KWR International Advisor #3


February 2000 Volume 2  Edition 1

Editor: Dr. Scott MacDonald, Chief Economist and Director of Investor Relations

Deputy Editor: Dr. Jonathan Lemco, Director and Senior Consultant

Publisher: Keith W. Rabin, President

Contributing Writers to this Edition: Jonathan Lemco, Scott B. MacDonald and Keith W. Rabin of KWR International, Peter M. Beck of the Korea Economic Institute  

© 2000 KWR International, Inc. No reproduction is permitted without the express consent of KWR International, Inc.

Please forward all feedback, editorial, circulation and reproduction requests to kwradvisor@kwrintl.com.

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TABLE OF CONTENTS

I. U.S. Economy: Strong Growth Continues, But…

II. Still Moving Ahead?: Business Reform in Japan

III. Investing in Canada in 2000: The Signs Remain Positive

IV. Internet -- Latin America’s Prospects

V. Brazil: Making Slow But Steady Progress

VI. Emerging Market Briefs: Chile, Indonesia, Middle East-NASDAQ, Russia, Ukraine

VII. Book Review: Devil Take the Hindmost: A History of Financial Speculation

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U.S. Economy: Strong Growth Continues, But…
By Dr. Scott B. MacDonald

The U.S. economy remains in a robust growth mode, with seemingly few dark clouds on the horizon. As of February 2000, the U.S. economic expansion entered its 107th month -- a record. We expect that trend to continue in March and April. For the rest of the year, we expect the positive trends to continue, with real GDP a little over 3% and inflation at 2.7%, with unemployment remaining low (around 4%). The stock market is also likely to continue its high degree of volatility, with some consolidation to be expected in the Internet sector. The probability of an ongoing inflationary pressures strengthens the likelihood of another Fed move later in 2000 to again raise interest rates.

The positive US outlook is reinforced by a vastly improved fiscal picture. The fiscal surplus in 1999 was around $120 billion. Driven by strong economic growth and the resulting surge in tax revenues, the federal budget surplus is now expected to expand at levels well in excess of projections made only a few years ago. Even though Clinton’s $1.8 trillion proposed budget will not pass in its current form, it projects a $184 million surplus part of which would be reserved for debt reductions.

This good economic news must be carefully balanced with underlying economic weaknesses. Savings are low, debt levels, both personal and private, continue to expand, and the stock market has become a national past time. It is estimated that the combined debt of U.S. households and firms ended 1999 at a record 132% of GDP. Borrowing has been used to finance the high-tech investment boom and share buy-backs. In 1998 and 1999 alone, non-financial corporations increased their debts by $900 billion while they retired $460 billion in equity.

All of this can continue as long as confidence remains high that the U.S. economy will continue to be driven by the "new economy" of high-tech, cyber services and biotechnology. And a growing U.S. economy is good -- to a point. Growth in the U.S. has absorbed Asian and Latin American exports, helping those regions climb out of recession. The problem is that the U.S. current account deficit of 4% of GDP last year will remain roughly the same in 2000. Someone has to pay for all those imports. Part of the bill has been footed by delving into U.S. savings. According to the OECD December 1999 Economic Outlook, the U.S. had the second lowest level of household savings rates as a percentage of disposable income in the G7 countries, at 2.5%. Only Canada was lower at 2.2%, while Japan was at 12.1%, Germany at 11.2%, and France at 15.2%.

The boom mentality in the United States is also a concern. One of the growing concerns is that a number of businesses are cashing out or putting the wealth back into the hands of shareholders, and not into areas that will enhance ongoing corporate development. As Richard Burnes, co-founder of Charles River ventures, noted in Red Herring (January 2000) of the high-tech industry: "A lot of thinking these days is much too oriented toward money and cashing out, rather than building a strong organization with good people, good products, and a defensible strategy. It’s really important for all of you entrepreneurs out there to remember this, because it’s what ultimately will bring all of this crashing down."

Time magazine recently made note that Silicon Valley has witnessed the passing of the scientific-mined engineers who built the Internet industry’s first wave of companies and their replacement by a new breed of entrepreneur whose aim is to make a quick fortune on the stock market. Furthermore, as many of these new Internet companies issue stock, they are no longer bought by venture capitalists, but by small investors, willing to assume the high risk (without full consequence of what would happen with a bursting of the bubble). As Red Herring’s Justin Hubbard observed: " When VCs [venture capitalists] and other insiders sell their stakes in those companies to the public at high prices, they not only make huge profits but also hand off risky investments to the stock-buying masses." He also notes that in the first three quarters of 1999, VC- backed companies raised a record-breaking $13 billion in initial public offerings and of the 27 Internet companies that went public, none were profitable and 5 were less than two years old.

The build-up in corporate debt in the United States is also evident from the standpoint of credit rating agencies. In his January 24, 2000 economic commentary for Moody’s Investors Service, senior economist John Lonski, noted that U.S. corporate credit rating downgrades exceeded upgrades in 1999: total upgrades were 243, compared with 444 downgrades. The chief culprit in this trend is rising leverage, which "has raised the risk profile of corporations and heightens the need for awareness of signs of financial stress." He cautions "that rising interest rates will place greater strain on debt repayment capacity", and that "greater vulnerability increases the downside risk from disruptions to earnings growth or access to financial capital."

The challenge ahead for the U.S. economy is to find a way to let some of the air out of the bubble. Although the build-up in personal and corporate debt could open the door to the possibility of a hard landing (like the U.S. in 1929 and Japan in 1989), fiscal policy has been prudent and public sector debt as a percentage of GDP is falling (from a peak in 1994 of 53.7% of GDP to 43.9% in 1999). The big issue is to maintain prudent fiscal policies. We fully concur with The Economist (February 5, 2000): "Fiscal policy is in good shape; so long as the budget surplus is not frittered away by new spending or big tax cuts, it offers plenty of firepower should private demand suddenly plummet." Additionally, the Fed has the option, in the case of a loss of confidence and a market downturn, to make use of a looser monetary policy.

The U.S. economy has enjoyed a long period of economic growth, which coincided with the Clinton Presidency. Although both the outgoing president and the Republican-dominated Congress claim credit for the boom, the next recession will most likely come with whoever wins the White House in 2000. Consequently, investors should carefully look with interest to the upcoming presidential contest in the United States. Although none of the frontrunners represent any drastic changes in economic policy, calls for tax cuts will have to be carefully measured with the probability of an economic downturn in the medium term. At the same time, the public perception of their next leader’s ability to lead will be keenly important and tied to the strength of the economic team, in particular at the U.S. Treasury. As dark clouds gather on the horizon, equity and debt investors should give serious thought about the value of investing in highly-leveraged companies. Instead there is merit in looking to older, more established companies that have been more prudent in their debt management and are better positioned to ride through any bumps in the road.



Still Moving Ahead?: Business Reform in Japan
By Dr. Scott B. MacDonald

There remains considerable debate as to whether or not Japan is really changing, that is whether it is becoming more market-oriented or if it continues to be the domain of statist-directed economic policy. Indeed, MIT’s Paul Krugman wrote on February 9, 2000 in The New York Times: "Japan’s government keeps on insisting that its economic strategy has put the nation on the road to sustained recovery, brushing aside both the doubts of outside economists and the growing evidence that the strategy is not, in fact, working." The strategy Krugman refers to is fiscal spending programs to infuse the Japanese economy to grow again. While the expansion of Japan’s public sector debt is indeed a point of concern (as recently underscored by Moody’s decision to put the country’s Aa1 rating on watch for a possible downgrade), Krugman only refers to part of the story. Change is occurring in Japan, as reflected by the increase in mergers and acquisitions, which mirror s the transformation of the corporate sector. While the pace may be slow by U.S. standards, it is taking place with important consequences for the future performance of the Japanese economy.

According to a recent study conducted by Nikko Securities, the amount of money paid in 1999 to finance mergers and acquisitions involving Japanese companies doubled from the previous year to a record 6.74 trillion yen. The number of actual mergers and acquisitions transactions hit a record 1,160 cases, up 24.9%, the sixth straight year of increase. Breaking that down further, acquisition deals between Japanese firms totaled 769, up from 1998’s 550 cases, and M&A activity of foreign companies in Japan rose to 154 cases, 30 more than in 1998. The two largest cases of foreign company involvement were with Renault of France buying large equity stakes of Nissan and GE Capital's acquisition of the leasing division of Japan Leasing Corp.

A more recent example of these M&A trends was the hostile takeover of SS Pharmaceutical Company by Boehringer Infelheim, a German company, in February 2000. Although Boehringer Infelheim had owned part of the Japanese company, their purchase of up to 35.86% of SS Pharmaceutical came as a surprise. This bigger stake gives the German company greater influence over decision-making and allows it to veto any major initiatives. The Boehringer Infelheim purchase was significant as it came on the heels of a failed hostile attempt to takeover Shoei, a real estate holding company and electronics parts manufacturer. Part of the reason for the failure of the Shoei takeover attempt was that the company was part of a cluster of companies built up around Fuji Bank and linked by cross-shareholdings with its sister financial companies.

Despite concerns over Japan’s rising public sector debt, we expect that the M&A trend will gain further momentum in 2000. This is due to foreign investors searching for value acquisitions in Japan (the world’s second largest economy) and the expectation that the government will be introducing a system to facilitate swaps of equity stakes between different companies. Moreover, more companies are likely to reconfigure their links with other companies. Simply stated, the old system of close company-bank relationships has been turned on its head and there is a search to restructure relationships in the Japanese economy. This includes Japanese Internet companies, such as Softbank, that are actively purchasing non-Internet companies, such as banks like Nippon Credit.

Additionally, Japan is now giving birth to a new generation of small, mobile and more competitive high-tech companies, many of them geared to the Internet and e-commerce. They carry with them very different values about the conduct and structure of business compared with older generation companies, especially those in the sectors of the economy long protected from outside competition.

Change is also evident in a number of the larger established international companies. Toshiba, long established in electronics, announced in February that it is establishing a wholly-owned subsidiary to provide Internet services through mobile terminals like cellular phones and digital personal assistants. The company estimates that its Internet-related activities would produce 500 billion yen ($4.63 billion) in current exchange rates in revenue through 2003, with about 150 billion yen, or $1.38 billion, coming from this new enterprise, called I-Value Creation Company.

Is Japan changing the way it does business? The answer is a qualified yes. Big changes are occurring, but the process is slow and painful and is being carefully weighted with such issues as higher unemployment, the need for private sector-led economic growth and burgeoning public sector debt. Moreover, the government has taken a number of non-fiscal measures, to deregulate the economy and provide greater transparency and disclosure in corporate and financial affairs. Consequently, anyone looking at Japan through the lens of what the government is doing or not doing, is observing only part of the picture. The private sector is not standing still and ultimately it will be segments of this sector that provide Japan a new economy.



Investing in Canada in 2000: The Signs Remain Positive
By Dr. Jonathan Lemco

From an investor perspective, Canada remains an attractive site for foreign investment. For the fourth straight year, GDP growth will be above three percent, and should register at 3.5% in 2000 and 2001. The federal and provincial governments have made world-class progress in reducing or eliminating their debt burdens. In addition, more than 200,000 full-time jobs were created in the October-December 1999 period alone. While much of that growth has been export-driven, consumer spending is becoming a vital force behind economic expansion. In general, the economy appears to be in excellent balance, with little signs of inflation, higher unemployment, a widening current account deficit or a growing budget deficit.

Furthermore, the Quebec sovereignty movement, although not dead, is quite dormant as surveys reveal that a substantial majority of Quebecers have no interest in a new referendum on separatism for the forseeable future. Taken together, the good news is so pervasive that the International Bank Credit Analyst, a respected Montreal investor publication, has stated that "Canada has entered an economic boom." Although we should not anticipate an upgrade in the country’s Aa1/AA1 sovereign ratings in the near term, due to a substantial though falling debt level, both Moody’s and Standard & Poor’s have a favorable outlook for Canada.

Why all the good news? It is largely because the federal and provincial governments have become better economic managers in the past few years. All of the governments have made deficit-cutting a priority, along with investment in new value-added industries. In addition, the Canadian economy is substantially dependent on the United States, since 80% of its exports go there. The strong US economy and relatively low domestic interest rates, have proven a boon to the Canadian economy.

Also, Canada’s resource industries, depressed by the weak international economy of the past few years, are beginning to benefit from the worldwide economic upturn. Meanwhile, a technological revolution is spurring companies to invest heavily in new equipment, sparking still more growth. Of course, there are risks as well, most notably higher inflation, although it is not evident at this time. Furthermore, there is the possibility that Canada’s current account deficit could grow, though there is no evidence of this at present. Indeed, Canada enjoys a substantial current account surplus with its largest trading partner, the United States.

Some economists worry that the average Canadian household is amassing dangerous levels of debt -- often exceeding total income. The Conference Board of Canada, a major economic policy think tank, recently reported that personal savings have dropped to about two percent this year, down from 10% at the beginning of the 1990s. Credit debt is also increasing. Nevertheless, the debt issue is not yet perceived to be a serious problem, and should remain this way so long as interest rates remain at manageable levels.

A more immediate concern for Canadians is the relatively high tax rate. Canada’s personal income tax rates are the highest in the G7, and are a factor in an apparent "brain drain" to the United States. Federal government officials acknowledge that the personal tax rates are too high, but there is still no comprehensive plan for tax cuts. We regard this a problem for Canadians. However, the federal and provincial governments are generous with various tax-deferred programs and subsidies for international investors.

On a regional basis, petroleum-rich Alberta is expected to post the best economic growth in 2000 (4.8%), due to a revival in prices for oil and natural gas. Newfoundland will post the second best growth rate in the nation at 4.4%, as several regional offshore oil and gas development projects take off. Taken together, Canada will continue to be a profitable and safe site for the prudent investor.



Internet -- Latin America’s Prospects
By Dr. Scott B. MacDonald and Keith W. Rabin

Internet usage in North America and Asia is rapidly rising. The financial press is filled with stories about mergers and acquisitions, the creation of new Internet and high-tech companies and strong investor interest in this sector. Latin America appears to be lagging in this area. However, the region from the Rio Grande to Terra del Fuego is beginning to adapt to the Internet. Interest in the region’s Internet stocks has even stimulated Merrill Lynch to create a Latin America Latin Strategy Technology Index in January 2000, composed of 22 companies operating in the emerging telecommunications, Internet or media sector that have a service or product marketed on the Internet. According to Wall Street sources, there is also a wave of new Latin American Internet and Internet-related companies heading to the NASDAQ to issue equity shares, including such names as Patagon.com (online broker), Submarino.com (e-retailer), Bradesco.com (online banking), and AT&T Latin America (broadband provider).

What all of this means is that foreign investors are being offered a new opportunity, with probable high rates of return. At the same time, Latin Internet ventures offer risks, which any investor should consider, ranging from unexpected currency devaluations, political upheaval, and debt default. That stated, the other risk is missing the boat when Latin American Internet stocks go up.

According to the Nua Internet Survey, a Dublin-based research group, total worldwide Internet users number around 201 million people, with 5.2 million of all users in Latin America, equal to a l.3 percent of the total population. A more bullish estimation by the International Data Corporation (IDC), puts Latin America’s Internet user population at 8.5 million. Latin American e-commerce generated only $460 million in 1999 on online sales -- tiny compared with Canada’s and the United States’ $18 billion, but growing.

In a report released in June 1999, IDC noted that spending on Web commerce in Latin America reached almost $167 million in 1998, an increase of 361 percent over 1997 levels. Although 1998 and 1999 were not years of strong economic growth in Latin America, especially with Brazil grappling with a devaluation early in the second year, IDC expects the region’s growth to pick up and with it, expansion of the Internet and net-related spending. According to the firm, Latin America is likely to experience above-average compound annual growth of 117 percent between 1998 and 2003.

Other bulls vis-à-vis Latin America and the Internet note that the region is decidedly open to considerably expanded usage. In particular, the following trends make increased usage highly probable -- the modernization of the telecom infrastructure, decreasing connection costs, a youthful population, and increased entrepreneurial activities. Entertainment-related Internet business is regarded as especially attractive for Latin Internet companies.

A number of foreign companies are looking into Latin America. Private equity funds in the United States that focus on Latin America are leading the way with such high profile investments as StarMedia (listed on the NASDAQ), El Sitio and Patagon.com. Starmedia, for example, acquired Cade?, Zeek!, Servicios Interactivos and Latin Red in an effort to offer more local content in each of the countries that it operates. Telefonica de Espana (TEF), Spain’s global telecom company, has invested all over Latin America, putting money into Ole!, a Spanish language portal as well as a number of other small Internet companies. With an eye to TEF, Portugal’s largest Internet company, PT Multimedia, announced in February 2000 that it was buying Zip.net of Brazil for $365 million. This is one of the largest Internet takeovers in Latin America thus far. The acquisition of Zip.et, Brazil’s third largest portal, will provide the Portuguese firm greater muscle to compete with TEF’s Terra Networks (listed on the NASDAQ), which has made substantial investments in Brazil’s Internet sector.

U.S. and European companies are not alone in having an interest in Latin America’s Internet development. Japan’s Softbank Corp. announced on January 11, 2000 that it will establish a new venture capital fund focusing largely on the Internet market in Latin America. The fund, called Softbank Latin American Ventures (SBLV), will have commitments of $100 million. According to Jan Boyer, the newly appointed manager to head operations of the new fund in Latin America: "The Internet represents a radical shift in Latin American economies and current business models. Latin American Internet companies are, and will be, key participants in the insertion of the region into the global digital economy."

As foreign investors begin looking with greater interest at Latin American Internet companies and Internet-related companies, most will probably turn to Brazil. Latin America’s biggest country and largest economy has a number of companies that could be attractive, including Embratel, with the biggest Internet-ready fiber optic network in Brazil, and fixed-line operators Tele Norte Leste and Tele Centro Sul. All three of these companies are listed on the New York Stock Exchange. Brazil’s banks, such as Bradesco, are also attractive Internet plays as they are moving to online banking.

Latin American Internet stocks offer an interesting and attractive option for investors, especially those who have the stomach for a degree of volatility and a willingness to properly investigate what they are putting their money into.


Brazil: Making Slow But Steady Progress
By Dr. Jonathan Lemco

Twelve months ago, international interest in Brazil had reached a low ebb. Central Bank authorities had devalued the currency by 8% on January 13, and then declared the currency freely floating on January 15. These episodes followed more than two years of economic stagnation, punctuated by $30 billion in capital flight in just August-September 1998 alone. Many feared that Brazil, Latin America’s largest economy, was heading into an Asian-style meltdown. In fact, throughout Latin America, economic growth had faltered, prompted by a decline in commodity prices, investors’ aversion to emerging market risk, and tighter fiscal and monetary policies.

Fortunately, the situation is now improved. Economic growth is positive, industrial production numbers keep improving month-to-month, interest rates have stabilized at 19% (down from 45% one year ago) and foreign currency reserves are ample at over $40 billion. Also, President Cardoso has demonstrated that his administration can keep inflation down to modest levels (although it has risen slightly of late due to jumps in wholesale prices). Remarkably, Brazil attracted $28 billion in foreign direct investment in 1999. This was triple the investment in Mexico and three-quarters that of China. We expect this level of investment to continue in 2000, since Brazil’s assets are still relatively cheap. In fact, we think foreign investors will be even more interested in Brazil’s Internet, telephone, steel, banking and retail sectors.

In addition, Brazilian equities gained a remarkable 152% in 1999 in local currency and 69% in dollar terms. As of January 2000, Brazilian shares are valued at 12-13 times forecast 2000 earnings, and are among the cheapest and most liquid in Latin America. Furthermore, the strong U.S. dollar is a great enticement to foreign firms to invest in Brazil. However, the greatest risk to continuing stock market gains would be a jump in U.S. interest rates and a hard landing for the U.S. economy. Should this occur, and we would bet against it in the short-term, Brazil and other developing countries would be totally vulnerable.

Most analysts are calling for the Brazilian economy to grow by 3-4% in 2000. Real GDP was up 0.9% in 1999, in sharp contrast to the dire projections of many analysts. The improved external environment, coupled with a shift to a more flexible exchange rate, has resulted in a more relaxed monetary policy. That said, Brazil’s prospects remain constrained by a large external financing requirement and a heavy fiscal burden. Brazil needs a 5% growth rate to successfully address its terrible problems of high unemployment, poverty and widening income disparities. But realizing that 5% goal will be extremely difficult for the foreseeable future. Also, Brazilian exports have not increased appreciably since the devaluation, leaving the government with a large current account deficit. Although direct foreign investment is filling the gap, this still leaves Brazil vulnerable to new external shocks.

Furthermore, Brazil’s political authorities are making little progress in approving the government’s economic program. The 2000 Budget has not yet been approved and, as of this writing, President Cardoso has forced a special session of Congress to meet until the government’s economic agenda is voted upon, likely in mid-February. The government’s proposals include a renewal of Cardoso’s line-item veto authority over the budget, reform of the tax and pension systems, and changes in labor laws. But the legislators appear to feel no sense of urgency in voting on these measures.

In fact, one could make the case that much of the Brazilian political class is conveniently forgetting that there was an economic crisis last year. Congressional leaders have been less than supportive of the proposed austerity budget, and have countered with proposals of their own including imposing limits to presidential powers and demanding more financial support from the federal government.

Similarly, crucial municipal elections in October 2000 could dissuade the Congress from pursuing more fundamental reforms including revamping the bankrupt national pension systems and rewriting the tax code.

Brazil has always been a difficult federation to govern. It has an extremely diverse population of 172 million people situated in 26 states and spread across an area that is half the size of the entire continent of Latin America. Brazil possesses large and well-developed agricultural, mining, manufacturing and service sectors. As with many developing countries, there is a tiny upper class, a small but growing middle class, and an enormous working class. Small political parties are emerging on the state level to represent local interests. But reconciling the various competing interests in Brazil is a tough road to hoe for any president, although Cardoso has enjoyed more success than most of his predecessors thus far.

We are reasonably optimistic that Brazil has evaded the worst of the financial crisis. Its economic performance this past year was greater than virtually any analyst had reason to expect. In particular, inflation remains in check. From a Brazilian perspective, this may be the best news of all. We expect the news to continue to be good in 2000, at least as long as the U.S. economy continues to flourish. However, long term improvement in Brazil will require a greater degree of cooperation between the President and the Congress than evident thus far. We expect the process to be characterized by two steps forward and one step back for the foreseeable future.



Emerging Market Briefs
By Dr. Scott B. MacDonald

Chile: Chile is indeed on the move in its economic recovery from last year’s steep recession. In February it was announced that the central bank was re-adjusting their projections for real GDP growth upwards, now looking for real GDP expansion at 5.5%. This is due to the increase in commodity prices, an improving international landscape and greater demand for Chilean products. Other economic data supported the turnaround.

Unemployment fell from 11.5% in the third quarter of 1999 to 9.8% in the fourth quarter, with further reductions expected in first quarter of 2000. At the same time, non-traditional exports, which account for 38% of total exports, grew by 4.4% in 1999, reaching $5.95 billion. The industrial sector, which represented 92.9% of non-traditional exports, increased by 5.5% year-on-year. In related news, the newly elected Lagos government named Nicolas Eyzaguirre as Minister of Finance. He is currently Executive Director at the IMF.

Indonesia: While Korea, Thailand and Malaysia have all made strong economic recoveries from the 1997-98 crisis, Indonesia has lagged. The combination of political upheaval related to the downfall of the Suharto regime in 1998, the transitional nature of the Habibie presidency until 1999, and the parliamentary and presidential elections left foreign investors with considerable caution vis-à-vis one of the Asia’s largest countries. That caution was reinforced by an ongoing crisis in the banking sector, an inability to resolve private sector foreign debt defaults, and complications with the sale of state assets. Scandals involving government officials did not help matters. Although conditions remain difficult, the government of President Wahid is attempting to establish a civil society, based on the rule of law. At the same time, the Wahid administration is seeking to establish the predominance of civilian authority over the country’s powerful armed forces as well as diffuse simmering ethnic and religious tensions within the country’s broad borders.

Indonesia has recently received some good news, which could indicate that perhaps the bottom has been reached and that a long-awaited recovery is in its earliest stages. In late January 2000, it was announced that the Consultative Group on Indonesia (CGI), an organization formed in the 1960s to give Indonesia economic assistance, pledged to provide the Southeast Asian nation with $4.7 billion in credit as part of the $43 billion economic package overseen by the IMF. The release of the credit is contingent on Indonesia’s cooperation in stamping out widespread corruption. The CGI announcement followed the World Bank’s decision to release a long-delayed $300 million payment from a loan meant to shore up the economy. The loan had been on hold since August 1999 due to a banking scandal and a violent rampage by pro-Jakarta militias in East Timor after the territory voted for independence.

While international support appears to have been re-affirmed for Indonesia’s fledgling democracy, the Wahid administration received some other good news on the economic front. The most recent data shows that Indonesia’s economy expanded at a 5.7% annualized rate in the fourth quarter of 1999, enough to eke out growth of 0.2% for 1999. Household and government spending led the growth, which exceeded most economists’ projections. KWR International expects real GDP growth of between 2%-3% for 2000.

Middle East-NASDAQ: When the Internet is discussed, the Middle East does not automatically come to mind. Despite this fact, the NASDAQ plans to invite securities officials from stock exchanges in the Middle East and Turkey to a Washington meeting in the summer of 2000. The purpose of this meeting is to explore the possibility of linking Middle East stock markets, possibly under a regional NASDAQ platform. The NASDAQ ha already commenced programs to establish better links with stock exchanges in Asia and Europe. One of the issues confronting the Middle Eastern project is the dominance of Israeli high tech companies, something which Arab countries could possibly have a problem, considering the longstanding confrontations between the two peoples in the Middle East. With around 100 mostly high tech companies listed on the NASDAQ, worth a total of $50 billion, Israel is the most probable candidate to become the first regional market to link up independently with the NASDAQ. A second likely candidate is the Istanbul Stock Exchange, also more advanced than other stock markets in the Middle East.

Russia: Russia’s sovereign credit ratings were upgraded by Standard & Poor’s on February 15, 2000 from CCC to CCC+. This action followed the deal with the London Club (official government creditors) on the restructuring of the $32 billion of Soviet-era debt. The rating agency noted the proposed restructuring included debt relief "that should increase its capacity and willingness to service all its local and foreign currency debt." Under the terms of the deal Russia will get more than 50% debt relief from the London Club. This is also a major victory for the Putin administration, allowing the acting President to claim that he is stabilizing Russia’s economy. Putin faces an election in March 2000 for the presidency. Thus far he is ahead of all competitors and is expected to win. In part, his tough stance on the war in Chechnya given him a degree of popularity in opinion polls.

Ukraine: External Debt Headache: In late January, 2000 the government of Ukraine announced that it had failed to make an $18 million payment on bonds issued through Chase Manhattan Bank Luxembourg SA. It was also announced that Ukraine was working on a debt restructuring offer. However, before a new plan was released, Ukraine failed to make another $35 million of payments due to Russia’s National Reserve Bank (a subsidiary of Gazprom) on its gas bonds, which represent earlier unpaid debts for Russian natural gas deliveries. Ukraine’s external debt is around $12.5 billion, of which more than $3 billion is due in 2000 and about the same amount in 2001. Greatly complicating matters, the central bank had only an estimated $1.2 billion at year-end 1999, hardly enough to cover what is needed.


Book Review
By Dr. Scott B. MacDonald

Edward Chancellor, Devil Take the Hindmost: A History of Financial Speculation (New York: Farrar, Straus & Giroux, 1999). $25.00.

What do Daniel Defoe, Benjamin Disraeli , Ivan Boesky and Hillary Rodham Clinton have in common? According to Edward Chancellor, they have all participated in speculation, some successfully and others decidedly not. In his history on the subject, Chancellor defines speculation as meaning "different things to different people, yet it retains something of its original philosophical meaning; namely, to reflect or theorize without a firm factual basis...The financial speculator still resembles the alchemist in that he is constantly constructing abstruse theories to turn paper into gold, normally with little success." Certainly one of the most savvy of the speculators was Mrs. Clinton, who (then the wife of Governor Bill Clinton) turned an initial $1,000 stake into $100,000 ten months later, at which point she retired from the game.

Chancellor is a free-lance contributor to the Financial Times and The Economist and worked for the firm of Lazard Brothers in the early 1990s. For anyone interested in investment and the stock market, his book is essential reading. His approach to creating a history of speculation is based on the view that speculative manias are "a manifestation of the occasional tendency of society to succumb to delusion and mass madness." In this he share an affinity with Charles Mackay, who wrote Extraordinary Popular Delusions and the Madness of Crowds in 1841. Mackay’s book was a popular account of the Tulip Mania, Mississippi Land Bubble and South Sea Bubbles. He quotes Mackay: "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

Chancellor refutes modern economic theory which believes that markets are efficient, i.e. that share prices reflect intrinsic values, and that speculators are simply rational economic agents intent on optimizing their wealth. In this approach, the history of speculation is a boring and rational affair. In contrast, Chancellor concentrates on the madness of crowds, covering a range of occurrences from the Dutch Republic in the 17th century to Japan in the 1980s and the Internet frenzy in the United States in the late 1990s and early 2000. Chancellor peppers his history with a number of views. For example, the American passion for speculation derives from the nation’s fierce competitiveness and appetite for risk.

Perhaps one of the more interesting areas of the book is his idea that speculation and credit are very closely related. One example of this is evident in the late 1990s stock market expansion in the United States. In this, he notes that the baby boomers poured record amount of capital into the market through retirement plans and ordinary mutual fund and brokerage accounts. At the same time, the federal budget was brought under control, making a shift from a steep deficit to a surplus in a period of five years. This freed up hundred of billions of dollars for private investment. In a sense, the private sector credit expanded as public demand for it declined. That flow of credit went into the stock market, which brought greater returns, hence helped shift credit into the stock market, an arena of speculation. Chancellor does not buy the argument that the new economy is impervious to cyclical downturns. Anyone reading their financial history, like Chancellor, knows that we have been there before and will be there again. This is a well-written and thoughtful as well as thought-provoking book. Well worth the money.

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Road Shows and Special Events
Materials Development & Dissemination
Project Management and Implementation
Program Evaluation
Training and Technical Assistance

Investment Promotion and Financial Communications
Marketing Communications and Trade Promotion
Public Affairs/Trade and Regulatory Issues
Internet and New Media Vehicles
Economic, Financial and Political Analysis
Telecommunications / High Tech
Tourism Promotion



For further information or inquiries contact:

KWR International, Inc.
Tel:+1- 212-532-3005
Fax: +1-212-799-0517
E-mail: kwrintl@kwrintl.com