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Emerging Markets Weekly

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Emerging Markets Weekly

Mon, Aug 4 2008, 10:47 GMT
by Erste Bank Bond Research Team

Erste Bank der oesterreichischen Sparkassen AG

LATIN AMERICA

Argentina
 Argentine President Cristina Fernandez de Kirchner, holding the country's first presidential news conference since at least 2003, defended the farm and inflation policies that have eroded most of her public support. Fernandez, 55, said her proposals are aimed at helping redistribute wealth to poorer people and regions of the country. She disputed criticisms that the country's inflation index is inaccurate and backed her failed effort to impose new export taxes on farm goods, a plan that prompted the biggest anti- government rallies since 2001.

 Brazil
 The 65 days that plunged Brazil into a bear market are reminding investors that Latin America's biggest economy is still an emerging nation. Banco Itau Holding Financeira SA's Roberto Egydio Setubal says Brazil has been transformed after inflation dropped to 6.1 percent from 6,800 percent in April 1990 and the nation got its first investment-grade rating. Templeton Asset Management Ltd.'s Mark Mobius isn't convinced as interest rates rise at the fastest pace in the developing world and foreign investors sell equities like never before. ``You cannot say the country has changed,'' said Mobius, 71, who oversees about $40 billion in emerging-market equities at Templeton in Singapore. ``The experience they've had in responsible government spending and balanced budgets is relatively short. Inflation was high. We all have to be very mindful that these things can happen again.'' The 66- stock Bovespa Index, which gets almost half its value from producers of energy and raw materials, tumbled 22 percent from a record in May as the central bank increased interest rates in June and July, the current account deficit widened to an all- time high, and economic growth slowed. The benchmark Selic target rate jumped to 13 percent in July from 11.25 percent in April.

 Colombia
 Colombian inflation should begin to slow this month as a surge in food prices levels off and higher interest rates cool the economy, Finance Minister Oscar Ivan Zuluaga said. Zuluaga, in an interview with Bloomberg Television in Bogota, said Colombia would miss its inflation target of 3.5-to- 4.5 percent in 2008 for the third straight year. He said core inflation, which excludes food and energy, is under control and the ``lowest in Latin America,'' creating conditions to quickly reverse the accelerating trend of the past three months.

 Mexico
 Mexico's central bank raised its inflation forecasts through 2010 because of higher-than-expected commodity costs, increasing speculation policy makers will be forced to raise the country's benchmark lending rate. Annual inflation will reach as high as 6 percent in the fourth quarter, up from a previous forecast of no more than 4.75 percent, the bank said in a statement. Inflation in the third quarter will be as high as 5.75 percent, the bank said.

 Venezuela
 Venezuelan President Hugo Chavez is set to tighten his government's grip on the economy by taking over his first bank, the local unit of Spain's Banco Santander SA. Plans to nationalize the country's third-largest bank, announced yesterday, will give the state access to Banco de Venezuela SA Grupo Universal's 285 offices and $9.46 billion in deposits. It follows nationalizations in the oil, steel, cement, electricity and telecommunications industries.

AFRICA & MIDDLE EAST

South Africa
 South Africa's government said it will set targets for reducing emissions of climate-altering gases and may impose a carbon tax to limit the country's contribution to global warming. Greenhouse-gas emissions ``must stop growing at the latest by 2020 to 2025, stabilize for up to 10 years, and then decline in absolute terms,'' Environmental Affairs and Tourism Minister Martinus van Schalkwyk told reporters in Cape Town.

 Zimbabwe
 Talks between President Robert Mugabe's ruling party and Zimbabwe's Movement for Democratic Change aimed at ending the southern African nation's politic crisis are deadlocked, an opposition spokesman said. ``We aren't going to discuss why they've deadlocked, that’s for the talks brokers to disclose or not,'' George Sibotshiw spokesman for MDC leader Morgan Tsvangirai, said in a telephone interview from Johannesburg. Mugabe and Tsvangirai met face to face last week for the first time in 10 years and agreed to hold talks in neighboring South Africa to end a dispute over elections earlier this year. Mugabe extended his 28-year rule of Zimbabwe in a June 27 presidential runoff ballot in which he was the sole candidate.

ASIA

China
 Standard & Poor's said it upgraded China's debt ratings because of the improved fiscal and external positions in the world's fastest-growing major economy. The long-term sovereign credit rating was raised to A+, the fifth highest on its scale, from A, and the outlook is stable, the agency said. The short-term rating was increased to A- 1+, the highest level, from A-1. ``The ratings upgrade is motivated by China's improving fiscal and external position,'' said Standard & Poor's credit analyst Kim Eng Tan in a statement. ``These improvements to the government balance sheet will offer greater resilience to deal with the shocks of a potential sharp economic downturn.'' China's economy, the world's fourth largest, expanded 10.1 percent in the second quarter from a year earlier. That was the fourth straight quarter of slowdown as exports cooled. Its foreign-exchange reserves soared to $1.81 trillion as of June 30.

 India
 India's budget deficit may come under ``pressure'' this year, the central bank said, as the government boosts spending ahead of elections due by May. Government finances will be hit by ``higher oil subsidies and the burden of a debt waiver to farmers,'' the Reserve Bank of India said in a report on the economy issued in Mumbai before its quarterly monetary policy announcement tomorrow at noon. Salary increases for civil servants may also widen the shortfall, it said. A ballooning budget deficit may force India's central bank to raise borrowing costs to prevent higher government spending from stoking prices.

 India's central bank increased its benchmark interest rate by a half point, more than economists predicted, and forecast slowing economic growth as inflation at a 13-year high erodes spending by consumers and companies. The Reserve Bank of India raised its repurchase rate to 9 percent from 8.5 percent, the third increase in two months, according to a statement in Mumbai. Only one of the 22 economists in a Bloomberg News survey expected the decision, with 16 predicting a quarter-percentage point gain.

 Indonesia
 Indonesia sold 7.3 trillion rupiah ($800 million) of bonds to finance the budget deficit, the finance ministry said in a statement. The government auctioned 2.25 trillion rupiah of 9.5 percent bonds due June 2015 at a yield of 11.62874 percent and 2 trillion rupiah of 12.8 percent bonds maturing in June 2021 at a yield of 12.239 percent, the ministry said.

 Malaysia
 Malaysian opposition figure Anwar Ibrahim produced a report by a private doctor on Tuesday that he said showed his accuser had not been sodomised, as he battles a criminal case in his drive to unseat the government. The former deputy premier turned de facto opposition leader is facing criminal investigations that he had homosexual sex with a former aide last month, in what he says is a trumped-up allegation aimed at scuttling the opposition's rise to power. A copy of a report, said to be by the doctor who examined the alleged victim the same day he filed a police report against Anwar, was earlier published by a prominent blogger. Anwar said the medical findings showed "the allegations levelled against me are baseless and politically motivated, and that the complainant is an outright liar working hand in glove with those in power to assassinate my character". "This report makes a mockery of the so-called impartial police investigation, and clearly shows the dubious and persistent attempts to incriminate me by whatever means employable," Anwar told reporters.

 Philippines
 Philippine President Gloria Arroyo pledged to hold on to a tax on oil, defying pressure to eliminate or reduce it and help ease inflation, saying the revenue is needed to fund food programs. The government's move in 2005 to extend the value-added tax to include oil helped the economy prepare for a crisis brought about by surging commodity prices this year, Arroyo, 61, said in her annual state-of-the-nation address in Manila. ``We've come too far and made too many sacrifices to turn back on reforms,'' she said. The value-added tax on goods like oil products have helped the government ``build a shield around our country,'' and this has ``slowed down and somewhat softened the worst effects of a global crisis.'' Arroyo, who lifted the Southeast Asian nation's growth to a three-decade high of 7.2 percent last year from 1.8 percent at the start of her term in 2001, has seen her legacy threatened by record commodity prices and a weakening global economy this year.

Thailand

 Thaksin Shinawatra's wife and her brother were sentenced to three years in prison for tax evasion, the first convictions in a string of cases filed against the former Thai prime minister and his family. Pojamarn Shinawatra, 50, and her brother Bhanapot Damapong were also found guilty of providing false testimony and documentation on a 1997 share transfer, the Bangkok Criminal Court said. They will appeal within a month, family spokesman Pongthep Thepkanjana said after the verdict was read. The convictions raise the stakes in a battle between Thaksin supporters and opponents that has hobbled the current government. Prime Minister Samak Sundaravej, accused by street protesters of working on Thaksin's behalf, is planning a cabinet reshuffle that may distance him from the billionaire, who was ousted in a 2006 coup.

EMERGING EUROPE & CIS

Azerbaijan
 Moody's Investors Service has changed its outlook to positive from stable on Azerbaijan's Ba1 issuer ratings for foreign- and local-currency government debt, taking into account the low government debt and the country's excellent medium- to long-term fiscal and external prospects. Large projected surpluses on the consolidated budget position and the balance of payments will reflect windfall profits from the rapid expansion of oil and gas production and exports in the context of high prices.

 Hungary
 Hungary's central bank Gov Simor stated that a slower rate of increases in inflation would improve firms’ profit margins but firms would have to contend with a stronger forint that is likely to be a consequence of the lower inflation. Simor suggested that in order to maintain margins, firms could offer lower wage increases. The other positive effect of this would be fewer layoffs. Simor also noted that by stabilising inflation the govt could seek to adopt the euro. At this stage the govt has not set an official target date for adoption.

 Romania

 Romania's central bank, BNR, on Monday raised its annual inflation forecast for 2008 to 6.6% from an earlier 6.0%, above the upper limit of its target band for the year, and also raised its annual inflation forecast for 2009 to 4.2% from a previous 3.5%. "For 2008, we have revised our prognosis from 6.0% to 6.6% [...], for 2009 - from 3.5% to 4.2%, still within the target band, " Romania's central bank governor Mugur Isarescu told a news conference, presenting the BNR's quarterly inflation report. However, the BNR kept its inflation targets unchanged at 3.8% for this year and at 3.5% for 2009, with a variation band of one percentage point on either side, Isarescu said

 Russia
 Russia's trade surplus stood at $104.8bn in January-June 2008, having risen 1.75 times compared to the same period of 2007, the Economy Ministry said in a monitoring report on the current economic situation in Russia. Under the balance of payments methodology, Russia's exports grew 1.5 times to 240bn, according to the Bank of Russia's estimates.

 Slovakia
 Slovakia's economic outlook with Moody's has been revised to positive from stable and an upgrade to AAA on ceilings has been awarded owing to stronger economic fundamentals. Moody's has pointed out Slovakia's achievement in ensuring strong growth and improving public debt dynamics. Also, Moody's noted that Slovakia remains competitive owing to its low wages and highly skilled labour. Moody's expects that euro adoption will be beneficial for Slovakia in particular that the economy will be less vulnerable to external financial shocks thus a balance of payments crisis is less of a threat.

 Turkey
 The Central Bank of Turkey released the third Inflation Report for the year where end-2008 and end-2009 CPI inflation forecasts had been revised up to 10.6% and 7.6%, respectively. The 1.3pp upward revision of CPI forecast for 2008 (as compared to the Inflation Report of April 2008) stemmed from a 1.8pp additional burden on energy prices, 0.3pp, as opposed to a 0.8pp decline due to the appreciation of the currency. The CBT essentially revised up its oil price assumption to 140 $/bbl for 2008 and raised its food price inflation to 14% (from 13% previously). The Bank maintained its view that the economy was slowing and that the output gap would be resident throughout the period covering 2008-2011Q2. The CBT acknowledges the fact that following a monetary policy tightening of 150bps during the latest cycle, inflation expectations had finally started to respond well.

 After beating his army-backed secular opponents in court, Turkish Prime Minister Recep Tayyip Erdogan now may have to learn to live with them. Erdogan's party escaped a political ban when the country's high court rejected charges that he sought to introduce Islamic law in violation of a constitutional mandate for a secular government. The win gives Erdogan a chance to pursue democratic reforms and European Union membership. To succeed, he may need to abandon policies favored by his Islamist power-base, such as ending curbs on Muslim-style headscarves. ``Now Erdogan has to decide if he's going to behave,'' said Bulent Aliriza, head of the Turkey program at the Center for Strategic and International Studies in Washington. ``There will be pressure from hardliners in his party to be firmer on the Islamist agenda.''

 Turkey will start talks on a new agreement with the International Monetary Fund after Aug. 8, Aksam said, citing unidentified officials. The Fund's board of directors must first approve a report on the last seven years of lending agreements to Turkey, the newspaper reported.

 Standard & Poor's on Thursday revised its outlook on Turkey to stable from negative on the diminished near-term political uncertainty after the country's top court's decision not to ban the ruling AK Party for Islamist activities. S&P affirmed the country's credit rating at "BB-". "The resulting improved prospects for policy continuity and political stability will likely bolster investor confidence, widening the sources for the financing of Turkey's large current account deficit," S&P said in a statement. Wednesday's verdict eased months of political uncertainty, which has battered Turkey's financial markets on fears that the democratically elected party would be closed down, halting economic and political reforms needed for Turkey to join the European Union. Turkey's current account registered a deficit of 5.7 percent of GDP and 25 percent of current account receipts in 2007. Although net inward foreign direct investment offset 53 percent of the deficit, with portfolio equity making up for another 9.0 percent, external borrowing remained substantial.

Ukraine

 Ukrainian President Viktor Yushchenko urged the government to ensure the start of Caspian oil shipments to the European Union by year-end, after accusing the cabinet of missing a July deadline. The planned transit of crude through the Odessa-Brody pipeline is a ``unique European project,'' Yushchenko said in a statement on his Web site. ``We may lose it if we continue debates over it.'' On July 17, presidential official Bohdan Sokolovskyi accused Prime Minister Yulia Timoshenko of blocking accords to start pumping oil from Azerbaijan through the pipeline. Timoshenko has called the project ``corrupted,'' without giving details.

INDUSTRIAL COUNTRIES

Iceland

Iceland's shaky economy posted its first trade surplus in more than five years in June, revised data from the country's statistics office showed on Thursday. Iceland had a surplus of 2.3 billion Icelandic crowns ($28 million) versus a preliminary June reading showing a deficit of 880 million crowns. The swing was almost entirely due to an upward revision in exports. The surplus was the first positive trade balance since February 2003, when it was around 850 million, data from the office's Web site showed. The office said exports totalled 41.4 billion crowns, compared with a preliminary total of 38.3 billion. Imports were 39.1 billion versus a preliminary 39.2 billion. The surplus compared with a year-earlier deficit of 13.4 billion crowns.

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Published on  Mon, Aug 4 2008, 10:51 GMT