At a seminar in Sweden yesterday, Mr Kenneth Rogoff, Harvard professor in economics and former Economic Counsellor and Director at the Research Department of the IMF from August 2001 to September 2003, said that Latvia should devalue its currency. Further he said that the longer they wait, the tougher the economic situation will become. He implied that the IMF, if it accepts the Latvian currency regime, would make the same mistakes as was made during the Argentine crisis – until the IMF left Argentina with no other choice than to devalue. We find it hard to disagree with Mr Rogoff.
Mr Rogoff additionally said that he does not expect a devaluation to occur in the near future, as the global community, according to him, has decided to save every troubled country and financial institution in the world. Interestingly he also said that he sees risks of large turmoil in FX markets should Latvia devalue. (We wrote about this topic in New Europe Weekly, June 26). Even though Mr Rogoff is no longer with the IMF, his comments are quite interesting since they arguably reflect the mindset of the IMF. Note that the IMF has still not approved the payout of the next tranche of Latvia’s international loan. By contrast, the European Commission said on Friday that it would pay the next vital EUR 1.2bn tranche within weeks.
The Russian economy ministry said yesterday that it expects GDP to contract 8.5% y/y in 2009, but sees 0.1% growth in 2010 – these forecasts are much in line with our forecasts (-8.0% in 2009, +0.5% in 2010). FM Kudrin said Russia would be forced to increase the budget deficit in 2010 to above the planned 5%, but said a final decision would be taken in July – we are beginning to spot a trend in the region.
Preview
Secondary data out of EMEA today. We expect a 50bp rate cut from the Romanian central bank. In Latvia, we expect a stabilisation in retail trade data.
Trading update
The Russian finance minister believes that the current oil price is “overheated”, and he expects a correction. We are not sure how Mr Kudrin could possibly know the equilibrium price of oil, but by his comments he seems to be preparing markets for a potential drop in the oil price (and hence RUB). We see increased RUB volatility in the coming weeks.
Otherwise, yesterday’s trading session was very quiet and there were limited price movements. Notable is the outperformance of the South African rand. USD/ZAR was pushed lower as stops were taken out. In fixed income markets, longer-term swap rates came down in the Czech Republic – we still see value in lower Czech rates, mainly in the short-end segment.
