Emerging Markets Weekly

European sovereign credits have been underperforming in the recent stress times

Mon, Mar 17 2008, 10:27 GMT
by Erste Bank Bond Research Team

Erste Bank der oesterreichischen Sparkassen AG


European sovereign credits have been underperforming in the recent stress times. Independent of fundamentals such as indebtedness and budget deficits, the spreads in relation to German interest rates have risen uniformly. However, the forecast is that countries with sound macroeconomics will be able to converge to the German level sooner than weaker countries such as Italy or Greece.

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Argentina’s economy, the second-largest in South America, expanded 9.1 percent in the fourth quarter. The National Statistics Institute released its report on fourth quarter gross domestic product in Buenos Aires.


Brazil’s government, concerned over a decline in the trade surplus as imports surged, is putting together a package of steps to help 25 industries that will be ready in 10-15 days, Trade and Industry Minister Miguel Jorge. Brazil’s economy expanded a greater-than-expected 6.2 percent in the fourth quarter, the fastest year-on-year quarterly expansion since June 2004, as consumer spending and business investment swelled. Gross domestic product rose more than the median 5.6 percent forecast in a Bloomberg survey of 31 analysts. The economy expanded 5.4 percent last year, the fastest pace since 2004, the government said.
Brazilian inflation slowed in February for a second straight month, reinforcing bets the central bank won’t need to boost interest rates in the months ahead to meet its target for consumer-price increases. Consumer prices, as measured by the benchmark IPCA index, rose 0.49 percent last month, compared with a 0.54 percent increase in January, the national statistics agency said.


Colombian President Alvaro Uribe’s approval rating rose to a record 84 percent in March from 80 percent in January, El Tiempo newspaper reported, citing a Gallup Colombia poll. Uribe’s popularity may have grown as Colombians rallied to him in his confrontation with Venezuelan President Hugo Chavez after a raid into Ecuador on March 1 killed a leader of the Revolutionary Armed Forces of Colombia, El Tiempo reported Gallup director Jorge Londono as saying.


Chile will invest about a third of its sovereign wealth funds in stocks and corporate bonds by the end of the year, Reuters reported, citing a finance ministry official. The South American country plans to have about 15 percent invested in equities and 20 percent in corporate bonds, said Eric Parrado, the finance ministry’s international finance coordinator, Reuters reported.


Ecuador will restore diplomatic relations with its northern neighbor Colombia next Monday, the day the Organization of American States (OAS) foreign ministers meet, Ecuador’s Deputy Minister of Foreign Affairs Diego Stacey said on Tuesday. This was no simple decision and the relationship would only be gradually normalized, Stacey told reporters.


Interior Minister Juan Camilo Mouriño, a rising political star and the second most powerful official in Mexico, came under growing pressure to quit Monday over charges that he acted improperly by signing government contracts on behalf of his family’s gasoline business while serving as a top energy official. The 36-year-old Mouriño, a confidant of President Felipe Calderon who has been mentioned as a possible successor, denies wrongdoing. But the controversy, which has developed over the last two weeks, shows no sign of fading. On Monday, critics issued fresh accusations that Mouriño helped his family’s business while in office, and a newspaper poll showed dwindling public support. In the poll, published by Milenio, two in three respondents said he should resign.
Mexican President Felipe Calderon said changes to the methods used to calculate economic growth will be “beneficial” and “probably surprise” analysts. Mexico’s economy may reach $1 trillion, narrowing the gap with Brazil, Latin America’s biggest economy, because of a change in the way output is calculated, according to Citigroup Inc.’s Banamex unit and UBS Pactual. The statistics agency may announce the changes as soon as this month.


Peru’s economy expanded faster than expected in January on surging construction, retail sales and manufacturing, the National Statistics Institute reported. Gross domestic product grew 10.1 percent in January from the yearearlier period, the institute said in a statement.


The presidents of Venezuela, Colombia and Nicaragua plan to meet to discuss regional peace, after breaking off diplomatic ties over Colombia’s pursuit of insurgents into Ecuador, Hugo Chavez said. Chavez, of Venezuela, and his counterparts Alvaro Uribe of Colombia and Daniel Ortega of Nicaragua reached the agreement in telephone calls yesterday, Chavez said on his weekly television show, “Alo Presidente.”



Ratings agency Moody’s said on Thursday it was placing Israel’s A2 government bond ratings and A2 country ceiling on review for possible upgrade. The ratings have carried a positive outlook since May 2006, Moody’s said in a statement. “The review for upgrade reflects both the resilience of the Israeli economy in response to repeated economic and political shocks and the fiscal consolidation of the past several years,” the ratings agency said. “Underlying the country’s rating is a history of financial and political support from the United States and the Jewish diaspora.”


Standard & Poor’s raised its outlook on Kenya’s sovereign credit rating to `stable’ from `negative’ after a powersharing agreement between the government and the leading opposition party stemmed ethnic fighting. The rating was left at B, five levels below investment grade, Standard & Poor’s said in a statement.


Nigeria is selling 65,000 metric tons of food from its strategic reserves at half the market rate to check inflation caused by poor harvests in parts of the country’s north, Agriculture Minister Abba Ruma said. Staples such as rice, millet, corn and cassava are being released from eight silos across the country on the directive of President Umaru Yar’Adua, Ruma said today on state-owned Nigerian Television.

South Africa

South Africa, the world’s biggest precious metals producer, said mining output fell by the most in at least a decade in January after a national power shortage shut mines for five days. Total mine production dropped 11 percent in the month from a year earlier while gold output plunged 17 percent, Pretoria-based Statistics South Africa, the national statistics agency, said on its Web site.
South African manufacturing unexpectedly rose an annual 1.4 percent in January, even as power outages cut production, the statistics office said. Growth in factory output, which accounts for 16 percent of the economy, accelerated from 0.3 percent in December, Pretoria- based Statistics South Africa said.



China’s money-supply growth slowed in February, aiding government efforts to cool inflation. M2, the broadest measure, rose 17.5 percent to 42.1 trillion yuan ($5.9 trillion) from a year earlier, the People’s Bank of China said on its Web site. That was less than January’s 18.9 percent gain and the 17.8 percent median estimate of 14 economists surveyed by Bloomberg News.
China’s trade surplus dropped for the first time in almost a year as the worst blizzards in half a century disrupted shipments and U.S. demand weakened. The gap narrowed 64 percent in February from a year earlier to $8.56 billion, the customs bureau said on its Web site.
China said on Monday it had shown great restraint in the face of violent protests by Tibetans, which it said were orchestrated by followers of the Dalai Lama seeking to wreck the Beijing Olympics in August. But even as the governor of Tibet said no guns were used against protesters in the regional capital, Lhasa, troops poured into neighbouring areas to enforce control after violent ethnic Tibetan protests. And Lhasa counted down to a midnight deadline for protesters to give themselves up or face tougher punishment. The developments underscore how, even as China asserts iron control, the violence will hang over the country, with foreign protests, pleas for leniency and China’s crackdown weighing uncomfortably on the build-up to the Games. Tibet governor Qiangba Puncog said the protests were ignited by supporters of the Dalai Lama just for that end. “This time a tiny handful of separatists and lawless elements engaged in extreme acts with the goal of generating even more publicity to wreck stability during this crucial period of the Olympic Games — over 18 years of hard-won stability,” he said. An ethnic Tibetan in Sichuan’s Aba prefecture said fresh protests flared near two Tibetan schools on Monday, with hundreds of students facing off against police and troops. The resident, who asked not be identified, said 18 people, including Buddhist monks and students, were killed when troops opened fire with guns on Sunday. Earlier a policeman was burnt to death, he said. His account could not be immediately verified. Exiled representatives of Tibet in Dharamsala, India, on Sunday put the protest death toll at 80.


India’s industrial production growth unexpectedly slowed in January as interest rates near a six-year high curbed demand for cars and other consumer goods. Production at factories, utilities and mines rose 5.3 percent from a year earlier after gaining a revised 7.7 percent in December, the statistics office said in New Delhi.


Indonesia’s budget deficit may widen to 2 percent of gross domestic product this year following changes to the government’s oil price and oil sales assumptions, Finance Minister Sri Mulyani Indrawati said. The deficit may rise to 86.8 trillion rupiah ($9.3 billion), Sri Mulyani said in Jakarta. The government’s current budget forecasts a shortfall of 1.7 percent of GDP in 2008. Last year’s gap was 1.3 percent.


Iran’s newly elected parliament is packed with conservatives, but hardline President Mahmoud Ahmadinejad is not assured of an easy ride in the run-up to next year’s presidential race. His re-election chances look bright judging by the unusually outspoken support he has won from Iran’s Supreme Leader Ayatollah Ali Khamenei for his truculent nuclear stance. But Ahmadinejad, 51, has powerful rivals inside the broad conservative camp that swept to victory in Friday’s election. They are likely to seize on popular discontent with the economy and roaring inflation to serve their own presidential ambitions. The outcome, however, will not have a direct impact on nuclear, oil and foreign policies, which all ultimately rest in the hands of Khamenei, not the president or parliament, under the Islamic Republic’s system of clerical rule.


Malaysian stocks fell the most in a decade after the ruling coalition’s worst election result in fifty years put Prime Minister Abdullah Ahmad Badawi’s position in doubt and raised questions about his spending program. Trading on the Kuala Lumpur stock exchange was halted for an hour after the Kuala Lumpur Composite Index tumbled by the 10 percent limit as opposition parties took control of almost half the states contested in March 8 elections.


Pakistan’s Parliament meets on Monday for the first time since three opposition parties agreed to form a coalition government after defeating supporters of President Pervez Musharraf in general elections a month ago. Lawmakers will be sworn in and will choose a speaker and deputy speaker for the 342-member National Assembly, the official Associated Press of Pakistan reported. The Pakistan Peoples Party will nominate a prime minister, possibly as early as Tuesday, choosing from five candidates, APP cited Nabeel Gabol, a PPP leader, as saying.

Papua New Guinea

Fitch Ratings has upgraded Papua New Guinea’s (PNG) Long-term foreign currency Issuer Default Rating (IDR) and its Country Ceiling to ‘B+’ from ‘B’. Fitch has also affirmed PNG’s Long-term local currency IDR at ‘B+’, and its Short-term foreign currency IDR at ‘B’. The Outlook is now Stable. The upgrades recognise, in part, PNG’s establishment of relative political and institutional stability for the sixth successive year and the progress the PNG government has made in managing public finances. “Sound economic policies, as well as electoral and structural reforms have set the stage for a relatively stable political environment and facilitated stronger, uninterrupted macroeconomic recovery in Papua New Guinea,” says Ai Ling Ngiam, Director in Fitch’s Sovereign Ratings team.

South Korea

South Korea’s new government will cut company taxes and remove limits on investment by large business to drive economic growth amid a global slowdown. The administration will lower corporate tax rates ranging between 13 percent and 25 percent to as low as 10 percent to 20 percent by 2013, the finance ministry said in a report to President Lee Myung Bak, who aims to achieve economic growth of 7 percent.
A senior Bank of Korea official said the loss in the won was “too fast,” after the currency dropped 3.5 percent against the dollar this year. The decline in the won has been driven by a widening current account deficit and outflows from stock sales, Ahn Byung Chan, director-general of the central bank’s international bureau, said in an interview with Bloomberg News. Korea is “closely watching” the foreign-exchange market, he said.


Bloodshed in Tibet last week is wedging its way into the centre of Taiwan’s March 22 presidential election, threatening the chances of a front-runner who has pledged closer ties with political rival China. Taiwan’s feisty and uncensored media has given wide coverage to the violence on the streets of Lhasa, and all sides of the island’s political spectrum have weighed in to condemn China, whose government also claims self-ruled Taiwan as its territory. Taiwan’s ruling Democratic Progressive Party, which advocates keeping a distance from China, said on Monday the island could suffer the same fate as Tibet if it gets too close to Beijing, whose troops marched into the remote Himalayan region in 1950. China has never renounced the use of force to bring Taiwan under its wing. The two sides have been ruled seperately since the defeated Nationalists fled to the island at the end of a civil war with the Communists in 1949.


Thaksin Shinawatra, ousted as premier and banned from politics, said Thailand’s newly elected government must repair economic damage to the country caused by the military coup that unseated him in 2006. “We have to bring back confidence to Thailand after the coup,” Thaksin said in an interview with Bloomberg News. “It’s quite difficult, but the government has to try harder.”


Turkey’s higher gross domestic product won’t lead to an immediate revision in its credit ratings, Farouk Soussa, Turkey analyst for Standard & Poor’s, said. Turkey on March 8 announced an increase of about one-third to the size of its economy after adopting new calculation methods and better data-collection. While the increase will reduce the ratio of the country’s current-account deficit to GDP, it doesn’t change Turkey’s dependence on foreign investment to finance the gap, Soussa said.



Fitch Ratings has affirmed the Republic of Cyprus’s Long-term foreign currency Issuer Default rating (IDR) at ‘AA-‘ (AA minus) with a Stable Outlook and Short-term foreign currency rating at ‘F1+’. The agency also affirmed the local currency IDR at ‘AA-‘ (AA minus) with a Stable Outlook and the Country Ceiling at ‘AAA’. “Membership of the euro area – which renders transfer and convertibility risk negligible – and fiscal improvements over the last five years have helped Cyprus achieve its current ratings,” says Chris Pryce, a Director in Fitch’s Sovereign team. The country formally joined the union on 1 January 2008. Cyprus is a modern, predominantly services-based economy. It has a significant tourist industry, a growing business services sector and a long-established capitalist economy. Its income per head compares reasonably well with its rated peers. Economic growth has been robust, averaging around 3.6% over the past decade and inflation has been contained.


Standard & Poor’s on Friday cut the outlook on Hungary’s BBB+ sovereign rating to negative from stable saying the country’s deficit reduction plan would stall from 2009 and its debt burden will keep rising. At the same time, the rating agency affirmed Hungary’s ‘BBB+’ long-term and ‘A-2’ short-term sovereign credit ratings. “We believe that the increasing political incentives and pressure to dilute the fiscal reforms ahead of upcoming elections, coupled with the increasing cost of external borrowing, will interrupt Hungary’s progress in reducing its deficit from 2009 and will keep the debt burden rising,” Standard & Poor’s credit analyst Frank Gill said.


Moody’s Investors Service announced the assignment of first-time sovereign ratings for the Republic of Montenegro. Moody’s has assigned a Baa1 country ceiling for long-term foreign currency debt and a Ba2 issuer rating for the foreign currency debt obligations of the government. “Montenegro’s ratings reflect the new country’s growing integration with the European Union and the financial stability afforded by the use of the euro as the official currency,” said Kenneth Orchard, Moody’s Vice-President/Senior Analyst. Orchard said that the fiscal policy framework has been increasingly prudent in recent years, enough so that the government finished 2007 with a budget surplus for the second year in a row. Government debt is primarily owed to official creditors, however, it is moderately high compared to the less-developed new EU members (the Baltics, Bulgaria and Romania). Moody’s expects the debt/GDP and debt/revenues ratios to decline over the medium term after a temporary rise over the next year when the government takes certain domestic liabilities onto its balance sheet.


Romania’s February annual inflation rose to 8 percent, its highest level in almost two years, boosted by hefty rises of natural gas tariffs and fuels, the National Statistics Board (INS) said on Tuesday. Price growth is expected to rise further, peaking at some 8.5 percent, according to analysts’ forecasts, and putting pressure on the central bank to raise borrowing costs. Analysts polled by Reuters earlier this month had produced a mid-range headline inflation forecast of 8.1 percent in February, compared with January’s inflation of 7.3 percent. “The figure is not surprising at all. The impact from gas price hikes is set to continue next month,” said Ionut Dumitru, head of research at Raiffeisen bank in Bucharest. “This is fuelling inflationary pressures and may prompt the central bank to further raise rates by 50 basis points to 9.5 percent,” he said.


Standard & Poor’s Ratings Services said it had revised its long-term ratings outlook on The Russian Federation to positive from stable. At the same time, Standard & Poor’s affirmed its ‘BBB+/A-‘ long-term and ‘A-2’ shortterm sovereign credit ratings, and its ‘A-‘ transfer and convertibility assessment. “The outlook revision reflects our expectation of further growth of the country’s already substantial fiscal and external reserves,” Standard & Poor’s credit analyst Frank Gill said. Although fiscal policy during 2007 was, as we expected, highly pro-cyclical, the general government surplus at 5.1% of GDP was well above target, leading to further increases in Russia’s fiscal reserves. While early 2008 nominal expenditure growth continued to be extremely high, our expectation is that it will moderate during the remainder of 2008. This will allow the general government to run a cash surplus of at least 4% of GDP, which will be accumulated in the newly created Reserve Fund and National Well-Being Fund.


Standard & Poor’s Ratings Services said it had revised its outlook on the Republic of Serbia to negative from stable, due to heightened political risk following the collapse of the Serbian government. At the same time, the long-term ‘BB-‘ and short-term ‘B’ sovereign credit ratings were affirmed. “The negative outlook reflects the growing risk that the May 2008 elections may bring a new government which does not share the current coalition’s objective of EU membership,” Standard & Poor’s credit analyst Sladana Tepic said. “The emergence of a government halting economic reforms and discounting the economic and political benefits of EU membership would lead to a lowering of the sovereign ratings on Serbia, as would a further rise of external imbalances, a budgetary blow-out, or significant slippage in economic reforms.”


The majority of Ukrainians estimate the work of Yulia Tymoshenko on the post of the Prime Minister of Ukraine more positively than the work of Victor Yushchenko on the post of the President of Ukraine. According to an UNIAN correspondent, these are results of the poll, publicized by director general of “FOM – Ukraina” LLC Oleksandr Buhalov at a news conference in Kyiv.


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