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Emerging Markets

Emerging market sell-off, Venezuelan oil shortage, Abu Dhabi debut bond, Nigeria’s new cabinet, Ecuador’s new economy minister, and Czech rate hike

Almost all emerging market assets suffered yesterday alongside developed stock markets, as investors moved into defensive assets such as US Treasuries. Investors are becoming fearful that losses from the US mortgage market will lead to a wider global credit crunch. The Argentine peso was one of the few high-yielding currencies to stage a recovery, after massive central bank intervention to stem losses that began late last week, but the unit is still a long way from recovering all the ground lost in recent days (see “Investors shun Argentina on pre-election fears”).

Venezuelan bonds were hit particularly hard in yesterday’s sell-off, after energy minister Rafael Ramirez revealed earlier in the week that the state oil company PDVSA needed massive investment in new capacity to maintain current oil output. According to OPEC data, Venezuelan oil output stood at 2.37 million barrels per day in June 2007, well below the average level of 2.54 million barrels per day in 2006, meaning that the country is failing to capitalize on oil prices of more than $70.0 per barrel.

The Emirate of Abu Dhabi overcame treacherous market conditions to price its debut bond on Thursday, establishing the first true sovereign benchmark for the Gulf region. The $1bn five year deal attracted $2.7bn of demand, allowing bookrunners Citigroup and Deutsche Bank to price at the tight end of the 18bp-20bp over mid-swaps guidance range. Hamad Al Hurr Al Suwaidi, undersecretary of the Abu Dhabi finance department, said the government’s aim was to raise Abu Dhabi’s profile in the international capital markets, to establish a sovereign benchmark and to set a yield curve against which corporate issuer could borrow. It plans to issue on an annual basis. For the complete story, please see our sister publication, the newspaper of the global capital markets.

President Alhaji Umaru Musa Yar’Adua of Nigeria has unveiled his cabinet after being elected in April 2007. His first nomination for finance minister was rejected by the senate, but he has now appointed Shamsudeen Usman, a former central bank deputy governor who is widely expected to continue market friendly economic policies of the previous administration. Yar’Adua has retained the energy portfolio held by the previous president Olusegun Obasanjo, in an effort to take personal control of curing Nigeria’s shortage of refinery capacity and electricity generation. For an interview with President Yar’Adua, see “Nigeria’s new leader defends reform stance”.

Fausto Ortiz, former deputy minister of the economy in Ecuador, has replaced Ricardo Patino. Ortiz is regarded as a more market friendly figure, lowering the risk of an aggressive haircut on Ecuadorean sovereign debt (for more detail, see Daily digest for July 26). The next coupon payment on Ecuador’s US$ 2030 Global bond is due on 15 August 2007.

The Czech central bank hiked its benchmark repo rate 25 basis points to 3%, after revising upwards its inflation forecasts for 2008, toward the top end of its 2%-4% inflation target band. The latest inflation expectations survey shows a stable rate of 3.1% for one-year inflation, but household consumption is accelerating, and the central bank governor Zdenek Tuma indicated that the monetary policy committee had even discussed the possibility of a 50bps hike. For this reason, analysts expect further monetary tightening in 2007. The hike shielded the koruna from the broad emerging markets sell-off, making it one of the few EM currencies to strengthen on the day.