KWR INTERNATIONAL ADVISOR
2003 Volume 5 Edition 3
In this issue:
A Sustainable Bull Market?: Better to Carry an Umbrella
Scott B. MacDonald
March 2003 the U.S. stock market has enjoyed a remarkable run
despite continuing volatility. There is a lot of talk that we
are at the beginning of a new bull market. The argument is simple
the federal government is pumping in a massive amount of
money to stimulate the U.S. economy in the second half of 2003.
Responmding to incentives totaling $210 billion over 16 months,
tech sales are starting to show signs of life, housing starts
are strong, inventories are falling, and temporary employment
numbers are up -- despite high unemployment of 6.4% for June.
There is even the beginning of a new round of M&A in the tech
and banking sectors. The bottom line is many investors and fund
managers are starting to believe we have hit the turning point
and that this will sustain corporate profits, revive capital spending
and relieve the tiring consumer. At a recent private investor
conference there was even talk of real GDP growth of 3-4% for
In the U.S. corporate bond market this positive tone is playing
out in a more active new issue pipeline and generally tightening
spreads. Investment grade issuance has climbed over $250 billion.
Although it seems that spreads are tight -- and compared to 2002
they are -- on a historic basis spreads are still wide. There
is room for tightening if conditions merit it.
All of this positive sentiment is balanced by lingering problems
overcapacity in sectors including autos, airlines and pulp
& paper; geo-political risks such as terrorism, new problems
in the Middle East, North Korea, etc.; higher pension costs; litigation
costs involving asbestos and tobacco claims; and weak growth.
In some sectors, debt reduction remains a slow and painful process,
with little to show for corporate belt-tightening. Although the
case can be made for a stronger economic recovery in the months
ahead -- we see real GDP at 2.4% in 2003 and 2.7% in 2004 -- the
actual pick up in growth in a sustainable and dynamic fashion
is not here yet. We still have Q2 corporate earnings season
to get through and in some sectors, such as pulp & paper,
autos, airlines and chemicals, there could be ongoing pain related
to higher energy costs, overcapacity, and a lack of pricing power.
Although we do not see the U.S. economy falling into a deflationary
spiral, deflationary pressures are likely to remain.
Part of the deflationary pressure comes from Asia. China is a
major producer of low-cost goods in a vast array of sectors exported
around the world and Japan, the worlds second largest economy,
struggles to pull out of its deflationary mode. In addition, the
worlds third largest economy, Germany, is increasingly being
hit by deflationary pressures, which may push it toward another
recession. The rest of Europe is not doing terribly well either.
All of this puts more pressure on the United States to buy European
and Asian goods which contributes to a widening current
account balance of payments deficit something that is not
sustainable in the long-term.
We would love to believe that a bull market in equities is here
to stay and that the corporate bond market will easily sail on
toward much tighter spreads -- but we are not entirely convinced.
We expect that the second half of 2003 will be defined by a balance
between a moderate strengthening in real GDP growth and ongoing
doubts over whether the growth is sustainable. This in turn could
have a negative impact in the form of a correction
in the stock market. Consequently, the sun is out, but we still
see dark clouds on the horizon and remain happier carrying an
umbrella at the party.
Scott B. MacDonald
There is a whiff of tear gas in the air in Europe this summer.
Vocal and sometimes violent opposition against economic reform
is giving Europe a troubled image. Indeed, the Eurozone economy
is struggling to stay on the positive side of the growth picture,
especially as Germany, the major locomotive, is expected to
slip back into recession this year. Most recent economic forecasts
for the German economy call for a decline of 0.1%, which would
be the first annual contraction since 1993.
The outlook for economic growth in the Euro area is expected
to be an anemic 1%. At the same time, unemployment is rising.
In Germany it is shooting toward 11%, while Belgium has the
distinction of having the highest unemployment rate among Eurozone
countries at 11.6%. The average across the Eurozone is close
to 9%. At the same time, much of the Eurozones labor unions
are in a militant mood about their rights, with demands ranging
from shorter workweeks to pension benefits.
What is the problem with Europe? The Eurozone economy (excluding
the UK and Ireland) is in the process of some very painful changes.
The old system of state-dominated economies, protected labor
markets, and generous and extensive social nets paid by high
taxes is clearly in trouble. In a sense, many of the European
economies, like France and Germany, wanted to enjoy the benefits
of market forces such as stronger economic growth, while managing
the risk through less social upheaval and lower unemployment.
The recent roots of this system of managed risk economics came
at the end of World War II and were implemented to help stop
any drift toward Communism as well as to pull badly damaged
economies out of dire straits. Consequently, inflexible laws
concerning the firing of workers, unemployment compensation
and retirement benefits, became engrained in the system. Over
time they have become entitlements something that many
Europeans have come to expect.
That was then. This is now. Globalization and technology have
put the old system under acute pressure. Economies that are
more open to risk taking, such as the UK, Ireland and Netherlands,
were rewarded by the new world that opened up in the 1990s.
They have proven more flexible in adapting to change and the
more managed risk-adverse economies have had to move at a slower
pace. At the same time, demographics indicate an aging European
population. This raises the delicate question of how to pay
for generous benefits and early retirement, let alone the question
of how to sustain businesses by working fewer hours. Add to
this mix, a lack of domestic demand throughout much of the Eurozone
and a weakening in export performance due to the rise in the
value of the Euro.
Another factor facing the Euzozone economies is that the corporate
sector is in the process of deleveraging and restructuring.
This means short-term pain, but probably long-term gains. Generally
speaking, most companies are cutting capital spending and payroll
and pricing power is declining. Consequently, 2003 is not going
to be a year of economic recovery for many corporations in terms
of profitability. It is also indicates that Corporate Europe
is responding more aggressively to the globalization of world
Although we have our concerns about the Eurozone economy and
there are clearly deflationary pressures at work, we think the
slump will bottom out during the second half of 2003 and as
the U.S. economy regains momentum, the seeds for a moderately
stronger 2004 will be sown. Despite labor unrest in France,
Germany and other countries, economic reforms are gradually
making headway. Tax cuts should pass in Germany and some form
of compromise will be negotiated over pension plans in France
-- though not enough to make the problem go away. Moreover,
the European Central Bank has finally indicated that inflation
is no longer the main concern, but deflation and therefore they
are in an interest rate cutting mode. All the same, angst is
in the air in Europe over the state of the economy and there
will be ongoing worries that European governments have opted
for reform too late to deal with deflation. Europe is in for
a long hot summer.
Japan Feeling a Little Better?
months of bad feelings over the economy, it looks as though
things are improving to a point. The Bank of Japans
most recent quarterly Tankan report showed that business sentiment
has almost made it to positive territory. On the day of the
announcement, the Nikkei 225 stock index rose 2.2% to 9,278,
a nine month high and things have continued to improve, with
it now approaching 10,000. The improvement in business sentiment
comes as disruptions from SARS and the war in Iraq fade, while
oil prices are gradually falling and stock prices have enjoyed
a two-month rally. The U.S. economy is also gradually getting
better, which helps the outlook for exporters such as Toyota,
Honda Motor, and Matsushita Electric. Reflecting the Tankan,
a number of manufacturers have raised their pre-tax profit forecasts
for the fiscal year that began in April.
Part of Corporate Japans cautiously improving sentiment
comes from the fact that companies have been active cutting
costs. Yet, there are also indications that sales will be up
in the second half of the year, part of which will come from
overseas. This, in turn, is helping to push an increase in capital
Although the Japanese economy is showing a stronger staying
power than earlier thought, the recovery is far
from dynamic and the banking sector remains a concern. Exports
remain the hope of achieving 1% GDP growth for the year, especially
as domestic sales remain sluggish. The job market is hardly
reassuring, with unemployment hovering above 5%. The Japanese
consumer also faces falling incomes hurt by ongoing deflationary
pressures and higher taxes. On top of this government finances
are in bad shape the fiscal deficit will easily top 7%
of GDP this year and public sector debt to GDP is the highest
among G-7 economies. Yet, the situation is perhaps not as dire
as initially thought. Revised figures for GDP in Q1 2003 show
that it grew at an annual rate of 0.6%, rather than stagnating.
And Japan still maintains a massive current account surplus.
It actually widened by 2% in April, to $111.7 billion, equal
to 2% of GDP. This compares favorably to the U.S. which is expected
to run a 5% deficit.
One consequence of the uptick in business sentiment is the recent
decline in the Japanese Government Bond (JGB). With hopes of
a better economy and less deflation, many Japanese investors
have opted to put their funds into equity markets, fueling an
upward swing in the Nikkei. The recent volatility in JGBs has
also helped make U.S. and European bonds more attractive. The
top four Japanese life insurance companies increased their holdings
of foreign bonds by more than Y2 trillion to Y10 trillion at
the end of March over the same period a year earlier. Does all
of this portend a major crisis for JGBs? Although it is easy
to point to the Nikkei and say that good times are here
considerable deflationary pressures remain that will drive investors
back to JGBs. Moreover, 95% of the $4.7 trillion in JGBs are
held by Japanese investors many of who will maintain
a position, unlike more fickle foreign investors.
All of this has important political consequences for Prime Minister
Koizumi. He has an upcoming LDP party leadership convention
in September, in which his more conservative rivals will seek
to either displace him which is not likely -- or to cut
into his influence by attacking Economy Minister/chief financial
regulator Heizo Takenaka, whose tough decisions on Resona Bank
angered party conservatives. With the recent Tankan report and
indications that industrial production and exports grew over
the last two months, Koizumi goes to the LDP convention in September
with a much stronger hand than he has had in months. This gives
us hope about reform. If nothing else, it helps Koizumi keep
Takenaka in the drivers seat on the economy and bank reform.
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The Thai Prime Ministers battles against drugs, crime
accusations have been laid upon Thai Prime Minister Thaksin
Shinawatra by his detractors that he has dictatorial
leanings, that he is prone to nationalistic rhetoric, that he
continues to pander to his own business interests even
his staunchest critics are forced to admit he is a man of results.
Under his tenure the Thai economy grew over 5 percent last year,
by far its best performance since the 1997 economic crisis,
and despite the damage wrought to the crucial tourism industry
by Severe Acute Respiratory Syndrome (SARS) and renewed terrorism
fears, it is poised to exceed 6 percent growth in 2003.
More importantly, in the eyes of a jaded electorate, he has
fulfilled the main pledges he made in the run up to his election
in 2001: a 30 baht (US$0.70) per hospital visit medical scheme,
a 1 million baht (US$23,000) fund for each of the countrys
villages and a moratorium on farmers loan repayments have
all been instituted during his time in office. The government
is now in the midst of an effort to supply low-cost computers
to a wide segment of the population and also has plans to build
state-subsidized housing for Bangkoks low-income earners.
All carefully orchestrated PR moves, say the Prime Ministers
critics. But for a man said to be almost morbidly concerned
with his image, Thaksin has proved surprisingly willing to court
controversy in other areas; most notably when it comes to human
rights issues. His war on drugs, a February to April
crackdown designed to purge the country of yaba
(methamphetamine) users, resulted in 2,200 deaths. While the
government insists most of these deaths resulted from frightened
drug dealers turning on each other, human rights monitors insist
the police were responsible for the vast majority of the killings.
The Bangkok-based Asian Forum for Human Rights and Development
said the muted atmosphere surrounding the fatalities showed
the government was bypassing human rights and the rule
Thaksin and leading members of his Thai Rak Thai party have
insisted tough measures were needed to deal with what was becoming
an epidemic. One in 17 Thais over 15 is addicted to methamphetamine,
according to some estimates, and the United Nations ranks Thailand
as the largest consumer of the drug in the world. In the eyes
of the government, the ends of the drug war nearly 20,000
dealers arrested, 280,000 addicts in custody or rehabilitation
programs, and a tripling in the street price of yaba, according
to the countrys Narcotics Control Board more than
justify the means.
It would seem the public agrees. Recent polls show support for
Thaksin and the ruling party at 54 percent, far higher than
the 14 percent registered by the countrys opposition,
the Democrats. Most political analysts now see the current government
not only completing its four-year term in office which
would make it the first of any government in Thailand to do
so but winning another term when general elections are
held in two years time.
Thaksin himself is obviously confident enough to set the stage
for a showdown with another, and far more insidious, problem
than drugs: corruption. The government is in the final stages
of compiling a list of over 2,700 criminal figures, army and
police officers, contractors and opinion leaders who will be
targeted in the governments forthcoming war on dark
influence. Thaksin claims this will strike at the very
heart of the nepotism and shady business dealings that have
plagued Thailand for so long. While the aim is to give the figures
on the list a chance to rehabilitate, rather than to detain
or eliminate them, the Prime Minister is once again promising
results as concrete as those that emerged from the battle against
Yet this time around, even the dynamic Thaksin may have overstepped
his bounds. Government spokesman Sita Divari told reporters
on July 1 that provincial governors and police officers responsible
for compiling the list had not proven fully cooperative. This
is unsurprising as few are inclined to implicate their own friends
or associates. The criteria used in drawing up the list has
also been called into question. It has yet to be fully disclosed
and inside sources claim it includes no one within the current
government, and the head of the campaign, General Chavalit Yongchaiyudh,
has himself been implicated in a number of scandals.
While foreign investors and firms operating in Thailand would
no doubt welcome any efforts to stamp out corruption in the
country, the vast majority of their most common complaints
bureaucratic inefficiency, ambiguous legislation and a lack
of coordination among government departments dealing with large-scale
business ventures have less to do with underground crime
lords than the realm of officialdom itself. As Thaksins
current war looks set to leave the mechanisms of government
unscathed, it is unlikely to make Thailand a significantly more
attractive place to do business.
Indeed, while he has little trouble gaining the approval of
his own people, Thaksin has proven far less adept at winning
international hearts and minds. His decision to turn down a
visit by the United Nations High Commissioner for Human Rights
at the height of the drug campaign and a current dispute with
the United Nations High Commissioner for Refugees Thaksin
claims the agency has violated Thailands sovereignty by
granting refugee status to Burmese exiles in Thailand without
consulting the Thai government have once again put his
apparent lack of concern for human rights issues in the spotlight.
Few would deny that the Prime Ministers first duty is
to his people. But he would do well to remember that much of
Thailands prosperity in recent years has been a direct
result of the countrys status as one of Asias most
stable democracies and a haven of political and economic freedom
in a troubled region. In pitting his government against multilateral
agencies such as the UN, Thaksin may find himself mired in the
first war he cannot win.
The Long March Back to Investment Grade?
Scott B. MacDonald
Before the 1997-98 Asian financial crisis Indonesia was rated
Baa3/BBB. It was regarded as a stable investment grade credit,
based on the countrys relative political stability,
strong export base, and competent fiscal management. The Asian
financial crisis, however, left Indonesia in a state of shock.
Political stability was shown to be fleeting as the longstanding
Suharto regime fell and successor governments wrestled with
new democratic procedures and institutions. Political Islam
rediscovered its voice. Long dormant regional loyalties resurfaced
to challenge Jakartas central power. And, the economy
took a sharp downward plunge that has taken several years
to recover. Indonesias sovereign ratings reflected this
descent, falling to B3/CCC+. Although tough challenges remain,
Indonesia is turning the corner and the long climb back to
investment grade has begun. On May 21, Standard & Poor's
recognized this and upgraded Indonesia to B-, with a stable
outlook. In June, Moodys put Indonesias B3 ratings
on review for an upgrade.
How has Indonesias progress been marked? Consider the
was down to 9% in 2002. Since year-end 2003, it has fallen
further to 7.54% in April. If the government maintains a
tight monetary policy, inflation could fall below 9% in
budget deficit has been reduced from 6% of GDP in 1998 to
1.8% in 2003 and less than 1% is projected for 2004.
burden of Indonesias public debt (which is half domestic
and half foreign) as a percentage of GDP will fall below
70% of GDP by year-end 2003.
ongoing political and social unrest on a number of fronts, the
democratic experiment continues. Since the fall of Suharto in
1997, the country has seen three different civilian leaders,
all assuming office by constitutional means and supported by
a result of these improving prospects Indonesias ability
to return to the international bond market for financing have
improved. Indeed, Indonesia's finance ministry at the end
of April announced it may issue international bonds next year
for the first time since the 1997-98 Asian crisis as part
of an effort to end its reliance on the International Monetary
Fund. "We are studying possibilities to issue international
bonds," Finance Minister Boediono was quoted as saying
by Dow Jones Newswire. The country wants to end its IMF program
at the end of this year. Without an IMF economic reform program
in place, the country's international creditors are unlikely
to agree to further debt restructuring.
Indonesia will need to refinance about US$3 billion in debt
coming due next year through a combination of international
and local bonds if it ends the IMF program.
Yet, Indonesia faces a number of challenges, which have the
potential to slow ratings upgrades. These include:
tourist sector is still in difficulty. Islamic radicalism
and terrorism as well as SARS, is putting a dent into tourism.
In 2002, tourism earned the country $4.3 billion from 5.03
million tourists, 20% down from 2001. Bali is still suffering
from the bombing.
prices vulnerability: as long as oil prices do not drop
significantly the financing gap is manageable.
Institutional weakness: The process of democratization is
hardly over and the countrys political institutions
remain weak. Corruption remains a problem. The central governments
authority is being challenged by new regional governments,
which have recently been given greater autonomy as part
of the decentralization process. As S&P noted: Indonesias
institutional weaknesses can often hinder policy coordination
and could undermine a timely response to political and external
to the weakness of central authority is the ongoing problem
of separatist movements in Aceh and Irian Jaya. In 2003,
negotiations between the local independence movement, the
GAM, and the government broke down. Clearly Acehese aspirations
for an independent country carved out of northern Sumatra
have little appeal in Jakarta, which has already felt the
loss of East Timor and is threatened by separatist groups
in Irian Jaya. Although the war is popular in Indonesia
and is helping Megawati in opinion polls, the conflict does
have a cost both on the fiscal side and in terms
of Indonesias image as a place to invest.
is a pivotal year elections and debt coming due.
positive relations with the IMF and other donors. There
is growing political pressure on the government to end the
IMF program by year-end 2003. President Megawati would stand
a greater chance of reelection if she can demonstrate that
her administration has made progress on the economic front
and regained independence vis-à-vis outside influences.
has some tough challenges ahead. Moving back to an investment
grade rating will be a multi-year process, with ongoing concerns
over policy slippage, terrorist threats and potentially volatile
international market conditions. In the short-term, the focus
on the war in Aceh could obscure ongoing efforts to reform the
economy even past August 2003 when parliament ends and
electoral politics come into play. Along these lines, it is
encouraging that the government went ahead in June 2003 with
the privatization of PT Bank Mandiri, which was heavily oversubscribed.
Following that success, the Indonesian Bank Restructuring Agency
(IBRA) signaled that it was moving ahead with the sale of about
20 percent of PT Bank Danamon and PT Bank Niaga. Indonesia remains
a pivotal country on many fronts. Sustained economic reform
and growth could be a major positive for its large population
as well as the rest of Asia. Reflecting this, the long path
back to investment grade will be closely watched by investors.
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Eyes World's Energy Markets
The Russian government has moved to adopt a strategy through
2020 to "position itself" as a leader in the world's
energy markets. Yet with a looming flood of Iraqi oil this
strategy may soon undergo a re-think.
In May, the Russian government approved the country's energy
strategy. According to the draft, by 2020 Russia is to pump
450-520 million tons of crude oil and 700 billion cubic
meters of gas per year. With domestic demand stable, the
bulk of the surplus is destined for exports. In 2002, Russia
pumped 379 million tons of crude, 9 percent up compared
However, the energy strategy draft, which has been debated
for the more than a year, now seems to be set for a major
re-write. Until late last year, Russian energy strategy
aimed at taking over from Saudi Arabia as the main oil provider
to the US. At their May 24, 2002 summit in Moscow, United
States President George W. Bush and Russian President Vladimir
Putin signed a joint declaration on energy cooperation.
At the "energy summit" between in Houston in October
2002, Russian and American officials signaled readiness
to boost Russian oil supplies to the US. Russian executives
told the Houston summit that Russia could export as much
as one million barrels a day to the US within five years.
Notably, in October 2002 Russia's state-owned Rosneft oil
company and the US firm Marathon Oil Corporation announced
a decision to participate jointly in Urals North American
Marketing (UNAM), a project to supply oil from the Urals
region in Russia to North America. Actual supply under this
project was due to begin in the third quarter of 2003, but
now it's far from certain whether this plan may materialize.
In the wake of the war on Iraq, which Russia had strongly
opposed, plans of Russian oil supplies to the US look increasingly
unrealistic. Moreover, in the wake of Iraq war a potential
conflict between Russian and US oil firms is brewing. US
officials have warned that Russian companies had little
hope of fulfilling contracts to develop Iraq's oil reserves
because of Russia's opposition to the US-led war.
LUKoil has threatened to seek a court injunction from an
international tribunal in Geneva to block any attempts to
develop the field and to seize all Iraqi crude if the country's
postwar administration allows West Qurna development. LUKoil
signed a contract in 1997 to develop the oilfield and pledged
to invest some four billion dollars by 2020. Now LUKoil
insists it still owns the right to develop the oilfield.
Meanwhile, the consolidation of the Russian oil industry
is widely seen as a sign of the country's growing competitiveness
in the global economy. YUKOS-Sibneft's $15-billion merger,
that created the world's fourth-largest private hydrocarbons
producer with a market capitalization of $35 billion, gave
Russia a strategic player in the global oil industry which
will give its businesses greater clout worldwide.
On the other hand, the Russian oil sector needs stable and
predictable crude prices. Moscow is wary that with a possible
flood of Iraqi oil, Russian Urals crude could become less
competitive and much cheaper.
After meeting OPEC president Adbullah al-Attiyah's in Moscow
last May, Russian Energy Minister Igor Yusufov said that
Russia was prepared to join other oil-producing nations
in cutting back exports if prices dropped too low. He did
not name that low price level, saying only that Russia favors
a range of $20 to $25 per barrel. In the past, Russia has
twice promised to cut its exports to help OPEC support oil
prices, but rarely sticks with its pledges.
Al-Attiyah, also Qatar's oil minister, said OPEC wants Russia
to be a full member of OPEC. Yusufov said: "Russia's
accession to the OPEC is a matter for negotiations,"
indicating that Russia would remain a non-OPEC producer.
However, Russia accepted OPEC's invitation to attend its
meeting June 11 in Qatar as an observer.
Founded in 1960 in Baghdad, Iraq, OPEC aims at coordinating
and unifying petroleum policies among member countries,
in order to secure stable prices for petroleum producers.
OPEC's 11 members collectively supply 40 percent of the
world's oil output, and posses more than three-quarters
of the global proven crude reserves.
OPEC's members are Algeria, Indonesia, Iran, Iraq, Kuwait,
Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates
and Venezuela. Since the end of the US-led war in Iraq,
there has been speculation that the country would leave
OPEC. Subsequent oversupply and a sharp drop in oil prices
would be detrimental to the Russian economy as the state
budget was heavily funded by revenue from the commodity.
A sustained period of high oil prices provided the cash:
the government's budget went into surplus in March 2000
-- and has stayed there -- while oil companies' investment
capital quickly trickled down to the rest of the economy,
throwing fuel on the consumer-spending fire.
Hence, 2003 may become Russia's fifth consecutive year of
growth, fourth of budget surpluses and third of early debt
payments to international creditors. The economy remains
in the midst of a bull run.
However, in his address to the nation earlier this year,
President Vladimir Putin acknowledged that most of Russia's
good fortune over the last five years has been "due
to external circumstances." He also says that the "pace
of reform is too slow," and challenged the government
to find ways to double the size of the economy by 2010,
which would require average annual growth of about 8 percent.
It is understood that if crude oil prices permanently fall
to $10; the global economy quickly recovers and interest
rates rise again; and the euro plunges against the dollar,
Russia's high inflation rate and strong ruble may become
economic problems. In this scenario where all these things
happened at once, Russia may face serious problems, although
they are unlikely to be as bad as in 1998. With a backdrop
of the economy's strong performance over the last five years,
the consensus is that the Russian economy is relatively
safe, at least for a few years.
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- Riding the Wave
Scott B. MacDonald
Bulgaria has recently been hot on the credit ratings front.
At the beginning of 2003, the Balkan country was rated
B1/BB. In the late 1990s, Bulgaria struggled and came
close to defaulting on its external debt. After several
years of structural reform and sacrifice by the Bulgarian
population as well as the looming probability of EU membership,
Bulgaria is now heading toward an investment grade rating.
This was underscored in late May and early June, when
Moodys upgraded the Balkan country from B1 to Ba2,
a two-notch increase, and Standard & Poor's raised
it from BB to BB+. The key reasons for the upgrades are
reduction in Bulgarias general government debt
burden from 80% of GDP in 2000 to around 60% in 2002,
with further projections of falling debt. Along with
this the government is benefiting from improved liquidity.
government has greater credibility for its fiscal policy,
reducing the fiscal deficit to a little under 2% in
2002, though it is expected there will be moderate increases
increases in productivity and competitiveness have added
government is making progress, albeit slower than initially
expected, in initiating structural reforms. These reforms
entail such things as accelerating the implementation
of the National Revenue Agency (NRA), broadening the
coverage of the large taxpayer office, improving arrears
collection, and changing the labor code to promote flexible
forms of employment and reduce hiring and dismissal
Bulgaria has made considerable progress since the late
1990s, tough challenges remain, which could constrain
the movement to investment grade. Key areas that need
improvement are privatization, corporate governance, an
inefficient energy sector, and deficiencies in property
law and contract enforcement. In addition, the long process
of economic reform has been painful and popular discontent
has been growing. As an IMF report earlier in the year
the increased political pressure stemming
from still-low standards of living and the declining popularity
of the government have exacerbated demands for higher
public spending and slowed the momentum on reforms.
A critical upcoming test for the government will be the
sale of the MobilTel, the countrys wireless operator.
It was acquired 15 months ago by an Austrian consortium
for Euro 850 million. It is expected the valuation will
be around Euro 1.5 billion. The Austrian consortium brought
in a management team from Vodafone, Libertel, Teleglobe
and Ameritech and have made it a stronger company. MobilTels
main selling point is that Bulgaria is still a growth
market in terms of wireless penetration. It is around
28%, compared to 83% in the Czech Republic and 68% in
Hungary. While this is not an issue of privatization of
a public holding, the sale of a majority share to other
major telecom companies represents whether Bulgaria has
the ability to keep attracting foreign direct investment.
Bulgarias move toward an investment grade rating
is ultimately anchored in how the government is to weave
a much closer linkage with the West. In this, Bulgaria
has had a solid track record. It has been invited to join
NATO and the European Union has endorsed the countrys
plans for accession in 2007. EU membership means that
Bulgaria must continue to reform its economy in terms
of competitiveness, openness and corporate governance.
Failure to make the grade with the EU will hinder membership.
Bulgaria and other Eastern European countries clearly
do not wish to be left out. One last link to the West
is that Bulgaria has emerged as a close U.S. ally, providing
bases for U.S. troops and equipment during the Iraq war.
There is a growing possibility that the U.S. could make
Bulgaria one of its new bases of operations for missions
in the Eurasian landmass.
Bulgaria is gradually climbing toward investment grade.
Tough challenges remain, but there is a lot at stake for
the country in terms of improving the standard of living,
the nations industrial and communications infrastructures
and the ability of Bulgarian companies to compete. Although
we do not expect it to achieve an investment grade rating
in 2003, if the reform process continues, we believe that
would be a possibility in mid or late 2004.
Argentina: Have We Reached The Bottom Yet?
For the past two years, Argentinas economy has
been mired in a deep recession/depression. One of Latin
Americas few economic success stories of the 20th
century, the nation had experienced a tremendous economic
meltdown that resulted in over half the population,
including large numbers of the formerly middle class,
relegated to the ranks of the poor. The reasons for
this disaster are related to political mismanagement,
bureaucratic inertia and corruption, inefficient industry,
and bad luck. But amidst all of the gloom, there are
some signs that the worst may finally be over.
Historically, the greatest economic fear of Argentines
is that inflation will return. Many analysts predicted
that inflation would surge following the 2002 financial
collapse. But as of June 2003, inflation seems to be
well behaved. In fact, consumer prices have actually
fallen of late, as the Argentine public is willing to
hold the local currency. Inflation is unlikely to exceed
10-12% in 2003, and may actually end in single digits,
especially if utility prices are not increased.
Also industrial production is way up in the past three
months and supply-side indicators and consumer and business
confidence are improving. There is decent GDP growth
as well, after 17 straight quarters of contraction.
In the current quarter, Gross Domestic Product growth
is 5.4% yoy, up 2.4% from the previous quarter. The
currency devaluation has revived local industry and
growing consumer confidence has bolstered spending.
The IMF expects the economy, which shrank 11% last year,
to grow 4% in 2003.
The fiscal situation is not as dire as it was three
months ago either. In fact, fiscal policies at both
the Federal and the Provincial levels reflect similar
trends toward primary surpluses. Many analysts think
the Kirchner administration has a good chance of achieving
a primary fiscal balance that would surpass the IMF
target of 2.1% of GDP for 2003. That is a very positive
The external sector has improved as well. A huge trade
surplus has resulted from a virtual collapse in imports
during 2002. Export growth has been negligible and has
been driven by higher commodity export prices. But exporters
are slowly gaining access to bank credit. Equally important,
Argentinas relations with its multilateral creditors
are improving, although serious problems remain -notably
the effort to restructure external debt. The government
wants to move rapidly in this area, but we expect actual
progress to be slow. Of the estimated US$160 billion
in public sector debt, US$63.66 billion may be subject
Argentina has a newly elected President, Nelson Kirchner,
whose policies are likely to be moderate and fiscally
prudent. Many political observers believe that he will
emulate the market-friendly policies (thus far) of President
Lula in Brazil and President Lagos in Chile. The current
economic team in place is experienced. That said, President
Kirchners priorities must begin with accelerating
negotiations with the International Monetary Fund on
a new medium-term arrangement. Argentina has to pay
the IMF US$3 billion on September 9. We expect IMF negotiations
to be very challenging, given where they fall during
the electoral cycle. Other significant issues include
banking sector restructuring and utility price adjustments.
We expect much attention will be devoted to the creation
of an enlarged public works program as well, for the
government argues this will play a key role in producing
an economic recovery that reduces unemployment and poverty,
led by a strong and efficient public sector. We think
that government policy is leaning towards emphasizing
government spending on infrastructure, and on consumption,
as opposed to private investment. In the short run,
this might be wise policy, particularly since the government
needs to build support for its programs as the cycle
of provincial and congressional elections conclude in
the fourth quarter. But we would be very concerned if
priming the pump continues into 2004, for
then it would do real damage to the business environment.
Other concerns include the health of the banking system.
It is very liquid, but many questions remain about its
solvency. In addition, access to credit and especially
to the global capital markets will remain problematic
for some time to come. Argentina will have to do much
to restore investor confidence. However, a satisfactory
agreement with the IMF on restructuring its debt will
be a major step in the right direction. On balance,
we remain extremely cautious but we are impressed with
the progress that Argentinas government has made
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Securities Valuation by Foreign Banks: What Do Bank Regulators
Joseph Blalock, Senior Consultant
Editors Introduction: Regulatory supervision of banks
around the world has evolved dramatically over the past
10-15 years. Rather than the static, audit-type oversight
practiced years ago, todays bank supervisors in the
U.S. and other countries are forward-looking, focused primarily
on a bank's ability to identify, evaluate, and manage risk
throughout their activities. And rather than intermittent
contact with regulated institutions, todays supervisors
are increasingly engaged in ongoing dialogue with them,
moving toward a model that is sometimes called continuous
Internationally, supervisory standards themselves have been
raised and made more consistent worldwide due importantly
to best practices work by the BIS-sponsored
intergovernmental Basel Committee on Banking Supervision.
Its also true that intensified bank supervision is
partly a product of notorious cases in the 1990s of inadequate
or evaded supervision think of BCCI,
Daiwa Bank in New York, certain Asian and Russian banking
problems a few years ago, and numerous money-laundering
For foreign banks operating in the U.S., the bottom line
now is that they need to make a proactive, focused effort
to understand what U.S. supervisors expect of them, and
why whether it be sufficient technical expertise
in handling credit and market risk; a fully effective system
of internal controls; or robust corporate governance throughout
their organization. Their ability to build sound regulatory
relations, through solid performance that wins the trust
and confidence of supervisors, can now be one of their greatest
As a case in point, the following article, based on the
first-hand experiences of a bank consultant, examines the
regulatory/supervisory dimensions for foreign banks in properly
pricing non-U.S. securities held in their portfolios.
As part of prudent management and maintaining their profitability,
banks must be able at all times to determine the current
market value of securities they hold. Market prices on recent
trades are typically the best indicators, but many factors
can alter securities values over time, including fluctuations
in the general level of interest rates, changed perceptions
of the quality of businesses in specific industries or regions,
and the changing creditworthiness of the securities issuer.
Additionally, market liquidity is an important consideration,
since a bank may have to sell some portion of its securities
or loans to meet liabilities or other commitments. Since
banks typically hold securities ranging from liquid, high-grade
government and corporate paper to less liquid, unrated debt,
bank regulators are naturally very interested in how well
banks monitor and manage the quality of their securities
and credit portfolios.
Many foreign banks and banking offices operating in the
US are in the unusual position of holding obligations of
home-country issuers that do not otherwise have a significant
financial presence in the US. If they buy bonds or instruments
such as a share of a loan syndication for a home country
customer, the foreign bank must demonstrate to US regulators
that it has the capability to verify the pricing of corporate
debt and credit-related instruments of these home-country
Among the illiquid and unusual financial instruments referred
to are corporate and convertible bonds, and other credit-linked
notes and derivatives. These instruments might be US dollar-denominated,
but trade infrequently on US debt markets. Therefore, pricing
information may be unavailable from standard services such
as Bloomberg; and even if available, this information may
be unreliable and/or volatile if the instruments are thinly
To maintain adequate information, the foreign bank would
typically have to augment market trade information with
dealer quotations and indicated prices of these
and similar securities. Indicated prices are approximations
of what securities dealers expect market prices may be,
but are not necessarily a firm price to buy or sell that
It is not uncommon for US regulators to scrutinize closely
how a foreign bank evaluates both the pricing of obligations
and their overall risk to counterparties that are clients,
or affiliates of clients, of the head office. Two key areas
of US regulatory concern include the foreign banks
internal controls related to pricing securities in general,
and pricing of securities and other capital markets exposures
of institutions that are also major loan clients of the
In anticipating this concern, the bank if it relies
on updated dealer quotes for repricing should have
information from multiple dealers. This is especially true
if the bank would otherwise be relying solely on quotes
from the dealer from whom the banks purchased the security,
since that dealer may be perceived as having a conflict
of interest regarding securities it has underwritten or
sold in the past. Nor should the pricing information come
from the issuer. Regulators prefer there be at least three
independent sources of prices, if possible. If it is not
possible for the bank to reliably obtain prices using dealer
quotes or a market data service provider, the bank may want
to use a financial model, which, if properly documented
and validated, can prove acceptable to regulators. (This
model should be based upon the appropriate market interest
rate or other underlying index for the security plus historical
factors such as yield curve spreads to support the models
estimate proxies for market prices.) If the foreign bank
is simply not able to periodically reprice certain unusual
securities due to lack of information, then the voluntary
establishment of a valuation reserve may be considered a
prudent move by the regulator.
Whatever pricing regimen the bank chooses, another major
control issue is that assumptions must be verified independently
by the risk management or internal audit departments. Regulators
expect to see there is a clear separation between the lines
of business that trade in securities and those that do accounting
or subsequent valuation. The internal third party should
also be sufficiently familiar with these financial instruments
to undertake the pricing verification, and, if necessary,
to challenge assumptions about the prices paid. For example,
the independent party should be able to understand the initial
trading or hedging strategy and report to senior management
as to whether these trades were done at market
and, subsequently, whether the assumptions underlying the
trades are still valid.
When purchasing securities from head office clients, and
when evaluating whether to continue holding such positions,
the US-based foreign bank should maintain documentation
as to why they are holding these particular securities and
how the securities fit within the US banks risk and
return objectives. Regulators look for assurances the US
arm of the foreign bank is not buying securities of a head
office client without undertaking adequate due diligence
at the time of the initial transaction or initiating follow-up
price monitoring to measure and manage risk exposure.
An issue of emerging regulatory, investor, and ratings agency
concern is how financial institutions monitor concentrations
of credit risk. The credit exposure of bonds, convertibles,
and other credit-linked notes comprise part of the banks
overall risk exposure to a client, with remaining exposure
stemming from lending and trade credit instruments to the
same client, as well as the replacement cost of relevant
market derivatives. Foreign bank offices in the US are often
unable to manage locally their entire exposure to particular
corporate clients, or to groups of affiliated clients (names,
in regulatory parlance), because their head office organizations
control the global management of credit concentrations.
However, the US-based entity should be able to demonstrate
to its US regulators that it monitors its own total exposures
to particular names so as not to have an excessive
concentration within its US operations. The US-based bank
would also want to demonstrate to its regulators that it
effectively communicates with its head office in a timely
manner about any increases and curtailments in overall exposure
to the consolidated firm.
Since corporate debt increasingly takes the form of capital
markets instruments, US regulators and many other interested
parties such as auditors, ratings agencies, and correspondent
parties are keenly interested in how well banking
institutions are monitoring and measuring the value and
extent of overall credit risk.
Foreign banks operating in the U.S. thus need to give full
weight to understanding and dealing with these concerns,
and should position themselves proactively to deal with
Economic Relations: Still Important?
President Roh Moo-hyuns May visit to Washington produced
limited results on economic issues. A joint statement was signed,
which committed both governments to renew support for expanded
trade and investment ties; however, no formal commitment was made
by either country to do anything specific on economic issues,
such as completing a bilateral investment treaty (BIT) or negotiating
a free trade agreement (FTA). Upon his return from Washington,
Deputy Prime Minister and Minister of Finance and Economy Kim
Jin-pyo was reported as saying that the time has come for the
two countries to complete a BIT. This would be a positive step
forward; however, it may prove difficult to enact because rescinding
the screen quota is a politically sensitive issue in Korea, just
as protecting the domestic steel industry is here in the United
States. President Roh currently has his hands full in trying to
quell labor strife, mediate between North Korea and the United
States, and get the economy back on track. Maintaining strong
bilateral economic relations also remains a priority.
Lingering Disputes Need Resolutions
The United States and Korea continue to enjoy a very fruitful
trade and investment relationship. According to industry statistics,
the United States remains Koreas single largest trading
partner and second largest source of investment. Two-way trade
totaled nearly $24 billion in the first five months of the year,
according to the Korea International Trade Association (KITA).
But new trends have emerged, which continue to influence the direction
of Koreas foreign economic policy. China, including Hong
Kong, is now Koreas largest export destination and Japan
its largest source of imports. China is also Koreas primary
destination for investment. President Roh recently held a summit
with Japans Prime Minister Koizumi in which the two leaders
discussed expanding economic ties. Roh will meet next week with
Chinas leader to possibly do the same.
Upon President Rohs entry into office, he committed to broad
economic reforms, an encouraging sign to U.S. companies seeking
to expand their business ties with Korea. But some companies now
argue that the government is slow to fulfill these commitments,
and they also remain frustrated with the lack of progress in resolving
disputes in areas such as automobiles, pharmaceuticals, telecommunications,
and intellectual property rights. Of particular concern are sectors
such as agriculture, and the motion picture screen quota.
In its annual report to Congress on foreign trade barriers, the
Office of the U.S. Trade Representative (USTR) also suggests that
very little progress has been made to resolve other issues such
as the auto trade imbalance. The deal completed last year by GM
to acquire Daewoo and Hyundai Motor Companys announcement
that it will set up a plant in Alabama are positive steps to improve
overall bilateral trade relations. However, these efforts have
done little to improve business conditions for foreign auto producers
that are seeking to enter Korea. The U.S. government has therefore
urged that Korea reduce its 8 percent tariff and streamline the
special auto consumption tax. Although the ROK government has
indicated a willingness to consider the latter, it will not reduce
any tariff in negotiations outside of those sanctioned by the
World Trade Organization (WTO).
The U.S. government and pharmaceutical advocates like PhRMA continue
to complain that doing business in Korea is difficult, in large
part because of inequitable pricing policy for foreign producers.
Companies have been most concerned in the past year about efforts
by the Ministry of Health and Welfare to resolve the health care
crisis by changing the regulations under which foreign drugs are
reimbursed under the national insurance system.
For the moment, U.S. companies remain optimistic about President
Rohs engagement with the business community; however, this
optimism is not likely to prove sustainable unless substantive
progress is achieved on a range of important trade issues. Pharmaceutical
producers, for example, are hopeful progress will soon be made
to create an equitable reimbursement pricing policy in the bilateral
health-care reform working group. Companies are seeking more intellectual
property rights protection. The Motion Picture Association criticizes
the increase in film piracy due to the limited power of the Media
Review Board to verify movie copyrights. The U.S. government is
concerned about a proposal by the Korean government to mandate
one wireless telecommunications standard, called the wireless
internet platform for interoperability (WIPI). However, attention
to this issue has lessened in recent months in part because Sun
Microsystems will be involved in the development of WIPI.
Bilateral trade disputes relate not only to doing business
in Korea but also to doing business in the United States.
Since 1998, Korean steel producers have been subject to many countervailing
and antidumping duties and three safeguard actionsa number
of which Korea has challenged in the WTO on procedural grounds
and won. Politics has factored heavily into disputes associated
with Korean companies doing business in the United States, especially
relating to the steel and semiconductor industries. A case in
point involves an ongoing investigation by the U.S. government
into whether the Korean government has subsidized Hynix Semiconductor.
In 2001, Idaho-based Micron Technology alleged that Hynix was
subsidized because the Korea Development Bank (partially government-owned)
coordinated a scheme for underwriting the refinancing of its maturing
bonds. The issue caught the attention of Idahos two Senators
Craig and Crapo, who pressed the U.S. government to raise its
concerns at the WTO. WTO action by the United States never went
beyond the initial phase because Micron announced soon it would
purchase Hynix. That deal fell through in mid-2002, and in November
Micron filed a petition seeking a countervailing duty investigation
of Hynix. The Commerce Department recently made a final decision
in the case, recommending that duties be imposed on imports produced
by Hynix to offset the estimated 45% subsidy rate. The U.S. International
Trade Commission (ITC) will make its own decision in the case
in mid-July. If the ITC finds that material injury was caused
to Micron, duties will be imposed on August 7.
The latest government economic indicators reveal that Koreas
domestic economic situation is worsening. Domestic consumption
and capital investment are down. Consumer debt is expanding and
consumer sentiment remains weak, indicating that demand will not
pick up any time soon. However, the current account balance reached
$1.8 billion in May, thanks in large part to an expanding trade
surplus, which preliminary statistics show reached $2.4 billion
for June. According to MOCIE, this is the largest surplus
amount since December 1999. This is good news, but more
exporting opportunities will be needed to expand growth.
Korea needs to balance its trade interests. Industry experts such
as Morgan Stanleys Andy Xie, warn against Korea's overdependence
on the Chinese market. Also, Korea remains fearful about expanding
trade with Japan through an FTA, with concern that Japanese companies
may undercut Korean firms. In the short-term, the U.S. market
provides Korea with the best opportunity for export expansion.
This fact should not be overlooked. The U.S. economy faces a bumpy
road ahead, but the latest economic reports suggest it will improve
in coming months. Korean companies would do well to continue expanding
into the U.S. market, both through exports and investment. Korean
products, especially consumer electronics, are highly competitive
in the United States.
In the long-term, Korean companies might face greater obstacles
in exporting goods to the United States. As the aggregate U.S.
merchandise trade deficit grows, Korean producers will face even
more scrutiny from domestic producers in sensitive industries
who are fearful of increased competition. However, a more formal
commitment by both governments to broaden trade and investment
would go far to benefit companies in both countries. While an
FTA may not be a realistic goal in the near term, completing a
BIT is possible and something to which business groups in both
countries agree is needed.
The U.S.ROK economic relationship remains an important one
for both countries. Neither should neglect the strength of their
past half-century military alliance or their economic partnership.
Maintaining strong bilateral economic relations, especially resolving
lingering trade disputes, must remain a priority. Both countries
have much to offer each other.
Cooper is the Director of Congressional Affairs and Trade Policy
at the Korea Economic Institute (KEI) in Washington. The views
expressed here are her own and not those of KEI or KWR International,
The Geopolitical Chessboard African Adventure
Scott B. MacDonald
In mid-July President George W. Bush conducted a five-nation
visit to Africa, the first in his presidency. Why? The Bush
trip reflects that Washington sees Africa as important in the
war against international terrorism. The U.S. President visited
some of the most significant African countries in terms of economic
size and political influence in the region Senegal, Nigeria,
Botswana, South Africa and Uganda. Along the same lines, it
is increasingly likely that the U.S. will lead a U.N. force
into battle-torn Liberia to help restore order. Washingtons
main concern is that if the U.S. and its allies lack a forward
thinking policy in Africa, al-Qaeda and its fellow-travelers
will expand their bases and gain new supporters.
And al-Qaeda and radical Islamic groups are active. Since 9/11
they have conducted bombings in Tunisia, Kenya and Morocco.
Terrorist cells have been broken up in Kenya and Tanzania and
an Islamic-inspired coup was defeated in Mauritania following
the governments crack down on possible al-Qaeda-linked
groups. There are considerable discussions that al-Qaeda agents
are active in West Africa, including Nigeria, which has a large
Muslim population in the north. In East Africa, Somalia is also
increasingly regarded as a base for al-Qaeda agents. Somalia
lacks any coherent central government and is close to Yemen,
which, in turn, has a porous border with Saudi Arabia
the main prize in al-Qaedas holy war.
Sudan is now looming large in the intelligence community. In
late June Greek authorities seized a merchant ship loaded with
680 tons of explosives and thousands of detonators. The ship
was destined for Sudan to a company that does not exist.
Sudanese authorities denied any terrorist links and stated that
the explosives were for road construction. Considering that
the Sudanese government is strongly Islamic, that Osama bin-Laden
once lived in the country and that vast regions of the country
are out of government control, the road construction story does
not carry much weight. It is thought by intelligence agencies
that western Sudan has a number of al-Qaeda bases, which are
being used to plan attacks against U.S., European and local
government assets in the broad arc from Moroccos Atlantic
coast through the Middle East and into Southeast Asia. Indeed,
Sudan borders Egypt, which has its own number of radical Islamic
George Bush is only the third American president (Jimmy Carter
and Bill Clinton being the others) to make an extended visit
to Africa. Earlier in his presidency he launched a new policy
against AIDS in Africa and promised greater amounts of U.S.
assistance to the region. One of the countries on the Bush trip
is Uganda a country that borders Sudan and has a long
history of supporting rebel groups in that country. Ugandas
President Museveni is a shrewd geopolitical player. He has little
desire to see the Islamists in Sudan gain greater power nor
does he wish to surrender the buffer created by the largely
Christian southern Sudan which has long fought the more Arab
north. What may make geopolitical sense for Uganda may make
sense for Washington.
While it is a positive development that the United States is
taking a more committed stance on Africa, the challenges are
substantial. The region has massive problems of a human,
economic and political nature. In a number of cases, the very
survival of some form of central authority is at stake. Add
to this Africa becoming part of the game map for geopolitical
intrigue between al-Qaeda and the United States. All things
considered, we could be hearing a lot more about Africa and
the war against terrorism this summer. Although Africa is not
a core area for U.S. national security, it is moving up the
scale, requiring more time and effort. A U.S. military intervention
into Liberia for the United Nations could be only part of what
Washington may eventually be forced to commit in Africa.
Emerging Market Briefs
Scott B. MacDonald
Growth At Last: For the first time in 17 quarters Argentina
experienced real GDP growth. Q2 real GDP expanded by 5.4%. Coming
after a 10.9% contraction in 2002, this was long awaited good
news. While manufacturing and construction were key factors in
the growth spurt, the main driver was fixed asset investment,
which grew 20.6% during the quarter. Exports were up 6.4% and
imports were up 15.9%.
Brazil Fitch Takes A Positive Look: On June 3, Fitch
changed its outlook for its B rating on Brazil from stable to
positive. The outlook change was based on optimism that President
Luiz Inacio Lula da Silva will succeed with policies aimed at
maintaining payments on the countrys $207 billion in external
debt. Since President da Silva, more popularly known as Lula,
won the October 27, 2002 elections the currency has risen close
to 30% and stocks and bonds have rallied.
Kong Unemployment Blues: 2003 is proving to be a tough
year for Hong Kong. The economy has failed to take off, having
been beaten down by a combination of SARS and a weak global economy.
In May, unemployment climbed to a record 8.3%. The main culprit
was SARS, which cut into shopping and tourism. This, in turn,
saw hotels, restaurants and stores fire employees. Unemployment
was 7.8% in April. The expectation is unemployment has yet to
peak it could climb to 9% before falling to less painful
Malaysia Industrial Production Up: In April Malaysias
industrial production expanded at its quickest rate in 28 months.
According to the Department of Statistics, factories, mines and
power utilities increased production by 11.8% from a year earlier.
The government had earlier launched a $1.9 billion stimulus package
to help boost the economy, following a slump in exports of semiconductors
and other goods. Electronics exports, which account for close
to half of GDP, fell for a fifth month in April, compared to an
overall rise of 5.7% in exports. Real GDP in Q1 was 4%, the slowest
rate in a year. Although there remains some degree of caution,
Prime Minister Mahathir is asserting that real GDP growth will
be in excess of 4.5%.
Romania Underrated: Following Bulgarias two-notch
upgrade by Moodys in early June, we regard Moodys
rating for Romania as too low. The Balkan countrys debt
ratios are comparable to many low BBB rated credits and the EU
reform program is moving ahead. Relations with the IMF are positive.
Exports Fall: Singapores exports in May fell by 6.8%,
largely due to a poor performance by electronics and the SARS
virus causing slower sales to China. Total exports reached $5
billion. According to the city-states trade promotion agency,
SARS is curbing demand for computer chips and other components
to China and other Asian markets, aggravating the impact on Singapores
economy from a downturn in retail and airline businesses. Singapores
real GDP is thought to have shrunk 1.9% in Q2. Although the outlook
for the electronic industry remains gloomy, Singapore usually
sees a seasonal pick-up in exports to the United States in Q3,
when suppliers ship goods for Thanksgiving and Christmas. The
United States accounts for a fifth of Singapores exports.
Venezuela How Grim Is It?: According to the Venezuelan
government, the countrys economy is in bad shape. Bad shape
is defined as an expected 10.7% contraction in real GDP for 2003.
Finance Minister Tobias Nobrega announced on June 22, that Q2
will see another contraction, following a 30% contraction in Q1
2003. In 2002, the economy declined by 8.9%. The root cause of
the dismal economic news is a combination of ongoing political
strife between the leftwing Chavez administration and its center-right
opposition, which resulted in an extended and highly damaging
It is estimated the two-month long strike lost the government
$7 billion in lost tax revenues. This, in turn, has caused the
government to rely on borrowing in domestic markets. Domestic
debt is now estimated at around $9.4 billion, close to 20% of
all debt. In a high interest rate environment, this represents
an ongoing bleeding of funds. In addition, government economic
policy has not been stellar and the foreign exchange controls
that were imposed earlier run the risk of strangling the private
Although oil production appears to be reaching more normal levels
and Venezuela should be able to service its external debt repayments
for 2003, financial conditions will remain tight and dark clouds
clearly hang over the economy. Indeed, the IMF expects tougher
conditions and is estimating that 2003s real GDP will be
around a 17% contraction. Rounding out the economic picture, unemployment
is estimated to be somewhere between 20-25 percent of the workforce.
This dire situation is reflected by the fact that around 2,000
private manufacturing companies closed during the first quarter
Nor does the political situation promise much. Although Chavez
and the opposition have come to a broad agreement on how to proceed
to a referendum for new elections, Venezuelan society is highly
polarized and tensions remain high. Complicating matters further,
the opposition is badly fragmented. This would be to President
Chavezs advantage as he retains a steady bloc of support
of around 30 percent of the population. All of this suggests a
great chance for more political turmoil in the months ahead. While
we do not see a default on the countrys external debt looming
in 2003, as foreign exchange reserves remain adequate and oil
prices remain relatively high, Venezuelas creditworthiness
remains overshadowed by political concerns.
Huffington, Pigs at the Trough: How Corporate Greed and Political
Corruption Are Undermining America
(New York: Crown Publishers, 2003). 275 pages. $22.00.
by Scott B. MacDonald
here to purchase "Pigs
at the Trough: How Corporate Greed and Political Corruption
Are Undermining America "
directly from Amazon.com
is nothing better than a good double-barreled shotgun blast
of moral indignation about corruption in corporate America.
Indeed, throughout much of the 1990s, corporate America enjoyed
excesses, which certainly went to the heads of a number of
CEOs. The cases of Enron, WorldCom, Qwest, Adelphia and Tyco
easily come to mind. Were these cases reflections of the overall
nature of the U.S. business culture? Did they represent a
dangerous, insidious force seeking to undermine and ultimately
control America, much like the Dark Side of the Force in the
Star Wars saga? Should we expect the horn-headed Sith demon
face of Darth Maul among the photos of CEOs walking into the
According to Arianna Huffington, herself in quite a huff in
her book, Pigs at the Trough, the answer to all of these questions
is a damning YES! The Dark Side of the Force has consumed
corporate America and the souls of the American people are
up for grabs. As she states in her chapter entitled The
Bloodless Coup: The Corporate Takeover of Our Democracy:
The financial scandals of our time were made possible
by an unprecedented collusion between corporate interests
and politicians that, despite all the breast-beating about
reform, is still going strong. Together, these two powerful
groups tore down hard-won regulations that restrained the
worst capitalist excesses, leaving in their place a shaky
edifice of feckless self-policing and cowed regulators, powerless
to prevent the corporate Chernobyles.
She goes to say of Washington and lobbyists: This is
the nexus of corporate corruption; the source of all the swill.
The unseemly link between money and political influence is
the dark side of capitalism.
Huffington provides an acid-tongue criticism of corporate
America and its main political allies of course, the
Republicans and mainly President George W. Bush and his White
House team. (No surprise that the Democrats receive a lesser
tongue-lashing.) While much of the book is entertaining
to a point and she does score points in looking at the most
blatant cases of corruption, the ultimate product is a highly
distorted view of the business world and the people that run
it. Yes, there were horrible excesses that occurred during
the 1990s, much as they did in other business and stock market
booms, both in the United States and elsewhere. Certainly
the 1870s through the early 1900s represented a period of
robber barons also captains of innovative American
industry. American democracy managed to mature and adapt,
much as it is doing this time around.
The fundamental problem with Huffingtons book is that
what she wants is innovation and economic growth without risk.
Capitalism is hardly perfect, but it certainly beats the alternatives.
And yes, capitalism needs some degree of rules and regulations.
Some of her suggestions, such as lobbying law reforms, improving
accounting standards and strengthening corporate boards all
have merit and are being done. And there is an appeal to the
Clean Money, Clean Election model, which limits access to
funding beyond the government and the voter, eliminating hard
and soft money and the endless dialing for dollars. However,
Huffington clearly wants a heavy hand of the state to turn
back the clock on such things as the end of the Glass-Stegall
Act, which hobbled U.S. banking for decades. Her call to outlaw
tax havens is hardly realistic, considering the international
Ultimately the cure is for the American people to take back
their political system, partially through becoming more active
in the countrys political life including more
letter-writing campaigns. As she clamors: Well, the
time has come for the shoppers to leave the malls and take
to the streets to go from invigorating our economy
to reinvigorating our democracy. With unemployment over
6% and people concerned about their jobs, people probably
are going to prefer to reinvigorate the economy. This book
should be read, but only by those who have a degree of rectal
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