Global Investing

Dollar drags emerging local debt into red

Victims of the dollar’s strength are piling up.

Total returns on emerging market local currency bonds dipped into the red for the first time this year, according to data from JPMorgan which compiles the flagship GBI-EM global diversified index of domestic emerging debt. While the EMBI Global index of sovereign dollar debt has already taken a hit the rise in U.S. yields, local bonds’ problems are down to how EM currencies are performing against the dollar.

JPMorgan points out that while bond returns in local currency terms, from carry and duration, are a decent 1 percent, that has been negated by the 1.3 percent loss on the currency side. With the dollar on the rampage of late  (it’s up almost 4 percent in 2013 against a grouping of major world currencies) that’s unsurprising. But a closer look at the data reveals that much of the loss is down to three underperforming markets — South Africa, Hungary and Poland. These have dragged down overall returns even though Asian and Latin American currencies have done quite well.

The graphic below shows South African local debt bringing up the bottom of the table, with the FX component of returns at around minus 9 percent  In rand terms however the return is still in positive territory, but only just. Hungary and Poland fare only slightly better.

Many bond positions are of course hedged. But as we wrote here yesterday  in an article on South Africa, escalating currency weakness can trigger exits from local bond markets.  And worryingly, JPMorgan notes that returns in local currency terms have plateaued at 1 percent over the past 10 days.

Ratings more than a piece of paper for Africa

By Stephen Eisenhammer

Does a sovereign credit rating from a glass tower in London or New York impact life in the country being rated? Apparently in Africa it does.

According to research by the rating agency Fitch, sovereign credit ratings significantly boost foreign direct investment (FDI) to Africa.

Credit ratings added 2 percent to Gross Domestic Product in sub-Saharan Africa each year from 1995 to 2011 through increased  FDI when compared to countries in the region which do not have a rating, Fitch said in a note.

Emerging policy-One cut, two steady

What a varied bunch emerging markets have become. At last week’s monetary policy meetings, we saw one rate rise (Serbia) and differing messages from the rest. Mexico turned dovish while hitherto dovish Brazilian central bank finally mentioned the inflation problem. Russia meanwhile kept markets guessing, signalling it could either raise rates next month or cut them.

This week, a cut looks likely in Turkey while South Africa and the Philippines will almost certainly keep interest rates steady.

Turkey’s main policy rate – the one-week repo rate – and overnight lending rate are widely expected to stay on hold at 5.50 percent and 9 percent respectively on Tuesday. But some predict a cut in the overnight borrowing rate – the lower end of the interest rate corridor, motivated partly by the need to keep the currency in check.   The lira is trading near 10-month highs, thanks to buoyant inflows to Turkish capital markets.  That has helped lower inflation from last year’s double-digit levels.

Mali risks in focus

The international focus is on  gold-producing country Mali after days of French air strikes on al-Qaeda-linked Islamist rebel strongholds in the north of the West African country. France expects Gulf Arab states will help an African campaign against the rebels,  and a meeting of donors for the Mali operation is due at the end of the month. West African defence chiefs are meeting today to approve plans to speed up the deployment of 3,300 regional troops.

Mali isn’t normally on the radar screens of international portfolio investors, with little external debt and no developed capital markets.

But it is Africa’s third biggest gold producer, with London-listed Randgold the biggest investor and other foreign firms such as Anglogold also having investments.

African growth if China slows

The  apparent turnaround in Africa’s fortunes over the past decade has been attributed to the rise of China and its insatiable appetite for African commodities. So African policymakers, like those everywhere, will have been relieved by the recent uptick in Chinese economic data.

But is Africa’s dependence on China exaggerated?  A hard landing in the Asian giant will be an undoubted setback for African finances but according to Fitch Ratings.  it may not be a disaster.

Fitch analyst Kit Ling Leung estimates that if China’s economy grows at below-forecast rates of 5 percent in 2013 and 6.5 percent in 2014, African real GDP growth will slow by 90 basis points.  So a 3 percentage point drop in Chinese growth will lead to less than a 1 percentage point hit to Africa. Countries such as Angola will take a harder hit due to oil price falls but others such as Uganda, which import most of their energy, may even benefit, Yeung’s exercise shows.

Corruption and business potential sometimes go together

By Alice Baghdjian

Uzbekistan, Bangladesh and Vietnam found themselves cheered and chided this week.

The Corruption Perceptions Index, compiled by Berlin-based watchdog Transparency International, measured the perceived levels of public sector corruption in 176 countries and all three found their way into the bottom half of the study.

Uzbekistan shared 170th place with Turkmenistan (a higher ranking denotes higher perceived corruption levels) . Vietnam was ranked 123th, tied with countries like Sierra Leone and Belarus, while Bangladesh was 144th.

And the winner is — frontier market bonds

Global Investing has commented before on how strongly the world’s riskiest bonds — from the so-called frontier markets such as Mongolia, Nigeria and Guatemala — have performed.  NEXGEM, the frontier component of the bond index family run by JP Morgan, is on track to outperform all other fixed income classes this year with returns of over 20 percent., the bank tells clients in a note today. Just to compare, broader emerging dollar bonds on the EMBI Global index have returned some 16 percent year-to-date while local currency emerging debt is up 13 percent.

That appetite for the sector is strong was proven by a September Eurobond from Zambia that was 15 times subscribed. Demand shows no sign of flagging despite a default in frontier peer Belize and shenanigans over the payment of Ivory Coast’s missed coupons from last year. Reasons are easy to find. First, the yield. The average yield on the NEXGEM is roughly 6.5 percent compared with  just under 5 percent on the EMBIG.

Second, this is where a lot of issuance is happening as big emerging markets such as Brazil and Mexico, once prolific dollar bond issuers, sell less and less on external markets in favour of domestic debt.  Frontier markets are filling the gap. JPM says Angola, Guatemala, Mongolia and Zambia joined the NEXGEM in 2012 as they made their debut on global capital markets. Bolivia is also set for inclusion soon, taking the number of NEXGEM members to 23 by end-2012.

Emerging Policy-The inflation problem has not gone away

This week’s interest rate meetings in the developing world are highlighting that despite slower economic growth, inflation remains a problem for many countries. In some cases it could constrain  policymakers from cutting interest rates, or least from cutting as much as they would like.

Take Turkey. Its central bank surprised some on Tuesday by only cutting the upper end of its overnight interest rate corridor: many had interpreted recent comments by Governor Erdem Basci as a sign the lower end, the overnight borrowing rate, would also be cut. That’s because the central bank is increasingly concerned about the lira, which has appreciated more than 7 percent this year in real terms. But the bank contented itself by warning markets that more cuts could be made to different policy rates if needed (read: if the lira rises much more).

But inflation, while easing, remains problematic.  On the same day as the policy meeting, the International Monetary Fund recommended Turkey raise interest rates to deal with inflation, which was an annualised 9.2 percent in September. The central bank’s prediction is for a year-end 7 percent rate but that is 2 percentage points higher than its 5 percent target. So the central bank probably was sensible in exercising restraint.

Emerging corporate debt tips the scales

Time was when investing in emerging markets meant buying dollar bonds issued by developing countries’ governments.

How old fashioned. These days it’s more about emerging corporate bonds, if the emerging market gurus at JP Morgan are to be believed. According to them, the stock of debt from emerging market companies now exceeds that of dollar bonds issued by emerging governments for the first time ever.

JP Morgan, which runs the most widely used emerging debt indices, says its main EM corporate bond benchmark, the CEMBI Broad, now lists $469 billion in corporate bonds.  That compares to $463 billion benchmarked to its main sovereign dollar bond index, the EMBI Global. In fact, the entire corporate debt market (if one also considers debt that is not eligible for the CEMBI) is now worth $974 billion, very close to the magic $1 trillion mark. Back in 2006, the figure was at$340 billion.  JPM says:

Olympic medal winners — and economies — dissected

The Olympic medals have all been handed out and the athletes are on their way home.  Which countries surpassed expectations and which ones did worse than expected? And did this have anything to do with the state of their economies?

An extensive Goldman Sachs report entitled Olympics and Economics  (a regular feature before each Olympic Games) predicted before the Games kicked off that the United States would top the tally with 36 gold medals. It also said the top 10 would include five G7 countries (the United States, Great Britain, France, Germany and Italy), two BRICs (China and Russia), one of the developing countries it dubs Next-11  (South Korea), and one additional developed and emerging market. These would be Australia and Ukraine, it said.

Close enough, except that Hungary took the place of Ukraine as the emerging economy in the Top 10 and the United States actually took 46 gold medals — more than Goldman had predicted.