Strengths
- South Korea’s exports increased by a higher-than-expected 31 percent in February (year-over-year), a fourth month of expansion. The increase came as external demand remained strong for semiconductors, automobiles and flat panel screens thanks to continued recovery in China and other economies.
- The Chinese Premier Wen Jiabao said the mainland is willing to make sacrifices in the negotiations over the Economic Cooperation Framework Agreement ahead of the second round of talks scheduled to take place mid-March with Taiwan.
- Peru’s fourth quarter 2009 GDP rose by 3.4 percent with full year GDP growth of 0.9 percent, the best in Latin America.
- Brazil’s Industrial Production (IP) rose 1.1 percent month-over-month (16 percent year-over-year) in January.
- Both Standard & Poor’s and Moody’s confirmed that Chile will retain its A+ and A1 investment ratings, respectively, following last Saturday’s massive earthquake. The agencies cited “strong institutions” and “financial flexibility” as well as “sound fiscal policy and a stable political backdrop” in Chile.
- The Russian MICEX benefited this week from significant demand for Russian bonds and equities with the 5-year Russian credit default swaps (CDS) now below a level of 160 basis points, almost back to summer 2008 levels. The market was also boosted this week by government inflows of $3.3 billion into state pension funds, some of which should see its way into the Russian equity market.
- Even after the exodus of scientists and engineers from the Soviet bloc in the 1990s, the intellectual capital in Russia and its former satellite states in Emerging Europe is on par with that of the U.S., the European Union and China. In addition, it is multiples ahead of India and Brazil, two of Russia’s BRIC counterparts.
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Weaknesses
- China’s Purchasing Managers’ Index moderated in February, albeit still in the expansionary territory. The slowing was due to adverse weather, the Chinese New Year holidays and liquidity tightening.
- Malaysia’s central bank surprisingly raised its overnight policy rate by 25 basis points to 2.25 percent to normalize monetary conditions and prevent risks of financial imbalances as the economy exited recession last quarter and continued to recover.
- February traffic for Mexican airport operator Grupo Aeroportuario del Sureste declined by 6.9 percent year-over-year. However, note that despite a 5 percent drop in passengers in fourth quarter 2009, EBITDA (earnings before tax, depreciation and amortization) rose by 3 percent in light of higher revenue per passenger. Watch to see if the trend continues in the first quarter of 2010.
- The Czech economy contracted by 4.2 percent year-over-year during the last quarter of 2009, a decline similar to that seen during the third quarter. According to monthly data, industrial production decreased by 1.8 percent, while business services dropped by 7.7 percent year-over-year.
Opportunities
China pledged to spend $19 billion on agriculture this year to help raise government purchase prices of crops and fund research in agricultural technology. Going forward, the government is expected to continue its focus on boosting rural income, a key political mandate to preserve social stability, as the income ratio between urban and rural China reached 3.33-to-1 in 2009, the highest in three decades. Chinese agriculture should remain a major investment theme in the intermediate future.
- Scotiabank acquired the wholesale banking operations of Royal Bank of Scotland in Colombia to serve commercial and corporate clients. Today, Scotiabank has around 32,000 employees and 1,400 branches in Latin America
- This week, after years of negotiations, Peru’s free trade agreement with China came into effect.
- Recent political turmoil has resulted in a significant upward move in Turkish implied equity risk premiums (ERP) to 7.4 percent from 5.8 percent in January. Turkish ERP is now one of the highest in the region but is expected to normalize, according to Goldman Sachs research.
Threats
- Indications have been increasing recently that Chinese steelmakers are facing disadvantages in the annual iron ore price negotiations and may have to accept higher contract prices than they originally expected.
- Remittances from the U.S. to Mexico in January declined by 15 percent. If that rate sustains for the long term, it may have a detrimental impact on consumption patterns in Mexico.
- Tax revenues outstripped the Russian government's target so far this year. At the current pace, the state reserve fund will be more than sufficient to cover the entire budget deficit. A Troika Dialog economist argued that the government could escalate ineffective expenditures and inflation in the years to come if it goes forward as planned with sovereign borrowing.
