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Emerging
Market Briefs
By
Scott B. MacDonald
 Cuba
– Still the Iron Hand: In March and April 2003 while the world
was focused the Iraq crisis, Fidel Castro, Cuba’s longstanding
socialist caudillo, flexed his regime’s muscles and clamped
down on local opposition groups. Although there has been speculation
as to the creakiness of the Castro regime, the authoritarian Caribbean
government demonstrated it was hardly down and out. In a well-planned
roundup, close to 75 independent journalists, human rights activists
and political opponents were arrested. Security forces charged the
dissidents with conspiring with the chief of the United States Interest
Section in Cuba, James Cason, and other U.S. diplomats to overthrow
the government. The crackdown was given extra severity when three
world-be hijackers apparently seeking to escape to the United States,
were executed by security forces.
The message from the Castro regime is clear – Fidel Castro
is still very much in command, has no intention to liberalize the
island-state’s political life, and regards the United States
as intent on intervening in Cuba’s affairs. While local opposition
groups were clearly cowered by the security crackdown, the Castro
regime was roundly criticized by much of the international community.
One casualty of the crackdown was a pending agreement with the European
Union (EU), which would have given Cuba preferential terms for its
products in the EU market. The EU had sought to engage Cuba, even
opening an office in Havana earlier in 2003. The EU approach was
that Castro could be induced by mutually beneficial trade agreements
and foreign investment to gradually open up Cuba’s political
system. Following the crackdown, the EU quickly signaled there was
no longer a deal on the table. The Cuban government was highly critical,
in turn, of the EU. However, it is the Cuban people that ultimately
suffer, especially considering the economy is in bad shape, having
expanded by only 1.1% in 2002.
Dominican Republic – S&P Lowers the Boom: On May
15, 2003, Standard & Poor's put the Dominican Republic’s
BB- on CreditWatch for a possible downgrade. The action was due
to concerns over emerging problems at Banco Intercontinental (the
third largest bank in the country), which could weaken political
institutions and the external reserve position and reduce financial
flexibility. Banco Intercontinental or BanInter has been a troubled
institution for a while, but in April the central bank was forced
to intervene after evidence of widespread fraud undermined plans
to sell the bank. Matters became even more murky when on May 13,
2003 BanInter’s president was arrested and the government took
over the bank’s companies. The government also confiscated
the assets of its troubled bank’s major shareholders. S&P
stated: “The ratings on the Dominican Republic are constrained
by low international reserves, shallow domestic capital markets,
and relatively weak institutions and social indicators. The ratings
are supported by tax and social security reform programs and a low
and favorably structured public sector debt burden. Should these
attributes be undermined by the contingent liabilities posed by
the financial sector, a downgrade to B+ would be likely.” We
expect the government will scramble to resolve the problems related
to BanInter, though there are concerns that the corruption around
the bank could be deeper than currently anticipated.
Costa Rica – Outlook Less Sunny: Costa Rica has been
one of the more positive examples that a small country can broaden
its export base, upgrade its soft infrastructure (i.e. people and
their skills), and attract considerable foreign direct investment.
While Costa Rica benefited from this package of developmental strategy
throughout much of the 1990s and into 2000, the slowdown in the
U.S. economy has hurt. As the government has sought to step in and
help buffer the slower pace of exports, the fiscal deficit has widened.
In May, the IMF released its annual review of the Costa Rican economy.
While giving the Central American country credit for a number of
reforms, the IMF was critical about the widening fiscal deficit,
which could end up being equal to 4% of GDP in 2003. In 2002, the
fiscal deficit was 5.4% of GDP, a substantial number. This prompted
the government to introduce a tax package and tighten public spending.
The government’s fiscal deficit target is now set at 3.1% of
GDP, which could be a little too optimistic. Shortly following the
IMF release of the annual review, both Fitch and Standard &
Poor's changed their outlooks for Costa Rica from stable to negative.
Hong Kong – Reaching the Heights of Unemployment: The
last two years have not been kind to Hong Kong. Deflation has become
a major factor hanging over the economy, SARS has hurt tourism and
retail sales, and there is considerable discontent with the government.
The government estimates that tourist arrivals declined 77% in April
after the World Health Organization advised travelers to stay away
from Hong Kong. Tourism accounts for 6% of the city’s GDP.
The most recent piece of bad news was that April’s unemployment
rate rose to 7.8%, matching an all-time high. The main culprit was
SARS, which kept consumers at home and drove away tourists. There
have been around 8,000 cases of SARS worldwide, with the vast majority
being in China, with Hong Kong having the second highest tally of
cases. Expectations are that unemployment will most likely climb higher.
HSBC and Standard Chartered Bank have recently cut their real GDP
forecasts for 2003 down to 0.5%. This is a considerable slowdown from
2002, when the economy grew at 2.3%.
Jamaica – Problems Mount: In recent years Jamaica has
sought to implement structural reforms to make its economy work better.
However, 9/11, civic unrest and a number of natural disasters have
hurt the economy. In response the government of Prime Minister P.J.
Patterson has opted for fiscal stimulus to keep the economy moving.
This has caused the country’s debt burden to climb. Jamaica’s
debt expanded from 131% of GDP at the end of the previous fiscal year
to 152% this year. In April the government advanced it budget, which
included a J$13.8 billion ($246 million) tax package. Debt repayments
will account for 65% of budget spending this year. Both S&P (B+)
and Moody’s are negative on Jamaica’s outlook and in April
the latter put the country’s Ba3 rating on review for a possible
downgrade. Moody’s stated: “The review was prompted by Moody’s
heightened concerns over the Jamaican authorities’ apparent lack
of policy options to quickly correct the fiscal deterioration that
has occurred over the last 18 months.” We believe Jamaica’s
Ba3/B+ ratings will fall, probably to B1/B in the medium term as tourism
remains weak, international commodity prices (bauxite and sugar being
topical to the Caribbean country) will underperform, and eventually
interest rates will go up (most likely in 2004). All of this bodes
ill for Jamaica.
Singapore
– Adjusted Growth for Q1 Up: The Singaporean economy expanded
at a quicker pace than initially anticipated for the first quarter
of 2003 as exports compensated for a decline in domestic demand.
According to the Trade and Industry Ministry, real GDP for Q1
2003 was 1.1%, an upward revision from 0.7%. Unfortunately, the
expectation is the Q2 2003 will not be as strong due to the negative
impact of SARS on tourism and retail sales.
Uzbekistan – Call for Reform: At the close of the
annual meeting for the European Bank for Reconstruction and Development
(EBRD), that institution’s president, Jean Lemierre, took
the bold stance of calling the host nation to adopt political
and economic reforms. Without reforms, the Central Asian country
could face cuts in the EBRD’s financial support in 2004.
Lemierre did not mince words as he urged President Islam Karimov
to make radical economic and political changes, in particular,
the end of torture in Uzbekistan’s prisons. In March 2004,
the EBRD board meets to discuss lending to Uzbekistan. If improvements
are not made, the board will consider curtailing funding facilities
for the Central Asian government. This has already been done in
the cases of Belarus and Turkmenistan, where authoritarian governments
have blatantly suppressed political freedoms.
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