Egypt Spurs Jump in Developing Money-Market Rates

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 of 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 2.63 percentage points, according to JPMorgan’s EMBI+ Index.

Inflation is accelerating in seven of the 10 biggest developing nations after surging prices for food, cotton and oil pushed the S&P GSCI Index of commodities to the highest level since September 2008. Oil advanced 4.3 percent in New York trading on Jan. 28 as Egyptian protesters clashed with police in the most populous Arab country, calling for an end to President Hosni Mubarak’s 30-year rule. Middle East shares sank yesterday, sending Abu Dhabi’s index to its biggest drop in 14 months.

“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.”

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.

Rate Increases
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, as traders predict borrowing costs may climb to a three-year high by the end of 2011. India raised rates to the highest in two years on Jan. 25 and signaled further increases. China has raised borrowing costs twice since October.

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.

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.

Egypt Yields Surge
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.”
Yields on Egypt’s dollar bonds due in 2020 surged 67 basis points to 6.97 percent on Jan. 28, the highest level since the notes were issued in April. Credit-default swaps insuring Egyptian debt against non-payment rose 123 basis points last week to 430, the highest since April 2009, according to CMA. The government delayed two debt sales scheduled for yesterday.

Stocks Plunge
Egypt’s stock exchange was closed yesterday and will remain shut today after the benchmark EGX 30 Index tumbled 16 percent last week, Al Arabiya said.
Emerging-market equity mutual funds had their biggest weekly outflows since mid-2008 in the week ended Jan. 26, according to data compiled by EPFR Global. The funds lost $3 billion, or about 0.4 percent of their total assets, the data show. The MSCI Emerging Markets Index dropped 0.9 percent last week to the lowest level in a month.

“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, wrote in a Jan. 28 report.
Most emerging-market currencies depreciated against the dollar on Jan. 28, with the South African rand falling 1.9 percent and Turkey’s lira dropping 2.1 percent to lead declines. Asian currencies including South Korea’s won and Indonesia’s rupiah strengthened against the U.S. currency last week.

Political Uncertainty
China’s seven-day repurchase rate, which measures the availability of funds between banks, increased 84 basis points last week to 8.14 percent, according to a daily fixing rate by the National Interbank Funding Center. It reached 8.30 percent on Jan. 28, the highest level since October 2007.
India’s three-month interbank borrowing costs climbed 17 basis points this month to 9.17 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 reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.