(click here to return to the table of contents)

Guatemala– Presidential Elections: On November 9th, 2003 Guatemalans went to the polls to elect a new president. Former Guatemala City Mayor Oscar Berger received 47.6% of the vote, while center-left candidate Alvaro Colom finished second with 26.4%. Retired General Efrain Rios Montt came in third with 11.2%. To win the election, however, a candidate must gain more than 50% of the vote. Consequently, the top two candidates face each other in a run-off election December 28.

Korea - S&P Warning: S&P announced that it thinks it is more likely that the North Korean government led by the colorful Kim Jong-il would collapse rather than gradually reform itself. The ratings agency also urged South Korea to build the financial reserves that will be required once the Northern regimes collapse takes place. S&P noted that the North Korean collapse was only a matter of time and when it comes it will cause a greater shock to the South's economy than the 1997-98 Asian financial crisis. Although the North has started to reform its command economy over the past year by liberalizing wages and prices, the regime is simply too rigid to emulate the market openings adopted by other communist governments in China and Vietnam. As the rating agency stated: "Although some other Asian nations that used to have centrally planned economies have successfully moved to a market-based system, the North Korean leadership probably lacks the flexibility and vision to undertake such a change." To this we would add, there are elements within North Korea's leadership that clearly have a vested interest in no change, rather maintaining the status quo, which allows them to make a lot of money from trading in narcotics and weapons, including the transfer of nuclear technology. The North is constantly short of food and fuel and it is desperate to develop a more solid bilateral relationship with the United States in order to exact more aid and stave off becoming more dependent on China. In a sense, the North's view is better to become a U.S. client state with Washington far away than a client state of China next door.

Jordan – Changing the Guard: King Abdullah II changed his government in October by asking Ali Abu Ragheb to step down as prime minister and Faisal al-Fayez to assume that post. Ragheb was the prime minister since June 2000 and presided over an opening of the country to greater foreign trade, including a free trade agreement with the United States. During his period in office Ragheb allowed U.S. troops to deploy prior to the start of hostilities in the last Iraq war, something that did little to endear him to the majority of Jordanians. Ragheb also had problems with the economy. He came into office promoting reforms that aimed to reduce poverty, unemployment and corruption. Unfortunately, the Jordanian economy was hard hit by the effects of the regional security situation on tourism, a major source of foreign exchange. Growth fell from 4.9% in 2002 to a more modest 3%, which is slower than the country’s population growth rate. Al-Fayez is the former court minister, has a close working relationship to the King and is regarded as both pro-reform and pro-U.S. His new cabinet is smaller, shrinking from 29 ministers to 20, and is supposed to be more focused on reform. At the same time, al-Fayez should benefit from stronger economic growth expected in 2004, with the IMF forecasting 5.5% real GDP expansion.

Oman – ratings Affirmed: n November 5, 2003, Standard & Poor’s affirmed Oman’s BBB rating, with a stable outlook.

Poland: In early November, Fitch has changed the outlook for Poland's BBB+ sovereign rating from stable to positive, reflecting improvements in foreign exchange reserves. In addition, Poland's financial position will be reinforced by its just announced sale of 7.5-8.5% of TPSA (it now currently owns 14% of the Polish telecom). The sale of TPSA shares is expected to raise Euro 376 million, which will help finance the fiscal deficit and make up for lower tax revenues related to slow economic growth. We do not expect the sale of state shares will have any adverse impact on TPSA as the ratings were not dependent on state ownership. This was confirmed in conversations with both rating agencies. Indeed, it is felt that the government's intention to move ahead with the share sale will reduce volatility in the company's stock.

Russia– GDP Up, But Politics Hangs Like a Dark Cloud: Russian real GDP expanded 6.5% percent in the first nine months of 2003, compared to 4% growth over the same time in 2002, Russian Prime Minister Mikhail Kasyanov announced on Oct. 23. Kasyanov added that the GDP is expected to grow 6 percent overall in 2003, largely fueled by higher energy prices. Despite the strong nature of the economy, the political situation turned problematic in early November when the Putin government arrested Yukos oil Chief Executive Officer Mikhail Khodorkovsky on charges of fraud and tax evasion. Moody’s had only the month before generously raised Russia sovereign ratings from Ba2 to Baa3, a two-notch upgrade. Now, Standard & Poor’s, which rates Russia BB, is thinking of a possible downgrade, stating: “Although we do not expect it at this point, if the Yukos affair leads to a significant outflow of capital and ensuing deterioration in economic activity, then we would consider an outlook change or downgrade.” The fundamental problem is that Russia’s recent strong spurt of growth has been based on higher oil prices and a substantial inflow of foreign capital, largely attracted to opportunities in the hydrocarbon sector. The issues concerning Khodorkovsky are directly related to the fact that he refused to back out of being involved in the country’s political life, in particular, ahead of the upcoming Duma elections. Other Russian oligarchs have either opted out of Russia (taking some of their money with them to London and continental Europe) or have quietly joined ranks with Putin, who appears to have the support of the old security crowd in Russia. None of this is positive for Russia and it makes a mockery of Moody’s two notch upgrade.

---

---

Thailand – On Review for an Upgrade: In early October Moody’s placed Thailand’s Baa3 ratings on review for a possible upgrade. If the upgrade occurs, which is widely expected, Thailand will be climbing back up the ratings ladder from which it fell in the aftermath of the Asian financial crisis in 1997-98. Backing up the upgrade tide, the government raised its estimate of how fast the economy will grow over the next five years to 6% annually, up from 5%. In addition, the nation’s budget is close to being balanced for the time since 1997 and investors have made the stock-market in Bangkok the best performer in Asia. It is no surprise that Thai stocks are at six-year highs.

Vietnam – A Warning from Fitch: On November 6, Fitch sent a warning to Hanoi about the country’s sovereign rating. Although it is maintaining the BB- rating, it changed the outlook from positive to stable and, if present trends continue, we would not be surprises to see the outlook go negative in the months ahead. The rating agency changed its outlook on concerns about the widening trade and current account deficits, excessive domestic credit growth and a dispute with the International Monetary Fund. Vietnam has enjoyed fast economic growth over the last couple of years: 5.8% real GDP expansion in 2002, with 6% expected in 2003. Rapid growth, however, has fueled demand for imports, both as consumer goods and industrial inputs. The trade deficit in 2003 could be a record $4.5 billion, putting pressure on the current account balance, which could top 7% of GDP, well above IMF projections of 3.6% of GDP.

At the same time, credit at Vietnamese banks has increased by an annual rate of 30% for the first half of the year. Even for a more developed banking system this would place the banking system under pressure. In Vietnam, the banking system still has considerable bad debt on the books, especially at the state-owned banks that are still the dominant players. Public nervousness with the banks is already evident as there was a ruin on a private-owned bank, largely due to rumors. The message from Fitch is that while strong economic growth is great, it must be balanced with ongoing structural reforms and proper regulation and supervision in the financial sector. Without a balanced approach, Vietnam could be heading into trouble.