Emerging market external debt and equity markets, together with high-yielding currencies, all slipped back on Thursday and Friday, as renewed fears about the impact of the US credit crunch on global financial liquidity took hold. This slide wiped out most of the gains seen on Tuesday and Wednesday either side of a 25 basis point interest rate by the US Federal reserve. Fed chairman Ben Bernanke signalled the monetary authority’s possible return to a neutral bias on Tuesday, but was forced to inject $41 billion liquidity into the interbank market just two days later, as attention focused on another segment of the financial sector that could face ratings downgrades due to sub-prime mortgage exposure: the debt insurance industry.
China’s yuan rose to a new record against the dollar this week since its revaluation in 2005, after the US Fed cut interest rates on Tuesday. The yuan reached 7.4558 versus the dollar, as Shanghai markets closed today, a gain of 0.56% for the week. The People’s Bank may also be allowing greater appreciation to help fight rising inflationary pressures. The Chinese government raised domestic fuel prices yesterday by 10%, further stoking inflation that is near the fastest in over a decade. But analysts say this move is unlikely to ease tensions between Shanghai and the US and Europe, who are calling on China to adopt a market-determined exchange rate. (For coverage on China rejecting calls from G7 finance ministers to revalue the yuan during this year’s IMF annual meeting, please click here)
The International Finance Corporation, the private sector arm of the World Bank, broke new ground this week, becoming the first foreign institution to launch a Brazilian-real denominated ‘Amazonia’ bond. The deal, which matures in January 2011, was priced with an 11.96% coupon and was 2.5 times oversubscribed. The bond is designed to deepen local markets in the country and increase access to long-term local currency financing for domestic companies. (For more details, please see Emerging Markets sister publication, Euroweek)
The world’s number one bank by market capitalization, Industrial & Commercial Bank of China (ICBC), has paid $5.6 billion for a 20% stake in Standard Bank, the largest bank in Africa with $165 billion in assets. The deal will provide ICBC with a vehicle to gain access to the continent’s growing and resource-rich economy, and may signal a new trend of Chinese banks diversifying their exposure to other emerging markets by gaining a foothold into Africa’s growing investment-banking and insurance industries. Analysts say this landmark deal ushers a new era of China banking on the continent’s economic potential, compared with its previous strategy of focusing on cheap loans to extract Africa’s oil and mineral wealth. (For coverage on China’s investment in oil-rich Angola as a case study in the closer economic and political Sino-African ties, please click here)
Moody’s Investor Services downgraded and placed on negative outlook six leading banks in Kazakhstan amid concerns that the overleveraged banking sector will be further hit by deteriorating global liquidity. Kazkommertsbank’s was downgraded to D- from D with a negative outlook, and Bank TuranAlem’s foreign currency debt ratings were similarly downgraded. The agency also placed Halyk Bank, Alliance Bank, Bank CentreCredit and Temir Bank on negative outlook. Kazakh financial institutions have borrowed heavily from international capital markets to fund a consumer boom in the oil-rich nation. But the turbulence in western credit markets has constrained efforts to refinance debt and the agency estimates that the banking sector will be have to repay foreign debts amounting to $12 billion next year. This is the latest in a series of downgrades, after Standard & Poor’s lowered the sovereign ratings one notch last month, over fears that troubled banks could become a liability for the government. (For an interview with the Kazakh central bank governor calling on the country’s banks to adopt better risk management strategies, please click here)