October 1999    Edition 1, Volume 1

Editor:         Dr. Scott MacDonald, Chief Economist and Director of
                                     Investor Relations

Deputy Editor:  Dr. Jonathan Lemco, Senior International Research

Publisher:      Keith W. Rabin,     President

© 1999 KWR International, Inc. No reproduction is permitted without
the express consent of KWR International, Inc.

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I.     Reflections on the IMF/World Bank Meetings
II.    The Global Economy: Growth Continues, But Dark Clouds Remain
         A. The US Economy
         B. Emerging Markets
         C. Ecuador's Defualt
III.   The Importance of Ratings
IV.    Doing the Ratings


I. Reflections on the IMF/World Bank Meetings
   By Scott B. MacDonald, Chief Economist and Director of Investor
   Relations and Keith W. Rabin, President, KWR International, Inc.

The annual IMF/World Bank meetings held in Washington, D.C. in late
September/October 1999 were decidedly an improvement over last year's.
The mood of the 1998 meeting was one of considerable angst and tension
related to the overriding sentiment that the global economy was on the
brink of a 1929-like depression.  While last year's meetings and
assorted receptions could be referred to as wining and dining with
depressed people, 1999's reception circuit could be referred to as one
of cautious optimism. The key messages of the myriad of meetings were
the following:

1. We're all chugging along: The global economy is growing and that
trend is expected to continue;

2. G-7 Issues: Within the G-7 economies, the key issues are the
over-valuation of the dollar and Yen, the process of structural reform
in Japan and Germany, and the decision to put a multi-year halt to the
sale of gold from G-7 central banks (which was almost immediately
mirrored in a rise of gold prices over $300);

3. IMF Green Light on Brady Bond Defaults: The IMF will no longer be as
supportive of debtor countries making repayments on their Brady bond
obligations because the private sector must now share the moral hazard
of investing in emerging markets.  The test case for this is Ecuador,
which announced during the meeting that it was going to default on part
of its Brady obligations.  Needless to say, the perception that the IMF
was advising Ecuador to default on its Brady bonds did not sit well
with members of the private sector in attendance.  The feeling is that
since the IMF is now encouraging countries to default and "bail-in" the
private sector to burden share, emerging markets are to be avoided as
an investment.  This, of course, could have a negative impact on
capital flows to a number of emerging market countries;

4. Other Messages: Other messages conveyed by the governmental and
multilateral development agencies included (1) that the most-heavily
indebted countries (like Guyana and Mali) will be given additional debt
forgiveness on official debt; (2) that Asia is in recovery, but that
recovery will be hard-tested over the next twelve months (Indonesia and
Daewoo's debt restructuring are big problems and there are many
concerns about China); and (3) although Latin America's recovery is
lagging, conditions are in place for renewed growth in 2000.

II. The Global Economy: Growth Continues, But Dark Clouds Remain
    By Scott B. MacDonald, Chief Economist and Director of Investor
    Relations, KWR International, Inc.

We are now more than halfway through 1999.  Compared to 1998, when the
situation as the gravest since 1929, the world is a considerably better
place.  U.S. economic growth continues to be strong, the Dow percolates
around  11,000, Japan is on its way to 0.5-1.0 percent growth and
European Union countries appear to be regaining their economic
momentum.  Canada's real GDP remains strong, with close to 3 percent
real GDP growth expected for year-end 1999, while Australia's economic
expansion continues, albeit at a slower pace in 1999 at an projected
3.8 percent.

A. The U.S. Economy

Our outlook for the U.S. economy is relatively positive for the rest of
1999, though we do have concerns about the strength of the dollar and
growing  current account deficit.  The Beige Book prepared for the
October 5, 1999 Federal Reserve meeting indicated that the economy
continues to expand at a "moderate-to-brisk" pace. Although the United
States can shoulder a current deficit equal to 4 percent of GDP (which
is where it could be at year-end 1999), the trend is not positive.  In
September the U.S. Commerce Department reported that the deficit
reached a record $80.7 billion in the last quarter, up by 18 percent
over the previous quarter and equal to 3.63 percent of GDP.  The
current account deficit was 1.9 percent of GDP in 1997 and 2.7
percent in 1998.

What makes the rise of the U.S. current account deficit significant is
that at some stage concerns over the size of the current account
deficit will become manifest in currency markets and confidence in the
dollar will be shaken.  This is not likely in the short-term as the
United States still remains a more attractive place to invest than in
Japan or Europe.  This situation, however, is changing.  Foreign
investment is increasing in Japan: in 1998, foreign direct investment
almost doubled from 1997, adding up to a record $10.5 billion.  That
trend is continuing in 1999.  Europe is also beginning to regain some
of its attractiveness as its economies start to gain momentum.  Both
of these developments could detract from the flow of funds into the
United States.

One scenario that could occur is when the dollar begins to slide (which
it will), Washington will be forced to make tough decisions.  The
protectionist wing in the U.S. Congress would no doubt call for
exclusionary measures for Asian and Emerging Market exports as a means
of reducing the trade imbalance. This clamor for protectionist measures
could gain an unexpected boost from a Reform Party presidential
campaign led by old-time populist Pat Buchanan. At the same time, the
Federal Reserve Board would most likely raise interest rates, which are
already higher than in Japan or Europe.  Although this action would be
made to attract investment, there is a danger that higher interest
rates could depress inflated stock prices and cause foreign investors
to reduce their exposure to the U.S. market rather than invest more.
This, of course, would be reflected by a correction in the stockmarket.
Furthermore, the higher interest rates rise, the more pressure the
dollar faces.

While economists, such as MIT's Paul Krugman, are calling for a
devaluation of the dollar and an economic slowdown (a few argue a
depression), there are a majority who argue that moderate economic
growth will continue in 1999 and 2000.  Additionally, the Dow will
continue to rise.  Charles W. Kadlec, chief investment strategist for
Seligman Advisors Inc., believes that the Dow Jones Industrial Average
will end up at 100,000 in the year 2020, based on "two decades of
above-average economic growth with price stability."  In  Dow 100,000:
Fact or Fiction (New York: Prentice Hall, 1999), he argues that "The
Great Prosperity" is going to occur because of the end of the Cold War
is being replaced by the spread of freedom (and the surge of individual
creativity); the drive of the baby boomers to retire in style;
technological innovations presenting new ways for workers to be more
productive and resourceful; and increased competition among governments
for economic activity.

Kadlec is careful to indicate that The Great Prosperity isn't
guaranteed.  Indeed, wars, terrorism and heavy taxes could derail the
ongoing growth track.  Equally important, a currency shock could untold
economic mayhem.  Those supportive of Kadlec's positive outlook include
Steve Forbes (Republican presidential candidate and owner of Forbes),
Byron R. Wien (Chief Investment Strategist Morgan Stanley Dean Witter),
and Dr. Arthur B. Laffer (Chairman Laffer Associates).

The relatively positive outlook for global growth is reinforced by a
tentative stabilization in the economies of Asia, which are making the
shift from contractions in economic activity in 1998 to growth in 1999.
Korea, which has done a considerable amount of structural adjustment,
is now expected to expand by 7 percent.  It will also have a current
account surplus for a second consecutive year (at around $20 billion)
and now has accumulated around $65 billion in foreign exchange reserves.

Moreover, foreign direct investment is flowing into the country (albeit
from a low base), with a record $9 billion in 1998.  For the eight
seven months of 1999, foreign direct investment totaled $7.8 billion.
A danger for Korea is that it has been too successful, leading to a
complacency that will slow the pace of reform.  We believe that the
Kim government will maintain the pressure on the reform process.

B. Emerging Markets

In contrast to the relatively positive outlook in major OECD economies
and Korea, prospects for most Emerging Markets remain cloudy and, in
some cases, dark clouds threaten another storm of market turmoil.  Our
major points of concern are Argentina, Brazil, Russia, China and, to a
lesser extent, Mexico.  In each of these countries the economic policy
environment is greatly complicated by political factors.

* In Russia, elections for the Duma must be held by December of this
year, while presidential elections are scheduled in 2000.  The backdrop
for the upcoming elections is not good.  Russia's external debt burden
of $142 billion remains problematic, the economy is expected to
contract by 1 percent (for the second consecutive year) and problems
with Chechnya have resulted in a new war in the Caucuses and a
terrorist bombing campaign in Russian cities.  Compounding these
problems, the country's organized crime has given Russia a bad
international reputation, raising questions about the propriety
of its financial institutions and corporations as well as the
officials in the Yeltsin administration, past and present.  Russia
also needs to finish a rescheduling of its external debt, which it
defaulted on in August 1998.  As of July 1999, it was $8 billion in
arrears.  This combination of economic crisis, criminality and
political uncertainty leaves Russia in a state of considerable
volatility through the rest of 1999 and into 2000.

* In Brazil, President Fernando Henrique Cardoso has lost popular
support and the fractious Congress is actively seeking to avoid any
more difficult votes on badly-needed structural reform in the run-up to
the municipal elections in 2000 and presidential and congressional
elections in 2002.  Key legislation on tax and pension reforms goes to
Congress in October and November in what is expected to be a long and
difficult struggle to regain momentum on the reform front.  Moreover,
rising international interest rates add greater pressure on Brazil's
ability to repay its external debt.

* In Argentina, the outgoing Menem administration is grappling with a
tough recession, rising unemployment, and ongoing vulnerability to
external shocks.  Elections are set for October 22, 1999 and it appears
that Fernando de la Rua of the opposition Alliance will win.  The
incoming government will face an increasingly grim economic situation
and there has been considerable speculation that Argentina may be
forced to dismantle its currency board.  We do not expect that to occur
in 1999, but would not be entirely surprised if such an action were
taken in the second quarter of 2000.

* In China, the government of President Jiang Zemin faces a multitude
of challenges, ranging from the overhauling of deficit-ridden and
inefficient state-owned enterprises and non-performing loan-burdened
banks to stimulating economic growth and pulling the country out of its
deflationary mode. China's industry also suffers from considerable
over-production, large inventories and a lack of transparency and
disclosure.  Additionally, China's leadership is deeply concerned about
the political overlap of slower growth: if the economy cools too much,
public dissatisfaction could result in political turmoil.  This point
was underscored by the government's harsh response to the Fulan Gong
cult.  Although foreign exchange reserves are over $150 billion, the
debt in the banking sector is considerable and the costs of a bank
clean-up could be substantial.  For China, 1999 and 2000 are going to
be difficult years, marked by ongoing pressure to devalue the currency
(a major preoccupation for the rest of Asia), the need to stimulate
economic growth, and the difficult balancing act of overhauling and
downsizing the public sector while maintaining political calm.  We do
not expect a major devaluation through the rest of 1999 and into 2000.
However, if the political situation becomes more difficult, a quick
devaluation to help the export sector could not be ruled out.

* Mexico: Mexico rode through the 1997-98 financial crisis relatively
well.  Growth was around 5 percent, inflation was high, yet containable
and external accounts remained manageable.  Yet, the legacy of the last
four political transitions have left a shadow over Mexico's short-term
prospects.  In particular, presidential and congressional elections are
scheduled for July 2000.  Despite relatively strong 3.2 percent growth
expected for 1999, possible storm clouds loom in the form of rising
crime, widespread corruption, a weak (yet restucturing) bank sector,
and an ongoing degree of vulnerability to external shock (though Mexico
is not as vulnerable as Argentina and Brazil).  A key point of that
vulnerability is the heavy dependence of the government on the oil
sectors for revenues.  Currently, oil accounts for a third of all
fiscal revenue.  Fiscal reform is needed, but not likely in an election
year. Our concern is that if the political situation deteriorates in
the run-up to the elections, capital flows to Mexico could be reduced,
which would certainly have a negative impact on economic activity. That
stated, the chance of another Mexican debacle are currently not high.
The Zedillo administration has made a concerted effort to spread out
maturities on its external debt to avoid any bunching in 1999 and 2000,
the saving rate is now about 23 percent of GDP and foreign exchange
reserves are at a record high of $31 billion.  Mexico has also put in
place as of July 1999 a $24 billion international financial support
package with the IMF and World Bank to ease worries.  Consequently,
while we have concerns about Mexico and urge careful scrutiny, the
scope of problems is not on the same level as Argentina, Brazil or

C. Ecuador Default: Stupid is as Stupid Does

The situation in Emerging Markets is not helped by Ecuador's default on
its Brady bond obligations.  On the last day of September 1999, the
government of Ecuador, allegedly encouraged by the IMF, missed a $44.5
million interest payment.  Ecuador thus becomes the first country to
default on Brady bonds, a highly negative signal for the future of
private sector capital flows to Latin America.  The IMF has apparently
decided that the time has come to "bail-in" the private sector to share
the pain of emerging market financial messes.  Ecuador, with $6 billion
in Brady bond debt, has a total debt of $13 billion, equal to over 100
percent of its GDP and beyond its capacity to repay.

Ecuador has been one of the few Latin American countries not to make a
concerted effort to restructure its economy during the 1980s and 1990s.
Instead it has offered considerable political theater for the rest of
the world, with three presidents sitting in the presidential palace in
one year, an amazingly long string of finance ministers and a Congress
that appears to take overt joy in impeaching cabinet ministers and
resisting reforms.  An oil-rich economy, supplemented by a strong
agricultural sector (bananas and shrimp), the nation's resources have
been horribly mismanaged to the point that the government was unable to
make the payment.

Ecuador's default coincided with the government's signing a letter of
intent with the IMF for a $400 million loan that could lead to $1.3
billion in overall international aid. IMF officials urged the Latin
American country to develop a new economic strategy and reach a
compromise accord with creditors before receiving the IMF loan.  The
deal also hinges on Ecuador passing austerity measures and tax
increases that most members of Congress oppose.

The creditor response to Ecuador's action was to reject the country's
pleas for more time to renegotiate the $6 billion in Brady bonds.
Investors voted on Friday to accelerate the repayment schedule (due to
cross-default clauses in the initial agreement on the Ecuadorean
Bradys).  Bondholders know Ecuador lacks the capital to repay the first
phase of $1.4 billion discount bonds.  The decision was made to send a
very clear signal that they do not want to go along with Ecuador's plan
for renegotiating its payments out of concern of setting a precedent
for other countries that owe billions in Brady bonds.

Our concern about the mess in Ecuador is that the IMF support for
burden-sharing is going to backfire and not benefit anyone, including
the Latin American country.  Simply stated, the danger exists that
many cash-strapped governments read the situation as the IMF blessing
defaults on Brady bonds.  If this is the case, why should countries,
such as Nigeria and Bulgaria, bother to struggle to make those payments.

Moreover, if they pursue a new policy with their creditors (i.e.
follow Ecuador's lead and default), the IMF will provide money.  The
Ecuadorian situation also is likely to cause many investors to
completely exit emerging markets, leaving the official sector
increasingly with that task. We expect Ecuador to be an ongoing
problem and its impact could ripple beyond its borders.  Stay tuned.

© 2001 KWR International

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