Year: 2011

The 2010 floods in Pakistan started late in July, following heavier than normal monsoon rains in Balochistan, the Punjab, Sindh, Pakhtunkhwa and the Khyber; in fact the whole Indus River Basin was affected.

At one stage nearly 20 percent of Pakistan’s land area was covered with water, a total of some 307,374 square miles (796,095 square kilometres). According to the Pakistani government the floods affected nearly 20 million people, mostly as a result of destroying infrastructure, property and crops. The death toll was nearly 2,000.

Initially, Ban-Ki-Moon, Secretary General of the UN, asked for emergency relief amounting to some $460m, noting that he had never seen a flood of this magnitude before. By August 15 only 20 percent of these funds had been received, which was a huge concern for the UN. The World Health Organisation reported, at the time, that 10 million people had no other choice but to drink polluted water.

The damage to the already frail Pakistan economy was immense. Infrastructure damage was calculated to be in the region of $4bn; wheat crops to the value of $500m were destroyed by the floodwaters and the total crop loss was estimated to be in the region of $1bn, much higher according to Pakistan’s own calculations. The impact on the country’s economy could well have been as high as $43bn.

More than 100,000 animals died during the floods and 17 million acres of agricultural land was submerged by the raging waters.

The last thing Pakistan needed was a disaster of this magnitude; the country’s economy was already extremely fragile and depended on a support package of some $11.3bn from the IMF. Even before the floods, the government was finding it difficult to adhere to the fiscal discipline required by the package. The country has an oversized public sector, a relatively small tax base and perpetual problems with its balance of payments.

Pakistan’s Finance Minister, Abdul Hafeez Sheikh, said in an interview with TIME magazine, “Now, it alters all the calculations, all the projections, all the scenarios. It is still too early to assess the full impact of the disaster, but the damage is colossal, it’s still unfolding. It will run into billions and billions of dollars.”

Aid donors did not come forward with the help that was needed, which forced the Pakistani government to take up a World Bank loan of $900m. This only added to the country’s already huge debt burden of $55.5bn and will make it even more difficult for the government to balance its budget in future.

Moody’s subsequently downgraded its rating of Pakistan government bonds, causing interest rates on them to increase even further. Standard & Poors affirmed its B-rating for long-term Pakistan government debt on November 15 last year.

Financial institutions, such as Nomura, UBS and Morgan Stanley, have warned that Pakistan will not be able to service such a large debt indefinitely, especially taking into account the high interest rates involved.

Moody’s Investors Service on Tuesday said Dubai and its state-owned non-financials have outstanding debt of $101.5bn and could require further financial support to meet their obligations.

The credit rating agency’s report showed that it remains concerned about the emirate’s maturing debt in spite of the “significant process” made by the authorities and state-owned companies to deal with it.

Figures published by the agency showed that Dubai’s government has about $27.9bn of direct debt, while State-owned corporations have $68.6bn in debt.

The FT reported quoting an unnamed senior government official that Dubai may restructure by next year some issued bonds to assist these companies to meet their $3.8bn debt payments.

Italy’s new Prime Minister Mario Monti announced late on Sunday and ahead of a crucial EU summit on Thursday and Friday, that his cabinet has approved a €30bn package of austerity measures to help “reawaken” the Italian financial system.

Europe’s third biggest economy is scheduled to present the plan to parliament today in a bid to help pull Italy back from the verge of insolvency and assist in saving the common currency from collapse.

The austerity plan includes budget cuts, a higher pension age and instruments to help fight tax evasion.

Fitch Ratings late on Monday warned the US it may cut its AAA rating if policymakers failed to agree on a “credible plan” to reduce its swelling budget deficit by 2013. There is a “slightly greater than 50 percent chance of a downgrade over a two year horizon,” said Fitch.

The ratings agency downgraded the US outlook from stable to negative after a bipartisan super-committee failed to agree on much needed $1.2trn deficit cutting measures.

 “The negative outlook reflects Fitch’s declining confidence that timely fiscal measures necessary to place US public finances on a sustainable path and secure the US AAA sovereign rating will be forthcoming,” said a Fitch statement.

Meanwhile, UK chancellor George Osborne will on Tuesday deliver his autumn statement to the House of Commons. Osborne is due to unveil measures which will focus on tackling the increased deficit of almost £30bn. 

Britain’s blue-chip ended lower for the ninth consecutive session on Thursday, marking its worst run since January 2003, after Germany reiterated its opposition to the use of euro bonds or monetary tools to help solve the eurozone’s debt crisis.

Following a meeting with the leaders of France and Italy, German chancellor, Angela Merkel, quashed market hopes that Europe’s paymaster would open the door to the launch of joint eurozone bonds or a quantitative easing programme by the European Central Bank.

“It was a completely wrong signal; anyone that was in for the short term closed their position,” Lee Curtis, a trader at City Index, said.

With Wall Street shut for Thanksgiving, trading volumes on the FTSE 100 were light at 88 percent of their 90-day
average, encouraging intra-day profit taking and causing sharp moves on the index, traders said.

The FTSE 100 closed 0.24 percent lower at 5,127.57 points, having risen to a day high of 5,184 in morning trade, boosted by better-than-expected macro data from Germany, before falling to a trough of 5,098 in the afternoon, when Merkel made her comments.

“People were just taking profits where they could, that’s all. From an eight-days trough, they were just seeing a bit of profit and they were taking,” Adam Saward, a trader at Penson Financial Services, said.

“No-one is looking to see any good news until the end of the year,” Saward noted, adding he expects the FTSE 100 to climb around 200 points to 5,300 in the remainder of the year, pointing a 10.2 percent annual fall.

Britain’s blue-chip gauge fell 7.5 percent in the last nine sessions, with banks and miners responsible for most of the recent losses as investors offloaded risky assets due to sovereign debt tensions in the eurozone and fears of a global economic slowdown.

However, the two sectors rebounded today, with banks up 1.2 percent and miners up 1.1 percent, led by Fresnillo and Royal Bank of Scotland, up 4.4 percent and 3.6 percent, respectively.

In a reminder of the dangers facing the financial sector, the European Banking Association warned lenders they needed to plan for a potentially disorderly break-up of the euro zone, or the exit of some countries as part of their contingency planning.

The eurozone crisis was also impacting the United Kingdom, which confirmed its economy grew just 0.5 percent in the third quarter of this year.

“The global slowdown is weighing on (British) exports while the ongoing debt crisis with the related financial strains is affecting consumer and business confidence as well as increasing bank funding costs,” UniCredit said in a note.

Weakness was mirrored by corporate results, with Europe’s number two electrical goods retailer Dixons recording a wider first-half loss, as cash-strapped shoppers cut back on purchases of discretionary goods.

Its shares closed 0.7 percent higher, having fallen sharply ahead of the results, which were ahead of expectations according to investment bank Espirito Santo.

Privately owned retailer Arcadia added to the gloom, posting a 38 percent fall in full-year profit.

Telecoms equipment giant Nokia Siemens Networks has said it will be shedding 17,000 staff globally in an attempt to bolster profitability in a stagnating network gear market.

The company plans to cut a quarter of its workforce by the end of 2013 in a restructuring that will allow it to focus in mobile broadband equipment.

Nokia Siemens CEO, Rajeev Suri, said the elimination would help the group cut annual operating costs by around $1.35bn by the end of 2013.

“As we look towards the prospect of an independent future, we need to take action now to improve our profitability and cash generation. These planned reductions are regrettable but necessary,” Suri said.

The South African rand dropped sharply against the USD and bonds depreciated as Moody’s Investor Services announced its intention to reduce its outlook on the country’s sovereign debt rating. The rating agency cited growth and deficit concerns as reasons for the decision.

Moody’s reduced the outlook from ‘stable’; South African debt is rated as BBB+ by Standard & Poor’s, one level below that of Moody’s.

The rand, which had appreciated substantially in recent weeks, immediately dropped 1.5 percent in value and is currently trading at around 8.00 to the USD. This was the biggest drop in a single day since the beginning of November.

The yield on 13.5 percent government bonds, which are due in 2015, also increased 11 basis points and now stands at 6.5 percent. The yield on the $2bn worth of South African government bonds due in 2020 also increased by 1.86 percent (23 basis points). Higher interest rates on government bonds reflect the increased risk investors associate with them.

Moody’s decision to reduce its outlook on South Africa’s A3 rating on local currency and long-term currency debt is the result of fears that the country’s annual growth rate will be lower than initially estimated and that the country’s government will be unable to meet its commitment to cutting budget deficits, as a result of popular pressure.

On October 25, Pravin Gordhan, who is South Africa’s finance minister, announced that the budget deficit for the year ending March 31 would, in all likelihood, be 5.5 percent of the country’s GDP, compared to 4.6 percent of the previous year.

Gordhan is in a particularly difficult position, on the one hand he is attempting to keep the budget deficit as low as possible, but on the other he is facing enormous pressure from a range of groups that includes trade unions and the ANC youth league, to increase social spending and job creation.

A currency strategist based at Standard Bank Group Ltd, in Johannesburg, Nomvuyo Guma, said in a telephone interview with Bloomberg, “Lowering the outlook is generally a precursor to a credit downgrade, which would certainly be a risk to inflows into the bond market, You’ve already seen the reaction in the markets.”

The South African Government strongly disagrees with Moody’s decision and expressed ‘disappointment’, in an email statement issued by the National Treasury. The statement claimed that the two main reasons behind Moody’s decision were the global economic situation and that the country’s public revenue would increase the moment growth prospects improved.

A fixed-income analyst attached to Afrifocus Securities, Michael Grobler, speaking in Cape Town, said that the South African market’s “direction is influenced by the weakening of Italian bond yields.” He described the outlook cut by Moody’s as “a setback for the current bond rally.”

To what extent Moody’s decision would become a self-fulfilling prophecy, only time will tell. There is little doubt that a general aversion to developing country debt played a major role in the rating agency’s decision.

The South African rand dropped sharply against the USD and bonds depreciated as Moody’s Investor Services announced its intention to reduce its outlook on the country’s sovereign debt rating. The rating agency cited growth and deficit concerns as reasons for the decision.

Moody’s reduced the outlook from ‘stable’; South African debt is rated as BBB+ by Standard & Poor’s, one level below that of Moody’s.

The rand, which had appreciated substantially in recent weeks, immediately dropped 1.5 percent in value and is currently trading at around 8.00 to the USD. This was the biggest drop in a single day since the beginning of November.

The yield on 13.5 percent government bonds, which are due in 2015, also increased 11 basis points and now stands at 6.5 percent. The yield on the $2bn worth of South African government bonds due in 2020 also increased by 1.86 percent (23 basis points). Higher interest rates on government bonds reflect the increased risk investors associate with them.

Moody’s decision to reduce its outlook on South Africa’s A3 rating on local currency and long-term currency debt is the result of fears that the country’s annual growth rate will be lower than initially estimated and that the country’s government will be unable to meet its commitment to cutting budget deficits, as a result of popular pressure.

On October 25, Pravin Gordhan, who is South Africa’s finance minister, announced that the budget deficit for the year ending March 31 would, in all likelihood, be 5.5 percent of the country’s GDP, compared to 4.6 percent of the previous year.

Gordhan is in a particularly difficult position, on the one hand he is attempting to keep the budget deficit as low as possible, but on the other he is facing enormous pressure from a range of groups that includes trade unions and the ANC youth league, to increase social spending and job creation.

A currency strategist based at Standard Bank Group Ltd, in Johannesburg, Nomvuyo Guma, said in a telephone interview with Bloomberg, “Lowering the outlook is generally a precursor to a credit downgrade, which would certainly be a risk to inflows into the bond market, You’ve already seen the reaction in the markets.”

The South African Government strongly disagrees with Moody’s decision and expressed ‘disappointment’, in an email statement issued by the National Treasury. The statement claimed that the two main reasons behind Moody’s decision were the global economic situation and that the country’s public revenue would increase the moment growth prospects improved.

A fixed-income analyst attached to Afrifocus Securities, Michael Grobler, speaking in Cape Town, said that the South African market’s “direction is influenced by the weakening of Italian bond yields.” He described the outlook cut by Moody’s as “a setback for the current bond rally.”

To what extent Moody’s decision would become a self-fulfilling prophecy, only time will tell. There is little doubt that a general aversion to developing country debt played a major role in the rating agency’s decision.