Emerging Market Briefs

By Scott B. MacDonald

Brazil - Trade Ahead!: Despite political concerns raised by polls over the lead of leftist Igancio da Silva for October 2002's presidential contest, Brazil's macroeconomic numbers continue to be relatively strong. The trade surplus for April was $481 million (from exports of $4.641 billion and imports of $4.160 billion), bringing the annual total to $1.508 billion, compared to a deficit of $561 million last year over the same period. Trade is likely to remain strong until September or October, based on seasonably-conditioned exports.

Chile - Economic and Political Cooperation Agreement with the EU Advances: On April 26, Chile and the European Union (EU) announced they had reached consensus in all matters for the Economic and Political Cooperation Agreement, which they have been negotiating for the past 18 months. This is an important development for Chile as the EU is the main destination for its exports, reaching $4.6 billion in 2001. Under the agreement, there is a progressive and reciprocal liberalization of access to markets including goods, services and government procurement. The liberalization of more than 90% of their trade of goods, services and investment was obtained for a term no longer than eight years beginning from the date of entry into the agreement. It will enter into force once the European Parliament and the Chilean Congress approve it.

East Timor - New Country, New President: In April 2002 East Timor went to the polls for the first time to elect a president. Although it was not much of a contest, with former guerrilla leader Xanana Gusmao won over 80 percent of the vote. The election is highly significant as it provides a degree of legitimacy to the new state, reinforcing the idea of democracy and civil society, and providing the local population with its own leadership as opposed to rule by the international community. Although one election does not make a democracy -- nor does it necessarily result in good governance -- it is an important step forward for one of the world's newest nations. One thing that could be a big boost to the world's newest state is natural gas. East Timor sits on some of the world's largest newfound supplies of natural gas. With a small population and an effort to tap these resources, East Timor could find itself a prosperous nation in a few years. A little bit of money, if properly managed, could make East Timor's democracy even stronger. If could also lead to massive corruption. If nothing else, East Timor faces interesting times ahead.

Ecuador - Good Numbers for 2001: In the late 1990s, Ecuador became the butt of many a joke concerning the lack of a political class to govern the country and manage the economy. That was then and this is now. In 2001, real GDP rose by 5.6%, well ahead of 2000's 2.3%. It was one the fastest levels in Latin America. The strong rate of growth was due to strong domestic demand, government investment and relatively high oil prices. Growth in 2002 is expected to remain strong with the Central Bank looking at 4.0-4.5% real GDP expansion. Helping to maintain strong growth is the new pipeline being financed by the government, which is expected to by completed in mid-2003.

Indonesia: Moody's raised its rating outlook to positive from stable on its B3 rating. The agency cited the recent Paris Club agreement, improved relations with official creditors and the progress made so far in key policies, including cuts in fuel subsidies, IBRA's asset sales (particularly the BCA sale) and adequate FX reserves. A ratings increase will depend on continued progress in these areas within the overall context of political and social stability

Korea - Telecoms on the Move: South Korea's Ministry of Information and Communication ordered the mobile network companies to lower interconnection fees. Overall, numbers were slightly more negative than expected for SKT, and slightly more positive than expected for LGT (and relatively neutral for KTF). Over the past few trading days the market has generally absorbed this information. Korea Thrunet said it will bid for a stake in Powercomm Co. when the government seeks to sell part of the company for a second time. Lehman Brothers commented on this statement, noting "Thrunet still needs a financial backer to take part in the bidding as its stake in Powercomm will likely be limited."

In related news, the South Korean government announced it will seek to sell its entire 28.36% stake in Korea Telecom (88.57m shares) on May 17-18 in a final bid to privatize. The authorities will offer 14.53% of KT's shares to various local investors (of which about 5.7% will be available to company employees), 2% will be placed with local institutions, 1.83% with individual investors, and 5% with an unnamed strategic alliance partner. The remaining 13.83% - will be offered to local investors in the form of exchangeable bonds.

Russia - Climbing Up: In early May 2002 Fitch upgraded Russia from B+ to BB-, reflecting a steady improvement in economic policy and the economy. The key factor for the upgrade is the expectation that Russia will have the ability to make its external debt payments in full in 2002, regardless of oil prices. Fitch has given Russia a positive outlook. Attention now turns to Standard & Poor's, which rates the country B+ and has had a positive outlook since February 2002.

Thailand - New Budget: Prime Minister Thaksin Shinawatra has directed the Finance Ministry to increase investment items in the fiscal 2003 budget by 30 billion baht to support economic recovery. The 2003 Budget Act is under revision by the Finance Ministry, the Budget Bureau and other associated agencies. Various spending projects worth some eight billion baht have already been cut or delayed to free up funds for new investment. Another 10 billion baht is expected to be realized through budget changes for local administrations and agencies, allocating a total of 81.1 billion under the 2003 fiscal budget. Of the budget, 10 billion baht has been allocated without any supporting projects. Sources said the government was also looking to shift funds from the 40 billion baht in revenues gained in value-added tax collected for local administrations but as yet unallocated for specific projects. Government officials have complained the practice by the Budget Bureau to allocate funds without any particular spending purpose limited financing for key policy programs. The fiscal 2003 budget projects a deficit of 174 billion baht, or 3 percent of gross domestic product, representing Thailand's seventh consecutive year of budget deficits. The 2003 budget, which starts in October, currently projects expenditures of 999.9 billion baht, with 21 percent dedicated to new investment.

Vietnam - Coming to Market?: While many Asian nations have made access to international capital markets an almost routine event, Vietnam has lagged behind. It now appears the Southeast Asia nation is going to issue an international bond, possibly up to $500 million. In the mid-1990s, Vietnam had considered a bond issue, but the reform process slowed to a snail's pace and the 1997-98 Asian financial crisis left international investors shy of sovereign bonds from the region. Vietnam has restarted the economic reform process, is working closely with the IMF and World Bank, and Asian bonds are back in vogue with international investors. With a B1 rating from Moodys and new ratings coming from Standard & Poor's and Fitch later in the year, Vietnam is moving toward issuing debt. Much will depend on the pace of reforms, how much debt the IMF and other donors are comfortable with and market conditions later in 2002.