Emerging Markets Diary (July 19, 2010)
Strengths
- China’s inflation rate for June came in at 2.9 percent versus expectations of 3.3 percent. This reflected declining food prices during the month.
- Retail sales in China have been fairly consistent and in June came in line with expectations at 18.3 percent. The recent trend of rising wages bodes well for continued strength in consumption going forward.
- Singapore’s GDP expanded at an annual rate of 26 percent in the second quarter. This means that growth in the first half of the year was the fastest since record-keeping started in 1975. The government raised its growth forecast this year to a mid-point of 14 percent—the forecast was previously 8 percent.
The unemployment rate in Turkey declined sharply to 12 percent in April. The rate stood at 14.9 percent in April 2009. All sectors saw higher employment. Non-farm unemployment and unemployment among the young also showed year-over-year improvement.
Weaknesses
- Second-quarter GDP in China came in slightly below consensus at 10.3 percent. While this reflects a slowdown from the first quarter, the government’s goal is to slow the economy toward a more sustainable level of 8 to 9 percent.
- Industrial production in China surprised to the downside at 13.7 percent. Expectations were 15.1 percent, and May’s figure was 16.5 percent. The sharpest declines were in steel production and power production.
- Ukraine abandoned plans to sell its first Eurobond since 2007 as investors demanded higher yields than the government was willing to pay, according to Bloomberg. The government has been issuing IOUs to exporters to cover unpaid value-added-tax refunds.
Opportunities
- With the greater-than-expected weakness in China’s macroeconomic numbers, interest rate and required reserve ratio hikes become less likely.
- Higher oil prices spurred onshore drilling in Russia. Land development drilling in Russia was up 18 percent year over year and 10 percent month over month in May, according to the statistics published by Interfax. Russian drillers are also preparing to deploy rigs to southern Iraq in the near future.
Threats
- If the sharp decline in industrial production continues in the coming months, there could be job cuts. This would be a negative for the growing consumption story within China.
- Reliance on state support is potentially risky for minority shareholders of Russian electricity distribution companies, according to JP Morgan. Minority shareholders may face considerable dilution if the state provides money for capital expenditure through additional share issuance, as occurred for federal transmission and hydro generation companies in 2009 -2010.
