Fitch Ratings: Global Recovery Under Way, But Insecure.

Business Editors

NEW YORK--(BUSINESS WIRE)--Sept. 17, 2003

Fitch Ratings, the international rating agency, said today that it forecasts growing momentum in the global recovery in the coming years, with world GDP growth of 3% per year in 2004-05, but the agency warned that imbalances in the global economy could undermine the strength and durability of the recovery.

In its semi-annual Sovereign Review published today, Fitch said the enormous policy stimulus and improvement in corporate sector financials in the US, combined with better-than-expected growth in Japan will drive global growth of 2.1% this year, 2.8% in 2004 and around 3% by 2005 - a level last seen in 1999. The European economy is not expected to become a significant driver of global growth before 2005. Key risks to this outlook are the widening fiscal and current account deficits in the US that could put upward pressure on interest rates and cause a crowding out of private investment. Historically high levels of private indebtedness in the major economies, uncertainty over whether the Japanese recovery will prove sustainable, the unfavourable outlook for Europe, and the reliance on the US as the sole engine of global growth cast a shadow over the medium-term outlook.

The widening US current account deficit in part reflects Asia's determination not to allow a strengthening of their currencies against the dollar, reflected in notably heavy intervention by the Bank of Japan. Despite growing pressure from the US, it remains very unlikely that Asia will abandon its 'strong dollar' policy. However, Fitch notes that while the focus has been on the China-US bilateral trade balance, China's increasing share of US imports has largely come at the expense of the rest of Asia, while China's trade surplus overall is shrinking.

In spite of the sharp rise in developed country bond yields since June, emerging market bond spreads had tightened to year-to-date lows by early September. In part this reflects improved credit fundamentals in the emerging market economies, with upgrades outnumbering downgrades at Fitch by 3:1 since the Spring Review (published April 9, 2003). But it also reflects a move down the risk curve by investors in search of yield, increasing the risk of contagion and a potentially destabilising market reversal.

Fitch projects that for emerging market economies, external financing needs - current account deficits and foreign debt repayments - will rise to around US$200 billion next year from a forecast US$190 billion this year, and a low of US$140 billion in 2002. The modest increase has been comfortably financed given the current relatively low cost of borrowing and ease of access to international capital markets for emerging markets. Foreign exchange reserves are also expected to increase by US$190 billion this year to a record US$1.4 trillion, reducing the vulnerability of emerging markets to international liquidity shocks and underpinning a more optimistic ratings outlook. Following defaults and downgrades over the last two years, the credit and rating outlook for Latin America may be reaching a turning point, underpinned by the brighter outlook for Brazil.

A copy of the full report is available from the agency's website at 'www.fitchratings.com' under the 'Sovereigns' sector. A conference call on the report will be hosted by the Sovereign Group on Friday Sept. 19 at 9:30 a.m. EDT.