• Home ::
• Fundamental ::
• Analysis Reports ::
• Emerging Markets Weekly

• Send
• Print
• Add To
• Rss

Emerging Markets Weekly

277e7877-31c5-4dd8-9c40-6ff97f4e2860

0

0

The Icelandic crown skidded to a fresh record low against the euro on Friday

Mon, Sep 29 2008, 09:16 GMT
by Erste Bank Bond Research Team

Erste Bank der oesterreichischen Sparkassen AG

EMERGING MARKETS

According to an article published by S&P, the ratings agency have turned negative on some EM sovereign credits. The article titled: 'At The Top Looking Down' suggests that the trend of improving credit fundamentals in EM sovereigns that has prevailed since 2003, appears to have run its course. S&P said the EM credit quality that has improved in the last 5 yrs will not be lost but the agency sees little further upside, commenting 'a pronounced downside is beginning to appear'. The agency still has stable outlooks on 33 of 43 of EM sovereigns, but only Poland, Slovak Republic have positive outlooks; whilst Hungary, Kazakhstan, Serbia have negative outlooks. The forecasts for most EM sovereigns call for lower growth, higher inflation, and deteriorating current accounts as dislocations in credit markets of industrialised nations persist. Therefore, S&P say EM as a whole has peaked in credit quality but there was no mention of major LatAm credits.

LATIN AMERICA

Argentina

Argentine President Cristina Fernandez de Kirchner may send Congress as soon as next month a plan to restructure defaulted debt held by investors who rejected a government offer in 2005, newspaper Infobae reported, citing Cabinet Chief Sergio Massa. Massa said the government will need ``two or three weeks'' to analyze a proposal submitted by three banks this week before submitting it to Congress for approval, Infobae said.

Brazil

Brazilian banks may struggle to boost profit next year as slower economic growth crimps an expansion in lending, Deutsche Bank analyst Mario Pierry wrote in a report. ``Sentiment toward the sector has deteriorated worldwide, and the indirect effects of the U.S. financial crisis could add further pressure to an already challenging operating environment in Brazil,'' Pierry wrote in a report distributed. Net interest margins, or the difference between what banks pay for deposits and charge on loans, may be a quarter percentage point narrower than estimated on average, should credit expand 15 percent next year, rather than the 20 percent Deutsche Bank forecasts, Pierry wrote.
Brazil eased rules on reserve requirements that banks must keep at the central bank in response to the credit crunch sparked by the U.S. financial crisis. Banco Central do Brasil delayed the introduction of higher rates for mandatory deposits from leasing companies by two months and raised the threshold on exemptions for cash, time and savings deposits, according to an e-mailed statement.

Chile

Chile's Finance Minister Andres Velasco said the country's sovereign wealth funds aren't at risk because of the U.S. financial crisis, Diario Financiero reported. The funds, which total about $21 billion and invest Chile's copper profits, aren't exposed to institutions affected by the crisis, Velasco said.

Colombia

Colombia's economy expanded at the slowest pace since 2005 in the second quarter as efforts to stem inflation damped consumer and industrial spending. Gross domestic product, excluding illicit crops, rose 3.7 percent in the April-through-June period, down from a revised 8.0 percent growth in the same year-earlier period, the country's statistics agency said in a report published in Bogota.

Dominican Republic

Fitch Ratings has affirmed the Dominican Republic's ratings as follows: Foreign currency IDR at 'B'; Local currency IDR at 'B'; Country ceiling at 'B+'; Brady bonds at 'B+/RR3'; Senior unsecured debt at 'B/RR4'; Shortterm foreign currency IDR at 'B'. Fitch has also revised the Rating Outlook to Stable from Positive for both the Dominican Republic's foreign and local currency IDRs, reflecting increased concern that the Dominican Republic's comparatively weak liquidity position relative to 'B' peers will render the country more vulnerable to external shocks in an environment of lower global growth and tighter international liquidity conditions.

Ecuador

Ecuador registered a budget surplus in the first half that will allow the government to keep investing, President Rafael Correa said. Ecuador's central government had a surplus of $508 million and public-sector entities such as municipalities and state-run universities had a $2.17 billion surplus, he said in his weekly television address.
Ecuador's President Rafael Correa said the nation may not honor a loan of more than $200 million owed to Brazil's state development bank that's linked to Odebrecht SA, a Brazilian construction company he says did a poor job building a plant.

Mexico

Petroleos Mexicanos, Mexico's state- owned oil company, may report that crude output fell for the 25th consecutive month in August, adding pressure on Congress to take up delayed legislation aimed at increasing production. Pemex probably extracted less than 2.842 million barrels a day, the amount the company produced in August 2007, said David Shields, an independent energy analyst and publisher of Energia magazine. The problem for Mexico is exacerbated by a more than 25 percent decline in oil prices since peaks reached in July.

Peru

Peruvian President Alan Garcia's approval rating dropped for a fourth month to the lowest since he took office in 2006 as Peruvians criticized his government for a two-week state doctors' strike and failing to halt inflation, daily newspaper El Comercio reported. Garcia's support fell to 19 percent this month from 22 percent in August, the newspaper said, citing Lima-based Ipsos Apoyo Opinion y Mercado. Eighty-two percent of those surveyed disapproved of Peru's Congress and 79 percent felt the same way about the country's judiciary.

Venezuela

Venezuela's unemployment rate fell to 7.1 percent in August, from 7.2 percent in July, matching the forecast of five analysts in a Bloomberg survey. The jobless rate fell from 8.6 percent in the same month a year ago, according to statement from the government-run National Statistics Institute.
Venezuela is considering buying back $2 billion of government bonds denominated in foreign currencies, newspaper El Nacional reported, without saying how it obtained the information. The plan calls for the buyback of debt maturing in 2010, 2013 and 2027, the newspaper reported.
Venezuela, the world's fifth-largest oil exporter, will boost crude shipments to China by 25 percent in 2009 to benefit from rising energy demand in the fastest-growing major economy, President Hugo Chavez said

AFRICA & MIDDLE EAST

Mozambique

Fitch Ratings affirmed the Republic of Mozambique's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'B' and 'B+' respectively, with Stable Outlooks. The Short-term foreign currency IDR is affirmed at 'B'. The country ceiling is affirmed at 'B'. "Mozambique's ratings are supported by a strong growth record, averaging 7.7% over the past five years, and the strongest export growth of all Fitch-rated 'B' countries over the last ten years, underpinned by one of the strongest investment rates in the 'B' rating category - 31% on average over the past five years versus a median of 24%," says Veronica Kalema, Director in Fitch's Middle East and Africa Sovereigns team. Sound economic policies and reforms, strong investment in the natural resources sector and solid donor support have all contributed to the above achievements and improved the resilience of the economy.

South Africa

South African Finance Minister Trevor Manuel said he and his deputy Jabu Moleketi have agreed to a request to serve in a new administration following the exit of President Thabo Mbeki. ``I am more than prepared to continue serving,'' Manuel told reporters via a video-link from Washington. ``I answered in the affirmative'' when asked to remain in the post.
South African inflation will remain `higher than expected,'' even after the statistics office makes changes to the consumer price index, Reserve Bank Governor Tito Mboweni said.

United Arab Emirates

The United Arab Emirates Central Bank launched an emergency funding facility for its banks on Monday as signs grew that a global liquidity crunch was biting in the oil-rich Gulf States. The central bank of the world's fifthlargest oil exporter said it would set up a 50 billion dirham ($13.6 billion) funding facility due to bottlenecks in money markets, in a move similar to those made by the Federal Reserve and European Central Bank. Bankers in neighbouring Kuwait and Saudi Arabia also renewed calls for their central banks to take similar action to ease market tensions that stretch back to the start of this year. While banks in the Gulf have largely ridden out the lending rates jumping 170 basis points since early June to 3.61 percent. "Everyone needs money. There is a massive shortfall," said Jason Goff, head of treasury sales at Emirates NBD. "These (central bank) funds are going to help. They are definitely required." The Gulf has expanded rapidly on a surge in oil prices since 2002, sparking a real estate boom and creating the world's largest sovereign wealth funds, one provider of liquidity during the year-long credit crunch. But that is little help to markets when lending between commercial banks worldwide has frozen up. "The central bank expects these funds would meet banks' needs for supporting continued financing of economic growth," the central bank said in a statement, without giving details on how the facility would be structured or operated. Bankers said the facility would likely involve the central bank buying debt -- such as bonds or certificates of deposits -- from banks in return for funds.
UAE banks have faced a liquidity shortage since authorities opted in April to keep the dirham pegged to the dollar, a move that quashed market bets the currency could be revalued to fight inflation at a 20-year high. The central bank said last week that 90 percent of foreign speculative money, which started flooding in late last year, had flowed out of the country. As in other Gulf states, the retreat has given banks less cash to lend and prompted calls for central banks to intervene. "In the last two years, loan growth was faster than deposit growth and essentially what happened was there was greater demand among corporates and banks for external funds," said Giyas Gokkent, head of research at National Bank of Abu Dhabi. "That has dried up because of the global volatility, and the projects are so large that any decline in funding sources creates a problem." In Saudi Arabia, economists said one possible move would be to cut the reserve requirement for banks, raised by the central bank four times since last November to the current 13 percent. They said the need for action was there, if less urgent. "If SAMA (Saudi Arabian Monetary Agency) injects money it will not be a bad thing," said John Sfakianakis, chief economist at HSBC affiliate SABB bank. "With the revaluation debate being over, banks have taken their money out, the deposit base is limited, high demand for loans, limitations on money that can be spent because of inflation and we are in a negative interest rate environment." Bankers in Kuwait said they had not heard of any plans by its central bank to pump more liquidity into the system, despite a public plea by the Kuwaiti banking association. Interbank rates in Kuwait have almost doubled since the central bank withdrew in August a facility guaranteeing the availability of dinars at a fixed rate on the interbank market.

Zambia

Inflation in Zambia, Africa's biggest copper producer, accelerated to an annual 14.2 percent in September as energy increased, the Central Statistical Office said. The inflation rate climbed from 13.2 percent last month.

ASIA

China

Chinese banks face worsening asset quality and slower profit growth as the nation's tight monetary environment and a worsening global credit crisis cause more borrowers to default, Fitch Ratings said. The nation's 14 publicly traded banks, whose total net income jumped 67 percent in the first half from a year earlier, have already shown signs of rising borrower defaults and tighter liquidity, the ratings agency said. ``Chinese banks appear to be approaching their first real test of resilience,'' Beijing-based analysts Charlene Chu and Chunling Wen wrote in a report yesterday. ``Increased vigilance is warranted as Chinese banks take on the growing challenges ahead.'' Chinese banks have boosted profits over the past three years as the nation's economy expanded at around a 10 percent annual clip. Industrial & Commercial Bank of China Ltd., Bank of China Ltd. and Bank of Communications Ltd. have predicted slowing growth after posting record earnings in the first half. Listed banks posted an average yield on loans of 7 percent in the first half, up from 6.3 percent in 2007, Fitch said. Loan profitability will narrow in the fourth quarter after the central bank cut the benchmark lending rate for the first time in six years and increased credit quotas in July, the report said.
Eighteen months ago, U.S. Treasury Secretary Henry Paulson told an audience at the Shanghai Futures Exchange that China risked trillions of dollars in lost economic potential unless it freed up its capital markets. ``An open, competitive, and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than governmental intervention,'' Paulson said. That advice rings hollow in China as Paulson plans a $700 billion rescue for U.S. financial institutions and the Securities and Exchange Commission bans short sales of insurers, banks and securities firms. Regulators in the fastest-growing major economy say they may ditch plans to introduce derivatives, and some company bosses are rethinking U.S. business models.

Malaysia

Malaysia's inflation will slow after peaking in recent months, state news service Bernama reported, citing Prime Minister Abdullah Ahmad Badawi. The government will now focus on offering a stimulus package to boost economic growth, Abdullah was quoted as saying by the report, without specifying the measures. Malaysia's inflation accelerated to 8.5 percent in July, the fastest pace in more than 26 years, after the government raised gasoline and diesel prices in June to cut fuel subsidy costs and narrow the budget deficit.

Nepal

Nepal's new Prime Minister Prachanda, a former Maoist guerrilla leader making his first trip to the United States, said on Wednesday his government would maintain democracy and not nationalize the economy. In a speech in New York on the sidelines of the U.N. General Assembly, he largely avoided using the language of Marx and Mao and said he wanted to clarify his month-old government's plans to develop the poor Himalayan country. "There is serious confusion and misunderstanding about our overall position in terms of economic development," he told the Asia Society think tank. "We are not fighting against the capitalistic mode of production." The prime minister's full name is Pushpa Kamal Dahal, but he still goes by his nom de guerre Prachanda - meaning "terrible" or "fierce." "In this transitional economic policy, we will try to have public-private partnership. We are not going to jump into other kinds of nationalizing or things like that," he said. Prachanda's election last month, after his Maoist party won a surprise victory in April's assembly elections, was seen as a major step toward capping a peace process after a civil war in which more than 13,000 people died. His Maoist party heads the country's first coalition government after the abolition of the 239-year-old Hindu monarchy and the declaration of a republic.

Pakistan

The outlook on Pakistan's B2 government bond rating was cut to ``negative'' by Moody's Investors Service, which said the country may have greater difficulty gaining access to foreign currency. The U.S. ratings company also cut to ``negative'' the outlook for the country's B3 foreign currency bank deposit ceiling. It left the unchanged the ``negative'' outlook for the Ba3 foreign currency bond ceiling. ``After the election of President (Asif Ali) Zardari, domestic political stability may improve somewhat, but underlying tensions will be difficult to remedy,'' Aninda Mitra, Moody's sovereign analyst for Pakistan, said in a report. ``Moreover, economic stabilization measures are expected to remain under pressure from deteriorating socio-economic conditions as well as a worsening external environment, and key macroeconomic objectives may not be met.''
Pakistan President Asif Ali Zardari will ask the U.S., U.K. and other industrial nations for financial aid amid concern South Asia's second-largest economy is in danger of defaulting on its debt.

Philippines

The Philippines may pre-fund its 2009 borrowings in the fourth quarter, National Treasurer Roberto Tan said. The Bureau of the Treasury is still considering $750 million in additional borrowing, Tan said in Manila. ``If the market becomes very difficult next year there can be an option to pre-fund borrowing,'' Tan said. ``The Philippines will sell $1.5 billion in debt next year.''
The Philippines may exceed its budget deficit target of 40 billion pesos ($860 million) next year as the government boosts spending to spur economic growth, Finance Secretary Gary Teves said. The Philippines may need to spend more than originally planned to boost growth if the United States, its biggest trading partner, fails to put an end to the credit crunch, Teves told reporters in Manila.

EMERGING EUROPE & CIS

Armenia

Russia's Gazprom said on Tuesday it will raise the gas price for Armenia by 40 percent next year, bringing it into line with the European market within two years, as it seeks to stop subsidising former Soviet states. Gazprom, Russia's gas export monopoly, has been supplying former communist neighbors with cheap gas for more than 15 years, since the Soviet Union collapsed. It is seeking to make them gradually reach parity with gas prices in Europe. Gazprom will charge Armenia $154 per 1,000 cubic metres (tcm) from April 1, 2009, up from $110 per tcm this year, Karen Karapetyan, general director of ArmRosgazprom, Gazprom's Armenian subsidiary, told reporters. In 2010, the price will further climb to $200 per tcm, and from 2011 Armenia will pay Gazprom as much as its European customers, he added. Karapetyan said that Armenia, which has no natural gas of its own and relies solely on imports, plans to buy 2.5 billion cubic metres (bcm) of gas in 2009, up from 2.4 bcm this year.

Belarus

Opposition candidates failed to win any seats with most results declared on Monday in a parliamentary election that Belarus's President Alexander Lukashenko hopes will promote better relations with the West. Election officials said all 100 seats so far had gone to pro-government candidates, as hundreds of opposition supporters marched in Minsk to protest against the ballot and to urge the West not to endorse it. Only 10 seats remained to be decided. Organisation for Security and Cooperation in Europe (OSCE) observers are due to report at 3 p.m. (1200 GMT) whether they found the poll in Belarus, once described by Washington as Europe's last dictatorship, to be free and fair. No election in the former Soviet republic, wedged between Russia and three EU members, has won Western approval since the mid-1990s, but Lukashenko has sought better ties in the past two years amid rows with traditional ally Moscow over gas prices.

Bulgaria

Ratings agency Moody's cut the outlook on Bulgaria's debt and currency ratings to stable from positive on Thursday, citing rising current account imbalances and the prospect of slower growth. "The prospect of an upgrade in the next 18 months has diminished because of deteriorating external imbalances -- from already high levels -- combined with the growing prospect of a sharp slowdown in economic growth next year in the context of the spreading global credit crunch," it said in a statement. European Union entry has generated an economic boom in the past few years due to strong growth in domestic consumption, credit lending, and foreign investment as former communist Bulgaria catches up with western Europe. But as global funding costs rise and the European economy cools, international banks are expected to reduce their credit expansion in Bulgaria, hitting growth, Moody's said. "Moody's is concerned that Bulgaria's outsized external imbalances leave the economy exposed to a potential reduction in external liquidity and asset price corrections, which could exert pressure on the domestic financial system," said Kenneth Orchard of Moody's. Some analysts say Bulgaria's huge current account deficit of over 20 percent of GDP and dependence on foreign cash could even lead to a hard landing if global financial woes persist. Moody's said it expected larger Bulgarian banks would receive liquidity assistance and capital injections from their parent banks if necessary. Most of Bulgaria's banks are owned by big European banks, mainly from Italy and Greece.

Georgia

Ratings agency Standard & Poor's on Thursday removed Georgia's ratings from CreditWatch negative, citing the end of fighting with Russia over South Ossetia and the provision of foreign aid to Georgia. S&P put Georgia on CreditWatch on Aug 8 when fighting broke out in the Georgian separatist region. "Georgia's economy is stabilising following the brief but intense war with Russia, and will be supported by an estimated $3 billion (24 percent of GDP) in foreign aid," Standard & Poor's credit analyst Trevor Cullinan said in a statement. Georgia's long-term debt is rated B by S&P, and the outlook is now stable.

Hungary

The minister responsible for Hungary's secret service said on Thursday a security firm was suspected of using illegal means to collect data on leading figures in business and politics. The Socialist minister, Gyorgy Szilvasy, told state television the company, which he did not identify, operated as a "shadow secret service" and politicians of the opposition party Fidesz were in contact with it. Szilvasy said the suspicions were based on taped telephone conversations which he had handed over to parliament's national security committee. "There is evidence of the operation of this octopus-like network, and (evidence) to justify the suspicion that they used unlawful means," Szilvasy said. He said the firm collected data on Economy Minister Gordon Bajnai as part of a background survey. Szilvasy said there was no evidence opposition politicians did anything unlawful but they gave work to the firm. Fidesz deputy faction leader Robert Repassy told Reuters two former secret service ministers from the party had contact with the security firm, but the tapes showed these were informal discussions and the politicians did not break any laws.

Kazakhstan

Kazakhstan, Central Asia's biggest oil producer, and the Abu Dhabi government created a $500 million fund to invest in energy and financial services in Kazakhstan and other former Soviet states. The Falah Growth Fund will finance projects in oil and gas, insurance, commercial property and other areas, Kazakh state investor Kazyna said in an e-mailed statement. Kazyna agreed to create the fund on Sept. 10 with Abu Dhabi's International Petroleum Investment Co., Kazakh private company Ordabasy Corp. and Falah Partners CI Ltd., it said.
Kazakhstan's government, grappling with a credit squeeze that has cut economic growth by half, is working on a $5 billion rescue fund to buy distressed assets from its banks. The central Asian country's banks will be able to swap their loans for bonds that are ``partially guaranteed by the government,'' Kazakh Finance Minister Bolat Zhamishev told a banking conference in the financial capital Almaty.

Latvia

Latvia's current account deficit fell to 15.6 percent of gross domestic product in the second quarter of 2008 from 18.3 percent in the first three months of the year, the central bank said on Tuesday. It was also a fall from the 24.9 percent of GDP registered in the second quarter of 2007, the bank said in a statement. "In the second quarter of 2008, economic growth in Latvia continued to slow down, and, in line with expectations, the current account deficit ... decreased notably, thus easing the risks of unbalanced development," the bank said. A key reason for the fall in the current account gap was a smaller trade deficit due to falling imports, the bank said. It saw risks to export growth from a weakening in the economies of trade partners. "Against this background, the role of the government's fiscal policy increases," it said, calling again for a balanced budget in 2009, in contrast to government plans for a budget deficit of 1.85 percent of GDP.
Moody's Investors Service has changed the outlook on the government of Latvia's A2 foreign and local currency debt ratings to negative from stable. The outlook on the A2 country ceiling for foreign currency deposits has also been changed to negative. The outlook on the Aa1 country ceiling for foreign currency bonds remains stable. According to Moody's, the change in outlook on the government's debt ratings is prompted by the steep fall in economic growth from double-digit annual rates to roughly zero, threatening a decline in the government's financial strength if not halted and contained. Consumption and investment had been inflated by a substantial increase in domestic credit and a related property boom, both of which are now unwinding. The rating agency cautions that declining external liquidity is increasing pressure on the domestic financial system, which could weaken local banks' lending capacity and exacerbate the economic slowdown.

Romania

Romania's buoyant real estate market may lose steam as financial turbulence boosts borrowing costs and leads to tighter lending conditions, the finance minister and the International Monetary Fund were quoted as saying. The real estate market, including construction and hefty foreign investment in property, has so far been a key driver of growth in the new European Union state as buyers flocked to what was seen as one of the most attractive sectors in Europe. "It is possible to see a contraction in the residential housing area," Finance Minister Varujan Vosganian was quoted as saying by daily Ziarul Financiar on Friday. He said did not expect a fall in the price of industrial real estate. The Ziarul Financiar newspaper also quoted the International Monetary Fund's senior representative in Romania as saying the domestic real estate market would lose some of its lustre. "Real estate yields will not be so high any more," IMF's Juan Jose Fernandez-Ansola said. "A slowdown in sales and a halt in real estate prices can be seen already." Overall construction grew 33.9 percent in the second quarter of this year, compared with 32.3 percent in the same period in 2007, data showed earlier this month.

Russia

Russia's economic growth may slow and inflation may accelerate more than the government expected amid the credit crunch, said Arkady Dvorkovich, Dmitry Medvedev's adviser. The financial crisis may erode gross domestic product growth, which the Economy Ministry estimated at 7.8 percent this year, by as much as 1 percentage point, he said, according to state broadcaster Vesti-24. Inflation may reach or ``slightly'' exceed 12 percent, he added.

Turkey

Turkish banks are starting to feel the effects of a tightening global credit market and will find it difficult to get long-term credit from abroad, Is Bank Chief Executive Ersin Ozince said on Tuesday. "Liquidity is tightening. It will be nearly impossible for the Turkish banking sector to find long term credit from abroad," Ozince told CNBC-e in an interview. Is Bank is Turkey's largest private bank by assets. Turkish banks are considered better placed than many European and U.S. rivals because of their strong balance sheets and limited foreign exposure. A deep financial crisis in 2001 also forced many Turkish banks to become more cautious in their lending practices. However, emerging markets, including Turkey, have not been immune to the global credit crunch, sparked by the U.S. housing market crisis. Turkish stocks have been hard hit too. Ozince said he did not expect foreign interest in Turkish stocks to increase in the short term. The percentage of foreign ownership in Turkish stocks fell to 67.77 percent last week from more than 70 percent earlier in the month. Istanbul's main stock index fell by as much as 16 percent last week, following global markets lower as the U.S. financial crisis worsened with the collapse of investment bank Lehman Brothers. Ozince said the banking sector's funding abilities will affect Turkish companies' expansion plans, particularly in the energy sector.

Ukraine

Ukrainian farmers have reaped 20 percent more sunflower seeds so far this season than a year earlier and the grain harvest has almost doubled, the Agriculture Ministry said. Farmers reaped 1.36 million metric tons of sunflower seeds as of Sept. 19, the ministry said in a statement published on its Web site that day. The average yield was 1.4 tons a hectare (2.47 acres), compared with 1.13 tons a year ago. About 23 percent of the planted land has been harvested. The overall grain harvest has totaled 44.1 million tons so far, compared with 23.7 million tons in the season to Sept. 14 a year ago, according to the ministry.
Ukraine's Prime Minister Yulia Timoshenko reiterated her plan to eliminate natural-gas trading companies from the market by 2009 in an attempt to get direct contracts with Russia.
Ratings agency Fitch cut Ukraine's sovereign outlook to negative on Thursday, warning of rising risk of a currency crisis as economic fundamentals deteriorate and the country faces yet another election. Fitch said the current account deficit, which it said was the main risk to the currency, is likely to widen further as prices of gas imports rise and prices of its steel exports fall. It said Ukraine was likely to need to borrow more, precisely at a time when global debt markets have ground to a virtual standstill. It said a downgrade was possible if the risk that Ukraine could fail to borrow abroad grew. "The negative outlook signals Fitch's concerns that Ukraine faces a growing risk of a currency crisis, driven by a widening current account deficit and deteriorating financial prospects," said Andrew Colquhoun, director in Fitch's sovereign group. "Strong capital inflows and reserves growth so far in 2008 are evidence of some resilience, but Ukraine faces growing risks." The country's current and trade accounts both turned negative in 2005, after Russia began a series of steep gas price hikes and Ukraine introduced trade regulations to bring it in line with the WTO, which increased other imports. The country's economy is export-driven and has benefited from soaring steel prices in the past year, but prices could now rise more slowly or even fall. The central bank in February abandoned a 3-year policy of keeping the hryvnia to the dollar at 5.00-5.06, allowing the currency to strengthen to as much as 4.5/$ and intervening on the interbank market far less. But in past weeks it has shed all those gains and on Thursday it traded at 5.073-5.090 -- close to a two-year low. One dealer said Fitch's announcement had no impact so far on the market "because they did not talk about anything new. They've talked about these problems -- the deficit and so on -- already for some months".

INDUSTRIAL COUNTRIES

Iceland

The Icelandic crown skidded to a fresh record low against the euro on Friday, weighed down by worries about the global financial system and an illiquid local swaps market. Investor jitters returned in force after negotiations stalled on a U.S. $700 billion bailout package for toxic assets, with Icelandic banking liquidity seen as particularly vulnerable to the crisis. "Iceland is getting hit particularly hard by the global disruption of money markets because Iceland depends on being able to offer high yields and that's not the case currently," said Beat Siegenthaler, chief strategist, emerging markets at TD Securities. The crown fell as far as 141.14 per euro and by 1250 GMT was trading at 140.70, not far off its low. The crown has fallen some 35 percent this year. The crown also hit a 6-1/2 year low against the dollar at 96.83 before trimming losses to 96.10. Asgeir Jonsson, economist at Kaupthing in Reykjavik, said the crown was also being hit by a scramble for euros and dollars by Eurobond issuers that are set to start paying back a wave of issues coming due. Jonsson said Iceland's high interest rates were not helping the crown because people who have put on carry trades have had to do so through the swaps market and that market has been clogged up.

• Download Full Emerging Markets Weekly

Published on  Mon, Sep 29 2008, 09:44 GMT