Emerging
Market Briefs
By
Scott B. MacDonald
Better
in the Bahamas: The Bahamas have one of the higher
rankings for a sovereign in the universe of Emerging
Market credits, having received an A3 rating from Moody’s.
On September 29, 2003, Moody’s affirmed the rating
and maintained a stable outlook. As the rating agency
noted: “The stable ratings outlook is based on
a relatively strong external position, although the economy
faces challenges posed by the negative effects on the
tourism sector of terrorism and geopolitical uncertainties.” Moody’s
also made note that while the negative impact of 9/11
on tourism appears to be bottoming out, the country has
as of yet to revert back to more favorable budgetary
trends. In addition, The Bahamas has embarked upon constructive
legislative and regulatory actions, which prompted its
removal from a blacklist of jurisdictions prone to money
laundering. The Caribbean nation has also been removed
from the list of non-cooperating tax havens by the Organisation
of Economic Cooperation and Development because of the
local authorities commitment to exchange information
on a bilateral, non-discriminatory basis with other governments.
The Bahamas is not rated by either Fitch or Standard & Poor’s.
Dominican Republic – Mounting Problems:
Standard & Poor’s on October 1, cut the Dominican
Republic’s ratings two notches due to growing
concerns that the island-state will default on $1 billion
of debt coming due in 2004. The country has been hard
hit by a major banking scandal, which has badly damaged
investor confidence, forcing the government to turn
to the IMF for assistance. The situation has only been
made more complicated by looming presidential elections.
Standard & Poor’s took the Dominican Republic’s
ratings from B+ to B-, with a negative outlook. Depending
on what the government can do to repair the economy,
we see ratings pressure mount for an external debt
default.
Indonesia – Moody’s
Upgrade: In September, Moody’s upgraded
Indonesia from B3 to B2, which places it on a par with
Brazil and Ukraine. However, the B2 rating is well below
Indonesia’s ratings prior to the 1997-98 Asian
financial crisis – Baa3/BBB. Key points that pushed
the upgrade were improved foreign exchange reserves,
a fall in external debt, corporate restructuring and
relatively prudent fiscal policies. The rating agency
also admitted that “there remain considerable risks
to Indonesia’s economic and financial outlook,
particularly in 2004 and 2005”. Those risks encompass
a major presidential and parliamentary election, a shift
away from direct IMF support, and dealing with the ongoing
insurrection in Aceh, northern Sumatra.
Pemex – Mexico’s Oil Company Under the
Moody’s Gun: In early October Moody’s
placed Pemex, Mexico’s state-owned oil company on review
for a possible downgrade. Although the rating was affirmed
in September, Moody’s suddenly appears to have been alarmed
by many of the same things that it noticed earlier, but now
have it concerned. The rating agency is now concerned over
the oil producer’s rising debt obligations and other
liabilities as it needs to make investments to boost its oil
and gas production. Another newly-reconsidered fear is the
company’s high tax burden. Ironically, many of the concerns
that Moody’s is fingering are being addressed. The company
has a new CEO who is expected to be smoother in dealing with
the unions, government and board; foreign companies are being
allowed to do some of the costly exploration and infrastructure
development -- something that has a big price tag and is not
Pemex’s forte); and prospects for an improving economy
in 2004 could take some of the government pressure for upstreaming
Pemex revenues to the government in the form of taxes. It appears
that Moody’s has more concerns with having Pemex sit
one notch above the sovereign Baa2 rating and attending to
housekeeping as opposed to any new development.
Philippines – Cloudy
Skies Ahead: On September 30, 2003, Moody’s
changed its outlook for the Philippines from stable to
negative. The country is rated Ba1. The key reasons for
the change entail “political uncertainties” stemming
from the failed July coup attempt and the upcoming presidential
elections. As the rating agency stated: “Recent
political developments, including the brief coup attempt
and legal maneuverings against senior officials in the
central bank, reflect deep political tensions.” Sadly,
the political uncertainty comes at a time when the administration
of President Gloria Arroyo is making headway in narrowing
the budget deficit. The government projects the gap in
its finances will narrow to 202 billion pesos this year
from a record 211 billion pesos in 2002. This year’s
deficit was 113.6 billion pesos at the end of August,
well ahead of economists’ forecasts after the government
spent more than planned for a second month. Standard & Poor’s
earlier in 2003 downgraded the Philippines BB+ rating
to BB, due to concerns over the fiscal deficit.
Thailand – Heading Back Up the Ratings Ladder: In
early October Moody’s indicated it was considering upgrading
Thailand’s Baa3 rating, probably to Baa2. The key reasons
for this change are strong economic growth (6.4% real GDP expected
for 2003), stronger revenues, robust foreign exchange reserves,
and low inflation. Factors that remain of concern include the
government’s overall fiscal situation and bad debt in
the banking system – which remain from the 1997-98 financial
crisis. Bad debt in the banks are reported to be as high as
16% of all loans as of June 2003. Standard & Poor’s
rates Thailand BBB-.
