NEWS / Foreign Exchange

Latin America, Africa & Middle East, Asia

Emerging Markets

Emerging-market bonds surged last week after the Federal Reserve unexpectedly dropped its bias toward raising borrowing costs, helping buoy demand for riskier assets. Fed policy makers said after a meeting that they held the benchmark overnight rate at 5.25 percent and shifted ???to a neutral posture??? on future rate moves. The Fed said it expects the U.S. economy to continue expanding at a moderate pace, preserving demand for the exports of developing nations.

EM dedicated bond funds saw net inflows over the past week. According to Emerging Portfolio, inflows into EM dedicated bond funds totaled $44mm during the week ending March 21. This is the second consecutive weekly inflow, after EmergingPortfolio reported a $555mm outflow two weeks ago (the largest outflow ever reported by EmergingPortfolio in absolute size). For the year, EM dedicated bond funds have seen $2.36bn in net inflows.

LATIN AMERICA

Brazil
The upward revision of Brazil's economic growth figures is not enough to trigger an upgrade in the country's ratings, Standard & Poor's and Fitch Ratings said on Thursday. Hopes of such an upgrade rose among analystsafter Brazil's official statistics agency released a series of revised GDP data that shows Latin America's largest economy grew more than initially thought between 2002 and 2005. In cumulative terms, the revised nominal 2005 GDP is now almost 11 percent higher than a previous estimate, which will reduce the country's debt-to-GDP ratios, widely watched by the ratings agencies. Fitch noted that, even after the GDP revision, Brazil will still need to reduce its debt burden before being upgraded. Brazil's gross government debt-to-GDP ratio, even with the new GDP numbers, is 68 percent of GDP, significantly higher than the 'BB' median, which is 48 percent of GDP, Fitch said.

Peru
Standard & Poor's said that it raised its Banking Industry Country Risk Assessment (BICRA) on Peru to Group 6 from Group 8. This action primarily reflects the improved economic environment in Peru and its beneficial impact on the creditworthiness of banks operating in the country, whereas industry risk is also viewed as more favorable as a result of the financial system's consolidation and the degree of sophistication of major banks. The improvement in banking industry country risk is a positive element that underpins all bank credit ratings in Peru. During the past years, the implementation of a strong macroeconomic framework characterized by high economic growth, low inflation, decreasing debt levels, and a stronger external position contributed to the reduction of Peru's historic vulnerabilities. On the other hand, despite the improvements in governability, Peru's social and political situation remains weak. Looking forward, Peru faces the challenge of reaching a higher degree of economic diversification and increasing investments to diminish its overdependence on commodities, sustain economic growth, and reduce poverty levels. In addition, the government's strategy of deepening its local capital market and increasing the use of domestic currency is yielding positive results (with total dollar deposits decreasing to 64% as of Dec. 31, 2006, from around 80% five years ago). The Peruvian banking system is much stronger than in the past. In the context of sound regulations, the system has benefited from the growing participation of foreign-owned banks (which account for 47% of the system's loans) in terms of financial flexibility, overall policies, and products and services. The improved economic environment has resulted in continually increasing financial intermediation to the private sector, with banks now presenting a more diversified lending portfolio, and good asset quality. Liquidity has remained high and capital levels are adequate to sustain current growth.

AFRICA & MIDDLE EAST

South Africa
South Africa's current account deficit swelled to 7.8 percent of GDP in the fourth quarter of 2006 on a surge oil imports and higher service payments. The shortfall widened from a revised 5.7 percent in the third quarter and 6.1 percent in the second quarter, bringing the deficit for the year to 6.4 percent of GDP, the highest yearly gap since 1981. "In the fourth quarter of 2006, exceptionally strong import demand for crude oil and capital equipment, along with comparatively moderate export growth, resulted in a widening of the deficit on the trade account of the balance of payments," the Reserve Bank said in the March quarterly bulletin. The current account deficit accordingly expanded from 99.9 billion rand ($13.68 billion) in the third quarter to 143 billion rand in the fourth quarter, equal to 7.8 percent of GDP. The fourth quarter figure was also the highest quarterly gap in almost three decades. Robust consumer spending in Africa's biggest economy has pushed economic growth higher to around 5 percent but has also helped widen the trade deficit due to an increasing appetite for imported goods. A relatively strong rand currency in the preceding years, until its depreciation in 2006, also hit exporters, many of whom struggled to compete against cheaper imports. The growing shortfall on the current account knocked the rand by about 10 percent against the dollar in 2006 and exports have since started to pick up pace. A high consumer spending has also added to inflationary pressures, and helped prompt the Reserve Bank to hike its repo rate by 200 basis points to 9 percent in the second half of 2006. The central bank said the rise in the deficit in the fourth quarter was largely due to a sharp rise in oil imports after the reopening of refineries following routine maintenance and a widening of the deficit on the trade and services account. Had the extra increase in oil shipments been excluded the deficit would have been 5.8 percent of GDP.

ASIA

Malaysia
Malaysia's ringgit will climb to the highest in more than a decade in a year as the government may lift a ban on trading the currency outside the country, Citigroup said. The bank raised its ringgit 12-month forecast to 3.36 per dollar from a previous forecast of 3.45, after Bank Negara Malaysia on March 21 eased curbs on foreigners investing in the country. The central bank still stops domestic banks from trading the currency overseas, a ban aimed at cutting supply of ringgit to speculators as Asian currencies tumbled in 1997-98. The ringgit advanced 2.2 percent against the dollar this year to the highest since February 1998, the second-best performer among 15 most actively traded Asia-Pacific currencies after the offshore Thai baht.