Emerging Market Briefs

By Scott B. MacDonald

Brazil — Positive Ratings News: With the demise of Argentina in international capital markets, the rest of Latin America, including the region’s largest economy held its breath. So many other crises in one country have resulted in the entire region being hit by a wind-chill of investor fear. This time, thus far, the default of one Latin economy has not had a daisy-chain effect. Evidence of this comes from Brazil, which benefited from an outlook change from Moody’s Investor Service from stable to positive for the country’s B1 foreign currency rating. The rating agency stated that Brazil has demonstrated "resilience" to neighboring Argentina’s debt default and currency devaluation. Over the past month, the largest Latin American economy cut interest rates for the first time in a year and ended nine months of power rationing. For Brazil to get an upgrade it will have to maintain a sizeable primary surplus (it now stands at about 3.7% of GDP) to reduce the country’s net debt, which stood at 55% of GDP in January, its highest level since 1991. Another factor is the looming presidential election scheduled for October 2002. Should the center-left candidate, Ignacio de Silva, take a commanding lead, we would suspect that any upgrade would have to wait until early 2003. If a center-right candidate takes a commanding lead in the poll, chances for an earlier upgrade are that much higher.

Korea on Track for Moody’s Upgrade: Korea is gradually climbing back to being a single A credit. On February 28, it was announced by Moody’s that Korea’s Baa2 rating would probably be upgraded to Baa1 within two months. The key points in helping push Korea back up the ratings ladder are shrinking external debt, rising foreign currency reserves (around $100 billion), and balanced economic growth. What could derail the upgrade is ongoing weakness in the financial and corporate sectors. As Tom Byrne, the Moody’s analyst stated: "Weakness in the financial and corporate sectors can still present vulnerability. High-profile restructuring cases are stalled, and there’s a good chance they’ll be stalled until elections are over." In particular, the analyst was referring to the fact that the Korean government has missed 10 deadlines in three years to sell SeoulBank and the slow pace of the sale of Daewoo Motor Company to General Motors.

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Macao Set for Stronger Growth: Macao's economic performance is expected to grow at a faster pace in 2002, following weak growth in 2001. Real GDP expanded by less than 1 percent in 2001, compared to a more dynamic 4.6% pace in 2000. Macao is expected to benefit from a further opening of the gaming industry, in which the tourism and related industries will get a boost. In addition, Macao expects to benefit from the fast growth of China's interior expected in the wake of its entry into the World Trade Organization if Macao business people take advantage of the emerging opportunities.

Malaysia — Escaping 2001 with Growth: It now looks likely that Malaysia escaped 2001 with a tiny amount of economic growth (0.4%), but well under the government’s 1-2% target. What helped the country maintain itself on the positive side of the growth ledger was positive real GDP growth rates of 3.1% and 0.5% growth in the first and second quarters respectively. The second half of the year was hurt by weakening global demand for electronic products, a situation only worsened following the Sept. 11 terrorist attacks on the United States. Gross domestic product shrank 1.2% and 0.5% in the third and fourth quarters, respectively, on an annual basis. The manufacturing sector, the major driving force behind the three-year economic recovery since the 1997 financial crisis, fell 5.1% in 2001 after growing 13.5% and 21.0% in 1999 and 2000, respectively. Although manufacturing fell, other sectors, with less share of the GDP did better. In particular, the construction sector, aided by the 7.3 billion ringgit (about $1.9 billion) stimulus package unveiled by the government last year to help cushion the effects of the global slowdown, registered growth of 2.3%. Agriculture grew at a pace of 2.5%, while the mining and services sectors expended 0.2% and 4.9%, respectively. Reflecting weak international markets and the impact of the slowdown at home, exports declined 7.6% while imports fell 8.6% in the year. Looking to 2002, we expect that real GDP growth will be in the range of 2%-3%, depending on the pace of recovery in the United States and Japan, Malaysia’s major trade partners. We also expect that government spending, which rose in 2001 to counter the downturn with stimulus measures, will be reined in during the second half of 2002 as growth becomes more pronounced.

Peru — Back on the Growth Track: For many investors Peru appeared to have fallen off the map in the 1999-2001 period as President Fujimori was forced out of office after a fraudulent election and revelations of high-ranking corruption. New elections were held and Alejandro Toledo assumed the presidency. The incoming government was immediately confronted with a domestic economy in disarray, political uncertainty and a global economy heading into a downturn. For many Peruvians expecting happier days, the Toledo administration represents broken election promises, lack of employment opportunities, tentative leadership and a painfully slow economic recovery. Real GDP growth in 2001 was a meager and disappointing 0.2%. In all fairness to President Toledo, public expectations were too high and considering the panorama of domestic and international conditions, the government has done relatively well. Things are beginning to look up for 2002. The government has already accessed international capital markets for the first time in decades with a $500 million bond issue done in January 2002 and further efforts are being made to improve financial flexibility. Real GDP growth is expected to be the 3.0-3.5% range for 2002 on the back of an improved performance from mining and construction, enhanced tax revenues, and the commencement of production at Antamina, one of the world’s largest copper companies. Even the raring agencies are looking more favorably on Peru, with Moody’s changing its outlook back to "stable" earlier this year for the Ba2 rating. As the ratings agency stated: "The orderly completion of the political transition during 2001 revealed the ability of Peru's institutions to continue to operate under conditions of severe strain. While confronting a belligerent congress, President Toledo has been able to forge the support required to assure approval of top items in his legislative agenda." Challenges still remain, but one can be cautiously positive about Peru’s prospects for 2002.

Philippines — Moving on Money Laundering Laws: Since 9/11 the hunt for al-Qaeda and its money has resulted in a major international effort to tighten laws pertaining to money laundering. In late February 2002, the Philippine Central Bank announced that moneychangers will be under their supervision. Moreover, moneychangers operating in the Philippines will be required to apply for licenses. The measures are in compliance with new guidelines established by the Financial Action Task Force (FATF), the Paris-based transnational organization entrusted with the coordination of money laundering rules and regulations in all members nations, including all the major economies in North America, Europe and Asia. The FATF had earlier mentioned the Philippines as one of 19 countries where money laundering prospered due to weak banking laws. The central bank is still refining the rules and determining the actual number of moneychangers that operate in the country.

Singapore - Recovery In the Wind?: 2001 was one of the worst years in decades for Singapore's economy. Real GDP for the year contracted by 2.2%, the worst number since 1965. The main cause was the huge decline in electronics exports, which account for 60% of the city-state's manufacturing. The government is now forecasting that the economy will grow 1-3% in 2002, due to a restocking of inventories for semiconductors and other electronic components. This, in turn, will help to reduce unemployment, which was at 4.7% at year-end 2001. Unemployment is still expected to peak at 5% before coming down.

Turkey - Guess Who's Coming to Dinner?: The IMF is sending a mission to Turkey on 5 March to review the stand-by arrangement. It was announced that an IMF mission would be going to Turkey for the first review of Turkey's performance under its IMF program. The mission is expected to remain in Turkey for fifteen days and concentrate on issues related to fiscal and monetary policies, banking sector reform and privatization. The next loan tranche (of US$ 1.15bn) is expected to be disbursed upon approval of the IMF board following the completion of the review (possibly in April). The government has to meet certain conditions before the board meeting takes place. Essential conditions to watch are the creation of an independent public procurement board and parliamentary approval of the Public Debt Management Law. A parliamentary sub-committee is working on the draft Public Debt Management Law. Furthermore, some administrative bodies must fulfill certain conditions. This includes the completion by the Privatization Administration of the public offering of POAS (oil distribution company) and appointment by the Banking Regulation and Supervision Agency of audit firms for thorough assessment of the banks' balance sheets to determine the need for capital increases. Considering where Turkey was last year at this time, there has been considerable progress in moving ahead with politically difficult measures. However, Turkey still has a substantial amount of work to do before victory can be proclaimed, especially in the areas of privatization, bringing inflation down, and attracting foreign investment.

Russia - External Debt Falling: There is good news from Russia - the Eastern European country's external debt burden is on the decline. The government announced that external debt payments in 2003 will be considerably lower than previously expected, in the range of $16.2bn, but possibly as low as US$ 15bn. The government reported a sharp fall in public external debt, which fell from $143 billion at year-end 2000 to US$ 130.1bn at end-2001. If the economy continues to grow and debt management targets remain on track, the Putin administration hopes to reduce external debt to $121-122bn by end-2002. The drop in external debt is due to active debt management, including debt restructuring and interest rates and/or exchange rates developments.