Emerging Market Briefs

By Scott B. MacDonald

Belize – Launches Bond Issue: Belize has now followed the Bahamas, Barbados, Trinidad & Tobago, Jamaica and the Dominican Republic in launching an international bond issue. In August, Belize issued a $125 million bond, which was largely bought by U.S. investors. The government will use the proceeds to retire short-term debt and other higher interest rate debt, helping to clean up the nation’s financial ledger and reduce foreign exchange outflow. Belize is rated Ba2/BB.

Brazil - Waiting for Lula: On October 6, Brazilians go to the polls to election their next president, congress and governors. The real focus is on the presidential contest that pits Luiz Inacio Lula de Silva against Jose Serra. Lula currently leads in the polls and there is now considerable speculation that he could win in the first round, negating the need for a second round on October 27. Lula is a center-left candidate from the Workers Party (PT), has run for four times, and represents a potential new policy direction for Brazil. Serra is the government candidate and a former health minister, who has trailed throughout the contest. Markets clearly favor Serra and the growing probability of a Lula victory has roiled financial and currency markets in Brazil. While there is concern that a Lula presidency would lead to poor economic policy decisions leading to a default on the country's debt, it must also be taken into consideration that Lula has little desire to preside over a severe economic crisis. Moreover, he has only to look south to Argentina to see what happens to a national leader - former President de la Rue - when there is a lack of clear and forceful policies in managing the economy. While a Serra victory cannot be entirely dismissed, most pundits look to Lula as the most probable man to fill Brazil's presidency.

Dominican Republic – Strong growth, but possible worries: The Dominican Republic appears to be well on its way to leading Latin America in terms of economic growth for 2002. Initial forecasts for real GDP growth were in the 3-4% range. However, the pace of growth was 6% for the first half of the year. Even if growth tapers from the blistering average real GDP growth rate of 7% in July, year-end growth will exceed earlier targets, probably coming in around 5-6%. The main drivers for economic activity have been communications, construction and local manufacturing. The main foreign exchange earners, mining, free-zone manufacturing and tourism all fared poorly. The combination of government spending and domestic demand are the major causes behind growth. Although inflation is under 3%, concerns are rising that government spending could be "excessive" and that there is too much reliance on external borrowing. Partially responding to these criticisms, the government of President Mejia has announced a freeze on public spending and curbs on borrowing offshore.

Indonesia – Ratings Upgrade: On September 5, 2002, Standard & Poor's raised Indonesia's sovereign currency rating from 'selective default' to 'CCC+'. The outlook was changed to stable. The upgrade was prompted by Jakarta's earlier announcement that it had successfully rescheduled the repayment of $1.3 billion of debt with the London Club of international commercial banks. Moody’s rates Indonesia a notch higher at B3, with a positive outlook.

Philippines - Sadly in the Wrong Direction: At the beginning of the year, the government of President Arroyo promised to turn the economy in the right direction. For many investors and business people in the Philippines this was a breath of fresh. However, things have not gone according to plan and after a period of improvement, economic conditions are gradually eroding. Public sector finances have been disappointing and the country's debt burden is actually growing. Total public debt rose to 83% of GDP in July, up 13% year-on-year. Total public debt was 79% at the end of 2001. Public sector foreign debt is $34 billion, equal to 56% of total public debt. In addition, it is expected that the Philippines will return to international bond markets later in 2002 to help finance its deficit. The Southeast Asian nation is rated Ba1/BB+, with a stable outlook from both Moody's and Standard & Poor's. If the trends of fiscal weakness and growing indebtness continue, we would not be surprised to see the outlooks change back to negative - just where they were when President Arroyo took office.

Trinidad & Tobago – New Refinery: The government of Trinidad & Tobago has given a green light for the construction of a new oil refinery that will more than double Trinidad’s current oil production. Already a major Caribbean oil producer, Trinidad’s oil production averages around 224,000 barrels per day. When the refinery opens for operations in 2005, an additional 224,000 barrels will come on stream. The government has also recently proposed the construction of a $500 million undersea natural gas pipeline, running from Trinidad to the French Overseas Departments of Martinique and Guadeloupe, with branches extending to Antigua, Barbados, Puerto Rico and the Dominican Republic.

Venezuela – Bad News on Economic and Political Fronts: President Hugo Chavez’s efforts to make Venezuela into a country of greater economic equality and less dependent on oil are faltering before the stark reality that populist rhetoric and economic mismanagement do not easily translate into desired objectives. Blaming outside forces, like U.S. imperialists, does not necessarily help either. Despite the relatively buoyant nature of international oil prices, Venezuela is having an exceedingly bad year. Real GDP contracted by 4.2% in the first quarter of the year, followed by an even more biting 9.9% contraction in the second quarter. The currency has depreciated by 46% this year.

Prospects for the rest of the year are not exactly robust. Certainly much of the blame rests on Chavez’s shoulders. Although conservative elements of Venezuelan political spectrum (the old political parties and big business) have been confrontational since his election, the president has stimulated widespread middle class antagonism and alienated big labor. In April, elements within the armed forces and a large segment of the public supported a coup attempt that ousted Chavez, before loyalist officers rallied and reinstated the constitutionally-elected president. The abortive coup d’etat left $800 million in damages from looting and lost work. It also left an undisclosed number of dead.

In the aftermath of the April coup, Venezuelan society has remained highly polarized. The army has largely remained behind Chavez as have members of the poorer segments of the population. At the same time, the country’s police and National Guard are regarded with some degree of suspicion by Chavez loyalists. The country’s largest business association, Fedecamaras, remains staunchly anti-Chavez. Fedecamaras chairman, Carlos Fernandez, recently stated in an interview over public radio: "The president is off his rocker. Only with him leaving power can Venezuela cure itself of the cancer it now has."

For his part, Chavez has been equally diplomatic, stating that his opponents were "the extreme right, religious extremists and racists." To this, he added that he had fought "battles with against a thousand demons" during his three and a half years in office.