The Czech crown is likely to depreciate in the near term as there are no fundamental reasons for its strength., the CNB governor Tuma commented during a meeting organized by the local Euro weekly. Tuma stresses that the CB does not target a specific exchange rate, but its level plays an important role in the monetary policy decisions. Despite the verbal intervention, the crown climbed to new high vs. the euro on Tuesday reaching CZK/EUR 24.83. One factor was the positive sentiment around Slovakia after the S&P decision to raise the rating outlook to positive.

Tuma's comments, the currency strength, as well as growth concerns, suggest that rates may remain on hold for some time despite the high headline inflation number for January (7.5% y/y). The latest inflation report is consistent with this view, but it would be important also to see the February CPI release, which is due out on Mar 10. The next monetary policy meeting is scheduled for March 26.

Domestic fuel giant PKN Orlen's trade unions are demanding a 10.5% raise for 2008. This works out to some PLN 640 per month per worker. The unions threatened to take any industrial action if management does not agree. This includes going on strike. Orlen, which employs some 23,000, has been racking up bumper profits. In Q4 2007, it reported a profit of around PLN 600mn, double analyst expectations and far better than the PLN 198mn loss a year earlier, though one-offs helped boost the bottom line. But the company also just saw the Law and Justice (PiS)-appointed CEO suspended and is in the process of searching for a new chief executive. It is not clear if this will keep the management from agreeing to the workers' demands. The wage call is clearly part of the ongoing pressure from workers for higher wages as the labour market tightens.

Privatisation revenues totalled PLN 86.7mn to end-Feb., the Treasury Ministry said in a statement. That comprises just 3.8% of the full-year target of PLN 2.3bn. It also marks a very small total against the Treasury's real stated goal of having sell-off receipts at around PLN 4.6bn or even higher. However, most of the sales seem set for later in the year, so this is not a large surprise. The new Civic Platform (PO)-Polish People's Party (PSL) government has promised to speed up privatisation after the prior Law and Justice (PiS)-led government basically stopped the process. For now, things remain at the planning stage, though a pledged 4-year plan should soon be unveiled. The initial statements see sell-off receipts at around PLN 5bn-7bn a year for the 4 years of a term that ends in 2011.

Monetary Policy Council member Marian Noga, a hawk, said Tues. that CPI inflation could accelerate to 5% in Apr. from a preliminary 4.3% in Jan. on the back of higher energy and food costs. In a written comment for the daily Gazeta Prawna, Noga said that Q3 would see another inflation spurt, though this depended on food-price movements. Wages were also threat, he said. "I continue to believe that with rates at 5.5% the 2.5% [inflation] target won't be hit . . . That's why further monetary policy tightening is needed," he said. Noga also warned of second-round effects. Overall, Noga has remained a consistent supporter of tighter policy. His latest view sees rates at 6-6.25%, with the higher end seeming to be the upper limit now considered by the hawks. We believe Noga will support another quarter-point hike in Mar., along with the hawks, but whether key swing-voters Jan Czekaj and Andrzej Slawinski do so as well remains to be seen and will depend in large part on coming data. But considering those data are likely to show a continuation of recent trends, this probably gives a greater chance of a hike occurring in Mar. than it not occurring.

The rumours that NBH is considering to give up its 3% medium-term inflation target are ridiculous and unfounded, NBH Governor Andras Simor said on Tuesday (March 4), adding that the inflation target remains in place. In our view, given the recent upward revision of inflation forecasts (which indicate NBH might fail to bring inflation to 3% in 2009) and lack of persistent HUF strengthening after the removal of the fluctuation band, the MPC is facing some sort of a credibility test, which some believe might be addressed by rate hikes. On other hand, there the MPC is also facing a dilemma concerning the magnitude of a rate hike (possibility of such a move is not excluded by MPC), especially at the time of notable economic slowdown and poor prospects for a quick revival of GDP growth in 2008 and 2009.

CEEMarketWatch estimates that the CPI fuel index will increase by 19.6% y/y and by 0.9% m/m in February. This will add 1.07pps to headline inflation in February, representing a larger impact that the 0.95pp seen in January.

The forecast is based the EconMin's report on the fuel prices (weekly data) for the entire February. According to media reports, fuel prices will continue moving upwards. It is worth noting that the gradually increasing fuel prices and the base effect have resulted in a situation where fuel prices have been putting increasingly more upward pressure on inflation since October 2007.

CEEMarketWatch fuel index forecast (updated version)

KSH fuels (y/y) CEEMW fuels y/y CEEMW fuels m/m Fuels' impact on y/y CPI (pps) * Feb-07 95.3 95.1 99.5 -0.24 Mar-07 98.7 98.2 103.2 -0.07 Apr-07 97.3 96.9 102.9 -0.14 May-07 94.1 93.6 101.0 -0.30 Jun-07 96.6 96.1 102.8 -0.17 Jul-07 92.8 91.9 100.5 -0.37 Aug-07 92.1 91.8 99.5 -0.40 Sep-07 98 97.5 100.9 -0.10 Oct-07 103.6 102.9 100.5 0.18 Nov-07 109.5 109.8 104.3 0.49 Dec-07 113 113.2 102.3 0.66 Jan-08 117.5 117.8 100.2 0.95 Feb-08 119.6 100.9 1.05

Source: Source: KSH, CEEMarketWatch (*): from KSH's data when available, from CEEMarketWatch proxy elsewhere

To see the methodology of our forecast, click here. Similar forecasts are available for Slovakia (click here) and Poland (click here).

The probability of the scheduled adoption of the euro in 2009 increased to 80% in Feb. from 78% in Jan., according to a survey done by the INEKO think-tank and the Club of Economic Analysts (KEA). Overall, 16 of 18 local economists polled believed in euro adoption as planned. The economists thus expect the Maastricht criteria to be met. The average general government deficit forecast was cut to 2.4% of GDP from the 2.5% forecast the previous month. Some 91% believed the fiscal criteria would be met, this up 0.1 pp m/m.

The economists' forecast of 12-month average HICP inflation in March 2008 -- to be used for the EU's gauging of Slovakia's adoption application -- was 2.3%, up from the 2.1% forecast the previous month. That is to be lower than the expected Maastricht benchmark of 3.0%, which was up from 2.8% in Jan. Both reflect the supply shocks hitting inflation on a European scale. Some 79% believed the inflation criterion would be met, this down 0.1 pp m/m.

The forecast of the EUR/SKK conversion rate was lowered. The Feb. forecast was 32.58 (15 analysts saying so), down from 32.72 (13 analysts) the previous month. Some 95% of the economists expected the exchange-rate criterion to be met. This was up from 93% the previous month.

The report and the list of experts can be found here.

The Slovak Statistical Office (SSO) expects real GDP growth to be 7.5% y/y in H1 2008, according to forecasts released Tues. along with the full Q4 figures. But its inflation forecasts were probably more interesting. The office expects CPI inflation to average 4.2% in H1. The CPI rate was 3.8% y/y in Jan., meaning it expects a considerable acceleration. CPI inflation is to be 4.3% y/y in Jun. This will come on the back of higher food and fuel prices as well as some regulated price hikes.

The SSO also expects employment (LFS) growth of 1.7% y/y to 2.372mn in H1 2008. The unemployment rate is expected to be 10.5%. Nominal wages are expected to grow by 6.8% y/y to an average of SKK 20,360 per month. The real wage growth forecast is 2.5% as rising inflation eats away at real income growth.

Slovak real wages grew by 4.5% y/y in Q4 2007, marking acceleration from 4.2% in Q3 and 3.9% a year earlier, according to Slovak Statistical Office data released Tues. The stats office noted that real wages grew in all sectors of the economy. Real wage growth came as nominal wages grew by 8.0% y/y in Q4, up from 6.8% the previous quarter but slightly down from 8.2% the previous year. The nominal average monthly gross wage was SKK 22,925 in Q4, up from SKK 19,514 in Q3 and SKK 21,131 in Q4 2006. Employment growth sped up to 2.8% y/y in Q4 and unemployment fell to a roughly 13-year low of 10.3% in the final quarter of 2007. This marks a continued tightening of the labour market. However, wage growth remains relatively muted and productivity growth is very fast. That latter will mean the NBS's Bank Board will interpret the data in a largely favourable way.

The stats office said it expected the average nominal wage would rise by 6.8% y/y to SKK 20,360 in H1 2008 on employment growth of 1.6% y/y. The real wage forecast is 2.5% y/y for H1 2008. The stats office forecast that inflation would average 4.2% y/y in H1 2008 and be at 4.3% y/y in Jun.

Slovakia’s unemployment rate fell to 10.3% in Q4 2007 from 11.2% in Q3 and 12.0% a year earlier, marking the lowest rate since 1994, according to a Labour Force Survey published Tues. by the Slovak Statistical Office. Some 275,300 were classified as unemployed, down 22,600 from the previous quarter and 43,700 from the same quarter of 2006. Against a year earlier, the biggest decline was the nearly 10,000 drop in unemployed in industry, with this reflecting strong manufacturing activity and growing output. The unemployment rate overall in 2007 was 11%, down from 13.3% in 2006. For H1 2008, the stats office forecasts a jobless rate of 10.5%.

Employment rose by 2.8% y/y to 2.398mn, the growth rate well up from 2.0% in Q3, though down from 3.5% a year earlier. The gain in the number of employed against a year earlier was 65,600. Industry noted the biggest growth (22,300 y/y). Construction also rose sharply (15,700), and real-estate, rental and business activities increased by at even quicker pace (17,700). The rise suggests that labour productivity remained blistering at just over 11%, compared with just over 7% the previous quarter. The stats office forecasts employment growth of 1.7% y/y in H1 2008.

Real GDP growth surged to 14.3% y/y in Q4 2007, the Slovak Statistical Office (SSO) said Tues. in a full data release revising up overall growth from the 14.1% flashed in mid-Feb. The Q4 growth rate was lifted by pre-stocking of tobacco products ahead of an excise tax increases this year. Though it did not mention a growth rate without this impact, the stats office previously said growth without the one-off impact was around 9.7% y/y in Q4. For the Q4 figures released Tues., foreign demand was the main driver, though domestic demand remained relatively solid. The structure of domestic demand was favourable from an inflation standpoint, with investment growing in share and consumption slowing. The NBS's Bank Board will not be overly affected by the data, though it will likely hail its favourable structure as productive capacity continues to grow and inordinate demand pressures are largely absent. For full-year 2007, growth was a record 10.4% y/y, up from an already high 8.5% a year earlier.

Fixed investment grew by 8.9% y/y in Q4, up from 5.0% a year earlier as companies continue to invest in production capacity largely destined for domestic markets. This could open the economy up to downside risks if EU demand should slow sharply, though supply-chain integration does partly shield the domestic Slovak economy.

Consumption rose by 4.4% y/y, well down from 7.3% a year earlier. This came as both private and public consumption slowed, with the latter seeing an especially sharp decline as the government strove to meet the Maastricht fiscal criteria. Private consumption rose by 5.9% y/y in Q4, down from 6.9% a year earlier. Wage growth has continued but considering labour-market tightness has been relatively muted. Retail sales figures show largely slow but steady growth. Public consumption fell to just 0.8% y/y in Q4, sharply down from 9.2% a year earlier. Government spending has been constrained, in part as it eyes euro adoption in 2009.

Export growth continues to be the main pillar of overall growth. Exports grew by 16.0% y/y in Q4, a robust result considering the high 23.1% y/y base of the prior year. Export demand in the euro-zone, the main destination for Slovak-built products, was relatively strong last year, though this could give downside risks going forward. Imports grew by 11.6% y/y in Q4, down from 14.9% a year earlier. Rising income, koruna strength and investment are helping fuel import growth, though favourable export developments are bigger. The main car companies and other manufacturers will up output again in 2008, helping keep the net export contribution as a main growth driver, though this will shrink somewhat.

Quarterly national accounts (%, y/y)

Q4-06 Q1-07 Q2-07 Q3-07 Q4-07 2006 2007 GDP 8.2 8.3 9.3 9.4 14.3 8.5 10.4 Final consumption: 7.3 5.7 5.0 6.9 4.4 6.7 5.5    Private 6.9 6.3 7.8 8.3 5.9 5.9 7.1    General govt 9.2 3.5 -3.5 2.2 0.8 10.1 0.7 GFCF 5.0 11.0 5.9 6.5 8.9 8.4 7.9 Exports 23.1 22.7 18.1 8.5 16.0 21.0 16.0 Imports 14.9 14.5 13.2 3.0 11.6 17.7 10.4

Source: SSO; chain-linked volumes to 2000 (ESA95)

Societe Generale announced its offer to the minority shareholders of Rosbank after it added to the initial stake of 25% + 1 share another 30% of the capital by exercising its option for USD 1.7bn on February 13. The offered price is RUR 194.09 or USD 7.87 per share which is above the prevailing market price. At the moment the bank shares are traded at USD 7.35 on RTS while at MICEX their price is RUR 183. In case all the minorities decide to take advantage of the offer it will cost to the French bank some USD 2.8bn. However, it is unlikely that all the minorities will sell their stake in Rosbank. Rosbank is among the top ten banks in Russia in terms of assets.

Gazprom will reduce gas supply to Ukraine by another 25% from today, March 4, at 20:00 Moscow time, the speaker of the monopoly announced. At the moment Gazprom supplies about 75% of the usual quantities to Ukraine which amounts to 104mn cubic meters of gas. The decision suggests that Gazprom is determined to put more pressure on Ukraine's Naftogaz. The initial 25% reduction in supplies did not have the desired effect as Naftogaz said it can manage without these quantities for a month. This appears to be undesired development by Gazprom taking into account that the monopoly reduces the financial obligations of the Ukrainian side and in fact loses money without receiving any favorable result. Prolongation of the present situation is not in favour of the monopoly while it brings positive points to the Ukrainian authorities.

The Central Election Committee announced today the election results after the count of 100% of the votes. According to them Dmitry Medvedev receives 70.28%, Zyuganov is second with 17.72%, followed by Zhirinovski with 9.34% and Andrey Bogdanov with 1.29%. What should be noted is that the turnout increased to 69.78%, slightly below the 70% we expected, which is much higher than the earlier announced 64%. This can be considered unexpected change taking into account that usually the number of voters is known with high precision immediately after the elections. The final results of the elections are expected to be announced on March 7.

During a meeting with members of the government yesterday President Putin recommended optimization of the Reserve and National Prosperity funds as well as CBR international reserves. The idea is not new and such a recommendation has been already given in December although it now has clearer shape. According to finance minister Kudrin, managing companies will be chosen for management of the accumulated resources in the mentioned institutions, in particular the National Prosperity Fund. This should happen by October 1 till when a special state agency will be created in order to select the managing companies. These can be Russian as well as foreign ones. Till then the rules for investments of the money will also be elaborated. The idea is the accumulated funds to be invested in corporate papers. In the beginning these will be mostly foreign ones although investments in Russian companies are not excluded. The experience of other sovereign funds will be used.

According to the latest report of the FinMin the funds to which the Stabilization fund was split in the beginning of February changed in different directions. Thus, the Reserve fund reports increase by RUR 13.3bn to RUR 3,082bn (USD 127.8bn). The increase is due to the return realized in January for the period December 15 2007 – January 31 2008, which amounted to RUR 28.63bn. In February alone the return earned from the resources of the Reserve fund was USD 0.90bn (RUR 21.64bn) while the exchange rate differences were negative and amounted to RUR 15.35bn.

The return of the National prosperity fund realized in February was RUR 5.74bn. At the same time the loss due to exchange rate changes amounted to RUR 5.77bn. We note that the Reserve fund should be equal to 10% of the GDP. At the moment the currency structure of both funds is USD:EUR:GBP in proportion 45%:45%:10%.

Reserve and National Prosperity Funds as of Feb 2008

Reserve Fund Total in RUR bn 3082 in USD bn 56.95 in EUR bn 38.57 in GBP bn 6.37 Monthly change RUR bn 13.3 Total in USD 127.81 National Prosperity Fund Total in RUR bn 777.03 in USD bn 14.31 in EUR bn 9.74 in GBP bn 1.62 Monthly change RUR bn -5.8 Total in USD 32.22

Source: Source: FinMin

The major parties failed to reach agreement on a resolution about NATO membership, leaving the parliament still inoperational. New talks were held at 14:00 local time with a view of resuming the parliamentary session at 16:00, but Regions of Ukraine continued blocking the work. The parliamentary speaker Yatsenyuk gave parties till 10:00 tomorrow to either reach agreement or accept that the talks have failed. Meanwhile, President Yuschenko warned that he plans to start consultations with political parties on dissolving the parliament. According to the constitution he has the right to dissolve parliament if it is not operational for more than 30 days. The last parliamentary session was held on Feb 12.

The gas argument between Russia and Ukraine escalated further Tuesday after Gazprom said it would cut supplies by another 25% from this evening, while Naftogaz threatened to take the missing gas from transit to the EU in order to "protect the interests of Ukrainian consumers". Besides, Naftogaz said Gazprom did not respond to its latest proposals thus blocking the resumption of dialogue.

The central bank issued a short note on the February price developments today, where it stated that processed food prices are the main reason for he unexpectedly high February inflation figures. The actual figures exceeded the inflation expectations of the CNBC-e pool, which had predicted a 0.47% m/m rise in consumer prices and a 0.69% rise in producers’ prices. CPI inflation rose by 1.29% m/m, and PPI was up by 2.56% m/m, while annual inflation was pulled to 9.1% y/y. The heavy snowfall was blamed for the rise in food prices in the note. The highest monthly increase in February was 5.05% m/m in the index for food and non-alcoholic beverages. Despite the recent surge in food prices, the central bank said that the disinflation trend in core inflation is expected to continue. The note once again reminded that high prices in processed foods are blocking overall prices to drop further. Deceleration in service sector prices and rent prices is said to continue in February, but headline inflation is still under the risk of from processed food and energy prices. The central bank said headline inflation will continue on its downward trend and pointed out that the disinflation trend in core inflation indices, like index-H, which excludes the prices of gold, energy, unprocessed food, alcoholic beverages and tobacco, will continue.

The fiscal reserve increased by EUR 146.4mn in January, up to EUR 3.96bn (12.5% of GDP) at the end of the month, according to figures of the finance ministry. The increase was on the back of favourable budget performance, as a notable surplus was reported. As far as the lower ratio to GDP is concerned, it is entirely because of the higher GDP forecast for 2008, though we expect that the fiscal reserve will quickly exceed 13% of GDP over the next couple of months. The higher value of the fiscal reserve will continue to increase pressure over new early debt prepayments, though a part of it will be used for that purpose, as we expect public domestic debt to decrease this year.

The general government budget reported a surplus at BGL 440.3mn (0.7% of projected GDP) in January, according to figures of the finance ministry. The surplus was on the back of an expectedly strong performance of tax revenues, which is due mostly to technical effects. At the beginning of 2007, proceeds from VAT were delayed, due to the introduction of new rules on intra-community supplies. As a result, VAT revenues from deals within the EU started coming in as late as in March, distorting budget performance.

In January, revenues jumped by 23.9% y/y (in real terms), adding up to BGL 2.08bn, which represents 7.7% of the annual plan. Tax revenues alone were up by 35.3% y/y, reaching 8.5% of annual plan. The greatest contribution, as noted above, came from indirect taxes, which increased by 82.8% y/y in January, reaching 10.6% of plan. Apart from the VAT effect, as mentioned above, there were also higher revenues from excise tax, resulting from the more expensive oil and metals at the beginning of 2008. Furthermore, the government has increased excise tax rates on fuels, electricity, coal and tobacco, the full effect to be reported completely in February. Finally, customs revenues are no longer affected by EU membership, as in 2007 revenues from customs duties were considerably lower, due to Bulgaria’s entry to EU.

Meanwhile, the contribution of direct taxes, and health and pension insurance was expectedly smaller, falling by 17.8% y/y and 11.2% y/y respectively. This is the result of tax changes that took place in 2007, reducing personal income tax to a flat rate at 10%, as well as bringing down social and health insurance contributions by a total of 3pps. Expectations are that on the back of a decreasing informal sector, as well as higher employment and economic growth, the total effect on the budget in 2008 will be at least neutral. Other changes regard corporate taxes, where advance contributions were removed for smaller enterprises, along with some other minor tax breaks.

Expenditure was slightly on the rise, going up by 5% y/y in January (including the contribution to the EU budget). Non-interest expenses increased by 6.7% y/y, affected mostly by the much higher capital expenditure, which was doubled in real terms. The higher capital expenses have been necessitated by Bulgaria’s commitments to EU membership, requiring additional funding of some projects, such as the common emergency number, as well as expenses on prevention of natural disasters. Otherwise, current expenses increased by 1.1% y/y in January, mostly on the back of personnel expenses. There was also a surge in transfers to the social security system, reflecting the government’s attempts to reduce debts of the system. Meanwhile, interest expenses were lower by 13.5% y/y, reflecting the much lower public debt levels in 2008.

At central government level, the situation was quite similar. The central government budget reported as surplus at BGL 378.1mn (0.6% of GDP). Revenues increased by 38.2% y/y, on the back of the factors listed above, out of which tax revenues were higher by 54% y/y. Meanwhile, government expenses were up by 21.7% y/y, which is on the back of higher transfers to social security. We should note that this is a one-time event, the result of a technical operation. Thus, we expect expenditure growth to decrease considerably over the next few months.

All in all, budget performance remained very solid, giving strong indications that end-year targets will be met without major problems. In fact, there are going to be some arguments that revenue forecasts are once again too conservative, letting the government to operate with much larger financial resources than envisaged in the budget law. On the other hand, external factors are still very unfavourable, and we won’t be surprised if there is no lasting improvement in external balances. Therefore, there might be a need for further fiscal consolidation, and budget performance at the beginning of the year gives strong indications that there will be enough contingencies to allow even a higher surplus than the envisaged 3% of GDP.

General governmetn budget, January

BGL mn %, y/y % of plan % of GDP REVENUES 2,083.2 23.9 7.7 3.4 Tax revenues 1,868.9 35.3 8.5 3.0 Direct taxes 237.1 -17.8 4.6 0.4 Social and health insurance 345.4 -11.2 7.2 0.6 Indirect taxes 1,286.4 82.8 10.6 2.1 Non-tax revenues 210.5 -15.9 6.6 0.3 Aid 3.7 -92.6 0.2 0.0           EXPENDITURE 1,642.9 5.0 6.5 2.7 Non-interest expenses 1,331.3 6.7 5.5 2.2 Current expenses 1,191.3 1.1 6.2 1.9 Capital expenditure 140.0 100.1 2.8 0.2 Interest expenses 237.8 -13.5 35.6 0.4 Contribution to EU budget 73.8 75.9 11.2 0.1           BALANCE 440.3 n.m. n.m. 0.7

Source: Ministry of Finance

Industrial producers’ prices on both the domestic and international market went up by 13% y/y in January, read data released by the statistical institute (INS). Thus, Romania's pace of PPI inflation is outpaced only by Lithuania, Denmark and Bulgaria in the European space. The most dynamic sectors were those of products of energy industry (+15.4% y/y) and consumer goods industry (+13.3% y/y). A slower pace was reported in the industry of capital goods (+11.9% y/y), intermediary goods (+10.6% y/y) and durable goods (+8% y/y). On monthly basis, prices in the manufacturing industry reported a 2.9% m/m growth in January, while those in the energy sector were up by 0.7% m/m. Meanwhile, the extraction industry prices went down by 0.9% m/m. As regards the big industrial branches, the intermediary goods industry went up by 4.4% y/y, while the capital goods industry reported a growth under expectations (+1.7%), consumer goods industry (+1.6%), thermal power industry prices only by 1.2%.

Investments reported a 29% y/y hike to EUR 18.3bn in 2007, read the provisory data released by the statistics institute (INS). Industry has attracted the highest amount of investments (39%), followed by trade (34.07%) and construction (13.95%). Regarding Q4 2007, the increase of investments was 29.5% y/y, up to EUR 7.8bn. The amount of money invested in new construction works went down by 1.4% y/y in Q4 2007, but investments in equipments (including vehicles) grew by 0.3% y/y. Nevertheless, investments in new construction works reached RON 31.04bn, up by 31.3% y/y in 2007, while RON 31.48bn were invested in equipments and vehicles (up by 26.8% y/y). According to INS, the sectors that attracted the most significant investments were industry, domestic trade, car repair, construction, transportation means and communications. Prime Minister Calin Popescu Tariceanu has stated investments are the solution for the government to be able to manage budget deficits, as a reply to EC's warning that the budget deficit is likely to exceed 3% of GDP over the next couple of years.

GDP growth reached 6% in 2007, according to preliminary figures of the statistical institute. GDP reached RON 404.7bn last year, which has been somewhat above official expectations. At any rate, growth has been below last year’s 7.9%, which was largely expected, as the economy wasn’t that buoyant as in 2006, when it was driven by EU accession. In Q4 2007, GDP grew by 6.6%, reaching RON 137.8bn. The growth rate was somewhat smaller than the 7.7% growth reported in Q4 2006, but given the high base, GDP has grown remarkably high. A complete breakdown of GDP data will be available on 12 March (next Wednesday).

IMF expects GDP growth to reach between 4% and 4.5%, according to statements of IMF experts at the end of their mission in Croatia. The forecast goes in line with the updated government forecast, which envisages GDP growth at 4.5%. IMF is projected annual average inflation to reach 5.5%, much close to the central bank’s expectations, which are for inflation near 6%. As far as fiscal policy is concerned, IMF has evaluated the draft budget law as having very conservative revenue forecasts, suggesting that budget performance should not be a problem. Thus, there will be strong prerequisites for reducing further the budget deficit in 2009, as the deficit is envisaged to reach 2.3% of GDP in 2008. IMF’s mission was only advisory, as Croatia completed its last stand-by arrangement at the end of 2006.

Dun & Bradstreet (D&B) upgraded Croatia’s credit rating by one notch, up to DB3c, according to an official statement. One of the major arguments is the appointment of a new cabinet, headed by Prime Minister Ivo Sanader, which guarantees that the current policies, namely EU integration, are going to be preserved. D&B expects that the new government is going to press on with EU-related reforms, leading to larger effect on the domestic economy. As far as the global lending crisis is concerned, D&B expects some effects on Croatia, but mostly in terms of more expensive external financing for local subjects. This goes a little bit out of line with the new government debt management strategy, declared by the cabinet, and aimed at new external borrowing. Nevertheless, D&B believes that global credit risks are not going to have a lasting effect on Croatia, which is suggested by the rating upgrade. Croatia has one of the highest ratings in Southeast Europe, following Slovenia, which is rated at DB2b.

Public debt decreased by HRK 347.1mn in November, reaching HRK 118.3bn (43.2% of GDP), according to figures of the finance ministry. The decrease was on the back of domestic debt, reflecting maturing government bonds. Thus, the domestic debt stock decreased by HRK 393.1mn in November, down to HRK 71.9bn (26.2% of GDP). Since the beginning of 2007, domestic public debt has increased by HRK 4.08bn, reflecting the government’s strategy to borrow mostly from the domestic market. This is going to change in 2008, however, as the government has given a green light to new external borrowing, taking advantage of better borrowing conditions on external markets. In the meantime, external public debt increased by HRK 46mn in November, adding up to HRK 46.4bn (17% of GDP). New borrowing has been mostly through tranches from IFIs and other official creditors, which has kept external public debt relatively stable throughout the year. In January-November 2007, external public debt decreased by HRK 2.18bn, which reflected restraint from external borrowing. However, the total public debt stock remained quite stable, suggesting that fiscal consolidation efforts are not enough to ensure lower public debt levels. This has been mostly because of the government’s decision to use privatisation proceeds to fund transfers to pensioners, under the so-called pensioners’ debt, instead of using them to reduce public debt. In 2008, the ratio between domestic and external public debt is likely to shift, leading to higher dependence on external markets. Unfortunately, we don’t believe that this is going to lead to a notable reduction of public debt, keeping it above 40% of GDP.

DSS will support the opposition SRS' initiative to add its resolution that deals with the country's EU integration process on the parliament's agenda, DSS-NS whip Milos Aligrudic announced on Tuesday (March 4). Among other things, the resolution says that Serbia can join the EU only with Kosovo as its integral party. Also today, Prime Minister Vojislav Kostunica (DSS leader) once again called the parliamentary parties to confirm a joint position on Kosovo. In a statement sent to the Tanjug news agency, Kostunica said that "only Serbia with Kosovo" can enter EU. In his view, parties that strongly insist on the EU integration process and those that insist on the "defence" of Kosovo should be satisfied with such a resolution.

It is worth reminding that G17 Plus leader Mladjan Dinkic said on several occasions that DSS has lost touch with reality. Also, we stress that that all the documents negotiated and signed until now with the EU mention that the situation in Kosovo is regulated by the UN Security Council resolution 1244, meaning that the government in Belgrade has no authority there. During the first steps of Serbia's EU integration process, it has been clear that Serbia can enter EU only without Kosovo, because Belgrade cannot take political or any other responsibility for the province. Kostunica should know this, but he is apparently trying to create a situation in which Serbia should insert and insurmountable barrier, practically destroying its hopes for any future in EU. As far as the EU is concerned, it has never asked Serbia to recognize Kosovo's independence, not wanting to further crumble the already fragile (or, better said, non-existent) consensus on the necessity to continue walking the road that would eventually lead to EU membership. DS and G17 Plus, the pro-EU reform-oriented members of the government, have so far supported numerous resolutions and declarations drafted by the DSS-NS, the nationalist and populist block of the government. The opposition SRS and SPS have also backed those declaration and resolutions. However, until now, those parliamentary resolutions never went as far as to tie the government's hands to such extent that could practically put an end to Serbia's aspirations for joining the EU.

DS whip Nada Kolundzija said that DS is against a debate on SRS' resolution and that it is unacceptable that a different majority than the DS-DSS-NS-G17 Plus sets the country's foreign policy course. G17 Plus also did not wait long to criticize the possibility of a parliamentary debate on SRS' resolution. We reiterate our observation that the Kosovo issue provided a fertile environment for political persecution. The latter is being carried out by nationalist parties (including DSS-NS) against everybody who does support a sharp response against countries that recognize Kosovo's independence. The primary target of the political persecution is LDP, followed by G17 Plus, while DS has not been attacked that much. The vocabulary of the 1990s, when Slobodan Milosevic was on power, seems to have returned to today's politics, meaning that nationalistic politicians accuse their opponents (and media that they do not like) of being traitors and foreign spies. Despite the fact that the relations in government are tense and without prospects for improvement, it is difficult to predict when the ruling coalition would fall apart.

The US government has last week decided to suspend financial support to the main RS party, SNSD, the US Embassy in Sarajevo said on Tuesday (March 4). Up to now, the SNSD has benefited from different programmes financed by the US Agency for International Development (USAID), the National Democratic Institute (NDI) and the International Republican Institute (IRI). The embassy explained the decision came because the SNSD is no longer meeting criteria for financial assistance. The USAID "does not provide financial or technical support to any ethnically-based, nationalist political parties in Bosnia-Herzegovina, as their agendas are inconsistent with Bosnia's Euro-Atlantic path," the embassy added. According to the US, the recent statements and actions of the SNSD have not helped BiH's progress. The decision follows a resolution by the RS parliament, in which the SNSD has a majority, which condemned Kosovo's independence and threatened the RS to secede from BiH. The US said that apart from cutting financial assistance it does not envision other sanctions against the party or its members and will continue to maintain normal contacts with the RS government.

Kosovo's independence have indeed increased secession rhetoric in the RS, however, RS PM and SNSD leader Milorad Dodik and other high officials have always assured they do not want to divide BiH and would not undertake such initiatives as long as the Dayton Peace accord entity structure is preserved. Nevertheless, this is not the first conflict between the US and the SNSD, with the most recent ones being this spring when the US tried to promote its constitutional reform draft that among other things envisioned renaming of the RS -- a proposal that truly frustrated RS leadership. We don't believe the measure would have any particular impact on SNSD or that it would divert them from their course. On the contrary it would only boost anti-US sentiments in the entity while suspicions of US' biasness could only give another argument in the hands of separatists.

Oman’s Telecommunications Regulatory Authority (TRA) on Tuesday invited interested telecom companies to submit proposals for a second fixed-line telecom licence and a third mobile phone licence by April 1/08 in line with country’s plan to fully liberalize its telecommunications sector. The fixed-line licence will end the monopoly of Omantel, which last month acquired a controlling stake in Pakistan’s Worldcall Telecom as it expands abroad to face growing competition at home. As part of its agreement with the WTO concerning the liberalisation of the telecommunications sector, Oman launched the privatisation of Omantel. A 30% stake in the company was sold on the Omani stock market in 2005, with 9% sold to specific pension and charitable funds. The government is considering the sale of another 30% of the national telecom group to a long-term investor in Q3/08. Omantel lost its mobile phone monopoly when Nawras, 70% owned by Qtel launched operations in March 2005. Moreover, there is a 49% cap on the level of foreign ownership in Omantel, although no single shareholder can presently hold more than 5% of the company's. The Omani mobile market has registered a rapid growth over the past several years. By the end of 2006 there were 1.8mn mobile subscribers, translating into a penetration rate of 70%, compared with 1.3mn subscribers, or a penetration rate of 53.3% at the end of 2005. The sultanate boats a population of 2.5mn.

Saudi Arabia and some other Gulf states will stay away from an Arab League summit in Damascus later this month unless Lebanon is invited, whether it has a new president or not, a Gulf official said on Monday. Syria and its ally Iran back the Lebanese opposition, led by Hizbullah. Saudi Arabia, along with its Western allies, backs the cabinet of PM Fouad Siniora, which has been unable to push through any of its legislative program since Nov 2006 when six pro-opposition ministers quit. A Saudi official said that Riyadh will "in principle" attend the Damascus summit, although it is awaiting the outcome of an Arab foreign ministers' meeting in Cairo on Wednesday that is supposed to make the necessary preparations. Technically, it should be the Lebanese president who was to attend the summit but with the continuing political crisis and failure to elect the next president the government has assumed the responsibilities of the president. The government, however, is deemed illegitimate by the opposition, supported by Syria and Iran. Thus, if Lebanon fails to elect a president on March 11, Syria may not invite the Lebanese PM to attend the summit which would trigger the absence of the Gulf states and ruin the summit.

Egypt's BoP in Jul-Dec 07 of FY 2007/2008 (H2/07) ran an overall surplus of USD 3.1bn, up from USD 2.9bn in the corresponding period of the previous FY, the latest official figures published by the CBE show. The surplus was the result of strong capital inflows from FDI, which managed to offset the steadily rising trade deficit. Total net inflows in the capital and financial account were USD 3.1bn in H1/07-08 (H2/07). Net FDI into Egypt was USD 7.77bn in H2/07 of which USD 4.8bn flowed in Q4/07 mainly through increased FDI in the oil sector, which posted a net inflow of USD 2.9bn, against USD 1.2bn in H2/06. Investment inflows for incorporations or for capital increases remained almost unchanged at USD 3.5bn while privatization proceeds were down to USD 1.4bn in H2/07, against USD 2.6bn in same quarter of the previous year. At the meantime Egypt saw an outflow of portfolio investment of USD 1.7bn, of which USD 918mn were in bonds.

Egypt's CA recorded a deficit of USD 0.2bn, generated from the expansion in the trade deficit, which exceeded the surplus on services and net unrequited transfers. Merchandise exports stepped up by 22.8% y/y to USD 13.1bn. Non-oil exports were the main engine of export growth, expanding by 26.2% y/y (mainly finished goods and raw materials), while oil exports augmented by 19.1% due to the rising international prices. Imports greatly outpaced export growth rising by 41.2% y/y in H2/07, to reach USD 24.4bn, driven by the noticeable rise in imports of petroleum derivatives and machines and equipment for the developing manufacturing sector.

The services surplus grew to USD 6.8bn in H2/07 from USD 5.6bn in H2/06 but was still inadequate to cover the merchandise gap. Services receipts were up by 28.5% y/y driven by chiefly by the rapid rise of tourism revenues rising by 30.1% y/y to USD 5.6bn, and transport proceeds because of the rise in Suez Canal earnings by 24.6% y/y to USD 2.5bn, spurred by the rise in the number of transiting ships and in net tonnage. In addition, receipts of investment income accelerated by 18.7% y/y. Furthermore, remittances from abroad were up by 42.5% to USD 4.2bn during the period under review.

Egypt's external position continues to improve on the back of strong investment interest in the country's oil and real estate sectors, the rising prices of the main Egyptian exports such as oil, cement and steel and the impressive performance of the tourism sector. The liberalization of the economy, followed by the current government combined with reforms aimed at improving the investment climate will continue to attracting foreign investments and support Egypt rapidly growing economy and external position.

Egypt BoP

Q1/06-07 Q2/06-07 H1/07-08 H1/06-07 Change % y/y Current Account -92.4 -153.3 -245.7 969.7 -1,215 -125.3% Trade Balance -5200.9 -6068 -11269 -6591.6 -4,677 71.0% Exports 5989.8 7113.3 13103.1 10666 2,437 22.8% Imports 11190.7 13181.3 24372 17257.6 7,114 41.2% Services Balance 3059.5 3735.6 6795.1 5573.3 1,222 21.9% Current Transfers 2049 2179.1 4228.1 2967.3 1,261 42.5% Capital and Financial Account 1655.9 1494.3 3150.2 -439.6 183 6.2% Direct investerment 2969.1 4800.4 7769.5 -401.3 8,209 -1867.4% Portfolio investment -1430.4 -303.5 -1733.9 7244.60 -1,333 332.1% Other investment 606.7 -2686.8 -2080.1 -7313 -9,325 -128.7% Change in reserves 1150.4 1936.1 3086.5 2905.8 10,400 -142.2%

Source: CBE

Israel’s budget deficit excluding net lending reached NIS 1.1bn in Feb 08, the latest figures of the MoF show. The domestic deficit excluding lending, which is a more accurate indicator measuring long-term balance changes, was NIS 460mn in Feb 08. Including government borrowing the February the deficit amounted to NIS 717mn compared to a NIS 1.4bn surplus in Feb 07. The deficit could be partly explained by a one time NIS 0.5bn expenditure on interest payments due to the redemption of the Sahar 2690.

Total government income reached NIS 18bn down by 1.4% y/y while excluding taxes on defense imports it amounted to NIS 15.7bn which represents a real decline of 3% y/y. This was mainly attributed to a 10.3% y/y decline of income and property tax revenue. Tax revenues of VAT and customs duties were NIS 6.4bn rising by 11% y/y, reflecting a strong domestic consumption trend. However, we should keep in mind, that in Feb 07 the government collected one-off tax revenues from the sale of the refinery. Supporting the budget were NIS 1.1bn in foreign grants mainly from the US.

The total government expenditures reached NIS 18.8bn that rose by 11.2% y/y. This increase was mainly driven by a 27.3% y/y increase in defense spending due to the preparation and launching of a military operation in Gaza. Interest payments and subsidies also followed an upward trend rising by 18.8% y/y to NIS 3.9bn in Feb 08 which combined with increased defense spending are the main reason for the February deficit. Expenditure of the social, economic and administrative ministries remained relatively unchanged in annual terms.

Although the most recent figures show very strong tax collection which is higher by NIS 600mn of the collection target, a large-scale military ground operation in Gaza would further boost government expenditure. In January and February the government has spent 14% of its 2008 expenditure target. Nevertheless, real economic indicators so far do not point to a slowdown in economic activity and we expect government revenue to remain solid and increasing in H1/07. Global economic downturn, however, is likely to put pressure on government finances in H2/08.

The tax authority published the value of imports of consumption and investment goods for January and Feb 08. According to the report the USD tax value of all imported goods (excl. diamonds) rose by 29.2% y/y in the first two months of the year, and reached USD 8.9bn. The number of imported private cars rose by 4.5% y/y in Jan-Feb while the US dollar value of imported durable goods rose by 15.7% y/y in the same period. The recent figures on imported goods do not indicate a new negative trend of local consumption, despite fears of BoI for deterioration in real economic activity in 2008 that led to a 50bps cut of interest rates last month.

The continuing rise in fuel prices in Jordan has weakened the competitiveness of local industries by 5%, according to Industry and Trade Minister Amer Hadidi. Speaking during the final session of the Jordan Economic Forum, Hadidi said talks are underway with the Egyptian government to increase Jordan’s share of natural gas exported from Egypt and used for industrial purposes. He expressed confidence that Jordanian industries would be able to overcome economic challenges within the near future given commercial agreements Jordan has signed with the US, Canada and other countries. Hadidi stressed the country’s exporting potential and the importance of a favourable investment environment, noting that 85% of the USD 7bn in investments had gone to the industrial sector. Planning and International Cooperation Minister Suhair Al-Ali said at the forum that Jordan’s unemployment rate remains high despite a drop in the unemployment rate to 13.1% as a result of creating more job opportunities.

Lebanon’s Army Commander General Michel Suleiman has ordered his officers to be ready to defend the country against any Israeli attempt to occupy it and at the same time to prevent Israel from attacking Syria from Lebanon. Suleiman issued the orders in a meeting with members of his command and commanders of major units. The army commander stressed that his troops would not fall back "if the enemy decided to occupy the south, because abandoning this territory means abandoning the whole of Lebanon." Suleiman was nominated by the ruling majority for election as the new president, but the Iranian an Syrian backed Hizbullah-led opposition has refused so far to cooperate. The reasons behind the statement of the army commander is not so much a perceived acute threat from Israeli aggression, which is highly unlikely considering the international discontent with Israel’s operation in Gaza but rather aim at improving Suleiman’s position with Syria which could bring closer his election as president. The next date set for presidential elections is March 11 but the deadlock continues.

Speaking to the daily Assafir on Tuesday, CBL Governor Riyadh Salameh reaffirmed the financial sector’s solid fundamentals and its ability “to weather any political and security shock, underpinned by what he called the central bank’s “sound policies,” which are strengthening the Lebanese pound. Salameh said that soaring gold prices on international markets have helped the CBL to scrap USD 4bn of the public debt, set to “increase by USD 2bn in 2008.” Lebanon's public debt stood at USD 42.06bn, 171% of the country's GDP, at the end of 2007, according to the Finance Ministry.

Salameh indicated that the population’s purchasing power shrank 10-15% in 2007, especially in the fourth quarter, while CPI inflation in 2007 reached 7% according to the IMF, he added. As to the buoyant banking sector, the CBL head indicated that overall commercial bank deposits amounted to USD 97bn by end of 2007, estimating the figure to grow to USD 100bn by end of 2008. The ongoing deprecation of the US dollar is underpinning the already heavily dollarized Lebanese economy (more than 77%) by boosting exports and services competitiveness.

The Association of Lebanese Industrialists (ALI) plans to file a lawsuit against the government for failing to protect local industry against unfair foreign competition, the head of the group said on Monday. Lebanese industrialists argue that most Arab states that have signed free trade agreements with Lebanon subsidize the cost of energy, which is essential for the manufacturing sector. Several Lebanese factories, mainly in plastics production, which rely heavily on fuel oil and gas, have threatened to close their businesses and relocate to other countries, while others have threatened to lay off most of their staff and reduce production. The Lebanese industrial sector, which employs a large number of people, incurred heavy losses after Lebanon signed free trade agreements with Syria, Jordan, Egypt and other Arab countries which provide full support to their local industries. The government claims that it can't afford to subsidize the cost of fuel oil and gas oil due to the size of the public debt but at the same reduces the duties on imported goods on the grounds that Lebanon will join the WTO. The parliament passed in 2006 a law, according to which the government is supposed to combat the dumping of cheap products coming to Lebanon by slapping duties on these items but the government has increasingly liberalized the market. The government also caused wide-scale criticism for abolishing the agricultural calendar according to which in certain months imports of some food products are bands to protect local farmers. The aim is to reduce inflation but at the same time exposing the local agricultural and industrial sector to increased competition.

The government is divided over the privatization of the Botswana Telecommunications Corporation (BTC), the nation's fixed line provider. The major friction has been between the management of the parastatal and the government's privatization advisory body PEEPA. Tensions have been running high between the CEOs of BTC and PEEPA about the way to privatize BTC. The PEEPA CEO Joshua Galeforolwe wanted BTC to be privatized by selling a stake to a strategic equity partner. This was opposed by BTC CEO Vincent Seretse who argued that BTC did not need a strategic equity partner as BTC did not need investment capital and the corporation could pay market rates to attract skills. Seretse wanted BTC be sold to the public through other means such as an IPO to extract the most value.

The Board of BTC had also been trying to get Seretse fired as they felt he was imposed on them by the Minister responsible for BTC. The Minister had been resisting the Board's demands as Seretse was performing well. Seretse had been at the helm of the corporation for 4 years and had turned the fortunes of the corporation around from losses to making profits all the years he has been at the top. The company was recently awarded a mobile phone license and was on track for a fast rollout of the service.

The government decided to give PEEPA power of attorney to advise and carry out the privatization of BTC and the BTC Board succeeded in getting Seretse's contract not renewed. Seretse leaves BTC at the end of April.

The National Assembly goes into session on 12th March, the Speaker Cavaye Yegui Djibril said in a memo circulated among MPs Tuesday. The memo gave no hint about the top issues on the agenda, but MPs were certain the highly controversial constitutional revision will not be discussed. A bill to amend the constitution needs only a simple majority to be passed, a situation that leaves the CPDM with nearly 2/3 of the House comfortable and a tiny opposition almost helpless. Despite last week's deadly chaos, the opposition is still planning to take the constitutional revision debate to the streets and try to stop the plan from there.

Last week’s nationwide shutdown to protest against high commodity prices and the planned constitutional revision cost the Cameroon economy over XAF 100bn, estimates the ministry of finance. The fuel, maritime transport and customs sectors that barely operated took the hardest hit. The estimate does not take into account attacks on state-run companies and the destruction of several private and public structures across the country. The death toll is now believed to have reached 50, mostly as a result of bullet wounds. On Monday, hundreds of youths arrested in protesting towns began appearing before high court judges to answer charges ranging from breach of public order to looting. Over 20 two-year jail sentences have so far been handed down in Yaounde.

A row is brewing over an allegation that voter registration in some 13 constituencies in central Ghana was bloated, some by over 100% in the 2006 District level elections. The row followed a statement by the opposition NDC presidential candidate Evans Atta Mills to the effect that the 13 constituencies which fall within the stronghold of the ruling NPP have unreasonably high number of voters. Mills backed his demand with a document purported to have emanated from the Electoral Commission containing the figures and the percentage difference.

The NPP general secretary Nana Ohene Ntow, upon hearing the information, visited the electoral commission and asked it to investigate the validity of the document and the authenticity of the figures.

The NDC has always insisted that the NPP rigged the 2004 elections which returned President Kufuor to office in 2004. The inter Party Consultative group consisting of the general secretaries of all the registered political parties, has scheduled a meeting on the document and is expected to make its position on the matter clear by nightfall.

The IMF mission that visited Ivory Coast in the period Feb 21-29 said it had reached an agreement with the authorities on the 2008 economic programme of the country, which should be submitted to the IMF board for discussion and if approved will be supported by further Emergency Post-Conflict Assistance (EPCA). The IMF said the main objectives of the programme were to restore pre-crisis economic growth rates and re-launch a poverty reduction strategy. It also seeks to improve revenue collection by redeploying tax administration to all parts of the country, fight tax evasion and corruption, reduce non-priority spending to free funds for sectors like education, healthcare and infrastructure. To help increased financing needs, the government envisages increasing the budget contributions from state oil company Petroci. To boost efficiency and budget revenue, prices of electricity and fuel should be hiked in line with global trends. The IMF praised the progress achieved so far in reunification of the country following the latest peace agreements, which has helped boost economic activity. GDP growth thus reached 1.5% in 2007 while inflation remained moderate despite certain food price increase. Investment and credit to economy were on the rise too, and IMF said it expected economic growth to reach 3% in 2008.

The Central Bank Governor, Professor Njuguna Ndung’u, said that the recent sale of forex by the Central bank should not be interpreted as a forex market intervention, but rather as a liquidity management instrument. Last week the bank sold around USD 10mn at a time when the political deadlock was pressing the shilling down. In the last two weeks the bank has spent a total of USD 40mn from its foreign exchange reserves in batches of USD 5mn and USD 10mn, mopping up excess liquidity in the process. The shilling has gone through waves of volatility since the announcement of the disputed Dec 27 election results, touching a four-year low of KES 74 from a high of KES 63.50 on December 24.

Two bills to help seal the new power sharing agreement are expected to be published this week under the supervision of the Attorney General Mr. Amos Wako. The Bills are to amend the Constitution and accommodate the National Accord and Reconciliation Act 2008 in the country’s statute books. The changes are to accommodate the establishment of the posts of Prime Minister and two deputies and define the character and functions of those offices, among other things. It is expected that when Parliament opens on Thursday the debate will begin with the proposed constitutional changes. The House will then turn to ordinary laws affected by the deal.

In the meantime, President Kibaki and Raila Odinga are expected to meet today to discuss the structure of the expanded coalition. The coalition deal was sealed last week bringing an end to the crisis that has plagued the country since the outcome of the general elections.

GDP growth accelerated to 7.64% y/y in Q4 07 from 6.05% in Q3, the central bank reported in its latest quarterly macroeconomic report. The main contributor to the increase was the non-oil sector, which expanded by 10.99% y/y in Q4 compared to 9.47% in the preceding quarter. Industrial production grew by 3.5% y/y in Q4 despite a 1.7% q/q drop. Manufacturing production grew 4.3% y/y and 0.7% q/q thanks to increased activity ahead of the holiday season. Mining output increased by 0.6% y/y and 0.1% q/q thanks to the slight increase in oil and gas production. Average electricity generation reached 3,850 MWh in Q4, dropping by 8.8% q/q, the central bank reported. However, according to our calculations it surged by 69.5% y/y. Electricity consumption fell q/q, by 1.8% to 1,750MWh, but rose by 3.6% y/y. Daily oil production dropped by 2.3% q/q and 9% y/y to 2.13mn bpd in Q4, while the total oil production for the period reached 195.96mn barrels. Oil exports reached 1.68mn bpd falling by 11.6% y/y while supplies to domestic refineries remained unchanged at 0.45mn bpd.

The federal government budget recorded a deficit of NGN 520.07bn in Q4 07, the central bank said in its latest quarterly macroeconomic report. In Q3 07, the budget posted a NGN 107.37bn surplus, while in y/y terms, the deficit widened more than 4-fold y/y. Total federally collected revenues dropped 0.5% y/y but exceeded plans by 19.7%, reaching NGN 1,475.25bn in Q4. Oil revenues accounted for the largest share, NGN 1,208.05bn, falling by 5.7% y/y but exceeding projections by 27% thanks to the rise of oil prices above the benchmark set in the budget. Non-oil revenues soared by 31.9% y/y but were still 4.9% below projections due to the drop in VAT revenues. The federal government retained NGN 561.02bn revenues, which represented a 0.5% drop y/y, while its expenditures soared by 57.6% y/y to NGN 1.081.09bn. Thus, federal government operations resulted in the largest quarterly deficit in the past several years.

Minister of state for air transport Felix Hassan Hyatt announced on Monday that the government has decided to offer four international airports for management under concession agreements. They are the Murtala Muhammed International Airport (MMIA) in Lagos, the Nnamdi Azikiwe International Airport (NAIA) in Abuja, the Mallam Aminu Kano International Airport (MAKIA) in Kano and the Port Harcourt International Airport (PHIA) in Port Harcourt. Hyatt said the government lacked the funds to modernise the airports and bring them in line with international standards and had therefore decided to allow private sector participation in their development, but would continue proving security at the airports. The government is yet to adopt model and terms of concessioning.

Shell has lifted force majeure on oil exports from Bonny and Forcados terminals. As recalled, last week, a spokesman of the company was cited by Reuters saying the repairs of the Nembe Creek pipeline feeding Bonny Light terminal had been completed and oil was flowing. Shell declared force majeure on Bonny exports in early February, saying 130,000bpd oil output had been shut in due to leaks from the pipeline. The force majeure on Forcados exports was announced in January due to a sabotage of two oil pipelines. Earlier this month, Shell managed to complete repairs and thus increase exports from the Forcados terminal to between 150,000bpd and 200,00bpd. In normal conditions, Bonny terminal produces some 400,000bpd of oil while Forcados produces 380,000bpd. In the meantime, ExxonMobil announced it had shut down some production at the western section of its joint venture operations with Nigerian National Petroleum Corporation (NNPC) as a precautionary measure due to a discovered minimal oil leak in the sea. The company said it had been evaluating the situation and was in the process of restoring production. According to traders cited by Reuters, Exxon has delayed some of March deliveries from its Qua Iboe terminal in Ibeno by around 10 days.

The Treasury auctioned ZAR 400mn of R204 bonds (due 2018) at an average yield of 9.06% on Tuesday. The total amount of bids received was ZAR 1.445bn, resulting in a bid-cover ratio of 3.61, from 1.73 in last week's auction for R208 bonds.

Bond yields jumped higher this past week, with the market battered by a spate of negative news following worse than expected consumer inflation and trade data. However, renewed pressure on the currency coupled with a deteriorating global backdrop added to the pressure on local bonds.

Despite the downside risks to growth, reflected in this week’s PMI report, the report also showed a sharp rise in prices, suggesting that inflationary risks remain high and thus potentially forcing the MPC to hike rates yet again.

New vehicle sales fell in February from 47,215 units sold in January to 46,248 (down 2% m/m), the National Association of Automobile Manufacturers of South Africa (NAAMSA) said Tuesday. The m/m fall follows January’s modest rebound and continues to point to ongoing weakness in the new vehicle market and thus domestic consumption. Recent data trends continue to suggest that the economy is likely to slow significantly during the first half of 2008.This month’s fall in new vehicle sales during February sees the y/y rate of contraction deteriorate once again to -12% y/y from a figure of -9.1% in the prior month. For the first two months of the year, total sales amounted to 93,463 units compared to 104,738 units for the comparable period one year ago or down -10.7%.

For 2007 as a whole the number of units sold amounted to 612,707, down -5.2% compared to the comparable period one year ago, and in contrast to the 14% growth rate registered in 2006. NAAMSA said in an accompanying statement that today’s data continued to reflect the trend of the past six to nine months of a mixed performance with the new car market remaining under pressure but new commercial vehicle sales achieving further improvement. On the export side, the industry body said that in February, 2008 aggregate new vehicle export sales amounted to 20,631 units, a significant improvement of 3,895 vehicles or 23.3% y/y from the 16,736 vehicles exported during the corresponding month last year.

The ruling CCM has dismissed the call of Zanzibar’s leading opposition party, Civic United Front for President Kikwete to intervene in the ongoing post election reconciliation talks because they are on schedule. The party’s secretary general, Mr. Makamba said talks between the two rival parties following 2005 disputed general election results which were won by CCM’s presidential candidate, Mr. Karume.

Makamba also ruled out any possibility to conclude the talks aimed at establishing a power sharing government in the divided semi autonomous islands which witnessed serious post election violence in 2001 when over 20 people died in street protests.

The CUF which claims to have won both the 2000 and 2005 elections, has warned that Kikwete who is also CCM national chairman should intervene as he did in Kenya and bring the talks to an end to pave the way for a transition government.

Bureaucracy in the European Commission has been singled out as the main reason for the delay in disbursing EUR 550mn to Tanzania from the 10th European Development Fund. The finance ministry's permanent secretary Mgonja said the EC is yet to release the money which goes directly into the country’s budget to finance poverty eradication, projects in education, health and infrastructure development. Mgonja said he would meet the EC delegation in Dar es Salaam this week to discuss the delays as the country starts negotiations with development partners including the EC on the next budget covering 2008/9.

The Treasury chief who is EDF’s national authorizing officer, is facing pressure from the public and some donors to resign because of his involvement in looting at Bank of Tanzania and a role played in payments made to American mailbox company, Richmond Development Company, which failed to deliver on a 100MW emergency power generation deal in 2006.