Asian bourses continue to fall in tandem with negative US economic news. Hong Kong’s Hang Seng closed down 3.6%, Japan’s Nikkei index shed 3.3%, India’s Sensex slid 5% while Taiwan’s Taiex lost 1.47%. These losses follow Thursday’s US figures that show the number of home repossessions hit record levels in the fourth quarter of 2007.
Premier Wen Jiabao called on China to pacify surging inflation and restrain bank lending as authorities attempt to cool an overheating economy in a speech delivered at the National People’s Party Congress in Beijing. In January, consumer inflation hit an 11-year high of 7.1%, pushing Wen to raise 2008 inflation forecast from 3% to 4.8%. The government’s target growth for the year is 8% compared with 11.4% in 2007.
Capital flows to emerging markets will soften in 2008 after last year’s record inflows, according to the Institute of International Finance. It said net flows should reach $731bn this year - 6.5% less than in 2007. However, foreign direct investment will in fact rise to $286bn from $256bn last year. Equity investment will fall modestly to $39bn compared with last year’s $43bn. However, bond and commercial bank lending will see the biggest decline shedding to $406bn from $483bn – mainly due to lower external borrowing in emerging Europe.
Standard & Poor’s ring-fenced Turkey and Hungary as the two emerging sovereign most exposed to an abrupt decrease in risk appetite. Both countries have “high gross external financing needs and rely considerably upon non-resident participation in government securities markets”. Turkish currency swaps have increased by 10-15bp as foreign investors sell risky assets or diversify into local bank deposits.
Fitch ratings upgraded the Czech Republic’s long-term foreign currency sovereign debt rating by one notch to A+ with a stable outlook. It cited the introduction of tax and spending reforms and the government’s strong fiscal base as reasons for the decision. This is further confirmation that the nation along with Slovakia, Poland and Russia are defensive sovereigns within the EMEA region in this current climate. Investors this year are expected to diversify out of Hungary, Iceland, South Africa, Kazakhstan and the Baltic’s and seek safer markets within EMEA.
Russia’s will miss its targets for domestic debt issuance in the first quarter of the year, the finance ministry has admitted, due to a lack of demand for state debt, as returns are at historically low levels relative to official interest rates. This week the finance ministry cancelled two auctions and its RUB 120bn ($5bn) debt target for Q081 may no longer be met. In the secondary market, yields for most maturities are still around 7% compared to 12.7% inflation year-on-year in February. Foreign investors are similarly unenthused for government T-bills due to the global liquidity strain and the fears that a near-term upside in the ruble’s favour is limited.