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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.
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