In this issue:

International Speculators Wreak Havoc with Hungarian Currency

IMF Strikes Back at Turkey for Resisting Fund's Demands

German Life Insurance Sector Faces First Bankruptcy in Half-Century

IMF Boss Tells Argentina: Be Like Lula—Pay the Debt!

Malaysia To Place Pensions Funds in Infrastructure Development

Malaysia's Islamic Bond and Equity Mart Can Set Example


From Volume 2, Issue Number 26 of Electronic Intelligence Weekly, Published July 1, 2003

World Economic News

International Speculators Wreak Havoc with Hungarian Currency

Symptomatic of the fragility of Eastern European economies, and of the political fights erupting around the upcoming enlargement of the European Union, are the events that took place on financial markets in Hungary recently. In the expectation of Hungary's entry into the European Union, and later also into the euro-zone, international funds directed huge amounts of hot capital into the country, boosting the foreign-exchange value of the Hungarian currency, the forint. In order to keep up Hungarian exports, the new government then exerted pressure on the Central Bank to devalue the forint. Finally, in early June, the reluctant Central Bank followed these demands and reduced its target for the forint/euro rate by 2.3%. What followed was an immediate crash of the forint by 7%. The Central Bank on June 10, and again on June 19, reacted by a shock 3% increase in interest rates, from 6.5% to 9.5%.

Bankers and financial experts quoted by the German-language Financial Times June 25, noted that this may have been just the beginning of a much more severe currency crisis. So far, only some short-term oriented hedge funds have sold the currency. But once the large investment funds pull out, the situation would become critical for the Hungarian currency and economy.

Hungary's current account deficit reached 5% of gross domestic product (GDP) last year, while the government budget deficit is almost at 10% GDP. The FT quotes a Hungary-based analyst at JP Morgan warning that these events will already postpone Hungary's entry into the Euro-zone, currently planned for 2006 to 2008, by several years. The same could happen any moment in Poland or other Eastern European countries. And growing expectations of a postponed euro-entry could again reinforce the decline of the Forint.

IMF Strikes Back at Turkey for Resisting Fund's Demands

The International Monetary Fund's permanent senior representative in Ankara, Odd Per Brekk, indicated at a conference on June 21, that the IMF will most likely postpone the payment of the next tranche of its total $28 billion rescue package, because the Turkish government has failed to implement demanded reforms. He warned that the "government needs to address a number of issues to ensure continuity in the reform effort." In particular, the demanded reforms in social security, bankruptcy law, and job cuts at large public corporations, have not been implemented yet.

As the Financial Times notes on June 25: "Sentiment was further affected when three members of the government spoke of their desire to dispense with the IMF's services after a three-year program expires in 2004." Turkish Economics Minister Ali Babacan downplayed the events, describing the next IMF tranche of $500 million as being somewhat "symbolic."

Right on cue, over the weekend, JP Morgan downgraded Turkish eurobonds, signalling investors to sell, which, that Monday, June 23, Merrill Lynch began immediately to do.

German Life Insurance Sector Faces First Bankruptcy in Half-Century

On June 25, representatives of all 110 members of the German Insurance Association (GDV) met in Frankfurt to negotiate the bail-out of Mannheimer Versicherung, which is about to go under. The medium-sized insurer, ranking No. 33 in Germany, lost massively on the stock markets in the recent three years, and can only survive by a minimum 330-million-euro cash injection. The German insurance companies wanted the bailout at any cost in order to prevent a devastating confidence crisis at the very time, they are campaigning for a larger share of private pension schemes in Germany. However, the foreign members of the GDV, in particular those Swiss insurers like Zurich Financial Services and Swiss Life, that are in big financial troubles themselves, voted against the joint GDV bailout, which would have required a 90% approval rate. As an immediate consequence, the stock price of Mannheimer crashed by 42% in early trading June 26.

The 124-year-old firm will now be put under the control of BaFin, the Federal supervision agency for financial services, which will try to restructure the company. As this procedure will most likely fail, Mannheimer would then be liquidated, and all its policies will be taken over by Protector, the rescue entity of the German insurance sector.

German life-insurance companies have lost more than 100 billion euro on the stock market since 2000, and Mannheimer is by far not the only insurance company in trouble. The German-language Financial Times covers the Mannheimer story front-page on June 26 with a cartoon showing falling dominoes, the first of which has the icon of Mannheimer on it.

IMF Boss Tells Argentina: Be Like Lula—Pay the Debt!

On the eve of his June 22 trip to Buenos Aires, the IMF Managing Director Hoerst Koehler told Argentine reporters that Brazilian President Lula da Silva, with his policies of "responsible" fiscal discipline, is showing that "it's possible to pay the debt" and "grow with social equality." Perhaps, "this might be a formula for Argentina," to follow, he said. Travelling with IMF Western Hemisphere Division chief Anoop Singh in tow, Koehler said he hoped that Argentina's new President Nestor Kirchner would "look at me, know me, and see that the Fund has a human face, and that we are committed to listening and helping."

The problem with Koehler's using Brazil as a model is that "the only thing that stands out in Brazil is the 'orthodox' side of the plan," columnist Alcadio Ona in Argentina's Clarin pointed out on June 21. Brazil achieved a primary budget surplus (which excludes debt service) of 6% in the first quarter, and has astronomical interest rates, while the much-touted "Zero Hunger" program hasn't gotten off the ground. He asked: Is this what Argentina is supposed to emulate?

President Kirchner did not appear too impressed by Koehler's "human face," chastising him during a private dinner on June 23. "You paraded [former President Carlos] Menem around the world, and said he was the model to follow, while in Argentina, economic concentration grew and social exclusion threatened to bring about an institutional breakdown, such that, you didn't expect to be seated next to this President." Koehler responded by admitting that the IMF had some responsibility for what happened to the country in the 1990s, but he insisted during his trip, that "the core of Argentina's problems lies in the country itself."

At the conclusion of the visit, it was announced that an IMF technical mission would begin negotiations in July on a "medium-term," three-year agreement, which would postpone until September 2006, some $13.5 billion in debt owed to the Fund, the first payment on which was to have been paid in September. But the Managing Director made clear he expected progress on "structural reforms" and a "clear strategy of confidence-building, based on transparency, consistency, and predictability, not the least in legal predictability" respecting "private contracts." He also reiterated his demand that the primary budget surplus be increased, "just as Lula did in Brazil."

Malaysia To Place Pensions Funds in Infrastructure Development

The Malaysian government is formulating plans for the Employees Provident Fund (EPF)—the national pension organization—to invest its funds in infrastructural development in the country, and allow it to obtain better returns on its investment, Prime Minister Mahathir Mohamad said June 24. He said the government has several schemes in mind to enable EPF to earn higher returns than it would by keeping its funds with Bank Negara Malaysia. EPF is the biggest pension fund in the country, with liquid assets of $U.S.52.6 billion (RM200 billion), comprising almost half of the market capitalization of the Kuala Lumpur Stock Exchange.

Malaysia's Islamic Bond and Equity Mart Can Set Example

The progressive Islamic bond and equity market in Malaysia can be an example for other Islamic countries, said the director of the Islamic Index Group at Dow Jones Index, according to the New Straits Times June 25. "I think the innovations that are taking place here are wonderful, and they are a good example for what could happen in the Gulf," Rushdi Siddiqui told the Business Times June 24.

Siddiqui is one of the speakers at the conference on Future Trends in Islamic Equity and Bond Market in Kuala Lumpur. The two-day conference June 25-26 was organized by the Centre for Research and Training (CERT).

New York-based Siddiqui said Malaysia could attract substantial capital from West Asia through the harmonization of the screening process and interpretation of Syariah principles. Often, there is a contradictory stand by Islamic jurists and scholars worldwide with regard to derivative instruments. In Malaysia, for example, the Syariah Advisory Council of the Securities Commission approved futures trading of crude palm oil but not of Stock Index Futures.

However, according to Mufti Taqi Usmani of Fiqh Academy in Jeddah, futures transactions are not permissible.

"If we can have some sort of harmonization on the equity screens, the benefit is (that) it opens up the door to other areas of harmonization," he said.

"We put Dr. Mohd Daud Bakar on our Syariah board in January. We are hoping it will allow him to explain the Malaysian position to the Gulf scholars," he said.

To date, Islamic equity funds make up 60% of the Syariah-based unit trust funds in the country while bond funds and mixed asset funds account for 14% and 22%, respectively.

Worldwide, there are about 100 Syariah-based mutual funds. Of these, West Asia makes up 50% while the remaining comes from Southeast Asia.

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