Citigroup moves SIVs, IMF warns Mexico on oil output, China-US dialogue yields little, Poland inflation above target, Turkey cuts rates

14/12/2007 |

Citigroup has moved $49 billion worth of structured investment vehicles (SIVs) onto its balance sheet, potentially forcing an increase in regulatory capital for the bank. The move marks a change in policy by new chief executive Vikram Pandit, who reversed former boss Chuck Prince’s refusal to bring the SIVs on-balance-sheet. As a result, Citigroup’s capital adequacy ratio is expected to drop 0.16% to 7.3%, but the bank believes this figure will return to 7.5% next year. Credit rating agency Moody’s had already downgraded Citigroup’s long-term credit rating from Aa2 to Aa3 and reduced the bank’s financial strength rating from A- to B. In the last three months, the assets of the company’s seven SIVs have fallen by 40.9% as mortgage-backed securities exposed to sub-prime borrowers have collapsed in value. The move by Citigroup also raises doubts about the bank’s commitment to a pooled “superfund” of troubled SIVs, the Master Liquidity Enhancement Conduit (MLEC), first mooted with JP Morgan and Bank of America in October this year.

Disappointing oil output is the major drag on Mexico’s lacklustre economic growth, according to the IMF’s latest annual assessment. With net oil revenues expected to decline by 0.4% of GDP this year and proven oil reserves down to 10 years of current production, the report emphasised that energy sector reform will be critical in the near future. Growth is expected to be close to 3% for the year; a figure which the report’s authors believe shows that Mexico “still has a long way to reach its full economic potential”. However, they concluded that the near-term outlook “remains solid” due to the admirable way the economy has weathered recent global volatility. The Mexican government broadly agreed with the IMF’s finding but said it is more optimistic about boosting growth in the near-term, particularly if its planned structural reforms can be implemented successfully.

The third China-US strategic economic dialogue ended yesterday with both sides emphasising their continued cooperation rather than announcing any major deals. China’s top negotiator, vice premier Wu Yi said that progress had been made on food safety and environmental protection and US Treasury Secretary Henry Paulson highlighted both countries’ responsibility in fighting “economic nationalism”. However, the modest announcements fall short of the US government’s demand for China to rectify anti-competitive trade practices, which Washington blames for the soaring American trade deficit. Just hours after the talks ended, the US Commerce Department reported that the US’s trade deficit rose 9.1% to $25.9 billion for October, a monthly record.

Like many of its eastern European neighbours, Poland’s inflation rate accelerated beyond expectations in November reaching 3.6%, up from 3% a month ago. The Central Statistics Office said the highest growth was in the cost of fuels for private vehicles (13.2%) and food and non-alcoholic beverages (7.6%). A further concern is Poland’s rising labour costs, which grew 11.9% year on year in the third quarter, compared with just 3.7% for the EU as a whole, according to Eurostat, the European Statistical Office. As inflation is now above the central bank’s 1.5%-3.5% target range, analysts expect a hike in interest rates, although this is not likely to happen before the new year.

By contrast, the Turkish central bank cut its benchmark interest rate by 50 basis points yesterday, to 15.75%, citing slowing domestic economic growth. This is expected to help bring inflation, currently at more than 8%, down towards the target of 4% (plus or minus 200bps) during 2008. Analysts believe that the central bank may not be able to cut rates more than another 25 bps without beginning to jeopardize the credibility of the inflation target, until CPI starts to converge more decisively.

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