Emerging Markets Radar (February 20, 2012)
Strengths
- Chinese Premier Wen Jiabao said the nation needs to start fine-tuning economic policies this quarter, the first indication of a timeframe for an adjustment he has pledged since October.
- China has instructed banks to roll over loans to local governments as the principal on much of the debt can’t be repaid, the Financial Times reported.
- China pledged to invest in Europe’s bailout funds and sustain its holdings of euro assets.
- India’s inflation was down to 6.55 percent year-over-year in January from 7.47 percent in November on lower food prices and a nearly 7 percent appreciation of the rupee in January. Markets reacted positively to this.
- Colombia’s exports rose 43 percent to $5.5 billion in December, the national statistics agency said.
- Despite very cold weather in Europe, Polish PMI at the end of January reached 52.2 and industrial production increased by 9 percent.
Weaknesses
- Wuhu city stopped its recently announced housing tax relief programs, probably under pressure from the Beijing central government which insists on housing market curbs. In fact, Wuhu is a third-tier city and, therefore, never had housing purchase restrictions. Although China reiterated frequently that its housing tightening policy wouldn’t change, it has lowered mortgage rates for first-home buyers and the People’s Bank of China said it would make sure enough funds are available for mortgage lending.
- Spain was downgraded for the third time in two months by Moody’s, as it was revised down to A3 this week and maintained a negative outlook, citing fiscal slippage and vulnerability to market stress.
Opportunities
- The chart below shows there were almost no railway projects awarded since the second quarter of 2011 due to the Wenzhou rail accident in July. With the investigation report out last month, JP Morgan believes the drought in new projects will end very soon. From a low base in 2011, construction revenues should look much better this year.
- Many people thought China had overinvested in railway and that there is not enough demand for rail. BCA, in its recent research, has shown that the length of the railway system in China increased by 50 percent since 1995, a remarkable gain, but passengers travelling on the country’s railway system per year doubled, and railway freight increased by 150 percent during the same period.
- Japan announced this week that it would expand its asset purchase program by JPY 10 trillion and made a formal announcement of its inflation target of 1 percent in an attempt to stave off deflation and weaken the currency in the face of monetary easing in the U.S. and other developed markets.
- In March, Brazil plans to ease a tax increase charged on imported cars for automakers investing to build local assembly plants. The surcharge of as much as 30 percent was implemented last month, amid protests from Chinese automakers, to stem a surge of imported cars being sold in Latin America’s largest economy. “The tax was used as an emergency brake, now we will lower it,” head of the Brazilian Industrial Development Agency, Mauro Borges Lemos, said in an interview this week. “It’s an incentive to speed up investments.”
Threats
- Recent reports from China show that new loans are below expectations, which will probably not improve liquidity in the economy.
- The Globe and Mail reported that optimism grew late this week that Greece had finally done enough to secure a second bailout despite worsening relations with Germany, but doubts remained over lenders’ demands for tighter supervision of how Athens will implement the deal. Greek officials say they have done everything asked of them for eurozone finance ministers to sign off on the €130-billion euro rescue package on Monday, a month before Athens needs the money to make €14.5 billion of debt repayments due on March 20 or go bankrupt.
