Liveblogging the Fitch Sovereign Hotspots conference

11:15am: OK, that’s it for the sovereign material, I’m done for the morning. Ed Parker threw away a comment as he was finishing up, saying that a US or Israeli bombing of Iran in 2007 would of course be bad news for Turkey — I wonder what the probability of that is. Lots of thanks to Fitch for embracing the blogosphere in such a friendly way!

11:10am: On the political front, Turkey survived the first big political risk when there was no suspension of Turkey’s EU accession bid in December. There won’t be real progress before the Cypriot presidential elections in early 2008, but the main danger period on the EU front appears to have passed.

The presidential elections are coming up in May, and the president is elected by Parliament. The Islamists have a majority in Parliament, but the secularist establishment is strongly opposed to an Islamist president, which could mean a push for a compromise candidate and political noise.

Turkey might also invade northern Iraq to take out PKK bases there, which could hurt Turkey-US relations.

Then there are parliamentary elections in November, and the parliament is likely to “return to weak, populist coalition governments”.

Conclusion: Turkey will likely muddle through in 2007, but there’s little chance of an upgrade until 2008, and some chance of a downward revision of the ratings outlook (if not the rating itself) this year, if things go worse than expected.

11:05am: The Turkish central bank continued to cut interest rates last year despite the fact that there was a clear pick-up in inflation, which spooked the markets in the spring. Inflation expectations remain high, there have been public wage increases of 12% this year and a minimum wage increase of 10%, which means that it’s going to be hard if not impossible to bring inflation down to 4%. So rates will remain high.

But it’s the current-account deficit ($33 billion, 8.4% of GDP) which is the biggest worry. It might come down a little bit, but not a lot. So Turkey is still very dependent on international financing, and is building up external liabilities.

The good news is on the FDI front: It was $18 billion last year and could be $14 billion this year, which has helped minimize the amount of hot money inflows. At the same time, foreign reserves are over $60 billion, which means the central bank “has firepower if there is a rush of hot money to the exit”.

11:00am: On the upside, Turkey’s main debt ratios are strong, with falling debt, falling deficits, and a stable primary surplus of more than 5% of GDP. The banking sector seems healthy and liquid, the IMF is happy, privatizations are bringing in lots of money, and Turkey looks set in 2007 to extend “the best sustained economic performance that Turkey has managed since at least the 1960s”. There could even be a 20% upward revision in Turkey’s GDP, which would help a lot of ratios.

On the downside, Turkey’s spreads tend to be the first to blow out when there’s any kind of market hiccup. What’s more, they’re not converging back to the EMBI, in the way that they always used to do. Domestic interest rates are still at around 20%, which means “there may be less scope to absorb any future market stresses”.

10:50am: Back from coffee for the last sovereign presentation: Ed Parker on Turkey. But first, some clarity on that Latin GDP per capita figure: Shelly Shetty told me that the drop in 2008 is likely due to a combination of weaker FX rates and constant population growth.

10:20am: Theresa Paiz Fredel’s up, on when/whether Peru can get its investment grade. She wants to see less external debt, a development of domestic markets, and macroeconomic prudence not only when commodity prices are high, but also in a down cycle. She’d also like to see a broader tax base. “Any of these factors, within the right context, could lead to an upgrade.” –but the most likely thing is a set of all of the above, offsetting weakness in political institutions and social development indicators.

9:50am: Brazil’s benchmark Selic overnight rate is now down into single digits, and could eventually get as low as 7%, says Scher. [UPDATE: This must refer to the real, not the nominal, rate.] Lots and lots of macro charts. To sum up: Macro policies are prudent, but there’s slow growth and lack of reforms to improve growth and the macro environment. An upgrade might come, “in the next two years”.

9:40am: Roger Scher is back, talking about Brazil, saying that he revised the outlook on Brazil from stable to positive yesterday, but he didn’t upgrade. Can there be credit improvement without growth? Solvency has improved, but there’s been fiscal slippage, and the president is constrained by Congress. On the other hand, its external debt is tiny, despite the fact that its internal debt is both enormous and short-dated (average maturity of 31 months).

9:30am: A weirdness in a chart: Fitch is forecasting that Latin GDP per capita will rise from $5241 in 2006 to $5710 in 2007, but then go down to $5475 in 2008 — I wonder if that’s a misprint, or if it has something to do with expected FX rates.

9:25am: A conclusion! “Most of these Latin credits are unlikely to join the investment-grade league in the next 12 months.”

9:20am: Shelly Shetty is up, talking about which Latin countries might make investment grade: El Salvador, Guatemala, Panama, Peru, Colombia, Brazil, Costa Rica, and Venezuela are all BB-rated. Brazil, with loads of debt, is already a net public external creditor, while Peru, with a much lower debt burden, is a net public external debtor. Most confusing. Also relevant: None of the BB-rated Latin sovereigns, except Peru, is set to reach the median BBB level of debt-to-GDP ratio by 2010. Peru is also the fastest-growing of the Latin double-Bs.

9:10am: The risks seem to be (a) commodity prices, and (b) liquidity. Copper and oil are both falling, if still high. If oil falls to a bit over $50, then Ecuador’s current-account surplus is erased; at $40, the same thing happens to Venezuela. Not that anybody expects oil at $40. On the liquidity front, there has historically been a correlation between Fed funds two years ago, and volatility today. Volatility is low now, but will it go up in line with where overnight rates have gone?

9:05am: Roger Scher of Fitch wants to know if the EM party is over. (“I’m going to ask that question, rather than answering it”.) He says that the Chinese central bank is dedicating 1% of assets, $10 billion, to EM assets — I’m not sure where that number comes from. Ask Brad Setser. The question of course is whether investors like that will leave at the first crisis.

8:50am: A bit of an experiment this morning: I’m at the Warwick Hotel in Midtown, where Fitch is holding its annual Sovereign Hotspots conference. I’ve got my lapel tag saying “felixsalmon.com”, I’ve got my laptop — and, of course, amateur that I am, I’ve forgotten my laptop’s power cord. But so long as my battery’s working, I’ll try and blog the proceedings.