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Emerging Markets Weekly

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Venezuelan industrial production fell 1.4 percent in May from a year earlier

Mon, Aug 18 2008, 08:22 GMT
by Erste Bank Bond Research Team

Erste Bank der oesterreichischen Sparkassen AG

LATIN AMERICA

Argentina

Argentina's foreign debt rating was cut by Standard & Poor's on concern slowing economic growth will crimp tax revenue while mounting investor mistrust in inflation data erodes confidence in the government. S&P lowered Argentina's rating to B, five levels below investment grade and in line with countries including Jamaica and Paraguay, from B+. Argentina faces ``increasing economic challenges,'' S&P analyst Sebastian Briozzo wrote in a statement. ``Inflation and fiscal and financial strain have increased while the likelihood of the government taking prompt corrective measures to staunch the loss of creditworthiness remains low.'' Argentine bonds tumbled last week after President Cristina Fernandez de Kirchner defended the government's inflation data at an Aug. 2 news conference.

Bolivia

Bolivian President Evo Morales and opposition regional governors agreed on Wednesday to meet to try to ease a bitter power struggle that has gripped the South American country all year. The announcement followed a weekend recall vote in which both Morales and his biggest rightist rivals were confirmed in their jobs, a result some political analysts said would only serve to deepen their standoff. Governors in four of Bolivia's nine regions want more autonomy and a greater share of the country's booming energy revenues. They are demanding that Morales scrap a plan to redistribute farmland among the poor. Opponents of Morales, a close ally of Venezuelan President Hugo Chavez, are also unhappy with a new draft constitution that Morales wants to implement against their will.

Brazil

Brazil's external accounts remain sound as higher inflows of foreign direct investments are financing the widening current account deficit, the central bank said. Latin America's biggest economy posted a current account deficit of $18.1 billion in the 12 months through June, the widest in six years, as companies send more profits abroad and increased imports. The gap was covered by a $30.4 billion inflow of foreign direct investment in the 12-month through June, according to central bank figures.

Costa Rica

Moody's Investors Service has revised the outlook on Costa Rica's key ratings to positive from stable in recognition of the significant improvement in the country's fiscal and debt positions and the likelihood of such improvement continuing in the medium term despite ongoing global turbulence. The outlook change affects Costa Rica's Ba1 foreign and local currency government bond ratings. The outlook on the Baa3 foreign currency country bond ceiling and on the Ba2 foreign currency bank deposit ceiling was also revised to positive from stable. "Costa Rica's remarkable fiscal performance over the past few years has been driven by significant expenditure restraint and an improvement in revenues, reflecting not only the business cycle but also a concerted effort to enhance collection," said Moody's Vice President -- Senior Analyst Alessandra Alecci. "As a result, the fiscal and debt positions have improved to such a degree that it would take a major crisis to reverse the virtuous debt dynamics seen in recent years." Costa Rica's fiscal and debt indicators have begun to converge towards the investment-grade level.

Mexico

Four police chiefs were assassinated in Mexico, bringing the number of police killed this year to 270, Milenio reported. Top police officials were slain in the state of Mexico, north of Mexico City; Chihuahua, near the U.S. border; Quintana Roo in the south of the country; and Michoacan, on the Pacific coast, the Mexico City-based daily reported, without saying where it got the information.

Peru

Peru had a $46 million trade surplus in June, the country's national statistics institute said in an e-mailed report. Exports rose 12.4 percent from a year earlier to $2.74 billion. Imports rose 84 percent to $2.69 billion, the agency said. The trade balance was less than the $410 million median estimate in a Bloomberg survey of six economists.

Trinidad & Tobago

Standard & Poor's Ratings Services said that it raised its foreign currency sovereign credit rating on the Republic of Trinidad and Tobago to 'A/A-1' from 'A-/A-2'. Standard & Poor's also said that it raised its transfer and convertibility risk assessment rating on the republic to 'AA' from 'AA-'. In addition, Standard & Poor's affirmed its 'A+/A-1' local currency sovereign credit rating on Trinidad and Tobago. The outlook is stable. "The upgrade reflects the continued strengthening of the republic's fiscal and external accounts," explained Standard & Poor's credit analyst Roberto Sifon Arevalo. "This came on the back of a booming energy economy that has grown an average of 9.3% annually since 2003 and we expect to grow about 7% in 2008."

Uruguay

Moody's Investors Service said on Thursday it placed Uruguay's foreign- and local-currency sovereign bond ratings on review for possible upgrade, citing strong economic growth and fiscal restraint. Moody's rates Uruguay's sovereign credit at "B1", four notches below investment grade and one notch below both Standard & Poor's and Fitch Ratings, which have the country at a "BB-" rating. "Uruguay's economic performance has been characterized by strong growth, with convergence towards lower, more sustainable rates anticipated following an extended period of above-trend expansion in recent years," sovereign credit analyst Mauro Leos said in a statement. Moody's highlighted that government debt ratios have reported significant reductions in previous years, and "also that the strengthening of Uruguay's fiscal indicators reflects strong government commitment to fiscal restraint."

Venezuela

Venezuelan industrial production fell 1.4 percent in May from a year earlier, the central bank said on its Web site.

AFRICA & MIDDLE EAST

South Africa

South Africa will exceed its budget to build and renovate stadiums for the 2010 soccer World Cup by more than 2 billion rand ($255 million), Deputy Finance Minister Jabu Moleketi said. ``Six billion rand has been spent'' so far on the stadiums, Moleketi told reporters in Pretoria. Cost overruns will be ``something to the north of 2 billion rand. That is a function of the increase in input costs.'' In the budget in February, the treasury said the national government would spend 9.6 billion rand on building five stadiums and upgrading five others to host the world's most-watched sporting event.

ASIA

China

Foreign direct investment in China rose 44.5 percent in the first seven months of 2008 from a year earlier, adding to the flood of cash that may stoke inflation in the world's fastest-growing major economy. Spending by overseas companies increased to $60.7 billion, the Ministry of Commerce said on its Web site. Cheap labor costs and a growing and more affluent consumer market have attracted overseas companies to build factories in China. Still, money from foreign direct investment may fuel a rebound in inflation that slowed for a third straight month because of smaller food-price gains.

Indonesia

Indonesia needs to raise interest rates further to cool inflation, even as slowing global growth poses risks to Southeast Asia's largest economy, the International Monetary Fund said. ``Further monetary-policy tightening will be needed to put inflation back on a firmly declining path,'' the Washington-based IMF said in a note published on its Web site yesterday. Authorities are encouraged to ``continue to strengthen the inflation-targeting framework.'' Bank Indonesia has joined Asian central banks from India to the Philippines in raising borrowing costs this year to slow price gains. Indonesia's inflation accelerated to a 22-month high of 11.9 percent in July after the government raised fuel prices in May. Indonesia's central bank has raised its policy rate four times in as many months to 9 percent.

Malaysia

Malaysia's economy may expand at the higher end of the official forecast range this year, even as it faces a ``more challenging'' time ahead, Trade and Industry Minister Muhyiddin Yassin said. Gross domestic product may grow at a ``modest'' pace of about 6 percent in 2008, Muhyiddin said in Singapore, citing ``robust'' manufacturing and exports. The central bank had forecast in March that the economy would expand 5 percent to 6 percent this year. ``While the Malaysian economy has performed well in the first quarter, Malaysia expects to experience more challenging times as a result of global economic volatilities,'' the minister said at a forum in Singapore.

EMERGING EUROPE & CIS

Bulgaria

Fitch Ratings has affirmed the Republic of Bulgaria's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB' and 'BBB+', respectively, both with Negative Outlooks. The agency has also affirmed the Short-term foreign currency IDR at 'F3' and the Country Ceiling at 'A-' (A minus). "The Negative Outlooks signal Fitch's concern that Bulgaria's booming economy, now running a current account deficit of around 22% of GDP, is on an unsustainable path and risks a hard landing, despite rigorously disciplined macroeconomic policies," said Andrew Colquhoun, Director in Fitch's Sovereigns Group. "Even if Bulgaria achieves a smoother adjustment, its gross and net external debt levels are starting to look stretched relative to its rating peers, and further deterioration could trigger a downgrade." A sharp slowdown in the economy would be negative for the ratings. Booming domestic demand is contributing to a rise in imports, taking the current account deficit (CAD) to 21.7% of GDP in 2007.

Georgia

Georgian President Mikheil Saakashvili urged the Kremlin to discuss ways to avoid "discord for future generations" as Russian troops prepared to pull out of the Black Sea state on Monday. Saakashvili's comments, in a televised address, contrasted sharply with recent descriptions of the Kremlin as "21st century barbarians", looters and thieves and his accusations of ethnic cleansing in the pro-Russian breakaway region of South Ossetia. Russia announced on Sunday it would begin pulling its troops out of Georgia at midday on Monday, under a sixpoint ceasefire deal brokered by France. The European Union and the United States, wary of a drift back into conflict if there are delays, are pressing Moscow to finish the pullout quickly. Kakha Lomaia, the secretary of Georgia's National Security Council, said he saw no sign of a Russian withdrawal.

Hungary

Hungary's Monetary Council voted 10 to one to keep rates on hold on July 21, and the central bank is ready to defend its inflation target if needed, the minutes said on Friday. Analysts said the minutes indicated that rates would stay on hold for several months despite rising market expectations for a rate cut. The decision to keep rates on hold at 8.5 percent was opposed by only one member, who voted for a 25 basis point rate cut, at a meeting at which Governor Andras Simor was not present. "The Council continues to believe that it is necessary to maintain tight monetary conditions and is ready to take the necessary steps if the inflation target comes under threat," the bank said. The bank said a firming of the forint and below-potential economic growth would help reduce inflation, while an increase in global energy prices was an upward risk.

Romania

Romanian cosmetics company Elmi Prodfarm used a modified communist-era washing machine to mix its herb extracts when it was launched in a university dorm a decade ago. Over the past three years, the rapidly growing company has bought high-tech turbo emulsifiers, melters, vessels and fillers from Italy for its plant near the centre of Bucharest. That sort of technological transformation, along with a cheaper leu currency, has helped Romanian exports to speed up this year despite the economic problems in key western European markets. Central bankers have been reluctant to call the improvement sustainable, but official forecasts indicate faster exports should help stabilise Romania's bloated current account deficit at around 14 percent of gross domestic product in 2008. This could be a welcome relief for the new European Union member's overheating economy, which is financing a spending boom as consumer race to improve living standards and companies modernise, economists say. "There is definitely a structural improvement in exports, driven mainly by manufacturers who have turned to more value added goods as a result of foreign investment and technology imports," said BCR bank analyst Melania Hancila.

Russia

Russian Emergency Situations Minister Sergei Shoigu may delay negotiations that include OAO Gazprom Neft's 400 million-euro ($630 million) offer to buy Serbia's national oil company because of the conflict with Georgia. Shoigu, who heads Russia's negotiating team, was expected to arrive this week to begin trade talks that would include the purchase of a 51 percent stake in Naftna Industrija Srbije by Gazprom's oil division.

Turkey

Turkish stocks strengthened more than 1 percent on Friday while the lira softened slightly following a dovish statement from the central bank which left key interest rates unchanged at Thursday's monthly meeting. The lira currency softened to 1.1835 per dollar from Thursday's close of 1.1810. Istanbul's main stock exchange index closed 1.16 percent higher at 42,194.42 points. "The consensus was that the central bank would hold rates. The market was right and the central bank's tone was very mild. It showed that inflation could hold if dynamics do not deteriorate," said Ayse Colak director of research at Tera Stock Brokers. Turkey's inflation-fighting central bank brought to an end a three-month raising cycle on Thursday, leaving its key interest rates unchanged. Turkish inflation is currently in double digits, due to higher food prices and energy prices. It said a cautious monetary policy was needed in the face of pricing behaviour risks and global uncertainties. The bank kept the benchmark borrowing rate at 16.75 percent and left the lending rate at 20.25 percent.

Ukraine

Ukrainian annual industrial output grew at a slower pace in July, raising concern the country's economy is faltering. Industrial production increased an annual 5.1 percent in July, compared with 5.2 percent in June and 8.3 percent in May, the Kiev-based Ukranian Statistics Office said in a statement on its Web site. The economy is expected to expand 6.8 percent this year from 7.3 percent in 2007, boosted by industrial output, investments, and domestic consumption, according to government estimates.
Credit ratings agency Fitch does not yet see rising tension with Russia as a major threat to Ukraine's creditworthiness, it said on Friday, but remains concerned about a series of stresses in the Ukrainian economy. The aftermath of conflict between Georgia and Russia has seen a deepening row between Ukraine and its larger neighbour over the use of a Ukrainian port by Russia's Black Sea Fleet, prompting investors to price its debt as riskier. "It's not one of our key worries for the rating at this stage," Fitch director of emerging Europe sovereigns Andrew Colquhoun. "We are more worried about the current account deficit, rising external debt levels and inflation." He said that a small clash in the Black Sea that went no further might not have too great an impact on Ukraine's current BB- rating with stable outlook. "But if you had escalation or even if a small clash simply prompted capital flight then that would have a negative effect. Conflict would certainly be negative but that is not something we see as very likely at this stage." Ukraine's hvrynia currency has been appreciating this year, but any sudden shift in sentiment that prompted currency weakening would threaten both inflation as well as the banking sector, with a lot of domestic private sector debt in dollars and therefore hard to repay in the event of a major currency move, he said.

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Published on  Mon, Aug 18 2008, 09:33 GMT