (broad money supply) growth trends (up 8% y/y in January and a function of the aforementioned NFA growth), coupled with below-historical average velocity (0.72 compared with 1.03 over the past decade) and rising bank system assets suggest further scope for lending–especially to an increasingly robust manufacturing sector (PMI up 14.4% y/y in January).  Saudi American Bank Group, which [correctly] warned last December that the ever-impending mortgage law was still some time away, noted recently that Saudi banks’ average loan-deposit ratio currently stands at around 80 as opposed to 100 percent or more in other Gulf countries.”

Regarding the thesis that “the outlook for [GCC investment banking] is broadly positive” as “the region’s investment and project finance needs are growing enormously,” Global Finance notes this month (“Banking on Stability”) that “after M&A, fees from debt capital markets operations (DCM) constitute the largest portion of investment banking fees in the Middle East.”  The piece quotes Mohammed Ali Beyhum, executive general manager at Lebanon’s Bank Med, who opines that the “Islamic bond, or sukuk, markets could hold great promise in 2011.”  Analysts in general have been calling for a sukuk ‘convergence’ of sorts ever since Dubai’s debt crisis, which some observers blame for unfairly calling into question the entire premise of Islamic financing structures.  “It is important to note that during 2010, the sukuk market lagged the conventional bond market, as the former was hit by the aftermath of Dubai’s debt restructuring and the accompanying series of defaults on high-profile sukuk issuances,” Beyhum said.  And recent regional turmoil may have only added further fuel to market discrepancies as well as to upside resurgence: Markaz, a Kuwaiti asset management firm, reported earlier this month that yields on Dubai’s Islamic bonds had dropped to a five-month low, leading a GCC sukuk rally, on speculation that UAE and Qatar would be spared from protests that toppled the governments of Egypt and Tunisia.  To that end, a recent New York Times article stated that while uncertainties “may have lowered appetite for sukuk introductions and made issuance more costly by raising premiums,” the long-term trend appears in tact.  Per Paul-Henri Pruvost, an analyst with S&P, while Malaysia accounted for nearly 80 percent of last year’s issuances, activity in the Gulf [in Saudi Arabia, Qatar and UAE in particular] is destined to flourish given not only the region’s “huge pipeline of [planned] government projects and infrastructure,” but also the need to “develop a more solid fund-raising market for Islamic banks and insurance companies . . . typically constrained in terms of the asset classes they can invest in.”  One U.S.-based law firm, in fact, projected that by next year already GCC-based Shariah-compliant financing will account for nearly one-third of the global market, up from 12.5% five years ago.  Said Pruvost: “These institutions in the Gulf and Asia are trying to make their balance sheets very liquid, so they are very hungry for this kind of instrument.”  Finally, it will be important for investors to weigh the long-term effects of recent measures taken by Qatar’s Central Bank, which earlier this year banned Islamic banking in conventional institutions, and the possibility of related policies in surrounding countries.  At first blush, the move (designed purportedly to squash co-mingling of conventional and Islamic funds) would appear to greatly benefit a handful of domestic Islamic banks such as Qatar International Islamic Bank (QIIB), whose shareholders gave approval earlier this month for a sukuk issuance later this year.

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FT noted “analysts expect that Japanese utilities will scramble for crude, thermal coal and liquefied natural gas (LNG) as replacements [for the shut down of at least 9,700 megawatts of nuclear capacity.”  Meanwhile UK wholesale gas prices for delivery next winter (“an indicator of LNG as Britain is a large importer of super cooled gas”) surged to record highs (since November 2008) of 74.85 pence on Tuesday; SocGen, for one, theorized that half of Japan’s loss in nuclear capacity will be need to be replaced by gas which equates to roughly one extra tanker carrying 145,000 cubic meters of LNG a week.  The French investment bank further projected an aggregate extra demand of 5 billion cubic meters (bcm) this year and 2 bcm above pre-quake levels (around 88 bcm) for the foreseeable future (UBS, using a more worst-case scenario analysis, used a ceiling of 12 bcm).  That said, many analysts don’t foresee a problem given global overcapacity that the International Energy Agency pegged at 200 bcm in 2011.  Qatar and Russia (the world’s biggest LNG and gas exporters, respectively) in particular will supply Japan with extra LNG cargoes, reporters note (Japan, in fact, is a fairly sizeable trading partner for GCC countries given its energy needs; an estimated 20 percent of Qatar’s LNG exports are already shipped there); as to the former, we remain intrigued by Nakilat as a proxy on the industry’s performance going forward and wonder whether its downtrend is due for a respite.  Per Rasmala, an investment bank, the company enjoys longstanding relationships with its upstream partners, the two state-controlled Qatari LNG giants Qatargas and Rasgas, and strong government support (the state owns 17% of Nakilat shares).  Moreover as the world’s largest LNG ship owner, with almost double the capacity of its nearest competitor, Nakilat’s wholly-owned vessels (which contribute nearly 90% of gross revenues) “incorporate the latest in shipping technology with significantly more capacity, lower operating costs and greater safety than conventional ships” according to analysts.  Yet the firm recently posted full-year net profit of QR665mn ($182.69 million) in 2010, up 13% on QR589mn registered in 2009 but short of consensus estimates (as was its 0.75 riyals per share cash dividend).  Additionally analysts expect wholly owned charter revenue to have “limited growth because . . . it is only the portion of the price paid by the charterers that corresponds to Nakilat’s operating expenses that is allowed to rise in accordance with U.S. CPI.  This results in a situation whereby revenue for the wholly owned ships increases by only the same amount as [forecast increases] in operating expenses.”  Operating margins, therefore, may have a fairly sticky ceiling regardless of spot LNG shipping rates.

The rand’s admirable comeback following its unceremonious freefall to begin 2011 (from trough to peak it depreciated from 6.6275 on January 3 to 7.3365 on February 15 against the dollar–making it, aside from Suriname, the world’s worst performer per Bloomberg–but has since rebounded and closed Thursday in Joburg to 6.8855) may have run its course, especially given that January’s manufacturing growth figures (up 1.3% y/y versus 1.9% consensus) missed the mark.  Moreover, though recent PMI data and business confidence have created some supply side momentum in the face of comparatively vigorous demand underpinned by relatively subdued core inflation and low interest rates (5.5 percent after three cuts last year), analysts remain skeptical over how quickly the South African Reserve Bank’s Monetary Policy Committee can go hawkish.  To that end, “the poor growth we continue to observe in sectors such as construction are still likely to leave the SARB MPC with a sense that a more ‘broad-based’ economic recovery is needed before interest rates can be hiked,” Absa Capital noted.  Finally, two additional dynamics remain in play that would suggest selling ZAR on strength: one, reverberations from last year’s outflow easing policy has spurred a greater-than-expected institutional offshore appetite whose scope remains uncertain.  Two, the Reserve Bank shows no signs of taking its foot off the FX coffer accelerator.

Awhile back we mentioned that one key indicator to watch in Turkey going forward was its current account deficit (CAD)/GDP ratio, which as the FT noted today in regards to Turkey’s suddenly diverging 5yr-CDS spread with Russia (with whom it had been treading in parity) is largely a function of its reliance on imported energy despite the obvious proximity advantages which shave roughly US$2-4/bbl off the spot rate.  Primarily, Turkey’s CAD should be monitored if for no other reason than the fragility of its foundation: analysts noted last December that “FDI coverage of CAD is less than 14% (12 months rolling), while portfolio flows into local bonds and equity together with rising non-resident lira (TRY) deposits make up over 70%.”  With this in mind the current spike in oil prices is particularly troublesome for Turkey’s economy, especially when coupled with the central bank’s (CBT) apparent curve lagging in the face of inflationary signs (i.e. high production rates and rising capacity utilization levels) that were ignored late last year in favor of rate cuts (75bps in December and January to cool inflows) and reserve requirement hikes to temper loan growth against the backdrop of implied political pressure (to combat currency appreciation) in the face of general elections in June to appease exporters.  Recent data only adds to the fear that the CBT’s rush to normalization cannot be abrupt enough: while February’s headline numbers sit at 4.16% y/y (from 4.90% y/y in January and versus a 5.5% target), the central bank’s preffered I-measure gauge (which excludes all food, energy, alcohol & tobacco and gold) rose to 3.8% y/y from 3.2% previously.  Moreover, per an Absa Capital note from today, not only are the “favourable statistical base effects that have kept the y/y rate of CPI growth low likely to run their course by May this year,” but “the sustained lira weakness (down 11% since November), combined with the surge in oil prices, is likely to start to pass through to inflation,” especially when taken in tandem with unrelenting credit growth: consumer loans rose 3.4% m/m at the end of December (38% y/y), and data as of mid-February saw a 2.6% m/m rise (39% y/y, versus 20-25% targeted).  For investors, however, Turkey’s woes bring opportunity: while Turkey’s benchmark two-year bonds sit at 9.12 per cent (as of Monday), some analysts remain skeptical whether or not local markets are adequately pricing in rate hikes over the coming twelve months.  On the opposite end of the spectrum, Credit Suisse wrote that it believed “a lot of bad news is now priced in as Turkey [now] trades on a 41% discount on our price-to-book versus ROE valuation model, replac[ing] Russia as the most undervalued market within [emerging markets].”


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