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Emerging Markets Weekly

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Emerging Markets Weekly

Tue, Aug 14 2007, 08:23 GMT
by Erste Bank Bond Research Team

Erste Bank der oesterreichischen Sparkassen AG

Global markets

Emerging bonds had a rollercoaster week and lost their previous gains on Thursday and Friday. The spread on JP Morgan’s EMBI+ closed the week at 203 bp. The London interbank offered rate continued to climb and reached 5.96 percent on Friday from 5.86 percent on Thursday, when it gained more than half a percentage point. The ECB again provided liquity to the market and loaned 61.05 billion euros to banks on Friday. 3-month dollar Libor rose to 5.58 percent from 5.5 percent. Traders are speculating that the Federal Reserve will cut interest rates at an emergency meeting as soon as next week, according to Merrill Lynch. Interest-rate futures for August show investors see the chances of a quarter-point reduction in the Fed's key rate on any day from August 16 at higher than 50 percent, Merrill wrote in a research report. US stocks recovered during the session on Friday, erasing most of the Dow's 213- point drop, after the Federal Reserve added $38 billion to banks to stem a crisis of confidence in credit markets. The S&P 500 rose 0.55 to 1453.64. The Dow lost 31.14, or 0.2 percent, to 13,239.54.

Among the latest casualties of the subprime crisis are:

• Goldman Sachs's $8 billion Global Alpha hedge fund has fallen 40 percent since July 31, a decline that may prompt more investors to withdraw their money, according to people familiar with the fund. 

• Deutsche Postbank disclosed on Saturday that it has taken onto its own books 600 million euros in exposure to two investment vehicles run by Germany's IKB. A Postbank spokesman confirmed a report to this effect by Der Spiegel magazine. He said all the securities that Postbank had taken onto its balance sheet this week were rated double-A or triple-A. 

• WestLB has 1.25 billion euros in overall exposure to the U.S. subprime mortgage sector, it said on Saturday. The figure includes all of its subsidiaries adding 87 percent of the underlying assets were rated double-A or better and 98 percent single-A or better.

• And Citigroup said it has lost $700 million in credit business in recent weeks.

LATIN AMERICA

Argentina
Argentina will seek to renegotiate $6.3 billion of dollar-denominated debt with the Paris Club, the Clarin newspaper reported without saying how it obtained the information. Economy Minister Miguel Peirano will travel to Europe for discussions prior to national elections October 28, the paper said. Argentina defaulted on its debt with the Paris Club in late 2001 when it also stopped payments on $95 billion of bonds. Argentina has refused to settle the debt with the Paris Club because the organization requires the nation to have a financial program approved by the International Monetary Fund.

AFRICA & MIDDLE EAST

Turkey
Turkey's main inflation trend is downwards but unprocessed food and energy prices pose a significant risk, the central bank said. Data showed consumer price inflation hitting a multi-year low of 6.9 percent in July thanks to clothing stores slashing prices in the summer sales season. The bank said its strict monetary tightening policy had started to produce results, as shown in July by a slowing in service prices and falls in consumer durables' prices. Inflation remains well above the official end-year target of 4 percent. The central bank is widely expected to start rate cuts in the final quarter of this year. Analysts do not expect the central bank to rush to cut interest rates.

Turkey faces a fresh political crisis if Foreign Minister Abdullah Gul runs again for president, the leader of the second biggest opposition party, the ultra-nationalist Devlet Bahceli, said. Gul has signalled he will make a second bid for the top job despite stiff opposition from the powerful secular elite, including army generals, who fear the ex-Islamist may try to undermine the separation of state and religion as president. The secularists derailed a first attempt in parliament in May to have Gul elected president, forcing Prime Minister Tayyip Erdogan to call an early parliamentary election, which his centre-right AK Party won decisively last month.

Israel
Israeli Finance Minister unveiled the 2008 state budget draft, vowing to stick to fiscal discipline despite spending demands from ministers who see the government as too weak to reject them. The spending package will be based on an expected economic growth rate next year of 4.2 percent and will create a budget deficit of 1.6 percent of GDP. The economy is forecast to grow about 5 percent in 2007 for a fourth straight year.

Botswana
Moody's has raised the outlook on Botswana's foreign currency ratings to positive from stable on the continued strengthening of the country's external position and financial assets. “The current account surplus widened yet again last year to nearly 20% of GDP. This was echoed by the government budget surplus, which grew from 8.4% of GDP in 2005/06 to 11.8% of GDP in 2006/07 thanks to rising minerals income and spending restraint. Botswana is also finally registering some success in diversifying its economic base away from diamonds, although still mainly within the minerals sector. The jump in global raw material prices has prompted significant exploration activity for a variety of other minerals around the country, some of which are already producing and exporting”, Moody’s said. In Moody's opinion, Botswana still faces major socio-economic challenges that will likely constrain its government ratings to the A rating range over the long term in spite of its extraordinarily strong financial situation.

South Africa
South Africa's rand fell after a report showed the central bank bought more dollars for its reserves last month to cap gains in the currency. The Reserve Bank is trying both to fight inflation and limit the rand's gains, to make exports more competitive and help the government boost economic growth. While the central bank quickened the pace of reserve accumulation in July to weaken the rand, Governor Mboweni suggested interest rates may be increased next week. The central bank said gross reserves increased 3.5 percent to $29.3 billion last month, after gaining 1.4 percent in June. Net reserves climbed to $26.97 billion from $25.9 billion. The CPIX inflation rate exceeded the target range for a third month in June, adding to expectations the bank will increase its benchmark rate from 9.5 percent on August 16. The central bank last changed its benchmark rate on June 7, when it lifted borrowing costs 50 basis points to 9.5 percent.

ASIA

South Korea
South Korea's central bank surprised markets by raising its benchmark interest rate by a quarter of a percentage point to 5.0 percent, taking a pre-emptive strike at inflation from fast growth in money supply. The central bank had lifted the interest rate target by a total of 1.5 percentage points between October 2005 and July this year to cool sizzling growth in money supply, which it has warned could stoke inflation.

Thailand
Thailand's consumer confidence index declined for a ninth month to the lowest levels since February 2002, the University of the Thai Chamber of Commerce said

EMERGING EUROPE & CIS

Russia
Russian inflation stayed stubbornly high in July, putting consumer prices on a course to overshoot target this year. The consumer price index rose by 0.9 percent on the month, the Federal Statistics Service said, after a gain of 1.0 percent in June, with food prices the main culprit behind the rise. Breach calculated year-on-year inflation was running at 8.7 percent -- official figures are due later -- and threatening to miss this year's government inflation target of 8 percent. The central bank runs a managed float of the rouble, targeting its exchange rate against a currency basket comprised of 55 U.S. cents and 45 euro cents. It has allowed the rouble to rise by a total of 1 percent against the basket so far this year.

Poland
Poland headed towards early elections to end the government crisis that blew up a month ago between the conservative ruling Kaczynski twins and their volatile mix of leftist and far-right partners. The party of Prime Minister Jaroslaw Kaczynski and his brother Lech, the president, gave its approval on Saturday for a snap parliamentary vote, and the prime minister said he expected elections to be held by November - two years early. The Kaczynskis have presided over a thriving economy in the former communist EU member, but have fought almost constantly with their coalition partners and won a reputation as troublemakers in the European Union. The latest crisis began over the sacking of deputy prime minister Andrzej Lepper, leader of a small rural leftist faction in the coalition, because of a corruption probe. He denies any wrongdoing and has launched vitriolic attacks on the Kaczynskis. Parliament reconvenes on Aug. 22 after its summer break and could then vote to dissolve itself ahead of new elections, although the prime minister will still have the chance to pull back before then.

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Published on  Tue, Aug 14 2007, 08:30 GMT