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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.

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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