Emerging Markets Diary (September 7, 2010)

Emerging Markets Diary (September 7, 2010)

Strengths

• India’s GDP expanded by 8.8 percent year-over-year in the second quarter, accelerating from the first quarter’s 8.6 percent, driven by robust growth in services and a gradual recovery in agriculture.
• China’s Manufacturing Purchasing Managers’ Index (PMI), from both official and private sources, registered an upside surprise in August. The official PMI rose to 51.7 from 51.2 in July, and the HSBC/Markit PMI recovered to 51.9 from 49.4.
• A preliminary report from the China Automotive Technology & Research Center suggests that China’s passenger car sales increased 59 percent in August from a year earlier, much faster than July’s 15.4 percent, due to government subsidies for energy-efficient cars and higher dealer incentives.
• Thanks to moderating food inflation and appreciating currency, Indonesia’s Consumer Price Index rose by a less-than-expected 6.44 percent (year-over-year) in August. The central bank kept its benchmark interest rate unchanged at 6.5 percent.
• PAZ Chile, via its Brazilian affiliate Paz Realty, signed a joint venture with Engelux, a Brazilian group, to develop and market middle income residential real estate projects. The first project will be in Rangel Pastaña in central São Paulo and will involve the property PAZ Corp. acquired in April. PAZ’s goal is to generate $75 million in revenue annually from Brazil.
• Chile’s unemployment rate in July declined to 8.3 percent from 8.5 percent the prior month and 11.6 percent in August of last year. The buoyant retail sector, which accounts for 20 percent of employment, has had a positive impact on employment growth in Chile this year.
• Colombia continues to attract investors – foreign direct investment (FDI) for the seven months ending July of this year reached $4.4 billion, 88 percent of that went to energy and mining sectors. Such an inflow of foreign capital has led to local currency appreciation prompting President Santos to call on the central bank to “be creative” in preventing further currency strengthening. The strengthening negatively impacts the country’s exporters.
• Eurostat’s second quarter GDP release confirms that the eurozone economies grew 1 percent quarter-over-quarter in the second quarter of 2010, outpacing the 0.7 percent consensus, according to RGE Monitor. Domestic demand was the main growth driver.

Weaknesses

• Singapore announced, for the third time this year, new measures to restrain speculation in residential property. This includes making the existing 3 percent stamp duty applicable for housing resale within three years from the previous one year, and raising the down payment ratio to 30 percent from 20 percent.
• Led by rising food and beverage prices, Thailand’s CPI climbed by a higher-than-expected 3.3 percent year-over-year in August.
• According to central bank statistics in Mexico, commercial banks in the country are rejecting 70 percent of credit card applications, down from 75 last year, due to insufficient income and excessive leverage of applicants. At the same time, the number of credit cards in the system declined by 11 percent over the last 12 months as banks have curtailed the spending habits of the most risky retail customers.
• Haberturk and NTV see a possible salary increase of 8.2 percent for Turkish civil servants in 2011, higher than an earlier proposal of 2.5 percent for this year (5.1 percent annualized). This is interpreted as a populist measure ahead of the referendum and approaching general elections.

Opportunities

• Several first-tier cities in China have announced measures to regulate pre-sales proceeds of property developers. Developers are currently allowed to collect 100 percent upfront, one to several years before completion of construction. This may be more effective in bringing down housing prices in China, as pre-sales proceeds have been a more significant source of funds for developers than bank loans. Lower housing prices should help reduce government policy risk going forward and facilitate consumer spending in other discretionary items including automobiles.

• Global Finance Magazine published the list of the “World’s Safest Banks” and Latin America is dominated by Chilean representatives. They include Banco del Estado de Chile, Banco de Chile, and Corpbanca that have been classified as the first, second, and fourth safest banks in Latin America.
• Marco Antonio Bologna, CEO of TAM holding, indicated that the synergies of the TAM/LAN merger will take two to three years to materialize. Bologna believes that the merger is not dependent on the approval of the new law, which will increase the foreign ownership limit of an airline from 20 percent to 49 percent. Investors are still awaiting the details of the source of synergies ($400 million per year cost per revenue) of the TAM/LAN merger.
• Pemex’s CEO, Juan Suarez Coppel, has been quoted as saying that the annual capital expenditure of Pemex will average $26.8 billion between 2011 and 2019. This year, the capex is likely to reach $20 billion. Mexico has experienced a steady decline in output of crude oil production in recent years and modernization of Pemex is seen as a vital component of reviving crude oil production, the state’s main source of revenue.
• Various telecommunications companies in Mexico are lobbying for a 100 percent foreign ownership of fixed-line operators. Currently there is a 49 percent foreign ownership limit for fixed-line companies but there is no such restriction for mobile operators. Axtel would likely be an obvious take-out candidate should the regulation be changed.
• Peru concluded negotiations for a foreign trade agreement with South Korea and it is estimated that the agreement will begin in 2011. Both countries have agreed to eliminate all tariffs within 10 years.
• Russia has seen a number of sectors increase penetration in the last decade. The key characteristic of these sectors is that they started off with low levels of penetration compared with Europe, and then grew rapidly toward European levels. There are still a large number of sectors with listed stocks where very high growth is possible in the next five years (see chart).

Threats

• Inflation expectations in Argentina this year have reached 33 percent.
• Bankruptcy of the Mexican airline, Mexicana, will likely have an impact on the businesses of the airport groups – GAP derives around 17 percent of revenue from Mexicana while ASUR’s exposure is 10 percent. However, many of Mexicana’s destinations will be covered by other airlines, so the bankruptcy’s financial impact will be less severe than originally feared.
• The Russian government is close to finalizing the scale for progressive export duties in nickel, according to VTB. The duty will reportedly be linked to nickel LME prices, with the base price set at $12,000 per ton. With nickel prices in the range of $12,000-$15,000 per ton, a 5 percent export duty will be applied. In the $15,000-$18,000 per ton range, a 10 percent duty will be applied. A similar scheme is being discussed for copper.
• Vladimir Putin has announced that Russia will not lift a ban on grain exports before next year’s harvest, extending the embargo for another year, sparking fears over a global food shortage, according to Telegraph. Rising prices around the world have raised concerns about a return to the political instability in 2008, when Haiti, Kenya and Somalia were among those that saw rioting over the cost of living.