NEWS / Foreign Exchange

Latin America, Afsia and Emerging Europe & CIS

Latin America

Ecuador
Ecuador's President Rafael Correa vowed to keep the U.S. dollar as the country's currency, but said a new constitution could establish a dual-currency system. Correa, a highly popular leftist economist, has worried businessmen and foreign investors with his criticism of the country's adoption of the U.S. dollar as its currency in 2000 after a crippling financial crisis. Ecuadoreans will head to the polls on April 15 to vote on a Correa-backed referendum on whether to hold an assembly with powers to rewrite the constitution, which could curb the influence of traditional political parties. A weakening opposition fears that Correa wants to consolidate his powers and seek radical reforms via the assembly that could undermine private property and hurt the country's economy.

Asia

China
China's short-term money rates and the yuan are set to rise while equities may pull back from record highs after the latest hike in bank reserve requirements, but the reaction will be mild, analysts said. The 0.5 percentage point reserve rise, to take effect on April 16, came several weeks earlier than many in the markets had expected. The sixth reserve requirement rise since last June merely confirms a monetary tightening bias that the markets had already expected to continue until at least late this year.

Emerging Europe & CIS

Czech Republic
Fitch affirmed the Czech Republic's Rating at 'A' with a Stable Outlook. The Czech Republic's ratings are supported by ongoing rapid real convergence with western Europe and a strong external financing position. Combined with a moderate general government debt stock and better-than-expected performance of the public finances, these factors were reflected in Fitch's upgrade of the Czech Republic's ratings by one notch in August 2005.

Kazakhstan
Standard & Poor's affirmed its 'BBB' rating on the Republic of Kazakhstan. The outlook is stable. The affirmation reflects the growing net asset position of the government and strong economic expansion that offset the contingent liability risk stemming from high domestic credit growth and the burgeoning external borrowing of the banks, said Standard & Poor's. The stable outlook balances the continued prudent fiscal policy against therisks of increasing inflation and deterioration in asset quality for banks. Risks to the budget from oil price fluctuations have been partially mitigated by the government's accrual of substantial reserves, added Standard & Poor's. Inflationary pressures may force the National Bank to allow an acceleration of the Kazakhstani tenge's appreciation, which would complicate attempts to diversify the economy. The recent proposal to limit external borrowings in the banking sector could be positive for the sovereign ratings if the potential negative implications of the policy are well managed. The policy challenge is to support continued economic expansion, while containing the vulnerabilities associated with the rapid growth of bank credit. Deterioration of the government's financial position due to sharp oil price declines, substantial increases in already-high inflation, or weaker asset quality for banks could result in downward pressure on the ratings. A significant deterioration in the political climate could also trigger a downgrade.