Central banks combat credit crunch, Gulf inflation, Brazil cuts excise, Asian 2008 growth forecast downgraded, second sovereign rating for Kenya

13/12/2007 |

Central banks in Europe and North America have clubbed together in an unprecedented move to increase short-term lending reserves and lessen the impact of the credit crunch. The European Central Bank, the Federal Reserve and central banks from the UK, Switzerland and Canada agreed yesterday to provide billions of dollars in loans to banks to boost global markets, which responded badly to the Fed’s 25 bps rate cut on Tuesday. UK Chancellor Alistair Darling welcomed the move saying the decision is a signal that central banks will do their utmost to ease the liquidity crisis. Some analysts are comparing the agreement to a further cut in interest rates, while others say the deal is a symbol of how serious the crisis has become.

Soaring inflation in the Gulf is down to a surge in the cost of renting property rather than Gulf currencies’ peg to the dollar, the governor of UAE’s central bank said today. Sultan bin Nasser al Suwaidi told reporters that just 3% of UAE’s current inflation rate was down to its fixed currency. Inflation in the oil rich state hit a 19-year high of 9.3% last year, the latest figure available. He explained: “The solution to inflation does not lie mainly in the area of foreign-exchange policy. Rents are the main cause of inflation and we are building more houses.” He added that the UAE would only revalue the dirham after consultation with its fellow Gulf Cooperation Council members, with whom it is planning to create a monetary union in or after 2010.

The Brazilian senate has decided not to renew the CPMF, an excise and financial transactions tax, in a move that will cost the government about 7% of its total revenue. President Lula was four votes short of the 49 majority needed to approve the tax, a proportion of which he proposed to earmark for health care. To address the shortfall, which is equivalent to around 1.4% of GDP, the government said it will either raise other taxes or halt social welfare programs and infrastructure investment. But analysts believe the increased economic activity as a result of the tax cut will more than offset this expected loss. In this year alone, tax revenues have increased by more than the amount raised by the CPMF and easily exceeded government expectations. Meanwhile, the Senate approved an extension of the DRU mechanism, which allows the government greater flexibility in its expenditure.

The Asian Development Bank downgraded its 2008 GDP forecast for developing economies in Asia by half a percentage point today, but expected growth remains strong at 8%. Illiquid financial markets and rising oil prices are expected to slow expansion in the key industrialised countries of the Association of South East Asian Nations (ASEAN) and China. The bank said that ASEAN’s collective growth will moderate to 6.1% next year, down from 6.3% in 2007, while Chinese GDP will drop from 11.4% this year to 10.5% in 2008. Jong-Wha Lee, head of the bank’s Office of Regional Economic Integration, said: “Slower growth but rising inflationary pressures despite appreciating currencies pose major challenges for the region’s policymakers.”

Kenya received its second sovereign rating, a 'B+' long-term foreign currency rating from Fitch. This is the same level as the rating assigned by Standard & Poor's in 2006. This suggests Kenya is moving closer to a sovereign bond issue, as institutional investors generally require two credit ratings. The country's finance ministry has mooted a $300 million Eurobond, although this would be too small for an international benchmark (it would not be included in the JP Morgan EMBI+), and is unlikely to take place before general elections on December 27. For more details on the planned bond issue, please click here.

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