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Emerging Sovereign Debt Markets NEWS

Number 22 Week 26 May – 1 June 2018

Table of contents

ASIA ...... 2 Pakistan ...... 11 Bahrain ...... 2 Pakistan seeks economic lifeline with fresh China loans ...... 11 Bahrain must reform state finances urgently, IMF official says...... 2 Philippines ...... 12 Hong Kong ...... 3 Philippines plans to sell $2 bln samurai, dollar bonds ...... 12 Hong Kong posts HK$5.1 bln fiscal deficit for April ...... 3 Saudi Arabia ...... 12 India ...... 3 Saudi finance ministry sells 3.95 bln riyals of domestic sukuk ...... 12 India's 2017/18 fiscal deficit at 3.5 pct of GDP ...... 3 Saudi central bank reserves rise sharply on back of high oil prices ...... 12 India Bond Traders Don't Rule Out Devolvement At Today's Debt Sale ...... 3 Sri Lanka ...... 13 India Stocks, Rupee, Bonds, Swap, Call At CDB snares sovereign mandate with Midday ...... 3 aggressive terms ...... 13 Indonesia ...... 4 EUROPE ...... 13 Indonesia bids to tame market contagion Albania ...... 13 as bets on a rate hike soar ...... 4 Albania to sell 3.0 bln leks (23.5 mln Indonesia sells 4.36 trln rupiah of Islamic euro) of 7-yr T-notes ...... 13 bonds, above target ...... 5 Bulgaria ...... 14 Indonesia's 2017 audited budget deficit Bulgaria's gross foreign debt falls 2.3% was 2.51 pct of GDP ...... 5 y/y in March ...... 14 S&P Affirmed Indonesia’s Sovereign Bulgaria expects budget surplus at 1.4 Credit Rating at BBB-/Stable Outlook percent of GDP in May ...... 14 (Investment Grade) ...... 5 Croatia ...... 14 Jordan ...... 6 Croatia sells fewer T-bills than planned, Thousands of Jordanians strike against yield flat ...... 14 IMF-driven tax rises ...... 6 Croatia's borrowing focus this year on Lebanon ...... 6 local market ...... 14 Lebanon's Hariri upbeat after gov't talks, Kosovo...... 15 rivalries surface ...... 6 Kosovo sells 20 mln euro of 5-yr T-notes, Lebanon central bank says sells $3 bln in yield up ...... 15 Eurobonds ...... 7 Poland ...... 15 Malaysia ...... 8 Rising consumption, inventories drive Malaysia tries crowdfunding to plug Poland's GDP growth above 5 pct ...... 15 ballooning debts ...... 8 Romania ...... 15 Malaysia fin min: scrapping GST will create $5 bln hole in budget ...... 8 Romania to issue 3.64 bln lei (783 mln euro) of domestic debt in June ...... 15 Malaysia vows to meet deficit target, plug $5 bln tax hole ...... 8 Russia ...... 16 Saving The Country From The RM1 Trillion Foreigners' share in Russian OFZ bonds Debt ...... 9 declines to 31 pct-central bank...... 16

PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 1

Slovakia ...... 16 Inflation-stricken Venezuela postpones currency overhaul ...... 20 Slovak end-May budget deficit at EUR 725.2 mln ...... 16 S&P Says Venezuela 'CCC-' Local Currency Slovenia ...... 16 Rating Off CreditWatch Negative And Affirmed ...... 21 Slovenia Jan-April tax income up, budget in surplus ...... 16 AFRICA ...... 21 Turkey ...... 16 African finance leaders to debate China's yuan as a reserve currency ...... 21 Fitch Says Turkey's Cities Face Pressure On Debt From Lira Slump ...... 16 Egypt ...... 22 Foreigners sell $1.15 bln of Turkish bonds Egypt's foreign debt rises to $82.9 billion and stocks May 1-25 ...... 17 as of end Dec ...... 22 LATIN AMERICA AND CARIBBEAN ...... 17 Kenya ...... 22 Argentina ...... 17 Kenya finance bill would emasculate central bank ...... 22 Fitch Says Rate Hike Adds To Argentinian Local Debt Risks ...... 17 Malawi ...... 23 Argentina's Macri vetoes bill freezing Malawi’s domestic debt to more than utility prices...... 17 quadruple in next fiscal year ...... 23 South Africa ...... 23 Barbados ...... 18 IMF Executive Board Concludes 2017 S&P reprieve supports resurgence in Article IV Consultation with Barbados .... 18 South African bonds ...... 23 Ecuador ...... 19 South Africa's April budget deficit widens year-on-year ...... 24 Ecuador seen issuing debt in coming months ...... 19 Tunisia ...... 24 S&P Says Ecuador Ratings Affirmed At 'B- Fitch Revises Tunisia's Outlook to /B' Outlook Remains Stable ...... 19 Negative; Affirms at 'B+' ...... 24 Tunisia committed to economic reforms Puerto Rico ...... 20 needed for loans ...... 26 Puerto Rico deaths will take toll on debt talks ...... 20 GLOBAL ...... 26 Venezuela ...... 20 Global funds cut stocks to 9-mth lows in turbulent May ...... 26

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will stagnate and economic growth will slow, Joshi said, noting that public debt increased to ASIA 89 percent of GDP last year and foreign reserves

were low, covering only 1.5 months of non-oil imports. Bahrain The cost of insuring Bahrain's sovereign debt against default jumped near multi-year highs Bahrain must reform state finances this month because of investors' concern over the country's debt burden as U.S. interest urgently, IMF official says rates rise. 31-May-2018 "Fiscal consolidation would support the peg to DUBAI, May 31 (Reuters) - Bahrain must the U.S. dollar, which continues to provide a urgently reform its finances to cut a large clear and credible policy anchor," Joshi said. state budget deficit and support its currency, He added that Bahrain should, for example, a senior International Monetary Fund official consider revising its subsidy system to make it said after annual consultations with the more efficient while curbing a large public sector government. wage bill. Fiscal steps which the government has already However, Bahrain's financial sector is stable, announced would cut the deficit to 11 percent of thanks to big capital buffers, and GDP is gross domestic product in 2018 from 14 percent expected to grow 3.2 percent in 2018 on the last year and around 18 percent in 2016, Bikas back of a recovery in oil production, Joshi, who led an IMF mission to Manama, said infrastructure projects and rising refinery and in a statement late on Wednesday. aluminium production capacity, Joshi said. GDP But without further measures, non-oil revenue grew around 3.8 percent in 2017. PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 2

Devolvement At Today's Debt Sale (Reporting by Andrew Torchia; Editing by Himani 01-Jun-2018 Sarkar & Shri Navaratnam) (( [email protected] ; +9715 6681 By Dharam Dhutia and Neha Dubey 7277; Reuters Messaging: NewsRise [email protected] )) MUMBAI (Jun 01) -- India’s INR120 billion (c) Copyright Thomson Reuters 2018. government bond auction, last one before MPC policy decision, may see tepid demand, with risk of devolvement of 2020 and 2026 bonds on primary dealers, traders say. RBI to Hong Kong auction five bonds today, including INR20 billion of 6.65% 2020, INR30 billion each of 7.59% Hong Kong posts HK$5.1 bln fiscal 2026 and FRB 2031 bonds and INR40 billion of deficit for April notes maturing in 2033 and 2055. “Volume is very shallow and it cannot be assessed whether 31-May-2018 traders will bid for the 2020 note,” trader with May 31 (Reuters) - Hong Kong's fiscal deficit was at HK$5.08 billion ($647.28 million) primary dealership says. "But looking at RBI’s during the first month of the financial year stance towards short-end rates, it may accept 2018/19. bids at higher yields," he adds. Three out of last A government spokesman said the deficit for the five auctions have seen devolvement of short- month ended April 30 was mainly due to the fact term papers. “The only reason why the shorter that some major types of revenue, including tenure papers went through in previous two salaries and profits taxes, are mostly received auctions was because of chances of OMO towards the end of a financial year. purchases, but that is not the case anymore” Fiscal reserves as of April 30, 2018: HK$1,097.9 another trader says. Cutoff for 2020 paper seen billion, down from HK$1,102.9 billion at the end in INR98.35-INR98.38 band while that for 2026 of March. note see in INR96.90-INR96.95 range; notes at INR98.42 and INR97.05 now, respectively. ($1 = 7.8482 Hong Kong dollars) (Reporting by Twinnie Siu in HONG KONG; Editing by - By Dharam Dhutia and Neha Dubey; Biju Dwarakanath) [email protected]; 91-22-61353308 (( [email protected] ; 852-2841 5763; - Edited By Mrigank Dhaniwala Reuters Messaging: - Send Feedback to [email protected] [email protected] )) - Copyright (c) 2018 NewsRise Financial Research & (c) Copyright Thomson Reuters 2018. Information Services Pvt Ltd

India India Stocks, Rupee, Bonds, Swap, Call At Midday India's 2017/18 fiscal deficit at 3.5 pct 01-Jun-2018 By Dipika Lalwani of GDP NewsRise 31-May-2018 MUMBAI (Jun 01) -- STOCKS NEW DELHI, May 31 (Reuters) - India's fiscal The benchmark BSE Sensex and the broader deficit in the year ended March 2018 came in NSE Index was 0.03% and 0.14% lower, at 3.53 percent of gross domestic product, in respectively, led by losses in HDFC Bank on line with the revised estimates, government profit booking after a rally yesterday, while data showed on Thursday. ICICI Bank led gains on reports that CEO India revised its fiscal deficit target in February Chanda Kochhar has been asked to go on an to 3.5 percent of GDP from 3.2 percent of GDP indefinite leave, which the lender later for the 2017/18 fiscal year. For the current fiscal clarified as a planned leave. year, the government estimates to trim the RUPEE deficit to 3.3 percent of GDP. The Indian rupee was trading higher at The shortfall for the 2017/18 fiscal year was 5.9 67.03/67.04 per dollar against its previous close trillion rupees ($87.53 billion), the data showed. of 67.4050/67.4150, underpinned by dollar sales New Delhi got 12.4 trillion rupees in net tax by exporters and likely corporate-related receipts during the fiscal year. inflows. Expectations that new rules to monitor foreign holding in Indian companies could open ($1 = 67.4050 Indian rupees) headroom for an investment across select stocks (Reporting by Neha Dasgupta; Editing by Malini also aided. Menon) GOVERNMENT BONDS (( [email protected] ; +91-11-49548058; The benchmark 10-year bond was trading lower Reuters Messaging: at 95.39 rupees, yielding 7.86%, against 95.62 [email protected] )) (c) Copyright Thomson Reuters 2018. rupees and a 7.83% yield at the previous close, as a sharp jump in January-March gross domestic product growth increased bets of an interest rate hike soon, even as traders remain India Bond Traders Don't Rule Out PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 3 on the sidelines ahead of fresh debt supply. is expected to raise U.S. rates again. INTEREST RATE SWAPS In a Reuters Poll on Monday, 16 out 18 The one-year swap rate was two basis points economists predicted BI will increase its key rate higher at 6.82% from 6.80% at previous close, 25 basis points on Wednesday. One forecast a while the benchmark five-year swap rate also 50 basis point hike, and other predicted BI rose two basis points at 7.20%. would stand pat. CALL MONEY BI's next scheduled meeting is June 27-28, after India's three-day cash rate was trading at the Eid al-Fitr holidays following the Muslim 6.00%/6.05%, against 6.05%/6.10% at its fasting month of Ramadan. This period is also a previous close for one-day loans. time of peak spending in the world's biggest Muslim-majority country, adding to pressure on - By Dipika Lalwani; [email protected]; policymakers to maintain stability. +91-22-61353311 At Monday's news conference, Darmin Nasution, - Edited By Debasis Basak the coordinating minister of economics, said - Send Feedback to [email protected] regulators will prioritise stability in the short- - Copyright (c) 2018 NewsRise Financial Research & Information Services Pvt Ltd term and economic growth in the medium-term. "We are not in a crisis. These are to strengthen things, to respond to dynamics," said Nasution. Other Indonesian markets also rallied on Indonesia Monday, with the benchmark 10-year government bond yield falling to 7.174 percent Indonesia bids to tame market on Monday's closing from 7.545 percent on contagion as bets on a rate hike soar Friday. Jakarta's main stock index rose 1.55 percent. 28-May-2018 "Markets have taken positively to news of an •Top policymakers hope to shore up additional meeting on 30 May (and prospects for confidence in economy more policy tightening)," DBS said in a note. •BI gov: Out-of-cycle Wednesday meeting to THE 2013 VOLATILITY look ahead to Fed's Last week, Warjiyo promised to use interest •Rupiah reaches a 2-week high, bond yields rate policy to stabilise the rupiah in the near- fall, stock index up term and to be "more pre-emptive" and ahead •Govt pledges to improve state firms' of the curve on monetary settings. governance The rupiah has been among the worst •All but one of 18 in poll predict a rate hike on performers among Asian currencies this year, Wednesday By Maikel Jefriando and Tabita Diela losing about 3 percent of its value, as investors slash their holdings in emerging markets in JAKARTA, May 28 (Reuters) - Indonesia's top policymakers sought to shore up confidence in response to rising U.S. Treasury yields. Southeast Asia's biggest economy, as bets DBS said that weaker sentiment on emerging grow that the central bank will raise interest market debt had pushed several central banks rates for the second time in two weeks at an including Argentina and Turkey to take a more out-of-cycle policy meeting on Wednesday. hawkish stance to control capital outflow risks Perry Warjiyo, sworn in as governor last week, and maintain financial markets stability. said on Monday it was not an "emergency The last time BI held an extraordinary meeting meeting", but the rupiah jumped to a two-week was the November 2014 one that raised its main high on hopes central bank actions will relieve policy rate, to tackle rising inflation persistent pressure on the country's financial expectations. markets. "Indonesia faces the possibility of having to Alongside other emerging markets, Indonesia bring down its current account deficit at the has seen an outflow of funds as U.S. assets expense of GDP growth, as in 2013," Citi become more attractive due to rising interest economist Helmi Arman said in a note. rates. When Indonesia last faced such market volatility Bank Indonesia (BI) on May 17 raised its in 2013, during the so-called "taper tantrum", benchmark interest rate for the first time policymakers took measures to restore calm. since November 2014 in a bid to bolster the These included BI raising rates by 175 basis fragile rupiah and stem capital outflows. On points, allowing the exchange rate to depreciate Friday, it said it will hold an additional meeting and preparing bilateral swap agreements, while on May 30 to discuss economic and monetary the government let in more imports to maintain conditions. domestic prices. "The dynamics offshore happen so quickly and Policymakers have already repeated some of market perceptions are formed quickly that these measures. there is a tendency that some became Warjiyo said the "dual intervention" BI is irrational," Warjiyo told a briefing attended by currently doing in the currency and bond other policymakers. markets is similar to 2013. "These dynamics need to be responded to BI has also announced an intention to broaden immediately to stabilise things." swap agreements with Japan to bolster its He said Wednesday's meeting will look ahead to "second line of defence".) the Federal Reserve's June policy review, which Meanwhile, the government has allowed more PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 4 food imports to keep prices low and cap energy 7611 prices with larger subsidies. Officials are also Reuters Messaging: working on improving tax incentives to attract [email protected] )) investment. (c) Copyright Thomson Reuters 2018.

FOREX RESERVES Finance Minister Sri Mulyani Indrawati said the government would improve debt Indonesia's 2017 audited budget management and governance of state firms, deficit was 2.51 pct of GDP especially those working on infrastructure. 31-May-2018 Many state firms dominating large swathes of JAKARTA, May 31 (Reuters) - Indonesia's the economy have seen debt levels balloon. Supreme Audit Board on Thursday submitted However, officials say the economy is now in a its audit results for 2017 state budget to much better condition compared to 2013, with parliament, showing a fiscal deficit at 2.51 larger foreign-exchange reserves, greater fiscal percent of gross domestic product. space and a smaller current account deficit. Finance Minister Sri Mulyani Indrawati's last "We are ready to take any kind of policy to estimate for the year's deficit was 2.42 percent support Indonesia's economy," Indrawati said, in January. adding that if short-term measures mean Following are details of last year's budget, slightly lower growth, "then that consequence compared with earlier plans for 2017 approved has to be accepted". by parliament last July, and plans for 2018.

(Additional reporting by Gayatri Suroyo and Fransiska (Reporting by Gayatri Suroyo and Tabita Diela; Editing Nangoy; Writing by Ed Davies; Editing by Richard by Richard Borsuk) Borsuk) (( [email protected] ; (( [email protected] ; +622129927609; Reuters Messaging: +622129927609; Reuters Messaging: [email protected] )) [email protected] )) (c) Copyright Thomson Reuters 2018. (c) Copyright Thomson Reuters 2018.

S&P Affirmed Indonesia’s Sovereign Indonesia sells 4.36 trln rupiah of Credit Rating at BBB-/Stable Outlook Islamic bonds, above target (Investment Grade) 30-May-2018 31-May-2018 JAKARTA, May 30 (Reuters) - Indonesia's Standard and Poor's (S&P) has affirmed finance ministry sold 4.36 trillion rupiah Indonesia's Sovereign Credit Rating at ($311.76 million) of Islamic bonds at an investment grade level, as announced on auction on Wednesday, above the indicative May31st, 2018. target of 4 trillion rupiah, its financing and In its press release, S&P affirmed Sovereign risk management office said. Credit Rating of the Republic of Indonesia at The weighted average yield for Islamic T-bills BBB- /stable outlook. The key factors that maturing in December 2018 was 5.35417 support the decision are the government's percent. relatively low debt levels and its moderate The project-based sukuk maturing in March fiscal performance and external indebtedness. 2020 had a weighted average yield of 6.81009 General government debt ratio to GDP over percent, up from 6.44518 percent in the the next few years is projected to be stable, previous auction on May 15. reflecting the relatively stable projected fiscal The project-based sukuk maturing in January balance. Moreover, improved tax collections 2022 had a weighted average yield of 6.98498 following the latest tax amnesty and higher percent, higher than last auction's 6.85508 energy prices should help government revenue. percent. On the external front, current account deficit is The project-based sukuk maturing in November expected to shrink in the next few years 2031 had a weighted average yield of 8.07512 reflecting steady global demand and higher percent, higher than 7.77764 percent received commodity prices. At the same time, the rupiah from the last auction. flexibility together with prudential policy There were no winning bids for the project- measures to manage the risks of private sector based sukuk maturing in October 2025 and short-term external borrowing have supported February 2037. the decline of the ratio of gross external Total incoming bids were about 7.16 trillion financing needs to current account receipt rupiah, down from 9.2 trillion rupiah in the (CAR). Furthermore, the risk of a marked previous auction. deterioration in the cost of external financing The highest bid-to-cover ratio was 2.14 for the that Indonesia faces has diminished significantly. project-based sukuk maturing in January 2022. In addition, Indonesian policymaking has been effective in promoting sustainable public ($1 = 13,985 rupiah) finances and balanced economic growth in (Reporting by Nilufar Rizki recent years. To support purchasing power and Editing by Subhranshu Sahu) (( [email protected] ; +6221 2992 consumption, the government has implemented policy measures which include freezing fuel PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 5 prices and electricity tariffs. These measures are Jordan could be losing hundreds of millions of likely to be temporary in nature and the reform dollars through tax evasion and that only about momentum would pick up pace again. Bank four percent of citizens pay taxes. Indonesia is also viewed as an important The amendments lower significantly the income institution in Indonesia's ability to sustain tax threshold and slap higher levies on banks economic growth and attenuate economic or and industrial firms at a time when economic financial shocks. growth has been stagnant amid regional turmoil In response to the S&P's statement, Governor of and businesses have complained of shrinking Bank Indonesia, Perry Warjiyo stated that consumer demand. 'S&P's affirmation on Indonesia's rating at BBB- Jordan earlier this year raised taxes on hundreds /Stable Outlook reflects Indonesia's strong of food and consumer items by unifying rates of economic fundamental and credible policy mix sales tax at 16 percent and removing framework. The affirmation further bolsters exemptions on many basic goods. investors' confidence on Indonesia's economic In January the government scrapped subsidies prospect amidst the ongoing global uncertainty. on bread, which doubled some prices in a In this regards, coordination among relevant country whose eight million people are suffering authorities to implement the policy mix will be increasing unemployment and poverty rates. strengthened to maintain macroeconomic The government argues the reforms will reduce stability and support growth'. social disparities by progressively taxing high S&P had previously raised Indonesia Sovereign earners while leaving low-paid public sector Credit Rating to BBB-/Stable Outlook onMay19, employees largely untouched. 2017. Jakarta, 31th May 2018 (Reporting by Suleiman Al-Khalidi and Reuters TV Jordan (C) Copyright 2018 - Bank Indonesia Editing by Mark Heinrich) (( [email protected] ; +962 79 5521407; Reuters Messaging: suleiman.al- [email protected] )) Jordan (c) Copyright Thomson Reuters 2018.

Thousands of Jordanians strike against IMF-driven tax rises Lebanon 30-May-2018 AMMAN, May 30 (Reuters) - Thousands of Lebanon's Hariri upbeat after gov't Jordanians heeded a strike call by unions on talks, rivalries surface Wednesday to protest at major, IMF-guided 28-May-2018 tax rises they say will worsen an erosion in •Lebanese Forces wants say equal to Aoun's living standards. FPM Unions declared the walkout earlier this week, •Speaker Berri says gov't to be formed within warning the government that sweeping tax a month amendments sent to parliament this month •Hezbollah seeking "weighty" ministry would impoverish employees already hit by •Hezbollah camp emerged stronger from May unprecedented tax hikes implemented earlier 6 election this year. Recasts with Hariri comment Unions representing tens of thousands of public BEIRUT, May 28 (Reuters) - Prime Minister- and private sector employees accused the designate Saad al-Hariri expressed hope on government of caving in to International Monday that a coalition government could be Monetary Fund (IMF) demands and squeezing a formed quickly to shield Lebanon from middle class hit by high prices while widening regional instability and a dire economic disparities between poor and rich. situation which he said posed the biggest Protesters at the headquarters of the danger to the country. Professional Associations Union in the capital Hariri was speaking after meetings with Amman carried placards criticising the lawmakers over the make-up of the new government and accusing politicians of coalition to be formed after a May 6 corruption and squandering public funds. parliamentary election that strengthened the "I can hardly afford anything with my salary. We hand of the Iran-backed Shi'ite Hezbollah and its are taxed for the air we breathe and now they political allies. are also looking to rip off our salaries. Everyone Pointing to complications ahead, the Christian knows the law is unjust and it has to be Lebanese Forces party demanded government withdrawn,” said Hatem Samara, an engineer. representation equal to its main rival, the Free The amendments, which would double the Patriotic Movement (FPM), and competition for income tax base, are a key condition of a cabinet portfolios also surfaced among rival three-year IMF economic programme that Druze factions. aims to generate more state revenue to "I am very optimistic, God willing, and I thank gradually bring down public debt to 77 everyone for the cooperation they showed percent of GDP in 2021. today," Hariri, who will be premier for a third The government has echoed IMF arguments that PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 6 time, told reporters. The post is reserved for a (( [email protected] ; Reuters Sunni Muslim in Lebanon's sectarian power- Messaging: [email protected] )) sharing system. (c) Copyright Thomson Reuters 2018.

"Nobody wants to put a spoke in the wheel," Hariri said. Lebanon's economic woes and unsustainable Lebanon central bank says sells $3 bln debt levels are seen as top priorities for the in Eurobonds next government. So too is the Syrian refugee 29-May-2018 crisis for a country where one in four people is •Central bank had planned to sell $1bn in now a Syrian refugee. Eurobonds Earlier, Shi'ite Parliament Speaker Nabih Berri •High local demand led to $3bn sale was quoted saying the government formation By Lisa Barrington should take less than one month. BEIRUT, May 29 (Reuters) - Lebanon's central "Nobody has an interest in delaying the birth of bank said on Tuesday it sold $3.022 billion of the government or putting complications in its Eurobonds, more than three times the $1 way," Berri told people who had visited him, the billion it had planned to sell, with demand Hariri-owned newspaper Al-Mustaqbal reported. from local investors high. HEZBOLLAH DEMANDS "WEIGHTY" The central bank, which this month said it MINISTRY intended to sell $2 billion of Eurobonds over the Hezbollah aims to secure a bigger say in the coming year, said it planned no further sales of next government than it had in the last one, Eurobonds from its portfolio in 2018. after the heavily armed group and its allies Tuesday's sale was of paper maturing between made significant gains in the election. 2028 and 2034 and yielding from 7 percent to The head of Hezbollah's parliamentary bloc, 8.25 percent. Settlement is on Wednesday, it Mohammed Raad, told reporters after meeting said. Hariri that his party had requested a "weighty The central bank acquired the Eurobonds ministry" in the new government. through two debt swaps with the Ministry of Senior political sources have said Hezbollah is Finance. seeking at least one service-provision ministry On May 18 Lebanon's government completed and will have three instead of two ministries this a $5.5 billion debt swap with the central bank, time. The group has typically taken ministries of issuing it with Eurobonds in exchange for marginal importance. Lebanese pound T-Bills. Hezbollah, along with groups and individuals The ministry said the swap secured its foreign that support its possession of arms, won at least currency financing needs until the end of 2018 70 of parliament's 128 seats in the election, a and also strengthened the central bank's dollar reversal of Lebanon's last legislative election, reserves. which returned an anti-Hezbollah majority in A similar $1.7 billion swap was also carried out 2009. in November 2017. The staunchly anti-Hezbollah Lebanese Forces Zahabia Gupta, an analyst at Standard & Poor's (LF) party is also seeking more government rating agency, said it was understood that the ministries to reflect its gains in the election. The debts swaps help moderate government LF, led by Maronite politician Samir Geagea, borrowing costs and boost the central bank's nearly doubled its number of seats in official foreign exchange reserves. parliament, winning 15. "However, in our view, these reserves may not "The (LF) representation must be equal to the be readily available for foreign exchange representation of the FPM," LF lawmaker George operations or repayment of external debt in a Adwan said after meeting Hariri. downside scenario. Therefore, we view the The FPM was founded by President Michel Aoun, quality of the additional reserves as somewhat and has been led by his son-in-law Gebran diminished," she said in emailed comments to Bassil since 2015. The group has been politically Reuters last week. allied to Hezbollah since 2006. After the two swaps and the sale, the central Bassil, foreign minister in the outgoing bank said it held around $4.7 billion in government, said the FPM's share of cabinet Eurobonds, representing just over 8 percent of posts should include either the ministry of its dollar assets. finance or the interior, saying his party had been Lebanese Eurobond prices have been under denied both since 2005. pressure since early April, with declines Berri is insisting that the finance ministry accelerating after Washington pulled out of the remains with his Shi'ite Amal Movement. Iran nuclear deal earlier in May, exacerbating a Hezbollah supports that demand, according to wider emerging markets selloff. Several issues sources familiar with the group's thinking. hit record lows a week ago before rising. The interior ministry was controlled by Hariri's PROBLEM ECONOMY Future Movement in the outgoing government. Lebanon is the world's third-most indebted Hariri lost more than a third of its seats in the nation after Japan and Greece, with a debt-to- election, many of them to Hezbollah allies. GDP ratio of more than 150 percent. It climbed from around 130 percent in 2011, (Reporting by Tom Perry, editing by Larry King and before war in neighbouring Syria and the arrival Catherine Evans) of more than a million refugees depressed PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 7 growth and paralysed government decision- The ministry said the fund would be called making. Malaysia Hope Fund and provided the name of a The International Monetary Fund has said local bank and an account number for Lebanon's debt trajectory is unsustainable contributions which it said must be made in cash and the government needs to take immediate denominated in the local currency. action to boost growth and reduce its budget While Mahathir's government has made it a deficit. priority to get a handle on debts - pledging to Lebanon held parliamentary elections on May 6 review mega projects, axe some government and now has a caretaker government while agencies and cut ministers' salaries - it is also Prime Minister-designate Saad al-Hariri forms a withdrawing a goods and services tax this week new government. which will hurt government revenues. Hariri on Monday expressed hope a government could be formed quickly to shield Lebanon from ($1 = 3.9870 ringgit) regional instability and the dire economic (Reporting by John Geddie situation which he said posed the biggest danger Editing by Jacqueline Wong) to the country. (( [email protected] ; +65 6403 Absent an effective government to carry out 5578; Reuters Messaging: fiscal and other reforms, the central bank has for [email protected] )) (c) Copyright Thomson Reuters 2018. years maintained stability using stimulus packages and unorthodox financial operations. Central bank policies have kept growth ticking Malaysia fin min: scrapping GST will over and foreign reserves high, but they have create $5 bln hole in budget increased risk in the financial system. The 31-May-2018 central bank and IMF say such policies should KUALA LUMPUR, May 31 (Reuters) - Malaysia's not continue long-term and that government finance minister said on Thursday that a policymaking needs to step in. promised withdrawal of a goods and services tax would create a 21 billion ringgit ($5.3 (Reporting by Lisa Barrington in Beirut, additional billion) hole in the budget, which will be reporting by Marc Jones in London mostly plugged by increased oil-related Editing by Peter Graff) revenues and spending cuts on projects. (( [email protected] ; +961(0) Lee Guan Eng said the scrapping of the tax on 1954456; )) (c) Copyright Thomson Reuters 2018. June 1 can be offset by 5.4 billion ringgit of oil- related revenues and cuts on non-essential projects amounting to 10 billion ringgit. He said a new sales tax would likely be Malaysia introduced on Sept. 1, and that the government would meet its projected budget deficit of 2.8 Malaysia tries crowdfunding to plug percent for 2018. ballooning debts ($1 = 3.9760 ringgit) 30-May-2018 (Reporting by A.Ananthalakshmi KUALA LUMPUR, May 30 (Reuters) - Malaysia Writing by John Geddie has set up a fund for members of the public to Editing by Jacqueline Wong) donate cash to help the new government (( [email protected] ; +65 6403 repay its hefty national debt, the finance 5578; Reuters Messaging: ministry said on Wednesday, providing a bank [email protected] )) account number for deposits. (c) Copyright Thomson Reuters 2018.

Prime Minister Mahathir Mohamad has made it a priority to cut Malaysia's debts and liabilities - estimated at 1 trillion ringgit ($250.8 billion) or Malaysia vows to meet deficit target, 80 percent of GDP - since he mounted a surprise plug $5 bln tax hole win over scandal-plagued Najib Razak in a May 9 31-May-2018 general election. •Govt prepares to scrap goods and services The move comes after a private fundraising tax initiative 'Please Help Malaysia!' received more •Says to be offset by spending cuts, higher than $3,500 of donations on website dividends GoGetFunding in a campaign to help the •Aims to keep budget deficit at 2.8 pct of GDP Southeast Asian country reduce debt. in 2018 "Due to the recent economic development and •Malaysia working with Singapore to help the growing concern among the rakyat (people) retrieve 1MDB funds on the country's current debt position, there are By A. Ananthalakshmi signs of awareness from the rakyat to lend their KUALA LUMPUR, May 31 (Reuters) - Malaysia support to the government," the finance ministry will be able to meet its budget deficit target said in a statement. for 2018 even though the scrapping of a "The rakyat voluntarily want to share their goods and services tax will blow a $5 billion earnings with the government to help ease the hole in the government's wallet, the finance burden." minister said on Thursday. Swept to a shock win in May 9 elections on PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 8 pledges to tackle rising living costs and high- (c) Copyright Thomson Reuters 2018. level corruption, the new coalition has set its sights on cutting an estimated 1 trillion ringgit ($251.38 billion) of debt it blames on abuses by Saving The Country From The RM1 scandal-tainted Najib Razak's previous Trillion Debt administration. First, however, on Friday it will fulfil a campaign 01-Jun-2018 Saving the Country from the RM1 trillion debt promise to scrap a much-maligned GST A. 100 Days Promises - Stabilising petrol and introduced in 2015. Diesel Retail Prices, Implementation of SST Finance Minister Lim Guan Eng said that the 21 B. Second Phase of Bantuan Sara Hidup (BSH) billion ringgit in lost revenue this year from the Payment (Formerly known as BR1M) tax's scrapping would be offset by rising oil- C. Toll Discount During Aidilfitri related income, spending cuts on non-essential D. 2018 World Cup Broadcast projects, increased dividends from government- E. Establishment of Tabung Harapan Malaysia linked firms and a new sales tax expected to be F. Special Assistance for Aidilfitri of Rm400 for introduced in September. Civil Servants Grade 41 and below and Rm200 "We are mindful that Federal Government for Pensioners debt which has exceeded RM1 trillion, G. Federal Government Financial Position for requires fiscal discipline," Lim told a news 2018 conference. 1. The Ministry of Finance is focused on the Lim said the government's projected fiscal deficit Government's fiscal measures, especially on would increase slightly to 40.1 billion ringgit in financial steps to be implemented to ensure that 2018 from 39.8 billion ringgit, which would the Government's financial position remains maintain the deficit at 2.8 percent of GDP. robust. Measures include reducing the RM1 He said there were no plans to revise economic trillion Federal Government debt caused in growth forecasts for now. part by financial scandals such as 1MDB and When asked about a possible public listing of to ensure that our Budget deficit remains state petroleum firm Petronas as an option for manageable. The Federal government shall also raising funds, Lim said this idea "has not been ensure that the current balance (revenue put forward to the government". received less operating expenditure) is not in Lim said higher dividends from government- deficit. linked entities such as Petronas, sovereign 100 Days Promises wealth fund Khazanah Nasional Berhad and the 2. The Federal Government is committed to fulfill central bank could deliver an extra 5 billion Pakatan Harapan's 100 Days manifesto to ringgit this year. That would be alongside 5.4 ensure the well-being of the rakyat without billion ringgit of extra tax revenue from oil escalating the hidden debt burden of RM1 trillion companies in Malaysia, and 10 billion ringgit passed on to the Pakatan Harapan government saved through reviews of high-priced projects. by the previous administration. Therefore, the A sales tax due to be introduced on Sept. 1 will Government has agreed to implement the add an additional 4 billion ringgit to the public following measures: purse this year, he said. Price Stabilisation Measures on Petrol And RELUCTANTLY PAID Diesel Retail Prices On troubled state fund 1Malaysia Development 3. Retail prices of RON95 petrol and diesel will Berhad (1MDB), Lim said the ministry be maintained at current prices of RM2.20 and "reluctantly" paid a 143.75 million ringgit ($36.2 RM2.18 per litre respectively. Meanwhile, the million) 1MDB bond coupon this week. retail price of RON97 petrol will be maintained at The new govt has said the fund - set up nearly a current price of RM2.47 per litre from 1 to 6 decade ago - has been insolvent for more than a June 2018 although the Goods and Services Tax year. It has pledged to keep honouring all (GST) is zero-rated (0%). Effective 7 June 2018, payments due on its debt. the retail price of RON97 will be set based on Malaysia has also made it a priority to find out market prices and reviewed on a weekly basis how billions went missing from 1MDB, and anti- every Thursday according to the managed float graft agents have quizzed ex-premier Najib over mechanism. his alleged role. Implementation of the Sales Tax and Service Najib has consistently denied any wrongdoing. Tax (SST) A task force investigating 1MDB said on 4. The Goods and Services Tax (GST) will be set Thursday it is working with counterparts in at 0% beginning 1 June 2018. To replace the Singapore to retrieve funds believed to have GST, the Sales Tax Bill 2018 and the Service Tax been misappropriated. Bill 2018 will be tabled in Parliament as soon as possible after the debate on the motion of the ($1 = 3.9780 ringgit) Royal Address in the First Meeting of the First (Reporting by A.Ananthalakshmi Term of the 14th Parliament Session. The Sales Writing by John Geddie Tax and the Service Tax will be implemented Editing by Jacqueline Wong and Richard Borsuk) from 1 September 2018 subject to the (( [email protected] ; +65 6403 completion of all required legislative procedures. 5578; Reuters Messaging: 5. To ensure that the RM1 trillion national debt [email protected] )) can be contained if not reduced, the Federal PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 9

Government is compelled to implement some of will provide the details. the 100 Days Promises, particularly on the Establishment of the Tabung Harapan targeted petrol subsidies for cars below 1,300cc Malaysia and motorcycles below 125cc, the EPF 10. In light of the recent developments and contribution scheme for housewives, the concerns of the rakyat on the country's debt increase in minimum wage, the deferment of position, there have been fervent requests by PTPTN loans repayment until the RM4,000 patriotic 5 Malaysians to channel donations and monthly income threshold and the their sincere contributions to the Federal implementation of the Skim Peduli Sihat only Government to reduce the Federal government's when the financial situation improves. debt. In this regard, in order to enable the 6. As much as we would like to implement all of donations and contributions to be the 100 day promises, this Federal government systematically managed and organised, a is fiscally responsible and would not follow the trust fund known as Tabung Harapan Malaysia previous government's example of fiscal (THM) will be set up and managed by the imprudence which would almost certainly have Ministry of Finance. Donations and contributions are accepted in local currency led the nation on a path to bankruptcy. The (Ringgit Malaysia). On behalf of the Federal Federal government continues to be committed Government, I express my appreciation and to implement our manifesto promises when the gratitude for the concern and sincere financial situation permits. Bantuan Sara Hidup or BSH payments contributions of Malaysians. The account number (formerly known as BR1M) no is 566010626452 (Maybank) and the 7. Effective on 6 June 2018 (Wednesday), the contribution is tax deductible. So far, the Government has agreed to disburse the second amount of contributions as at 2pm is RM6.5 tranche of the BSH 2018 payment. This payment million. The Ministry of Finance will be updating will involve almost 4.1 million recipients with an the latest contribution amount at our website estimated allocation amount of RM1.6 billion. (www.treasury.gov.my) every day at 2pm. The Government hopes that this BSH payment Special Assistance for Aidilfitri for Civil Servants Grade 41 and below and Pensioners will assist the rakyat in purchasing essential 11. The Federal Government recognises the items in preparation for the Hari Raya Aidilfitri important role civil servants of the past and celebrations. BSH payments will be credited present play in shaping the country. As such, a directly to the respective recipient's account. For Hari Raya bonus of RM400 will be given for civil those who have no bank account, a letter of servants Grade 41 and below and RM200 for approval will be mailed directly to the recipient pensioners. This will cost the government and the cash may be collected at any nearest approximately RM700 million. Bank Simpanan Nasional branch. Only those who Federal Government Financial Position 2018 are qualified shall receive this assistance. For 12. Following the announcement of the zero- further inquiries, kindly contact the toll-free rated GST announcement effective 1 June 2018 number: 1800-88-2716 or email to: (Friday), Federal Government revenue is [email protected]. expected to decline by RM21 billion. However, Highway Toll Discount of 50% for the last two days of Ramadhan with the increase in global oil prices (an average 8. To welcome Hari Raya Aidilfitri by reducing of USD70 per barrel), the expected 6 increase in travelling costs and traffic congestion during the oil-related revenue is estimated at only RM5.4 festive season, a 50% toll discount will be given billion. As an immediate measure, the Ministry of for the last two days of Ramadan. This discount Finance has identified expenditure savings worth is an additional incentive after the Government RM10 billion. The measures are focused on the has set a zero rate for the GST from 1 June review of expenditure including the downsizing, 2018. Concessionaires are encouraged to delaying and abolition of overlapping and non- continue the toll discount as has been urgent programmes and projects. implemented during previous festive seasons in 13. The country has come together to elect a order to reduce travelling costs. new Federal government to save the country World Cup Football 2018 Live on RTM Channel from financial ruin. This task will not be easy. 9. Sports is one the platforms which can unite We believe that together, we can reduce our Malaysians. Therefore, to give everyone the RM1 trillion Federal government debt. Despite opportunity to watch the upcoming World Cup the fiscal pressures, the fundamentals of the Football Championship 2018 live and free of economy remain strong. The banking sector is charge on TV as promised in the Pakatan well-capitalised with low non-performing loans Harapan manifesto, this event will be ratio and there is sufficient liquidity in the capital broadcasted live via RTM throughout the markets. Let us remain united to face and tournament period. We believe that this will overcome these economic challenges. make for a more enjoyable Hari Raya Aidilfitri for all football fans. The government has set aside a (C) Copyright 2018 - Ministry of Finance of Malaysia maximum of RM40 million for this World Cup 2018 broadcast but the actual expenditure is RM30 million which will likely be sponsored via advertising revenue. The Multimedia and Communications Minister, YB Gobind Singh Deo PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 10

China's finance ministry and central bank, who were faxed questions about the loans, did not Pakistan immediately respond to requests for comment. Although Pakistan's economic growth has soared Pakistan seeks economic lifeline with to nearly 6 percent, the fastest pace in 13 years, fresh China loans the structural problems with the economy are coming to the fore. It is similar to 2013, when 26-May-2018 foreign currency reserves dwindled and Pakistan Repeats May 25 story with no changes in text narrowly escaped a full-blown currency crisis. •Pakistan scrambling to shore up plummeting FX reserves "The current situation appears to be a replica of •China now Pakistan's biggest investor, debt what we experienced in 2013, albeit on a slightly inflows grow larger scale," said Yaseen Anwar, who was the •Some analysts say Pakistan will need governor of the central bank, the State Bank of another IMF bailout Pakistan (SBP), back in 2013. •Pakistan received $6.7 bln IMF bailout in The darkening macroeconomic outlook prompted 2013 the IMF earlier this month to downgrade its By Drazen Jorgic economic growth forecast for Pakistan to 4.7 ISLAMABAD, May 25 (Reuters) - Pakistan percent for the next fiscal year ending in June expects to obtain fresh Chinese loans worth 2019, way below the government's own $1-2 billion to help it avert a balance of ambitious target of 6.2 percent. payments crisis, Pakistani government "TEMPORARY BRIDGE" sources said, in another sign of Islamabad's Over the past nine months Pakistan has growing reliance on Beijing for financial enacted a series of measures to combat its support. ballooning current account deficit, including Lending to Pakistan by China and its banks is on hiking tariffs on more than 200 luxury items track to hit $5 billion in the fiscal year ending in and devaluing its currency by about 10 June, according to recent disclosures by officials percent. and Pakistan finance ministry data reviewed by In the six months to end of March, Pakistan took Reuters. bilateral loans worth $1.2 billion from China, The ramp up in China's lending comes as the according to the Pakistan Finance Ministry United States is cutting aid to Pakistan following document reviewed by Reuters. During this a fracture in relations between the on-off allies. period the government also borrowed about In February, Washington led efforts that saw $1.7 billion in commercial loans, mostly from Pakistan placed on a global terror financing Chinese banks, finance ministry officials added. watchlist, drawing anger in Islamabad amid In April, Pakistan's central bank borrowed fears it will hurt the economy. another $1 billion from Chinese commercial The new Chinese loans that are being negotiated banks to buffer its reserves, State Bank of will help bolster Pakistan's rapidly-depleting Pakistan Governor Tariq Bajwa told the Financial foreign currency reserves, which tumbled to Times (FT). A spokesman for the central bank $10.3 billion last week from $16.4 billion in May told Reuters the FT report was accurate. 2017. The $1-2 billion under discussion would be in The talks come only weeks after a group of addition to that loan. Chinese commercial banks lent $1 billion to So far, all the measures appear to have had a Pakistan's government in April. limited impact on Pakistan's economy and The reserves decline and a sharp widening of foreign exchange reserves continue to plummet. Pakistan's current account deficit have prompted The collapse of the reserves is mainly due to the many financial analysts to predict that after the central bank's efforts to maintain an artificially general election, likely in July, Islamabad will strong rupee over the past few years, analysts need its second International Monetary Fund say. The currency is now trading at about (IMF) bailout since 2013. The last IMF assistance 115.50/116 to the U.S. dollar, down 9.8 percent package was worth $6.7 billion. in last six months after two separate Beijing's attempts to prop up Pakistan's devaluations since December. economy follow a deepening in political and In the past three weeks, reserves have declined military ties in the wake of China's pledge to by $1.2 billion and now stand at two month fund badly-needed power and road worth of import cover. infrastructure as part of the $57 billion China- "This new (Chinese) money is a temporary Pakistan Economic Corridor (CPEC), a key cog bridge until August or September, when a new in Beijing's vast Belt and Road initiative. government will come into office and the country "I think this month we will get that $1-2 billion," will likely opt for a new IMF programme," said said a senior Pakistan government official, Saad Hashmey, chief economist at brokerage saying the funds will come from Chinese state- house Topline Securities. run institutions. Hashmey and several other economists are A second government official confirmed Pakistan predicting another currency devaluation by the was in "sensitive" talks with Beijing over extra end of 2018. funding for up to $2 billion. Pakistan may also seek help from Saudi Arabia. Pakistan finance ministry officials did not The Middle Eastern ally loaned $1.5 billion to respond to a request for comment. Pakistan in 2014 to shore up its foreign currency PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 11 reserves. to fund the infrastructure programme and pay RISING EXPORTS maturing debts. The scale of the task facing Pakistan is huge as The dollar bond issue might be launched "late the current account deficit widened to $14 billion third or early fourth quarter", ahead of further in the first 10 months of the current fiscal year, interest rate increases by the U.S. Federal according to SBP data. Dollar-denominated debt Reserve, he said. repayments in 2018 are also expected to top $5 billion, analysts say. (Reporting by Enrico dela Cruz Part of the problem for Pakistan has been a Editing by Matthew Mpoke Bigg) multi-year consumer boom accompanied by (( [email protected] ; +632 841-8934; Reuters huge imports of Chinese machinery for CPEC Messaging: [email protected] )) projects, which has piled pressure on the current (c) Copyright Thomson Reuters 2018. account deficit. More recently, a jump in the oil price has compounded the problem as Pakistan is a fuel importer. One of the senior Pakistani government officials Saudi Arabia said the money from China should give the economy breathing space. Saudi finance ministry sells 3.95 bln He said exports have shot up in the last two riyals of domestic sukuk months, helped by the devaluation in the rupee, and that should help ease the current account 27-May-2018 deficit. RIYADH, May 27 (Reuters) - Saudi Arabia's However, Pakistan's central bank appears more finance ministry sold 3.95 billion riyals ($1.05 nervous as oil prices climb, raising its main billion) of domestic sukuk in its monthly sale by re-opening an issue originally made last policy rate by 50 basis point to 6.5 percent on month, the ministry said. Friday and warning the "the balance-of- It sold 3.35 billion riyals of five-year sukuk, 350 payments picture...has further deteriorated". million riyals of seven-year and 250 million riyals

of 10-year. (Reporting by Drazen Jorgic Edited by Martin Howell) Last month, the ministry sold 5.0 billion riyals of (( [email protected] ; +92 307 8888 domestic sukuk. 153; Reuters Messaging: [email protected] )) (Reporting by Marwa Rashad; Editing by Alexander (c) Copyright Thomson Reuters 2018. Smith) (( [email protected] ; +966114632603 ; Reuters Messaging: [email protected] )) Philippines (c) Copyright Thomson Reuters 2018.

Philippines plans to sell $2 bln samurai, dollar bonds Saudi central bank reserves rise sharply on back of high oil prices 28-May-2018 MANILA, May 28 (Reuters) - The Philippines 28-May-2018 said on Monday it is aiming to raise as much By Andrew Torchia as $2 billion via bond issues denominated in RIYADH, May 28 (Reuters) - The Saudi Arabian yen and U.S. dollars before the year ends, central bank's foreign reserves rose last depending on market conditions. month at their fastest rate for four years, The plan is to sell $1 billion in global bonds and official data showed on Monday, revealing the another $1 billion in samurai bonds, National extent to which a rebound in oil prices is Treasurer Rosalia de Leon told Reuters. strengthening the kingdom's finances. "That is part of (this year's) financing Net foreign assets climbed by $13.3 billion programme but actual sale will depend on month-on-month to $498.9 billion in April, their market conditions," she said, confirming a local highest level in over a year. newspaper report about the fund-raising plan. The assets peaked at $737 billion in August In March the government raised $230 million 2014 before the government began drawing from a sale of panda bonds, a debut offering them down to cover a budget deficit caused by a that drew strong demand and followed an issue plunge in oil prices, and to build up its main of 10-year global bonds early this year, which sovereign wealth fund in preparation for raised $750 million. overseas investments. The Philippines, one of Asia's most active Last month's sharp rise in the reserves issuers of sovereign debt, is raising money to suggested the government is no longer under finance its $180 billion "Build, Build, Build" major financial pressure, after the Brent oil price infrastructure plan that aims to upgrade or climbed to about $75 a barrel last month from build roads, bridges, railways, seaports and around $50 in the middle of last year. airports. However, Riyadh is still running a sizeable Finance Secretary Carlos Dominguez said in May budget deficit, which it can fund partly with a second dollar bond issue this year was planned domestic and international bond issues. Saudi PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 12

Arabia issued $11 billion of international bonds teamed up to bid for the hotly contested in April. mandate. Quite unusually, Alpen Capital, Riyadh would need oil prices to average $85-$87 National Savings Bank and NDB Investment a barrel this year to balance its state budget, an Bank – all of which are Sri Lankan financial International Monetary Fund official told Reuters institutions – were also in the fray, while India's this month. Axis Bank had submitted a solo bid for a small The vast majority of the reserves are believed to amount. The government is also preparing to be denominated in U.S. dollars. The April data refinance big debts that fall due up to 2022, with showed the central bank boosting its deposits the start this year of repayments on expensive with banks abroad by $8.6 billion and its infrastructure foreign loans, the Reuters report investment in foreign securities by $3.7 billion. said. The government has blamed its The data also showed Saudi bank lending to the predecessor's "colossal borrowing" for the spike private sector rising from a year earlier in April, in debt servicing. by 0.7 percent, after falling for 13 straight Finance Minister Mangala Samaraweera said months. earlier this month the debt crisis would If it continues, the rebound in bank lending further worsen next year, when US$4.3bn has could indicate the beginning of a recovery in the to be paid for debt servicing in 2019, the economy, which has been slumping because of report said. Some 77% of next year's new taxes, fees and other government austerity repayments are for debts obtained by the measures designed to cut the budget deficit. previous government, according to the minister.

(Reporting by Andrew Torchia; Editing by Toby The cabinet has approved plans to borrow some Chopra) US$5bn in 2018 to refinance the debts due this (( [email protected] ; +9715 6681 year. 7277; Reuters Messaging: Sri Lanka's previous loan was a US$1bn three- [email protected] )) year facility in July last year. That deal paid a (c) Copyright Thomson Reuters 2018. top-level all-in pricing of 250bp based on a margin of 200bp and a two-year average life.

(([email protected]; +852 Sri Lanka 2912 6671; Reuters Messaging: [email protected]; CDB snares sovereign mandate with Twitter @TRLPC @PrakChakravarti)) aggressive terms (Editing by Luis Morais) (c) Copyright Thomson Reuters 2018 29-May-2018 China Development Bank has won the mandate on a US$1bn loan for the Democratic EUROPE Socialist Republic of Sri Lanka, dashing the hopes of rival lenders vying for the deal, sources said. Albania "The terms at which the Chinese bank won the deal are very aggressive," said one banker from a rival firm that was bidding for the mandate. Albania to sell 3.0 bln leks (23.5 mln Sri Lanka accepted an eight-year US$1bn loan euro) of 7-yr T-notes from CDB at an effective rate of return of about 29-May-2018 5.3%, Reuters reported last Friday quoting two TIRANA (Albania), May 29 (SeeNews) – officials from the Ministry of Finance. Albania's finance ministry said it will offer 3 The loan has a grace period of three years with billion leks ($27.4 million/23.5 million euro) repayments of US$100m taking place twice a of seven-year fixed-rate Treasury notes at an year after the fifth year for the remainder of the auction on June 7. tenor, the report said. The government securities will mature on June CDB was among four bidders for the 11, 2025, according to the calendar for the borrowing, which emerged in April after the issuance of government securities in the second Government of Sri Lanka raised US$2.5bn quarter posted on the website of finance from a two-part bond, split equally into a five- ministry. year portion priced to yield 5.75% and a 10- At the last auction of seven-year T-notes held in year piece yielding 6.75%. February, the finance ministry raised 3.36 billion The sovereign had sent out a request for leks, below its target of 4 billion leks. The proposals for the loan, to be denominated in US coupon rate increased to 5.86% from 5.39% at dollars, euros or yen and with a minimum the previous auction of seven-year government maturity of three years. securities held in December. A rival group of 10 banks was expected to win the mandate given the line-up of heavyweight (1 euro = 125.659 leks) lenders. Citigroup, Credit Suisse, Deutsche Copyright 2018 SeeNews. All rights reserved. Bank, Emirates NBD, First Abu Dhabi Bank, HSBC, MUFG, Standard Chartered, State Bank of India and Sumitomo Mitsui Banking Corp had

PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 13

Bulgaria Croatia

Bulgaria's gross foreign debt falls Croatia sells fewer T-bills than 2.3% y/y in March planned, yield flat 28-May-2018 29-May-2018 SOFIA (Bulgaria), May 28 (SeeNews) - ZAGREB, May 29 (Reuters) - Croatia sold 335 Bulgaria's gross foreign debt fell by an annual million kuna ($52.38 million) worth of one- 2.3% to 33.3 billion euro ($38.8 billion) at the year treasury bills at auction on Tuesday, with end of March, the central bank said on the yield unchanged at 0.09 percent, Finance Monday. Ministry data showed. The gross foreign debt was equivalent to 62.1% The target at the auction was set at 800 million of the projected 2018 gross domestic product kuna. A bit more than 60 percent of the bills (GDP), down from 67.6% of GDP at the end of were taken up by the banks. March 2017, the Bulgarian National Bank said in Bids at recent auctions of papers denominated in a statement. the national kuna currency have been modest Month-on-month, Bulgaria's external debt edged amid low yield. up 0.5% at end-March. The ministry occasionally also auctions bills with three-month and six-month maturities as well as ($= 0.8570 euro) those denominated in euros. Copyright 2018 SeeNews. All rights reserved. After the auction, Croatia's overall short-term

debt in the local currency fell to 18.56 billion kuna from 19.23 billion. Bulgaria expects budget surplus at 1.4 The next auction will be held on June 5. percent of GDP in May ($1 = 6.3954 kuna) 31-May-2018 (Reporting by Igor Ilic, editing by Larry King) SOFIA, May 31 (Reuters) - Bulgaria expects to (([email protected]; +385 1 4899 970; post a fiscal surplus of 1.4 percent of gross mobile +385 98334 053;)) domestic product on a cash basis at the end of c) Copyright Thomson Reuters 2018. May, the finance ministry said on Thursday.

The ministry said the Balkan country recorded a surplus of 1.3 percent of GDP at the end of April, Croatia's borrowing focus this year on mainly due to a deadline for citizens to pay their local market annual taxes and generally better collection. Bulgaria is targeting a fiscal shortfall of 1.0 30-May-2018 percent of economic output this year as it allots ZAGREB, May 30 (Reuters) - Croatia plans this more funds for education and public sector year to issue bonds at home and abroad with wages. It ended 2017 with a surplus of 0.9 a total worth of 16.2 billion kuna ($2.55 percent of GDP. billion), the government said in a document The ministry sees the economy growing by 3.9 on debt management adopted on Wednesday. percent this year mainly due to increased Croatia will seek to refinance a 750 million euros domestic demand and strong exports. The ($872.00 million) international bond that economy expanded by 3.6 percent in 2017. matures in July by the end of June. Government revenues in April rose 8.0 percent "We have already made some steps to prepare from the same period in 2017 to 13 billion levs for this issue," Finance Minister Zdravko Maric ($7.77 billion). Spending rose to 11.7 billion levs told a cabinet session. in April from 10.4 billion a year ago, data The government also plans to issue domestic showed. bonds with a total worth of 10.5 billion kuna in Fiscal reserves held under the currency regime the third and fourth quarters. pegging the lev to the euro stood at 10.7 billion A domestic bond worth 6.0 billion kuna matures levs at the end of April. in July. The government also set its treasury bills ($1 = 1.6736 leva) borrowing target for this year at 17.4 billion (Reporting by Tsvetelia Tsolova; editing by David kuna. Stamp) For this year the government plans a general (( [email protected] ; +359 888 budget deficit of 0.5 percent of gross domestic 695 510) ) product. (c) Copyright Thomson Reuters 2018. Croatia is making effort to gradually reduce its public debt to below 70 percent of GDP from the current level of 78 percent as part of its efforts to prepare the economy for the euro zone entry tentatively planned in the next five to seven years.

($1 = 6.3528 kuna) ($1 = 0.8601 euros) PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 14

(Reporting by Igor Ilic on-year from 5.4 percent in the previous Editing by Richard Balmforth) quarter. (( [email protected] ; +385 1 4899 970; "The pick-up in investment was caused by mobile +385 98 334 053; )) infrastructure investment co-financed from EU (c) Copyright Thomson Reuters 2018. funds," Malaises said, adding that private investment remained weak. Poland is the largest recipient of EU cohesion Kosovo funds and some analysts have said the Polish government's well publicised conflicts with the Kosovo sells 20 mln euro of 5-yr T- EU and policies to raise tax collection might be discouraging firms from investing more. notes, yield up The European Commission presented earlier this 29-May-2018 week proposals to cut the value of EU aid to PRISTINA (Kosovo), May 29 (SeeNews) – Poland and other post-communist EU members Kosovo's finance ministry has raised 20 in the next long-term budget starting in 2021. million euro ($23.3 million) from the sale of a Polish household consumption rose by 4.8 new issue of five-year Treasury notes, in line percent year-on-year, supported by a record low with plan, the country's central bank said on level of unemployment and fast wage growth. Tuesday. Economists said the data, together with the The average weighted yield on the government lower than expected May inflation, added to securities rose to 2.08% at the auction held on arguments that interest rates would not be Monday, from 1.53% at the previous auction of changed in the coming quarters. five-year T-notes held in February, according to "One should expect that the Monetary Policy figures posted on the website of Kosovo's central Council will maintain the outlook for a long bank. stabilisation of interest rates in Poland," said

Monica Kurt, chief economist at Bank Pocztowy. ($ = 0.85760) Copyright 2018 SeeNews. All rights reserved. In seasonally adjusted terms, the economy grew by 1.6 percent year-on-year in the first quarter, accelerating from 1.0 percent a quarter earlier.

Poland (Reporting by Anna Koper and Marcin Goettig; Additional reporting by Pawel Sobczak, writing by Marcin Goettig; Editing by Toby Chopra) Rising consumption, inventories drive (([email protected]; Poland's GDP growth above 5 pct +48226539720; Reuters Messaging: 30-May-2018 [email protected])) (c) Copyright Thomson Reuters 2018. •Polish Q1 GDP growth revised up to 5.2 pct y/y •GDP driven by rise in consumption, inventories Romania •Slowing foreign trade weighs •Economists expect growth to slow •Consumption supported by record low Romania to issue 3.64 bln lei (783 mln unemployment euro) of domestic debt in June By Marcin Goettig and Anna Koper 31-May-2018 WARSAW, May 30 (Reuters) - Robust BUCHAREST (Romania), May 31 (SeeNews) - consumption together with rising inventories Romania's finance ministry said on Thursday helped propel Poland's economic growth to it plans to auction 3.64 billion lei ($916 more than 5 percent in the first quarter, data million/783 million euro) worth of showed on Wednesday, but weaker foreign government securities, including 435 million trade signalled the expansion could slow in lei in non-competitive offers, in June. the future. The finance ministry plans seven auctions of Growth accelerated to 5.2 percent year-on-year, government securities with residual maturities above an earlier estimate of 5.1 percent. That ranging from eight months to 13.3 years and compared with 4.9 percent GDP growth in the one auction of six-month Treasury bills in June, three months to December 2017. it said in a monthly debt issuance calendar. A new breakdown showed consumption added Romania's finance ministry planned to auction 3.6 percentage points to the first-quarter growth 3.84 billion lei worth of government securities in rate, a rise in inventories added 1.9 percentage May, of which it managed to sell some 1.9 billion points, investment added 0.9 point, while lei. foreign trade subtracted 1.2 percentage points. Since the beginning of 2018, the finance "The data show that economic growth has ministry has sold roughly 15 billion lei and 252 peaked at the start of this year," said Grzegorz million euro worth of domestic debt and has Maliszewski, chief economist at the Warsaw- raised 2 billion euro on international markets based Bank Millennium. from the sale of 2028 and 2030 Eurobonds. Investment, seen by analysts as crucial to the growth outlook, accelerated by 8.1 percent year- (1 euro= 4.6485 lei) PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 15

Copyright 2018 SeeNews. All rights reserved.

Slovenia

Russia Slovenia Jan-April tax income up, budget in surplus Foreigners' share in Russian OFZ bonds declines to 31 pct-central bank 31-May-2018 LJUBLJANA, May 31 (Reuters) - Slovenia's tax 30-May-2018 income increased by 7.7 percent year-on-year MOSCOW, May 30 (Reuters) - The share of in the first four months of 2018 due to higher foreign investors among holders of Russian company profits and increased spending, the treasury bonds, known as OFZs, has declined Finance Ministry said on Thursday. to around 31 percent, Ksenia Yudayeva, first It added the central government budget had a deputy governor at the Russian central bank, surplus of 26.6 million euros ($31 million) in the said on Wednesday. period compared to a deficit of 133.9 million As of April 1, the share of foreign investors euros in the first four months of 2017. among holders of OFZ treasury bonds had been "Total budget income was 6.8 percent higher 34.5 percent. than a year ago ... while budget expenditure Yudayeva also said foreign investors had sold increased by 1.3 percent," the ministry said in a around 200 billion roubles ($3.21 billion) of OFZ statement. bonds since new U.S. sanctions were announced The government plans a budget surplus of some on April 6. 0.4 percent of GDP in 2018 compared to a The yield of OFZ bonds has been falling due to surplus of 0.03 percent last year. demand from Russian investors. The central Slovenia, which narrowly avoided an bank did not buy OFZ bonds when foreign international bailout for its banks in 2013, investors were selling them off, Yudayeva said. returned to growth a year later and the government expects the economy to expand ($1 = 62.2900 roubles) by 5.1 percent this year, boosted by exports, (Reporting by Elena Fabrichnaya investments and domestic spending, versus 5 Writing by Polina Nikolskaya percent in 2017. Editing by Tom Balmforth) Earlier on Thursday the statistics office reported (( [email protected] )) that GDP growth in the first quarter of 2018 (c) Copyright Thomson Reuters 2018. slowed to 4.6 percent year-on-year from 6 percent in the previous quarter, mainly due to slower growth of exports. Slovakia On Wednesday the Fiscal Council, a body which advises the government on public finances, said Slovak end-May budget deficit at EUR more has to be done to ensure long-term public finance stability, pointing out that the country's 725.2 mln debt remains high at some 73.6 percent of GDP. 01-Jun-2018 BRATISLAVA, June 1 (Reuters) - The Slovak ($1 = 0.8554 euros) central government budget deficit reached (Reporting By Marja Novak; Editing by Toby Chopra) 725.2 million euros ($846.89 million) at the (( [email protected] ; = 386-1- end of May, narrower than a 891.48 million 5058805, Reuters Messaging: euro deficit posted a year ago, the Finance [email protected] )) Ministry said on Friday. (c) Copyright Thomson Reuters 2018. Total revenue reached 5.25 billion euros at the end of May, while expenditure was 5.98 billion euros. Tax revenue stood at 4.53 billion euros, Turkey up from 4.28 billion euros a year ago. Revenue from EU transfers reached 412.62 million euros, up from 277.44 million euros at Fitch Says Turkey's Cities Face the end of May 2017. Pressure On Debt From Lira Slump The Slovak Finance Ministry aims to reach a 29-May-2018 deficit of 0.8 percent of gross domestic product May 29 (Reuters) - Fitch: this year for the overall public sector, down from Fitch says Turkey's cities face pressure on 1.04 percent last year. The state budget is the debt from lira slump. main part of the public sector finances. Fitch says lira depreciation will put pressure on budgetary performance of Turkish ($1 = 0.8563 euros) municipalities due to their unhedged foreign (Reporting by Tatiana Jancarikova currency borrowing. Editing by Jan Lopatka) Fitch says Istanbul , Izmir , Antalya and bursa (( [email protected] )( +420 have a high share of unhedged external 224 190 477) (Reuters Messaging: borrowing, exposing them to significant [email protected] )) depreciation risk. (c) Copyright Thomson Reuters 2018. Fitch says ratings of Turkish municipalities PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 16 incorporate currency depreciation of 30 percent, (c) Copyright Thomson Reuters 2018. but further declines could weaken credit metrics. Fitch says lira's fall has been driven by investor concerns over turkey's exposure to tighter global Argentina's Macri vetoes bill freezing financing conditions, political & geopolitical risks. utility prices

(c) Copyright Thomson Reuters 2018. 31-May-2018 By Hernan Nessi and Maximiliano Rizzi BUENOS AIRES, May 31 (Reuters) - Argentine President Mauricio Macri on Thursday vetoed Foreigners sell $1.15 bln of Turkish a bill passed in the early morning hours by the bonds and stocks May 1-25 Senate that would freeze energy and water 31-May-2018 prices, as political tensions deepen in the LONDON, May 31 (Reuters) - Foreign investors economically ailing country. withdrew $1.15 billion from Turkish The measure could have derailed Macri's plan for government bonds and stocks in the first cutting the fiscal deficit he inherited from his three weeks of May, data from the Institute of predecessor, Cristina Fernandez, a free-spending International Finance (IIF) showed, as doubts populist who governed for eight years and is over the country's monetary policy roiled now a senator. markets. Macri's cabinet chief, Marcos Pena, told reporters Outflows from Turkish local currency- that Macri rejected the measure as soon as it denominated bonds amounted to $1 billion reached his desk. between May 1 and May 25, the IIF said. "Argentina has to make a more of an effort to In the week ending last Friday, non-residents get closer to having a balanced budget," Pena sold Turkish equities to the tune of $9 million, said. "The law that limits utility price increases is while debt markets saw outflows of $153 million. vetoed." The IIF's data applies to government local Macri, elected in 2015 on a pro-investment currency debt securities. platform, has cut utility subsidies, forcing Argentines to pay higher monthly bills. His fiscal (Reporting by Karin Strohecker; editing by Sujata Rao) belt-tightening program has not gone down well (( [email protected] ; with members of the Peronist opposition, +442075427262; Reuters Messaging: particularly those allied with Fernandez. [email protected] )) In a 37-30 vote, the Senate gave final legislative (c) Copyright Thomson Reuters 2018. approval to the price freeze bill. Pena called the law "irresponsible." LATIN AMERICA AND But opposition lawmakers argued it was a lifeline for Argentines on fixed incomes. CARIBBEAN "The utility hikes, together with increasing

inflation, have had the most impact on our salaried workers, to say nothing of retirees and Argentina pensioners, whose incomes do not increase alongside rising tariffs," said Senator Ines Blas Fitch Says Rate Hike Adds To said during the debate that preceded the vote. Argentinian Local Debt Risks The country's 2019 fiscal deficit target of 2.2 percent of gross domestic product will be cut 29-May-2018 as part of a renewed belt-tightening effort by May 29 (Reuters) - FITCH : the government as it negotiates a standby Fitch says rate hike adds to Argentinian local loan deal with the International Monetary debt risks. Fund. The IMF agreement may be conditional Fitch says recent currency exchange volatility upon tighter fiscal policies. and central bank's rate hike to 40% could This month, the government cut Argentina's affect Argentina's local and regional govts. 2018 deficit goal to 2.7 percent of gross Fitch on Argentinian local debt risks says domestic product from 3.2 percent. uncertainty remains around 2018 financing The peso lost 17.6 percent of its value in May trends. before settling at 24.9 to the U.S. dollar. Fitch says Argentinian provinces with revenue Weak Argentine fundamentals, including 25 linked to U.S. dollar, such as hydrocarbon percent inflation, combined with a worldwide royalties, could be at advantage for external selloff in emerging markets to punish the local funding. currency. More foreign exchange turbulence may Fitch says if market volatility evolves into an lie ahead as opposition resistance stiffens in the economic downturn, Argentina's local and months before Macri's expected re-election regional governments would be affected by campaign next year. lower local, federal revenue.

Fitch says Argentinian provinces with lower (Additional reporting by Walter Bianchi; Writing by foreign currency exposure could also be at an Hugh Bronstein, Editing by Steve Orlofsky) advantage for external funding. (( [email protected] ; 5411 4318 0655; Reuters Messaging: (( [email protected] ;)) [email protected] )) PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 17

(c) Copyright Thomson Reuters 2018. stable with banks well capitalized. Financial soundness indicators show further progress in

reducing NPLs by commercial banks and credit unions. However, private sector credit growth Barbados continued to be subdued and banks' profitability remains weak. IMF Executive Board Concludes 2017 Executive Board Assessment Article IV Consultation with Barbados Executive Directors noted that after an 30-May-2018 improved economic performance in 2016, the Barbados economy is slowing down. Large On January 26, 2018, the Executive Board of fiscal deficits, high debt, and low reserves are the International Monetary Fund (IMF) concluded the Article IV consultation with posing challenges. Directors emphasized that a Barbados. stronger macroeconomic framework and bolder Following the economic recovery in 2016, GDP structural reforms are needed to achieve fiscal growth is slowing reflecting increased pace of and debt sustainability, address the large fiscal consolidation. Real growth reached 1.6 financing needs, build adequate international percent in 2016, as a result of continued robust reserves, and boost growth. long-stay tourism arrival and spending. It is Directors welcomed the authorities' consolidation projected to slow to 0.9 percent in 2017 and 0.5 efforts over the past two fiscal years. They percent in 2018 due to the ongoing fiscal stressed that additional efforts will be adjustment and policy uncertainty related to the necessary to balance the budget over the medium term, given the urgency in tackling forthcoming elections. Inflation is projected to the high debt, meeting the funding rise by year end to 5.5 percent as a result of requirements, and addressing the balance of recent tax increases but return to its historical payment needs. They recommended that norm in the medium term. adjustment measures should focus on The current account balance continues to narrow expenditure, primarily supported by reform of but international reserves are falling. The the State Owned Enterprises (SOEs). Efforts to current account deficit declined to 4.4 percent of contain the wage bill and reform of government GDP in 2016, about of half that in 2014, due to pensions, while improving revenue lower energy prices and a recovery in export administration and broadening the tax base, earnings. Notwithstanding, NIR continued to including by reducing exemptions, would also be decline with lower official and private capital important. Progress with these reforms could inflows, to about US$275 million at end- allow for a partial reversal of the increase in the September (1.6 months of imports). The current National Social Responsibility Levy. account deficit is projected to continue to narrow Directors emphasized that a comprehensive to 3.7 percent in 2017, and to 2.9 percent of restructuring of SOE operations is critical to GDP in 2018 as a result of lower imports, but address the structural imbalance in the public continued weakness in the financial account and sector, in particular by reducing government delayed privatization will contribute to weak transfers. Priority should be given to defining reserves. clear objectives for SOE reform and There has been progress with fiscal implementing the Public Financial Management consolidation but the deficit and debt remain and Audit Act, as well as other measures. high. The fiscal deficit is estimated to have Directors also underscored the importance of declined to 5.5 percent of GDP in FY2016/17 making changes to the size and delivery of social reflecting stronger revenue performance, programs to contain their cost and ensure their including the introduction of the National Social long term viability. Responsibility Levy (NSRL) and one-off factors. Directors encouraged the authorities to continue The government also reduced total expenditure, despite a large increase in debt efforts to phase out direct financing of the service, reflecting efforts to contain spending government by the central bank and to reorient across the board. Staff project further progress monetary policy towards supporting the fixed in reducing the fiscal deficit, to 4.1 percent of exchange rate regime. They also called for steps GDP in FY2017/18 without divestment proceeds. to ease the recent increase in statutory However, this is less than planned as a result of requirements for banks to hold government shortfalls in NSRL revenues and higher transfers securities. Directors noted that banks remain to SOEs. Central government debt at end- well capitalized and that NPLs have been FY2016/17 was 137 percent of GDP or 101 declining. They encouraged the authorities to percent of GDP excluding securities held by the enhance regulatory and supervisory frameworks, National Insurance Scheme (NIS). especially for non bank financial institutions, to The larger than expected fiscal deficit is strengthen the AML/CFT regime, and to proceed increasing funding challenges. While the central with legislative amendments to increase Central bank significantly reduced its funding of the Bank independence. Directors also called for government in the first half of FY2017/18, the sustained action to bolster reserves. commercial banks' reserve requirements for Directors emphasized that stronger and deeper holding government securities have been structural reforms are critical to unlock the increased, increasing banks' exposure to economy's growth potential and maintain sovereign risk. The financial sector remains macroeconomic stability. They underscored that PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 18 reforms should focus on strengthening the best sovereign performer over that period, business environment, facilitating economic according to ICE Bank of America Merrill Lynch. diversification, and improving the efficiency and "Ecuador was tanking, but now it has come effectiveness of public service delivery. back," said one investor. "It was oversold for Directors supported the authorities' efforts in sure." improving the timeliness and quality of economic With the 2028 trading at 9.30% on Monday, data. bond funding is looking more attractive to the Under Article IV of the IMF Articles of new administration of President Lenin Moreno agreement, the IMF holds bilateral discussions who started his term just last year. with members, usually every year. A staff team While promising to remain current on his visits the country, collects economic and debt, Moreno has been critical of his financial information, and discusses with officials predecessor Rafael Correa for leaving an the country's economic developments and economy that was "irresponsibly indebted". policies. On return to headquarters, the staff "They are hesitant to come above 10%," said prepares a report, which forms the basis for Petar Atanasov, co-head of sovereign research discussion by the Executive Board. at hedge fund Gramercy. At the conclusion of the discussion, the "That is a psychological barrier for Moreno as he Managing Director, as Chairman of the Board, wants to distance himself from his predecessor summarizes the views of the Executive Directors Correa who was issuing debt at 10% and and this summary is transmitted to the country above." authorities. Sentiment toward the sovereign has been improving ever since May when Maria Elsa Viteri (C) Copyright 2018 - IMF - International Monetary was replaced as finance minister by market Fund friendly Richard Martinez. ©Thomson Reuters 2018. All rights reserved. Investors had always looked askance at Viteri, who held the same position in 2008 when the

country selectively defaulted on its bond debt, and they welcomed a new, albeit unknown, face. Ecuador "Minister Viteri's communication with investors was pretty poor at a time when Ecuador needs Ecuador seen issuing debt in coming the market," said Atanasov. "It was a positive months surprise that she was removed." 29-May-2018 Martinez's recognition that debt to GDP was in By Paul Kilby the mid to high 50% area - as opposed to NEW YORK, May 29 (IFR) - Improving debt Viteri's calculation of 35%-40% - was a good prices have opened the door for yet another first step, he said. bond from Ecuador in coming months, but the Local economists ideologically opposed to the Andean nation will face tougher terms than it government think this is the first time they can did just a few months ago, say analysts. talk about regime change in terms of economic The oil exporting nation still needs to raise policy, said Atanasov. another US$3bn in 2018 even after accounting Still, Martinez will have to sell his story well to a for improved crude prices, calculates Siobhan buyside that is less inclined to take on risks after Morden, head of LatAm fixed-income at Nomura. already taking loses in EM this year. This comes after the country raised US$3bn in A roadshow and bond issue could take place as January through a 2028 issue, bringing the total soon as next month as the sovereign looks to amount garnered in the bond markets since top up diminishing cash cushions, said Morden. early 2017 to US$8.5bn. "They will need to come to market again this Since then sentiment toward emerging markets year. (But) it is clear they will come in a more has changed dramatically after investors challenging environment for EM," said Atanasov. recently pulled back from the asset class on "That is why it is so important for them to say concerns about a rising dollar and higher US they are cutting expenses and adjusting fiscal rates. expansion to be less reliant on markets going "It is not the same market as earlier this year forward." and there is now a penalty for single B credits," said Morden. (Reporting by Paul Kilby Even so, a recent rally should be good news for Editing by Natalie Harrison) the junk rated sovereign (B-/B) that continues (( [email protected] ; 646 223 4733; Reuters Messaging: to lean heavily on the capital markets for its [email protected] )) funding needs. (c) Copyright Thomson Reuters 2018. The country's newest bond - the 7.875% 2028 - hit a recent high of 90.95 on Monday, up from a 83.45 low seen on May 9, according to Thomson Reuters data. It priced at par to yield 7.875% in S&P Says Ecuador Ratings Affirmed At January 'B-/B' Outlook Remains Stable And Ecuadorean spreads tightened 135bp over 30-May-2018 the 10 days ending May 25, making it LatAm's May 29 (Reuters) - S&P: S&P says Ecuador ratings affirmed at 'b-/b'; PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 19 outlook remains stable. looks increasingly problematic. The government S&P - failure to reduce Ecuador's fiscal estimates that nearly 4 percent of the population imbalances over the next 12 months could has already moved to the mainland. Economic weaken credit quality. output is expected to shrink by more than 13 S&P on Ecuador says despite a challenging fiscal percent in the current fiscal year, according to outlook, expect government to continue to the federal oversight board’s latest fiscal plan, slowly reduce the deficit. adopted in April. And the board’s executive S&P- Ecuador's stable outlook balances director warned last week that the plan's fiscal expectations of more moderate fiscal deficits targets were already looking unrealistic. It adds S&P on Ecuador says expect the accumulation of up to greater pressure for debt forgiveness – debt to slow in 2019-2021. and more of it than creditors probably hoped. S&P- Ecuador stable outlook balances CONTEXT NEWS expectations of some debt stabilization going - Puerto Rico suffered an estimated 4,645 forward against risk arising from governability excess deaths between Sept. 20, 2017, when challenges. Hurricane Maria made landfall on the island, and the end of last year, according to a study (( [email protected] ;)) published on May 29 in the New England Journal (c) Copyright Thomson Reuters 2018. of Medicine.

- The territory’s mortality rate increased by 62 percent in that span compared with the same Puerto Rico period a year earlier, according to the study led by scientists from Harvard’s T.H. Chan School of Public Health. They based their findings on a Puerto Rico deaths will take toll on survey of nearly 3,300 households. They said debt talks that the estimate was conservative, with 29-May-2018 statistical adjustments to account for survivor By Tom Buerkle bias and household-size distributions raising the NEW YORK, May 29 (Reuters Breakingviews) - estimated toll to more than 5,000. Puerto Rico’s hurricane devastation may be - On May 23, bond insurer Assured Guaranty even greater than the island’s own leaders and two of its subsidiaries filed a federal lawsuit contend. Last year’s storm ultimately killed against the Commonwealth of Puerto Rico and some 5,000 people, a new study claims. That’s the Financial Oversight and Management Board more than perished as a result of Hurricane of Puerto Rico claiming their revived fiscal plan Katrina in New Orleans or the Sept. 11 attacks. was unlawful and unconstitutional. It said the The extraordinary number will help the commonwealth had ample funds available for federal overseer that is trying to curtail both essential public services and debt payments on the island’s $72 billion debt. repayment. Few people believe the commonwealth’s official - The plan, adopted on April 19, calls for budget death toll of 64. In December, the New York and structural reforms designed to improve the Times analyzed mortality data from the island’s island’s fiscal position by some $12 billion by statistics bureau and estimated the toll at a little 2023 and restore economic growth. over 1,000. But even that figure pales in comparison with the estimate published by (Editing by Antony Currie and Martin Langfield) researchers led by a team from Harvard’s T.H. (( [email protected] ; Reuters Chan School of Public Health. Messaging: They surveyed households to determine that the [email protected] )) territory had at least 4,645 excess deaths in the (c) Copyright Thomson Reuters 2018. three months and 11 days after Hurricane Maria came ashore last September with its devastating winds. That’s not beyond belief, if tolls Venezuela incorporate those who die as a result of unhealthy conditions or a loss of medical services. Maria left many of Puerto Rico’s 3 Inflation-stricken Venezuela postpones million-plus people stranded and without power currency overhaul for months. 29-May-2018 Creditors have long contended that the island’s CARACAS, May 29 (Reuters) - Venezuelan debt woes are the result of its own financial President Nicolas Maduro said on Tuesday he mismanagement. In one way the new study would postpone an overhaul of the national buttresses that argument too. If officials can get currency to remove three zeroes from the the death toll wrong by a factor or more than 70 bolivar after banking industry leaders times, why should anyone believe their dire requested more time to ensure cash fiscal forecasts? Assured Guaranty for example, transactions may proceed. which has insured more than $1 billion of the Maduro had said the government on June 4 island’s debt, already suggested that the would remove three zeros from prices and print authorities had the resources to service the debt new bank notes in response to inflation that has and provide essential public services. made it nearly impossible to obtain cash and left Yet squeezing more money out of Puerto Rico millions of Venezuelans struggling to find basic PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 20 foodstuffs. S&P says negative outlook on long-term local "I agree with a period of 60 days," Maduro said currency sovereign credit rating reflects view in a televised meeting with banking industry Venezuela may miss payment on outstanding leaders in the presidential palace, adding that local currency debt obligations. the period could be extended to 90 days. "This S&P says Venezuelan government. will continue monetary 'reconversion' is very much needed by monetary financing, making less uncertain Venezuela." timing of default on its domestic debt issuances. He also said new bolivar notes would coexist S&P says negative outlook on long-term local with old notes during the monetary overhaul. currency sovereign credit rating also reflects Critics had accused Maduro of rushing the plan view Venezuela may advance distressed debt through, noting that the new bank notes were exchange operation. not ready yet. Some feared a repeat of the protests and looting of December 2016 when (( [email protected] ;)) Maduro abruptly eliminated the largest bolivar (c) Copyright Thomson Reuters 2018. note in circulation. Consumer protection agency Sundde on Monday AFRICA warned businesses not to halt or slow operations as the monetary overhaul went into effect. Venezuela's annual inflation is now close to African finance leaders to debate 14,000 percent, according to the opposition- China's yuan as a reserve currency controlled legislature, as the country's 29-May-2018 socialist economic system spirals downward. SHANGHAI, May 29 (Reuters) - Central bankers Cash is in short supply because new banknotes and officials from 14 African nations will have not been printed fast enough to keep up discuss the viability of using China's yuan as a with price increases, spurring a growing use of reserve currency for the region, the official cellular phone apps for financial transactions. Xinhua news agency said on Tuesday. Late socialist leader Hugo Chavez in 2008 Seventeen top central bankers and officials from carried out a similar so-called monetary the region will meet at a forum in Harare to conversion that removed three zeroes from the consider the possibility of using the yuan in currency. national reserves, Xinhua said, citing a But the has bolivar depreciated by 99 percent statement from the Macroeconomic and since Maduro took office in 2013, while Financial Management Institute of Eastern and unchecked expansion of the money supply has Southern Africa (MEFMI). given the country's the world's fastest rate of The forum, to take place on Tuesday and inflation. Wednesday, will be attended by deputy Economists say shedding three zeroes from the permanent secretaries and deputy central bank currency is a palliative measure that would need governors, as well as officials from the African to be repeated unless Maduro makes deep Development Bank, Xinhua reported. reforms to the country's dysfunctional currency Attendees will focus on the weakening external controls and excessive money creation. positions of most member countries, following "It's hyperinflation that's the problem, not the an economic slowdown. bills," tweeted opposition lawmaker Carlos "Most countries in the MEFMI region have Valero. loans or grants from China and it would only Maduro, who portrays the country as the victim make economic sense to repay in renminbi of an "economic war," has in the past accused (Chinese yuan)," said MEFMI spokesperson adversaries of stealing the country's bills and Gladys Siwela-Jadagu. smuggling them to neighboring Colombia. "This is the reason why it is critical for policy makers to strategise on progress that the (Reporting by Brian Ellsworth and Corina Pons; writing continent has made to embrace the Chinese by Angus Berwick, editing by G Crosse yuan which has become what may be termed Editing by Alexandra Ulmer) 'common currency' in trade with Africa," she (( [email protected] ; +34-6-6183- added. 2451 Twitter https://twitter.com/AABerwick) ) (c) Copyright Thomson Reuters 2018. MEFMI includes Angola, Botswana, Burundi, Kenya, Lesotho, Malawi, Mozambique, Namibia, Rwanda, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe. S&P Says Venezuela 'CCC-' Local Earlier this year, several central banks in Europe Currency Rating Off CreditWatch also revealed plans to hold yuan as part of their Negative And Affirmed foreign currency reserves, highlighting the 30-May-2018 Chinese currency's rise as a unit in the world's May 29 (Reuters) - S&P: major foreign exchange reserve. S&P says Venezuela 'ccc-' local currency "With China as the largest trading partner of rating off credit watch negative and affirmed; over 130 countries, the main challenge for 'SD' foreign currency rating affirmed. African countries is how to benefit from the new S&P says following Venezuela's presidential pattern of international commerce," said Siwela- election, continue to expect erratic policies Jadagu. fueling "economic crisis", hyperinflation. China's strategic goal of making the yuan a PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 21 major global unit of foreign exchange were next month. bolstered this year as the currency stabilised, Critics say a proliferation of lenders using helping increase foreign purchases of domestic mobile phone financial technology to extend bonds and stocks. credit to people even if they do not have bank accounts is saddling borrowers with high (Reporting by Engen Tham; interest rates and leaving regulators Editing by Eric Meijer and Sam Holmes) scrambling to keep up. (( [email protected] ; +86-21-6104- The government caps the rate banks can charge 1769; Reuters Messaging: their customers for loans at 4 percentage points [email protected] )) above the central bank rate, saying they were (c) Copyright Thomson Reuters 2018. charging very high rates. But lenders who offer

mobile phone services are exempt from that rule because they are not covered by the banking Egypt act. "The bill emasculates the central bank (which) ... is under attack," Njoroge told a news Egypt's foreign debt rises to $82.9 conference. It relegates the banking act and billion as of end Dec leaves bank customers at the mercy of lenders 30-May-2018 by curbing the central bank's ability to regulate CAIRO, May 30 (Reuters) - Egypt's foreign debt fees and charges, he said. rose to $82.9 billion by the end of December, It also takes away the central bank's ability to up 4.9 percent compared to six months deal with "reckless lending", limits its power to earlier, central bank data showed on issue prudential guidelines and place banks Wednesday. under receivership, he said. The ratio of foreign debt to gross domestic Finance ministry officials were not immediately product reached 36.1 percent as of the end of available for a comment. the second quarter of the 2017-2018 financial The bill does not propose repealing the year, which the bank said is "still within the safe government's cap on commercial lending rates, limits according to international standards." which local banks and the International Egypt's fiscal year begins in July and ends in Monetary Fund blame for sluggish growth in June. private-sector credit. In December 2016, Egypt's foreign debt stood at The central bank faced criticism in 2011 after $67.3 billion. inflation rose to nearly 20 percent and the Egypt's foreign reserves were $44.030 billion at shilling weakened to record lows against the the end of April, having climbed steadily since it dollar but it has won praise for maintaining secured a $12 billion, three-year, International macro-economic stability since then. Monetary Fund loan in 2016 as part of efforts to Njoroge, who was appointed in June 2015 lure back foreign investors and revive the from a senior post at the International economy. Monetary Fund in Washington, was also credited with a robust response to the (Reporting by Ahmed Tolba, Writing by Nadine collapse of three financial institutions soon Awadalla, Editing by Richard Balmforth) after he took office. (( [email protected] ;)) He said he had been warned there were some (c) Copyright Thomson Reuters 2018. unnamed parties that were keen on creating mischief and frustrating the central bank's fight

to keep its independence, but he said he was Kenya ready. "I have been warned in various ways about certain parties that lie in wait, poised for Kenya finance bill would emasculate mischief but our actions have consequences, central bank after all this is Kenya, we are ready for that," he 29-May-2018 said. "That menace shall find us at our post and By Duncan Miriri unafraid." NAIROBI, May 29 (Reuters) - Kenya's central He did not give details about who was making bank will be emasculated if a draft bill that the threats. aims to regulate the conduct of financial Njoroge also said lower fiscal deficit targets set institutions becomes law, bank Governor by authorities would be challenging to meet, but Patrick Njoroge said on Tuesday. if they were achieved it would create room for The Financial Markets Conduct bill published last monetary easing. week by the finance ministry proposes to create a regulator in addition to the central bank to (Editing by Matthew Mpoke Bigg) deal with the conduct of lenders. (( [email protected] ; Tel: +254 The ministry says the bill aims to protect 20 499 1234; Reuters Messaging: consumers from lenders who charge high rates [email protected] )) (c) Copyright Thomson Reuters 2018. for services provided over mobile phones. It is open for review and comment by the public and industry and will be presented to parliament PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 22

head of the ruling ANC in mid-November, the yield on the 2026 government bond has fallen Malawi 110 basis points, weathering a heavy emerging market sell-off and a dollar-driven liquidity Malawi’s domestic debt to more than crunch. quadruple in next fiscal year On Monday, it inched lower once more after S&P Global Ratings kept its rating unchanged at sub- 29-May-2018 investment grade "BB'/'BB+" with a stable LILONGWE, May 29 (Reuters) - Malawi's outlook, following a similar decision by Moody's domestic debt is likely to more than quadruple in March. in the next financial year as the government tries to cover falling public revenues, the It was trading at 8.45 percent on Monday finance minister said on Tuesday. compared to a 18-month high of 9.5 percent in Goodall Gondwe told parliament the government November. planned to borrow 176 billion kwacha ($246 "The S&P decision confirms that South Africa is million) in the financial year starting in July, up moving in the right direction, that our slide down from 30.7 billion kwacha in 2017/18. the credit ladder has been halted for now," said Government revenues have been hit by a 45 analyst at ETM Analytics Halen Bothma. billion kwacha bailout of state-run Agricultural "SA bonds have been one of the better Development and Marketing Corporation, as well performers this year and that's down to the as low revenue collection and the failure to improving sentiment after Ramaphosa's receive 55 billion kwacha in grants from donors, election." he said. Western donors have suspended aid to S&P said late on Friday Ramaphosa's election Malawi over graft allegations. and his reform efforts could unlock higher "We need to increase revenue collection and growth and help keep public debt in check. control expenditure so that our debt does not South African debt now ranks in the middle of become unsustainable," Gondwe told Reuters. emerging market peers, with its benchmark bond yielding slightly more than India's 7.7 However, he said current debt levels were still percent and Russia's 7.3 percent, but much manageable with external debt at 23 percent less than Brazil's 11 percent and Turkey's of GDP against the 30 percent recommended 13.7. for low-income countries. "We plan to borrow from commercial banks and Benchmark bonds in Hungary and Colombia, also the central bank will issue Treasury bills for which have similar rating as South Africa at just the same purpose," Gondwe said. below investment grade from two of the three Treasury data shows that as of last December, big ratings agencies, yield 3.1 percent and 6.6 Malawi's public debt stood at 2.4 trillion kwacha, percent respectively. made up of 1.4 trillion kwacha in external debt Analysts see the yield trending lower as and 1.2 trillion in domestic debt. Ramaphosa's anti-corruption drive starts to make a dent in the poorly run state firms that ($1 = 716.8200 kwacha) have been a drain on the public purse. (Reporting by Mabvuto Banda "There's definitely been a huge improvement on Editing by James Macharia and Susan Fenton) the political front which we're very positive (( [email protected] ; about but that's just one of the boxes that needs +27117753034; Reuters Messaging: to be ticked," said fund manager at Sanlam [email protected] )) Melville du Plessis. (c) Copyright Thomson Reuters 2018. "International investors are weighing all of this

up as well as looking at the yield on offer, which is pretty good." Foreign holdings of government bonds are at an South Africa all-time high of nearly 43 percent, far above the emerging market average. Year-to-date S&P reprieve supports resurgence in purchases are 100 billion rand ($8 billion) more South African bonds than they were at the same time last year. 28-May-2018 The central bank believes bonds are slightly •South African bonds boosted after S&P keep over-valued but said last week it did not expect rating steady a pull-back similar to 2013 when the United •Bond should extend rally on Ramaphosa States began raising its lending rates after half a reform hopes decade of large-scale bond buying. •No threat of "taper tantrum" repeat By Mfuneko Toyana ($1 = 12.4507 rand) JOHANNESBURG, May 28 (Reuters) - During the (Reporting by Mfuneko Toyana so-called "taper tantrum" in 2013, South Editing by Ed Cropley and Toby Chopra) Africa's 10-year bond yield added 200 basis (( [email protected] ; points; similar market conditions this year +27117753153; Reuters Messaging: have seen yields move in the opposite [email protected] )) direction, with political stability trumping (c) Copyright Thomson Reuters 2018. shaky economic fundamentals. Since business-friendly Cyril Ramaphosa became

PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 23

and its strategic importance in a precarious South Africa's April budget deficit regional context. We expect Tunisia to meet the quantitative performance criteria of its current widens year-on-year arrangement with the IMF for the upcoming 30-May-2018 review of 1Q18 in June. Official lending will JOHANNESBURG, May 30 (Reuters) - South cover the bulk of external financing needs in Africa recorded a budget deficit of 43.7 billion 2018, although we also expect the rand ($3.48 billion) in April, compared with a government to also tap the international shortfall of 30.74 billion rand a year ago, market. Tunisia's performance under the Treasury data showed on Wednesday. arrangement with the IMF was weak in 2016 and The table below shows revenue and expenditure 2017, leading to recurrent delays in for the first month of the 2018/19 fiscal year, disbursements of the Fund's loans. This is a compared with the previous financial year. These source of liquidity risk given that portions of are also expressed as a percentage of the official financing are directly or indirectly tied to 2018/19 budget and the preliminary outcome for meeting the milestones of the IMF programme. 2017/18. Inflation surged to a 26-year high of 7.7% in April. We project it to remain well above its ($1 = 12.5678 rand) long-term average of 4% for the foreseeable (Reporting by Olivia Kumwenda-Mtambo future, reflecting Banque Centrale de Tunisie's Editing by Joe Brock) (( [email protected] ; +27 11 (BCT) gradualist approach in tightening its policy 775 3159; Reuters Messaging: stance and the broad nature of price pressures [email protected] )) in the economy. The central bank has raised its (c) Copyright Thomson Reuters 2018. policy rate three times by a cumulative 150bp over the last 12 months, causing an increase in the cost of financing with the money market rate fluctuating close to the upper bound of the Tunisia interest rate corridor. However, real interest rates are still negative and money supply growth Fitch Revises Tunisia's Outlook to is buoyant, at 12% in March. Negative; Affirms at 'B+' The current account deficit (CAD) will remain 28-May-2018 wide, averaging 9.5% in 2018-2019 based on Fitch Ratings-Hong Kong-May 27: Fitch our forecasts, down from 10.4% in 2017 and Ratings has revised the Outlook on Tunisia's against a 'B' median of 4.2%. Non-energy Long-Term Foreign-Currency Issuer Default imports are stabilising in volume, while exports Rating (IDR) to Negative from Stable and are gathering pace. However, the energy import affirmed the IDR at 'B+'. bill is swelling due to rising oil prices and the A full list of rating actions is at the end of this durable drop in domestic production of rating action commentary. hydrocarbons. KEY RATING DRIVERS The upsurge in inflation and the rise in unit Tunisia's rating is weighed down by high and labour costs are aggravating the overvaluation growing public and external debt, reflecting of the dinar. BCT's interventions and the wide wide twin deficits, subdued economic growth CAD have resulted in a fall in foreign-currency and sluggish reform momentum against a reserves to the equivalent of 72 days of imports background of social and political tensions. in May down from 111 days at end-2016 and 93 This is balanced against strong structural days at end-2017. We project net external features relative to 'B' peers, including high GDP debt to rise to 75.6% of GDP in 2019, almost per capita and governance indicators and a clean double its level five years earlier and well debt service record. above the 'B' median of 24%. The revision of the Outlook to Negative reflects GDP growth is gradually picking up momentum increased pressures on external finances and the and will average 2.7% in 2018-2019, up from high uncertainty surrounding the government's 1.5% in 2016-2017, under our baseline. Tourism capacity to advance the required policies to is rebounding from the slump that followed the reduce macroeconomic imbalances amid social 2015 terrorist attacks, aided by an improved discontent, political tensions and busy electoral security environment. Agricultural output is agenda. Slow progress on largely unpopular expected to achieve strong growth and the fiscal reforms and continued upward pressures revival of external demand is supporting on wages will lead to a persistently wide saving- manufacturing activity. Over the medium term, investment gap. Thin external and fiscal buffers the tightening of the policy mix, pressures on exacerbate the economy's susceptibility to purchasing power and rising costs of inputs will exogenous shocks. The rebound in oil prices and increasingly constrain domestic demand. tightening US dollar financing conditions on The government enacted significant permanent international markets raise downside risks for direct and indirect tax increases in 2018, despite Tunisia's external and public finances. social protests against the provisions of the Greater pressures on external finances are budget law taking place early January. It notably mitigated by strong official creditor support for increased several VAT rates by one percentage Tunisia, reflecting the international community's point, introduced a 1% social solidarity backing for the country's democratic transition contribution on corporate and individual income PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 24 and raised custom duties and other direct and and presidential elections is a source of policy indirect taxes. risk and could lead to renewed government Fiscal consolidation is yet to be entrenched on instability. The signatories of the current the spending side of the budget. The government coalition pact are expected to reach government plans to gradually phase out an agreement on a new common platform of energy subsidies by 2021, but incremental economic policies in the coming days, probably increases to gas and electricity tariffs will not leading to a cabinet reshuffle. The new pact and be sufficient to offset additional cost the composition of the new cabinet will be key pressures due to rising oil prices. Budget for the government's ability to advance the transfers to bridge the pension funds' liquidity reform agenda over the coming 18 months. shortfall will continue as the pension reform has SOVEREIGN RATING MODEL (SRM) and been further delayed. The strain on liquidity QUALITATIVE OVERLAY (QO) faced by the two pension funds has led to the Fitch's proprietary SRM assigns Tunisia a score accumulation of arrears to the national health equivalent to a rating of 'BB-' on the Long-Term insurance fund, which has in turn accumulated Foreign-Currency (LT FC) IDR scale. unpaid bills to the health sector. Fitch's sovereign rating committee adjusted the The public payroll is a key constraint for output from the SRM to arrive at the final LT FC consolidation efforts as it absorbed 68% of tax IDR by applying its QO, relative to rated peers, revenues, equivalent to 15% of GDP in 2017. as follows: The government's plans to reduce the headcount •Structural factors: -1 notch, to reflect high in the civil service through a restrictive hiring social and political risks which continue to policy will only bear fruit over the medium term. impact growth, external and public finances and Participation in the negotiated redundancy hamper the implementation of reforms scheme targeting 10,000 departures in 2018 has Fitch's SRM is the agency's proprietary multiple been weak, according to preliminary results. regression rating model that employs 18 We project the central government (CG) deficit variables based on three-year centred averages, narrow from 6% of GDP in 2017 to 5.6% in including one year of forecasts, to produce a 2018, against a budget projection of 4.5% score equivalent to a LT FC IDR. Fitch's QO is a (4.9% excluding grants), and further to 5% in forward-looking qualitative framework designed 2019. This will result in an improvement in the to allow for adjustment to the SRM output to general government (GG) deficit (including assign the final rating, reflecting factors within social security and local government balances) our criteria that are not fully quantifiable and/or to 5.4% from 6.3% in 2017. GG debt will not fully reflected in the SRM. continue rising albeit at a slower pace than in RATING SENSITIVITIES previous years, reaching 75% of GDP in 2019, The main factors that may individually, or up from 70% in 2017, under our baseline. collectively, lead to a downgrade: With 70% of CG debt denominated in foreign currencies, the debt trajectory is highly -Continued weakening in external finances, such vulnerable to shocks on the exchange rate. as widening of the current account deficit and The financial health of several major state- further drawdown in international reserves, owned enterprises (SOEs) is undermined by leading to pressures on external liquidity. governance shortcomings, low autonomy and -Failure to narrow the fiscal deficit or their quasi-fiscal roles resulting in under-pricing materialisation of contingent liabilities, for example from the weak state-owned of services and ballooning payroll. Transfers to enterprises, leading to a faster rise in ailing SOEs are a burden for the budget and the government debt/GDP than our current restructuring of several loss-making public projections. companies, including the national carrier -Instability at the government level or social Tunisair, are a source of contingent liabilities for unrest hindering further progress on the sovereign. Government guarantees on SOE macroeconomic adjustment policies and reforms debt were 13% of GDP at end-2016. or resulting in the IMF programme going off- The banking sector is currently reliant on BCT track. financing, as the growth in loans has outpaced The current Outlook is Negative. Consequently, deposit inflows. The sector's financial health Fitch does not currently anticipate developments metrics are below 'B' medians. Profitability is with a material likelihood of leading to an relatively weak and might be further eroded by upgrade. However, the main factors that may the expected monetary tightening. The ratio of individually, or collectively, result in the Outlook non-performing loans (NPL) to total loans being revised to Stable include: receded to 13.8% at end-2017 from a peak of -Stronger implementation of adjustment policies 16.6% two years earlier, reflecting a decline in and reforms supporting macroeconomic stability public sector banks' NPL ratio from 26% to a still and reducing downside risks for the economy. high level of 20%. A new law to facilitate the -Reduction in budget deficits consistent with resolution and write-off of NPLs in public bank stabilising the public debt/GDP ratio over the has recently been approved. Contingent medium term. liabilities for the sovereign arise from the -A sustainable improvement in Tunisia's current protracted litigation over Banque Franco- account deficit, leading to lower external Tunisienne (BFT). financing needs and stronger international Party positioning ahead of the 2019 legislative liquidity buffers. PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 25

KEY ASSUMPTIONS when the country needed economic reforms. We expect global economic trends to develop as outlined in Fitch's Global Economic Outlook. (Reporting by Tarek Amara and Ulf Laessing; Editing The full list of rating actions is as follows: by Catherine Evans and Leslie Adler) Long-Term Foreign-Currency IDR affirmed at (( [email protected] )) 'B+'; Outlook revised to Negative from Stable (c) Copyright Thomson Reuters 2018. Long-Term Local-Currency IDR affirmed at 'B+'; Outlook revised to Negative from Stable GLOBAL Short-Term Foreign-Currency IDR affirmed at 'B' Short-Term Local-Currency IDR affirmed at 'B' Country Ceiling affirmed at 'BB-' Issue ratings on long-term senior unsecured Global funds cut stocks to 9-mth lows foreign-currency and local-currency bonds in turbulent May affirmed at 'B+' 31-May-2018 •Global equities cut to 47.4 pct, lowest since Media Relations: Peter Fitzpatrick, London, Tel: +44 Aug. 2017 20 3530 1103, Email: •Japanese stocks raised to 19.1 pct, highest [email protected]; Wai-Lun Wan, in over 2 yrs Hong Kong, Tel: +852 2263 9935, Email: •61 pct of respondents say not reducing EM [email protected]. exposure Additional information is available on •For poll data: Open www.fitchratings.com By Claire Milhench

LONDON, May 31 (Reuters) - Global investors cut their equity holdings to a nine-month low Tunisia committed to economic reforms in May after a turbulent month characterised needed for loans by revived trade war fears, Italian political 30-May-2018 turmoil and a spike in U.S. bond yields. The Reuters monthly asset allocation poll of 52 TUNIS, May 30 (Reuters) - Tunisia has expressed a firm commitment to making wealth managers and chief investment officers in urgent economic reforms needed for it to Europe, the United States, Britain and Japan was qualify for another tranche of International carried out between May 14 and 31. Monetary Fund loans, the IMF said on In May, investors were whipsawed by a series of Wednesday. broad-based sell offs triggered by renewed U.S. The Washington-based IMF reached a deal in protectionist threats, U.S. President Donald 2016 to assist Tunisia with a four-year loan Trump's comments on a possible summit with programme worth about $2.8 billion, tied to North Korea, and fears of a euro zone crisis as economic reforms aimed at keeping the anti-establishment parties in Italy tried to form a country's deficit under control. government. "The discussions progressed significantly," the Global equities look set to end the month in the IMF said in a statement after talks with the black, but are now 7 percent below January's Tunisian government about an economic reform record highs. plan. A huge bond and equity sell off in Italy also sent "Risks to macroeconomic stability have become the euro to multi-month lows as investors fear a more pronounced. Inflation reached 7.7 percent eurosceptic government could put Italy's euro (year-on-year) in April, the highest level since zone membership in question, while more stress 1991," it added. in the banking sector could ultimately crimp euro Tunisia has dropped into a deep economic slump zone growth. following the overthrow in 2011 of autocratic Overall equity exposure fell by 1 percentage leader Zine El-Abidine Ben Ali. point to 47.4 percent, the lowest since August Since then, nine governments have failed to cut 2017, while bond holdings rose by 1.2 the budget deficit. Tunisia needs $3 billion in percentage points to 40 percent, the highest foreign loans this year alone. since October 2017. The talks with the IMF came as the ruling DEEP DIVISIONS coalition has been at loggerheads over a new Although most participants completed the poll economic reforms program and the possibility of before the crisis in Italy escalated, several a cabinet reshuffle. managers identified it as a potential problem. On Tuesday, Prime Minister Youssef Chahed said Among them was Mark Robinson, chief that the president’s son had destroyed the ruling investment officer at Bordier & Cie (UK), who Nidaa Tounes party and that the crisis in the warned that the formation of an anti- party has affected state institutions. establishment government could prove to be a The president’s son, Hafedh Caid Essebsi, who is catalyst for increased market volatility. the leader of Nidaa Tounes, had called for the "Unless the new government's wings are clipped, prime minister’s dismissal because of his the risks of deep divisions developing within the government’s failure to revive the economy. eurozone, and investors taking flight, could But the moderate Islamist party Ennahda increase," he said. refused to accept this change and said the exit Within their equity portfolios investors stuck with of the prime minister would hit stability at a time euro zone stocks, raising allocations slightly to PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 26

20.6 percent, the highest since September 2017. undermine euro longs." Japanese equity holdings also rose to 19.1 percent, the highest level in just over two years. (Reporting by Claire Milhench; additional reporting by Cedric Baron, head of multi asset at Generali Massimo Gaia and Hari Kishan Investments, said the Japanese economy was Editing by Alison Williams) gaining traction thanks to "dynamic private (( [email protected] ; +44 (0) 207 542 3571; Reuters Messaging: consumption", while earnings were also [email protected] )) supportive. Europe poll story EUR/ASSET U.S. poll story Asset managers trimmed their emerging market US/ASSET UK poll story GB/ASSET Japan poll stocks exposure to 12.8 percent from last story JP/ASSET China poll story CN/ASSET month's 13.5 percent, but raised their emerging (c) Copyright Thomson Reuters 2018. bond holdings to 11 percent from 10.4 percent. Emerging markets had a torrid month, with the Argentine peso and Turkish lira coming under sustained selling pressure as U.S. 10-year Treasury yields climbed above 3 percent to a seven-year high. Central banks in both markets had to hike rates to put a floor under their freefalling currencies. SPILLOVER RISK But 61 percent of poll participants who answered a specific question on emerging markets said they had not reduced their exposure in light of the recent upheaval. "The wobble in EM assets is no cause for alarm," said Jan Bopp, an investment strategist at J Safra Sarasin, although he added investors should become more selective given the vulnerability of those countries with large external borrowing needs. Peter van der Welle, a strategist at Robeco, was among those moving to a neutral EM local currency debt position from a previous overweight. He warned that "spillover risk" within EM currencies had increased at the margin with overseas investors waking up to renewed dollar strength and possible credit rating downgrades. U.S. 10-year yields retreated to 2.8 percent at month-end as the Italian crisis prompted a flight to safety, and in the poll U.S. bond holdings rose by 1.8 percentage points to 37.8 percent, the highest since June 2017. A slim 56 percent majority of poll participants who answered a question on U.S. Treasuries said they would not be buyers of the 10-year at yields above 3 percent. Several, including Christopher Peel, chief investment officer at Tavistock Wealth, said the 10-year was likely to sell off much further from present levels, and yields would need to rise to 4 percent before longer-term buyers returned to the market. The dollar index surged to a 6-1/2 month high in May after the Italy crisis battered the euro but an overwhelming 92 percent of those who answered a question on the resurgent greenback said they had not changed their year-end forecast. Michael Ingram, chief market strategist at WHIreland Wealth Management, said the re- rating in the dollar since mid-April was expected. Although there could now be a period of consolidation, he added: "A continued widening in interest rate differentials is likely to prove attractive, particularly if European politics and softening macro momentum continue to PDM Network Weekly Newsletter on Emerging Markets For information, contact the PDM Network Secretariat at: [email protected] Follow us on Twitter @pdmnet and on our website wwwpublicdebtnet.org 27