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Emerging Market Briefs

By Scott B. MacDonald

Cuba – Still the Iron Hand: In March and April 2003 while the world was focused the Iraq crisis, Fidel Castro, Cuba’s longstanding socialist caudillo, flexed his regime’s muscles and clamped down on local opposition groups. Although there has been speculation as to the creakiness of the Castro regime, the authoritarian Caribbean government demonstrated it was hardly down and out. In a well-planned roundup, close to 75 independent journalists, human rights activists and political opponents were arrested. Security forces charged the dissidents with conspiring with the chief of the United States Interest Section in Cuba, James Cason, and other U.S. diplomats to overthrow the government. The crackdown was given extra severity when three world-be hijackers apparently seeking to escape to the United States, were executed by security forces.

The message from the Castro regime is clear – Fidel Castro is still very much in command, has no intention to liberalize the island-state’s political life, and regards the United States as intent on intervening in Cuba’s affairs. While local opposition groups were clearly cowered by the security crackdown, the Castro regime was roundly criticized by much of the international community. One casualty of the crackdown was a pending agreement with the European Union (EU), which would have given Cuba preferential terms for its products in the EU market. The EU had sought to engage Cuba, even opening an office in Havana earlier in 2003. The EU approach was that Castro could be induced by mutually beneficial trade agreements and foreign investment to gradually open up Cuba’s political system. Following the crackdown, the EU quickly signaled there was no longer a deal on the table. The Cuban government was highly critical, in turn, of the EU. However, it is the Cuban people that ultimately suffer, especially considering the economy is in bad shape, having expanded by only 1.1% in 2002.

Dominican Republic – S&P Lowers the Boom: On May 15, 2003, Standard & Poor's put the Dominican Republic’s BB- on CreditWatch for a possible downgrade. The action was due to concerns over emerging problems at Banco Intercontinental (the third largest bank in the country), which could weaken political institutions and the external reserve position and reduce financial flexibility. Banco Intercontinental or BanInter has been a troubled institution for a while, but in April the central bank was forced to intervene after evidence of widespread fraud undermined plans to sell the bank. Matters became even more murky when on May 13, 2003 BanInter’s president was arrested and the government took over the bank’s companies. The government also confiscated the assets of its troubled bank’s major shareholders. S&P stated: “The ratings on the Dominican Republic are constrained by low international reserves, shallow domestic capital markets, and relatively weak institutions and social indicators. The ratings are supported by tax and social security reform programs and a low and favorably structured public sector debt burden. Should these attributes be undermined by the contingent liabilities posed by the financial sector, a downgrade to B+ would be likely.” We expect the government will scramble to resolve the problems related to BanInter, though there are concerns that the corruption around the bank could be deeper than currently anticipated.

Costa Rica – Outlook Less Sunny: Costa Rica has been one of the more positive examples that a small country can broaden its export base, upgrade its soft infrastructure (i.e. people and their skills), and attract considerable foreign direct investment. While Costa Rica benefited from this package of developmental strategy throughout much of the 1990s and into 2000, the slowdown in the U.S. economy has hurt. As the government has sought to step in and help buffer the slower pace of exports, the fiscal deficit has widened. In May, the IMF released its annual review of the Costa Rican economy. While giving the Central American country credit for a number of reforms, the IMF was critical about the widening fiscal deficit, which could end up being equal to 4% of GDP in 2003. In 2002, the fiscal deficit was 5.4% of GDP, a substantial number. This prompted the government to introduce a tax package and tighten public spending. The government’s fiscal deficit target is now set at 3.1% of GDP, which could be a little too optimistic. Shortly following the IMF release of the annual review, both Fitch and Standard & Poor's changed their outlooks for Costa Rica from stable to negative.

Hong Kong – Reaching the Heights of Unemployment: The last two years have not been kind to Hong Kong. Deflation has become a major factor hanging over the economy, SARS has hurt tourism and retail sales, and there is considerable discontent with the government. The government estimates that tourist arrivals declined 77% in April after the World Health Organization advised travelers to stay away from Hong Kong. Tourism accounts for 6% of the city’s GDP.

The most recent piece of bad news was that April’s unemployment rate rose to 7.8%, matching an all-time high. The main culprit was SARS, which kept consumers at home and drove away tourists. There have been around 8,000 cases of SARS worldwide, with the vast majority being in China, with Hong Kong having the second highest tally of cases. Expectations are that unemployment will most likely climb higher. HSBC and Standard Chartered Bank have recently cut their real GDP forecasts for 2003 down to 0.5%. This is a considerable slowdown from 2002, when the economy grew at 2.3%.

Jamaica – Problems Mount: In recent years Jamaica has sought to implement structural reforms to make its economy work better. However, 9/11, civic unrest and a number of natural disasters have hurt the economy. In response the government of Prime Minister P.J. Patterson has opted for fiscal stimulus to keep the economy moving. This has caused the country’s debt burden to climb. Jamaica’s debt expanded from 131% of GDP at the end of the previous fiscal year to 152% this year. In April the government advanced it budget, which included a J$13.8 billion ($246 million) tax package. Debt repayments will account for 65% of budget spending this year. Both S&P (B+) and Moody’s are negative on Jamaica’s outlook and in April the latter put the country’s Ba3 rating on review for a possible downgrade. Moody’s stated: “The review was prompted by Moody’s heightened concerns over the Jamaican authorities’ apparent lack of policy options to quickly correct the fiscal deterioration that has occurred over the last 18 months.” We believe Jamaica’s Ba3/B+ ratings will fall, probably to B1/B in the medium term as tourism remains weak, international commodity prices (bauxite and sugar being topical to the Caribbean country) will underperform, and eventually interest rates will go up (most likely in 2004). All of this bodes ill for Jamaica.


Singapore – Adjusted Growth for Q1 Up: The Singaporean economy expanded at a quicker pace than initially anticipated for the first quarter of 2003 as exports compensated for a decline in domestic demand. According to the Trade and Industry Ministry, real GDP for Q1 2003 was 1.1%, an upward revision from 0.7%. Unfortunately, the expectation is the Q2 2003 will not be as strong due to the negative impact of SARS on tourism and retail sales.

Uzbekistan – Call for Reform: At the close of the annual meeting for the European Bank for Reconstruction and Development (EBRD), that institution’s president, Jean Lemierre, took the bold stance of calling the host nation to adopt political and economic reforms. Without reforms, the Central Asian country could face cuts in the EBRD’s financial support in 2004. Lemierre did not mince words as he urged President Islam Karimov to make radical economic and political changes, in particular, the end of torture in Uzbekistan’s prisons. In March 2004, the EBRD board meets to discuss lending to Uzbekistan. If improvements are not made, the board will consider curtailing funding facilities for the Central Asian government. This has already been done in the cases of Belarus and Turkmenistan, where authoritarian governments have blatantly suppressed political freedoms.

Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editors: Dr. Jonathan Lemco, Director and Sr. Consultant and Robert Windorf, Senior Consultant

Associate Editor: Darin Feldman

Publisher: Keith W. Rabin, President

Web Design: Michael Feldman, Sr. Consultant

Contributing Writers to this Edition: Scott B. MacDonald, Jane Hughes, Marc Faber, Jonathan Lemco, Russell Smith, Andrew Thorson and Robert Windorf

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