April 2017 | bloombergbriefs.com

Emerging MarketsSaudi Arabia Reforms to Attract Foreign Capital

Russian Sanctions Regime May Wobble, Unlikely to Break

Mexico’s AMLO Wants to Rethink Energy Reform

Quicktake: Malaysia’s 1MDB Muddle Explained

ALSO INSIDE

Contents01 SPOTLIGHT: Mexico’s Surge

02 SAUDI ARABIA: Aramco IPO

04 MIDEAST: Loomis Sayles’ Eddy Sternberg

05 MIDEAST: IPO Hot Spots

06 SAUDI ARABIA: Governance

07 SAUDI ARABIA: Terminal Guide to Pricing Bonds

08 RUSSIA: Sanctions

10 TURKEY: Turkven Private Equity’s Seymur Tari

11 BRAZIL: The Return of Lula

12 MEXICO: Amlo’s Energy Reform

13 AFRICA: BRVM

14 CHINA: Zheshang Bank

15 MALAYSIA: QuickTake

16 CALENDAR: Upcoming Conferences

To contact the editor responsibleJames Battyjbatty4@bloomberg.net+44-20-3525-9244

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EMERGING MARKETS SPOTLIGHT

By JAMES CROMBIE

Trump Rebound: Mexico Leads Surprise Surge in First Quarter

EM Equities on a Tear, Tripling S&P 500 GainPercent change, normalized at 1/31/17

Source: Bloomberg

Source: Bloomberg

MSCI EMS&P 500MSCI EM

EMEA

12%

6%

0

11%

7%

3%

–1%

1/3 3/21

Peso Was Top Performer in 1QSpot return, 1/3–3/27(%)

MXN ZAR KRW PLN RUB TWD INR HUF PEN BGN CZK BRL SGD THB RON COP ARP MYR CNY IDR CLP HKD TRY PHP

AFTER YEARS IN the wilderness, emerging markets appeared to be back in the first quarter. If that weren’t counter-intuitive enough, given tighter monetary policy and growing protectionist noise from the U.S., the surprise outperformer was Mexico. The peso, which fell 12 percent in the week Donald Trump was elected, was up more than 11 percent in the year to March 27. The rebound is unlikely to last, according to analysts polled by Bloomberg. The market consensus as of March 27 was that the Mexican peso would be among the worst-performing major currencies through year end, with an expected devaluation of about 7 percent.

1

Saudi Arabia first struck black gold in March of 1938 at the Dammam Number 7 well in the desert near the state oil com-pany’s present-day headquarters on the Persian Gulf.

Now the Kingdom is looking for a new gusher eight decades after that first dis-covery — this time by wooing foreign investors to buy into state-owned Saudi Arabian Oil Co. The king’s influential son, Deputy Crown Prince Mohammed bin Salman, is championing a sale by the end of next year of as much as 5 percent of the company known as Saudi Aramco, which he values at more than $2 trillion.

Saudi Arabia is courting investors as the world’s biggest oil exporter seeks to diversify the economy by building new industries to create jobs. Selling part of Aramco will underpin the over-haul. To tap those funds, the Kingdom needs to show it can do more than just sell crude.

“Saudi Arabia is all about oil — it’s still the lifeblood of the country,’’ said Olivier Jakob, managing director of Zug, Switzerland-based energy consultant Petromatrix GmbH. “The Aramco sale has to be a success’’ if the Kingdom is going to raise the cash needed to diver-sify the economy, Jakob said. “It’s about the credibility of the country.’’

The biggest questions surrounding the region’s most anticipated initial public offering are how much Aramco is worth

Aramco Looks for Cash, 80 Years After First Saudi Oil Gusher

ARAMCO

and how much oil it has. The country is currently conducting its first indepen-dent audit of oil reserves, which it quan-tifies at about 260 billion barrels. Aramco is still sorting out where and when to list its shares, and details like these will determine whether investors flock or flee when the company hits the market.

If Aramco were to achieve the crown prince’s target for the IPO, it would be the world’s biggest company by far — about three times the size of Apple Inc. and six times larger than Exxon Mobil Corp. But some analysts reckon that Aramco won’t raise a fifth of what the prince wants. A 5 percent sale of a $2 trillion company would bring in about $100 billion, dwarfing the $25 billion snared by Chinese Internet retailer Alibaba in the world’s largest initial public offering in 2014.

Urgent reformThe need to reform the economy gained urgency when Brent plunged from $100 a barrel on average from 2010 through 2014 to less than half that amount. Saudi Arabia isn’t alone among Middle Eastern oil producers in cutting gov-ernment spending by reducing subsi-dies and delaying projects. It’s running

deficits and drawing down financial reserves even as it leads the Organization of Petroleum Exporting Countries in cutting crude output to curb a global glut and shore up prices.

The government targets a bal-anced budget by 2020, and it forecasts a deficit for this year of 7.7 percent of gross domestic product, down from 11.5 percent in 2016. The International Monetary Fund lowered its Saudi growth forecast to 0.4 percent from 2 percent in January. In the meantime, the Kingdom has burned through about $222 billion in financial reserves since August 2014, when oil income swelled its cash pile to a record $746 billion.

Long-term returnIn a turbulent market, Aramco needs to be transparent to ensure investors of earning long-term returns. That means sharing three key pieces of informa-tion, said Neil Beveridge, a Hong Kong-based analyst covering oil and natural gas companies at Sanford C. Bernstein & Co. Aramco will need to report its financial performance, disclose the size of its oil and gas reserves and provide a picture of how much investors can expect for their money.

Saudi Arabia Foreign Assets

$516b

$51/bBrent

2007 2017

Oil Prices Deflate Reserves Pile

Source: Saudi Arabia Monetary Agency, Bloomberg; Note: Prices as of March 15

$100b$25b

$20.4b$19.7b

$18.1b$17.4b

$16.1b$16b$16b

$15.3b

Saudi Aramco Plans World’s Biggest IPOEstimates for share sale range up to $100 billion vs Alibaba’s record $25 billion offer

Saudi Aramco*Alibaba Group (2014)

AIA Group (2010)

Visa (2010)

General Motors (2010)

Enel SpA (1999)

ICBC (2006)

NTT Docomo (1998)

Facebook (2012)

NTT (1987)

Source: Bloomberg; *High valuation based on Deputy Crown Prince Mohammed bin Salman’s estimate

By ANTHONY DIPAOLA

More transparency on reserves and cashflow, as well as the recently announced reduction in income tax, are key to attract foreign investors to the IPO of Saudi Arabian Oil Co., according to analysts and investors. The deal is likely to be pushed ahead with the backing of Deputy Crown Prince Mohammed bin Salman, though the government may struggle to secure the $2 trillion valuation he proposed.

2

The company has said it will release its 2017 financial results, includ-ing the audited reserve data, before the IPO. The independent review of Saudi oil reserves “is very reassuring,” Energy Minister Khalid Al-Falih said in February. The share sale could come in the second half of next year, Aramco Chief Executive Officer Amin Nasser said in January.

Stock exchanges worldwide are vying for the honor of hosting the Aramco IPO. Bourses in Hong Kong, Singapore and Tokyo have all courted the Saudis, and King Salman bin Abdulaziz visited Asia in February and March. China offered to buy a stake in Aramco through its sovereign investment fund and largest energy company, people familiar with the situation said in March. Singapore made a similar offer, people familiar with those talks said in February. Both groups of people asked not to be identified because the talks are private, and companies involved declined to comment.

While an Asian listing is an option, Aramco could also sell shares in New York or London along with the main listing in Riyadh, where the Saudi Tadawul exchange is located, Aramco’s Nasser told Bloomberg in January.

Tax concernsWithout more clarity, investors will have scant information on which to base their valuations of the company. Aramco could be worth as little as $400 billion, Wood MacKenzie Ltd. told clients at a briefing in February, according to two people who attended that event. Part of the reason the consultant valued the company at so much less than the Saudi government has to do with the high tax burden on its earnings, according to these people. Wood MacKenzie declined to comment at the time.

“Our most likely scenario is that the IPO will happen, but proceeds will come below the government’s expec-tations,’’ Raphaële Auberty, an analyst at Fitch Group’s BMI Research, said on March 14. “The level of transparency over reserves and management will be crucial to generate sufficient investor interest, and therefore boost the valua-tion of the company.’’

Taxation and government involve-ment in corporate decision-making are among reasons why state oil companies usually trade at a discount to their pri-vately owned peers, Beveridge said. “The big question is how much Aramco will be taxed,’’ he said.

Aramco currently pays a 20 percent royalty on its revenue plus an 85 percent

tax on income. Under plans set out on March 27, the company’s income tax rate will be cut to 50 percent retroactive from Jan. 1 this year.

The reduction meets one of the requirements set out by analysts for the IPO. “The Saudi government needs to reduce the rate to bring it more in line with other listed oil and gas companies,” said Mohamad Al Hajj, equity strategist at EFG-Hermes Holding, in early March. “A range of 40 to 50 percent would be more in line with the typical tax rates applied on global oil and gas producers.”

While Aramco will derive most of its value from oil, Energy Minister Al-Falih says the company he led before joining government is ploughing cash into becoming one of the largest refiners and chemical makers and also exploring for natural gas to power the country’s indus-trial growth.

“The benefit of having oil and gas has long been considered a birth right to many Saudis,” said Peter Salisbury, a senior research fellow at the Royal Institute of International Affairs, also known as Chatham House. “The Saudi leadership has signaled they’re willing to make radical changes. Prince Mohammed has made a series of strategic bets, and each of them has to come through to make his plan work.”

① 1973 Yom Kippur War

② 1973 Saudi govern-ment buys a 25% interest in Aramco

③ 1974 Saudi gov-ernment increases interest to 60%

④ 1980 Saudi gov-ernment completes

Aramco purchase, 100% owner

⑤ 1988 Saudi Arabian Oil Company established

⑥ 1990/91 Gulf War

⑦ 1993 Saudi Aramco merges with state refiner Samarec

1965 2015

The Road to Aramco IPOSaudi oil output and key dates in Aramco’s history

Sources: Saudi Aramco, BP Statistical Review of World Energy

2.2mb/d

12mb/d

PH

OT

O: S

IMO

N D

AW

SO

N/B

LOO

MB

ER

G

Aramco plans to list on the Tadawul exchange and an unspecified number of other bourses

①②③

④

⑤

⑥

⑦

3

Q: Why consider Middle East credits?A: The Gulf countries have two things to sell you: oil and gas. The price of oil is no longer $20 or $30, it is closer to $50. Most people expect it to be somewhere in a range

of $50 and $65. That in itself, along with some additional adjustments in spending habits at the government level, means they will be very good credits, they will be able to pay back and that makes it attractive. Most of them have very large sovereign wealth funds, so there is some-thing behind all of these countries. They have accumulated savings and their debt is still very low compared to most other EM countries.

Q: Where are you invested?A: Saudi Arabia, Kuwait, Qatar. We had Oman issue bonds recently and it had substantial interest from the investor community. But I thought, for a dedi-cated EM investor, it had little value left.

Q: Who are you expecting to come to the market this year?A: Saudi Arabia is probably going to come again. I don’t know about Qatar. I’m not sure if the Gulf states are going to be coming or not now that oil has recovered.

Q: What’s your Middle East strategy?A: We look at them from two different points of view: the firm and the ded-icated emerging markets. At the firm level these credits are added value as they are not part of any bench-mark. For an emerging market inves-tor these countries may make it into the

Ports, Utilities, Telcos ‘Attractive’: Loomis

Q&A

James Batty interviewed Eddy Sternberg, vice-president and co-portfolio manager, EM Debt, Loomis Sayles & Company on March 17. His comments have been edited and condensed for clarity.

benchmark like Oman did, but on the other hand they are not as yielding as other EMs in the rest of the world, so they have less attraction. From an EM perspective I don’t know if we would look at adding many more positions here unless they come at attractive valu-ations. From a firm perspective, I think there is still room, especially when oil prices dip below $50.

Q: Is sovereign debt in Gulf states a bet on oil prices?A: You know that they need the price of oil to go up to be able to sustain that debt and their lifestyle. So yes, it is a bet on oil but at the same time they sort of control the price of oil.

Q: What corporates are you interested in?A: There’s some that we’ve been invest-ing in for a while now. Some in Dubai, DP World is attractive. Some are quasi-sov-ereigns, so water and utility companies in Abu Dhabi like Taqa. The telephone company in Qatar, Ooredoo. And there are bonds in gas projects in Qatar, which are hard to find these days.

Q:What’s your overall take on EMs/frontiers?A: We’ve been bullish since the end of 2015 and thought that by the turn of the year, early in 2016, we would be seeing a lot of improvement. We were too early as we didn’t see improvement until mid-Feb-ruary of 2016, but ever since EM has been attractive. We still continue to be posi-tive, not as bullish because pricing has changed a lot, so whatever was very cheap at that time is less cheap these days. They’re not extreme, in terms of very rich or very expensive. But we con-tinue to see opportunities in Argentina, Brazil, India, Indonesia, and some pockets in Africa. For example, Egypt may be turning a corner, other countries are quite stable in Africa and yield attrac-tively, like Ivory Coast and Morocco. Each one with it’s own rating, Morocco has BBB- rating, so that makes it attractive.

Q: What credit are you excited about?A: Good corporates in perhaps smaller countries. For example, a couple of cor-porations in Guatamala: one a cement company, the other a beverage company. They are very successful ventures.

XX Likes DP World, Taqa and Ooredoo on the corporate side; Saudi Arabia, Kuwait, Qatar and Egypt on the sovereignXX Saudi Arabia likely to come to market this yearXX From an EM perspective, ‘not sure’ about adding more position unless they come at attractive valuations as there are better opportunities elsewhere

Lesson learned in your career Patience

Thing to know about investing in EM Things are seldom as they seem

Best advice Make sure you work with good people when you take a new position

Recommended book Animal Farm by George Orwell (great message, easy to read and short)

Best EM country to visit and why

Uruguay… for its people, the rule of law, their love for democ-racy and democratic values, low levels of corruption and, above all, the beauty of its beaches.

At a Glance

4

–1.5%–2.1%

–3.5%–3.9%

–5.3%

EgyptThis could be the year with the highest number of IPOs since 1998 in Egypt, and companies should raise a record amount through equity sales, said Egyptian Exchange Chairman Mohamed Omran.

About 10 companies should price new sales this year, Omran said during an event in Dubai in mid-March. The economy is expected to stabilize, partly because the government allowed the pound to float last year, a move that has increased the attractiveness of local stocks for foreign investors, he said.

Egypt’s stocks benchmark has advanced 3.3 percent this year, while those of Saudi Arabia, Abu Dhabi, Dubai, Oman and Qatar have retreated.

Saudi ArabiaAramco’s share sale is likely to happen in the second half of 2018, or even be slightly delayed, and is likely to achieve less than the $2 trillion valua-tion estimated by the government, Fitch Group’s BMI Research said in a note in mid-March.

In the meantime, authorities are speeding reforms to make the coun-try’s market more attractive to foreign investors, which currently account for only about 4 percent of holdings in local stocks. Initiatives include the start this year of the Nomu parallel market.

Saudi Arabian regulators have been contacted by more than one company from other Gulf Cooperation Council

As You Wait for Aramco, Here Are Other Middle East IPO Hot SpotsBy FILIPE PACHECO with assistance from MATTHEW MARTIN

countries seeking a cross listing in Riyadh by the end of this year, said Yarub Awadh Albadi, head of initial public offerings at the Kingdom’s Capital Market Authority. He estimates “a handful of IPOs” on the Saudi bourse’s main board. The billionaire Olayan family, Credit Suisse Group AG’s largest shareholder, is considering selling shares in some local assets, a spokesman for the family’s holding company said in mid-March. Olayan Financing manages more than 40 companies in the Middle East, including the regional Burger King fran-chise, according to its website.

KuwaitKuwait plans to list a power and water company this year, as part of plans to overhaul its economy following the slump in oil prices. The volume of trading in the local stock market has surged over the first three months of 2017, helped by a series of events that encouraged equity investors.

These steps include reforms in trading systems and rules, an ambitious

Saudi Arabian Oil Co.’s plans for a giant initial public offering are top of mind for Middle East investors — but they may have to wait at least until late 2018 to snap up the shares. While they prepare for Aramco, regional money managers are taking stock of what else might come to market this year. After a slow 2016, when IPOs in the Middle East and Africa fell 64 percent to $1.7 billion, according to data compiled by Bloomberg, activity in the region should pick up this year, Jaap Meijer, head of equity research of Arqaam Capital Ltd. in Dubai, said in March. “The IPO pipeline in Saudi Arabia, in par-ticular, looks strong with some interesting names listing on the Nomu exchange,” which focuses on small and mid-size enterprises, Meijer said. “In Egypt, the government is looking to embark on a large privatization process, starting with the banking sector, with Banque du Caire and the Arab African International Bank said to be the first candidates.” Here are some Middle East markets to watch for IPOs in 2017:

spending plan by the government and the successful sale in March of $8 billion in dollar bonds at a lower cost than neighboring countries. “There are a few companies to be listed soon,” said  Samar Santini, manager for the equities institutional trading desk at Global Investment House in Kuwait City. “We expect IPOs coming from industries such as consumer services, banks and telecommunications.”

MIDDLE EAST

Dubai

Oman

Abu Dhabi

Qatar

Saudi Arabia

Egypt 3.3%

Outperforming Regional PeersEgypt’s main stock gauge posted gains since the beginning of the year

Source: Bloomberg; Note: Data as of March 15

$1.7bAmount of IPO sales in the Middle East and Africa

in 2016, down 64 percent from a year earlier.

5

55.648.6

17.873.4

53.155.6

21.460.2

63.154.7

27.64

7459.1

n/a69.871.2

8.3

RankingA Bloomberg Intelligence analysis finds that credit ratings show a strong cor-relation with institutional governance. Rule of law, corruption and political stability relate directly to a country’s ability to effectively lead and foster eco-nomic growth.

Most Middle Eastern nations rank in the top two quintiles globally on insti-tutional governance. Israel (21), Qatar (43) and United Arab Emirates (52) rank in the top quartile globally on 18 equal-weight governance indicators, based on Bloomberg’s ESG Country Risk tool. Saudi Arabia slipped to its current ranking of 77 from 69 in 2012.

Corporate GovernanceCompanies that embrace good gover-nance practices such as board indepen-dence policies and minority investor protections may be viewed as lower risk.

One thing that may give investors pause about Saudi Arabian companies is their low proportion of independent directors and high shareholder concen-tration, including ownership by the government.

Saudi Foreign Investment Goals May Need New Approach on GovernanceBy GREGORY ELDERS, Bloomberg Intelligence Analyst, and SHAHEEN CONTRACTOR, Bloomberg Intelligence Associate

GOVERNANCE

Saudi Arabia, which has seen its sovereign credit rating decline with lower oil prices, may need to take more steps to improve its institutional governance to increase its attractiveness to foreign investors. The Kingdom, which held its first international bond sale in 2016, is looking to attract foreign capital and shift the country away from its oil dependence. Fitch Ratings Inc. lowered its long-term foreign currency rating to A+ on March 22, following a downgrade last year.

Saudi Arabia Ranks Relatively Low on Governance Compared to 200 NationsBloomberg ESG Country Risk Tool measures governance on the percentile ranking of 18 indicators

Only two companies tracked by Bloomberg, Riyad Bank and Alinma Bank, reported a majority independent board at the end of the latest fiscal year.

A majority independent board, par-ticularly at companies with a dominant investor, may help protect minority shareholder interests. This is common in the Middle East. The median own-ership by the top holder is about 34 percent, across 162 companies in the Middle East whose governance data is tracked by Bloomberg.

In U.S. and European companies, the largest shareholder typically owns about 10 percent. Minority shareholders may face added risks without strong corpo-rate-governance controls.

Source: S&P, Fitch, Moody’s. Bloomberg Intelligence; Note: Ratings are an average of those from S&P, Fitch and Moody’s

Source: Bloomberg ESG Country Risk Tool

Business Freedom

Ease of Doing Business Rank (per persons)

Investment Freedom

Labor Freedom

Property Rights Freedom

Regulatory Quality

Starting a Business Rank

Government Effectiveness

Rule of Law

EIU Political Risk

Political Stability and Absence of Violence/Terrorism

Voice and Accountability

Total tax rate (% of commercial profits)

Control of Corruption

Value lost due to electrical outages (% of sales)

Internet Users (per 100 people)

Patent Applications

R&D expenditure (% of GDP)

Governance Score Vs. Credit RatingAnalysis finds a correlation between the two

Kuwait

Investment Grade

UAE Qatar

IsraelSaudi Arabia

R2 = 48%

Oman

Turkey

JordanBahrainEgypt

Lebanon

Iraq

AAA

AA+

AA-

A

BBB+

BBB-

BB

B+

B-

CCC

10 80

A+Saudi Arabia’s long-term foreign currency rating as of March 22, according to Fitch

Ratings Inc., down from a previous AA- rating

6

7

Saudi Arabia may be able to issue dollar debt at tighter spreads to U.S. Treasuries than last year, as stable oil prices and the successful October sale have improved investor sentiment toward the Kingdom’s debt, even with rising U.S. rates and a downgrade to A+ from AA- by Fitch Ratings.

The government plans to issue as much as $15 billion of dollar debt in 2017, as well as $18.5 billion in Saudi riyals on the local market. While the local currency debt plans are being delayed, the dollar bonds look imminent.

Use Bloomberg to gauge what price a country may issue at.

X Type “saudi arabia bond” in the command line and select KSA Govt - Saudi Government International Bond (Multiple Matches). 

X Load the 2.375 percent coupon note that is due on 10/26/2021 by click-ing on it. 

X Type “new issue analytics” in the command line and select NIA - New Issue Analytics from autocomplete.

Saudi Spreads Show No Time Like the Present for Debt SaleBy EBRU BOYSAN, Bloomberg LP

TERMINAL GUIDE TO PRICING BONDS

This function shows possible pricing on a range of tenors if Saudi Arabia were to come to market. The curve is calculated using the Bloomberg Valuation Service (BVAL), which collates data on already issued bonds.

On the NIA screen, the table above the chart shows that the 5-, 10- and 30-year bonds, the tenors that Saudi Arabia has issued most recently, were priced at 83, 127 and 198 basis points over U.S. Treasuries, as of March 23.

NIA also allows users to compare bonds from the same issuer. Click on the gray All Issuer Bonds tab in the middle of the screen.

The table below shows that spreads on the secondary market as of March 23 were tighter than when the bonds were issued. In this study we are looking at the I-spread (the interpolated spread to U.S. Treasuries). 

OPEC’s decision to cut output to boost oil prices last November, as well as the demand for the dollar debt shown in last October’s sale, are both possible reasons for the spread tightening.

Saudi Arabia raised $17.5 billion in the October issuance. The 5-, 10- and 30-year bonds offered attractive yields relative to Saudi Arabia’s credit market peers. Bloomberg’s comparative bond function shows the same situation in the current market.

X Select the KSA 3 1/4 10/26/26 secu-rity in the list. This is the 10-year bond issued in October 2016. 

X Then, type “comparable” in the command line and choose COMB - Comparable Analysis from autocom-plete. This allows users to compare liquid bonds with similar credit, matu-rity and sector characteristics.

X Choose I-spread in the drop-down box in the middle of the screen. Saudi’s 10-year note gives a wider I-spread than the same maturities from comparable issuers Qatar and Israel.

Functions for the Market stories are written by

Bloomberg LP employees who may be involved

in the selling of the Bloomberg Professional

Service and then edited by the News Department.

To suggest ideas or provide feedback, contact

ffmeditors@bloomberg.net or this story’s editor:

James Batty at jbatty4@bloomberg.net

Bond Coupon Maturity I-Spread Issue Spread

Saudi International Bond 2.375 10/26/21 83 135

Saudi International Bond 3.25 10/26/26 127 165

Saudi International Bond 4.5 10/26/46 198 210

Bond Coupon Maturity I-Spread

State of Qatar 9.75 6/15/30 155

Saudi International Bond 3.25 10/26/26 130State of Israel 7.25 12/15/28 124

State of Qatar 3.25 6/2/26 107

Israel 2.875 3/16/26 85

How Saudi Arabia’s Bonds Compare (as of March 23)

How Saudi Arabia’s Bonds Compare (as of March 23)

Source: Bloomberg

Taking a Gauge of What Price Saudi Arabia’s Debt May Issue At

1Y 30Y

1.88%

4.64%

Source: Bloomberg

Brief ReviewIt’s been three years since the U.S. and EU announced the first layer of restric-tions against Russia over the destabi-lization of Ukraine and annexation of Crimea. Throughout 2014, travel bans and asset freezes against individuals and companies were expanded to sanc-tions targeting Russia’s energy, financial and defense sectors. Countries including Canada, Japan and Switzerland adopted similar measures.

Sanctions Regime May Wobble, Unlikely to BreakBy SCOTT JOHNSON, Bloomberg Intelligence Economist

RUSSIA

International sanctions imposed on Russia look set to survive the year, unless the conflict in eastern Ukraine, which isn’t encouraging, changes course. Punishing Russian President Vladimir Putin costs the U.S. little, and a rapprochement floated by the Trump administration could be politically toxic for months to come. In Europe, two-way trade restrictions have proved painful and cracks are forming in the united front, but leaders remain committed to the toughest measures.

Timeline: Sanctions, Oil’s Plunge Pushed Russia Into Crisis Russia 5Y CDS Spread Brent Crude

Russia retaliated by denying entry to European officials and in August 2014 it imposed a ban on food products from the EU, U.S. and other countries.

Both sides have renewed mea-sures repeatedly. Most recently, the EU extended its travel bans and asset freezes to Sept. 15, having already rolled forward economic sanctions to July 31. The U.S. piled on additional restrictions in December over alleged hacking. Putin extended Russia’s

food embargo last summer until the end of 2017.

The CostFor Russia, sanctions were the prelude to a wider crisis. Oil prices plummeted in the second half of 2014, bringing the economy to a halt and driving a devalua-tion of the ruble. Countersanctions mag-nified the spike in inflation that followed.

While oil effects were bigger, sanc-tions buffeted the Russian economy as

Source: European Council, U.S. OFAC, Bloomberg News

2014 2017

3/6/2014

U.S. travel bans, asset

freezes

7/29/2014

EU economic sanctions

3/20/2015

EU aligns sanctions with Minsk

accords

3/21/2014

Crimea annexation

8/2014

Russia food ban

6/24/2016

Russia extends food

ban

7/16/2014

U.S. economic sanctions

9/5/2014

Minsk I ceasefire

9/15/2016

EU extends individual measures

2/15/2015

Minks II ceasefire

12/19/2016

EU extends sanctions

12/29/2016

New U.S. sanctions

over hacking

$107.78/b

165.17bps 165.93bps

$55.08/b

8

RUSSIA

Russia Focus Competes With Trump Domestic AgendaStory count: “Trump” and “Infrastructure” “Trump” and “Russia”

a result of restricted access to financial markets, trade disruptions and height-ened uncertainty. The International Monetary Fund in 2015 put the initial blow at 1–1.5 percent of GDP. If pro-longed, it saw a medium-term loss of up to 9 percent, as reduced capital accu-mulation and technological transfers weigh on productivity. Forecasters at the Russian Academy of Sciences saw a similar cumulative impact. Financial sanctions alone are believed to have cost 2.4 percent of GDP through 2017, versus 8.5 percent due to the plunge in oil prices, a separate study showed.

The U.S. and Russia had modest economic ties previously, so American losses are barely perceptible at an aggregate level. Still, targeted sanctions can have a concentrated impact and business groups campaigned against them.

Europe’s collateral damage is greater but hard to isolate. Russian trade would have collapsed anyway following the sharp decline in oil prices and there’s some evidence that some exporters found new markets for banned goods. Initial European Commission Estimates reportedly put the cost at 0.3–0.4 percent of GDP (40–50 billion euros) in 2014–15 — Russian economists saw 0.5 percent. France’s CEPII found global trade losses of $3.2 billion a month, with EU members bearing the brunt. Small numbers for the bloc could still have concentrated effects, according to a country breakdown from Austria’s WIFO.

Cracks in the CoalitionThat burden gives Europe more incen-tive to ease sanctions. This summer brings another deadline to extend them and another opportunity for any of 28 EU countries to exercise their power of veto.

So far, criticism from countries includ-ing Italy, Hungary and Greece has been just that, but looming elections could embolden opponents. In Germany,

Chancellor Angela Merkel and her main rival, Martin Schulz, have both champi-oned sanctions. Yet French presidential hopeful Marine Le Pen declared them “completely stupid,” and Emmanuel Macron has supported a rethink, while taking a harder line on Russia. Snap elec-tions in Italy could see the government there break ranks.

Still, a complete reversal would be tough to justify. EU leaders have linked a removal of sanctions to implementa-tion of the Minsk agreements, outlin-ing a ceasefire between Ukraine and pro-Russian separatists. With violence escalating and each side blaming the other for violations, that looks unlikely in the short term.

TrumpFor the U.S., the message has been mixed. President Donald Trump’s administration said it might consider lifting sanctions, perhaps as part of a deal on nuclear weapons or terror-ism. Yet UN Ambassador Nikki Haley said in February that U.S. restric-tions will remain in place until Russia returns control of Crimea to Ukraine, something it’s unlikely to do. And Congressional leaders have introduced

legislation to require their oversight of any sanctions relief. Some are pressing for tighter measures.

Politics favors the status quo. At his Feb. 16 news conference, Trump said “the false, horrible, fake reporting makes it much harder to make a deal with Russia,” referring to coverage of alleged collusion between the country and his election campaign. A move by the White House to ease sanctions on its own would be controversial, and Congress could still block it.

The OutlookSanctions might come down the old-fash-ioned way — by succeeding — but prob-ably not soon. Current posturing makes it more likely the conflict in Ukraine will keep simmering. Proponents of U.S. sanctions have the upper hand for now. Barring a breakthrough or electoral upset, Europe will probably stay united and extend restrictions into year-end. And with Russia’s economy recovering and a presidential election set for early 2018, Putin is unlikely to be forced into making the first move. An end to the vio-lence in Ukraine and an economic thaw may hinge on fresh negotiations, which could be months away.

Source: Bloomberg

06/01/2016 03/22/2017

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9

Q: What is your strategy?A: The big theme in emerging markets across the world has been the rising con-sumer. It you look at your credit card statement, all of the line items there are possible investments for us. We have invested in education, hospitals, pay-TV, home security, furniture, apparel and fast food businesses.

Between 2002 and 2014, our invest-ments performed well. But in the past two or three years, emerging markets went out of fashion. And commodity prices went down, oil went down, and for the first time we realized that we were selling a lot to the Middle East consumer, and that they were buying less.

There was also a lot of political turmoil in our region and that has affected tourism. It has affected Western fund flows and our politics. The last few years have been more difficult in that sense.

Q: You raised your last fund in 2012. How do you ride out the turmoil, given your investment horizon? A: It is a challenge. We invested at a healthy pace between 2012 and 2014. Starting in 2014, there was so much volatil-ity around the Turkish lira that company owners didn’t know how to price their companies. And, honestly, we didn’t know how to price them. We thought that valuations should come down. But there is a lag. Company owners take their time to decide to come down from their pedes-tals. So we haven’t been able to agree on pricing for almost the past two-and-a-half years. It wasn’t a conscious decision to wait, but that’s how it turned out.

Unfortunately for Turkey, in 2014, 2015 and 2016, we had election after election. But, after two or three years of holding

Look Beyond the Politics as Turkey ‘Upside is Bigger Than the Downside’: Turkven’s Tari

Q&A

their breath, many companies are coming to the market so there is a lot of deal flow. Because the Turkish lira is extremely depressed, it may be a good time to buy Turkish lira assets. Probably the upside is bigger than the downside.

Q: Have you made any investments in the past two-and-a-half years? A: No, we didn’t. We just couldn’t agree on the pricing.

Q: What does it mean for your 2012 fund? Has the investment period been extended? A: Yes, we did extend the investment period. Our investors have approved the extension, around and even after the coup attempt. So they have shown great solidarity.

Q: What do you think will happen in the next year? A: We hope to do three, four or even five deals over the next year. The deals we did prior to the downturn were on the basis of a more expensive lira exchange rate, so those have had a tougher time growing in hard currency value. If things revert to mean and the devaluation is closer to inflation, so we don’t lose because of the exchange rate, we should have healthy returns. Typically, even over the past three years, on average we have grown our companies 25 percent in local currency terms.

Q: What’s your outlook on Turkey?A: The good thing, the silver lining, is that most of our issues have been political rather than macro fundamentals. Turkey still has little debt, a young, large popu-lation, and we have good companies that

have high potential in the region. We also have very good managers. Politics has really gotten in the way. In a sense, it is easier because the problems are not to do with economic momentum.

Q: What concerns you most? A: Turkey is next to a very complicated region. If the conflict gets worse, if Iran goes on an adventurous path and clashes with the U.S. etc, if things turn sour, we will somehow be affected. We had to open our doors to 2.5 million Syrian refugees, which is a big burden. But it’s a noble cause. It has a huge social cost as well. We have to hope that the region stabilizes.

Q: Where are the biggest opportunities? A: The biggest opportunity is to buy companies at attractive multiples. With a weak lira, and if the political situa-tion cooperates, you could really get the benefit of selling at higher multiples and potentially a higher exchange rate further down the line.

Q: How do your investors feel about Turkey? A: They are very confused. They find it very difficult to understand. Most of them are in wait-and-see mode. Some of them have more global emerging markets portfolios and are more understanding because they can see interesting things happening around the world in emerging markets. They put things in perspective and they think ‘maybe it’s not so horrible.’

Many, many emerging markets could have ups and downs. But many Western markets are having huge discontinuities too. There is no shortage of volatility in the world.

Ainslie Chandler interviewed Seymur Tari, CEO and founder of Turkven Private Equity, on March 1 at the SuperReturn International conference in Berlin. His comments have been edited and condensed for clarity.

XX Market has been hit by political and currency volatility and low oil prices, which has reduced spending in neighboring Middle Eastern marketsXX Deal flow is returning to the Turkish market after years of stagnationXX Targeting up to five deals over the next year XX Turkven has assets under management of $2 billion

10

LUIZ INACIO LULA da Silva remains such a towering figure in Brazilian poli-tics that even his absence casts a shadow.

When President Michel Temer last week inaugurated a long-awaited irriga-tion project in Monteiro, a dusty town in Brazil’s arid northeast, much of the praise from locals and visiting dignitar-ies went to Lula for launching the much-needed infrastructure over a decade ago.

“I thank God for the works,” said Joao Bezerra, a grizzled 51-year old farmer. “But I also thank the man who started it: Lula.”

The 71-year old former metal worker, trade union leader and two-time pres-ident retains the devotion of many Brazilians, particularly in the north-east. Despite a devastating corruption scandal, much of which originated on his watch, and the catastrophic unraveling of the economy under his hand-picked successor, Dilma Rousseff, Lula is consid-ering a comeback. Facing no fewer than five separate criminal charges against him — three linked to Operation Carwash — the leftwing leader is still the most popular in opinion polls only 18 months ahead of the next presidential race.

“Lula is a phenomenon and always will be,” said Andre Cesar, an indepen-dent political analyst. “But the ongoing accusations and investigations weigh on him a lot.”

Brazil’s political establishment is not counting him out quite yet. Aloysio Nunes, the foreign minister and leading member of the Brazilian Social Democracy Party — Lula’s Workers’ Party (PT)’s traditional opponent — told Bloomberg that the former presi-dent clearly had a chance of returning to power.

“Lula is an idol,” he said. “He’s strong, popular.”

Lula’s LegacyTens of millions of Brazilians rose out of poverty on Lula’s watch and former U.S. President Barack Obama once called him the most popular politician on Earth. Not since the nationalist leader

Down But Not Out, Brazil’s Lula Mulls an Unlikely ReturnBy SAMY ADGHIRNI

BRAZIL

Getulio Vargas has a politician domi-nated Brazilian public life as has Lula, who ended his eight years in office with record-high approval ratings.

For Flavio Lucio Rodrigues Vieira, a sociologist and historian from the Federal University of Paraiba, the ex-president’s continued appeal to many in the north-east rests on his government’s investment in the region’s infrastructure and its poli-cies of social inclusion.

“They had the greatest impact in the northeast due to the fact the region has lower average incomes and salaries,” he said. As a son of the northeast himself, Lula’s rise from poverty to Brazil’s highest office remains a source of inspiration for many in the area, he added.

Monteiro voted for Rousseff. In the 2006 presidential election, over 83 percent voted Lula in for a second term of office, according to figures from Brazil’s top electoral court. Ahead of Temer’s arrival in the town last week, the local radio station pleaded with locals not to protest. But when the ceremony started, organizers had to turn up the music to drown out the demonstrators booing Temer and cheering Lula.

Over 50 million Brazilians live in the impoverished northeast, and many receive Bolsa Familia, the benefits program that expanded dramatically under the PT.

In Boqueirao, another sun-baked town in the interior of Paraiba state, residents complain about the lack of job opportu-nities and the Temer government’s plans to shake up the pension system and force Brazilians to retire later.

“If I don’t Work, how am I going to retire?” wondered Ilza Silva, a 40-year old mother of three who relies heavily on the Bolsa Familia program. “I would always vote for Lula and Dilma if I could.”

Rejection RatingsBut outside the region, Lula and the PT, are far less popular. In local elec-tions in October the party lost control of Sao Paulo along with 60 percent of the municipalities it won in the previous elections in 2012.

The former president also faces serious legal challenges to running again. If he loses just one of the cases against him he could be barred under Brazil’s ‘clean slate’ law that prohibits anyone convicted in an appeals court from standing for office, according to Eurasia Group.

Still, he has defied the odds before and may do so again in 2018. But this time around, some analysts believe that the former president himself may decide against another run.

Not so much for the legal questions, Cesar argues, “but for the possibility that Lula realizes he would ruin his image if he enters the race and loses”.

Luiz Inacio Lula da Silva

The former president has repeatedly stated his willingness to run again “if needed”. The recent death of his wife, Marisa Leticia, saw an outpouring of sympathy from his supporters. One of the speakers at her funeral described the former first lady, who also faced cor-ruption charges, as a “victim of perse-cution”. The widespread belief among Lula’s followers that the charges against him represent a political witch-hunt have strengthened his appeal in places like Monteiro.

“Only Lula cared about the poor,” Bezerra said. “I would vote for him again 200 times over if I could.”

Few of the town’s residents would dis-agree. In the last elections, 77 percent of P

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Mexico’s presidential frontrunner Andres Manuel Lopez Obrador insists Latin America’s second-biggest economy needs to revisit foreign investment in its energy sector as he pushes for a policy that will foster the expansion of the national industry.

“If we don’t review these reforms there’s no way out, there’s no viable Mexico,” Lopez Obrador said in an inter-view at Bloomberg headquarters in New York on March 14. “I’m convinced that if there’s not a regime change, there will not be a Mexico revival.”

A poll published by Mexico City newspaper El Financiero in February showed Lopez Obrador receiving 33 percent of voter support, followed by 27 percent for Margarita Zavala of the National Action Party and 20 percent for Miguel Angel Osorio Chong of current President Enrique Pena Nieto’s Institutional Revolutionary Party. Miguel Angel Mancera, Mexico’s City Mayor, received 10 percent backing in that poll, tied with independent politi-cian Jaime Rodriguez.

If he wins in the July 2018 elections Lopez Obrador plans to call a national referendum and seek to make changes to the laws accordingly. “There’s going to be a revision of the structural reforms

Mexico’s Amlo Wants to Rethink Energy Reform

MEXICO

XX Presidential frontrunner Andres Manuel Lopez Obrador says Mexico must review recent reformsXX Favors a redistribution of wealth, replacing gasoline imports

through democratic procedure,” he said, repeating that any decision will be without “authoritarian actions.”

The 63-year-old former Mexico City mayor, who’s known simply as Amlo to compatriots, faces a long road. If the proposal to revise Mexico’s energy reform is accepted by voters he would also need the green light from Congress, where Lopez Obrador most likely won’t have the majority.

Energy Reform Falls ShortMexico’s energy reform, Lopez Obrador said, was foisted on an uninformed public by President Pena Nieto and it failed to lower fuel and electricity bills as promised. “Ninety-nine percent of Mexicans don’t know what the reforms were about. We are not going to decree the cancellation of the reforms, but use a democratic way to reopen each of them,” Lopez Obrador said.

At the centerpiece of Lopez Obrador’s policy is a plan to build a new oil refinery that he said will help Mexico to reduce imports of gasoline from the U.S. that are costly for the consumer and for the industry. Lopez Obrador didn’t offer details on the location and cost on the new refinery.

If the energy reform goes under scru-tiny and the oil contracts are revised, Lopez Obrador risks creating uncer-tainty on future investments in one of nation’s most active economic sectors. He believes local and international inves-tors will give him a vote of confidence as the nation will have a better “rule of law” under a government focused in fighting corruption. “I think there’s a consensus in Mexico that things are not working as they should,” he said.

In December, Mexico awarded four blocks in a deep-water oil field in the Gulf of Mexico called the Perdido Basin to companies including Chevron Corp., Exxon Mobil Corp., Total SA and CNOOC Ltd. The auction was part of the law signed by Pena Nieto in 2013

that broke state-owned Pemex’s 75-year monopoly on the nation’s oil industry. As many as 600 oil and gas blocks will be offered by 2019.

Lopez Obrador believes local and international investors will give him a vote of confidence as the nation will have a better “rule of law” under a govern-ment focused on fighting corruption. “I think there’s a consensus in Mexico that things are not working as they should,” he said.

The energy laws required two-thirds support from Congress to change the constitution. “We’re going to proceed legally,” he said. “If the congress rejects it, that’s another issue. Only then it would be their responsibility.”

Surviving Without NaftaLopez Obrador believes he can “per-suade” President Donald Trump of the benefits of a relationship with Mexico. “We don’t want military cooperation, we want cooperation to develop [Mexico],” he said. “We urgently need to reactivate the economy, create jobs in the country, and strengthen the domestic market.”

Mexico can survive without Nafta, Lopez Obrador said, but “we need to review our relationship. With the U.S., protectionism is not an alternative.”

A Nafta renegotiation is not likely to be resolved in the next year, Lopez Obrador said, as things in Mexico and D.C. move slowly.

By JOSE ENRIQUE ARRIOJA AND JAMES CROMBIE

600Deepwater oil and gas blocks in Mexico

that will be offered via auction by 2019 fol-lowing the 2013 law that broke the coun-

try’s monopoly on the oil industry

Mexico’s presidential front-runner Andres Manuel Lopez Obrador of the left-wing political party National Regeneration Movement

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ON ABIDJAN’S AVENUE Joseph Anoma, amid the bustle of shoeshine men, fruit sellers displaying baskets of mangos and bananas, and mobile-phone vendors hustling for custom, a stock exchange is rising from the ashes.

The Bourse Regionale des Valeurs Mobilieres — a regional bourse covering eight Francophone countries — occupies a modest office block in the Ivory Coast’s commercial capital, dwarfed by its next-door neighbor, the 18-story headquarters of the African Development Bank. But just six years ago, the BRVM, as the exchange is known, was in limbo, having been temporarily relocated to the Malian capital Bamako after soldiers armed with AK-47 assault rifles invaded its headquar-ters amid post-election chaos in the West African nation.

Listings BoomSince its return to Abidjan, the bourse has grown from one to four floors, including a new trading room and a giant street-facing screen scrolling stock prices. It is in the midst of an unprec-edented listings boom, with six suc-cessful offerings since late 2014, and another 16 in the works, according to Chief Executive Officer Edoh Kossi Amenounve. And it is introducing ordi-nary people — teachers, clerks and government workers — to investing in capital markets.

When Coris Bank, Burkina Faso’s biggest lender, started a public offering last year, it planned to keep the sale open for two weeks. It had to close the book after five hours as investors swamped it with bids totaling seven times the target. In July, Societe Ivoirienne de Banque, the Ivory Coast unit of Morocco’s Attijariwafa Bank, received 13,000 bids in one day total-ing 55 billion CFA Francs ($91 million), twice what it looked for. In both cases, investors were mostly individuals and for half of them, it was the first time they ever bought shares in any company.

“We were expecting the IPO to go well, but we couldn’t imagine that it’d be

Amid Mango Sellers and Shoeshine Men, a Stock Market FlourishesBy OLIVIER MONNIER

AFRICA

such a success,” said Yacouba Sare, the director-general of Coris Bourse, which arranged the Coris Bank offering.

‘Near Riot’“Our offices were besieged, it was a near-riot situation,” Egue said in an interview. “We got more than 1,000 people in Abidjan for only one counter. Everyone wanted to buy shares because they were convinced it would close in one day.”

A daily stock-market television show and weekly training seminars organized by the BRVM, which attract up to 60 par-ticipants at a time, are helping stoke interest. The BRVM also partnered with mobile-phone companies including Orange SA and MTN Group Ltd. in four countries to send daily market news to investors via text messages. 

The service, called “Infos BRVM”, began two years ago in Ivory Coast, where it now has 50,000 subscrib-ers, according to the bourse. For about 300 CFA Francs ($0.48) a month, inves-tors receive three texts per day inform-ing them of stock prices. The exchange is setting up a smartphone application that’ll enable users to place orders from their mobiles.

“A change is taking place in the level of financial literacy,” said Youssouf Carius, who heads Pulsar Partners, an investment fund based in Abidjan.

Small Investors Jump inAmong small investors getting a taste for stocks was Eric Kouakou, 34, the head buyer for a private hospital in Abidjan.

“I like taking risks, so I immediately made arrangements and threw myself into it,” Kouakou said. In about a year, Kouakou bought shares in eight com-panies, including participating in three IPOs, and built a portfolio of about 2.5 million CFA francs ($4,090), money he would otherwise have left in the bank.

The BRVM trades securities of 43 companies in eight West African nations and is heavily weighted toward banks and telecommunications. The bourse’s market capitalization of about $16

billion places it sixth among Africa’s 13 major exchanges.

The number of securities trading accounts at BOA Capital Securities has doubled in the past two years to about 10,000, Egue said. Many of the new investors are part of the middle class but the base is wider — from wealthy individuals to students and shopkeep-ers investing amounts from as little as 50,000 francs ($81) to 200 million francs ($320,000), he said.

Inclusion of the BenchmarkForeign investors are also taking notice. The inclusion of the benchmark index in the MSCI Frontier Markets Index placed it on the radar of money man-agers tracking the gauge, according to Bertrand Llinas, a portfolio manager at Paris-based Lfpi Asset Management SAS. Companies trading on the BRVM are operating in some of the fastest growing countries in the world, accord-ing to World Economic Forum data. Ivory Coast is leading at an average of 9 percent growth per year since 2012.

“There is a return of economic attrac-tiveness, which has put the BRVM under the spotlight for international inves-tors,” said Llinas, whose $6.7 million Frontier Africa fund returned 2.2 percent in the past month, beating nine out of 10 peers.

To attract more foreigner investors, the exchange is looking to boost liquid-ity, which remains “relatively low,” by encouraging companies to split their shares and agree to float at least 20 percent of their equity, Amenounve said.

If West Africans are thirsty for new investment opportunities, it’s also because — before the current boom — there had been no new listings for four years, said Kadi Fadika Coulibaly, the head of Hudson Cie, an Abidjan-based brokerage firm.

Some recent IPOs were part of Ivory Coast’s program to privatize at least 15 state-owned companies. But closely held firms based in the region are showing increasing interest in the bourse as a way to raise capital, she said.

13

Large — note the adjective. There’s no guarantee that the government won’t let a couple of smaller banks go belly-up. That point may have been lost on some international investors.

China Zheshang Bank Co., the nation’s 19th-largest listed lender by assets, on March 22 sold $2.2 billion of additional Tier 1 notes, its first marketed to offshore fund managers. The bonds rank above equity only if the firm is liq-uidated; don’t have a maturity date; and include clauses that could see them con-verted to potentially worthless shares if the institution’s capital falls below a threshold. Oh, and they also lack a credit rating.

Heard of Zheshang Bank? Safer Than StanChart, ApparentlyBy CHRISTOPHER LANGNER, Bloomberg Gadfly

CHINA

Since Chinese banks started selling perpetual bonds internationally in 2014, global bondholders have accepted that if Industrial & Commercial Bank of China Ltd., the world’s largest lender by assets, faces insolvency, the least of their concerns is whether they’ll be bailed in. Beijing won’t let its large institutions fail.

Despite all that, the yield on the secu-rities was only 5.45 percent, 214 basis points more than 10-year Chinese gov-ernment bonds. If that doesn’t look too bad, let’s put this in perspective.

Moody’s Investors Service rated the senior debt of Zheshang Ba1. Usually, the credit company will grade subordi-nated perpetual debt, such as the secu-rities just sold, four to six notches below the issuer’s score. That would put the new notes almost at, if not inside, the C category, usually reserved for com-panies on the verge of default. Perhaps that’s why Zheshang didn’t get a rating for the debenture.

The securities that most closely resemble what Zheshang sold are the 8.25 percent perpetual bonds of Spain’s Banco Popular Espanol SA, which is similar in size to its Chinese peer. Those securities, rated Caa1 by Moody’s, offered a 12 percent return until the next date they can be redeemed, north of 12 percentage points more than German bunds.

Meanwhile, Standard Chartered Plc has perpetual bonds that are rated Ba1 —six notches below the bank’s A1 senior grade. The return on Zheshang was closer to what can be achieved by investing in Australia & New Zealand Banking Group’s 6.75 percent bonds. ANZ is only two steps from Moody’s highest rating, at Aa2.

Sure, the 5.45 percent was 139 basis points more than the yield on perpetuals from Bank of China. But you shouldn’t compare Zheshang with Bank of China.

This may just have been an outlier. However, many other small banks plan to raise capital internationally. Investors had better start adding some risk premi-ums — Beijing shouldn’t be expected to backstop everything, all the time.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Deepening TrustSince the Bank of China issued the nation’s first Tier 1 note, the yield to call on the security has dropped about 280 basis points

7%

6%

5%

4%

Source: Bloomberg

10/2014 2/2017

Spot the AnomalyThe yield on bonds from China Zheshang was less than those from Standard Chartered despite its senior debt only having a Ba1 rating from Moody’s

Source: Bloomberg, Moody’s Investor Service; Note: Yield to call, based on prices available on Bloomberg on March 22

Banco Popular (Ba1)

Standard Chartered (A1)

China Zheshang (Ba1)ANZ (Aa2)

12%7.3%

5.45%5.4%

$2.2bAmount that China Zheshang Bank Co. sold additional Tier 1 notes for in March — its first

marketed to offshore fund managers

14

The SituationThe scandal centers on a state invest-ment fund, known by its acronym, 1MDB, set up by Prime Minister Najib Razak in 2009. Najib denies a U.S. Justice Department claim that $681 million in his personal bank accounts was stolen from the fund. He says it came from a gift from a Saudi Arabian donor and was earmarked for his party, United Malays National Organisation, and “the community’s needs.” The scandal has spawned multiple investigations, from Switzerland to Singapore. A Malaysian inquiry cleared Najib of wrongdoing, saying $620 million was returned to the donor, and the premier hasn’t been identified as a target in any of the other probes. More than $3.5 billion was taken from 1MDB, according to the Americans — some, they allege, to bankroll “The Wolf of Wall Street” movie. Yet barely a year after tens of thousands demon-strated, the ruling Barisan Nasional coa-lition fared well enough in state ballots to point to success in the coming general election, due to be held by mid-2018.

Malaysia’s MuddleBy SHAMIM ADAM

MALAYSIA: QUICKTAKE

That’s partly because the opposition has been fractured by infighting follow-ing the jailing in 2014 of Najib’s fierce critic, Anwar Ibrahim, for sodomy. (A politically motivated case, according to human rights groups). The government has also cracked down on dissent, with media executives, activists and even a cartoonist detained under sedition laws. Najib has tapped race to boost support, warning ethnic Malays that Islam would be threatened and they’d be reduced to “beggars” should the opposition take power.

The BackgroundMalaysia recovered from an economic battering in the 1998 Asian financial crisis to establish itself as a commodities juggernaut: It’s Asia’s only net exporter of oil and the world’s second-big-gest palm oil shipper. The country of 31.7 million people is also home to the world’s tallest twin towers and the largest Islamic debt market. Stable gov-ernment, investor-friendly policies and a tolerant brand of Islam have helped Malaysia build on its historic role as a conduit for trade between Europe and Asia. Its history has also been shaped by racial tension. Najib was a teenager when riots erupted between Malays and Chinese in 1969. His father, Abdul Razak Hussein, became prime minister the following year and responded with a program to reduce Chinese dominance in business by giving preferential treat-ment to the bumiputera, or “sons of the soil,” which include ethnic Malays and indigenous groups. Those programs, such as discounted housing and univer-sity scholarships, still exist today.

The ArgumentCritics including Human Rights Watch argue that Malaysia needs a thriving

A lot has changed since Malaysia’s independence from Britain in 1957. The Southeast Asian country has shifted focus from the tin and rubber production coveted by colonists to electronics factories and palm oil plantations. It’s become an Islamic finance hub and home to some of the world’s biggest skyscrapers. But a lot hasn’t changed. Corruption and cronyism persist, along with decades-old laws that disadvantage ethnic minorities. There’s also the money politics that trickles cash down from the party chiefs to the grassroots, helping to keep the ruling coalition in uninterrupted power for six decades. Opposition groups are unlikely to break through anytime soon, even after a multibillion-dollar graft scandal that’s tainted the prime minister, sparked street protests and, critics say, set back Malaysia’s push to become a more open and modern nation.

opposition and a freer media, as well as a more powerful and indepen-dent anti-corruption agency. To avoid future scandals, patronage politics that encourage corruption should be elim-inated, other critics say. Stricter cam-paign funding rules would reduce the pervasiveness of money politics, and Najib has set up a commission whose chairman said it will ban donations from overseas and government- linked sources. Even Najib’s banker brother has said Malaysia needs to fix its “moral compass” after the 1MDB scandal eroded trust in the government. Business leaders argue that the affirmative-action programs impede competitiveness and under-mine unity, shackling an economy that’s begun to lag those of its peers. The government says they’re still needed to improve the economic plight of Malays. Najib is plowing billions of dollars into highways and transportation and has removed subsidies in a bid to boost the nation’s finances. Meantime, Malaysian academics are sounding alarm bells about the radicalization of Islam in the country.

Others 1%Indians 7%

Malaysia

Indonesia

Philippines

Vietnam

Chinese 23.4%

Bumiputera (ethnic Malays and indigenous groups) 68.6%

The Politics of RaceEthnic makeup of Malaysia’s citizens

Falling BehindMalaysia’s economic growth trails Southeast Asian peers

Source: Department of Statistics, Malaysia Source: Bloomberg; *Economist consensus forecasts

7.5%

5.5%

3.5%

2010 2018*

15

APRIL4 Euromoney hosts the Indonesia Investment Forum in the Mandarin Oriental, Jakarta

5 Markets Group hosts the Private Wealth Middle East Forum in Dubai

5–6 EMPEA’s Seedstars Summit and Investor Forum takes place in the Swiss Tech Convention Center

6–7 Claret Consulting’s Silk Road Investment Forum in Asia House, London

6–7 VI Cbond’s Emerging Markets Bond Conference in Hotel Cafe Royal, London

11–12 UBS’s Hong Kong/China Property Conference in Hong Kong

24–26 Informa hosts the SuperReturn China conference in the Ritz-Carlton, Beijing

25–27 The UBS ASEAN Conference vists New York and then Los Angeles

28 The Milken Institute organizes the Investing in Emerging Markets in Los Angeles

29 The University of Chicago hosts the Emerging Markets Summit on its campus

28–29 Terrapin hosts the Power and Electricity World Africa conference

at Sandton Convention Center in Johannesburg, South Africa

27–29 Frontier Conference will be hosted by Exotix and Equity Investment Bank

29 BlackRock hosts their annual Fixed Income Panel in London

MAY2–3 The Euromoney Saudi Arabia Conference in Riyadh

3 Kellogg School of Management in Chicago hosts the Emerging Markets Conference

8–9 The Euromoney Emirates Conference in Sharjah

8–9 UBS hosts the China A-Share Conference in New York

9 The Euromoney Kenya Conference in Nairobi

15 The Euromoney Lebanon Conference in Beirut

12–13 SSEM’s Global and Domestic Challenges and Opportunities in EM in Chengdu

15–18 IFC and EMPEA host the Future of Emerging Investing conference at the Ritz-Carlton, Washington.

16–18 Clarion Investing hosts African Utility Week at the CTICC in Cape Town

24–26 UBS’s LVMC and Thailand Conference in the Grand Hyatt Erawan, Bangkok

31–2 June The BoAML Emerging Markets Corporate Conference in Miami

JUNE1 Euromoney’s Greater Mekong Investment Forum in the Centara Grand at CentralWorld, Bangkok

8 Markets Group hosts the Latin America & the Caribbean Institutional Investors Forum in Hotel Riu, Panama City

7–9 The EnergyNet/Clarion Events Africa Energy Forum in the Bella Center, Copenhagen

19–21 UBS’s Korea Conference in the Conrad, Seoul

21–23 UBS’s Taiwan Conference in the Grand Hyatt, Taipei

26–28 Informa hosts the SuperReturn Emerging Markets conference in the Hotel Okura, Amsterdam

27–29 UBS’s LATEMEA One-on-One Conference in London

26–30 UBS’s Asia Consumer Conference in Hong Kong

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UBS is hosting the Taiwan Conference in June in the Grand Hyatt, Taipei.

Calendar

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