IFR IMF/World Bank 2007

Back in 2002, before Luiz Inacio Lula da Silva's Workers' Party came to power, the Real slumped to four to the US dollar and external debt weighed heavily on the coffers as interest rates soared above 20%. C bonds had also lost more than half of their value and whispers of default were hitting the market, despite outgoing President Fernando Henrique Cardoso's ability to put together the IMF's largest standby agreement totalling US$42bn.No one then believed Brazil would become the multilateral's poster child and that by early 2005 it would be able to quit the accord and leave the IMF without its best customer. Since then, Latin America's largest economy has also taken great strides toward putting itself on a path toward investment grade. In fact, the list of achievements is long. “Brazil has come a long way in tackling its significant external vulnerability which is markedly different today compared with five years ago," said Lisa Schineller, director of sovereign ratings at S&P. "With pragmatic policy implementation it slowly reduced its debt-to-GDP ratio and improved its debt composition. The combination of these factors have made the prospect for growth stronger than it has been in the past.”Brazil's debt load has increased from US$392bn in 2003 to US$645bn today, but that doesn't account for a strengthening Real against the dollar. Perhaps more important is the fact that the country's debt to GDP has dropped about 1,000bp since 2005 and its debt composition is now longer term and less vulnerable to external shocks. Between 2005 and 2006, Brazil took out its Brady paper via an impressive US$4bn-plus C bond swap for new 2018s before buying back the remaining US$7bn. The sovereign ended its annual external funding programme of up to US$6bn and told the market it no longer needed to fund itself overseas. The government also started to reduce its volatile local floating-rate paper and for the first time began to issue fixed-rate paper extending beyond the five-year mark – a move that was helped by the removal of a 15% withholding tax that opened the door to multibillion dollar foreign investor flows.FRNs today make up 22% of the total debt stock versus more than half in 2002, while fixed-rate paper has come out of nowhere and is at 30%. That was deemed impossible at the start of this decade.Brazil increased its international reserves to more than US$160bn from sub US$20bn in 2002, and brought the Real down to below R$2.00 to the dollar. It also always beats its own primary budget surplus target of 3.8% by a comfortable margin. In July, the surplus was R$7.9bn, or 4.37% of GDP.Furthermore, the nation's net debt to GDP ratio, which has for years remained elusively stuck above the 50% mark, has today dropped to 44.4% after Brazil changed its methodology to a fairer system. In other words Brazil's net-debt-to-GDP ratio is already at investment grade levels.On the equities side, the Bovespa has become one of the fastest-growing equities exchanges in the world. The IPO market took off with small companies finally finding an audience overseas and locally as bankers found new names for the insatiable appetite of equity investors.Consequently, Brazil trades like an investment-grade credit. In the latest selloff, the sovereign has outperformed its South American peers and it is rated by all three core ratings agencies one notch below investment grade amid expectations that any one of them could raise the nation to Triple B.But even if Brazil reaches investment grade, Brasilia cannot afford to sit on its laurels and slow the pace of reforms. "Challenges remain for continued improvement on the fiscal side where the size of the debt still crowds out private-sector investment and a lower debt burden would open the door to higher private investment," said Schineller.Furthermore, “to date Brazil's fiscal adjustment has rested primarily on revenue increases [rather] than expenditure consolidation," she added. "Plus bringing down spending would

With its reputation somewhat tarnished and hedge funds retreating from what was once a favourite play, Argentine sovereign and corporate paper was severely battered during the August selloff. Five-year CDS, for example widened more than 360bp to 560bp versus pre-volatility levels.It has been so bad that many agree that Argentine debt was essentially oversold over the summer. If the sovereign were to issue today it would have to pay on a peso-denominated bond about 400bp–500bp more than it did pre-volatility. It does not help that Argentina is also holding back its corporates, which have put off all issuance until January 2008 because of poor conditions and uncertainty ahead of October's presidential election.Bankers see up to US$3bn worth of corporate supply locally and internationally getting under way early next year but in the near-term they remain pessimistic. The most bankers can hope for between now and January are a few local peso-denominated loans and some trust securitisations. That's nothing to write home about for a country needing to revamp its credit universe, and one that saw its corporates tap the international markets for about US$3.2bn earlier this year.And yet change is in the air. There is an intense debate within the government about how to resolve the holdouts crisis. In short, many officials want Argentina to return to a path of credibility and respect within international markets. This is critical if Argentina is to bring down its relatively high borrowing costs.So far outgoing president Nestor Kirchner has done little on this front, mostly because he would gain no political advantage by doing so. Many locals would see, or be led to see by the opposition, that such a move is nothing more than a give-away of hard earned Argentine money to a number of rich foreigners.Kirchner has shown little respect for international investors during his presidency. Argentina’s US$103bn restructuring in 2005 was arguably one of the most painful ever for bondholders who had to swallow an estimated haircut of over 70%.But there is hope and that optimism takes the form of Cristina Kirchner, the outgoing president's wife. The powerful senator of the ruling Peronist party, who is often likened to Eva Peron, has shown more interest in taking a market-friendly approach, leading bankers to conclude that an announcement toward resolving the holdouts crisis could come as soon as the first half of 2008.Cristina Kirchner is expected to win easily in late October. She has already overcome a rough patch in her campaign when in June and July economy minister Felisa Miceli was forced to resign after a bag allegedly containing some US$240,000 was found in her office. The minister said part of the money was to buy a property.Today, the senator is expected to win with 50% to 60% of the votes. In short, the opposition has failed to make a dent in her campaign. But no one really knows what she will do with regard to economic policy or the holdout crisis. Bankers say that they will get a better picture only after the election.Should Cristina Kirchner try to win back the market she will have much to do. Regarding the US$19bn of holdouts, Argentina is only expected to offer pars and discounts to bondholders as it did the first time round. But the government is not expected to include GDP warrants into the package, given that it has already made it clear that it wouldn't offer more attractive terms than the original deal. Indeed it is likely to pay less, though some are hoping for a sweetener.Even if Argentina sweetens the offer and pays more than it did the first time round – a move that would upset those who accepted the original restructuring – it is unlikely to gain 100% approval for its reopening. Some very big funds have made it very clear they want all of their money back, and some speculate that the crisis will not be resolved unless the government offers extremely generous terms."There are always going to be investors that will not get i

Kazakh banks started their funding year in 2007 aggressively as six banks – BTA, BCC, Alliance, Tsesnabank, KKB and ATF – printed nine Eurobonds worth almost US$5bn-equivalent by mid-February. Since then, just Halyk Bank and Temirbank have come to the market – with US$700m 10-year and US$500m five-year deals in April and May respectively. Eurobond supply is likely to continue tailing off as the combination of waning investor appetite and excessive external borrowing concerns contain issuance amid doubts about the future of some second-tier institutions.By the end of June, Kazakh banks' total international borrowings stood close to US$40.7bn, according to Moody's. This followed an extremely busy 2006 when external borrowing more than doubled to US$33.3bn, representing over half of the banking sector's total funding, according to the rating agency.Concerns about oversupply weighed on the secondary market even before the late spring/summer EM sell-off, which triggered a marked acceleration in this year's losses. KKB five-year CDS more than doubled from 210bp in early June to over 500bp at the peak of the EM sell-off, while in the cash market BTA 2037s and Alliance Bank euro 2012s had collapsed to 87.25 and 89.00 by early September from their 99.165 and 99.251 reoffer prices earlier this year. Despite the jump in interest rates, many Kazakh banks will be willing to pay up in the new environment since Eurobond yields remain attractive compared with the bumper returns received from lending on locally. On the demand side there is plenty of value after the sharp sell-off, particularly for shorter-dated Kazakh issues of two or three years, which have spreads of 400bp–500bp over Libor and where the default risk is limited. In the primary market, however, investor appetite has plunged for a sector that has left many badly burned, including the crucial Asian private bank bid. "A lot of Kazakh bank issues were upsized and priced inside guidance before tumbling in the illiquid secondary market. This has left a bad taste in many investors' mouths," said one London-based fund manager, who only sees decent demand for the very top Kazakh names, specifically Halyk and KKB."Despite double-digit yields, hedge funds may also be reluctant to get involved given the traditional lack of liquidity in Kazakh issues," he added.Further down the credit curve the fund manager believes the market will be shut to banks for some time while origination desks say they will attach "health warnings" to returned RFPs. "An investor strike will act as a clear signal to Kazakh banks to stop their excessive annual loan book growth of around 100%, which would undoubtedly be a good thing. Up to 40% of loans are related to the real estate market, which has obvious potential to deteriorate," said an EM syndication manager. Indeed, hefty real estate exposure coupled with the need to refinance maturing Eurobonds has raised questions about the future of some banks. The National Bank of Kazakhstan (NBK) has sought to allay fears over banks' ability to repay Eurobonds, with its chairman, Anvar Saidenov, seeing "absolutely no cause for any concern among investors". The central bank is able to provide banks with short-term loans as its very liquid stabilisation portfolio has just been increased by US$2bn, while Saidenov has indicated that banks will be allowed to forgo proposed increases in reserve requirements. The NBK is hardly likely to allow the top three Kazakh banks to fail, perhaps the top five. Below this there is potential for some smaller banks to go under, though struggling credits could of course be taken over by the large domestic banks or foreign institutions. Grigori Marchenko, a former central bank governor and the current Halyk Bank CEO, believes new regulations to limit foreign borrowing could trigger mergers among second-tier Kazakh banks, in view of their need to boost capital and the limits on domestic borrowing. One or two banks may be open to foreign partne

Thus far Turkish markets have survived the “year of elections” in relatively good shape, in spite of sporadic military rumblings about the selection of former Islamist Abdullah Gul as the new head of state. The ruling AK party’s convincing victory in June’s early parliamentary elections emboldened it sufficiently to re-nominate its preferred presidential candidate against the armed forces’ wishes while its retained grip on power provides comfort to investors anxious that the reform process continues.Turkey lacks the commodity riches that benefited other EM countries so much during the global economic boom (notably Russia and Latin America) but it still managed to hold up well during the July/August EM sell-off. Turkey five-year CDS climbed from 62bp at the end of June to 207bp in early September while similarly rated Ukraine, which benefits from a total government debt level of less than 20%, widened 72bp in that time, also to 207bp.The Turkish economy and growing market maturity bodes well for possible upgrades by the end of the year or early next, despite a record current account deficit and still hefty issuance schedule. Indeed, Kazakh banks have taken over from Turkey as the first port of call for sellers during EM's sporadic struggles.Much work still needs to be done, however, with pre-election spending and disappointing tax returns raising doubts about the government’s fiscal forecasts, though a decisive new electoral mandate fortifies the government which should be able to take the required fiscal steps to satisfy the IMF. This should ensure Turkey completes its 2007 Eurobond programme without too many hiccups as it enjoys increased scarcity value as the stalwart issuer within the shrinking EM sovereign space. Several Latin American sovereigns have used their commodity wealth to carry out Eurobond buybacks and repay IMF loansGiven its low commodity output Turkey is in no position to follow the Latin American model and in terms of total issuance US$5bn–$5.5bn is likely to remain Turkey’s annual Eurobond figure for coming years, according to the Treasury.Ankara is pleased with its issuance strategy to date, in particular the success of the first five-year lira linker auction which offers another source of financing. Meanwhile, the Treasury was at the time of writing contemplating a fourth Eurobond visit of 2007 having completed US$3.35bn of this year's US$5.5bn foreign currency issuance target.2007 started off in disappointing fashion as the sovereign raised US$500m from each tap of outstanding 7.0% 2016s and 6.875% 2036s on January 9, with both deals priced below initial guidance as market conditions deteriorated. The additions' fixed reoffer prices of 101.875 and 95.875 were 1/8 and 1/4 less than initial price talk, providing yields of 6.732% and 7.215%, equivalent to 207bp and 247bp over US Treasuries. Expectations had centred on bumper supply of US$1.5bn–$2bn.But Turkey got its issuance strategy back on track later in January with an above expectations €1.25bn 12-year Eurobond that was the country's second-largest deal and biggest non-dollar issue. The Reg S issue pays a 5.875% coupon and was priced at 99.106 to yield 5.977%, equivalent to 168bp over mid-swaps and 193.4bp over Bunds.The Treasury made its third visit with February's US$750m addition to the existing 2020s which took that issue's size up to US$2bn. The bond pays a 7.0% coupon that with a tap price of 100.95 yielded 6.888%, 2bp inside initial guidance of 220bp over 10-year Treasuries.Since then Turkey has missed a couple of windows as it continues to monitor the markets on a daily basis with US$2.15bn still to raise plus some traditional pre-financing for next year. "This [US$2.15bn] only represents one and a half visits to the market and is easily doable in the timeframe. The main question for the Treasury is whether to come quickly with a modest tap or bide its time until the market revives and then go for a new blow-out benchmark," said one syndication

While the EM pipeline was firmly closed during the global credit crunch, the longer term outlook for the asset class is relatively healthy, supported by a growing army of cross-over investors – led by US pension funds – who will continue to expand their presence in the EM space.In the absence of new government paper, Russian quasi-sovereign supply has enjoyed particularly broad demand of late with Gazprom's second deal of the 2007 emphasising the upturn in interest from outside the traditional EM world. The A3/BBB rated gas giant attracted stunning books of €2bn and £1.75bn for its €700m October 2014 and £550m October 2013 issues launched in May, little of which came from dedicated EM accounts. Such huge demand enabled both tranches to price at the tight end of revised guidance at 79bp over mid swaps and 115bp over Gilts respectively.Paul Johnson, head of sterling syndicate at joint bookrunner ABN AMRO, stressed that Gazprom's sterling debut provided the gas giant with a new investor base and gave sterling investors access to a name they had not bought before. "The order book resembled that of a Single A domestic corporate issuer, dominated by dedicated UK money," he said. The sterling bond, which was swapped into US dollars as an intrinsic part of the deal, provided an opportunity to beat the dollar curve. Johnson believes the success of the deal should encourage other Russian benchmark names to look at the sterling market as an attractive proposition."Gazprom is pushing away from being an EM name and more towards being a high-grade name," added Nick Darrant, director of EM syndicate at ABN AMRO, while Pierre Lebel, head of corporate bond syndicate at euro bookrunner SG CIB, concurred and lauded the euro deal as a great success. The decision to roadshow in Paris and Milan reaped rewards, he said, as French and Italian investors were allocated an impressive 16% and 9% of the euro piece, respectively."Typically there is little EM demand out of France but Gazprom can no longer be considered an EM name, with the majority of attendees certainly not dedicated EM accounts. There was a similarly strong response in Milan where there was standing room only at the investor meetings," Lebel said.An EM origination manager away from the deal was not surprised by the scale of demand for the sterling tranche. "UK investors have been crying out for non-standard issues and in particular EM credits with good ratings." This was only the second sterling issue from Russia, following the VTB (A2/BBB+) £300m three-year that was launched in March when UK asset managers dominated the book.Other Russian quasi sovereigns fall within the cross over radar with Transneft (A2/BBB+) even managing to price February's debut US$1.3bn seven-year Reg S 144a Eurobond in line with the sovereign curve at 55bp over midswaps, equivalent to 98.8bp over US Treasuries with US asset managers at the fore. Transneft was unable to repeat the feat for its second visit in June, however, when a dual-tranche five-year Reg S/144a transaction came in 20bp over sovereign CDS.The credit crunch has created an even more tempting pick up for non-dedicated EM names. Gazprom launched a US$1.25bn 30-year Reg S/144a Eurobond during a brief window of opportunity on August 8 at an attractive 225bp over Treasuries. US investors took 69% of that bond that was printed on the fifth-busiest day ever in the US dollar market in volume terms with 15 deals printed, 14 of which were high-grade US names. "Gazprom was the exception, which is testament to the high regard the company is held in by US investors," Darrant stressed.Similarly, broad-based demand will underpin other Russian state-owned entities including Sberbank, VTB, RAB and Gazprombank, though pricing must be realistic as the eight banks involved in the inaugural Rosneft deal can testify. While Gazprom has shown itself willing to pay up to secure its financing needs oil giant Rosneft (Baa1/BB+) postponed July's debut transaction of up to US

The Venezuelan president has dismissed the notion that he wishes to fill the boots of the IMF. But many observers think otherwise as Chavez routinely tours the region and other parts of the globe, offering various types of aid. In that sense, Venezuela is pushing historical precedents in Latin America."I can't remember any Latin American government spreading influence and wealth around the region like this one," said Arturo Porzecanski, professor of international finance at American University in Washington DC, and a Wall Street veteran. "Chile and Peru have excess dollars, but you don't see them buying goodwill and influence."According to Fitch, Venezuela has recently provided cash financing to 12 Latin American and Caribbean countries, and the largest recipients of its investments, grants and military spending have been Brazil and Argentina. Uruguay, Bolivia, Ecuador and the Dominican Republic are next in line, but all with smaller amounts. Interestingly, as Fitch pointed out earlier this year, the main beneficiaries have been countries that also made the largest net repayments to the IMF between 2005 and 2006. This list includes Brazil, Argentina and Uruguay. These are also Mercosur countries, a trading block Chavez is interested in joining.Late last year Uruguay announced it would cancel its current standby agreement with the IMF and repay early all of its outstanding obligations. Just a year before that, Brazil also made a similar move, announcing it would repay the equivalent of US$15.46bn to the agency.Argentina ended its long and ignominious relationship with the IMF in December 2005 when it used US$10bn in reserves to pay what it still owed the Fund. Vilified in Buenos Aires at the time, the IMF accepted some blame for the sovereign's debacle, but cutting links with the Fund also drew criticism.Critics thought Argentina's IMF payback meant there would be a lower probability of the holdouts getting paid and that such a move further isolated the country from the international financial community. In some ways, such critics were proven right.The holdout problem is still hanging over the country and hence Argentinean issuance has been confined to local law, domestic bonds to raise capital for fear of attachment risk. The other option of course has been selling bonds to Venezuela, which has gladly come to the rescue.Since the beginning of 2006, Venezuela has bought roughly US$4.5bn worth of bonds from Argentine. This has come in handy for the government of President Nestor Kirschner, especially when demand has waned locally or when the cost of funding exceeds the government's ideal limits.Indeed, Argentina is perhaps the best example of where Venezuela is playing an IMF role. In most other cases such as some Caribbean and Central America countries, it has acted more as an aid agency, while in Brazil it has been involved more in energy projects and defence spending."Much of Chavez's spending is more like USAID, spending on medical care and subsidising oil imports. It is more development related," said Porzecanski. "In the case of Argentina you could argue that instead of looking for financial assistance, they went to the Fondo Monetaria Chavista. In this case it is budgetary support, bonds that Argentina would like to sell internationally, but out of attachment fears did not."Nevertheless, some analysts question the notion that Chavez, or at least his economic team, is ignoring market realities and blindly throwing money at countries just to gain influence. Others wonder whether Venezuela would ultimately act like the IMF and become lender of last resort and support countries that face severe crises."Whenever the Venezuelan economic team has extended credit, it has done so for political reasons but also ones that are economically sound," says Maya Hernandez, country analyst at HSBC. "Even in Cuba, the intangibles Chavez is getting justify the cost of what he is giving in oil. He gets doctors and the Cubans are running all h

In an ironic reversal of fortunes, the fault lines in the most recent market upset came from the United States, while the old troublemakers in emerging market countries essentially watched from the sidelines and waited to see if they would be hit by the fallout.EM assets largely held their own, or at least saw investors distinguishing between credit risk, with Venezuela and Argentina taking a pounding on the back of weak economic policies and perhaps heavier positioning by more volatile hedge funds, while stronger credits like Brazil remained steady. Asia also largely seemed to be an island of tranquility with JPMorgan noting that “almost all [EM] countries remain unfazed by the recent turbulence”.Even Turkey, whose external financing needs and current account deficit made it particularly vulnerable during these kinds of sell offs, stayed calm. “Nothing particularly disturbing happened in Turkey,” said Igor Arsenin, EM debt strategist at Credit Suisse. “The sell off in Turkey was relatively mild and the currency is stronger than it has been at the end June.”As JPMorgan noted the EM correction was comparatively mild compared with other asset classes, and was driven more by gaps in liquidity than any fundamental repricing, For instance, the EMBIG widened by 66bp during the second half against a 159bp widening for US high yield, though the bank warned that more spread widening could be on the way given EM's increasingly stronger correlation with other markets.On the other hand, Latin American equities did see some of its worst monthly declines in the past decade, which may have seemed odd given the strength of some of the economies and corporates. But UBS attributed the drop mostly to the abundance of foreign investors willing to head for the exits on any sign of weakness.As far as emerging markets were concerned, the IMF looked sadly obsolete and seemed to be shouting in the dark when it offered help to EM countries when none was really required. Indeed, the lines between emerging and developed markets have been blurring as more and more EM sovereigns head toward investment-grade land.“The fund stands ready to support any emerging market nations that are caught up in the market turbulence, although there have so been no request for assistance, and there has also been little pressure on exchange rates or reserves,” said then IMF managing director Rodrigo De Rato, in early September.Thanks to lessons learned from the series of EM crises that roiled the markets during the 1990s, many developing countries have worked hard to reduce their vulnerability to external shocks and have given analysts good reason to think there is plenty of room for optimism.In Latin America, for instance, enormous efforts have been made to develop local capital markets that can serve as an alternative to external financing, or wean the region from what former chief economist at the IDB Ricardo Hausmann referred to as the original sin of not being able to borrow abroad in domestic currencies.Before the sell-off, EM sovereign and corporates had been able to entice yield-hungry foreign investors with cross-border local currency trades. And that market looked set to reopen in September as Colombian gas pipeline TGI retested investor appetite with an up to US$900m 144A Reg S offering which included a 20-year peso denominated tranche.But perhaps more important is the growing strength of what is essentially a captive domestic investor base. Merrill Lynch estimates that local institutional investors in Latin America's principal markets will have about US$1.24trn under management and that figure is set to grow to close to US$2trn by 2011 or 56% of those countries' GDP. That compares to a relatively meagre US$356bn in 2002.While these local markets have typically been the exclusive domain of high-grades corporates and the government, it is hoped that changing regulatory environments may open them up to a wider group of lower-grade borrowers. It was this burgeoning l

The securitisation markets in EEMEA and Latin America are growing in leaps and bounds. Despite the recent spike in risk aversion toward the asset class, strong local demand and the unique characteristics of structures emerging from these regions have helped maintain momentum.So far US jitters have had little, if any, impact on risk perception, with participants forecasting more deals on the horizon. "Fitch has not changed the rating on any of its emerging market deals," said Michael Hoelter, director in emerging markets at Fitch. "The larger banks have other sources of funding, but smaller banks may not. These smaller banks may be more likely to carry on with MBS deals."In EEMEA, several countries such as the Ukraine and UAE saw debut securitisations in the international markets this year. In July two internationally rated deals, an RMBS and a CMBS, were issued out of Dubai. The Ukraine also sold its first mortgage-backed deal at the beginning of the year.Russia remains one of the biggest players, offering a variety of asset classes and substantial volumes. Over the last year the country issued its first domestic transaction, Sofintrade's Specialised Mortgage Agent GPB-Mortgage, and in early 2007 Citi launched the first domestic tranched RMBS, First Mortgage Agent of AHML. There has also been a steady stream of offshore transactions.Market participants largely expect Russian securitisations to remain alive and well during the last quarter, though volumes may be dented somewhat until banks can assess the damage caused from the downturn in global markets."The mortgage market is booming in Russia, and the pipeline is fairly large," said Daniel Mumzhiu, an analyst at Moody's. "It is difficult to say how many deals will materialise, though, as larger banks are likely to hold back until credit conditions improve."Other participants are more upbeat and don't expect any spill over from the US markets. Stephen Matthews, senior associate in the Allen & Overy structured finance group in Moscow, said that his clients do not see the credit crunch impacting flows in Russia, especially given the country's unique story and strong fundamentals."When the dust settles, it may even stimulate new enthusiasm among international investors looking for both yield and structural conservatism from the same bucket,” he said. “It's fair to say that Russian deals are structured cautiously. Thekey risks are now well understood and documented and in many cases can be significantly mitigated through mechanical techniques.”Nevertheless, legal frameworks in emerging countries are often still developing, as governments aim to strengthen structures and encourage more volumes. Further amendments are to be made to Russia's domestic mortgage securitisation law, and Kazakhstan passed a securitisation law in 2006. Meanwhile, Turkey's parliament has recently implemented a mortgage law, which could result in future RMBS deals.Some countries have been able to move forward without an established legal framework for securitisation. For instance, the Ukraine has experienced considerable growth in its mortgage market and the country saw its first public securitisation in early 2007, namely the Ukraine Mortgage Loan Finance 2007-1, a US$180m transaction originated by Privatbank and arranged by UBS. The issuer was an SPV incorporated under the laws of England and Wales, and political risk insurance was provided for the Class A notes by Steadfast.The majority of the senior bonds were bought by typical European subordinated tranche ABS investors, whereas the majority of the sub notes were bought by emerging market investors. It was notable that neither of the rated tranches was wrapped.Tamweel Residential MBS and UAE CMBS Vehicle 1 paved the way for further securitisation in the UAE. Both deals were issued out of Dubai in June this year. Tamweel Residential MBS was of particular significance as it was the first public Islamic RMBS from Dubai, originated by Tamweel, one of th

Over the past decade, China has increased its presence in Africa. In order to secure oil, uranium, diamonds and other natural resources, the Chinese government has enticed African counterparts with investment, loans and trade deals.Trade between the continents – dominated by oil, metals and minerals and arms sales from China – increased from US$10bn in 2000 to US$50bn in 2006. Chinese President Hu Jintau says China intends to double direct investment on the continent to US$20bn over the next three years. The People’s Republic has become Africa’s third biggest trading partner behind the United States and France, with 670 state-owned companies having a base there.Simultaneously, multilateral agencies including the World Bank are also increasing activity. The World Bank Group increased financial assistance to sub-Saharan Africa by US$1.8bn to US$7.5bn in the 2007 financial year.China’s increased involvement is coming under ever-growing scrutiny. Critics say its willingness to deal with Africa’s most corrupt regimes undermines efforts by multilaterals to improve transparency and governance.Conversely, China’s defenders say such criticism derives from jealousy at its success in building relationships where the West failed. Perhaps with some justification, the PRC resents the accusation it is a “Johnny-come-lately” in African affairs. During the decolonisation process that began in the 1960s, China was thought an ally against Western imperialists, sending doctors and agricultural engineers to work in former colonies.But there is no doubt the crux of the relationship has shifted from ideological solidarity. Where it once sent doctors, China now distributes cheap manufacturing goods. And where it once propagated Maoism, now it is much more interested in buying oil – some 60% and 35% of Sudanese and Angolan oil exports are heading east, for example – and other raw materials.“In terms of its geopolitical importance, Africa is a long way back from other regions,” said David Kang, professor of government at Dartmouth College. “China is making friends in order to access raw materials. It is doing the same in Latin America. This differs significantly from the role it has in East Asia where I think China is trying to build diplomatic relationships and not be seen as a destabilising threat.”This changing relationship raises key questions. Is China continuing the tradition of foreign imperialists plundering Africa or, given turmoil in the Middle East and rising prices from former Soviet Bloc producers, adopting a logical approach to securing the resources it needs for growth? Do deals such as the US$2bn aid package for infrastructure in Angola in exchange for future oil production encroach on the space usually filled by the World Bank and other agencies?Harry Broadman, economic advisor for Africa at the World Bank, says from a financial standpoint, Africa desperately needs investment. “Non-traditional development partners, including China and India, are welcome because the need for infrastructure in Sub-Saharan Africa is so great the World Bank, African Development Bank and other agencies could never fill this ‘infrastructure gap’ alone,” he said. “Frankly, it’s hard to argue against additional resources coming in to help build infrastructure in Africa. Furthermore, other countries traditionally active on the continent do not and probably should not have a monopoly on doing business there.”Broadman suggests comparing the World Bank’s role to that of China is not comparing like with like. He argues it is more relevant to look at how China’s policy differs to other bilateral donors.But Kang believes the scrutiny it is under reveals much about how China is now viewed by Western competitors. “Exploitation of Africa is clearly going on, but this is hardly new and not limited to Chinese actions,” he said. “China is doing what all resource-requiring countries do – striking deals for goods that are in its interests to acquire. If you look at US and Eu

South Africa's economy dwarfs that of every other country in Africa, representing one quarter of the continent's GDP. However, apartheid shackled it, barring the majority of the population from productive jobs and it has taken South Africa nearly fifteen years to start to turn around. "The South African economy has pretty much transformed itself in recent years, with interest rates at their lowest for 30 years and growth close to 5%, with 6% feasible," says Razia Khan, regional head of economics, Africa at Standard Chartered.This economic growth has meant a similar increase in credit. "In the past two years, non-government paper listed on the Bond Exchange of South Africa has risen from R166bn [US$23.8bn] to R328bn, and by end-2007 we project that figure to be near R400bn," said Kate Rushton a corporate analyst with ABSA. "Non-government debt will soon make up about half of all listed debt – from just 30% three years ago. Liquidity, however, remains problematic with less than 10%, and often less than 5%, of amounts in issue trading monthly."The most liquid funding source for corporates in South Africa is the stock market. "One reason for this is that domestic pension funds are constrained from investing overseas," said Jeff Gable, head of research at ABSA Capital. "Further, strong growth in equities attracted R66bn of net foreign inflows last year. Through early September, net inflows have reached R64bn already in 2007.”In comparison, corporate borrowing has not been particularly strong – partly as a function of the interest rate environment and partly thanks to sturdy corporate balance sheets – something that could change as investment grows in infrastructure and in manufacturing capacity.But South Africa has seen significant securitisation issuance. Rushton pointed out that the removal of some regulatory constraints and changes in securitisation regulations have opened up this market.But that is not the only reason for its relative blossoming. “South Africa has not seen the same kind of risky lending in mortgages, whether residential or commercial, or in corporate loans as much of the rest of the world has. This has – so far – helped its securitisation market escape the turmoil elsewhere in the global markets,” Gable said.As a demonstration of this different dynamic, on 20 August there was a R3.3bn of home loan securitisations completed at a spread of about 50bp over Jibar.Exchange controls have sheltered South Africa from the global credit crunch, as investors are able to take limited exposure to external markets. That should not suggest, however, that the shocks have not been felt. "Negative sentiment has impacted spreads on locally placed rand-denominated issues, the bulk of which have priced wide of expectations," said Rushton. "In addition, any euro or dollar offshore fundraising programmes are being postponed."Analysts also believe that global inflationary pressures could dent growth in South Africa, particularly as developing countries are proportionately more exposed to rising food and fuel costs.On the plus side, the South African government is making major infrastructure investments in the run-up to the World Cup in 2010. "The electricity and transport systems parastatals are slated to invest Rd150bn and Rd78bn over the next few years, respectively," says Gable. Improvement in the country's infrastructure is expected not only to appeal to tourists keen on football, but to make South Africa's manufacturing and commodities industries much more competitive. So acute is the need for investment in productive capacity, as well as in roads and ports, that even mining for precious metals such as gold and platinum, where one would expect South Africa to prosper, has not profited from the current global boom in the way that it might have, Gable pointed out.Whatever the current challenges, the analysts are upbeat on the future. "We are bullish on economic growth in Africa generally and believe that South African manufacturing

The entry of independent Russian bank Renaissance Capital into sub-Saharan Africa this year alerted many to a region that had not always been considered worthwhile for equity investment.Most bankers maintained that the emerging market focus in EMEA would remain Russia and the new markets to appear would be other members of the Commonwealth of Independent States, such as Ukraine and Georgia. Yet the move by Renaissance has coincided with a trickle of deals that has found strong appetite from international accounts and shown investor appetite for more.Experienced hands are looking for the early stage opportunities they saw in Russia during 2004–2005, and recent deals suggest they see this in sub-Saharan Africa."There is an investor search for the next opportunity," said a head of emerging market ECM at one US bank. "Sub-Saharan Africa has growth potential but there are only a few markets, so while it is an opportunity I doubt whether there can be a flood of issues."Yet there has already been a clutch of deals, dominated by the banking sector, and those closer to the market suggest the growth could be more rapid than some expect."The market has changed dramatically since last year," said Yvonne Ike, JPMorgan's senior country officer for West Africa. "Just 12 months ago the international equity deal was almost non-existent. This year, JPMorgan has so far completed three equity transactions, adding that to the other deals which have been completed and Nigerian issuers have so far raised in excess of US$3bn and there are more deals on the way."JPMorgan began the flow of Nigerian deals with the IPO of Dangote Sugar Refinery on the Nigerian Stock Exchange in January 2007. The stock was all placed locally, but the placing size of US$450m suggested deals were now sufficiently sizable to open the market to international investors.Dangote was followed up by the capital increase by United Bank of Africa in April in the first significant test of international interest. JPMorgan and Renaissance Capital found demand was stronger than some had expected with the result that they increased the international offer from US$200m to US$300m. Total demand in the book for the unlisted GDRs was US$600m.Nigerian banks are growing quickly in line with the growth in the economy that their loans are supporting. Regulators are also gradually increasing the regulatory demands on banks and their capital adequacy leading to the need to raise equity. Following on from UBA has been Access Bank, which raised US$300m from its offer of unlisted GDRs in July through JPMorgan and Renaissance and a US$750m GDR offer from Guaranty Trust Bank, also in July. GTBank was a more developed company and listed its GDRs on the LSE in a deal led by JPMorgan and Morgan Stanley. Notably GTBank was the first African bank to list in London, including South Africa. Yet there are prospects outside of the banking sector with a cement company expected to come to market by the end of the year.The success of this initial flow of deals led to a hotly contested process for the award of the IPO mandate for Kenyan mobile operator Safaricom. Many international banks yet to establish a presence in Nigeria or Kenya were well represented among the syndicates responding to the RFP issued in July.Citi, Credit Suisse, Goldman Sachs, Morgan Stanley and Renaissance Capital all teamed up with local brokers and were successful in making it through the first round of assessment by the government. Several other international banks responded to the RFP but did not make it through the first stage.Banks were attracted to the deal for several reasons. The first was the comparative ease of getting the deal done as Vodafone has been a strategic investor since 2000 and therefore accounting and corporate governance was already good. Also the deal is expected to total US$500m so would immediately give lead banks a high profile in the region.The level of competition was underlined by rumoured bids on fees as low as

Weather risk management consulting now has a formal role in World Bank activity, but the complexity of the initiative makes its future as unpredictable as the weather itself. Interest in finding a role for weather risk management in global social protection and climate change projects continues to grow, however.The idea that weather risk management can be used as part of aid organisation-led initiatives in developing countries dates back to the 1980s.It was not until 1999, when Rodney Lester led the first World Bank feasibility study on weather index based insurance in developing countries, that testing of the idea began in earnest.The project involved using weather risk management techniques to address developing countries’ weather-linked volatility in agricultural production and income.“The challenge for us is drawing lessons from the pilots. Each pilot is unique and thus you have to look at the pilots on a case-by-case basis," said Olivier Mahul, programme manager for insurance for the poor at World Bank headquarters in Washington.In the first pilot, the International Finance Corporation (IFC), the private sector arm of the World Bank, planned to use weather derivatives as a risk management tool for developing economies. The pilot involved helping to set up a joint-venture insurance company that would act as an intermediary between local agricultural banks or insurers and end-users and the international entities interested in taking on weather risk.Morocco was selected as the testing ground for the idea. At the time, the correlation between Morocco’s GDP growth and rainfall was close to 60%, making it one of the most weather-exposed countries in the world. The population depends on rain, as Morocco is a cereal-dependent country. The index that the contracts would have been based on was intended to represent rainfall over a set period and to set thresholds linked to the growing season of specific goods, such as sunflowers.Under the plan, which foundered not long after it was launched in 2001, local bank and insurance companies in Morocco would have offered affordable index-based weather insurance to farmers and other weather-exposed parties in select regions. The new joint-venture insurance company would have pooled the weather exposure and placed most of it in the open market, while a portion of the exposure would have been retained by the IFC.The project’s short lifespan was due in part to the failure of its international joint venture partner, Aquila, which was dragged down in the wake of Enron’s collapse. On top of this, the Moroccan government proved to be unwilling to push the idea. Subsidies can be hard to compete against, those who watched the pilot plan unravel said.Other factors also pose challenges when introducing projects to provide farmers in developing economies with direct access to weather risk management tools.The absence of the technical capacity to develop weather risk products or even a lack of a local market concept of weather or crop insurance, can create technical problems that hinder a broad roll-out of weather risk-based programmes by the World Bank.Operational obstacles to delivering a programme to farmers present another issue. A main reason why crop insurance can be so expensive in some developing countries is because is can be hard to deliver.Legal challenges have also emerged as a hurdle. "In terms of the regulatory and legal framework, the local insurance law usually does not allow for index-based insurance, or more precisely does not mention whether index-based financial products are considered as insurance products," Mahul said.For the World Bank, the vision driving its pilots is to popularise the concept of weather risk management, rather than to set up large programmes within countries.In theory, a programme offering direct access to weather risk management tools could replace or compete with the World Bank’s business of delivering emergency loans, one official noted.The World Bank dismiss