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Monday, 23 June 2014

EconoMonitor : EconoMonitor » Emerging Market Corporate Sector Debt: A Stitch in Time Could Save Billions

EconoMonitor : EconoMonitor » Emerging Market Corporate Sector Debt: A Stitch in Time Could Save Billions:

Much has been said lately about growing private sector debt in emerging market economies. In our recent analysis, we examined the corporate sector in a number of countries and found their rising levels of debt could make them vulnerable.
Low global interest rates in the aftermath of the global financial crisis and ample amounts of money pouring in from foreign investors have enabled nonfinancial corporations to raise record levels of debt.
figure 1
Credit was readily available in the aftermath of the crisis, and economic expansion enabled earnings to grow healthily, thus helping to prevent leverage from rising too far and too fast.  Recently though, slowing growth prospects are beginning to put pressure on firms’ profitability. Moreover, higher debt loads have led to growing interest expense, despite low interest rates. As a result, the ability of firms to service their debt has weakened (Figure 1).

Vulnerable to a slowing economy
figure 2
These debt servicing pressures have left companies more vulnerable to shocks, such as large withdrawals of foreign capital, geopolitical uncertainties, or a sharp rise in interest rates. In such situations, firms’ earnings could be severely dented, while borrowing costs could escalate. Our analysis of a sample of 15,000 large and small companies in emerging markets suggests that a combination of a 25 percent decline in earnings and 25 percent increase in borrowing costs could amplify the proportion of weak firms and their debt service ability (Figure 2).
Such shocks are plausible given that earnings have declined 20–30 percent in the weaker firms, while interest expense rose 10–50 percent in the aftermath of U.S. investment bank Lehman Brothers’ bankruptcy. Within our sample of 15 countries, the debts of highly leveraged and weak firms could increase two-fold by $740 billion, rising to 35 percent of total corporate debt from 17% currently.
Exposures to currency losses
figure 3
Another source of vulnerability stems from firms’ exposure to exchange rate risks. External debt has been rising, and now comprises more than one-quarter of total corporate debt in a number of countries. Since the market turbulence in May 2013, currencies have dipped by up to 30 percent, while long term government bond yields have increased nearly 150 bps, on average.
Corporations with high foreign currency debts may run the risk of a “triple whammy”: foreign exchange losses from debt principal and interest payments; lower revenues; and higher refinancing costs.
figure 4
Our analysis shows that a 30 percent depreciation in nominal exchange rates could erode 20–30 percent of earnings in some countries, even after accounting for natural hedges from overseas earnings (Figure 3).
Are banks vulnerable?
For most countries, thebanking sector appears healthy with sufficient levels of capital buffers. However, lax recognition of doubtful assets and loan forbearance may mask the true extent of asset quality risk in a few countries. In such cases, there is a danger that high corporate loan losses could overwhelm what were thought to be adequate levels of balance sheet equity capital and loan loss buffers. Countries with weak bank provisioning and thin loss absorbing buffers are at risk (Figure 4).
Policy suggestions 
The good news is that corporate leverage has yet to reach precarious levels in most countries. As such, preemptive policy actions could help to alleviate systemic risks.
Policymakers should focus on a number of issues:
  • Containing the rapid growth of corporate leverage, particularly in foreign currencies
  • Implementing stronger macroprudential policies in countries where large capital inflows have fueled growth
  • Improving data collection while mandating better corporate disclosure of foreign currency liabilities, and bolstering banks’ resilience through active provisioning and the buildup of more capital.
In the case of emerging market companies, a stitch in time could save billions.
This piece is cross-posted from iMFdirect with permission.

U.A.E. Needs to Pare Energy Subsidies, Cut Demand, Minister Says - Bloomberg

U.A.E. Needs to Pare Energy Subsidies, Cut Demand, Minister Says - Bloomberg:



"The United Arab Emirates, OPEC’s fifth-largest oil producer, needs to roll back subsidies on fuel and power to help limit its energy consumption and imports of natural gas, the country’s energy minister said.



“You will never have a strong economy if you are subsidizing,” Suhail Al Mazrouei told reporters in his office in Abu Dhabi yesterday. “In consumption of electricity, we are two to three times the global average, and we are not happy about that level.” The government has yet to determine changes in prices and subsidy levels, he said.



Middle Eastern oil producers including the U.A.E. and Saudi Arabia are consuming as much as 10 percent more electricity each year, governments in the region have said, as they diversify into power-dependent industries such as petrochemicals and steelmaking and as household demand rises. The amount of crude Saudi Arabia has available to export will fall to “unacceptably low levels” over the next two decades if the country doesn’t pare its fuel use, state-run Saudi Arabian Oil Co. said in May."



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Dubai Stocks Enter Bear Market, Ending Best Rally Since 2005 - Bloomberg

Dubai Stocks Enter Bear Market, Ending Best Rally Since 2005 - Bloomberg:



"Dubai shares plunged, dragging the benchmark index down 20 percent from a peak in May and bringing an end to the biggest bull market since 2005.



The DFM General Index declined 4.3 percent to 4,296 at the close, entering a bear market after falling from a high on May 6. The drop was led by real-estate stocks including Arabtec Holding Co. (ARTC), which tumbled 9.9 percent after three people familiar with the matter said the company dismissed hundreds of staff, including several senior executives.



“There is confusion in the market and I call it Arabtec fever,” Wadah Al Taha, chief investment officer of Dubai-based Al Zarooni Group, said by telephone. “It’s contagious and affecting every single share in the market.”"



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Great time to invest in Russia and Iraq argues veteran contrarian Mark Mobius « ArabianMoney

Great time to invest in Russia and Iraq argues veteran contrarian Mark Mobius « ArabianMoney:



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Abu Dhabi’s al Hilal Bank plans $500 mln capital-boosting sukuk - Al Arabiya News

Abu Dhabi’s al Hilal Bank plans $500 mln capital-boosting sukuk - Al Arabiya News:



"Abu Dhabi’s al Hilal Bank plans to raise $500 million from a capital-boosting Islamic bond issue, a document from lead arrangers said on Monday.



The transaction, which has a perpetual tenor but can be bought back by the lender after the fifth year, is earmarked to price in the area of 6 percent. Order books for the trade are currently worth around $1 billion, the document added.



The sukuk will boost the bank’s Tier 1 - or core - capital."



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Babbage: The "full stack" startup - YouTube

Babbage: The "full stack" startup - YouTube: ""



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The Peninsula Qatar - Qatari banks record strongest growth in loan book, NII in Q1

The Peninsula Qatar - Qatari banks record strongest growth in loan book, NII in Q1:



"Qatar-based banks witnessed the highest increase in their loan book growth in the GCC during the first quarter of 2014. The banks’ loan book grew by 23 percent year-on-year, the highest among GCC nations, a new report noted yesterday. 




“Qatar-based banks maintained their loan growth momentum due to increase in public sector spending. Acquisition made by Qatar National Bank (QNB) and Commercial Bank of Qatar during the year also propelled loans growth considerably. Among Qatar-based banks, Commercial Bank of Qatar, Qatar Islamic Bank and Doha Bank registered higher growth in loan book of 33.6 percent, 30.1 percent and 26.1 percent YoY respectively,” Global Investment House’s (GIH) GCC Banking Quarterly report said.



Qatar also ranked top in the GCC in terms of the growth in the net interest income (NII) of GCC banks. The NII of banks grew the most (25.6 percent YoY), followed by UAE (12.9 percent), Saudi Arabia (7.8 percent) and Kuwait (5.2 percent)."



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Why Iraq, Ukraine won't rattle markets


Vasu Menon, Vice President of OCBC, says geopolitical tensions in Iraq and Ukraine are not "systemic risk factors" that will affect global financial markets.



UAE mid-table in property transparency index | The National

UAE mid-table in property transparency index | The National:



"Dubai came 49th and Abu Dhabi 53th in a transparency index of 102 global real estate markets.



The new table – which measured real estate markets, most of them national, based on the ease with which property could be bought, sold and valued – ranks Dubai and Abu Dhabi as retaining their places as the top two markets in the Middle East and North Africa.



When the study was last conducted in 2012, Dubai ranked 47th and Abu Dhabi came 52nd out of 97."



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Robin Mills: Few clean lines in drawing Iraq’s future | The National

Robin Mills: Few clean lines in drawing Iraq’s future | The National:



"Tidy lines on a map are comforting. But they conceal the reality of communities separated, of towns, families and people who don’t fit into neat sectarian or ethnic identities. And they raise the messy problem of vital economic assets – pipelines, rivers, oilfields – cut in two.



We have seen this problem in the patchwork of post-Soviet states in Central Asia, in the troubled divorce of Sudan and South Sudan, and now it may be repeated in Iraq. From the infinity of possibilities, what do three broad scenarios mean for the future of the country’s oil industry?



The scenario of revival would involve a unity government in Baghdad, under some acceptable candidate – needing domestic support as well as nods from both the US and Iran. This government would expel the Islamic State of Iraq and the Levant (ISIL) and regain shaky control of northern Iraq. But unless this is combined with a resolution to the Syrian civil war, the north is likely to remain a violent and chaotic place."



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Dh3.12bn investment in Abu Dhabi Securities Exchange in 2014 | The National

Dh3.12bn investment in Abu Dhabi Securities Exchange in 2014 | The National:



"Net foreign investment in the Abu Dhabi Securities Exchange (ADX) has reached Dh3.12 billion so far this year compared with Dh2bn for all of 2013, according to Al Ittihad, The National’s sister Arabic newspaper.



About Dh2.16bn of that amount was pumped in by non-Arab investors, Dh649.8 million by Arabiab Gulf investors and Dh311.7m by Arab investors, the figures showed.



In an interview with Al Ittihad, Rashed Al Balooshi, the chief executive of the ADX, said that the UAE’s financial markets remain strong and have scope for further investment opportunities, supported by a strong national economy and the sustained growth of all economic sectors."



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Dubai property market is most 'transparent’ in region | GulfNews.com

Dubai property market is most 'transparent’ in region | GulfNews.com:



"Dubai retained its status as the most “transparent” regional property market for global investors, but the biggest improvement has been for Qatar, according to the ‘Global Real Estate Transparency Index’ for 2014 released by the consultancy JLL.



Dubai was ranked 49th in the JLL findings with a composite score of 3.11, while Abu Dhabi was 53rd with 3.20. These scores placed in the list of countries rated as being ‘semi-transparent’, while the UK, the US and Australia were the top three ranked countries and with ‘high transparency’. (The composite score is made up of five sub-indices such as ‘performance measurement’, ‘market fundamentals’, ‘governance of listed vehicles’, ‘regulatory and legal’, and transaction process.)



The transparency parameter determines how an investor with substantial funds at his disposal assesses the ease of an entry into – and exit from - a particular market. Since 2008, Dubai has sustained its efforts to create a real estate regulatory environment that would stand up to scrutiny, which is when it topped the Middle East standings."



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Jazeera Airways Group leases two A320s to TAP airlines | GulfNews.com

Jazeera Airways Group leases two A320s to TAP airlines | GulfNews.com:



"Jazeera Airways Group on Sunday announced that its fully-owned aircraft leasing subsidiary Sahaab Aircraft Leasing has entered the EU aviation market by placing two Airbus A320 aircraft on long-term leases with TAP Portugal airlines, one of Europe’s leading airlines.



In addition to the two aircraft placed with TAP Portugal, Jazeera Airways Group also has four aircraft A320s placed with Virgin America since 2010, one Airbus A320 placed with SriLankan Airlines since 2010, and one aircraft placed with Flynas in 2013, Jazeera said in a statement."



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Libya’s Hariga oil port reopens, talks continue with protesters | GulfNews.com

Libya’s Hariga oil port reopens, talks continue with protesters | GulfNews.com:



"Libya’s eastern Hariga oil port has reopened and received a first tanker loading oil, a spokesman for state-owned National Oil Corp (NOC) said on Sunday after the government paid salaries of protesting state security guards at the terminal.



A second tanker was readying to dock but talks were continuing with protesters complaining that the Tripoli government had not met their full demands, a separate spokesman for the port operator said.



Hariga had been closed for a month by members of the state Petroleum Facilities Guards (PFG) who claimed they had not been paid for months, one of many disruptions in Libya, where militias, state security guards and tribesmen seize oil facilities at will to press Tripoli into their demands."



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Arabtec Head of M&A Said to Have Been Fired Amid Staff Cuts - Bloomberg

Arabtec Head of M&A Said to Have Been Fired Amid Staff Cuts - Bloomberg:



"Arabtec Holding Co. (ARTC)’s head of mergers and acquisitions, Shohidul Ahad-Choudhury, has been dismissed following the resignation of Chief Executive Officer Hasan Ismaik, a person familiar with the situation said. 




Hundreds of employees at the United Arab Emirates’ largest construction company, including a number of managers, have also been fired since Ismaik’s departure, according to three people familiar with the situation who asked not to be identified because the information is private.



Ahad-Choudhury, a former Deutsche Bank AG executive, joined Arabtec in March 2013. Calls to his personal mobile yesterday were not returned, while a number listed on his business card was out of service. A public relations executive for Arabtec in Abu Dhabi declined to comment on the dismissals when contacted by phone."



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