Latin America & The Caribbean Economic Monitor:
Argentina: Looking to Settle Bilateral Debt
In the wake of securing a deal to repay US$960mn in debt that Spain extended during the 2001 crisis, Argentina appears ready to discuss its other bilateral obligations. The country hopes to settle US$6.3bn in outstanding debt with the Paris Club by 2015 according to reports in Argentina’s Ambito Financiero. Economy minister Felisa Miceli is said to be preparing a proposal to the Club for the beginning of December, in which Argentina would be allowed to repay Spain ahead of the rest (by 2012) in light of the ‘bail-out’ nature of that loan.
Brazil: Where do we go from here?
Over the last three years, Brazil has taken great strides toward reducing its traditional vulnerabilities. Its lumbering public and external debt burdens are being tamed, perceptions of financial stability have helped secure more stable sources of capital flows, and it has succeeded in opening and broadening its trade profile. All these developments will make the country much more resilient in the face of the coming downturn. The next step toward investment grade, however, will require the Lula administration to address some of the economy’s fundamental structural challenges, and may well expose an internal struggle for the soul of this PT government. But the choice is between the government’s social democratic agenda and its target growth rate of 5% in 2007.
Brazil’s investment ratio currently stands at 17.5%, down significantly from 32% in 1975. For gross capital formation to rise, however, it is not enough for the real interest rate to fall. Improvements are needed with respect to the overall business environment. Excessive growth of public spending places upward pressure on taxation. Primary spending has increased at an average of 9.4% in real terms through the first Lula administration. Given the government’s commitment to maintain a 4.25% primary surplus and reduce public debt, this is only possible with higher taxes. Another factor inhibiting investment is the dire state of the country’s transportation infrastructure, which some say costs businesses $5 billion per year in efficiency losses. But due to fiscal constraints, addressing this requires private capital. To achieve this, as I’ve said, the government will have to strengthen the country’s regulatory framework, and begin to look more seriously at the public-private partnership scheme.
Ecuador: Dollarization safe…for now.
Since his election victory on September 26, President-elect Raphael Correa has ruled out any sudden changes to the dollarization of Ecuador’s economy, but added that he "would be opposed to keeping the policy going indefinitely, because one of the symbols of a country’s sovereignty is its currency." EDC Economics does not believe that there is sufficient displeasure in Ecuador at this point with the dollarization regime to motivate such a move in the near- to medium-term. Mr. Correa has, however, indicated on several occasions that he would be in favor of ‘renegotiating’the country's external debt. We have enough reason to believe that he would carry
out such a threat, and caution that he should be taken at his word in that respect. That said, a collapse of the dollarization regime would not necessarily go to follow. Mr. Correa does have a reputation of being extremely erratic and, despite being a US-trained economist, a move toward more Chavez-inspired economic heterodoxy should not be ruled out.
Mexico – Impacts of US slowdown and Domestic Politics should be watched closely
A US slowdown is already underway. Mexican companies whose main sources of income are dependent on the US housing market and the US consumer will feel the greatest impact. And now US manufacturing is also facing its problems with November’s ISM release coming in below the threshold 50 mark, meaning the sector is in contraction. Meanwhile, President Calderon was sworn in last week. The peso showed little reaction and the stock market hit another record, but political developments deserve close attention. Monetary policy and good debt management are important but can’t do it all. Longer term structural issues such as declining oil reserves will weigh on the fiscal accounts. Production from Cantarell is projected to fall 14% annually between 07-15.
In 2004, its output accounted for 63% of Mexico’s total crude production.
Peru: The Herd Mentality in Full Effect
In July, EDC Economics upgraded Peru to ‘BB+’, citing "healthy growth and stable inflation combined with sound macroeconomic management." Then in August, Fitch Ratings upgraded the country to ‘BB+’ due to Peru’s "rapidly growing exports…as well as strong output growth." Now, on November 20th, S&P also bumped the sovereign’s MLT FC credit rating to ‘BB+’, based on strong growth in the context of "a strengthening macroeconomic framework characterized by low inflation…current account surpluses, and a fiscal consolidation strategy."
Friday, February 9, 2007
Central & Eastern Europe Economic Monitor:
Russia - Strong Fundamentals and Reserves Mitigate Risk Profile
The country is registering very respectable growth of 6.4% this year thanks to strong macroeconomic and financial indicators offset by weak institutional factors. Notwithstanding massive export revenues, economic growth is being hindered by infrastructure bottlenecks, particularly in the oil and gas sector. This is expected to continue in the foreseeable future, as fixed capital formation remains among the lowest of all transition economies at under 20% of GDP. The resulting bottlenecks are also hindering the country's ability to attain the 7.5% annual
growth required to meet the government's target of doubling GDP in ten years. Still, economic growth remains high at around 6% thanks to rising wages and credit growth within a context of rising government expenditures. Moreover, foreign exchange reserves are still growing, and recently exceeded US$280 billion - the world's third largest; and the stabilization fund also surpassed $80 billion. These joint reserves should allow Russia to weather any economic downturn for some time.
Turkey - Outlook Clouded by Troubled EU Negotiations and Slowing Economy
Despite continuing decent economic results, Turkey's economic outlook may have been caught up in the possible suspension of negotiations over EU entry. At the time of writing, the EU Commission has recommended that accession talks with Turkey be suspended in eight of the thirty-five policy areas (chapters) over Turkey's delays in opening its ports and airpots to Greek Cypriots. Turkey has given no indication that it would bow to EU pressure to abide by that condition. Moreover, growth, which has averaged over 6% yearly in the last three years, may slacken this year on the back of the slowing world economy. A complicating factor for Turkey is
the looming 2007 presidential race which will be exacerbated by the chasm between Turkey's secular forces and the ruling AKP party. The economy is also slowing, with most recent industrial production (IP) data slowing to 5.8% in September, versus 9.3% the previous month. Most recent figures show inflation tracking at slightly less than 10% (y/y), far above the Central Bank original target of 5%. Moreover, the October trade deficit registered at $4.4 billion, for a cumulative January-October total of $44.5 billion (8% of GDP). The problem with Turkey is that the the EU negotiation/integration process had been one of the key mitigants of country risk by serving as
backstops to economic policy. If EU integration stalls, the country could find itself with only the current IMF economic program to provide a guarantee of economic sustainability. To sum up: Turkey's economic outlook has become clouded - stay tuned.
Russia - Strong Fundamentals and Reserves Mitigate Risk Profile
The country is registering very respectable growth of 6.4% this year thanks to strong macroeconomic and financial indicators offset by weak institutional factors. Notwithstanding massive export revenues, economic growth is being hindered by infrastructure bottlenecks, particularly in the oil and gas sector. This is expected to continue in the foreseeable future, as fixed capital formation remains among the lowest of all transition economies at under 20% of GDP. The resulting bottlenecks are also hindering the country's ability to attain the 7.5% annual
growth required to meet the government's target of doubling GDP in ten years. Still, economic growth remains high at around 6% thanks to rising wages and credit growth within a context of rising government expenditures. Moreover, foreign exchange reserves are still growing, and recently exceeded US$280 billion - the world's third largest; and the stabilization fund also surpassed $80 billion. These joint reserves should allow Russia to weather any economic downturn for some time.
Turkey - Outlook Clouded by Troubled EU Negotiations and Slowing Economy
Despite continuing decent economic results, Turkey's economic outlook may have been caught up in the possible suspension of negotiations over EU entry. At the time of writing, the EU Commission has recommended that accession talks with Turkey be suspended in eight of the thirty-five policy areas (chapters) over Turkey's delays in opening its ports and airpots to Greek Cypriots. Turkey has given no indication that it would bow to EU pressure to abide by that condition. Moreover, growth, which has averaged over 6% yearly in the last three years, may slacken this year on the back of the slowing world economy. A complicating factor for Turkey is
the looming 2007 presidential race which will be exacerbated by the chasm between Turkey's secular forces and the ruling AKP party. The economy is also slowing, with most recent industrial production (IP) data slowing to 5.8% in September, versus 9.3% the previous month. Most recent figures show inflation tracking at slightly less than 10% (y/y), far above the Central Bank original target of 5%. Moreover, the October trade deficit registered at $4.4 billion, for a cumulative January-October total of $44.5 billion (8% of GDP). The problem with Turkey is that the the EU negotiation/integration process had been one of the key mitigants of country risk by serving as
backstops to economic policy. If EU integration stalls, the country could find itself with only the current IMF economic program to provide a guarantee of economic sustainability. To sum up: Turkey's economic outlook has become clouded - stay tuned.
Asia Economic Monitor:
India - Solid Q3 Growth Numbers Underpins Continuing Creditworthiness
The Indian economy continued its strong expansion with GDP growing by 9.2% y/y (all figures y/y) in Q3, versus 8.9% in Q2 and 9.3% in Q1. These three results suggest that overall growth for teh entire year may exceed 8%. Key drivers of the economic expansion included trade, transport, and communications (+14%), manufacturing (+12% y/y), finance and insurance (+9.5%), and construction (+9.8%). The key agriculture sector, which still employs about half the population, registered growth of only 1.7%. Given much of the manufacturing output is for domestic consumption, the strength of the manufacturing sector is quite telling can be used as a proxy for domestic demand. As a result, while India's domestic demand appears to be quite robust, overall growth should dip next year as a result of tightening by the Indian Central Bank to tackle inflation, and slowing global growth. Expect growth to be in the 7-8% range - still respectable by any standards.
China - Growth Eases - somewhat - But Lots of Oomph Left in System
While GDP data indicated a continuing firm expansion in the third quarter 2006 (Q3/06) of 10.7% y/y, only slightly less than the 11.3% y/y growth registered Q2/06, industrial production (IP) in October slowed unexpectedly to 14.7% y/y, lower than the 16.1% y/y registered in September. At this point there are two possible explanations for the slowdown. First, the mix of monetary and regulatory measures implemented by Chinese authorities to slow growth - particularly fixed investment - may be starting to bite. Second, as many of the goods produced in China are for overseas consumption, the slowing October IP figure may reflect the slower pace of orders placed by firms as a result of the world slowdown. But export growth has remained solid (with
October's merchandise trade balance setting a record high of US$23.8 billion, up from US$15.3 billion in September), and therefore it may be too early to tell if the slowdown is affecting exports. One last note: foreign exchange reserves may have exceeded $1 trillion. To sum up, China's growth remains strong.
Taiwan - Quarterly Growth Data Higher than Expected, But No Miracles Looking Ahead
Taiwan's rate of economic growth accelerated in the third quarter to 5.0% y/y following a 4.6% y/y rate of growth in Q2. Nevertheless, growth is expected to scale back in view of slowing world economic growth and slowing consumption by Taiwanese households. The issue of slowing world growth - particularly in the US - is particularly appropriate to Taiwan, given the reliance on high-value-added electronic goods which is among the country's export staples. This suggests that growth is expected to decline slightly next year, although remain at a still-respectable level of about 4%.
India - Solid Q3 Growth Numbers Underpins Continuing Creditworthiness
The Indian economy continued its strong expansion with GDP growing by 9.2% y/y (all figures y/y) in Q3, versus 8.9% in Q2 and 9.3% in Q1. These three results suggest that overall growth for teh entire year may exceed 8%. Key drivers of the economic expansion included trade, transport, and communications (+14%), manufacturing (+12% y/y), finance and insurance (+9.5%), and construction (+9.8%). The key agriculture sector, which still employs about half the population, registered growth of only 1.7%. Given much of the manufacturing output is for domestic consumption, the strength of the manufacturing sector is quite telling can be used as a proxy for domestic demand. As a result, while India's domestic demand appears to be quite robust, overall growth should dip next year as a result of tightening by the Indian Central Bank to tackle inflation, and slowing global growth. Expect growth to be in the 7-8% range - still respectable by any standards.
China - Growth Eases - somewhat - But Lots of Oomph Left in System
While GDP data indicated a continuing firm expansion in the third quarter 2006 (Q3/06) of 10.7% y/y, only slightly less than the 11.3% y/y growth registered Q2/06, industrial production (IP) in October slowed unexpectedly to 14.7% y/y, lower than the 16.1% y/y registered in September. At this point there are two possible explanations for the slowdown. First, the mix of monetary and regulatory measures implemented by Chinese authorities to slow growth - particularly fixed investment - may be starting to bite. Second, as many of the goods produced in China are for overseas consumption, the slowing October IP figure may reflect the slower pace of orders placed by firms as a result of the world slowdown. But export growth has remained solid (with
October's merchandise trade balance setting a record high of US$23.8 billion, up from US$15.3 billion in September), and therefore it may be too early to tell if the slowdown is affecting exports. One last note: foreign exchange reserves may have exceeded $1 trillion. To sum up, China's growth remains strong.
Taiwan - Quarterly Growth Data Higher than Expected, But No Miracles Looking Ahead
Taiwan's rate of economic growth accelerated in the third quarter to 5.0% y/y following a 4.6% y/y rate of growth in Q2. Nevertheless, growth is expected to scale back in view of slowing world economic growth and slowing consumption by Taiwanese households. The issue of slowing world growth - particularly in the US - is particularly appropriate to Taiwan, given the reliance on high-value-added electronic goods which is among the country's export staples. This suggests that growth is expected to decline slightly next year, although remain at a still-respectable level of about 4%.
Africa & Middle East Economic Monitor:
Congo Republic (Brazzaville) – spending & good governance challenge progress
Macroeconomic performance has been improving, admittedly on the strength of buoyant oil
conditions. GDP growth doubled in 2005 to 7.9% and is expected to slow from an estimated 7.2% in 2006 to less than 2% in 2007, as oil production falls, before recovering to 6.5% in 2008, as a new field come on stream. Macroeconomic policy has been under the guidance of an IMF arrangement - Poverty Reduction and Growth Facility (PRGF), but the country experienced performance problems due to delays in transferring oil revenues to the Congolese treasury. Nevertheless, containing spending on the eve of parliamentary elections is among the key
challenges for 2007. The “Second Review” under the Fund program took place in June 2006 and then the PRGF had to be extended. The PRGF has been the pillar of the international rescue package needed to regularize the Republic of Congo’s very difficult financial position. The country has been eligible to the first phase of the Enhanced HIPC Initiative in 2006. Meanwhile, the country liquidity position has been improving markedly and foreign exchange reserves have been equivalent to 7.5 months of import cover earlier in 2006.
Iran – plenty of foreign reserves and low external debt
The consolidation of power in the hands of hardliners, which have been exacerbated by populist rhetoric, has pushed to the country in isolation, particularly over the nuclear issue. Existing sanctions by the US have been extended, and investors’ sentiment has been increasingly “mixed” and fluctuating in between opportunity and risk. This should have adverse implications on the needs to upgrade the oil and gas sector over the longer run. However, over the shorter run, Iran enjoys plenty of liquidity with foreign exchange reserves that could be in the area of US$65bn by the end of the fiscal year 2006/07 (end in March) equivalent to one year of import of goods & services. Iran has never been “as liquidity as” in nowadays. External debt problems are also a story of the past, as the external debt is equivalent to 10% of GDP.
Nigeria – on the path of balance of payments viable and debt sustainable
Nigeria has recorded a solid performance for the past 24 months and the outlook is equally encouraging with GDP growth of 7% by 2007 due to buoyant oil conditions. It has implemented rigorously an economic reform program, which has been supported by the IMF. It met the conditionality of the First Review of the Fund program Policy Support Instrument (PSI). Fund Board discussions for the Second review is scheduled for the second half of December 2006. Oil windfalls have led to budgetary and external current account surpluses. Business conditions are challenged by high domestic interest rates (of 14%), an on-going banking reform and changes in the exchange rate policy. Nevertheless, the country is in the process of reaching balance of
payments viability and debt sustainability after the conclusion of the international financial package that was reached in October 2005. The liquidity position is more than comfortable with foreign exchange reserves equivalent to 15 months of import cover. The external debt has been falling from US$35.9bn two years ago to less than US$5bn in 2006.
Congo Republic (Brazzaville) – spending & good governance challenge progress
Macroeconomic performance has been improving, admittedly on the strength of buoyant oil
conditions. GDP growth doubled in 2005 to 7.9% and is expected to slow from an estimated 7.2% in 2006 to less than 2% in 2007, as oil production falls, before recovering to 6.5% in 2008, as a new field come on stream. Macroeconomic policy has been under the guidance of an IMF arrangement - Poverty Reduction and Growth Facility (PRGF), but the country experienced performance problems due to delays in transferring oil revenues to the Congolese treasury. Nevertheless, containing spending on the eve of parliamentary elections is among the key
challenges for 2007. The “Second Review” under the Fund program took place in June 2006 and then the PRGF had to be extended. The PRGF has been the pillar of the international rescue package needed to regularize the Republic of Congo’s very difficult financial position. The country has been eligible to the first phase of the Enhanced HIPC Initiative in 2006. Meanwhile, the country liquidity position has been improving markedly and foreign exchange reserves have been equivalent to 7.5 months of import cover earlier in 2006.
Iran – plenty of foreign reserves and low external debt
The consolidation of power in the hands of hardliners, which have been exacerbated by populist rhetoric, has pushed to the country in isolation, particularly over the nuclear issue. Existing sanctions by the US have been extended, and investors’ sentiment has been increasingly “mixed” and fluctuating in between opportunity and risk. This should have adverse implications on the needs to upgrade the oil and gas sector over the longer run. However, over the shorter run, Iran enjoys plenty of liquidity with foreign exchange reserves that could be in the area of US$65bn by the end of the fiscal year 2006/07 (end in March) equivalent to one year of import of goods & services. Iran has never been “as liquidity as” in nowadays. External debt problems are also a story of the past, as the external debt is equivalent to 10% of GDP.
Nigeria – on the path of balance of payments viable and debt sustainable
Nigeria has recorded a solid performance for the past 24 months and the outlook is equally encouraging with GDP growth of 7% by 2007 due to buoyant oil conditions. It has implemented rigorously an economic reform program, which has been supported by the IMF. It met the conditionality of the First Review of the Fund program Policy Support Instrument (PSI). Fund Board discussions for the Second review is scheduled for the second half of December 2006. Oil windfalls have led to budgetary and external current account surpluses. Business conditions are challenged by high domestic interest rates (of 14%), an on-going banking reform and changes in the exchange rate policy. Nevertheless, the country is in the process of reaching balance of
payments viability and debt sustainability after the conclusion of the international financial package that was reached in October 2005. The liquidity position is more than comfortable with foreign exchange reserves equivalent to 15 months of import cover. The external debt has been falling from US$35.9bn two years ago to less than US$5bn in 2006.
Thursday, February 8, 2007
Snapshot: US Exports & Imports.
News: NEW YORK (CNNMoney.com) -- The nation's trade deficit tumbled in October on lower prices for oil imports, but the gap with China kept growing ahead of a key trip to that country by Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and other top officials.Overall, imports topped exports by $58.9 billion in October, down from $64.3 billion in September, the Commerce Department reported. Economists surveyed by Briefing.com had forecast a much smaller decline, to $63 billion.But the deficit widened with China, which runs by far the biggest trade surplus with the United States of any other country.The report comes as Paulson, U.S. Trade Representative Susan Schwab and other officials left for China for meetings that are sure to bring up some contentious trade issues. Bernanke is due to join them after Tuesday's meeting of the Fed policymakers.
Comments: China is on everyone's mind these days, and as a result, almost all international economic news is now viewed through the China lens. As this news excerpt mentions, the trade deficit with China does indeed continue to widen even as the overall US trade deficit seems to have peaked (at least temporarily).But it's worth noting that simply looking at the US trade deficit with China is a bit misleading. In fact, US exports to China have been growing much faster than US imports from China. The problem is, of course, that the levels of exports and imports are very different, so US exports would have to grow much faster than imports in order for the US trade imbalance with China to stop rising.The following tables show how US exports and imports have changed in 2006 compared to 2005. First, let's take a look at changes by trading partner. US exports to nearly all of the US's trading partners have grown solidly over the past year, but exports to most of the developing world - including China - have done particularly well. Interestingly, the parts of the world that seem to be lagging in terms of US export growth are the rest of east Asia, such as Japan, Taiwan, and Korea.
Obviously, a huge chunk of the increase in US imports is oil. The interesting thing to notice in this table is that US imports of consumer goods have actually grown relatively slowly over the past year. Meanwhile, exports have grown solidly in the US's traditional strengths: capital goods (things like machinery, telecommunications equipment, and aircraft) and industrial supplies (things like chemicals, wood and paper products, metals, etc.).Meanwhile, Treasury Secretary Paulson heads to China to try to work some magic on the US trade deficit. The pressure on him to do so is substantial. But short of somehow managing to get Chinese consumers to do more spending and US consumers to do less of it, I think he has little chance of actually accomplishing that goal.
Source & Links: BEA (Bureau of Economic Analysis), CNN Money.com & Bloomberg
http://www.bea.gov/bea/newsrel/tradnewsrelease.htm
http://www.usatoday.com/money/economy/2006-12-11-treasury-side_x.htm
http://money.cnn.com/2006/12/12/news/economy/trade/index.htm?postversion=2006121211
News: NEW YORK (CNNMoney.com) -- The nation's trade deficit tumbled in October on lower prices for oil imports, but the gap with China kept growing ahead of a key trip to that country by Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and other top officials.Overall, imports topped exports by $58.9 billion in October, down from $64.3 billion in September, the Commerce Department reported. Economists surveyed by Briefing.com had forecast a much smaller decline, to $63 billion.But the deficit widened with China, which runs by far the biggest trade surplus with the United States of any other country.The report comes as Paulson, U.S. Trade Representative Susan Schwab and other officials left for China for meetings that are sure to bring up some contentious trade issues. Bernanke is due to join them after Tuesday's meeting of the Fed policymakers.
Comments: China is on everyone's mind these days, and as a result, almost all international economic news is now viewed through the China lens. As this news excerpt mentions, the trade deficit with China does indeed continue to widen even as the overall US trade deficit seems to have peaked (at least temporarily).But it's worth noting that simply looking at the US trade deficit with China is a bit misleading. In fact, US exports to China have been growing much faster than US imports from China. The problem is, of course, that the levels of exports and imports are very different, so US exports would have to grow much faster than imports in order for the US trade imbalance with China to stop rising.The following tables show how US exports and imports have changed in 2006 compared to 2005. First, let's take a look at changes by trading partner. US exports to nearly all of the US's trading partners have grown solidly over the past year, but exports to most of the developing world - including China - have done particularly well. Interestingly, the parts of the world that seem to be lagging in terms of US export growth are the rest of east Asia, such as Japan, Taiwan, and Korea.
Obviously, a huge chunk of the increase in US imports is oil. The interesting thing to notice in this table is that US imports of consumer goods have actually grown relatively slowly over the past year. Meanwhile, exports have grown solidly in the US's traditional strengths: capital goods (things like machinery, telecommunications equipment, and aircraft) and industrial supplies (things like chemicals, wood and paper products, metals, etc.).Meanwhile, Treasury Secretary Paulson heads to China to try to work some magic on the US trade deficit. The pressure on him to do so is substantial. But short of somehow managing to get Chinese consumers to do more spending and US consumers to do less of it, I think he has little chance of actually accomplishing that goal.
Source & Links: BEA (Bureau of Economic Analysis), CNN Money.com & Bloomberg
http://www.bea.gov/bea/newsrel/tradnewsrelease.htm
http://www.usatoday.com/money/economy/2006-12-11-treasury-side_x.htm
http://money.cnn.com/2006/12/12/news/economy/trade/index.htm?postversion=2006121211
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