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Emerging Markets Weekly

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Moody's Investors Service on Tuesday placed Jamaica's ratings on review for downgrade

Mon, Nov 10 2008, 08:16 GMT
by Erste Bank Bond Research Team

Erste Bank der oesterreichischen Sparkassen AG

EMERGING MARKETS

Fitch cut ratings for four Eastern European countries, including cutting Romania to below investment-grade. It also lowered its outlook on South Korea, Mexico, Russia and South Africa to negative from stable, while that of Chile and Malaysia were cut to stable from positive. The actions are part of a review of 17 big investment-grade emerging markets, which resulted in four downgrades and seven outlook revisions, it said on Monday. Emerging markets with current account deficits and those reliant on short-term external funding have been among the worst hit by the crisis that has already led the International Monetary Fund to provide loans to Hungary and Ukraine. The widespread risk aversion has led foreign investors to flee markets such as South Korea in droves, aggravating the liquidity crunch faced by these countries.

LATIN AMERICA

Fitch Ratings has revised Mexico's Rating Outlook to Negative from Stable, and Chile's Rating Outlook to Stable from Positive, for both their Long-term foreign and local currency Issuer Default Ratings (IDRs). This follows the conclusion by Fitch of a global review of the sovereign ratings of 17 major investment-grade emerging market economies. At the same time, Fitch has affirmed the local and foreign currency IDRs and Stable Rating Outlooks for Brazil and Peru. Investment-grade Latin sovereigns have seen increased financial pressures in recent weeks, as illustrated by volatile market moves in equities, credit and currencies. "Global recession, falling commodity prices and tighter external liquidity conditions are expected to buffet all the investment-grade Latin sovereigns to varying degree," said Shelly Shetty, Senior Director in Fitch's sovereign group. At this juncture, Fitch believes that Brazil's strong external liquidity and Peru's relatively low external financing needs provide sufficient cushion to sustain current rating levels and Stable Outlooks.

Argentina

Moody's has released its annual report on Argentina. The report notes that Argentina's B3 rating is highly susceptible to default risk due to even one major shock. In a related comment, Moody's notes that Argentina's dependence on commodity exports makes it vulnerable to external shocks. The report also notes that Argentina's development level is higher than most of its ratings peers (that is not a compliment), but that Argentina's development has been tempered by institutional weakness (also not a compliment). The report acknowledges progress on "most headline fiscal and debt metrics" but even that praise is half-hearted, as fiscal policy is cited as being pro-cyclical and lacking in a cushion for a downturn.
Argentina's lower house voted to support President Cristina Fernandez de Kirchner's plan to nationalize about $26 billion in private pensions, a proposal that raised concern of a default. Legislators voted 162 to 75 to back the plan after a session that began yesterday afternoon and ended after midnight. The proposal will be sent to two senate committees for consideration next week. A full senate vote on the measure may take place Nov. 20, the senate's Work and Social Security Committee said.

Brazil

Banco Itau Holding Financeira SA agreed to acquire Uniao de Bancos Brasileiros SA in a stock transaction, creating Brazil's biggest bank as fallout from global market turmoil spread to Latin America's largest economy. The combination will create a bank with 575 billion reais ($261.4 billion) in assets, the companies said in an emailed statement today. The accord follows 15 months of talks between Itau, the second-largest non-government bank, and Unibanco, the third-largest. The banks called the deal a merger.
Foreign investors pulled money from Brazil's stock exchange for a fifth straight month in October, the longest streak in four years, on concern the seizure in credit markets will halt growth and crimp demand for the nation's commodity exports. Investors from abroad sold 4.69 billion reais ($2.23 billion) more shares than they bought in Latin America's largest stock market last month, BM&FBovespa SA said on its Web site. That brings the outflow this year to about 23 billion reais. The 66-stock Bovespa Index, which gets about half its value from producers of energy and raw materials, lost a quarter of its value in October as the financial crisis deepened and commodity prices had their biggest monthly drop in 52 years.

Chile

Chile's annual inflation rate rose to a 14-year high in October, led by rising costs for food and transportation, increasing pressure on policy makers to raise interest rates this month. Consumer prices jumped 9.9 percent last month from the same month a year earlier, the fastest pace since September 1994, the National Statistics Institute said.

Ecuador

Ecuadorean consumer prices rose 0.03 percent in October from the previous month, the smallest increase since May 2007. Prices climbed 9.85 percent last month from a year earlier, Byron Villacis, director of the South American country's National Statistics and Census Institute, told reporters in Quito.

Jamaica

Moody's Investors Service on Tuesday placed Jamaica's ratings on review for downgrade as the ongoing financial crisis is exerting significant pressure on the country's external and fiscal positions. The "B1" foreign-currency and the "Ba2" local-currency government bond ratings, as well as the "B2" foreign-currency bank deposit ceiling, were all placed under review. "Despite the government's adequate policy response and continued strong commitment to servicing its obligations, the challenges imposed by the global financial crisis and economic slowdown are simply too severe for Jamaica to avoid an increase in credit risk," analyst Alessandra Alecci said in a note. "The government's precarious debt dynamics and onerous debt burden, which exceeds 125 percent of GDP, leave very little room to absorb shocks of this magnitude."
Standard & Poor's said on Tuesday it is likely to downgrade Jamaica's credit ratings if external pressures and an expected economic downturn add to the country's fragile fiscal position. S&P revised the outlook on Jamaica's "B" sovereign credit ratings to negative from stable, warning that deteriorating global financial conditions are making it more difficult for the government to meet its external funding needs, despite high primary fiscal surpluses

Mexico

Banco Santander reduced its 2009 economic growth forecast for Mexico to 0.6 percent from 1.6 percent, predicting a contraction in the manufacturing industry and a slowdown in services, investment and consumer activity. ``The economic deceleration, as a result of the U.S. recession, will be sharper than we initially expected,'' Delia Paredes, senior economist for Santander in Mexico City, said in a report.

Peru

Peruvian inflation accelerated 0.61 percent in October on electricity rates, transport and food prices, the government said. Consumer prices last month rose from 0.57 percent in September, the national statistics agency said.

Puerto Rico

With election fraud charges hanging over his head, Puerto Rico Gov. Anibal Acevedo Vila was beaten soundly in his re-election bid on Tuesday. The 46-old-governor from the pro-commonwealth Popular Democratic Party, who was indicted this year on campaign fund-raising charges, lost the leadership of the U.S. Caribbean territory to Luis Fortuno of the pro-statehood New Progressive Party. Fortuno opened up a comfortable 10-point lead in early returns and held it until Acevedo Vila conceded the race four hours after polls closed. A 10-point margin is a landslide in Puerto Rico, where the electorate is evenly split between people who favor the island's current commonwealth status and those who want full U.S. statehood.

AFRICA & MIDDLE EAST

Middle Eastern economies reliant on Arab Gulf capital inflows for booming economic growth are seeing a drop in investment as the global financial crisis has curtailed investors' appetite for the region, bankers and analysts said on Tuesday. Cash-rich Arab Gulf countries had poured billions of dollars in Egypt, Jordan, Lebanon and Syria as they invested in mega-real estate projects, equities and energy and telecoms companies beyond their domestic markets. "There are visible signs that intra-regional capital flows are tapering off, which will put a dampener on the accelerating momentum that we've been witnessing over the past several years," said Omar Masri, director of the Edgo Group, a regional oil & gas company. Masri echoed worries across the region about a drop in Gulf capital inflows that had contributed to the region's economic transformation as countries adopted investment friendly policies to attract projects to ease unemployment and rising poverty. "These economies have become more susceptible to regional financial turmoil given their growing dependency on Gulf investment. Such countries have high birth rates and must maintain a robust GDP growth rate of at least 5-6 percent just to absorb the new entrants into the labour force," Masri added. The IMF's latest report projected that growth could decelerate to 6 percent in 2009 from 6.5 percent in 2008 in emerging markets countries such as Egypt, Tunisia, Jordan, Morocco and Lebanon as a result of the global slowdown.

Egypt

Egypt, the Arab world's most populous country, will attract Gulf investments fleeing the crisis in Western economies, Investment Minister Mahmoud Mohieldin said. ``We will see that one of the good sides about the global financial crisis is that there will be a reduction in Arab investment in Europe and the U.S.,'' Mohieldin said at the annual conference of the country's ruling National Democratic Party today. ``This is not a guess, but based on meetings we had in Arab countries.''

ASIA

China

China should invest more heavily in overseas shares rather than provide cheap financing for U.S. and European governments to acquire stocks at low valuations, said Li Daokui, head of economic research at Tsinghua University. ``It doesn't make good business sense to buy rising U.S. Treasuries and a strong dollar when you can buy stocks cheaply,'' said Li, who in July attended a meeting called by President Hu Jintao to discuss the economy. The U.S. and U.K. governments will be the primary beneficiaries of low-cost funding, he said at a finance forum in Beijing.
China, the biggest contributor to world growth, unveiled a 4 trillion yuan ($586 billion) plan to sustain its economy, spurring gains in stocks, metals and oil. China's cabinet pledged ``fast and heavy-handed investment'' in housing and infrastructure through 2010 and a ``relatively loose'' monetary policy, according to a State Council statement. Copper jumped more than 7 percent and Asian stocks rallied on optimism the package will limit the depth of a looming global recession and encourage coordinated efforts to revive growth. President Hu Jintao will join crisis talks with world leaders this weekend in Washington, where President-elect Barack Obama has pledged to pass stimulus measures. ``This plan is, by all measures, too large to be ignored,'' said Kevin Lai, an economist at Daiwa Institute of Research in Hong Kong. China may ``help the rest of the world by creating more demand for foreign goods and services.'' China's CSI 300 Index of shares jumped 5.2 percent as of 1:01 p.m. in Shanghai.

Indonesia

Indonesia's central bank refrained from reducing its benchmark interest rate, aiming to stem an exodus of foreign investors that pushed the rupiah to its biggest drop in a decade. Bank Indonesia kept its key rate unchanged at 9.5 percent, after six increases since May, it said in a statement in Jakarta.

Malaysia

Malaysia's export growth unexpectedly accelerated in September, as rising commodities shipments to Asian markets countered declining electronics sales to the U.S. Overseas sales increased 15.1 percent from a year earlier to 62.3 billion ringgit ($17.7 billion) after gaining a revised 10.7 percent in August, the trade ministry said in a statement in Kuala Lumpur.

Philippines

The Philippine economy will probably expand 4 percent this year and next, helped by farm output and government spending, central bank Managing Director Cyd Tuano-Amador said in a briefing today in Manila. The Philippine central bank said it remains on guard against inflation and has the ``latitude'' to keep its monetary policy settings unchanged, Amador said.

South Korea

The Bank of Korea lowered interest rates for the third time in four weeks and signalled it's ready to act again to prevent the economy from sinking into the first recession in a decade. The nation's shares and currency rose. The bank reduced the key rate by 25 basis points to 4 percent, the lowest since 2006, adding to 100 basis points of cuts in October. Policy makers are focused on keeping ``the economy from weakening too much,'' Governor Lee Seong Tae said, adding he's prepared to ``take bigger actions if necessary.''
South Korean treasury bond futures extended their sharp losses for a second session on Monday, depressed by a large government bond auction and Fitch's warning of a possible sovereign rating cut. The December futures contract dropped as much as 67 ticks before ending 64 ticks lower at 108.20, adding to Friday's 63-tick decline. The finance ministry sold an unusually large amount of 5-year treasury bonds totalling 2.25 trillion won at an average rate of 5.10 percent in an auction on Monday. Investors stayed away from government bonds, with fears of more financial turmoil arising after Fitch Ratings put South Korea's rating outlook on its 'negative' watch list.

EMERGING EUROPE & CIS

Austria's move to help its banks with state funds is less aimed at shoring up troubled lenders and more at boosting credit and growth in emerging Europe, where its banks dominate and it could lose heavily from a downturn. The Austrian financial sector's lucrative grip on the former Communist part of Europe, which contributed 42 percent of its profits last year, has turned into a risk. It has even made it relatively more expensive for the government to borrow and has driven up costs to insure against its default in recent months. Austrian banks are owed $290 billion by borrowers from Albania to Russia. Its exposure is much higher than that of Italy, Germany and France, and almost on par with what Spain has lent to Latin America, according to the Bank for International Settlements. Relative to the size of the Alpine country, the exposure -- roughly equal to its gross domestic product -- is daunting. In other words: should the recent central European hiccup turn into a crisis of Asian or Latin American proportions, with currencies devaluing and debtors defaulting en masse, Austria would be in trouble, and more so than any other western country. This fact has shaped how the Austrian government is using its 100 billion euro ($129 billion) banking package. The finance ministry last week agreed to boost the capital of Erste Group Bank by 2.7 billion euros, even though the bank, emerging Europe's third-biggest lender, is well-capitalised and funded. The state money came cheaper and with fewer strings attached than similar deals in Germany or Belgium. There are few rules on how to use the capital -- just enough to allow the government to present the measure as boosting domestic credit. In reality, most of the capital is going to underpin lending in countries including Romania, where Erste owns the biggest bank, or Hungary, where it is number 6. "That this is about providing credit to Austrian companies is just a pretense," said Matthias Siller, who manages emerging market funds at Baring Asset Management. "This move is a clear commitment to eastern Europe. "But this has nothing to do with charity. Those (Austrian) banks are system-relevant banks in central and Eastern Europe, and if they had to withdraw capital from there, this would set off a landslide," he said.

Baltic States

Moody's cut its credit rating for the Baltic state of Latvia on Friday and reduced its outlooks on neighbours Lithuania and Estonia to negative from stable, citing an economic slump and possible trouble for banks. Latvia's government said it had already approved plans to help local banks if needed while the central bank said the Moody's move showed present plans for a budget deficit next year were unacceptable. Estonia's central bank said problems cited by Moody's showed the need for quick adoption of the euro. Moody's downgraded the foreign and local currency ratings of Latvia to A3 from A2. It made the move just before news Latvian gross domestic product sank 4.2 percent in the fourth quarter. Markets worry that Latvia, Estonia and Lithuania, with high current account deficits and consumer debts, could be vulnerable to the kind of crisis which has forced Hungary to turn to the IMF, though Baltic leaders have played down this probability.

Bulgaria

Fitch Ratings has downgraded the sovereign rating of Bulgaria. The downgrade reflects the increasing risk of a recession in response to a marked decline in external financing flows, which will necessitate a sharp contraction in domestic demand to rein in the current account deficit. However, given the strong sovereign balance sheet - large fiscal reserves mean that government net financial liabilities are virtually zero - and the broad-based commitment to the currency board arrangement (CBA), Fitch believes the risk of recession broadening into a deeper economic and financial crisis over the medium-term is limited and consistent with a Stable Outlook.

Hungary

Moody's Investors Service has announced it downgraded the foreign currency deposit ratings of eight Hungarian banks, including a government related issuer. The foreign currency deposit ratings were downgraded to A3/Prime-2 from A2/Prime-1 and the outlook was changed to negative from stable on the long-term foreign currency deposit rating for the following banks: OTP Bank, OTP Mortgage Bank, CIB Bank, Kereskedelmi & Hitel Bank, MKB Bank, Erste Bank Hungary, Budapest Bank and MFB Hungarian Development Bank. On November 7, 2008 Moody's downgraded Hungary's local and foreign currency government bond ratings to A3, outlook negative, from A2, outlook stable, and the country's foreign currency bank deposit ceiling to A3, outlook negative, from A2, outlook stable. Hungary's Aa1 country ceiling for foreign currency bonds, the Aaa local currency deposit ceiling and the Aaa local currency debt ceiling were not affected by this rating action.
Following the conclusion of its global review of the sovereign ratings of 17 major investment-grade 'emerging market' economies, Fitch Ratings has downgraded the sovereign rating of Hungary. The downgrade reflects the severity of the recession and post-crisis correction to macroeconomic imbalances and associated risks to the public finances and from foreign currency mismatches in the private sector. However, the EUR20bn IMF-led package of support has largely removed external financing and liquidity risks, supporting Fitch's Stable Outlook.

Kazakhstan

Kazakhstan said on Monday it expected a host of state stabilisation measures to start taking effect later this month and urged the government to act fast to combat the affects of the global financial crisis. Stung by credit ratings downgrades and falling oil prices, Central Asia's biggest economy has been struggling to ease strains from the global financial storm, announcing a number of stabilisation measures and promising banks additional liquidity. Prime Minister Karim Masimov, addressing a cabinet meeting, said the government planned to finalise its anticrisis package by Nov. 25 to "defuse clots" in the financial sector. "I expect to see quite a significant shift over the next two weeks. We have to act very fast," Masimov said. "I think over the next two weeks we will be able to defuse clots related to the lack of credit in the economy, settle problem loans through the distressed asset fund, boost banks' capital and pour additional liquidity into the economy." Last month, the government said it would inject $5 billion into the country's four largest banks to stave off potential loan losses stemming from the crisis. Under the plan, the banks are due to sell stakes to the government in a partial nationalisation deal that has raised concerns among some equity investors whose stakes are to be diluted in the transaction. Masimov said the government had hired Credit Suisse and JPMorgan to act as consultants on recapitalisation issues, and Citibank to help it with the state distressed asset fund. Overall, the government plans to inject a total of $15 billion this year into the economy. Despite the measures, economic weakness continues to persist. The government expects economic growth to slow to 5.3-5.5 percent this year after averaging about 10 percent since 2000. The International Monetary fund sees growth at 4.5 percent. Echoing some of these worries, Fitch cut its sovereign rating on Kazakhstan on Monday by one notch to BBB-, the lowest investment-grade level.

Macedonia

Fitch Ratings on Tuesday revised Macedonia's credit outlook to stable from positive on the widening of the current account deficit and political setbacks that could make the prospect of the country's accession to the European Union more difficult. The agency affirmed Macedonia's foreign currency rating at "BB+", the shortterm foreign currency rating at "B" and the country ceiling at "BBB-". Fitch's main concern is the rapid widening in the current account deficit, which it projects to reach around 12 percent of GDP this year, compared with just 3 percent in 2007 and a virtual balance in 2006, Fitch said in a statement. In terms of political stability, the handling of national elections this year -- effectively a major EU benchmark for Macedonia -- was poor. Macedonia also experienced a series of political shocks this year. In April, its application for NATO membership was rejected due to the Greek government's objection to the use of Macedonia as the country's name.

Romania

Romania's leu fell over 1 percent against the euro in early trade on Monday, after ratings agency Fitch cut Romania's credit rating to "junk" status, dealers said. The ratings agency's move comes nearly two weeks after a Standard & Poor's downgrade turned Romania into the only European Union member with a non-investment grade credit rating. "The leu is falling because of the Fitch downgrade, but based on the S&P experience, regional sentiment will be more important in the near future and if the emerging markets currencies firm, the leu will relate to them," said one dealer with a local bank. At 0730 GMT, the leu traded at 3.7441/80 per euro, compared with a Friday close of 3.713 and an intra-day low of 3.7533.

Russia

Russia's currency reserves, the third-biggest in the world, are no match for tumbling oil prices and an exodus of capital that may force the central bank to accept a devalued ruble. Just 10 years ago, Russia let the ruble fall as much as 71 percent as the government defaulted on $40 billion of debt and world stock and bond markets collapsed. Now, the combination of a 61 percent drop in oil prices from their peak in July, slowing economic growth and increasing investor concern about emerging markets are draining Russia's foreign reserves, which fell 19 percent to $484.6 billion in the 12 weeks through Oct. 31. Russia, which uses reserves to curb swings in the ruble that hurt the competitiveness of exports, may find the resistance futile after the currency fell 13 percent against the dollar since Aug. 1. The central bank sold a record $40 billion in October, according to Moscowbased Trust Investment Bank. Troika Dialog, the country's oldest investment bank, said the currency may slump as much as 30 percent in the event of a devaluation.
Russia's inflation rate fell to 14.2 percent, the lowest in seven months, as grain, legumes and gasoline prices decreased. The rate dropped from 15 percent in September, the Moscow- based Federal Statistics Service said in an e-mailed statement. Prices gained 0.9 percent in the month, after rising 0.8 percent in September.

Serbia

Serbia said on Tuesday it would cut its 2009 budget to get a safety line from the IMF and Ukraine appealed to the fund for approval of a $16.5 billion rescue plan to weather the global financial storm. They were the latest central and eastern European states to look to the International Monetary Fund for help as the European Bank for Reconstruction and Development warned a number of countries in the region were sure to hit recession. Analysts say that Serbia, a small but open economy heavily reliant on external borrowing and investment, is not as exposed to the global crisis as Iceland, Ukraine or Hungary, hit by market turmoil in recent weeks. Yet Serbia's dinar was the biggest loser in an investor flight from the emerging European assets last month that has raised fears that economies in the Balkans and on the Baltic Sea could hit trouble as the crisis filters through. "We are still in talks with the International Monetary Fund about the (2009) budget," Deputy Prime Minister Mladjan Dinkic said. "Our position is to have the precautionary programme and not to draw the money unless it is really necessary." A top government official said later in the day the IMF was demanding that Belgrade cut its fiscal gap to 1.5 percent of GDP from 2.7 percent this year by freezing real wages and pensions. Both spoke a day after the Finance Ministry said Serbia was negotiating a stand-by deal with the IMF, with analysts estimating the country's needs up to two billion euros in a worst case scenario if global financial turmoil triggered panic.

Turkey

A new loan deal between Turkey and the International Monetary Fund is in doubt because of a disagreement over the level of spending by municipalities, Deputy Prime Minister Nazim Ekren said on Saturday. The IMF and Turkey are expected to hold further talks during a summit of G20 industrial and developing nations in Washington on Nov. 15. These will cover details of Turkey's follow-up deal with the Fund after a previous agreement expired earlier this year, Ekren told reporters. "It is not very easy to say whether there will be an agreement with the IMF or not," Ekren said. Ekren, who supervises economic coordination, also said Turkey had sufficient foreign exchange reserves for its banks to roll over their debt. "It looks that the banks can roll over 50- 65 percent of their debt. There is no possibility that we fail to overcome this with the level of foreign exchange we have," Ekren said. Turkey's $10 billion IMF stand-by deal expired in May and Prime Minister Tayyip Erdogan has said the government does not want to sign a new loan accord if the IMF programme exerted excessive constraints on budget spending, taxes, economic growth and public investments.

Ukraine

Ukrainian Prime Minister Yulia Tymoshenko has warned steel industry bosses and other business leaders that mass sackings will prompt the government to renationalize private enterprises, government sources have told MB. Tymoshenko sent the message to business leaders during a television broadcast on the Inter TV channel, according to the Ukrainian government website.
Ukraine must keep to the budget levels agreed with the International Monetary Fund in order to receive the next tranches of a $16.5 billion loan, the local IMF representative told a television channel late on Thursday. Balazs Horvath also told news channel 5 that the tranches may be released to Ukraine every quarter. The IMF said late on Wednesday when it approved the loan and gave the first tranche of $4.5 billion, that Ukraine was allowed a budget deficit of 1 percent to GDP this year and must have a balanced budget next year. It also required greater currency policy flexibility. "In order to release the next tranche, for us the most important thing will be the budget deficit," Horvath said. "If the deficit is significantly higher than the level we agreed, this will become a problem and the IMF could take a decision that Ukraine cannot receive the next tranche until this problem is solved," he said.
Ukraine is cutting back its dollar sales to support the hryvnia on the market as the currency becomes more stable, central bank said. The Natsionalnyi Bank Ukrainy is reducing the amount of dollars it sells on the currency market to support the hryvnia ``from day to day,'' Petro Poroshenko, head of the bank's council, told reporters in Kiev.

INDUSTRIAL COUNTRIES

Iceland

Icelandic Prime Minister Geir Haarde said on Friday the country's banking system was functioning again after all but collapsing last month. Haarde told a news conference a group of lenders were still finalising the details of a loan package that will include a $200 million Polish contribution announced earlier on Friday. Commerce Minister Bjorgvin Sigurdsson told reporters the government had appointed new boards of directors for banks Landsbanki, Glitnir and Kaupthing, all of which the state took over last month.

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Published on  Mon, Nov 10 2008, 08:34 GMT