Emerging markets 'more vulnerable' than Mideast

www.gulf-daily-news.com LONDON:

A long war in Iraq will hurt the likes of Brazil and Turkey, which depend on overseas finance, rather than more creditworthy Gulf states like Kuwait, Qatar and Bahrain, ratings agency Standard & Poor's said yesterday.

A short war would have little impact on current sovereign ratings but a longer war could have a large impact, which may not yet be priced in by emerging market investors, the ratings agency said in a report.

"Every time something unexpected happens, you hear the same mantra. People this time are looking at credit risk in a way they did not before," said David Beers, S&P's global head of sovereign ratings.

"What we are looking at is the capacity of governments to ride out a period when they do not have access to markets," Beers said after the release of the S&P report.

So far the reaction of emerging market debt investors to war has been muted, with shifts to relative safe havens like Russia and away from the likes of Brazil and Turkey, but there has been no big sell-off as there has been in equity markets.

The risk premium for holding emerging market debt rather than safe-haven US Treasuries has actually fallen since November 8 when the UN Security Council approved resolution 1441 to 719 basis points (7.19 percentage points) from 854 bp.

The S&P report had little direct impact on emerging market debt prices as most investors and analysts have been pondering the impact of a conflict in Iraq for some time and have been recommending a shift to safe havens like Russia, Malaysia and eastern Europe.

Brazil is rated B-plus by S&P and Turkey is rated B-minus, while among the Gulf states close to Iraq which are rated by S&P, Kuwait is rated A-plus and Bahrain and Qatar are both A-minus.

Kuwait kept on paying its debts even after it was invaded by Iraq in 1990.

Brazil, which many analysts reckoned last year was only 18 months from default, has won a huge funding programme from the International Monetary Fund and has elected the one-time bete noire of markets leftist Luis Inacio Lula da Silva as president.

Since taking office, Lula's government has surprised the financial community by imposing tough measures like imposing $3.9 billion of spending cuts so as to exceed the IMF mandated budget targets.

Nonetheless, Brazil still faces interest rates on its external debts in excess of 1,300 basis points over Treasuries, a burden which makes the debt unsustainable in the long term.

If those risk premiums do not fall in response to the implementation of a credible economic programme, Beers said there would be calls for the IMF to step in.

Turkey, which is asking the U.S. to put its hands in its pockets to help offset the effects of any war, with figures being mooted up to $15 billion, could face a tougher task.

"What we are concerned about is not whether the IMF or U.S.

give additional financial support, but whether this (new) Turkish government is going to be able to use its political advantage to achieve an enormous fiscal correction which can be sustained," Beers said.

Apart from Brazil and Turkey, S&P said Guatemala, Israel, Jamaica, Lebanon, Morocco and the Philippines could also see problems.

As well as constrained financing, there will simply not be the ability to achieve lower spending and budget reduction if the war is long and there was the risk of political disturbance in some states, S&P said.