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Emerging Markets Weekly

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Banco Itau Holding Financeira SA's Roberto Egydio Setubal

Mon, May 19 2008, 11:19 GMT
by Erste Bank Bond Research Team

Erste Bank der oesterreichischen Sparkassen AG

LATIN AMERICA

Argentina

Striking farmers in Argentina are counting on the plunging popularity of President Cristina Fernandez de Kirchner to hel force the repeal of higher export-taxes that have disrupted grain shipments. Farm-group leaders extended their protests yesterday for at least another six days, after the government failed to renew talks over the taxes. Farmers won the support of governors of agricultural provinces Santa Fe and Cordoba and pledged to continue to block grain trucks from ports and withhold crops.

Brazil

Banco Itau Holding Financeira SA’s Roberto Egydio Setubal, head of Brazil’s second-biggest non-government bank, said his nation is in a “transformation” that’s creating the best conditions for business he’s ever seen. Brazil, Latin America’s largest economy, has broken a cycle of boom and bust because of rising commodity exports and will enjoy sustainable annual growth of 4% to 5%, Setubal said in an interview this week in Sao Paulo. An investet-grade rating granted by Standard & Poor’s last month will make Brazil a magnet for foreign investors, he said.

Chile

Fitch Ratings affirmed Chile's long-term foreign and local currency sovereign Issuer Default Ratings (IDRs) at 'A' and 'A+', respectively. The short-term IDR is affirmed at 'F1' and the Country Ceiling is affirmed at 'AA'. The Rating Outlook is Positive. Chile's low general government debt, sound macro policy framework supported by consensus, institutional integrity, and healthy financial system underpin its long-term foreign currency IDR of 'A'. Fitch revised the Outlook on Chile's ratings to Positive from Stable in May 2007 due to stronger public and external finances, in part underpinned by a favorable external environment. However, macroeconomic challenges have arisen on multiple fronts since then. 'Fitch will monitor the effectiveness of the monetary and fiscal policy response to the challenges currently facing Chile's macroeconomic framework,' said Casey Reckman, Associate Director in Fitch's Sovereign group. 'Specifically, Chile's creditworthiness could improve with evidence that the central bank can successfully execute plans to improve the country's international liquidity position, while simultaneously bringing inflation back under control.'

Dominican Republic

President Leonel Fernandez swept to a third term in the Dominican Republic, propelled back into office by what many see as his success in pulling the Caribbean country out of a deep economic slump. With partial results giving the New York-raised lawyer and academic enough votes to avoid a runoff after Friday's election, Fernandez's main rival, real estate and construction magnate Miguel Vargas Maldonado of the center-left Dominican Revolutionary Party, conceded defeat. "I accept and recognize the results of the elections," Vargas said in a speech at his campaign headquarters. A triumphant Fernandez dedicated his victory to former President Juan Bosch, his leftist mentor who was elected in December 1962 but overthrown in a coup the following September. The first-round win, he told cheering supporters, meant that "no time will be lost in the continuation of our work and progress." The central elections board gave Fernandez of the centrist Dominican Liberation Party 53 percent of the vote, while Vargas of the center-left Dominican Revolutionary Party received 40 percent, after results from 99 percent of voting stations were tallied. The rest of the vote was split among candidates of five tiny opposition parties. Fernandez inherited a crumbling economy in 2004 when he became president for the second time. The collapse of a major bank in 2003 had sent inflation soaring, plunged the Dominican government deep into the red and provoked a sharp economic downturn. With the help of loans from the International Monetary Fund, Fernandez managed to turn things around, although poverty remains widespread. The election on Friday that catapulted Fernandez into his third term was marred by violence and accusations that his government dipped into the public purse to ensure it won enough votes for re-election.

AFRICA & MIDDLE EAST

Saudi Arabia

John McCain, who is trying to strike a distance fro the policies of President George W. Bush, accuses Saudi Arabia of sponsoring insurgents in Iraq and condemns it for human-rights violations, including imprisoning people whose “only crime is to worship God in their own way.” That should make the prospect of a McCain presidency a nightmare for the Saudi rulers, who have enjoyed close ties to the Bush family. Instead, Saudis are privately rooting for the presumptive Republican nominee, discounting some of this rhetoric because he’s the only candidate to promise to keep US troops in Iraq and to deter Iran. “The royal family and other elites would like to see McCain,” Mai Yamani, a visiting scholar with the Carnegie Middle East Center in Beirut, said yesterday in a telephone interview from London.

Senegal

Standard & Poor's Ratings Services said it had affirmed its 'B+' long-term and 'B' short-term sovereign credit ratings on the Republic of Senegal. The outlook remains negative. "The ratings on Senegal are constrained by its vulnerable public finances, in combination with a low level of economic development and exposure to external shocks," Standard & Poor's credit analyst Sarah N'Sonde said. "Fiscal management difficulties have contributed to accumulated suppliers' arrears estimated at about 2% of GDP in 2007. However, energy sector reforms have contributed notably to reduce government-owned companies' burden on the budget, improving their financial prospects."

South Africa

South Africa's Finance Minister Trevor Manuel said on Thursday wage increases had negative implications for price stability, but it was important to ensure that inflation did not erode workers' salaries. The central bank has cited electricity tariffs and wage settlements among the key issues its monetary policy committee will monitor closely as it battles to bring soaring consumer inflation back to within a 3-6 percent target range. "It's important that we never look only at numbers ... Even in macroeconomics the reason why we fight for price stability ... is that you don't have inflation erode the incomes of people," Manuel told journalists at the launch of South Africa's 2008 tax season.

West Africa

West African nations need to forge a common agricultural policy to combat rising food prices if the impoverished region is to stave off a long-term crisis, the Economic Community of West African States said on Sunday. Trade and agriculture ministers from the 15-member bloc meet in Nigeria's capital Abuja on Monday to discuss the impact of soaring food prices, which ECOWAS economists estimate could cost the region $11.6 billion in emergency intervention alone. Rocketing prices for staples such as rice and millet, reflecting a global surge in the cost of major cereals and oil, have triggered riots and protests across West Africa, the poorest region of the world's least developed continent. "We need to look at the issue in two dimensions. First how to help member states facing an immediate problem, then how to address the problem in the medium to long term in a structural way," ECOWAS Executive Secretary Mohammed Ibn Chambas said. "(We need) a common agricultural policy which can help us to share and harness the resources of the region collectively," he told Reuters by telephone. Governments around the region have scrambled to take short-term measures, such as easing taxes on basic food imports or introducing price control measures, to try to ease the burden on already impoverished populations. In a presentation ahead of Monday's ministerial meeting, ECOWAS economists estimated immediate steps to improve access to food supplies, lift food production and build up safety stocks could cost member states $11.6 billion. While the region's larger economies such as oil-producing Nigeria or cocoa-producing Ivory Coast have been able to absorb the cost of measures like tax cuts with relative ease, sustained high food prices are more challenging for the poorest states.

ASIA

China

The most powerful earthquake in China since 1950 shows the nation’s insurance industry is decades behind those of the world’s biggest economies. Just 5% of the more than $20 billion of damages from the quake in Sichuan province is covered by insurance, according to estimates from an official at the China Insurance Regulatory Commission, who declined to be identified. By contrast, about half of the $120 billion of estimated costs from Hurricane Katrina, the most expensive storm in US history, was insured by companies or the federal government, data compiled by analysts at Jersey City, New Jersey-based Property Claim Services show.

India

India’s inflation rate unexpectedly rose to the highest in 3.5 years, adding pressure on the central bank to raise borrowing costs further to tame prices. Wholesale prices rose 7.83% in the week ended May 3 from a year earlier, after gaining 7.61% in the previous week, the government said in a statement in New Delhi. Economists surveyed had expected a 7.55% increase. Increasing borrowing costs will check the flow of money to speculators in the commodities market and rein in food prices, former central bank Governor Bimal Jalan said in parliament last month. The government, to augment monetary policy action, has persuaded steel and cement makers in the past week to cut prices and help slow inflation.

Malaysia

Standard & Poor's (S&P) cut its outlook on Malaysia's credit rating to "stable" from "positive", citing heightened political uncertainty after recent elections. The ruling coalition lost its more than two-thirds majority in parliament for the first time in four decades. "Coming amid a challenging external environment and expectations of a slowdown in growth, prospects for a ratings upgrade have diminished over the short term," S&P said. The ratings agency affirmed Malaysia's "A-" foreign currency rating, noting that the country's public sector debt was expected to decline further to 7.4 percent of 2008 current account receipts from 11.2 percent in 2006. "The government's economic policies are generally pragmatic and market friendly," S&P added. But the ratings agency noted that Malaysia's debt and deficit levels were weaker than its peers, warning that the country's credit rating could be threatened if fiscal policy were loosened to spur growth or if the economy slows sharply.

Pakistan

Ratings agency Standard & Poor's cut Pakistan's sovereign rating on Thursday, citing increasing pressure from expanding budget and trade deficits against a volatile political setting. The move came as no surprise to analysts, who have long been warning about deteriorating economic fundamentals and policy paralysis in the South Asian economy, or to investors who have driven the rupee down to record lows. "This cannot be a surprise, unfortunately," said Tim Condon, head of Asian economic research at ING. "From the rating agency's perspective, if the politics has really undermined the economic fundamentals to a degree, they have to take action." Standard & Poor's cut Pakistan's long-term foreign currency debt rating to B from B+ and its long-term local currency rating to BB- from BB. The outlook is negative, S&P said. "More than the ratings cut, the negative outlook is going to hurt the government's ability to raise foreign debt, especially at a time when they are trying to refill their dollar reserves," said Asad Iqbal, managing director at Ismail Iqbal Securities.

EMERGING EUROPE & CIS

Bosnia-Herzegovina

Bosnia will sign a key pact for closer ties with the European Union on June 16, the international community's high representative in Bosnia, Miroslav Lajcak, said Friday. "I can confirm that the Stabilization and Association Agreement should be signed on June 16," said Lajcak on national radio. Bosnia had been expected to sign the trade-and-aid agreement - a stepping stone towards eventual E.U. membership - in April, after lawmakers adopted long-disputed police reforms. But the date had to be pushed back due to technical issues arising from the translation of the document into E.U. and Bosnian languages, according to local and E.U. officials.

Hungary

Hungary needs to cut its high taxes on labour and create more jobs in the economy to be able to return annual growth rates of 4 to 5.0% said the country's EconMin Bajnai. The EconMin was appointed only last month after PM Gyurcsany reshuffled his month follow the exit of the junior coalition and Free Democrat party leaving the coalition. The EconMin told a news conf that Hungary has a sustainable growth track of 4-5.0% and believed that it could come closer to European growth levels.

Lithuania

Lithuania's current account deficit rose to 1.4 billion litas ($626.9 million) in March from 807.5 million the previous month, bringing the first-quarter gap to 15 percent of GDP, the central bank said on Thursday. The deficit had been 12 percent of gross domestic product in the fourth quarter of last year. Analysts have pointed to data showing a wide current account deficit, caused by a surge in imports, as one of the worrying signs accompanying economic overheating. The March current account gap swelled after the goods deficit gained by 520 million litas, the central bank said in a statement.

Romania

Romania's current-account deficit widened 10.9% on the year in January-March to EUR3.519 billion from EUR3.173 billion in the year-earlier period, due to a wider trade deficit, news agency Mediafax reported the central bank as saying Thursday.

Russia

The Russian Banking sector has had a short and turbulent history, and when banks default, recoveries have so far been minimal, said Standard & Poor's Ratings Services in a report published "Recoveries From Russian Bank Defaults Have Been Little And Late." "An unpredictable bankruptcy regime, political and business conflicts, asset stripping, uncertain shareholder support, and the relatively risky credit profile of the banking sector combine to keep recovery prospects low," said Standard & Poor's credit analyst Ekaterina Trofimova. Moreover, slowness in bringing banks to liquidation and protracted court proceedings can cause significant delays in payments. This is one reason why Standard & Poor's Ratings Services classifies Russia in the group of least creditor-friendly countries with respect to insolvency rules and practices. Romania's current-account deficit widened 10.9% on the year in January-March to EUR3.519 billion from EUR3.173 billion in the year-earlier period, due to a wider trade deficit, news agency Mediafax reported the central bank as saying Thursday.

Serbia

Serbia will speed privatisation in the next three years to fund infrastructure spending if the Democratic Party manages to form the country's next government, former deputy prime minister Bozidar Djelic said on Sunday. "In energy, we will have tenders for two (power) plants, each one with 700 (megawatts), plus one that is 400 (megawatts) in hydro," said Djelic, whose Democratic Party narrowly beat ultranationalists in elections earlier this month. Democrats are in talks to form a coalition government after the inconclusive general election that gave Djelic's party 39 percent of the vote, but left it well short of an absolute majority in the 250-seat parliament. Djelic, mapping out the economic agenda a Democrat-led government would pursue, said sales of stakes in stateowned firms had made investors of half the Serbian population. He said there would be a push for privatisations in key industries, including agriculture, telecoms, real estate, shipping and energy. "We have created a pressure group of 4 million people, which is half the population of Serbia, which will lead us into opening the equity of those companies over the next three years," Djelic told Reuters on the sidelines of the annual meeting of the European Bank for Reconstruction and Development. "The first one on the block will be most likely in the first quarter of 2009 -- the telecoms service. So it's going to be the first big IPO." "We will also have a tender for a cargo center in Belgrade," he said. The money raised from these sales will be spent on ambitious infrastructure projects and national development, on which the government will spend 10 billion euros per year.

Turkey

Turkey's ruling party has begun to expect that the Constitutional Court will close it down in the next few months and ban the prime minister from politics, and is now searching for a way to hold onto power, senior party members have told Reuters. Turkey was plunged into political turmoil in March when the Constitutional Court accepted a case by the Court of Appeals' chief prosecutor, who seeks the closure of the AK Party. He also wants 71 party members banned, including President Abdullah Gul and Prime Minister Tayyip Erdogan, over accusations they breached Turkey's secular constitution by supporting Islamist activities. After weeks of upbeat statements, the Islamist-rooted AK Party now believes its chances for survival are bleak, and has begun planning how to return to power as a new movement. "The AK Party will be closed, Erdogan is expected to be banned and some other members too," a government minister, who declined to be named, told Reuters. "This view is shared by many in the cabinet." Another senior AK Party member agreed, adding that there was a high possibility that Gul, who was elected by parliament last year, would also be banned from belonging to a political party for five years. As Gul is president, any ban would take effect only once his term ends.

Ukraine

Fitch Ratings has revised Ukraine's Outlooks to Stable from Positive. Its Long-term foreign and local Issuer Default Ratings (IDR) are affirmed at 'BB-' (BB minus). The Country Ceiling is affirmed at 'BB-' (BB minus) and the Short-term foreign currency IDR at 'B'. "Ukraine's recent strong macroeconomic performance faces growing risks from accelerating inflation and a rising current account deficit," says Andrew Colquhoun, Director in Fitch's Sovereigns Group. "While improving fundamentals continue to support Ukraine's ratings, an uncertain policy response is not convincingly mitigating the near-term risks facing the economy, justifying a reversion to a Stable Outlook." GDP growth has averaged 7%pa since 2000, boosting average incomes to 91% of the 'BB' range median, from 43% in 2000, a fundamental improvement supporting the rating. However, Ukraine's annual headline inflation reached 30% in April 2008 from 17% at end-2007, one of the highest among Fitch-rated sovereigns. While a 47% rise in food prices has boosted inflation, overly loose monetary conditions have also played a role. Strong unsterilised capital inflows in the context of an exchange-rate peg drove broad-money growth of 52% over 2007, while credit to the private sector expanded 78% in the year to March 2008.

INDUSTRIAL COUNTRIES

Iceland

Standard & Poor's Ratings Services said that the strengthening of access to foreign exchange by the Republic of Iceland (foreign currency A/Negative/A-1, local currency AA-/Negative/A-1+) would have no immediate effect on either its ratings or outlook on the sovereign. The action by Iceland is a positive step towards containing the deleterious effect of high financial sector borrowing costs on its already very large current account deficit, which is expected to widen from 16.2% of GDP in 2008 and 15.6% of GDP in 2007. The EUR1.5billion euro/Icelandic krona bilateral swap facility with the central banks of Sweden, Norway, and Denmark (all three rated AAA/Stable/A-1+), combined with other sources and existing reserves, provides Iceland's central bank with a tool to improve domestic and external credit conditions for the commercial banks. These banks, in turn, rely on wholesale funding, particularly from overseas. Were debt servicing costs to decline lastingly, the effect on the current account deficit would be equivalent to several percentage points of GDP.

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Published on  Mon, May 19 2008, 13:19 GMT