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Emerging Markets Weekly

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China's economy grew at the slowest pace since 2005 in the second quarter

Mon, Jul 21 2008, 10:39 GMT
by Erste Bank Bond Research Team

Erste Bank der oesterreichischen Sparkassen AG

LATIN AMERICA

Argentina

Argentina's President Cristina Fernandez de Kirchner revoked a decree that increased some agriculture export taxes after she failed to win support for the levy from the country's Congress. The country will resume the level of taxes on farm exports that existed before the measure took place in March, Cabinet Chief Alberto Fernandez said in a press conference in Buenos Aires. Since the president signed the decree, her public support slumped as farmers set up roadblocks and halted grain shipments to protest the tax, causing some food shortages. The Senate rejected the new tax, after Fernandez had sought legislative ratification.

Colombia

Colombian President Alvaro Uribe's fight against the country's biggest rebel group was strengthened as millions of Colombians marched nationwide to demand the end of the 44-year conflict and the release of all hostages. Colombians flooded the streets in Bogota, Medellin and Barranquilla for the ``Great Mobilization for Freedom and Peace'' march, on what is the 198th Colombian Independence Day, with concerts including a performance by Colombian pop star Shakira. Recently liberated French-Colombia politician Ingrid Betancourt headed a gathering in Paris backed by Colombian musician Juanes in front of the Eiffel Tower, and similar marches took place in Caracas, Buenos Aires, and Miami.

Costa Rica

Standard & Poor's raised its foreign currency sovereign credit rating outlook for Costa Rica to positive from stable on Monday, citing a decline in the government's debt burden. The sovereign credit rating of "BB", two notches below investment grade, was affirmed, S&P said in a statement. S&P cited buoyant tax revenues and continued good growth in gross domestic product as reasons contributing to its revision. "The ongoing improvement in the sovereign's fiscal and debt profile, combined with more exchange rate flexibility and a more effective monetary policy, could reduce Costa Rica's vulnerability to sudden external shocks, potentially improving creditworthiness," S&P sovereign credit analyst Joydeep Mukherji said in a statement. S&P said Costa Rica's expected entry this year into the DR-CAFTA, a trade agreement for Central America, will likely boost investment and specialization within the region and provide shelter "from possible protectionist pressures in the U.S. in case its economy decelerates more rapidly than expected."

Dominican Republic

Standard & Poor's Ratings Services said that it affirmed its 'B+/B' sovereign credit rating on the Dominican Republic and removed it from CreditWatch, where it was placed on Feb. 8, 2008, with negative implications. Standard & Poor's also said that the outlook on the Dominican Republic is negative. "The negative outlook reflects the Dominican Republic's widening fiscal and current account deficits," explained Standard & Poor's credit analyst Joydeep Mukherji. "These have led to increased debt and declining international reserves, resulting in diminishing external liquidity." It also reflects the growing risk that lower external liquidity and rising macroeconomic strain could hurt creditworthiness.

Mexico

Mexico's central bank raised its benchmark interest rate for the second straight month to curb the highest inflation rate in more than three years. The bank's five-member board, led by Governor Guillermo Ortiz, raised the key lending rate by a quarter percentage point to 8 percent, the highest since December 2005. Policy makers said the inflation outlook has worsened and they will raise their forecasts by an average of about half a percentage point in a quarterly report this month.

Peru

Peruvian Finance Minister Luis Carranza left office on a high note on Monday, stepping down as a second major credit rating agency raised the booming Andean country's rating to investment grade. Peru, once an emerging market pariah that defaulted on its debts two decades ago, is now a favorite among investors. Its economy has surged under President Alan Garcia, a former leftist who now staunchly defends free markets and fiscal prudence. Standard & Poor's elevated Peru's foreign currency sovereign credit rating to "BBB-", up one notch from "BB+", putting it on par with a rating Fitch awarded in April. With two investment-grade ratings, Peru will enjoy greater access to cheaper loans and more foreign investment. Garcia tapped Luis Valdivieso, a veteran from the International Monetary Fund, to replace Carranza. During nearly two years in office, Carranza oversaw annual economic growth of 9.0 percent, reduced the debt load, liberalized trade rules and helped keep inflation at around 4.0 percent a year. Though he will stay on as a special adviser to Garcia, he has told aides he wants to return to the private sector or academic work. Valdivieso, who investment bankers have praised, said he will build on the base Carranza left, aiming to keep inflation under control, make sure demand is not growing too quickly and fight poverty. The former IMF official was part of the team that reined in Peru's economic chaos after Garcia's first term from 1985 to 1990 ended in hyperinflation.

Venezuela

Venezuela's unemployment rate rose in June to 7.6 percent, from 7 percent in May, exceeding the median forecast of five analysts in a Bloomberg survey. The jobless rate was less than the 8.3 percent rate in the same month a year ago, according to a statement published on the Web site of the government-run National Statistics Institute.

AFRICA & MIDDLE EAST

Morocco

Rising food costs pushed Moroccan consumer prices up 4.7 percent in June versus the same month last year, official figures showed on Tuesday. The year on year figure in May was 5.4 percent. Food costs, inflated by soaring world commodity prices, grew 8.7 percent last month compared with June last year, according to the government's High Planning Commission. On a monthly basis, consumer prices eased 0.3 percent in June versus May as food prices declined 0.8 percent, the Commission added. In June, the government said it forecast annual inflation of 2.7-2.9 percent, up from an initial estimate of 2.0 percent. The government has increased its subsidies on fuel and basic foods to more 40 billion dirhams ($5.54 billion), from about 15 billion dirhams it envisaged earlier this year, in a bid to tame inflation. Financial authorities and business leaders were fearing that higher inflation may prompt the Central Bank to hike interest rates, which would stunt growth-- a government priority to create jobs and alleviate mass poverty. The government expects the economy to grow by 6.8 percent this year from 2.7 percent last year and at an average of 6.3 percent annually over the next four years.

Qatar

The Qatar Investment Authority (QIA), the energy exporter's $50 billion sovereign wealth fund, said it would diversify away from the weakening USD by investing more in Asia such as Japan, China, South Korea and Vietnam. With an estimated $800bln in Gulf Arab government assets after a tripling of oil prices in the past five years, the QIA said it intends to diversify its portfolio because most of the country's revenues are denominated in dollars. The agency's Head of strategy said the agency have been investing mostly, or principally, in the US. So, the strategy in terms of diversifying away from dollar assets would be investing outside of the US and Europe, into markets which are not as exposed to the greenback.

South Africa

South Africa's ruling African National Congress stepped up its effort to sideline President Thabo Mbeki, forcing him to assign its deputy president to a cabinet post and indicating it may fire two provincial governors he appointed. Western Cape Premier Ebrahim Rasool and Eastern Cape Premier Nosimo Balindlela, who backed Mbeki's failed bid to retain the party presidency in December, may be dismissed, the ANC said in an e-mail. Two days ago, Mbeki named former labor unionist Kgalema Motlanthe to his Cabinet, complying with an ANC directive issued almost four months ago.

Turkey

Turkey's ruling Justice and Development Party would win 40 percent of the vote if an election were held today, a survey by Metropoll Stratejik & Sosyal Arastirmalar showed, Vatan newspaper reported. That compares with 52 percent for Justice in a previous Metropoll survey in December, Vatan said. The main opposition Republican People's Party would get 14 percent, up from 10 percent in December, Metropoll's survey showed, according to the Istanbul-based daily. The right-wing Nationalist Action Party would receive 7.6 percent of the vote from 10.5 percent in December, Vatan said. The poll didn't distribute the preferences of 25 percent of respondents who said they were undecided voters, it said.
Turkey's central bank raised its benchmark interest rate to 16.75 percent as it seeks to regain credibility after surging global oil and food prices forced it to increase inflation targets. The Ankara-based bank added a half point to its overnight borrowing rate, according to an e-mailed statement.

ASIA

China

China's economy grew at the slowest pace since 2005 in the second quarter, prompting speculation the government will slow the yuan's gains to protect export jobs. Gross domestic product rose 10.1 percent from a year earlier, down from 10.6 percent in the first quarter, as exports weakened and the government curbed lending. Consumer prices rose 7.1 percent in June, slowing from 7.7 percent in May, the statistics bureau said in Beijing.

India

Fitch Ratings lowered India's domestic rating outlook to negative from stable on Tuesday, blaming the central government's worsening fiscal position. It maintained the country's BBB-minus rating for both its local currency rating and its foreign currency rating. The outlook on the country's foreign currency rating is stable. James McCormack, Fitch's head of Asia sovereign ratings, said the change in the outlook was also partly due to a notable increase in government debt issuance to finance subsidies not reflected in the budget.

Malaysia

Malaysian opposition figure Anwar Ibrahim has been arrested for sodomy, his lawyer said on Wednesday, setting the stage for a political showdown that could further rattle the country's financial markets. The former deputy premier had agreed to meet police on Wednesday in connection with a sodomy complaint lodged by a former aide, and police had warned they would arrest him if he did not show up for questioning. Anwar's lawyers had said he would go to the police at 0600 GMT, but the arrest came about an hour before that. "They say he was arrested under Section 377 of the Penal Code (sodomy)," Sankara Nair, Anwar's lawyer, said. "He was arrested as a suspect in the case. There was a lot of fear and intimidation. It's absolutely unnecessary." Nair said police could detain Anwar for up to 24 hours, after which they would have to obtain a remand order from the court to allow further detention for up to 14 days without charging him. Anwar, who is leading a charge by the opposition to seize power by September, is fighting the sodomy accusation, in a replay of scenes from a decade ago when he was jailed for sodomy and corruption. The authorities sealed off roads to the police headquarters where Anwar had been brought, while a water cannon was on standby and a helicopter circled overhead, as the authorities braced for a possible repeat of 1998 protests when Anwar's arrest brought tens of thousands onto the streets.
Malaysia's inflation rate may have reached a 26-year high after the government raised fuel prices, adding pressure on the nation's central bank to raise interest rates this week. Consumer prices may climb 7 percent ``or even higher'' this month after a similar gain in June, Second Finance Minister Nor Mohamed Yakcop said in Kuala Lumpur. That would be the fastest pace since January 1982, according to Malaysia's statistics department.Philippines The Philippine central bank raised its benchmark interest rate by the most since 2000 and forecast inflation will exceed last month's 14-year high on record oil and food prices. Bangko Sentral ng Pilipinas increased the rate it pays banks for overnight deposits by 0.5 percentage point to 5.75 percent, Governor Amando Tetangco told reporters in Manila.

Philippines

The Philippine central bank raised its benchmark interest rate by the most since 2000 and forecast inflation will exceed last month's 14-year high on record oil and food prices. Bangko Sentral ng Pilipinas increased the rate it pays banks for overnight deposits by 0.5 percentage point to 5.75 percent, Governor Amando Tetangco told reporters in Manila.

EMERGING EUROPE & CIS

Hungary

Hungary's government ruled on Monday that communist-era cars can stay on the road until 2020 without catalytic converters, extending the original 2008 deadline. The decree published in the official gazette Magyar Kozlony affects Trabant and Wartburg cars and Barkas minibuses and vans, the national news agency MTI said. A catalytic converter is fitted to road vehicles to remove toxic particles from exhaust emissions. The government threw a lifeline to owners of cars built during the communist era who argued that the number of the vehicles on the road had fallen sharply and pollution from their smoke-belching two-stroke engines was not significant. Millions of the cars once ran on the roads of Eastern Europe but their production in East Germany survived the collapse of communism two decades ago by only a few years. The Trabant with its Duroplast body, a composite of resin reinforced with cotton fibre, has become a motoring legend alongside the Germany's Volkswagen Beetle and the British Mini. There are an estimated 40,000 "Trabis" still running in Hungary.

Kazakhstan

Kazakhstan intends to fulfill all its commitment to democratic reforms ahead of taking up the chairmanship of the OSCE 2010. The country which will be the first former Soviet state to chair the organization has promised to reform its election laws and take steps to increase media freedom by the end of 2008.

Romania

Romania's current account deficit widened by 11 percent on the year to 6.5 billion euros ($10.37 billion) in the first five months of 2008. A year earlier, the deficit had expanded by 100 percent on an annual basis in January- May, after Romania's European Union accession removed customs taxes with member states. It reached a cumulative 16.9 billion euros at the end of 2007, or around 14 percent of gross domestic product. Economists have warned the shortfall makes Romania particularly vulnerable to any big outflows of foreign cash as the global credit crunch has made investors increasingly averse to riskier markets such as Romania. But export growth has picked up since the start of the year, while import growth slowed on the back of a weaker leu currency. Market watchers said this may also reflect a positive structural change in the Romanian economy, as foreign investment and technology imports are switching the new European Union member's exports towards high value added products.

Russia

Ratings agency Moody's upgraded Russia's government bond ratings on Wednesday, citing an ever-stronger balance sheet and reduced political risk after the transfer of the presidency. Moody's upgraded the bond ratings and country ceiling for foreign currency deposits to Baa1 from Baa2 with a positive outlook, with an A2 country ceiling for foreign currency bonds also with positive outlook and A1 country ceiling for local currency bonds and deposits confirmed with a stable outlook. Moody's senior analyst for Russia Jonathan Schiffer said Russia had paid down its direct debt to "relatively negligible levels" and praised the easy transfer of power from former President Vladimir Putin to current incumbent Dmitry Medvedev. "President Medvedev will continue, if not improve upon, the macro economic policy framework of former President Putin, who now serves as Prime Minister," the Moody's statement said. "Russian political risk has diminished with the smooth transition."
Russian producer prices rose in June at the fastest pace since December 2004 as energy and metal prices rose. The cost of goods leaving factories and mines in the world's biggest energy exporter surged 28.1 percent, compared with 25.1 percent in May, exceeding the 25.7 percent median forecast in a Bloomberg survey, the Federal Statistics Service said in an e-mail. Prices rose 4.9 percent in the month.

Slovakia

Slovakia should use adoption of the euro currency in 2009 to deepen reforms that will boost competition and support economic growth, the Organisation for Economic Cooperation and Development said on Thursday. The OECD, grouping 30 mostly industrialised economies, said in a report the euro changeover will boost prices in several sectors, but the overall impact on inflation should be small. Slovakia will become the 16th euro zone member in January after the government of leftist leader Robert Fico reduced the fiscal deficit and kept inflation low enough to meet the entry conditions despite a global surge in energy and food costs. The entry will cap a decade of transformation from a central European laggard to the economy with the European Union's fastest growth rate of 10.4 percent last year, thanks largely to market-friendly measures taken by the centre-right coalition Fico beat in a 2006 election. Andreas Woergoetter of the OECD's Economics Department said many euro zone members had experienced reform fatigue after they joined the single currency area, expecting economic growth to continue without further measures.

Ukraine

Ukraine will mine about 7 percent more coal this year and needs $670 million of spending to expand production by a further 13 percent next year, Coal Minister Viktor Poltavets said. Production will advance by about 5 million metric tons to 80 million tons this year, the minister told journalists in Kiev. Output may reach 90 million tons next year, he said. Ukraine relies on Russia for more than 70 percent of its natural-gas supply. Russia curbed supplies in January 2006 because of a price dispute. Ukraine's government, seeking to reduce that dependency, has pledged 3.1 billion hryvnias ($670 million) in state guarantees to improve coal mines and bolster production.

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Published on  Mon, Jul 21 2008, 10:48 GMT