India’s industrial output shrank for the first time in 28 months, pushing stocks and the rupee lower on concern faltering growth will force the central bank to suspend its fight against the fastest inflation in BRIC nations.
Production at factories, utilities and mines fell 5.1 percent from a year earlier in October, the government reported today. The slide exceeded the median of 24 estimates in a Bloomberg News survey for a 0.7 percent drop. Output was down 3.3 percent from September, the third decline in four months.
Inflation Rate
India’s inflation rate has exceeded 9 percent every month this year as the rupee’s 15 percent slump against the U.S. dollar during the period, Asia’s worst performance, adds to the cost of imported goods.
Consumer prices rose 6.6 percent in Brazil, 6.8 percent in Russia and 4.2 percent in China last month.
RBI Governor Duvvuri Subbarao has raised the repurchase rate by 375 basis points since the start of 2010, to 8.5 percent, in the fastest round of increases since the central bank was established in 1935, according to data compiled by Bloomberg.
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Luck May Be Key to Success for EU Leaders
European leaders’ effort to save the euro hinges on support from investors, central bankers and credit-rating companies to win the months needed to put a revamped budget rulebook into practice.
“Luck is likely to be required,” said Joachim Fels, chief global economist at Morgan Stanley in London.
To have a chance of success, a deal reached after all-night talks on Dec. 9 to restore faith in the single currency requires investors to avoid dumping European debt, Standard & Poor’s to hold off on threatened downgrades, foreign countries to chip in rescue cash and the European Central Bank to soothe bond markets.
Politicians also have to avert the unforced errors that sank previous initiatives and turned a Greek deficit problem in 2009 into a threat to the international financial system.
The result of a Brussels summit that French President Nicolas Sarkozy called the last chance to rescue the euro after a two-year debt crisis ended with leaders setting themselves a March deadline to flesh out new fiscal rules.
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Arab States May Suffer 24% Drop in Foreign Direct Investment After Unrest
Arab states have suffered a slump in foreign direct investment of as much as 24 percent this year as political unrest sweeps the region, according to the group that insures such funding against non-commercial risks.
Foreign financing will shrink to between $50 billion and $55 billion in 2011 from $66.2 billion the previous year, the Arab Investment & Export Credit Guarantee Corp., known as Dhaman, said in an e-mailed response to questions.
The total value of insurance operations concluded by Dhaman in the first eight months was about $780 million, “a significant increase” versus last year, indicating heightened concern, Fahad al-Ibrahim, its director-general, said in the e-mail.
Egypt is worst affected, with foreign direct investment dropping an estimated 92 percent to $500 million, according to a report issued by Dhaman in October. Tunisia, where the so-called Arab Spring began, is estimated to have drawn $1.2 billion in funding this year, a decline of 20 percent, the report said.
Kuwait-based Dhaman’s figures, which have not been verified by individual governments, suggest Libya received about $500 million, down 87 percent, and Syria $484 million, where unrest continues, a decline of 65 percent. Bahrain, which witnessed anti-government protests by the majority Shiite population, may have suffered a 36 percent drop to $100 million.
Higher oil prices, an increase in public spending and international pledges of as much $50 billion in aid could help mitigate the decline in investment, al-Ibrahim said.
“The main challenge facing regional governments is adopting balanced and well-thought of policies to attract profitable foreign investments,” he said. “A big number of international companies are still considering investing in the region, especially in oil-rich, politically stable countries.”
Dhaman, which counts all Arab states as members except the Comoros Islands, provides insurance coverage for Arab and foreign investments in member countries against risks such as expropriation, war and civil disturbance, its website says.
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No One Says Who Took $586B in Fed Swaps
For all the transparency forced on the Federal Reserve by Congress and the courts, one of the central bank’s emergency-lending programs remains so secretive that names of borrowers may be hidden from the Fed itself.
As part of a currency-swap plan active from 2007 to 2010 and revived to fight the European debt crisis, the Fed lends dollars to other central banks, which auction them to local commercial banks. Lending peaked at $586 billion in December 2008. While the transactions with other central banks are all disclosed, the Fed doesn’t track where the dollars ultimately end up, and European officials don’t share borrowers’ identities outside the continent.
The lack of openness may leave the U.S. government and public in the dark on the beneficiaries and potential risks from one of the Fed’s largest crisis-loan programs. The European Central Bank’s three-month dollar lending through the swap lines surged last week to $50.7 billion from $400 million after the Nov. 30 announcement that the Fed, in concert with the ECB and four other central banks, lowered the interest rate by a half percentage point.
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China May Add Stimulus as Exports Weaken
Chinese Premier Wen Jiabao and officials meeting to map out economic policies for 2012 may be encouraged to add more stimulus as a shrinking trade surplus shows Europe’s debt crisis hitting exports.
Overseas shipments rose 13.8 percent in November from a year earlier, the weakest growth since 2009, according to customs data released Dec. 10 in Beijing. The excess of exports over imports fell by 35 percent.
The decline in the surplus and signs that capital has started to flow out of the country may prompt the government to keep cutting banks’ reserve requirements to sustain growth. Sliding exports to Germany and Italy weighed on gains in shipments to emerging nations, and President Hu Jintao yesterday marked 10 years in the World Trade Organization by warning that the global economy faces “severe” challenges.
“China’s capital outflows will continue and the trade surplus may shrink further, forcing the central bank to cut reserve ratios” and use bill sales to inject liquidity and bolster growth, said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. “It’s very likely China will see a trade deficit in the next quarter,” said Shen, who previously worked at the International Monetary Fund and the European Central Bank.
