In this issue:

German IPO Market Vaporizes

German Retail Sales Drown in Red Ink

Venezuelan Bolivar Plunges on News of Bank Workers' Strike

Argentina Will Not Meet Jan. 17 Deadline to IMF

IMF Continues To Keep Argentina Guessing

China Makes Big Investments in Water Projects

People's Daily Warns Against Too Much High-Tech

GDP Growth Alone Will Not Solve China's Economic Problems

Singapore Bankruptcies Hit 17-Year High


From Volume 2, Issue Number 2 of Electronic Intelligence Weekly, Published Jan. 13, 2003

WORLD ECONOMIC NEWS

German IPO Market Vaporizes

In the late 1990s, German bank managers announced they had discovered the perfect scheme to boost profits: Abandon their traditional extension of credit to German firms, and instead, jump into the booming investment banking—in particular, managing takeovers and initial public offerings (IPOs). Unfortunately, by the time German banks became competitors of U.S. and British investment banks, the whole investment banking sector collapsed. The figures for the German IPO market in 2002 are dramatic: The value of German IPOs crashed from $20 billion in 2000 to just $135 million in 2002, a decline of 95%. None of the four top German banks—Deutsche Bank, HVB Group, Dresdner Bank, and Commerzbank—could arrange a single IPO in Germany throughout the entire year of 2002. This means that the banks could not generate one pfennig of revenues from this particular business. Compared to 168 IPOs in the German "New Market" in 1999, and another 153 in 2000, there had been just one lonely IPO during 2002—from German windmill maker Repower Systems. Even this IPO was not really successful, since Repower stocks have, in the meantime, plunged well below its initial offering price.

German Retail Sales Drown in Red Ink

According to the just-released January report of the Bundesbank, German retail sales in November 2002, just after the re-election of the Red-Green coalition, had their second biggest year-on-year drop for any month since German reunification. November retail sales were down 3.7% compared to October and even 6% down from the year ago. For example, car sales in November fell by 7%. Only in the month of August 1997 was there an even bigger slump in retail sales.

The managing director of the German retail association (HDE) Pellengahr emphasized that German consumers were in a state of shock in November, as the government mooted higher taxes and social security contributions. Pellengahr said he expects the downward trend to continue in January. German consumer confidence has now plunged to an eight-year low.

Venezuelan Bolivar Plunges on News of Bank Workers' Strike

The Venezuelan bolivar lost 5% of its value Jan. 8, as people began buying dollars, following the announcement by the bank workers' union that they will shut down the banks for two days, in support of the national strike against President Hugo Chavez. The currency is already down 12% for 2003.

The financial sharks are beginning to worry about Venezuela's ability to pay its $22.4 billion in foreign debts, as the strike continues. Bloomberg reports $850 million comes due in the first quarter of 2003, and another $1.2 billion in the second. Finance Minister Tobias Nobrega reported on Jan. 7 that the government had lost $2.4 billion in oil and gas revenues because of the strike. (Eighty percent of Venezuela's export income is generated by oil.) Foreign currency reserves have dropped by 5.6% since the strike began Dec. 2, to $11.8 billion, according to Bloomberg. Another $2.86 billion has been spent since the strike began from the government's oil fund, a drop of 15%.

A Deutsche Bank analyst is forecasting a 26% collapse in GDP for the first quarter of 2003, since there is no sign of the strike letting up; this is on top of her estimate that GDP fell by 15% in the fourth quarter. No official fourth-quarter figures have been reported yet, but most estimates run in the 12%-15% collapse range.

Argentina Will Not Meet Jan. 17 Deadline to IMF

Argentina can't meet its Jan. 17 deadline to pay $1 billion to the IMF, said the country's Ambassador in Washington, Eduardo Amadeo. He made these statements Jan. 7, the day before the IMF board was scheduled to meet to decide whether to grant Argentina an interim agreement, which would roll over the $8 billion in debt coming due in the first half of this year. An IMF mission will leave for Buenos Aires on Jan. 9, should the board okay the interim agreement. To encourage the IMF, the Duhalde government agreed to lift more of its exchange controls, which had restricted buying and selling of dollars. Among other things, the announced changes will facilitate repatriation of profits abroad, which foreign companies operating in the country have been demanding.

IMF Continues To Keep Argentina Guessing

The IMF has sent a mission to Buenos Aires, but wouldn't say definitely whether there will be a short-term agreement to roll over the $7.2 billion Argentina has coming due in the first half of this year. The Jan. 8 IMF board meeting in Washington decided to send the mission, but then issued a communiqué refusing to say whether an agreement were imminent, and demanded that the government do more to qualify for any assistance. During the board meeting, Western Hemisphere Division chief Anoop Singh reportedly gave a very negative appraisal of Argentina's progress, according to Clarin, while others complained about the "slowness" with which the Duhalde government has moved toward a "sustainable economic program."

In its press release, the Fund stated that Argentina must still achieve "a clear political consensus" in favor of "reform" (translation: "not enough dead people yet"). It also wants a "sound fiscal framework, restoring confidence in the banking sector, increasing trade openness, and restructuring debt."

The IMF mission arriving Jan. 9 was greeted at the airport by protesters denouncing the "International Misery Fund," while government officials said they have no illusions about the outcome of the visit. Cabinet chief Alfredo Atanasof said the IMF communiqué was "positive," but added there are no guarantees that an agreement will be reached before Jan. 17, when Argentina must pay $1 billion to the IMF.

China Makes Big Investments in Water Projects

China has made huge investments in solving its water-management problems over the past five years. One-fifth of the state Treasury bonds issued in that period—660 billion yuan worth—were used for water projects, Minister of Water Resources Wang Shucheng stated Jan 6. This investment was used for building embankments, upgrading old dams, improving agricultural irrigation systems, and making drinkable water available to more people.

In addition, a special investment fund of 30 billion yuan was used to reinforce the dikes along the Yangtze—using new technologies and materials—to ensure prevention of the disastrous floods of 1998.

Chinese Leader Calls for Better Foreign-Exchange Management

Chinese Prime Minister Zhu Rongji emphasized the importance of better foreign-exchange management in 2003, Xinhua reported Jan. 7. He also pointed to the continuing importance of maintaining the current valuation of the renminbi (the foreign-exchange version of the yuan), as was done during the Asian financial crisis.

"The stability of renminbi and the sustained increase in foreign-exchange reserves are major signs of the country's improving national strength and sustained and healthy economic development," Zhu stated.

He emphasized that China would face a "severe external economic environment" in 2003, and therefore, the government should deal with even the current strictly limited convertibility "cautiously." China will also improve its "early-warning system" against risks.

China's foreign-exchange reserves rose 35% in 2002 to $286.4 billion from $212.2 billion at end-2001, Zhu reported. In 1993, China's forex reserves were only $21.2 billion.

People's Daily Warns Against Too Much High-Tech

China must ensure that its agriculture and basic industry are developed, and that the economy does not get "dragged into a mire" of too much "high-tech" and service "industrialization," warned a commentary in the People's Daily Jan. 7.

The ruling Communist Party has a policy of fostering a "new type of industrialization," but this is being "interpreted" by local governments in a way that can lead to problems, the paper said.

"Local economic planners are shunning the manufacturing sectors more and more, and will probably end up dragging China into a mire of 'cored industrialization,' " economist Fan Gang is quoted as saying. By "cored industrialization," Fan meant too much focus on service and hi-tech industries, but inadequately capitalized primary and secondary industries such as agriculture, mining, and manufacturing.

The real policy of the government, is to use advanced technologies to expand industry, but also to maintain a high employment rate. Too many local governments are "swarming into the so-called hi-tech and service sectors," warns the commentary. Localist policies have led to severe problems before, such as during the runaway inflation of 1988-89.

Now, two-thirds of China's technical professionals are working in the service sector, rather than manufacturing, and the total social investment in manufacturing has been declining during the past five years.

"It's ridiculous for all cities to spearhead the hi-tech industries," stated Zhu Gaofeng of the Chinese Academy of Engineering. "Without development in the manufacturing sector, all the other industries cannot grow healthily, which will further worsen the unemployment problem, impede the general improvement of people's living condition and even jeopardize the nation's stability and security."

GDP Growth Alone Will Not Solve China's Economic Problems

Higher Gross Domestic Product (GDP) alone will not solve the economic problems China is facing, according to the Chinese Academy of Social Sciences' new "Social Trends and Analysis: 2003" report.

While GDP will go down slightly—barring any major disaster or disruption in international financial markets, "Having money alone won't solve the problems we are facing," the CASS report stated. China must "pay more attention to closing the rural-urban disparity in earnings and living standards" and other such structural problems.

Per-capita urban income was 5,793 yuan in 2003, compared to 1,721 yuan in villages. Also, about 100 million villagers remain impoverished. Re-employment of laid-off state workers is also a serious problem, with the proportion of those who have found new employment falling from 50% in 1998, to 30% in 2001, and about 20% in 2002. About 20 million urban residents are living on minimum-wage standards or below the poverty line, the CASS reports, and China must solve these problems. (See also ASIA DIGEST.)

Singapore Bankruptcies Hit 17-Year High

Singapore bankruptcies hit a 17-year high in 2002, while revenue has plummeted. The city-state is suffering its worst economic downturn since independence in 1965, the Singapore Straits Times said Jan. 8. A total of 3,587 individuals declared bankruptcy in 2002, an 11% rise from 2001, and the highest level since 1986. A total of 265 companies shut down in 2002, a 5% increase from the previous year.

Singapore's revenue plummeted by $2.47 billion in the first nine months of 2002, when compared to the same period in 2001, indicating the rate of collapse in the economy. The $11.31 billion collected by the state from Jan. 1 to Sept. 30, 2002, represented a drop of 18% from the $13.78 billion it received as operating revenue over the first three quarters of 2001.

Prime Minister Goh Chok Tong warned recently that Singapore's economy is unlikely to recover fully before 2004. He warned that a possible war with Iraq would add to global economic uncertainty, and could further damage the domestic economy in 2003. Singapore's economy grew 2.2% in 2002, reversing a 2% contraction in 2001, but it is battling its highest-ever unemployment levels, which hit 4.8% in the third quarter of 2002, eclipsing the previous high of 4.3% seen during the 1997-99 Asian financial crisis.

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