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Emerging Markets Weekly

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The government has to work to regain confidence in the national Statistics Agency

Mon, Jul 28 2008, 08:46 GMT
by Erste Bank Bond Research Team

Erste Bank der oesterreichischen Sparkassen AG

LATIN AMERICA

Argentina

Argentina's cabinet chief, Sergio Massa, said the government has to work to regain confidence in the national Statistics Agency, which releases inflation data, newspaper Clarin reported. Massa, who took office July 24 after his predecessor, Alberto Fernandez, resigned, is the first government official to note a lack of public confidence in the statistics agency, the newspaper said.

Brazil

Brazil's central bank signaled it's ready to pick up the pace of interest rate increases after raising lending costs more than economists forecast for a second time in three meetings. Policy makers led by President Henrique Meirelles raised the overnight rate by three quarters of a percentage point to 13 percent last night to bring inflation back to target in a ``timely fashion.'' Thirty-one of 45 economists surveyed by Bloomberg News predicted a half-point increase as in the two previous meetings. The increase aims to slow domestic spending as food and energy costs rise. Mereilles will miss his inflation goal for the first time since 2003, according to a survey of about 100 economists by the central bank. For 2009, inflation forecasts are on the rise and consumer prices are expected to increase 5 percent, above the goal of 4.5 percent.
Brazilian President Luiz Inacio Lula da Silva said the government has no room left for further spending cuts in its attempt to help control inflation, Estado de S. Paulo reported. The government has made all the adjustments it can in its budget and isn't able to cut spending any more, Lula told reporters during a trip to Portugal, the newspaper said.

Chile

Chile's gross domestic product will probably expand 4.25 percent this year, below its potential because of energy shortages, the International Monetary Fund said. ``Chile has obviously faced a very difficult environment over the last year,'' Martin Muhleisen, the IMF's mission chief, said in a conference call with journalists.

Colombia

Colombia will cut 1.5 trillion pesos ($831 million) in planned spending from its 2008 budget in a bid to reduce the deficit, Deputy Finance Minister Juan Pablo Zarate said. The government now targets a budget deficit equal to 1 percent of gross domestic product, down from 1.4 percent, Zarate told reporters in Bogota. The central government budget deficit will narrow to 3.1 percent, down from 3.3 percent, he said.
Colombia's central bank raised the benchmark interest rate for the second time this year in a bid to combat accelerating inflation. Policy makers increased their overnight interbank rate by a quarter-percentage point to a near seven-year high of 10 percent, matching the forecast of 19 of 41 economists surveyed by Bloomberg.

Ecuador

Ecuador's Central Bank President Robert Andrade stepped down after less than six months in office in the latest sign that the institution will lose its independence under President Rafael Correa. The Constitutional Assembly, within which Correa has a majority, announced the resignation in a statement without saying why Andrade, a 31- year-old economist and former assistant to Correa, decided to quit. ``It's a change that will help make the bank absolutely subordinate to the administration,'' said Jaime Carrera, head of the Quito-based Fiscal Policy Observatory, a research institute.

Uruguay

Standard & Poor's on Tuesday raised its foreign- and local-currency long-term credit ratings on Uruguay to "BB- " from "B+", citing diminishing economic vulnerabilities while the country remains solidly committed to sound macroeconomic policies. "Over the last four years, Uruguay has achieved high economic growth levels with only moderate inflation within a context of balanced fiscal accounts and only minor current account deficits, significantly reducing both fiscal and external debt levels," S&P said in a statement. "We expect that net general government debt will decline to 45 percent of GDP (gross domestic product) by the end of 2008 compared with about 89 percent after the crisis in 2003," the agency said. Net public-sector external debt will likely reach 60 percent of current account receipts by the end of 2008 compared with 200 percent in 2003.

Venezuela

Venezuelan President Hugo Chavez reaffirmed ties with Russia forged on shared rivalry with the U.S. as he shopped for air defense systems, submarines and other weaponry and signed energy deals. ``I am sure your election will become a guarantee of the stability of our plans,'' Chavez told Russian President Dmitry Medvedev at a meeting outside Moscow in comments broadcast on state television.

AFRICA & MIDDLE EAST

Ghana

Ghana, the world's second-biggest cocoa producer, slashed its forecast for the amount of beans it will receive from the so-called light crop because of smuggling to neighboring Ivory Coast. The Ghana Cocoa Board expects to receive at most 40,000 metric tons of the beans during the season, down from an estimate of 50,000 tons last month, Charles Ntim, the Accra-based board's deputy chief executive officer for operations, said in an interview. ``It looks as if our best bet may be around 40,000 tons or even less,'' he said. Lighter controls and poorer quality beans in neighboring Ivory Coast, a bigger cocoa producer, allow smuggled Ghanaian beans to fetch higher prices in that country, he said.

Nigeria

Nigeria, Africa's most populous country, plans to launch a national development plan in October that will aim to transform the nation into a manufacturer of finished goods, Planning Minister Sanusi Daggash said. The move will ensure its ``resources are no longer traded in their primary state,'' Daggash said at the annual meeting of the national association of manufacturers in the commercial city of Lagos. Nigeria, Africa's second-biggest producer of crude oil after Angola, is also one of the world's biggest exporters of cocoa, and is rich in several other commodities.

South Africa

A strike in four of South Africa's provinces to protest increased power prices shut car manufacturing plants and hindered people from getting to work in the several cities. The strike, called by the Congress of South African Trade Unions, also drew support from some workers at mines owned by Anglo Platinum Ltd., Impala Platinum Holdings Ltd., Harmony Gold Mining Co. and Gold Fields Ltd. Cosatu, South Africa's biggest labor federation, called the strike after the country's energy regulator last month allowed state-owned Eskom Holdings Ltd. To raise electricity prices by 27.5 percent, almost triple the 10.9 percent inflation rate, to help fund a $44 billion expansion.

ASIA

Asian governments from India to Malaysia, clinging to budget-busting fuel subsidies, may end up paying an even higher price: saddling their economies with an extended period of stagflation. ``Subsidies will come increasingly in the way of future growth,'' says Kalpana Kochhar, a senior adviser for the International Monetary Fund's Asia- Pacific Department in Washington. ``Not passing prices through and keeping artificial price and wage controls never works.'' Governments are being forced to choose between two unattractive alternatives: run up bigger deficits by continuing to shield citizens from soaring energy prices, or start to withdraw subsidies, fueling inflation and political backlash. Inflation has already reached decade highs throughout the continent and played a role in destabilizing politics. The result will be a combination of slower annual growth, amounting to 7.6 percent in 2008, and accelerating inflation of about 6.3 percent in East Asia, which excludes Japan and the Indian subcontinent, according to a July 22 report from the Asian Development Bank. The region averaged 8.4 percent gross domestic product growth and 3.2 percent inflation in 2004-2007, according to ADB figures. The consequences for Asia ``may prove more socially and politically noxious'' than the currency crisis of the late 1990s, says Uwe Parpart, chief Asia economist and strategist for Cantor Fitzgerald Hong Kong Capital Markets. Unlike the region's rapid recovery in 1997-98, ``there is no V-shaped exit from inflation, only a long and painful one,'' he says.

China

China's yuan declined for the first time in three days after the Politburo said maintaining economic growth and curbing inflation are priorities, fueling speculation the government will slow gains to aid exporters. The Politburo, the Communist Party's top decision-making body, wants to maintain ``steady and relatively fast'' economic growth, state-run China Central Television reported on July 25. The yuan's 7 percent advance this year is eroding the value of overseas sales as manufacturers contend with the slowest domestic economic growth since 2005.

India

India's government, victorious in a confidence vote this week, will push to lift restrictions on overseas investors' control of privately run banks, Finance Minister Palaniappan Chidambaram said. Stalled legislation removing a 10 percent cap on foreigners' voting rights in banks may be revived before laws on pensions and insurance, Chidambaram said. Prime Minister Manmohan Singh remained in power Tuesday with support from new allies who replaced communists opposed to foreign investment. ``We seem to have acquired the political space to take the liberalization process forward,'' Chidambaram said in a telephone interview from New Delhi. ``We are looking into various aspects of the foreign direct investment regime, trying to see whether further liberalization is possible.''

Indonesia

Indonesia's offer to swap short-term debt for a 14-year paper on Tuesday is likely to get a good response from the market as inflation in Southeast Asia's top economy may have peaked, analysts said. The finance ministry plans to swap government bonds maturing in 2009-2013 -- excluding treasury bills -- with fixed rate bonds maturing in 2022, as part of efforts to ease the country's refinancing risks. The 14-year bonds have a coupon of 12.9 percent and will be offered at 99.95 percent of par value. "I think the outlook for inflation is improving, so investors will likely go for long-term paper," debt analyst Handy Yunianto of Mandiri Sekuritas said. "With the debt switching, I think investors will opt for long-term debt with an attractive yield." Indonesia's annual inflation in June accelerated to 11.03 percent, its highest in nearly two years as the full impact of a fuel price hike took effect, prompting the central bank to raise its key interest rate, BI rate, to 8.75 percent on July 3. But the central bank governor, Boediono, said on July 9 that inflation may have peaked and might come down in July, based on the central bank's preliminary readings.
Bank Indonesia will use all its ``arsenal,'' including the rupiah, to slow inflation and reduce the need for the central bank to increase rates aggressively, Deputy Governor Hartadi Sarwono said. Indonesia's central bank has raised borrowing costs by a quarter-point in each of the past three months since resuming rate increases in May. Bank Indonesia, which is on a ``tightening mode,'' raised the rate to 8.75 percent on July 3.

EMERGING EUROPE & CIS

Hungary

Hungary will continue to issue more short-maturity discount treasury bills and fewer longer-maturity government bonds in the second half as the negative impact of the global subprime crisis persists into the second half of the year, executives of Hungarian debt center AKK said Thursday. "The restrained bond issues need to be continued in the second half so the role of T-bills and foreign currency issues will play a bigger role in the year as a whole," Laszlo Andras Borbely, AKK deputy chief executive, said at a press conference.

Romania

Romania's centrist government signed a deal with trade unions on Friday to raise the minimum monthly wage by 8 percent to 540 lei ($237) from October and to 600 lei from Jan. 1, 2009. The plan has been discussed with employers' associations and labour unions, which have put pressure on the minority cabinet to keep its pledge to raise wages. "This is what the Romanian economy can now bear, but in a reasonable way and without putting additional pressure on inflation," Prime Minister Calin Tariceanu said after the signing. Market watchers have warned that the centrists face pressure to loosen the purse strings before parliamentary elections later this year. The cabinet had planned to raise the lowest salaries from July if economic conditions were appropriate. But government officials said earlier this month that inflation was too high to allow a boost to people's spending power. Finance Minister Varujan Vosganian argued later that the inflationary impact will be offset by weaker food prices because of expectations of a good farming year.

Serbia

The arrest of Bosnian Serb war crimes suspect Radovan Karadzic showed Belgrade's willingness to recognise its international obligations, and more arrests could follow, the Serbian prime minister said on Sunday. Karadzic, twice indicted by the U.N. court in The Hague for orchestrating genocide during the 1992-95 Bosnia war, was arrested on Monday after more than a decade on the run. Serbia's bid to join the European Union had been held up by its failure to comply with demands by the Hague court to hand over Karadzic and other war crimes suspects. "The arrest of Karadzic was in a way the proof that there is a willingness to cooperate with the (U.N.) tribunal and we believe that cooperation with the tribunal will be essential for our country," Serbian Prime Minister Mirko Cvetkovic told reporters ahead of an annual meeting of the region's prime ministers.

Turkey

Turkish Prime Minister Recep Tayyip Erdogan, anticipating a court decision forcing him to quit, has begun preparing for early elections that likely would return him to power. His ruling Justice and Development Party has done internal polling that shows it probably would match the 47 percent it won in 2007, said Reha Denemec, its deputy chief. Erdogan is arguing in speeches that voters, not judges, should decide his fate. A repeat victory by Erdogan, 54, and his Islamist-leaning supporters would signal a shift in power away from Turkey's army-backed secularists as the country pushes to join the European Union. It also would probably boost confidence in Turkey's $659 billion economy, cutting borrowing costs and increasing foreign investment.
The militant Kurdistan Workers' Party, or PKK, denied responsibility for two bomb attacks in Istanbul that killed at least 14 people and injured more than 140, Milliyet reported. The group said it didn't plant the bombs that exploded in the city's Gungoren district, the newspaper said, citing a ``high-level'' PKK official who spoke on usual condition of anonymity.

Ukraine

Germany's backing of Ukraine's bid to sign a trade pact with the European Union doesn't mean it is ready to endorse the former Soviet republic's efforts to join the bloc, German Chancellor Angela Merkel said. Ukraine is expected to sign the Stabilization and Association Agreement, a first step before membership talks would begin, in September in France. ``It shouldn't be mixed up with concrete perspectives for joining the EU,'' said Merkel at a press conference in Kiev after meeting with Ukrainian President Viktor Yushchenko and Prime Minister Yulia Timoshenko.
Ukraine's current account deficit for the first five months of 2008 rose to $6.2 billion from $3.6 billion in the first quarter and was more than 3 times higher than in the first five months of 2007, the central bank said on Friday. The bank, quoting preliminary figures, said exports over the first five months of the year rose by 35.7 percent, while imports climbed 50.3 percent. "Stimulation of domestic demand in the absence of vital structural reforms, plus inflationary pressure, has led to faster rates of growth in imports and a worsening of the foreign trade balance," the bank said on its Web site www.bank.gov.ua. It said a continued gap in the rate between exports and imports had created a "negative foreign trade balance which is 2.6 times higher than last year's figure. "This led to an increase in the negative balance of the current account balance of payments to $6.2 billion, 3.4 times greater than the same period last year." The central bank said the inflow of investment funds over five months totalled $7.4 billion -- not only offsetting the current account deficit but allowing for an increase in reserve assets.

INDUSTRIAL COUNTRIES

Iceland

Iceland's consumer price index rose 0.94 percent in July from June to put annual inflation at 13.6 percent, a high unseen since August 1990, the statistics office said on Friday. Economists said they expected price pressures to pick up further in the next couple of months as the effects of a weaker crown currency and costlier imports work through the system. "This definitely adds to the worries of a (negative) spiral because of the wage negotiations early next year," economist Kristrun Gunnarsdottir at Landsbanki said. "This could mean that the (crown) effects are coming more clearly sooner than we thought, but if we look at the next two measurements after the sales finish, I think we could see very high numbers then." Still, several economists said that although inflation is well above the 4 percent ceiling of the central bank's comfort zone, fears of an economic slump will likely prompt policymakers to start lowering rates from record highs in November. At its last meeting on July 3, Iceland's central bank held rates at 15.5 percent and said it could start easing credit costs in the second quarter of 2009, once inflation eases. Policymakers have raised official rates sharply over the span of four years to curb rapid growth and rising prices, stimulated by huge foreign investment in aluminium smelters. The boom years show every sign of coming to an end.

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Published on  Mon, Jul 28 2008, 08:58 GMT