NEWS / Foreign Exchange

Latin America, Africa and Middle East, Asia, Emerging Europe & CIS

Latin America

Colombia
Standard & Poor's issued a commentary that examines the possible path to investment grade for the Republic of Colombia, which is now one notch below investment grade, through a comparative analysis with five investmentgrade peers. The article, entitled "Charting A Course To Investment Grade For Colombia Based On The Paths Of Five Comparable Sovereigns," finds that consolidation of reform could propel Colombia on a path to sustained economic growth, growing fiscal flexibility, higher exports, and declining debt burden, which would strengthen creditworthiness and lead to an investment-grade rating. According to Standard & Poor's, Colombia has witnessed a remarkable improvement in most key indicators over the past four years, which has supported improvement in its creditworthiness. Comparative analysis with several investment-grade peers indicates that improvement in both the fiscal and external indicators is needed to achieve further improvements in creditworthiness, said Standard & Poor's. Given spending constraints this will mean further increases in tax revenue, but it is unclear if improvements in tax administration alone will generate the revenue necessary to maintain the fiscal deficit at less than 2% over the medium term, the agency added.

Ecuador
President Rafael Correa said he wanted a radical overhaul of Ecuadorean politics after he overwhelmingly won a referendum that should enable him to wrest power from a Congress reviled as corrupt. With 19 percent of ballots counted, 83 percent of voters backed Correa's call for an assembly to rewrite the constitution and strip powers from a Congress they see as tainted for appointing cronies to state firms and the courts. The referendum exposed political fault lines in the world's largest banana exporter. More than half of Ecuador's congressmen were fired last month after opposing Correa's plans for the referendum. The clear referendum win is expected to bolster Correa's mandate and allow him to push ahead with initiatives such as ending the lease on a major U.S. military base, renegotiating oil deals and restructuring the national debt.

Africa & Middle East

Lebanon
The International Monetary Fund approved the first IMF finance for Lebanon, backing a $77 million emergency loan to help rebuild the country after last year's conflict with Israel.

South Africa
Good macroeconomic policies and a sound banking system mean South Africa's economy is well positioned to resist external shocks and should keep growing 5 percent a year, the International Monetary Fund said. The country's economy had not suffered from the sharp markets sell-off that followed a downturn in global risk appetite last spring. But the Fund warned the wide current account deficit and galloping credit growth were of concern. Low external debt levels, the central bank's growing reserves stockpile and the flexible exchange rate system, are factors in South Africa's favor, the Fund added. South Africa was one of the worst affected of emerging markets last year, forcing the central bank (SARB) to raise interest rates by a total 2 percentage points in an effort to cool sky-high private sector credit growth that is contributing to the current account deficit. The central bank held its repo rate steady at 9 percent and said the CPIX inflation measure will peak at 5.9 percent, near the upper end of the 3-6 percent band that the SARB targets. The IMF saw the rand as being fairly valued. On the downside, credit and consumption growth are too high. According to the Fund, South African banks were well capitalized with low levels of nonperforming loans so they would be able to withstand some deterioration in loan portfolios. But the boom carries risks for the more vulnerable households. The country has so far had no problem financing its current account deficit, thanks to large portfolio flows into stock and bond markets, the Fund noted. The deficit has surged to a three-decade record of 7.8 percent of GDP.

Asia

Thailand
Thailand's central bank will lower interest rates further to stimulate economic growth, the Bank of Thailand said. The central bank cut the 1-day repurchase rate, its key policy rate, by 50 basis points to 4 percent.

Emerging Europe & CIS

Russia
The Russian rouble is likely to appreciate further in 2007, a trend that the economy must adjust to, the Russian Finance Minister said. The rouble appreciated about 4 percent last year against the currency basket used by the central bank while in real effective terms it firmed some 7.6 percent, driven by booming oil and commodity exports and huge capital inflows from foreigners keen for a slice of the growing economy. The firmer rouble allowed Russia to cut inflation to single digits for the first time since the demise of the Soviet Union but some government officials and businesses have complained the appreciation is hurting competitiveness. The five-year long oil boom has helped Russia turn around its finances completely, going from a 1998 currency collapse and debt default to being a net creditor and having accumulated some $330 billion in reserves, the world's third largest. The country has moved to diversify reserves and money accumulated in a special stabilisation fund in recent years, buying more euros and sterling as the U.S. dollar has weakened. Russia and other emerging market countries running large current account surpluses were urged by the G7 industrialised nations to allow their currencies to appreciate in order to address global economic imbalances.

Turkey
Turkey's presidential election race officially began, but the ruling AK Party is expected to wait at least until Wednesday before saying whether it is proposing Prime Minister Tayyip Erdogan as its candidate. Tensions between Turkey's secular elite, which includes army generals and judges, and the Islamist-rooted AK Party are rising amid fears that Erdogan, a charismatic but divisive figure, might become head of state. More than 300,000 people joined a protest rally in Ankara in defence of Turkey's secular political system and against Erdogan's candidacy. Erdogan denies any Islamist agenda. Registration of candidates opened on Monday and runs until April 25. Erdogan, who comes from a humble background, would be the first Islamist-rooted head of state since the founding of the modern secular republic by Mustafa Kemal Ataturk in 1923. Although the government and parliament hold most power in Turkey, the president can veto laws, appoints many key officials and is commander-in-chief of the armed forces. The presidency also carries great symbolic importance. Political analysts do not expect any candidate other than the one fielded by the ruling party. Turkey's parliament, where the AK Party has a big majority, selects the president in a series of up to four votes expected to begin on either April 26 or May 3. Any member of parliament can stand for the presidency, but as he could not hope to win without the support of at least a sizeable number of deputies from the AK Party the opposition may opt not to field a candidate. President Ahmet Necdet Sezer, a staunch secularist, retires on May 16. He is barred from seeking a second seven-year term. Financial markets are closely watching the contest, aware of the risks of increased tensions if Erdogan or another top AK Party figure takes the presidency. Secularists fear Erdogan would chip away at the strict separation of state and religion.