Average wage settlement has far outpaced weak, below-trend economic growth, impairing productivity. South Africa’s unit labor costs had one of the largest increases in the world, a risk the IMF and OECD highlighted in recent reports. In the 2010 Article IV report, the IMF estimated a 16% increase in unit labor costs from 2007-09, driven by a near 11% increase in public sector wages. The increase in wages without a concurrent increase in labor productivity poses major upside risks to inflation, a concern of the South African Reserve Bank. Though wage increases fell slightly to 8.2% in 2010 from 9.3% the previous year, they far outpaced inflation, which eased to a 3.5% y/y pace by Q3 2010. As such, rising wages could counteract the other deflationary and disinflationary forces in the economy.
Zambia’s economic performance is closely tied to the price of and demand for copper, which accounts for 70% of foreign exchange earnings and exports. This lack of export diversity in the economy leaves Zambia extremely vulnerable to global shocks since foreign investment is correlated to the copper price. While higher copper prices boosted the economy (and made Zambian T-bills a temporary wonder) during the 2007-08 commodity boom, the subsequent correction of commodity prices broke the country’s growth momentum, which was further trammeled by the global slowdown. A combination of industrial destocking, weak industrial production and a weak property sector exacerbated the shift in exports from advanced economies to EMs in general—and China in particular. From 2007-09, Zambian exports to the EU fell by 41%, driven by a reduction in metal exports. Notably, exports to Zambia’s largest trading partners within the EU—the UK and the Netherlands—both declined. (The average annual export growth dropped 23% and 6%, respectively.) Switzerland, Zambia’s main export destination, also significantly reduced its metal imports over the period.
Over the last week two frontier markets-Ukraine and Kazakhstan- retracted their ambitions to venture into international debt markets with Eurobond issuances. In both cases, these are countries that are not in need of immediate cash, but they are emblematic of a recent trend in which frontier markets are still having trouble accessing global markets at a price they like.
We hope all our readers are enjoying the World Cup! Given the international diversity of our analysts and strategists, the event has certainly been the preeminent topic of water-cooler conversation this week in our New York and London offices. While we are recognizing the limits of our abilities and refraining from forecasting a winner, we noted in a recent Critical Issue, “Can Economists Predict the World Cup Winner?” that many other research firms are, in fact, making such calls.
During his recent visit to Sub-Saharan Africa, IMF chief Dominique Strauss-Kahn penned a piece Africa is Back which exudes optimism of an economically brighter sound future for the region, which has been emerging from recession. Kahn stopped by South Africa, Kenya and Zambia where he met members from the business, political and academic communities to evaluate the effects of the global financial crisis on the continent. Kahn stressed that sound economic policies adopted by African nations, including countercyclical monetary and fiscal policies have helped them buffer the effects of the crisis and it is these policies that will ensure stronger growth in the future. Stable domestic governance will underscore the African growth trajectory. He argued that unlike other crises this time Africa’s recovery is not lagging global recovery but is occurring almost at the same pace.
Last week, S&P deemed Ukraine so likely to default that it downgraded its short-term foreign currency sovereign credit ratings to CCC+/C from B/B, seven notches below investment grade, and local currency ratings to B-/C from B+/B. This puts the Ukraine on par with Pakistan as a default risk. Ukraine’s CDS spreads spiked up to 3,500 basis points suggest a 70% chance of default – an outcome the Ukraine demurs of course. So what happened to boost Ukraine’s default risk so much, How likely is it to default and what might the implications of such a move be, for Ukraine and the global Economy?
In recent weeks, both Russia and Kazakhstan allowed major depreciation of their currencies to adjust to their new terms of trade and then attempted to repeg their currencies. These new pegs despite reflecting a 35% (Russia) and 20%+ (Kazakhstan) reflectively might not be the end of of the story as outflows and pressure on their reserves may continue to mount, causing pressure on the new ‘equilibria’ that they hope will be lasting. Russia’s depreciation has been both more gradual – including 20 or 1% moves from November to mid January before a broad widening of the trading band which they have subsequently tried to maintain by hoisting interest rates. – and more extensive (35%) whereas Kazakhstan’s has so far moved less than 20%, most of it over Feb 4. Both have faced a reversal of their terms of trade, pressure on the current account (Kazakhstan’s was in deficit again in Q4 and Russia’s shrank to a small surplus) and with oil dominating their exports even their respective 30%+ and 18% devaluations may not spell the end to the pressure given that the commodities which dominate their exports remain cheap.
Just as Russia seems poised to loan Iceland $5+ billion ($4b Euros) to stem a run on Iceland, President Medvedev announced $37 billion in new long-term loans into state banks. By our best guess (and assuming that the funds are not double counted) Russia’s bailout seems to be in the neighborhood of $180 billion. (Bloomberg says $200 billion). These are incredible sums of money – and a reflection of the enormous shift in funds from developed to developing countries. Yet could it be not enough?
All in all, Russia has pledged funds exceeding 10% of its GDP. For those of you, like us who might have been getting confused by the dizzying numbers, we present is a list of Russia’s capital injections. Where possible we’ve tried to identify where the money is coming. But this is an incomplete list – comments and corrections welcome.
The 123 Civil Nuclear Agreement between India and the United States was approved by the Senate by an 86-13 vote on Oct 1, 2008. This landmark deal, three years in coming, represents a major foreign policy achievement for both the Bush administration in its final months and Manmohan Singh’s coalition government in India that was almost voted out of power after allies withdrew support over the government’s aggressive backing of the pact. Ending thirty years of India’s nuclear isolation following its nuclear tests, the pact allows American businesses to begin selling nuclear fuel, technology and reactors to India in exchange for safeguards and U.N. inspections at India’s civilian, but not military, nuclear plants.