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Emerging Markets Weekly

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Brazil's retail sales rose at the slowest pace in seven months in April

Mon, Jun 23 2008, 08:22 GMT
by Erste Bank Bond Research Team

Erste Bank der oesterreichischen Sparkassen AG

LATIN AMERICA

Argentina

Argentine bonds fell to an almost five-week low after farmers renewed their strike against the government following the arrest of a farm leader. The yield on Argentina's benchmark 8.28 percent bonds due in 2033 climbed 10 basis points, or 0.10 percentage point, to 10.45 percent at 4:46 p.m. New York time, according to Bloomberg data. The bond's price fell 0.75 cent on the dollar to 79.75 cents, the lowest since May 14. Farmers launched their fourth strike since March after police on June 14 arrested 19 farm leaders, including Alfredo De Angeli, one of the most outspoken critics of the government tax on exports that set off the protests three months ago. He was later released. The farmers are withholding crops and blocking roads, which may trigger food shortages and add to a pickup in inflation.

Brazil

Brazil's retail sales rose at the slowest pace in seven months in April, as rising consumer prices deterred household spending. The country's retail sales rose 8.7 percent in April from the same month a year earlier, down from a revised 11 percent gain in March, the government said. The April gain was less than a 9.4 percent median forecast in a Bloomberg survey of 27 economists. Domestic demand in Latin America's biggest economy has begun to cool off after policy makers snapped two year of interest rate cuts in September 2007
Moody's Investors Service said it's unlikely to follow Standard & Poor's in raising Brazil to investment grade this year because the government's debt load is too large. ``It will be hard to see it in 2008,'' Mauro Leos, a senior credit officer at Moody's, said at a Bloomberg seminar in New York. S&P and Fitch Ratings this year raised Brazil's long-term foreign currency debt to BBB-, the lowest level of investment grade, after record commodity exports bolstered foreign reserves and growth in Latin America's biggest economy. Moody's rates the debt Ba1, one step below investment grade. Brazil, which became a net foreign creditor in January, still runs a budget deficit of about 1.9 percent of gross domestic product. Brazil's government debt load is equivalent to 57 percent of GDP, about twice as large as the average of countries with investment grade ratings, Leos said.

Colombia

Colombia's foreign credit rating was raised to within one level of investment grade by Moody's Investors Service as the fastest economic expansion in three decades lures capital and narrows the budget deficit. Moody's raised the rating to Ba1 from Ba2, putting Colombia on the verge of regaining the investment-grade rating it lost in 1999. Moody's said its outlook on Colombia's rating is stable. Colombia's economy expanded 7.5 percent last year, the most since 1978, as President Alvaro Uribe's crackdown on guerrillas and drug traffickers boosted investor and consumer confidence. The expansion has buoyed tax receipts, helping pare the government's net debt to 28 percent of gross domestic product last year from 48 percent in 2002, the year Uribe took office. ``The dramatic progress with respect to Colombia's once-precarious security situation has spurred a sustainable recovery in domestic demand and generated a virtuous cycle that has significantly improved debt dynamics,'' Moody's senior analyst Alessandra Alecci said in a statement. Uribe has taken advantage of a five-year rally in the peso to pay down dollar debt and make the country's finances less vulnerable to declines in the currency. Colombia's foreign debt fell to about 28 percent of total debt last year from 52 percent in 2002, according to the Finance Ministry.
The government forecasts it will have a budget deficit equal to 1.4 percent of GDP this year, less than half the deficit of 3.6 percent of GDP in 2002. Foreign direct investment in Colombia rose more than fourfold to $9.03 billion last year from $2.13 billion in 2002. The average yield gap on Colombia's dollar-denominated bonds over U.S. Treasuries narrowed 9 basis points, or 0.09 percentage point, to 1.72 percentage points, according to JPMorgan Chase & Co.'s benchmark emerging-market debt index. ``This is terrific news,'' said Arthur Byrnes, who manages $1 billion at Deltec Asset Management in New York. ``The government has done a great job and I'm glad that's being recognized.'' The peso slipped 0.5 percent today to 1,677 per dollar. It has soared 20.5 percent this year and 69 percent over the past five years. The increase puts Colombia's rating from Moody's on par with Brazil's rating. Brazil, Latin America's biggest economy, has higher ratings, though, from Standard & Poor's and Fitch Ratings. Both those companies boosted Brazil to BBB-, the lowest investment grade rating, in the past two months while Colombian debt is rated BB+, one level below investment grade.
Government-imposed capital controls, aimed at slowing capital flows that are driving up the peso, will hurt Colombia's chances of getting an investment-grade rating, said Benito Berber, a strategist at RBS Greenwich Capital Markets in Greenwich, Connecticut. The Finance Ministry last month raised deposit requirements on new portfolio investment in the country, such as the purchase of bonds and stocks, to 50 percent from 40 percent. Foreign investors must make the deposit with the central bank for six months, or pay a fee. The ministry also said on May 30 multinationals will be required to keep foreign direct investment in Colombia for a minimum of two years. Moody's ``upgrade is a testimony to Colombia's progress in terms of fiscal prudence,'' said Berber. ``But as long as capital controls are in place, the chances of investment grade are greatly diluted.''

Ecuador

Ecuador has no intention of defaulting on any of its debt, said Finance Minister Fausto Ortiz in an event at the Harvard Club in New York. The commission auditing the country's debt is expected to release a report on the first week of July, Ortiz said. Then the government will decide what measures should be taken, he added.
Ecuador's bonds rose, with yields over Treasuries narrowing the most in almost three months, after Finance Minister Fausto Ortiz said the government won't halt payments on the country's debt. The extra yield investors demand to own Ecuador's dollar debt rather than U.S. Treasuries narrowed 19 basis points, or 0.19 percentage point, to 5.43 percentage points at 10:12 a.m. in New York, according to JPMorgan Chase & Co.'s EMBI Plus index.

AFRICA & MIDDLE EAST

Egypt

Moody's changed the outlook on Egypt's Ba1 foreign currency government bond rating from stable to negative. It has also changed the outlook on Egypt's foreign currency country ceilings for bonds (Baa2) and bank deposits (Ba2) from stable to negative. Finally, Moody's downgraded the government's local currency bond rating from Baa3 to Ba1 while preserving its negative outlook. The negative rating action was primarily motivated by the country's soaring consumer price inflation, which exceeded 20% in May. This was the highest level in Egypt for almost 20 years.

South Africa

Fitch Ratings cut South Africa's credit-rating outlook to ``stable'' from ``positive,'' indicating it won't upgrade it from BBB+, the third-lowest investment-grade level. Rising interest rates and a power shortage may crimp economic growth, while financing of the current account deficit is a ``risk to the macroeconomic outlook,'' London-based Veronica Kalema, a sovereign credit analyst at Fitch, said in an e-mail. Africa's biggest economy grew at its slowest pace in more than six years in the first quarter after power outages slashed mining production. With inflation expected to remain outside of the central bank's 3 percent to 6 percent target range for the next two years, interest rates will need to stay higher for longer, undermining growth, Fitch said. ``The revision of the outlook reflects a re-assessment of South Africa's medium term potential growth prospects as supply side constraints have become more visible in 2008,'' Kalema said. ``Rising inflation, a wide current account deficit and political uncertainties are creating a testing environment for policy makers.'' The government expects a power shortage, higher interest rates and a possible recession in the U.S. to curb economic growth to 4 percent this year from 5.1 percent in 2007. Fitch had raised South Africa's credit-rating outlook to ``positive'' in July last year, citing an improvement in the economy's growth performance and increased government spending on infrastructure. While infrastructure investment will continue to underpin growth, higher interest rates ``are already taking their toll on consumer spending,'' Fitch said. The power shortage and other bottlenecks will ``limit growth potential until at least the end of the decade,'' it added. The central bank has raised its benchmark interest rate six times in the past year to 12 percent, crimping sales of cars and furniture. Inflation climbed to an annual 10.4 percent in April from 10.1 percent in the previous month. Financing of the current account deficit has been ``problematic'' because of negative global investor sentiment, the prospect of a slowdown in economic growth and ``increased political uncertainty,'' Fitch said. The deficit, the broadest measure of trade in goods and services, widened to a 36-year high of 7.3 percent of the economy last year as the government's infrastructure program fuelled imports. The rand has dropped 14 percent against the dollar this year, partly on concern South Africa will struggle to attract the foreign investment needed to fund the shortfall. The government's fiscal surplus was an ``important strength for the rating,'' Fitch said. A change in leadership in government next year and the corruption trial of Jacob Zuma, leader of the ruling African National Congress party, ``are likely to affect investor sentiment,'' the ratings company said.
South Africa's rand fell against the dollar for the first time in five days after the current account deficit widened to a 26-year high in the first quarter. The rand weakened as much as 0.7 percent to 8.066 per dollar and traded at 8.0239 at 12:17 p.m. in Johannesburg, from 8.0121. The current account gap, the broadest measure of trade in goods and services, increased to 9 percent of gross domestic product, from 7.5 percent in the final quarter of 2007, the Pretoria-based South African Reserve Bank said. That was in line with the median estimate of 12 economists surveyed by Bloomberg News.

South Africa's current account deficit swelled to 9 percent of gross domestic product in the first quarter, the widest in 26 years, while foreign investment in stocks and bonds plunged, undermining the rand. The shortfall, the broadest measure of trade in goods and services, increased from 7.5 percent of GDP in the final quarter of last year, the Pretoria-based Reserve Bank said in its Quarterly Bulletin. That was in line with the median estimate of 12 economists surveyed by Bloomberg. South Africa relies mainly on foreign investment in stocks and bonds to fund its import needs, inflows that began to dry up in the fourth quarter as investors sold riskier, emerging market assets. There was a net outflow of portfolio investment for the first time since 2005 in the first quarter, fueling a 15 percent decline in the rand against the dollar this year, the worst performer of 16 major currencies tracked by Bloomberg.

Turkey

Turkey's central bank raised its benchmark interest rate to 16.25 percent, the highest among major emerging markets, as it follows other developing nations in sacrificing economic growth to tame inflation. The overnight borrowing rate will rise half a percentage point, the Ankara-based bank said in an e-mailed statement, matching the forecast of 19 of 20 economists surveyed by Bloomberg. The bank will release minutes of the meeting within eight working days. Central banks in India, Brazil, South Africa and Russia have raised interest rates this month as surging oil and food prices boost inflation even as growth slows. Turkish central bank Governor Durmus Yilmaz said on June 5 his task was to restore the bank's credibility after inflation accelerated to the fastest pace in more than a year and forced the bank to rewrite its targets.
Turkey will ``soon'' announce the details of a new International Monetary Fund program to replace a $10 billion lending accord that expired last month, Prime Minister Recep Tayyip Erdogan said. Turkish and fund officials will meet to discuss the new arrangement, Erdogan told reporters after meeting company executives at a conference in Istanbul to discuss how Turkey can attract more investment. Turkey's last accord with the fund limited budget spending to curb inflation and reduce the country's debt stock. Since the agreement expired the government has announced that it's loosening budget targets to invest $15 billion over five years in irrigation and roads in the southeast of the country. The government is considering a more flexible accord with the fund that won't involve new lending, Economy Minister Mehmet Simsek said in April. He said an arrangement that would make loans available if they're needed, known as a precautionary stand-by, would send a ``strong message'' to international investors that the country's economy is well managed.
Turkey's dollar bonds fell, sending yields over Treasuries to their widest in more than two months, after the government said it plans to sell more debt. The government is turning to the market as mounting political tension erodes demand for its securities. Turkey's Constitutional Court is considering a request by prosecutors to shut down Prime Minister Recep Tayyip Erdogan's Justice and Development Party, or AKP, for breaching secular rules. ``The timing is just horrible,'' said Luis Costa, an emerging-market strategist in London at Commerzbank AG, Germany's second-largest bank by assets. ``They're facing the AKP closure situation. It's just not a good time for them to come to the market.'' The extra yield investors demand to own Turkey's debt rather than U.S. Treasuries swelled by 16 basis points, or 0.16 percentage point, to 3.3 percentage points at 2:08 p.m. in New York, according to JPMorgan Chase & Co.'s EMBI Plus index. The so-called spread is the widest since March 31.
Turkey sold an additional $500 million of dollar-denominated bonds due 2015, the government said. The security was sold at a yield of 7.34 percent, the Ankara-based Treasury said in an e-mailed statement. Turkey has borrowed $2.5 billion through global debt issues so far this year, the statement said. The borrowing plan for the year sees a further $3 billion.

ASIA

China

China, the world's second-biggest oil-consuming nation, unexpectedly raised gasoline and diesel prices by at least 17 percent and increased power tariffs to rein in energy use, potentially driving up inflation. The record price increase, the first since November, may ease refining losses at China Petroleum & Chemical Corp. and PetroChina Co., who have been forced to sell fuels below cost. The companies' shares rose in Hong Kong trading. Crude oil futures fell the most in 11 weeks in New York yesterday on speculation the increase, earlier and larger than analysts had forecast, will cut demand. China will pay 19.8 billion yuan ($2.9 billion) in subsidies to help farmers, fishermen and public transport operators cope with higher costs. ``This pushes inflation up in China but contributes to easing inflationary pressure elsewhere in the world,'' Merrill Lynch & Co.'s head of global commodities research, Francisco Blanch, said by phone.

Indonesia

Indonesia's government raised a record $2.2 billion in an overseas debt sale, 47 percent more than targeted, helping cover rising fuel subsidies that have swelled the budget deficit. The fundraising attracted bids for $6 billion, four times the $1.5 billion sought in the sale of six-year, 10-year and 30- year debt, according to an e-mail to investors. Credit Suisse Group, Deutsche Bank AG and Lehman Brothers Holdings Inc. managed the sale. Investor demand for emerging-market debt has improved in the past three months on optimism that banks have reported the worst of losses from subprime mortgage defaults. Indonesia's government was able to boost confidence in Southeast Asia's largest economy and stem a three-month slump in the rupiah by increasing fuel prices and raising interest rates.

Thailand

Chanting "Get out, get out", thousands of protesters camped outside the office of Thailand's prime minister on Friday after police removed barricades blocking them in their four-week campaign to oust the government. The crowd, nearly all them wearing yellow shirts in honour of King Bhumibol Adulyadej, waved flags and sang songs outside the ornate wrought-iron fence surrounding Government House as riot police stood by casually watching them. Despite fears of violence, the People's Alliance for Democracy (PAD) march of 25,000 mainly middleclass Bangkok residents was largely peaceful, prompting relieved investors to push up Thai shares by nearly 4 percent. "This is a victory for the PAD and people who love justice," PAD spokesman Suriyasai Katasila told reporters as night fell on the thousands of demonstrators still on sitting on the road outside the compound. The PAD, a motley collection of businessmen, academics, royalists and unionised workers, launched the campaign four weeks ago, united by their hatred of former prime minister Thaksin Shinawatra who was ousted in a bloodless 2006 coup. The long-running protests against the government of Prime Minister Samak Sundaravej, which the PAD views as an illegitimate Thaksin proxy, raised political tensions at a time of stuttering economic growth and soaring inflation. Fears of clashes last month between police and demonstrators stoked rumours of another military coup less than two years after the army's bloodless removal of Thaksin, who insists he has retired from politics although few believe him. Samak called a meeting with the chiefs of the army and police as the protest unfolded, but declined to speak to reporters after the talks at a military compound. Army chief Anupong Paochinda, a member of the military council that ousted Thaksin, has previously insisted the army would not get involved, perhaps mindful of unrest in 1992, when soldiers opened fire on pro-democracy marchers, killing dozens.
Rising political tensions are causing the baht to fall too quickly, although there is no panic in the market, Bank of Thailand Assistant Governor Suchada Kirakul said on Friday. She said that the fall in the currency is being prompted by capital outflows as foreign investors sell Thai shares. "It is weakening too quickly, but there is no panic in the market yet. Exporters are still selling dollars and importers are buying," she told reporters. The baht was trading around 33.43 to the dollar at 0830 GMT. It dropped as far as 33.55 earlier, its lowest level in more than five months, as a major anti-government protest got underway in Bangkok. "We are taking care of it as usual, but we don't have to do it too much at the moment," she said, using words that usually indicate the central bank has intervened in the market. Currency traders said the Bank of Thailand has been intervening by selling dollars to defend the baht regularly in the past few weeks. The country's foreign exchange reserves fell by $4 billion in the week to June 13, suggesting reserves had been used to prop up the baht. Thousands of protesters have laid siege to the government's headquarters in an attempt to force the five-month-old administration from power. Protestors view the coalition government elected in December as an illegitimate proxy of former Prime Minister Thaksin Shinawatra. The stock market has shed 15 percent since the anti-government protests began on May 25, with net foreign selling of 39 billion baht ($1.2 billion) worth of Thai shares. The currency meanwhile, has fallen close to 5 percent against the dollar over the same period.

EMERGING EUROPE & CIS

Hungary

Hungarian wages rose faster than consumer prices in April, keeping pressure on policy makers to raise interest rates as early as next week. The average monthly gross wage increased an annual 10.6 percent to 194,455 forint ($1,241), after climbing 9.9 percent in March, the Budapest-based statistics office said. Wages were expected to rise 9.1 percent, according to the median estimate of 10 economists in a Bloomberg survey. Policy makers, who will next discuss rates on June 23, last month raised the benchmark two-week deposit rate to a three-year high of 8.5 percent to prevent soaring food and energy prices from driving up costs. The central bank sees wages as an indicator of expectations for future inflation.

Romania

Romanian inflation may have peaked in March this year unless gas prices are hiked by more than 10 percent this summer, the deputy head of the central bank's statistical department said on Thursday. Headline price growth of 8.5 percent in May was slightly lower than a two-year high of 8.6 percent hit in March, but still well above the central bank's target of 2.8 to 4.8 percent. Analysts have warned that annual price growth may rise further in coming months, before easing later in the year due to an expectedly strong harvest and a statistical base effect. However, the central bank's Constantin Chirca said the scope for further increases was limited. "At the very least, inflation will stay at a similar level (to May) in June-July and drop in August," Chirca told reporters on the sidelines of a financial conference. "It looks like the (gas price) hike may be only 10 percent. Even with that, the peak is behind us, in March." The finance and economy ministry has estimated price growth will peak at 9 percent in July, pending energy price hikes expected to come into effect from July 1. There are no official estimates available about the extent of the increase. Officials have come under pressure recently from gas distributors who are pressing for price hikes of above 20 percent in response to rising global energy costs. Romania's central bank has raised official interest rates by 275 basis points to 9.75 percent since October to counter stubborn inflation, driven by surging food and fuel prices. Analysts see rates jumping to double digits at the bank's June 26 meeting.

Ukraine

Ukraine's trade deficit in goods ballooned in the first four months as imports grew faster than exports, State Statistics Committee reported. The shortfall widened to $7.4 billion through April, compared with about $3 billion in the same period a year ago, the committee said in a statement on its Web site.

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Published on  Mon, Jun 23 2008, 08:30 GMT