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TRADE WARS AND SANCTIONS
America’s growing use of soft power poses new challenges
THE LIFE OF AMLO
Is Mexico’s new prez a Tropical Messiah – or just a very naughty boy?
ESKOM’S WOES
Time is running out for South Africa’s troubled SOE
GOVERNANCE IN MENA
Will Abraaj’s fall from grace catalyse an ESG revolution?
RUSSIAN DE-DOLLARIZATION
Risks of economic isolation mount
INDIA’S BORROWERS
Stuck between a rock and a hard place
THE LARGEST EVENT THAT CELEBRATES THE LATIN AMERICAN FINANCE
INDUSTRY AND CONGREGATES MORE THAN 1,600 BANKERS FROM
AROUND THE WORLD, WILL BE HELD IN DOMINICAN REPUBLIC.
November 11-14, 2018
Punta Cana International Convention Center, Hard Rock Hotel
www.asambleafelaban2018.com.do
From The Editor
Dear Reader,
What was supposed to be a quiet, restful Summer turned
out to be anything but, with the consistent escalation in
global trade war rhetoric, capricious currency volatility, and
rising concerns over structural deficiencies in emerging
economies sending markets wobbling in the best of
moments and crashing in the worst.
Chief Executive Officer and Publisher
Alex Johnson Against that backdrop, what was perhaps most surprising
T: +44 (0)20 7045 0922 was the volume of economic and political discord
E: Alex.Johnson@GFCMediaGroup.com surrounding not just Turkey and Argentina – once
Managing Editor emerging market darlings, now faced with amongst
Jonathan Brandon the worst crises they’ve confronted in years – but others
T: +44 (0) 20 7045 0937 like Italy, the United Kingdom, the United States, and
E: Jonathan.Brandon@GFCMediaGroup.com Germany, among others.
Deputy Editor
However, looking at the macro and sectorial challenges
Yevgeny Kuklychev
facing EMs from Brazil to Bali and many in between in
T: +44 (0) 20 7045 0904
any considerable depth gives one the sense that there
E: Yevgeny.Kuklychev@GFCMediaGroup.com
need not be such a stark trade-off between institutional
Advertising strength or sophistication, and the willingness of leadership
Aveen Prasad
to take bold and often politically or economically risky
T: +44 (0) 20 7045 0928
measures to stave off crisis and return to growth.
E: Aveen.Prasad@GFCMediaGroup.com
For reprints please contact: In other words, there may be a flipside to all of this – a silver
Marcia Ardila lining that brings new opportunities and new challenges.
T: +44(0) 20 7045 0900 Here, I’m thinking of the acute reprioritisation of ESG in
E: Marcia.Ardila@GFCMediaGroup.com investment and organisational ethos; the rising use of
soft over hard power – fighting wars with g-spreads, not
© GFC Media Group
www.bondsloans.com
guns – on the global stage; and the growing acceptance
www.gfcmediagroup.com that countries must live within their means to ensure
Unauthorised photocopying is illegal. The contents stability (or in some cases, survive in their present form).
of this publication, either in whole or part, may not Whether market participants and lawmakers alike are
be reproduced, stored in a data retrieval system or
transmitted in any form by any means, electronic,
up to the challenge is, as ever, another story.
mechanical, photocopying, recording or otherwise
without written permission of the publishers. Action These are some of the issues we explore in the latest
will be taken against companies or individuals who issue of Bonds & Loans.
ignore this warning. The information set forth herein
has been obtained from sources which we believe to Kind regards,
be reliable, but is not guaranteed.
Jonathan Brandon
Managing Editor
CONTENTS
Issue 15 - July / August
GLOBAL THEMES THE AMERICAS AFRICA
6 18 26
A LIBORious Transition The Rise of AMLO East African Credit
Exploring the challenges of Some call Mexico’s new president the In-depth look at the idiosyncratic
gradually weaning the world off the “Tropical Messiah”, while others balk at challenges still weighing on the region’s
most popular credit benchmark his “naughty” fiscal policies local debt markets
10 23 31
ESG: Standards on Standards Case Study: Atlas Prints Green Power Outage
Will ESG standards and ratings Project Bonds
Exploring the factors behind Eskom’s
heterogeneity kill the sustainable The unique A/B private placement failings and scandals – and what it
finance market? structure with both senior and means for South Africa’s economy
13
subordinated traches is a first for
Uruguay 34
The Flipside of Turkey
While the US doubles down on 24 Kenya Pooled Water Fund
The fund’s CEO on green bond
sanctions as key foreign policy The Loan Syndicator
opportunities in the water and
tool, is the impact of “soft power” Monica Macia on how the loan market sanitation sectors
waning? is evolving in line with the shifting
dynamics on the ground
in the Americas
4 www.BondsLoans.com
MIDDLE EAST & TURKEY RUSSIA, CIS & EUROPE ASIA
36 46 54
Governance in MENA Reserve Reservations Corporate Borrowers in India
Abraaj's spectacular collapse is a Russia seeks to mobilize internal Facing the challenge of a thin bond
cautionary tale on governance too reserves amid sanctions and dollar market on one side, and increased
big for MENA to ignore liquidity shortages tightening by banks on the other
40 52 57
Fiscal Woes A Serbian Miracle Green Sukuk
Concerns have risen over Bahrain’s Branco Drcelic, the director of As Indonesia finds itself in the
finances, but are things better than Public Debt, elaborates on the nexus of ESG and Islamic finance,
they seem? Anita Yadav has the country’s transition from chronic we interview Luky Affirman,
answer deficits to a healthy surplus the Director General of Budget
Financing and Risk Management
42
Turkey: Call & Response
Richard Segal’s take on the
monetary policy measures,
discussions with the Central Bank
and the country’s economic outlook
44
Looking for Windows
Turkey’s healthcare industry still has
access to the markets, but smart
balance sheet management and
timing is key, says CFO of MLP Care
JULY / AUGUST 2018 5
Global Themes
A LIBORious
Transition
Weaning the World off the Most Popular
Credit Benchmark
M
ore than a year has passed since the UK FCA’s Chief Executive
Andrew Bailey set the deadline for the financial markets’ transition
away from LIBOR, upon which roughly USD350tn in securities,
loans and derivatives across five major currencies is contracted. Finding
an alternative that can satisfy the diversity of markets that rest upon
this crucial benchmark is proving to be more elusive than anticipated,
beckoning questions about the pace and scale of transition.
The saying “vision is always 20/20 in stop compelling banks to publish data decade. And because it remains a critical
hindsight” is fairly apt for LIBOR, whose used for rate setting, but despite the global benchmark, we’re continuing
demise largely comes as a result of the high probability that transactions in to invest in strengthening LIBOR such
acute realisation that a key financial the near term will continue to be based that investors have confidence in
benchmark likely shouldn’t be decided on it, its future is anything but certain. the benchmark.”
through a sur vey of select banks A big part of ensuring its integrity going
drawing on their ‘expert judgement’; forward, especially during the transition “What we want to avoid is a vacuum - an
this, coupled with the fact that the period, will involve shifting the market’s uncontrolled process in which LIBOR
underlying market which LIBOR seeks perception of the benchmark. ceases to exist but markets have not
to measure – the market for unsecured yet fully adopted new rates,” he added.
wholesale interbank lending – is no “Given how important LIBOR is in the
longer sufficiently active. pricing of the extension of credit, we Investors believe it is likely that, given
believe the banking industry and their the extensive use of LIBOR globally,
Had the height of the LIBOR-rigging clients will be willing to work with us to the banking community will continue
scandal, in which bankers at some of find a path for LIBOR to continue to be to voluntarily support and publish the
the world’s largest lenders colluded to published. We have received significant rate for many years, despite several
fix the rate, not coincided with one of positive feedback from banks and banks having previously requested to
the worst market crashes in history, one their clients on LIBOR’s utility and its withdraw as contributors due to the
wonders whether we would have indeed strengthened framework,” explained costs maintenance incurs and rising
come to that realisation. Following the Tim Bowler, IBA’s President. “However,
revelations, significant reforms were we can’t make any promises and there Global Themes
implemented in multiple jurisdictions to is no guarantee that the banking
help address moral hazard – including industry will remain committed to LIBOR 6
requirements for panel banks to use beyond 2021.” Libor: Weaning the World off the Most
Popular Credit Benchmark
actual trades and keep records of
large submissions. “LIBOR in 2018 is not the same as LIBOR 10
in 2008. People often see the name London Remains Top Spot for International
ICE Benchmark Administration (IBA) – LIBOR and think of all the connotations Debt Listing Despite Brexit Noise
the organisation that has maintained that come with that, but much has
LIBOR since 2014 – has agreed to changed. The benchmark is now well 13
America's Growing Use of Soft Power
continue publishing (and improve) the regulated and managed in a thoroughly
Poses New Challenges
rate beyond 2021, the year the FCA will different manner than it was in the last
6 www.BondsLoans.com
Global Themes
In the UK, Japan, Europe and Switzerland,
more consideration is being given to
reference rates based on unsecured
overnight repo rates. In the UK and
Japan, the chosen replacements (Sterling
Overnight Index Average, SONIA, and
the Tokyo Overnight Average, TONAR,
respectively) are already commonly
used reference rates for swaps and
collateral. European regulators have
set themselves a deadline of 2020 to
develop a euro unsecured rate, one
that may or may not be largely based on
existing benchmarks – the Euro Overnight
Index Average (EONIA) and the Euro
Interbank Offered Rate (EURIBOR).
Pioneering floating rate note issuers
are already tr ying to set the pace
for other borrowers. In late June the
European Investment Bank placed
what we understand to be the first
bond linked to SONIA since 2010. The
GBP1bn 5-year notes pay a coupon of
SONIA+35bp, a move the EIB hopes will
instil confidence in alternative reference
rates among other borrowers.
But effectively replacing LIBOR while at
regulatory risk, and despite only a that reduce as much as possible any the same time continuing to sustain it
quarter of the rate being based on subjective judgement in their constitution. also brings with it additional challenges,
actual transactions. largely in the form of how risk is valued
Simultaneous Replacement and priced fairly. Indeed, one of the
Banks and authorities are already shifting and Continuation is Risky reasons bank s are moving away
their focus towards developing more Much of that work is only just starting from using the wholesale interbank
regionally-specific benchmarks that to bear fruit. In the US, the Alternative borrowing market as a measure
more accurately reflect the underlying Reference Rates Committee (ARRC) was of the base interest rate charged
markets they intend to. Martin Egan, convened in late 2014 to identify a set on credit transactions is because
Vice Chairman of Global Markets at BNP of alternative USD reference rate more their reliance on overnight lending
Paribas says there’s no clear answer firmly based on transactions from a has in many instances diminished;
on what those will look like in terms of robust underlying market which comply many lenders – particularly since the
their practical application. with the International Organization onset of Basel II and III regulator y
of Securities Commissions’ (IOSCO) frameworks – have sought out Tier
“What we do expect is less of a specific Principles for Financial Benchmarks. 1 and 2 capital issues as a way of
global standard, but more specific The group has recently chosen the boosting regulatory capital, rather
standards in each relevant jurisdiction Securities Overnight Financing Rate than go direc tly to their relevant
with some consistency across the board. (SOFR), a secured overnight Treasury Central Bank, which raises questions
The most important thing is that it’s repo rate, which is published daily by about any of these new benchmarks’
fair and transparent and that all the the New York Fed. adequacy as a credit interest rate
market counterparts can understand floor for future transactions.
how a particular rate is set, but also The SOFR is calculated as a volume-
who actually inputs the data into the weighted median of transaction-level The potential cost implications for
particular rate – and that’s it’s seen to tri-party repo data collected from the borrowers (and investors) of maintaining
be appropriate.” Bank of New York Mellon as well as GCF a dual benchmark market, and the threat
Repo transaction data and data on to generating liquidity in new reference
Authorities in most major financial bilateral Treasury repo transactions rates – arguably the most important
jurisdictions have over the past couple cleared through FICC's DVP service; precondition for any new benchmark’s
of years set to work on helping the it’s a broad measure of the cost of adoption – could force regulators to
industry seek out and develop new borrowing cash overnight collateralized move beyond just encouraging the
risk-free reference rate benchmarks by Treasury securities. market to shift to new ones.
JULY / AUGUST 2018 7
Global Themes
“If existing trades continue to reference reference rates included.” The same There could be a number of ways to
the old LIBOR, there is a risk that a conspicuous absence of fall-back address this according to Serge Gwynne,
bifurcated market will develop which provisions applies to much of the loan a corporate and institutional banking
may severely affect end-users and result market, too. Upgrading these contracts specialist at Oliver Wyman. One would
in punitive impacts to valuations,” argue will be costly and time consuming to be to use an arrears-based compounded
William De Leon and Courtney Walker say the least. version of an overnight rate, but it would
of PIMCO in a recent note. be backwards looking, and wouldn't give
Understanding the impact that the a borrower the visibility of cashflows they
“Because such a transition would be variety of benchmarks condoned would require. Another option would
so complex and potentially involve by authorities will have on liquidity – be to develop a term structure for SOFR
significant participation within the and market friction – is another story and SONIA and other benchmarks, but
financial industry to implement, the altogether. The elegance of using one kind as of today, authorities have yet to find
transition may require regulatory mandate of reference rate for derivatives, futures a way of assessing or establishing the
to ensure a coordinated and smooth and other frequently traded products is term value of these reference rates
move away from LIBOR and to the new that it can be well-understood by global that is anchored in actual transactions.
benchmark… Our greatest concern is investors of varying sophistication. Using Borrowers and banks could create a
that a transition is not well-scripted and myriad reference rates appears likely term-based rate linked tothe futures
fails to consider the potential impacts to cause unnecessary confusion and markets or overnight index swaps, which
on all securities types [which] threatens potentially lead to a market slowdown. by definition would combine a daily
to favour certain market participants rate compounded up and a fixed rate
over others.” Loan Markets Could Become on the other side; the fixed rate would
Moan Markets essentially provide stakeholders with
Derivatives and forwards – which account The challenges most banks and borrowers an expectation on the compounded
for nearly 95% of all contracts linked face in adjusting to the new reference interest over the next three months.
to LIBOR – that aren’t transitioned to a rate environment will be difficult to CME Group has for instance created one
new benchmark may become less liquid overcome, in part because most of the and three-month SOFR futures based
as we move towards 2021, especially if benchmarks currently being mulled on the compounded daily SOFR rate.
their contracts don’t have suitable fall- by authorities are overnight rates –
back benchmark mechanisms in place. whereas LIBOR is a forward-looking “If there is sufficient liquidity in the OIS
According to one legal professional rate and calculated on a term basis (1 market, you could then use pricing in
focused on derivatives and futures month, 3 months, 6 months, and so that market to form a term-based three-
contracts, the number of contracts forth). Term-based rate provide loan month benchmark,” he explains. “But
that make reference to LIBOR without borrowers and lenders with more with all of these alternative rates, the
suitable fall-back language “vastly and certainty over their funding costs and question is whether there is sufficient
overwhelmingly exceed those with asset value, respectively. liquidity in the underlying market to
The Legacy of Libor
It’s still used to benchmark over USD370tn of financial products in five currencies
160
140
120
100
80
60
40
20
0
U.S *Euribor British Japanese Swiss *Tibor Euro
Dollar (Euro) Pound Yen Franc (Yen)
Source: ISDA
Note: Figures reflect face value of contracts benchmarked as of 2014 *Euribor is the Euro
Interbank Offered Rate and is distinct from euro-denominated Libor. Tibor, the Tokyo Interbank
Offered Rate, also differs from from yen-denominated Libor
8 www.BondsLoans.com
Global Themes
make it happen. It’s a classic chicken
Estimated USD LIBOR Market Footprint by Asset Class
and egg problem: no borrower would
use a reference rate that doesn’t have
sufficient underlying liquidity, but without Volume
sufficient liquidity these reference rates (Trillions End End After After
would not be viable in the first place. USD) 2021 2025 2030 2040
It’s still an open question.”
Over-the-Counter
Derivates
Interest rate swaps 81 66% 66% 7% 5%
Reference rate heterogeneity could also Forward rate agreements 34 100% 100% 0% 0%
be problematic due to their differing
Interest rate options 12 65% 68% 5% 5%
constructions. While many banks have
Cross currency swaps 18 88% 93% 2% 0%
been updating their loan documentation
to allow for additional reference rates,
some are still uncertain about how SOFR Exchange Traded Interest rate options 34 99% 100% 0% 0%
Derivates
in particular will operate in practice Interest rate futures 11 99% 100% 0% 0%
because it is secured with US Treasuries,
in contrast to other mostly unsecured Business Loans2 Syndicated loans 1.5 83% 100% 0% 0%
rates being proposed in the UK, Europe, Nonsyndicated business loans 0.8 86% 97% 1% 0%
Japan, and Switzerland. Nonsyndicated CRE/Commercial 1.1 83% 94% 4% 2%
mortgages
According to one banker, this could mean,
hypothetically, that US dollar loan rates Consumer Loans
1.2 57% 82% 7% 1%
Retal mortgages3
linked to SOFR could actually decline in Bonds
Other Consumer loans 0.1
the event of market stress, since many
Floating/Variable Rate Notes 1.8 84% 93% 6% 3%
investors typically pile into shorter-dated
US Treasuries whenever global markets
panic – reducing their yield. Securitizations Mortgage -backet Securites 1.0 57% 81% 7% 1%
(inci. CMOs)
“As banks have increasingly turned to the
Collateralized loan obligations 0.4 26% 72% 5% 0%
traditional bond and loan markets for
additional capital, particularly those that Asset-backed securities 0.2 55% 78% 10% 2%
are fairly well-capitalised already, their
cost of capital is no longer as dependent Collateralized debt obligations 0.2 48% 73% 10% 2%
on interbank liquidity as it was in previous
Total USD LIBOR Exposure: 199 82% 92% 4% 2%
years, and increasingly dependent on
market rates… [this] could create a
Source: US Federal Reserve
double-whammy for banks – where
the cost of our bonds or capital could
rise in the event of some geopolitical or
market event, while those borrowers we “It would have been simpler if all the is a significant risk in waiting. But it’s
extend loans to could benefit through different currencies adopted a similar not just borrowers that are exposed
a compressed reference rate,” said one definition and approach, and while most to the risks prevalent throughout the
bank treasurer based in Dubai, where market participants are sophisticated transition.
the US dollar tends to be the currency of enough to differentiate between secured
choice for larger loan transactions. The and unsecured benchmarks, the bigger “Not knowing how much you have to
next twelve months, which is forecast to issue is that as we transition, if there are pay in the future is a very real cashflow
see the highest US Treasury bill issuance different timings on different currencies, management problem that simply isn’t
volumes since 2010 to finance a yawning there could be a huge impact on multi- on the radar of many corporates. But
deficit, could be crucial for the SOFR – currency swaps and multi-currency one concern we have for banks is
particularly as the yield curve continues loans,” Gwynne adds. “If you have a potential conduct risks that they are
to flatten and interest rates rise. term structure in US dollars and an facing. If they are originating lots of
overnight structure in Sterling or Yen, new business beyond 2021 based
One of the challenges of using a secured as a borrower you will not only have on LIBOR, there simply isn’t sufficient
rate over an unsecured one is that its to factor in different currencies but clarity for corporates around the fact
viability doesn’t just depend on the also the timing effect of one leg looking that LIBOR may not be available after
ability or willingness to lend but the forward three months and the other that point in time. There is a risk that
availability of the underlying collateral. looking back three months.” [banks] may have either mis-sold or at
If collateral is scarce, it could drive the very least not communicated those
additional volatility in pricing – which The level of awareness of these issues risks clearly enough to corporates,”
could feed through to the repo market. among borrowers is minimal, which Gwynne concludes.
JULY / AUGUST 2018 9
Global Themes
Standards on
Standards
Will ESG Standards and Ratings Heterogeneity
Kill the Sustainable Finance Market?
A
s the world continues to embrace ESG-led investing, a dizzying
array of standards and ratings tools has emerged to help clarify
the underlying non-economic impact of an investment and help
investors make sense of ESG-linked assets. This explosion in ratings,
criteria and standards, however, could sow more confusion than they
aim to resolve.
Measuring a borrower’s ESG – shorthand universe. BNY Mellon for instance has
for environmental, social and governance partnered with Sustainalytics to provide
– posture has in recent years become environmental, social and governance
more important for investors looking to data on and to global issuers. BlackRock
gain deeper insight into an organisation’s uses a combination of ESG data provided
ethical and sustainability practices, often by MSCI along with its own data for
in the hopes of using this information to its own ESG-focused ETF products.
help avoid reputational or idiosyncratic JP Morgan, which has partnered with weights in the index, and issuers with
risk events. It is particularly essential for BlackRock on its recently launched better ESG scores will have their weights
those on the hunt for green bonds and ESG index ( JESG) specifically aimed increased relative to their baseline
other securities that claim to generate at emerging markets, claims to soak index weights. The JESG suite will also
similar non-economic returns. up data from Sustainalytics, RepRisk, overweight Green Bond issuances.”
and the Climate Bonds Initiative (CBI)
ESG rating services are used by many of as inputs. A standardised approach to what
the world’s largest investment funds and constitutes a return in ESG terms
are growing more numerous; Bloomberg, It also applies another ethical screening is, however, sorely lacking, despite
Dow Jones, Institutional Shareholder on top of that, excluding sectors like the flurry of activity around properly
Services, MSCI, RepRisk, Sustainalytics, Thermal Coal or ‘Clean Coal’, Tobacco, pinning down their measurement,
SigmaRatings, and Thomson Reuters Weapons, or any violator of the United making it more difficult for investors
are just a handful of the dozens of Nations Global Compac t (UNGC) to compare securities’ and companies’
specialist providers catering to rising principles. The JESG is available for ESG practices in an unbiased way. Core
demand for ESG analysis and rating. the EMBI Global Diversified, GBI-EM ESG metrics considered by some of
Traditional credit rating agencies like Global Diversified and CEMBI Broad the largest rating houses can vary
Moody’s, which recently launched a Diversified to begin with. from anywhere between 12 to more
green bond-specific rating system than 1,000.
aimed at measuring the management, According to JP Morgan: “There are five
administration, and allocation of use of components in the JESG methodology “Individual agencies’ ESG ratings
proceeds on ESG-linked instruments, once the baseline index is selected: can vary dramatically. An individual
are also throwing their collective hat def ine the data inputs; establish company can carry vastly divergent
into the ring. JESG index scores; apply integration rating s from dif ferent agencies
mechanics; consider ethical factors simultaneously, due to differences in
Lack of Standards and exclusion, and calculate new ESG methodology, subjective interpretation,
This veritable pick & mix in ESG weights. These newly calculated JESG or an individual agency ’s agenda,”
rating and scoring has naturally led index scores will be systematically explains Timothy Doyle, Vice President
to varied adoption within the investing applied to determine the new ESG of Polic y & General Council at the
10 www.BondsLoans.comGlobal Themes
obligations (like Europe, which requires Our portfolio is roughly 50% investment
companies with 500 employees or more grade and the average rating across
to publish non-financial statements the portfolio is BB or BB-.”
and provide additional disclosures
around diversity and sustainability) ESG profiling has been a big focus for
are likely to be home to entities that PineBridge in recent years. The EM bond
carry a stronger ESG rating than their team relies exclusively on its own data,
peers based in regions where such and uses 9 ESG factors against which
reporting is optional, like the US or each of the 400 entities his team covers
Indonesia. are matched, ranging from binary box-
tickable metrics like ‘is the company
Both of these factors skew the ESG operating in the alcohol or firearms
rating scale in certain countries and product segments?’ to others that are
industries in a way that disadvantages much more difficult to quantify, like
some – usually smaller – entities. ‘is the company ethical?’ or ‘how does
management treat human capital?’.
Doyle contends that because there
a re n o s t a n da rd i s e d r ul e s fo r “It can be tricky, especially when you
environmental or social disclosures are trying to compensate for natural
for ESG-linked instruments, nor any discrepancies that emerge in certain
mandated disclosure auditing process sectors and in certain countries, or in
to verify reported data, agencies have countries that are handicapped by a
to rely on assumptions about the legacy of poor investment,” he added.
efficacy and tangibility of ESG-related
impacts in their assessments. Measuring the Unmeasurable
It is indeed quite dif ficult to take
“ That lack of disclosure distorts the something qualitative like ethics and
information available to both rating place it in a quantitative framework,
agencies and investors.” Bates explains, but one of the ways
this can be done is by separating out
EM Bias entities into respective peer groups
Then there is the general emerging aligned by sector, geography, size, and
American Council for Capital Formation market bias present in ESG scoring, rank them relative to one another on
(ACCF) in a recently published report, partly a function of the above, and partly an empirical basis.
which analyses and compares different the result of a broader psychological
ESG rating providers. di v ide bet ween developed and This also helps contextualise borrowers
emerging markets that influences against a myriad of factors that some
Understanding, Overcoming fuzzier qualitative factors like ethical external ESG score providers either
Bias posture or perceptions of corruption to don’t adjust for, or do adjust in peculiar
There are also inherent biases – more fundamental underlying factors or opaque ways.
from market cap size, to location, like credit ratings.
to industry or sector – many if not all “For instance, from an ESG perspective,
of them rooted in a lack of uniform “There are companies in Mexico and according to MSCI scoring, Petrobras
disclosure, Doyle says. Argentina that are every bit as savvy would be excluded, but PEMEX wouldn’t.
when it comes to embracing ESG in But if you look at RepRisk, the opposite
These biases seem inherently difficult practice and internal policy as their is the case. So, there is definitely a
to address through quantitative counterparts in Europe and the US, difference depending on the provider
modelling, and some exper ts are but many ESG rating agencies still treat and it isn’t always clear which of the
sceptical about how one would quantify emerging markets a bit homogenously, variables either entity falls down on,”
cer tain fac tors. For instance, it is particularly when it comes to perceptions explains Claudia Calich, who manages
reasonable to expec t that larger of governance,” explains John Bates, M&G’s emerging market bond fund.
companies are better positioned to an emerging market corporate analyst “It’s easier to normalise something like
allocate resources into non-financial at PineBridge in London. carbon emissions or green investment
disclosure than smaller, leaner entities, because you can compare to regional
thus increasingly the likelihood that “Whether on ESG or credit rating, one peers rather than global average and
larger companies will score higher of the biggest anomalies is that most localise them to some extent. It’s much
in ESG terms. of the corporates in our universe, if harder to do this from a governance
they were literally lifted out of Brazil, or perspective, or with perceptions of
Additionally, jurisdictions with more Colombia, or Russia, and implanted in the corruption, in a quantifiable way, and
stringent non-f inancial repor ting US, they would be A-rated companies. in a way that doesn’t lean on biases.”
JULY / AUGUST 2018 11Global Themes
“For example, many people have a but they aren’t necessarily precise, to measure the non-financial benefits
sense of which countries may have either.” they aim to foster. But investors also
more endemic corruption, as lofty as need to be aware that going into the
that may be… but look at something For ESG-centric investors, the variety murky world of ESG scoring without
like the Freedom House Index – it’s in approaches aimed at assessing an eyes wide open could lead to unmet
an entirely different thing than saying entities approach to the environment, expectations on the very non-economic
country ‘x’ is 23% more corrupt than sustainability and governance isn’t benefits they aim to measure at best,
country ‘y’”, she says. “At the end of necessarily a bad thing. For the savvier, or a misinterpretation of risk that could
the day, there are so many indicators more switched-on pockets of investors, lead to a blow-out down the road at
and components of scoring, and the it’s that variety which gives them the its worst.
results are not necessarily irrational… ability to choose exactly how they want
ESG Agency Rating Scale Key Metrics
37 key ESG issues across ten themes:
climate change, natural resources,
pollution & waste, environmental
MSCI AAA (highest) to CCC (lowest) opportunities, human capital, product
liability, stakeholder opposition, social
opportunities, corporate governance,
and corporate behaviour
70 indicators in each industry. It also
100 (highest) to 0 (lowest) using sector breaks down ESG indicators into three
Sustainalytics
and industry-based comparisons distinct dimensions: preparedness,
disclosure, and performance
28 ESG issues connected to the Ten
Principles of the UN Global Compact.
It divides these into environmental,
community relations, employee
RepRisk AAA (highest) to D (lowest) relations, and corporate governance
issues. It also includes ESG risk
exposure for both a two-year and a
ten-year timeframe using a scope of 28
ESG issues and 45 “hot topics”
380 factors (at least 240 for each
industry group) divided into
environmental and social factors.
Areas of focus include management of
10 (highest) to 0 (lowest) for environmental risks and opportunities,
ISS E&S Quality Score
environmental and social overall human rights, waste and toxicity, and
product safety, quality, and brand.
The offering is touted as being very
similar to the company’s well-known
governance score.
Source: Davis Polk
12 www.BondsLoans.comGlobal Themes
The Flipside of Turkey
America’s Growing Use of Soft Power Poses new Challenges
Jan Dehn, Head of Research, Ashmore Group
U
nited States sanctions against two Turkish government ministers triggered the recent bout of
volatility in the Turkish currency market. While Turkey was fundamentally vulnerable to begin with,
due to a lengthy period of bad economic policies, the fact that volatility was so severe and spread
far beyond Turkey indicates that this was not just about Turkey. It is also about the major shift in America’s
use of soft power on the global stage.
US President Donald Trump favours America’s allies react and how quickly The imposition of sanctions on Russia
discretion over rules and increasingly China overcomes its credibility deficit for alleged involvement in a recent UK
uses American soft power in a coercive to emerge as the new global hegemon. poisoning incident similarly precipitated
way in pursuit of narrow short-term material Rouble volatility. Even the
objectives rather than using it to reassure Emerging Markets, mighty Renminbi has weakened under
and support the global governance Submerging Currencies the onslaught of US trade tariffs this
infrastructure. This particular use of Apart from the times when the United year, although this weakness is largely
US soft power confers clear benefits States (US) is physically dropping bombs mechanical.
onto Trump, who appears strong and on other countries, American power is felt
potent, but at the same time erodes most keenly when the US imposes legal, The term used to describe America’s
America’s stock of soft power at the financial, trade and other sanctions on ability to effect massive pressure on other
fastest rate in the modern era. other countries. The imposition of sanctions countries with mere words or tweets
on two Turkish ministers a fortnight ago is ‘soft power’. America established
The erosion of US soft power will immediately led to significant pressure on its stock of soft power during World
render the world more uncertain in the Lira, which in turn triggered a broader War II, when the US successfully used
the foreseeable future, but exactly how global repricing of assets including US its massive military might, aka hard
long the uncertainty persists and how stocks, EURUSD, VIX, US Treasuries and, power, to bring about a morally good
bad it gets depends on the US itself, how of course, non-Turkey EM. outcome to the conflict.
JULY / AUGUST 2018 13Global Themes
Top 10 countries that hold the most soft power
Ranking based on global factors, 2017
France 75.75
United Kingdom 75.72
United States 75.02
Germany 73.67
Canada 72.90
Japan 71.66
Switzerland 70.45
Australia 70.15
Sweden 69.32
Netherlands 67.98
Source: Portland
In subsequent decades, the US broadly recent US presidents have. Ironically, had told blatant lies on the floor of the
preserved this original stock of soft the greater use of soft power may simply United Nations. Close allies, UK and
power through the exercise of global reflect the fact that the US has become US, thus found it impossible to mount
economic and political leadership in more constrained in terms of its ability military incursions against President
the Cold War and by sponsoring the to exercise hard power. Bashar al-Assad after his use of chemical
establishment of global institutions weapons against his own people in
for conflict resolution. For example, every Republican president 2013, 2014, 2015 and again in 2017.
since Ronald Reagan has gone to war in
American soft power remains formidable. his first term. Trump may yet become the In short, Trump is turning to the use
It rests with the size and openness first Republican president not do so. Why of soft power because it is so difficult
of the American economy, the global has the US become more constrained in to mount global coalitions in support
reach of the US banking sector, control its ability to go to war? US military might of the application of hard power. Of
of important benchmark indices by US is as formidable as ever, perhaps even course, the world may ultimately be
banks, the widespread use across the more so, but America’s ability to form safer in an era of soft power compared
world of the Dollar in transactions and broad alliances in support of military to an era of hard power in the sense
the high levels of trust vested in American action has received significant setbacks that there are fewer US-instigated wars.
legal and regulatory institutions. over the last couple of decades.
Uses and Abuses
Soft power manifests itself in a willingness For instance, despite the outrage of Soft power, like hard power, can be
of other countries to comply with US rules 9/11, former President George W Bush used or abused. How soft power is
even when they do not agree them, at was unable to establish a Europe-wide utilised determines whether its stock
least up to a point. They comply because coalition against Iraq after declaring increases or decreases. When American
business ties with the US institutions that, “either you are with us or you are soft power has been employed in pursuit
are so deep and wide that those ties with the terrorists”. Iraq had nothing of objectives with broad global backing,
ultimately matter more than relations to do with 9/11, so Bush’s categorical US leadership credentials have tended
with most third parties. statement alienated many European to improve and the stock of soft power
countries for whom frivolous application has grown.
Many also comply because they recognise of military power is still a sensitive issue
the value of a predictable and stable (this sensitivity is rooted in Europe’s The US victory in the Cold War, the collapse
system of rules, even if those rules are memory of the horrors of two world of the Soviet Union, the establishment
not always very fair. wars on its own soil). of NATO, the rise in living standards in
the post-World War II era, free trade and
Growing Reliance on Soft Power European scepticism about US military globalisation, America’s technological
It has not escaped anyone’s attention action deepened further when it became advances and the Brady Plan, which
that President Donald Trump has made clear that Iraq had no weapons of mass laid the foundations for the integration
greater use of American soft power than destruction and that General Colin Powell of Emerging Markets (EM) into global
14 www.BondsLoans.comGlobal Themes
financial markets, all contributed to Europeans are sceptical of Trump’s the US legal framework and banking
American soft power. North Korean adventure, but Iran is institutions. The likelihood that the EU
a far more divisive issue. The Trump conforms with US sanctions in the future
On the other hand, the use of soft power Administration’s withdrawal from the is also lower.
in pursuit of goals defined from the Iran nuclear deal and the imposition of
perspective of narrow US self-interest, or sanctions against companies in third Global Governance Framework
in pursuit of objectives seen as contrary countries doing business with Iran has Under Threat
to values of the majority of the world, has pushed Europe into a direct challenge The third and largest threat posed
been negative for American soft power. to US law. to American soft power comes from
the recent withdrawal and/or outright
The loss of macroeconomic control in the For the EU, the disagreement over Iran is attacks by the Trump Administration on
1970s with resulting high inflation and not solely about European self-interest. the institutions, which form the pillars
a halving of the value of the Dollar, the EU nations strongly believe, with good of the system of global governance.
flawed ‘Domino Theory’ that ultimately led reason, that the Iran nuclear deal was These institutions, which include NATO,
to military defeat in Vietnam, America’s working as intended and that it made WTO, UN, the Human Rights Council,
support for South Africa’s Apartheid the world a safer place. The EU believes TPP, NAFTA and the Paris Agreement
Regime, CIA sponsorship of coups as Iran is less of a threat to world peace if on climate change, have widespread
well as recurring financial bubbles its economy can be integrated into the global support and there are no obvious
(Savings & Loans, telecoms, DotCom global economy and views US withdrawal replacements. Across the world, their
and Subprime) depleted American from the nuclear agreement as reckless, decline is seen as posing a direct threat
soft power. self-serving and counter-productive. to global stability.
Diminishing Returns to Soft In the EU’s eyes, the threat against In addition, there are growing doubts
Power European companies doing business with about America’s commitment to sound
Today, even as Trump steps up his Iran is therefore particularly offensive, so macroeconomic policy following a
reliance on soft power, America’s stock offensive, in fact, that the EU has issued massive fiscal stimulus at the precise
of it is eroding away at the fastest rate a ‘blocking statute’ to shield European point the US achieved full employment.
since World War II. Depletion is coming companies involved in legitimate Iranian The unilateral imposition of tariffs on
from three specific directions. First, the business from US sanctions. Under key US trading partners has upended
Trump Administration is applying soft the statute, EU companies can take the decades’ long equilibrium in trade
power to targets, where soft power has US banks and businesses to court to policy. These changes may boost US
sharply diminished effectiveness, much recover damages arising from adherence economic performance in the short
like trying to get blood from a stone. to Trump’s sanctions. term, but they are unambiguously
inconsistent with a stable Dollar, thus
The recent US sanctions on Iran are In other words, the EU is threatening to threatening the global reserve currency
not going to have much of an effect, do to US businesses exactly what the US over the medium to long term.
because the more divorced a country is is threatening to do to EU businesses.
from US systems, the less effective the The result will be a drop in direct EU-US Despite global concerns about American
application of system levers. In the final business and less reliance in Europe on attacks on the global governance
equation, countries become practically
immune to soft power, when they no
longer have any ties with the US at all.
Iran is extremely removed from US
system levers after thirty-nine years of
US sanctions, including a ban on using US
dollars for international transactions. Iran
is still alive and kicking. North Korea and
Cuba are other examples of countries,
whose regimes are still in place despite
decades of US sanctions, blockades,
interventions and other US measures
designed to destabilise them.
Where to Apply Soft Power?
The second reason why US soft power
is waning is that the US government
is now applying soft power in areas
where America’s long-standing allies
clearly believe it is unwelcome. Many
JULY / AUGUST 2018 15Global Themes
infrastructure, which America itself
was so instrumental in establishing,
such concerns appear to have little
effect on the Trump Administration.
Moreover, since the Administration
appears to be responding to political
considerations emanating entirely
from within the US itself, there is very
little reason to expect major changes
in the near term.
Widespread domestic discontent with
the conventional political establishment
in the US due to stagnating living
standards and rising inequality continues
to nurture a political environment in
which it is politically expedient to attack
establishment institutions in all their
manifestations. Trump is responding
to this discontent and likely to continue
to do so.
Short-term Trumps Long-term
America now employs soft power in a
coercive way in pursuit of narrow short-
term national objectives rather than to
reassure the likeminded and support
the global governance infrastructure.
This is a deliberate choice based on
a simple political calculation, which
says that it is no longer efficient for
the US to incur the upfront costs of
global leadership.
Rather, by actively divesting the US from
its global leadership obligations Trump
gives the impression of wielding great
power. He sells himself to voters as a
man of action, someone who is taking
back control, someone with great virility. communism took root in Europe and The risk of war ultimately rises. The
Unfortunately, the actions are mainly ultimately led to World War II. Even if list goes on.
destructive in nature. He is tearing things such extreme outcomes do not occur,
down rather than building anything it seems reasonable to expect less Rivals Appear
(apart from the wall with Mexico). predictable international relations, When then French finance minister
which will be bad for businesses. Valery Giscard d’Estaing coined the
The dismantling of institutions built term ‘exorbitant privilege’ in the 1960s,
painstakingly over decades is populism Economic nationalism and growing he undoubtedly did so with a twinge
in the classic sense of the word. The discretion in policymaking increases of envy. Other countries have long
private short-term benefits, which the risk associated with engaging in wished they could avoid the risk of
accrue to Trump, vastly exceed any business with the US. Gains from trade currency crisis by issuing the global
short-term costs, but the longer-term evaporate. Global financial flows shrink. reserve currency of choice.
implications, which are only negative, The Dollar ultimately becomes less widely
only accrue over time and affect America used and America’s ability to finance China, in particular, is not oblivious to
as a whole, not just Trump. its deficit is gradually undermined. the benefits of global hegemon status.
China will exploit any vacuum created
Costs Harmonisation of legal and regulatory by America’s shrinking leadership role.
What are those long-term costs? The systems falls apart. The environment China’s greatest obstacle to assuming
list is long and some of the risks are suffers. Rogue states exploit the greater global leadership is lack of credibility. Not
impossible to predict. The last time room afforded by divisions among the big only is China a relatively new entrant on
America turned in on itself, fascism and powers. Geopolitical tensions increase. the global stage, the country also has a
16 www.BondsLoans.comGlobal Themes
massive opportunity – European leaders the UK went from the world’s largest
have repeatedly failed to act in unison. empire to IMF patient in just 30 years;
when a hegemon loses the will to lead,
The resulting ‘U’-curve in global leadership things can change very quickly indeed.
means that the world is heading into
a period, which could last for years, Final Thoughts
in which aggregate global leadership America’s shift away from rules towards
goes into decline. This period is likely discretion and her willingness to abandon
to be characterised by growing rivalry the pillars of global stability is rooted in
between the leadership contenders domestic political developments. These
until the baton has decisively changed developments demand that America
hands. If, as appears to be the case, looks inwards, but introspection is
the US leans more on direct attacks inconsistent with global leadership.
on individual countries in a bid to US hard power is already constrained
demonstrate soft power, such as the and soft power is now depleting rapidly
recent attack on Turkey, then noise as well, aided by Trump’s abuse of
levels will spike periodically. soft power.
Europe may not be able to lead, but The US withdrawal from global leadership
European countries are very open, vastly increases global instability and introduces
experienced in the realm of geopolitics hitherto unfamiliar risks associated with
and have populations, which broadly direct dealings with the US. Protectionism
support global governance institutions. and fiscal irresponsibility pose clear
As such, Europe can generally be relied risks to the Dollar’s standing as global
upon to exercise boring and slow, but reserve currency over the medium term.
sensible leadership and to support Rational countries must therefore
constructive global initiatives. now begin to face reality and adjust.
Change is scary, but ultimately good,
It is in the interest of the world as a because global leadership belongs
whole that global leadership changes to countries, which are willing to
hands as quickly as possible. Europe set aside their narrow self-interest
will undoubtedly play an important part in order to protect the pillars of the
in this process as will Japan and the big global governance structure.
EM economies. EM central banks will
be important supporting actors in a Today, the vast majority of countries in
transition, because they are the stewards the world do not share Trump’s vision of
of USD8.5trn of FX reserves, which are introversion, populism, protectionism
mainly invested in USD denominated and irresponsible fiscal policies. Instead,
US Treasury bonds. they strongly favour a continuation of
nasty legacy of Maoism, the most militant a rule-based global system, which has
version of Communism ever known. The quicker Europe, Japan and large delivered sustainable gains in living
EM countries move, the sooner the standards for many decades. Today,
China is working to overcome these new geopolitical reality comes about. China, rather than the US, looks the most
handicaps by acting in an especially Remember that change can be rapid: likely country to deliver this outcome.
mature and rational manner in the face
of US aggression, including explicitly
supporting the very global institutions
from which the US is currently seeking to
divest itself. It serves China’s purposes America now employs soft power in a coercive
that Trump’s America is doing all it can way in pursuit of narrow short-term national
to not lead. objectives rather than to reassure the like-minded
and support the global governance infrastructure.
The Soft Power ‘U’ Curve
This is a deliberate choice based on a simple
Due to the rapid pace of erosion of
political calculation, which says that it is no longer
US soft power and the still formidable
challenges faced by China in gaining
efficient for the US to incur the upfront costs of
credibility as a global leader, it seems global leadership.
rational to expect the global stock of
soft power to decline for a time. While
Europe ought to pick up the slack – a
JULY / AUGUST 2018 17The Americas
AMLO
Rising
Markets Cautiously Optimistic after “Tropical
Messiah” AMLO’s Mexico Election Landslide
M
onths of uncertainty finally ended in July as Mexico decisively
voted in its new president, Andres Manuel Lopez Obrador
(better known as AMLO), an ageing left-wing icon with populist
appeal. With almost four months until the official inauguration, he is
trying to woo the markets with a more conciliatory tone. If the currency
and bond yields are anything to go by, it appears to have worked, but
will it manifest in policy?
Lopez Obrador’s victory in Mexico’s 250 mayoral elections and four out of reassure them that he will maintain
presidential election – emphatic as it eight gubernatorial positions, as well regulatory continuity and not introduce
was, with the widest margin in decades as achieving a majority in Congress – any drastic measures.
– has polarized popular opinion, with no mean feat.
widespread disdain for mainstream “ The market environment is good,
politicians turning him in a sort of “In the past the incoming administrations especially after a year of pain for
“tropical messiah” on the one hand, struggled to pass new legislation and Mexican assets,” noted Octavio Calvo,
and the fear that his “naughty” public implement reforms,” said Enrique Managing Director, Debt Capital Markets
spending and social policies could topple Covarrubias, Director of Economic at Santander. “AMLO is getting the benefit
the economy on the other. Strategy at Actinver. “The PRI lost, but of the doubt, and his popularity gives
are recognizing AMLO’s mandate and him a strong mandate.”
Two months on from the election, the reacting constructively.”
former far outnumber the latter: it is Mexico’s new leader has significantly
more vocal, positive and, crucially, The strong mandate and party support toned down the radical rhetoric from
politically active. could prove to be game-changing. Some, his pre-election rallies and has made
however, are wondering whether this is
“With presidential, congressional and too much power for the “radical leftist.”
state elections all bundled together, Americas
this is the most significant voting period Tightening Belts
in Mexico’s history,” a CFO of a large- His party, Morena, has a majority, so passing 18
Markets Cautiously Optimistic after
cap Mexican company told Bonds & legislation should be easier, admitted
"Tropical Messiah" AMLO's Mexico
Loans a few days before the vote. And Alejandro Padilla, Head Strategist for
Election Landslide
while AMLO’s victory did not come as Fixed income and FX at Banorte.
a big surprise, few had anticipated the 23
Case Study: Atlas Renewables Prints
landslide and, even more impressively, “But he has also been very consolatory,
one of Latin America's First Green
the mandate his party – Morena – would and emphasized his commitment to
Project Bonds
achieve in congress and across the states. fiscal responsibility, which investors
are taking to,” the expert noted. 24
Lopez-Obrador garnered 53% of the HSBC's Monica Macia Talks Loan
Market Dynamics in the Americas
vote, the highest proportion among Indeed, market observers on the ground
any of the four most recent presidents. are encouraged by early signs, praising
At the federal level, Morena won over AMLO’s phone call with investors to
18 www.BondsLoans.comThe Americas
far. “Lower salaries tend to lead to a
talent drain,” Calvo admitted. Even
AMLO himself conceded that he would
bring the base salary even lower, raising
concerns around the attractiveness
of the public sector.
An Eclectic Cabinet
While his official inauguration is still
months away, Lopez-Obrador is hoping
to get a head start, getting involved
in and acquainted with government
affairs; the threat of wage cuts has
not prevented AMLO from informally
bringing in a formidable transition team,
most of whom are expected to take up
senior positions once in office. A few
observers pointed out that the incoming
president tends to announce the new
cabinet a week or two before coming
into office, so AMLO is four months
ahead of schedule.
According to a senior banker who
spoke with Bonds & Loans, the likeliest
candidate to take the role of Minister
of Finance and Public Credit is Carlos
Urzua, a respected career academic
with a doctorate in economics.
a point of emphasizing commitment in the public sector by forcing officials to
to fiscal discipline. That included a disclose their assets (Mexico currently He, like many of the picks, can be traced
somewhat populist, but nevertheless ranks 135 out of 180 countries in the back to AMLO’s time as governor of
praiseworthy decision to take a 60% Corruption Perception Index published Mexico City, where Urzua was the
pay-cut for himself and lower salaries for by Transparency International). finance chief. During his time in the
government officials across the board. role, Urzua reigned in the spending
The proposed measures, predictably, and brought the level of indebtedness
This ties in with his broader austerity have been welcomed by the general in real terms from 19% to just 3.3% - a
plans, taking away other “perks” from state public, although some have raised feat he would certainly be welcome to
officials and fighting to stem corruption concerns about pushing this plan too repeat on the federal level.
He also vowed to maintain fiscal discipline,
AMLO - in His Own Words
respect the Central Bank’s autonomy
and keep the floating exchange rate.
What we want is for the budget to reach everybody With current CBM governor Alejandro
Díaz de León set to remain in his role
until December 2021, the signs are that
the fiscal and monetary policies should
at the very least remain independent
We must make the US see that the most important thing
and consistent.
is justice and universal fraternity where we can live
without walls, poverty, fear, discrimination and racism.
“Mexico’s Central Bank remains one
of the most stable institutions in the
country. They are nonetheless facing a
broader global trend of greater mandate
More than the use of force, we will deal with the causes for central banks,” noted Covarrubias.
from which insecurity and violence originate. ¡am
conviced that the most effective and humane way of Finally, Lopez-Obrador’s preferences
fighting these ills involves combating inequality and for ex-Mexico mayor Marcelo Ebrard as
poverty. Peace and tranquillity are fruits of the justice. new foreign minister, ex-Supreme court
judge Olga Sanchez Cordero as new
JULY / AUGUST 2018 19You can also read
