Citigroup’s Ajay Kapur reported from India on the country’s strengths and weaknesses. “India's entrepreneurs have the confidence; its governance, while unwieldy, is pro-growth… its non-resident population a source of knowledge and capital… its macroeconomic management quite good.” Long-term investors will reap the rewards of strong cash flow and high capacity utilization in key industries, and private and public infrastructure projects.
Kapur is cautious short-term: “A lack of global risk appetite could continue to hurt institutional foreign fund flows,” while corporate earnings growth moderates and “higher oil prices, inflation and rising global interest rates could weigh on the market.”
The Mexican government has stated its intention to issue a 30-year, fixed-rate, peso-denominated bond some time before the end of 2006. Credit Suisse’s Igor Arsenin and Alonso Cervera estimate the pricing of this potential issue. “We think that a reasonable way to extend maturity on a bond yield curve from 20 to 30 years is to assume constant forward rates.” The positive 30-/20-year yield differential is smaller than the 20-/10-year slope observed in the market. There is a 40 bps slope between Mexico’s 20- and 10-year Bonos. “Our best estimate is that the new 30-year Bono would start trading in a 10-20 bps range over 20-year Bonos.” The result is broadly in line with the data from markets with a well-developed yield curve extending to 30 years.
Dresdner Kleinwort’s Raffaella Tenconi and Arnab Das visited the Czech National Bank to discuss the latest inflation report. “Despite the CNB’s large upward revisions to the output gap estimates, we don’t yet see a case for a very aggressive monetary tightening in the year ahead.” According to the banks’ latest report, inflation is likely to overshoot the 2 to 4% inflation target by the end of next year. The output gap is up from 0.25% of GDP to 0.8% for the first quarter of 2006 according to the Bank, and close to 2.5% of GDP according to Tenconi and Das.
“Potential growth rates are fraught with problems and structural improvements are almost always visible only years later… this task gets even harder in the case of a transition economy with very fast productivity growth.” The time lag between the output gap and inflation varies depending on labour market developments, and over the past year the relationship between the wage premium (wages above labour productivity) and CPI growth appears to have broken down."
China’s exports chicken came before its savings egg, according to Standard Chartered’s Stephen Green. Processing firms operating on China’s coast, rather than households, are responsible for China’s very high savings rate and external account surplus. Processing firms generate surpluses that cannot be absorbed even by a corporate sector that is a net dis-saver. “Think about it as a developed world, savings generating manufacturing centre operating within a developing country with high rates of investment but weak consumption dynamics.. The funds generated by the sector cannot be absorbed by either investment or consumption, leading to a tendency for excess savings.”
There are several reasons why processing firms save so much: the lack of collective bargaining keeps a lid on worker’s wages; few Chinese households derive income from the sector as very few are shareholders; and foreign owners of processing capacity are keeping funds in China, in anticipation of a Yuan appreciation.