Money Rates in Developing Nations Rise Most Since 2008 on Inflation, Egypt

Money-market rates in developing nations are increasing at the fastest pace since 2008 as central banks from China to Brazil lift borrowing costs and banks hoard cash on concern unrest in Egypt may destabilize the Middle East.

The yield on JPMorgan Chase & Co.’s ELMI+ Index of short- term debt in emerging markets rose to 2.5 percent on Jan. 28, from a record-low 1.74 percent on Dec. 31. Overseas borrowing costs also jumped, sending the extra yield on developing-nation dollar bonds over U.S. Treasuries to a two-month high of 2.74 percentage points today, according to JPMorgan’s EMBI+ Index.

Inflation is accelerating in seven of the 10 biggest developing countries after surging prices for food, cotton and oil pushed the S&P GSCI Index of commodities to the highest level since September 2008. Oil rose 4.3 percent in New York on Jan. 28 and touched $90.87 a barrel today as Egyptian street protests against President Hosni Mubarak entered a second week. Middle East shares have tumbled the past week and Dubai’s benchmark index sank to a four-month low today.

“The geopolitics is clearly a warning to investors,” said David Cohen, the head of Asian forecasting at Action Economics in Singapore. “Oil prices have spiked higher. That would be one more source of upward pressure on interest rates.”

Rate Increases

The last time short-term borrowing costs in developing nations rose this fast was the second half of 2008, when the global financial crisis and record commodity prices pushed the world economy into a recession. The yield on JPMorgan’s ELMI+ Index jumped as high as 21 percent in October 2008, prompting central banks around the world to slash benchmark borrowing costs.

Now policy makers are raising interest rates as the global economy expands. Brazil’s central bank lifted its benchmark overnight rate by 50 basis points, or 0.5 percentage point, to 11.25 percent on Jan. 19 and traders predict borrowing costs will reach a three-year high by the end of 2011.

India raised rates to the highest in two years on Jan. 25 and signaled more increases. China lifted borrowing costs twice since October, while Russia’s central bank increased reserves requirements for banks today in a bid to stem the fastest inflation in a year.

Russia’s worst drought in a half-century helped send a United Nations gauge of food prices to an all-time high last month, cutting the buying power of 2.8 billion people in the so- called BRIC countries of Brazil, Russia, India and China who spend 19 percent of their income on groceries, compared with 6 percent in the U.S., Euromonitor International data show.

Algeria, Tunisia

Rising milk and flour costs triggered protests in Algeria this month that left three people dead and 420 injured. Tunisian President Zine El Abidine Ben Ali was forced to hand over power to his prime minister on Jan. 14 and leave the country after failing to end a month of protests by promising lower prices for bread and sugar.

The Tunisian uprising inspired anti-government rallies in Egypt that drew tens of thousands into the streets and led to looting and gunfire as protesters clashed with the police. As many as 150 people have been killed in the unrest, Ibrahim al- Zafarani, head of the rescue and emergency committee at the Arab medical union, told Al Jazeera television yesterday.

Mubarak has ignored demands to resign, instead appointing the first vice president since his rise to power in 1981 and naming a new premier. U.S. Secretary of State Hillary Clinton said on ABC’s “This Week” program yesterday that Mubarak has done “the bare beginning of what needs to happen.”

Egypt Downgrade

Yields on Egypt’s dollar bonds due in 2020 climbed 11 basis points to 7.08 percent at 10:30 a.m. in New York, the highest level on a closing basis since the notes were issued in April, data compiled by Bloomberg shows.

The government delayed two debt sales scheduled for yesterday and Moody’s Investors Service cut its credit rating for the country by one step today to Ba2, two levels below investment grade.

Egypt has about 272.7 billion pounds ($46.6 billion) of debt maturing this year, data compiled by Bloomberg show. Short- term Treasury bills and local-currency government bonds account for about 97 percent of the total, the data show. The goverment has $2.5 billion of dollar-denominated debt, including $1 billion of notes maturing July 11, 2011, according to data compiled by Bloomberg.

“We are watching it carefully,” said Endre Pedersen, who manages $25 billion of Asian debt at MFC Global Investment Management in Hong Kong. “So far, it has a small impact on the market. We don’t think it’s the start of a wider trend.”

Stock Outflows

Egypt’s stock exchange was closed yesterday and will remain shut today after the benchmark EGX 30 Index tumbled 16 percent last week. Orascom Construction Industries, Egypt’s biggest publicly traded builder, declined 4.5 percent in London trading to the lowest level on a closing basis since July 2009.

Mutual funds investing in emerging-market equities had their biggest outflows since mid-2008 in week ended Jan. 26, according to data compiled by EPFR Global. The funds lost $3 billion, or about 0.4 percent of their assets, the data show.

The MSCI Emerging Markets Index of shares dropped 0.7 percent today, heading for its lowest close in six weeks. The MSCI World Index of advanced-nation stocks rose 0.3 percent.

“Inflationary pressures, moves towards capital controls, renewed attention being paid to political risk and the weakness of the U.S. dollar have all weighed on emerging markets in recent weeks,” Brad Durham, managing director at EPFR in Cambridge, Massachusetts, wrote in a Jan. 28 report.

Political Uncertainty

Most Asian currencies depreciated against the dollar today, led by South Korea’s won and the Philippine peso. The Bloomberg- JPMorgan Asia Dollar Index declined to the lowest since Jan. 10.

China’s seven-day repurchase rate, which measures the availability of funds between banks, slid 32 basis points today from a three-year high of 8.50 percent, according to a daily fixing rate by the National Interbank Funding Center. India’s three-month interbank borrowing costs climbed 30 basis points this month to 9.30 percent, the highest since December 2008.

“The developments in Egypt will unlikely bring the global economic recovery to a halt,” Robert Pavlik, chief market strategist at Banyan Partners LLC in New York, wrote in an e- mailed note Jan. 28. “However, the market does not like uncertainty and these developments have brought uncertainty to the geo-political landscape.”

To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

To contact the editor responsible for this story: Sandy Hendry at shendryt@bloomberg.net; Rocky Swift at rswift5@bloomberg.net

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