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As both Thailand’s Prime Minister (Yingluck Shinawatra, “elected in a landslide just four months ago” per the Economist) and economy continue to suffer (industrial production plunged 35.8% y/y and capacity utilization fell below 50% to 46.4% in October–the lowest respective prints on record as analysts ponder annual growth revisions), its markets spent the last week pricing in an expected 25-50bp rate cut from the Bank of Thailand’s (BoT) impending monetary policy decision–1w and 1m Bibor dropped 3bp and 7bp, respectively for instance, while the 14d repo rate at the last 14d BoT bilateral repo fell 3bp per observers.  And while inflation continues to creep up ultimately the discord between headline and core should allow officials some leeway to not only maintain their hitherto credible inflation-fighting creed but also help preserve an enviable current account surplus (see chart) seen by officials as an effective inflation tempering tool but now under pressure from the plunging Bhat and dithering exports.  To this end, despite some rate cut front running in the bond markets (2 and 5 year debt have narrowed by roughly 30bp during the past month) the yield curve has further room to steepen per Barclays, which cites in particular the 5y’s “ample systemic liquidity” in addition to lingering output contraction in 2012 which will likely persuade officials not to spare further easing if deemed necessary.  That said, one shouldn’t discount the role that Thailand’s net reserve coverage will also play in helping policy makers accommodate.


The combination of expected-persisting monetary accommodation along with a hitherto sticky, macro-proof global demand profile for diesel (influenced further by the looming likelihood in China of a weather-aggravated supply shortage in the coming months) make West African crude and, by proxy, its sovereign credit our holiday frontier market wish list security of choice.  The latter phenomenon–i.e. the burgeoning diesel/gasoline spread (see chart below)–continues to play on an ongoing theme, namely per one pundit the “diverging drivers behind the consumer and industrial activities as [developed market] high unemployment and stagnant wages continue to crimp consumer spending, while industrial and manufacturing activity [particularly in developing economies] are revving up.”  Barclays energy wonk Paul Horsnell further elaborated on diesel’s EM-fueled, relative buoyancy in a research note from last week:

“Ever since the migration of non-OECD countries to the margin of the oil market, diesel demand has received a significant boost on a global scale, given the bias of diesel in the oil mix in these countries. Its dominant position in commercial freight traffic has made it a fast growing demand component in countries characterised by large distances in internal trade and by strong underlying economic growth. For instance, in China, significant government investment in the road system and a mandate in 2000 that all trucks should run on diesel by 2010 facilitated the rapid expansion of domestic diesel demand. Beyond road transport, diesel also continues to be the primary fuel employed in China’s rail system, as well as being a major fuel for several significant types of marine transport. A similar picture can be painted for India, where diesel makes up 70% of road fuel use due to the intensity of truck and bus fuel consumption as well as the increasing penetration of diesel within the passenger car segment. In a country with some degree of oil product price subsidisation still in place, diesel prices are considerably more politically sensitive than gasoline. It has, therefore, usually proved easier to allow retail gasoline prices to rise with international markets, while retail diesel prices can often be stickier, with the current retail price discrepancy between gasoline and diesel almost double in India.”

Thus despite this weekend’s report indicating Asia would cut its African sourced imports to a three-month low, we expect lower or “sweet” sulfur blends (about half of the average Brent) from Angola and Nigeria (versus heavier or “sour” grades from Saudi Arabia and Iran) and their associated higher (up to twice more) distillate yield to continue to be in vogue.  The Chinese in particular continue to suffer from tight supply side dynamics–“especially in the country’s Northern, Eastern and Central regions” per Horsnell–such that net product imports (at 322k b/d in October, higher than the year-to-date average of 286 thousand b/d) will likely continue to trend up.  And while Nigeria, Africa’s largest oil producer, plans to export 2.18m b/d of crude next month, with Angola second at 1.72m, we remain impressed with the relative price stability in Ghana in the face of oil output that, while growing, still fell short of expectations.  Granted, Ghana’s fiscal targets (both its own and those set by the IMF) were predicated on abnormal output, and thus the initial 5.5% of GDP deficit estimate may turn out to be a bit pollyanna given President John Atta Mills’ looming showdown with Nana Akufo-Addo (close runner-up in 2008) next year.  Yet inflation expectations remain sanguine enough (CPI +8.6% y/y in October from 8.4% in September, in line with consensus, while non-food inflation was unchanged at 11.3% y/y, suggesting still modest inflationary pressure per analysts) that the country’s 12.5% policy rate will most likely remain unchanged into 2012.  To echo our sentiment from last spring, therefore, Ghana’s 2017 Eurobonds remain attractive versus peers.

Analysts note that with expansionary fiscal policy boosting money supply growth (14.4% y/y in August) and [private-sector] credit expansion, “GCC countries remain well positioned in the event of a global downturn”.  Yet said effects seem especially and comparatively potent in Qatar where, per Barclays, “M3 growth jumped the most, by 24.4% y/y [versus] more moderate growth observed in Saudi Arabia (15% y/y) and the UAE (12.4% y/y), while concurrently headline inflation, which [GCC weighted-average] region wide turned upward for the first time in 2011 in September, remains somewhat subdued given a still shaky real estate sector.  Said M3 jolt, in turn, continues to jostle its way onto regional bank balance sheets, with deposits registering double-digit growth in August–Qatar again leading the pack at 18.6% y/y.  Coupled with 
Abu Dhabi’s International Petroleum Investment Co.’s (IPIC) $3.75b, three-tranche foray into capital markets alongside Union National Bank’s international debt debut, pundits and punters alike now envision a rash or rally of sorts revolving around Abu Dhabi and Qatar issuers in particular given both “ongoing funding needs” as well as a “need to enhance/diversify” said funding bases.  Thus investors eying an increasingly stable and profitable sector (GCC collective average bank ROE stood at 13.9% in June, versus a 2005-2010 average of 18.9%) would be wise to perk up should debt capital markets indeed entice new concessions in the near term.

The FT‘s Kenya oriented pullout from late October underscored the contextual dichotomy present between those investors [rightfully] weary of the country’s NSE Index, down 44.6 percent YTD at the time compared with the benchmark MSCI Frontier Markets Index’s -20.1 showing (though it was SSA’s best performer in 2010, up 28.3 percent), versus an ever burgeoning brigade of “public money, alternative asset managers, funds of funds, family offices [and] public and private pension funds coming onstream almost every month” into private equity, a phenomenon whose efficiency will only be enhanced, per Edward Burbidge, a Nairobi-based corporate finance advisor, by both an SME exchange (geared towards smaller-to-medium sized firms in lieu of the generally not practical costs and regulations associated with public listing) as well as a proposal to raise capital limits allowed to be invested (currently only 5 percent) by domestic institutional investors such as pension funds and collective investment schemes.  While long-term investors such as Templeton’s Mark Mobius continue to correctly emphasize the economy’s inherent potential, we noted this summer that the Central Bank of Kenya’s (CBK) dovish dithering in the face of increasingly entrenched inflation (core inflation more than doubled to roughly 13% from March-September) left it continuously behind the curve, perpetuating a vicious spiral whereby declining fundamentals exacerbated a deterioration of the balance of payments (analysts estimate the country’s CA deficit in H1 2011 doubled y/y to approximately 12% of GDP), eroded by an ever-wobbly schilling (KES, down 23% YTD against the USD to mid-October and now at ~97/dollar).  Lo and behold, headline inflation printed 18.9% y/y in October-the highest rate in three years-driven chiefly per the CBK by food inflation fueled in part by over-zealous domestic credit expansion.  Finally, however, the response seems apropos: Tuesday’s 550bp hike by the monetary policy committee to 16.5% (following a 400bp bump in early October) surpassed consensus expectations and may help temper yields (Tuesday’s 91-day treasury yield was at 15.31% versus 9.71% at end-August and 3% at end-March 2011, per Absa Capital) and schilling weakness alike, especially if the government’s request to further tap the IMF’s Extended Credit Facility (ECF) is obliged (Kenya has hitherto withdrawn USD170mm from the USD509mm, 3y program agreed to with the Fund last January).  Regardless, however, the underlying macro-theme to remember about Kenya remains the growing,  negative net export contribution to growth, which will counteract whatever monetary policy exists to try to stabilize the schilling–stability that should ultimately be of interest to public and private investors alike.


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November 2011
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