The central government budget posted deficit of CZK 5bn during the first two months of the year, the finance ministry said. This is slightly better than the CZK 6.7bn deficit in the same period of last year, but the improvement is a result of the strong performance in January, while in February alone the deficit was CZK 15bn, up from CZK 12bn last year. This year the annual budget deficit is projected at CZK 70.8bn, which was supposed to mean fiscal tightening after the budgeted CZK 91.3bn in 2007, but the actual deficit last year came in at just CZK 66.4bn.

Bond issuance in Q2 is projected at CZK 46bn, according to the issuance calendar published by the finance ministry on Monday. A total of seven auctions will be held with volumes of CZK 6-7bn each and maturities between 3 and 15 years. The volume is similar to the planned CZK 47bn in Q1, but demand has been rather low so far, as a result of which the ministry has been buying papers also for its own accounts, thus reducing effective borrowing. The schedule provides also for four T-bill auctions during the quarter for a total of CZK 12bn.

As expected the regional branch of CSSD voted to oust the former CSSD MP Snitily from the party. Snitily was earlier expelled from the parliamentary group because he backed President Klaus in last month’s elections, violating the party decision to support Svejnar. CSSD also urged Snitily top resign from parliament, which he refused to do. Now there are already three independent former CSSD MPs, but it is unclear how Snitily is going to vote in the future. He had said he remained a social-democrat despite the expulsion, which may mean he would not support the ruling majority like his two other colleagueas.

The PMI index improved further to 56.5 points in February from 56.1 in January, ABN Amro and NTC Research announced in their regular monthly release. This is also the highest level seen since August last year, despite the global concerns and the rapid appreciation of the currency. The improvement is driven mostly by the output and new order components, especially domestic orders, while growth in foreign orders slows down slightly. The indices measuring growth in input and output prices declined somewhat in February, but they remain well above 50, indicating significant price growth. Input price growth remains significantly faster than that of output prices, indicating narrowing profit margins.

Overall, the PMI predicts continued strong growth in manufacturing, which is more optimistic than the mild slowdown in industrial confidence according to the stat office survey. Yet, both surveys point to rather resilient industry in the face of deteriorating external demand, strong crown and a tight labour market.

Manufacturing PMI

Dec-07 Jan-08 Feb-08 Output 56.9 57.8 59.6 New Orders 56.7 58.4 58.0 Export orders 52.6 55.1 54.5 Backlog 49.9 50.3 52.6 Quantity of Purchases 55.1 56.9 58.7 PMI input prices 63.3 67.2 65.7 PMI output prices 55.2 59.3 57.2 Delivery Times 44.9 43.4 44.6 Stocks of Purchases 50.3 51.0 52.5 Finished Goods 49.1 49.5 51.9 Employment 52.1 52.7 53.0 PMI Index 55.0 56.1 56.5

Source: NTC Research, ABN Amro

The major Czech gas supplier RWE Transgas announced that it would increase gas prices by an average of 3.1% from the start of April. This follows an increase of 7.4% from the start of this year. Company representatives said the hike was due to higher international energy prices, but the growth was curbed by the strong crown recently. The other major player on the market, E.ON, said it will maintain its prices unchanged for the time being. E.ON hikes retail gas prices by an average of 7.5% in January.

PM Topolanek will most probably ask this week President Klaus to re-appoint the KDU-CSL leader to the post of deputy PM, it emerged from a statement of the PM. This follows the definitive clearance of Cunek by the prosecution, but it has the potential to destabilize the coalition because of opposition by the third partner, the Greens. The major opponent to Cunek's return is foreign minister Scwarzenberg, who had said he would resign if Cunek is back. The party leader Bursik had said the party would not remain in the coalition at any cost, although did not directly threaten to leave. In turn, Cunek said he was little interested about the opinion of the Greens as they should respect his innocence, proved by the prosecution. Cunek has been entangled in a number of scandals and although the prosecution did not find enough evidence to bring official charges, public support for him is down to record lows. Yet, the coalition agreement provides for the right of KDU-CSL to propose a deputy PM and so far they have stood behind their leader.

Although there is potential for political rhetoric, we do not think the coalition is seriously threatened. None of the parties would benefit from early elections that are likely to follow a government crisis.

Deputy Finance Minister Elzbieta Suchocka-Roguska expects the state budget to post between a deficit of PLN 0.1bn and a surplus of PLN 0.1bn at end-Feb., according to comments cited being given on Mon. The ministry's plan for the year shows the deficit at PLN 1.3bn at end-Feb., so was some improvement since it was created. Suchocka-Roguska said this was due to lower payments to the Social Insurance Fund (FUS). In Jan., the budget showed a surplus of PLN 4.4bn. After Feb. 2007, the budget posted a deficit of PLN 3.0bn. The 2008 budget deficit target is PLN 27.1bn, with the ministry guiding expectations down to PLN 24bn as long as GDP growth is close to the 5.5% assumption. Overall, there are no big threats expected for this year's budget execution, though it is not expected to see such a shortfall as in 2007 (PLN -17bn deficit vs. original PLN -30bn target), especially as the growth forecast faces downside risks.

Budget execution plan

Income Spending Deficit         - monthly cumulative % TOTAL 281.9 309.0 -27.1 -27.1 - Jan. 22.6 18.2 4.4 4.4 - Feb. 20.5 26.3 -5.8 -1.3 4.9% Mar. 19.5 24.2 -4.7 -6.0 22.3% Q1 62.6 68.6 -6.0 - - Apr. 27.2 28.1 -0.9 -6.9 25.6% May 19.5 25.0 -5.5 -12.4 45.9% Jun. 21.0 24.0 -3.0 -15.4 57.0% Q2 67.7 77.1 -9.4 - - Jul. 23.1 25.6 -2.5 -18.0 66.3% Aug. 25.3 22.9 2.4 -15.6 57.4% Sep. 24.0 25.1 -1.2 -16.7 61.7% Q3 72.4 73.6 -1.3 - - Oct. 25.0 30.3 -5.3 -22.0 81.2% Nov. 27.4 28.0 -0.6 -22.6 83.5% Dec. 26.9 31.4 -4.5 -27.1 100.0% Q4 79.2 89.6 -10.4 - -

Source: FinMin

The Civic Platform (PO) continued to hold a wide lead on other political parties, taking 46% in a Feb. 22-24 survey done by GfK Polonia and partly published Mon. late afternoon. That is down 2 pp in 2 weeks. However, Jaroslaw Kaczynski's Law and Justice (PiS) sank by 10 pp to just 16%. That is the lowest result in at least 3 years and is half that received by the party in the Oct. 21 elections. PiS continues to beset by internal bickering and its once vaunted PR machine has become a bit of a laughingstock. One recent attempt to hit the PO by comparing its electoral promises to the world of the Matrix was a mess that included a poorly done photo-shop job with PM Donald Tusk as Neo (not the worst comparison for many of the young that make of the PO's electorate and which J. Kaczynski would love to have). Jaroslaw continues to be the main face of the party and though a loyal elderly crowd likes him, most do not. The PO, however, continues to be buoyed by the desire for change and if it does not begin producing some of this, there could be a backlash and some of the conservative PO voters could give Jaroslaw a chance, particularly since the left remains a mess.

GfK polling results (%)

Oct. 21 Election Jan. 11-13 Jan. 25-27 Feb. 8-10 Feb. 22-24 Civic Platform (PO) 41.5% 46% 43% 48% 46% Law and Justice (PiS) 32.1% 20% 25% 26% 16% Leftists and Democrats (LiD) 13.2% 5% 5% 6% na Polish Peasants' Party (PSL) 8.9% 3% 6% 5% na

Source: GfK

NBP Governor and MPC chair Slawomir Skrzypek harshly criticised Mon. some council members for giving too detailed comments that include the potential size of rate moves and said he was considering getting the NBP to start forecasting an interest rate path from 2010. "I very much don't like the way some MPC members communicate and present their own views of the future interest rate path," he said, referring specifically to Halina Wasilewska-Trenkner's Fri. comments that 1 to 3 more hikes were needed. "I'm considering whether to institute a future interest rate path, of course with consideration of the market. . . This requires a lot of work and in around 2 years it might be able to start being published."

Skrzypek also affirmed his comments last week that CPI inflation could return to the NBP's 2.5% target at end-2009 or beginning-2010, even though the bank's Feb. inflation projection didn't show it coming into the top of the +/-1 pp range until end-2010. He said that inflation would be high this year due to regulated, fuel and food prices. He acknowledged that natural gas prices were an uncertainty and that these could push inflation upward.

Overall, Skrzypek's inflation comments can be ignored as a reflection of his generally dovish view, though he might actually have backed some hikes due to a desire not to be pigeonholed or to be accused of being against the majority (he used to criticise Balcerowicz for being against the majority). But his implicit criticism of Wasilewska-Trenkner and other members that give potential rate targets (such as Dariusz Filar or Marian Noga) could cause a lot of trouble. The council already faces disputes over organisational changes put in place by Skrzypek last year. Though things seem to have settled into an uneasy truce, the criticism might trigger a renewed eruption of conflict. The fact Skrzypek alone presented the idea of getting the NBP to make possible rate forecasts could also lead to disputes as it does not appear the rest of the MPC knew about it.

Monetary Policy Council member Halina Wasilewska-Trenkner, a hawk, said that the Finance Ministry's forecast of CPI inflation at 4.3% y/y in Feb. confirms the view of the latest inflation projection and the need for further rate hikes, she told Thomson Financial on Monday. She said this also confirms her view that at least 1-3 hikes would be needed, though she would not yet given any direct comments about whether one was needed at the Mar. 26 sitting. On inflation potentially peaking in Feb. she said the following: "It is hard to say whether inflation in February will be the peak. There are concerns over the price of gas. Monetary policy will aim to ease second round effects on inflation." It is increasingly looking like Mar. will see another quarter-point hike -- potentially the third this year -- if the monthly data to be released in the next few weeks shows a continuation of current trends. The FinMin's inflation forecast is generally fairly accurate (granting that it erred to the low side by 0.3 pp in Jan.) and a 4.6% rate would confirm the inflation trend and set up council members to hike in Mar.

Deputy Finance Minister Katarzyna Zajdel-Kurowska said that the ministry's Feb. CPI inflation forecast of 4.6% y/y, if reached, would mark the peak if the regulated natural-gas hike hit a maximum of 10%, according to cited comments. However, a 10% price hike seems unlikely these days, as the gas monopoly PGNiG has asked for 30%. Though the regulator URE's chief said Mon. that 30% would not be agreed to, most money is on a hike of 15-20%. Zajdel-Kurowska admitted that if the rise was more than 10%, the peak would occur later. Besides gas, the deputy minister said the coming re-weighting of the inflation basket was a main uncertainty. The Central Statistical Office (CSO) releases inflation data on Mar. 13.

Zajdel-Kurowska said that the expected acceleration of inflation from 4.3% in Jan. to 4.6% in Feb. was based on the expectation of 2.0% m/m growth of energy prices. All electricity companies were given the right to hike prices by an average 11.6% in Feb., though some moved in Jan. as the situation was complicated by regulatory confusion. She said food prices likely rose by only 0.2% m/m.

The deputy minister added that the updated convergence report would give an average HICP inflation forecast of 3.5% for 2008, 2.9% for 2009 and 2.4% for 2010. In the convergence report for 2007 done by the previous government, the inflation path was shown as 2.4% for 2008 and 2.5% for 2009 and 2010.

Poland's Finance Ministry could delay its Eurobond issue beyond Q1 due to tumultuous global financial markets, Deputy Finance Minister Katarzyna Zajdel-Kurowska said on Mon. The deputy minister said the unfavourable conditions meant the issue -- which she said last week would be worth at least EUR 1bn -- could be delayed till later. She added that the issue was not needed for current financing needs and that some other form of funding could be considered, including a private placement or a tapping of the NBP. Such funds would be aimed at financing scheduled Paris Club payments (usually at end-Mar.). The Paris Club debt, she said, would be paid off in its entirety by end-Q1 2009. Paris Club debt was worth EUR 2.9bn at end-Dec.

The head of the energy regulator URE said that he will not agree to the roughly 30% natural gas tariff requested by state-controlled natural gas monopoly PGNiG, according to comments made to the daily Dziennik. URE chief Mariusz Swora said that a 30% hike was "unacceptable" though he would not give guidance as to what level of hike he would agree to. The daily said unofficial info suggested it would be 15-20%. The URE has until Mar. 17 to approve a higher tariff if gas prices are to rise from Apr. 1. It is likely the URE will do so since the later the agreement the higher the final hike. Procedural problems meant the URE could not rule on tariffs for the beginning of the year despite the fact PGNiG wanted to raise prices. If the URE agrees to a 15% hike (fairly likely), then the boost would be 0.2-0.3 pp. And if it's 20% (which can't be ruled out), the impact would be as much as 0.4-0.5 pp. We doubt it will be above 20% and, as indicated above, it will not be 30%.

Poland's Feb. manufacturing PMI index rose relatively sharply to a 6-month high, though input and output prices also showed strong inflationary pressure, according to the ABN AMRO Poland PMI released Mon. by NTC Research. The PMI indicator rose to 53.1 in Feb. from 51.9 in Jan. This is above the 52.9 average of 2007 and points to continued strong expansion in the month. On the back of real economy data that pointed to a good start to Q1, this would seem to confirm that the economy remains in good shape. Along with signs of growing price pressure, this would seem to set the Monetary Policy Council up to be inclined to raise interest rates in Mar.

The output indicator rose to the highest level since Sept. 2007 on the back of domestic strength. New orders rose by the highest since July 2007. New export orders, however, fell for the fifth month in a row with exporters pointing to zloty strength and the global slowdown as the main problems.

Input price pressure again jumped sharply, with the indicator spiking to the highest since Jul. 2006. Energy, utilities, transport and raw materials were all blamed. The output price indicator held at the same level as in Jan., but that means the indicator remains at a 43-month high. Clearly, the PMI price indicators reflect the growing press pressure in the economy as a whole.

Of the other indicators, companies continued to plan to add employment, though at a slower pace than in Jan. Stocks of finished goods contracted as new output grew. Backlogs of work also rose.

NTC compiles the PMI on the basis of responses from execs in 300 industrial companies regarding questionnaires. A reading of above 50 indicates an overall increase and below 50 an overall decrease. All data are seasonally adjusted. The PMI basket is as follows: new orders - 0.3, output - 0.25, employment - 0.2, suppliers' delivery times - 0.15, stocks of items purchased - 0.1 with delivery times' indicator inverted.

PMI

Dec-07 Jan-08 Feb-08 Comment PMI Index 50.8 51.9 53.1 6Mo high, points to solid Q1 Output 50.2 52.5 54.1 Fastest since Sep-07 New Orders 52.4 53.6 55.7 Highest since Jul-07, domestic based New export orders 47.9 47.8 48.0 5th straight fall, though less than in Jan. Backlogs of work 48.7 49.9 52.2 Rise in outstanding business Quantity of purchases 50.2 49.2 53.7 Fastest since Sep-07 Input prices 54.2 60.3 65.4 Big increase, fastest since Jul-06 Output prices 52.4 58.1 58.1 Unchanged, but at 43Mo high Delivery times 50.8 50.1 49.1 Slight contraction Stocks of purchases 48.7 48.2 49.1 3rd straight fall Stocks of finished goods 46.2 46.4 45.8 Quick contraction of stocks Employment 51.3 52.0 51.4 5th straight rise, but less than in Jan.

Source: NTC Research

The Polish Finance Ministry's official forecast for Feb. CPI inflation is 4.6% y/y, up 0.3 pp from a preliminary 4.3% in Jan, according to a statement. The ministry expects one-month price growth of 0.5% m/m. CPI data will be released on Mar. 13 along with the updated basket for 2008 and a revised Jan. figure. If the release confirms the FinMin's forecast, CPI inflation will be at the highest level since Aug. 2004 and will be well above the NBP's 2.5% +/- 1 pp target. The Feb. data should take into account more broadly regulated price hikes in electricity and continue to see some fallout from other hikes from the beginning of the year. Global food prices have also remained high and fuel should contribute around 0.7 pp as well. However, a print of 4.6% will not take into account coming regulated natural gas price hikes, which the regulator is now deciding. Thus, CPI inflation could rise further. The monetary policy impact will depend fully on whether actual CPI surprises to the upside or not. A big upside surprise would definitely clear the way to another interest-rate hike in Mar. On the other hand, the latest updated projection and recent council comments have suggested the council could be ready to hike anyway, with only a lower-than-expected set of economic data possibly delaying a hike to Apr.

The Government Debt Management Agency (AKK) announced on Monday (March 3) that it will cut back the amount of bonds offered at auctions by 25-30% in Q2, and increase the sale of T-bills by the same rate. AKK also mentioned a possibility to carry out a foreign bond issuance earlier than the planned end of Q2. The announced changes are as response to a sharp increase in yields on the secondary market on Friday (February 29) and Monday (March 3).

The manufacturing PMI fell by around 6 points m/m in February to 50.6, according to data of the Hungarian association MLBKT. The February 2008 value is the lowest one in the past six months. Also, it is lower than the one recorded in the corresponding month a year ago. The sub indices moved mostly downwards in February compared to one month earlier.

S&P said Mon. it revised the outlook on Slovakia's debt rating to 'positive' from 'stable' to reflect its expectation that the country will be able to adopt the euro as planned in 2009, according to a statement. The rating agency also raised its transfer and convertibility assessment to 'AA+' from 'AA'. Slovakia's 'A/A-1' rating was affirmed. "The Slovak government has reaffirmed its commitment to the established target of euro-zone accession by 2009 and the required fiscal consolidation by executing a relatively constrained 2007 budget," S&P analyst Eileen Zhang said. The agency expected the general government deficit to be 2.4% of GDP in 2007 with further gradual declines to come in coming years. S&P said rating upside existed if fiscal consolidation continued after Slovakia adopts the euro. It called for social insurance and labour market reforms to help real convergence. Downside risk was pegged to any reversal of previously conducted structural reforms, an expansionary fiscal stance or a postponement of euro adoption.

Slovakia's state budget posted a surplus of SKK 1.6bn in Jan.-Feb., according to Finance Ministry data released on Monday. That marked shrinkage from SKK 13.0bn in Jan., but was much better than the SKK 8.5bn deficit recorded a year earlier. The budget continues to benefit from strong economic growth and some regulated tax increase, notably, increases in the excise on tobacco tax. Spending, meanwhile, remains constrained, and current expenditure was still down y/y. The deficit target for the year is SKK 32.0bn.

Total revenues rose by some 12% y/y to SKK 51.5bn in Jan.-Feb. Tax revenue rose by 18% y/y to SKK 43.4bn. Indirect tax income increased by 23% y/y to SKK 37.4bn, with excise tax receipts up a strong 61% y/y to SKK 13.8bn. The massive excise gain was in large part due to higher revenues from the excise on tobacco, which was up by 276% y/y to SKK 7.1bn. Total grants and transfers fell by 26% y/y to SKK 4.5bn. This was entirely due to a 24% y/y fall in transfers from the EU, with these totalling SKK 4.48bn.

Expenditure continued to be restrained. Total spending fell by 8% y/y to SKK 50.0bn. Current expenditure decreased by 5% y/y to SKK 48.2bn. As opposed to transfers from the EU, transfers to the EU were up strongly. The gain here was 35% y/y to SKK 4.6bn. Capital expenditure amounted to SKK 1.9bn, with strong seasonality meaning such spending is done at the end of the year.

State budget execution (SKK bn)

Budget law Jan. Jan.-Feb. Execution   2008 2008 2008 2008 DEFICIT -31,981.3 13,033.4 1,554.9 -4.9% INCOME 348,251.7 35,003.7 51,538.2 14.8%    Tax revenue 270,976.0 33,163.1 43,361.0 16.0%    Indirect 202,799.0 29,703.1 37,447.0 18.5%    VAT 142,026.0 19,189.4 23,598.9 16.6%    Excise 60,770.0 10,510.0 13,833.6 22.8%    Corporate taxes 58,455.0 3,089.1 5,957.4 10.2%    Personal taxes 3,131.0 -621.4 -1,588.5 -50.7%    Non-tax revenue 22,326.5 1,806.9 3,646.0 16.3%    Grants and transfers 54,949.3 33.6 4,531.2 8.2%       From EU 35,984.7 0.2 4,482.2 12.5% SPENDING 380,233.0 21,970.3 49,983.3 13.1% Current expenditure 340,424.9 22,057.6 48,160.3 14.1%    Current transfers 197,547.4 15,857.7 32,320.3 16.4%    Transfers to EU 18,727.0 4,614.5 4,614.5 24.6% Capital expenditure 39,808.1 106.5 1,916.2 4.8%

Source: FinMin

President Ivan Gasparovic continued to enjoy a big lead in opinion polls for presidential elections due next spring, according to a Feb. 18-24 survey done by the MVK agency. Gasparovic received 52%, or enough to win outright (50% needed). Slovak Democratic and Christian Union (SDKU) deputy leader Iveta Radicova was second with 26%, SNS leader Jan Slota was third with 7%, HZDS leader Vladimir Meciar was fourth with 6%, and political analyst Martin Butora rounded out the top five by taking 5%. Some 14% were undecided. Clearly, Gasparovic remains on the inside track to be re-elected, though these are obviously still early days and much could happen in the next year.

Gazprom announced today that it reduced gas supply to Ukraine by 30mn cubic meters per day. This is a consequence of the lack of agreement with Ukrainian authorities over the repayment of old debts. Later today Naftogaz Ukraine announced that it would be using gas reserves in underground storage to secure normal supply to Ukrainian customers. According to the company the final consumers of Ukraine and Europe should not be concerned about deliveries. According to the speaker of Naftogaz several hours will be needed for the gas transportation system of Ukraine to start working under the new conditions.

The government ordered the State Tax Administration to extend the payment period for Naftogaz? VAT and corporate profit tax payments due for the period Oct 2007 – Mar 2008, says the government’s decree signed on Feb 27. The regulation concerns not only Naftogaz, but all its subsidiaries (Ukrtransgaz, Gaz Ukraine, Ukrgazvydobuvania), and is motivated by uncertainty around volumes and prices of gas imports at the end of 2007 – beginning of 2008. The payment period will be extended till the end of 2008.

We remind that earlier the government allowed Naftogaz to reduce its debts to UkrGaz-Energo for gas imported in Nov-Dec 2007 by the amount of the dividend not yet transferred by UGE in 2006-2007. Note that these are emergency measures, and while they will temporarily improve the financial situation of Naftogaz, they will at the same time reduce revenues to the budget, which is already under the stress of considerable repayments of Soviet-era deposits. Overall, the government is likely to retain high level of state protection of Naftogaz.

The government decided to raise gas prices for the population and the budget sector, says the decree signed on Feb 27. The document says that the rise will be realized starting from April 1st in the form of an increased ?special purpose levy` to the price of the gas. In particular, this levy for industrial enterprises and the budget sector will be increased to 8% of the gas price, and for the population the increase will be to 4%, while the levy for heat producing enterprises will be left at 2% of the gas delivery price. We remind that the gas import price in 2008 is set at USD 179.5 per 1,000 cu meters. Correspondingly, the price for industrial enterprises is somewhat higher at about USD 200-215 (20% VAT plus delivery expenses), while for the population and the budget sector the gas price is lower, about USD 60-70 for the population and USD 70-90 for the budget sector.

Gazprom acted on its threat to reduce gas supplies for Ukraine from today and deliveries have been reduced by 38-40mn cubic meters per day, which is roughly equal to 25% of the total deliveries for Ukraine. Ukraine’s Naftogaz assured that missing quantities will be supplied from gas in storages and consumers will not feel the cut, but concerns in the EU are on the rise. The EU receives slightly over 400mn cubic meters of Russian gas per day, which is transited through Ukrainian territory. Meanwhile, Naftogaz said they have received new terms for gas deliveries from Gazprom and they are currently studying them and talks between the two companies are to resume this week. We remind that the major disagreements are related to the gas debts for 2007 and the presence of intermediaries between Gazprom and Naftogaz.

CPI inflation accelerated slightly to 18.8% y/y in February as compared to 18.7% y/y registered in January, informs Kazakhstan?s statistical office. The breakdown shows that food price growth remained at a record high rate of 26.8% y/y, followed by 14.5% y/y for services and 11.3% for non-food goods. The considerable increase in food CPI was observed across the whole range of foods included in the consumer basket. Thus, the inflation dynamics is very similar to that observed in January.

As we expected, the government's efforts to restrain price growth for socially sensitive food products (flour and bread) did prove effective for reduction of the total inflation rate. The process of reducing inflation will likely be very prolonged, as additional pressure comes from producer price growth (PPI inflation accelerated in Dec 2007 to an all-time high of 31.9% y/y). For now, NBK keeps its inflation forecast for this year unchanged at 7.9-9.9%.

The Council of State has rejected an appeal for the cancellation of the privatization of the petrochemical giant Petkim. On 8 February, the Union of Petroleum, Chemicals and Rubber Workers (Petrol-Is) appealed the Supreme Privatization Board’s (OYK) decision to approve the sale of Petkim, and with yesterday’s rejection no more obstacle remained for one of the boggest privatization deals of 2007. The privatization of 51% of Petkim through a block sale was compliant with the privatization law and the principles embodied within that law, a Council of State statement said. Azerbaijan's SOCAR-Turcas-Injaz consortium had submitted the second highest bid in a 5 July tender for the block sale of a 51% state-owned stake in Petkim, and won the tender with a USD 2.04bn bid.

The government has decided to revive Turkey's stalled EU membership process with new reform legislation this spring, reports Sabah daily. After a large group of intellectuals, artists, academics and journalists urged the government to take immediate action toward EU reform, the ruling Justice and Development Party (AKP) finally realized that the ground where they are standing is shaking and no longer solid. The first job the government will tackle will be probably to amend the controversial Article 301 of Turkish Penal Code (TCK). This will most likely be followed by discussions over the new civilian draft constitution.

AKP parliamentary group deputy chairman Nihat Ergun acknowledged in an interview that demands voiced in the declaration were reasonable. Ergun reminded that the Foundations Law was adopted by Parliament last week, despite bitter opposition by opposition parties. Ergun noted that they would refer a draft amendment to Article 301 to parliament next week, and that the new draft constitution will be opened for further discussions in two weeks’ time. The draft, which will be made available to the public for review by political parties, civil society organizations and universities, will be referred to parliament in two months.

AKP plans to ensure the passage of the new constitution by the end of 2008. In the event of prolonged discussions, however, party executives have said it may not be passed until early 2009. For this reason, the party plans to first take care of the priorities in regards to Turkey’s EU bid to make sure that the parliament reviews the new draft constitution in October 2008.

These are bold moves by the government and this is the first time they are giving solid deadlines for their plans. Time will show whether they will live up to their promise, but a strong Turkey is a prerequisite for the stability of the region and thus the world. Because of this, AKP has to do whatever they can to finalize the legal and economic transformation process of the country.

CPI inflation soared in February as prices rose by 1.25% m/m, while the PPI was up by 2.56% m/m, according to figures of TurkStat released today. After cooling in January when CPI went up by 0.8% m/m and PPI up by 0.42% m/m, inflation surged due mainly to food prices in February. February's prices pulled the annual CPI inflation to 9.1% y/y from 8.2% y/y in January.

The highest monthly increase was 5.05% m/m in the index for food and non-alcoholic beverages. The index for miscellaneous goods and services rose by 1.73% m/m, for hotels, cafes and restaurants 0.90% m/m, for furnishings and household equipment 0.86% m/m. The highest increase was 14.75% m/m in the index for housing followed by alcoholic beverages and tobacco with 14.34% m/m, food and non-alcoholic beverages with 12.93% m/m.

Looking at PPI inflation, the highest monthly increase in the industrial PPI was 21.32% m/m in electricity and gas. Other notable increases were 1.64% m/m in the index for manufacturing industry and a decrease of 0.08% m/m in the index for mining and quarrying.

The February results are worse than expected, but not a complete surprise. The Central Bank Monetary Policy Committee's (MPC) note mentioned that food prices are a high risk item for February. The inflation figures are also above market expectations measured by Central Bank surveys.

The manufacturing PMI decreased in February after another decline a month ago, according to a report by NTC Economics revealed today. The index fell to 46.4 in February, which is a 33-month low and now it is significantly below the 50 expansion/contraction threshold. The report points out that the fall in the index is due to the low domestic demand and high price dynamics and high prices are because of the bad weather conditions. According to the report, a number of Turkish manufacturers suggested that exchange rate appreciation against the US dollar, and a general moderation in global demand, had reduced growth in new export orders. Companies reported that increased labor costs and higher oil-related prices led to a further sharp rise in their average cost burdens. The continuing drop in the manufacturing PMI is in contrast to the record high export figures seen in the last three months, suggesting that a slowdown is in the pipeline.

RWE (Germany) and Electrabel (Belgium) are reportedly in the lead of the short list for investors, willing to enter the construction of a second nuclear plant in Belene, according to information of Reuters. The national power utility, NEK, announced that it would prepare a short list, which was a little bit surprising, as it was widely anticipated that NEK would pick from the five candidates, including also CEZ (Czech Republic), E.ON (Germany) and Enel (Italy). It is expected that the short list should be prepared by the end of March, though delays are quite possible. We believe this is likely because of the decision of NEK to pick a strategic investor along with a bank that will fund the project. Thus, the most likely date of picking both an investor and a bank will be towards the end of the year. The project is estimated to cost EUR 4bn, but there is a possibility to increase construction costs, in case additional tasks are given to the contractor, Atomstroyexport (Russia).

The European Commission has expressed dissatisfaction with the report of the finance ministry on corruption in the state roads fund, and it has requested more detailed information. Reportedly, there has been a warning that if no detailed information is provided, EC might freeze additional resources, marked for Bulgaria, such as programmes to be funded by structural funds, according to sources of 24 chasa. The lack of detailed information has been one of the major motives in the interim report of the Commission on judicial reforms and fight against corruption and organised crime. This is not the only request of the Commission, as it has required additional information on a number of other programmes, including Natura 2000, maritime administration, regional development projects and many others. The finance ministry and all other related institutions are expected to provide information by the end of March. In case this request is not carried out, EC will probably start a procedure on freezing financing to Bulgaria until further notice.

This is one more example for the either incompetence or the lack of political will to fight corruption in the public administration. This time, the Commission has changed the approach, and instead of safeguards, it has started making threats on cutting financing to Bulgaria, which will be a much heavier blow on the country than any safeguard. In the end, Bulgaria is facing the possibility to become a long-term net payer to the EU, which will put additional strain on the economy and will block huge potential investments, delaying structural reforms considerably.

The police may face a major corruption scandal, as it appears that they have been funded by the duty-free petrol stations of Fuat Gyuven, a Turkish citizen with considerable interests in petrol retailing. Even though there has been a legislative argument for such transfers between 1992 and 2006, payments have continued in 2007, according to a report of the Chief Auditing Office. Understandably, regular payments from duty-free stations to the police can be seen as nothing but a bribe, very probably providing protection for petrol contraband. Duty-free petrol stations have been outlined as a source of corruption and smuggling in the region, which is why the government finally took a decision to close them, at the end of February. An investigation will very probably have to be launched, and it may cost the position of the chief of police. However, we doubt that charges will be ever pressed, as we believe there is no political will in the government to deal with major corruption affairs, particularly at such high levels. In fact, we expect very strong reaction to this report, downplaying its importance and eventually turning around its conclusions.

The central bank (BNR) announced that its foreign reserves fell by EUR 250mn in February to EUR 27.37bn at the end of the month. The foreign currency reserves dropped because of the central bank payments of foreign debt to the European Commission. Foreign currency reserves lost EUR 311mn following inflows of EUR 1.45bn from modifying minimum foreign currency reserves of commercial banks. Outflows of EUR 1.76bn represented payments to the European Commission from the foreign debt. We believe the decrease is also due to the continuous widening of the CA deficit and exchange rate fluctuations. Furthermore, EU funds continue not to be utilised considerably, not being able to compensate for the growing external deficits. The gold and foreign currencies reserve reached EUR 27.62bn at the end of January. Gold reserves stayed at 103.7 tonnes. As price hiked, the value went up to EUR 2.126bn from EUR 2.073bn.

Railway unions and transportation ministry have failed to come to an agreement on higher salaries and better work conditions. Thus, the first protest of the CFR unions' members is scheduled for Wednesday (5 March) morning, when no trains will run. Transport Minister Ludovic Orban announced it was impossible for CFR employees to have their salaries increased by 18% as they want because this percentage is not covered by the productivity in the railway system. According to Orban, the strike is not a negotiation means, but nothing else but a threat.

The owner of the former Tractorul Brasov plant, Flavus Investitii, wants to attract investments of EUR 800mn, mainly for an industrial park and a real-estate project to be developed on the plant's location. Under these circumstances, the production of tractors is to continue unless a strategic partner for a green-field investment is found, as the old equipments are not useful anymore. According to Florin Rebic, CEO of the industrial division of Flavus Investitii, negotiations are currently ongoing with ten investors interested in Tractorul. Rebic says that given the unprofitable nature of manufacturing tractors, the full production of tractors is not possible anymore, but assembling parts activity is taken into consideration.

PSD head Mircea Geoana has said that President Traian Basescu has a "constitutional duty" to make public his opinion on the issue of early parliamentary elections. In Geoana's opinion, any delay or cancelling of the elections would need an organic law. PSD considers as compulsory the endorsing of a decision on early elections and their organizing in the same time with the local elections. On the other hand, Geoana said that the main problem of the country was the political class' answer to the institutional deadlock that was likely to come soon. Both PNL and PSD leaders have proposed the merger of the general and local elections, most suitably in May or June. According to the current schedule, the local elections are due in May and the general ones – in November.

Agriculture ministry has announced that within the first rural development project session due this month out of a total of seven sessions, up to EUR 195mn are to be allotted. The projects meet the main measures within the National Rural Development Program (PNDR): upgrading farms' infrastructure, increasing competitiveness and developing villages. Up to EUR 103.7mn are to be alloted for village development. Co-financing for village infrastructure development projects can benefit of total coverage from European funds and state budget.

More than EUR 991mn are available for improving agriculture by 2013. Another EUR 1.07bn are alloted for increasing the added value of agriculture products. PNDR establishes the policies and the rural development actions for the 2007-2013 period in the farming, forestry and rural development areas. PNDR was approved in February by the Rural Development committee within the European Commission and has been officially released today.

The sale of Automobile Craiova plant to Ford is likely to enter into force at the end of March or no later than the beginning of April, stated the head of the Authority for State Assets Resolution (AVAS) Teodor Atanasiu. According to Atanasiu, the EC took the right decision when it allowed the privatisation to continue. He said that following the state demand Ford to make a major investment, the one which benefits from this state aid is the business operator.

The EC ruled that the agreement between the state and Ford represents state aid, and therefore, it is illegal. EC asked Romania to recover EUR 27mn from the carmaker, after it was sold to Ford. EC officials opened up an investigation in October 2007 checking whether Romanian authorities conditioned the privatisation on maintaining certain production level and staff. On its side, the state accepted lower selling prices. Imposing conditions within a privatization process led to a lower sales price.

Romania is to recover the EUR 27mn standing for illegal state aid in the following four months, announced the head of the company’s privatization commission Sebastian Vladescu, after Automobile Craiova’s privatisation commission and Ford officials met to analyze the impact of the EC decision over the privatisation deal. This was the fourth time EC decided to investigate a privatization deal in Romania.

S&P raised the long-term corporate credit rating of the gas distributor Transgaz Medias to BBB- from BB+ with a negative outlook. According to S&P, the new rating reflects the increased visibility and amount of operating cash flow following a significant tariff increase and the finalization of tariffs for the regulatory period through June 2012. The rating is also due to the sole licensed status of the operator, the predictable cash flows generated from regulated transmission activities and the company's strong financial profile. Nevertheless, the identified weak points are an outdated asset base, which requires continuous investment; remaining transition-economy features and worsening macroeconomic conditions in Romania and planned investment in the Nabucco international pipeline project. The state now owns 75% of Transgaz following the IPO last year. S&P does not expect further privatization over the medium term.

Prime Minister Ivo Sanader rejected the option, where Croatia should choose between EU and its protected environmental fishing zone (ZERP) in the Adriatic, speaking at a public event. He underlined that the true question was whether Croatia could protect its national interest while obtaining EU membership. In his view, this was quite possible, and he expressed certainty that all outstanding issues will be resolved. Sanader noted that talks with Italy and Slovenia could be delayed because of the general elections in Italy. Currently, there is an interim government which may not wish to assume responsibility for the talks, since the issue will have a long-term effect. Thus far, Slovenia has agreed to hold negotiations with Croatia, and an answer is expected by Italy. The European Commission will be also represented, since EC was a long-time supporter of direct talks between all involved countries. Sanader continued that similar to the ZERP issue, one could also place a choice between the judiciary and EU, since EU has been pressing Croatian authorities for quite thorough reforms in the justice system. In the end, Sanader concluded that his government would withstand Croatia’s interests, but at the same time aim at EU membership.

The central bank's foreign reserves increased by EUR 55.1mn in January, adding up to EUR 9.33bn at the end of the month, according to official figures. In 2007, the central bank's reserves increased by EUR 582mn. The reserves of commercial banks decreased by EUR 72.5bn in January 2008, following a strong growth posted in H2 2007.

Domestic credit growth slowed down from to 6.5% y/y in December from 6.8% y/y in November (all changes in real terms), according to figures of the central bank. Similarly to the previous month, credit to the private sector was responsible for the slower growth, decelerating by 1.6pps m/m to 8.7% y/y. In nominal terms, credit to private sector slowed down only slightly, meaning that it was not only the acceleration of inflation that led to lower real growth of credit to private sector. The nominal slowdown reflects the effect of the central bank's restrictions on bank lending growth.

Banks posted slower credit growth to the real sector, reaching 7.9% y/y in December, down from 9.2% y/y in November. Bank equity growth continued to decelerate, reaching 25.6% y/y in December. However, equity growth is still much higher than lending growth leading to a improvements in capital adequacy rations. Overall, bank assets increased by 12.3% y/y in December, and they stood at 126% of projected GDP.

Gross external debt increased by EUR 692.2mn in December, reaching EUR 32.9bn (90.5% of GDP) at the end of the month, according to central bank figures. The increase in the last month of 2007 was driven by both the private and public sector. Over the entire 2007, external debt increased by EUR 3.7bn, or 12.5% y/y. There has been some slight deceleration of external debt growth, since, external debt increased by 13.7% y/y in 2006.

External debt increase was driven mostly by the private sector in 2007. However, public external debt went up EUR 0.9bn. As far as private external debt is concerned, it grew by EUR 2.7bn in 2007. Banks' external debt decreased by more than by EUR 1.3bn in 2007, reflecting the result of central bank restrictions. On the other hand, in the corporate sector, the external debt was up more than EUR 5bn in 2007. Thus, gross external debt continues to grow rapidly, mostly because of the corporate sector, which is likely to keep creating concerns.

Following promises from the Serbian government that it will increase its presence in parts of Kosovo where Serbs live and news that Serbs were leaving Kosovo's police, yesterday was marked by the news that Zeleznica Srbije, the state railway company, has regained control of a part of its infrastructure in Kosovo. Company's board chairman and Prime Minister Vojislav Kostunica's (DSS) advisor, Branislav Ristivojevic, explained that it refers to a 60km stretch of railway in northern Kosovo which has been under UNMIK jurisdiction since 1999. The transport on that part of the railway network is suspended because of alleged controls into safety and quality conducted by the Serbian state railway company. UNMIK reaction to the news was that they were not aware that Zeleznica Srbije took over a part of the railway infrastructure. The US and EU administration reiterated several times that they would not allow a division of Kosovo.

There will be no tax hikes and increases of public expenditure in order to preserve the macroeconomic stability in the country, Deputy Prime Minister Bozidar Djelic (DS) said on Monday (March 3). However, he added that reallocation between the different items in the budget are possible, due to the need to provide additional investments to Kosovo. Talking at a meeting with domestic and foreign investors, Dinkic also pledged that the government will ensure safety of their property, find solution to remove obstacles for investing, continue with EU integration process, etc. Apart from Djelic, the meeting was attended by Finance Minister Mirko Cvetkovic (DS), Economy Minister Mladjan Dinkic (G17 Plus), and Serbian Central Bank (NBS) Governor Radovan Jelasic. In other words, the job of trying to calm down foreign investors and promising them a bright future in Serbia is done by DS and G17 Plus, and not the whole government. On the other hand, DSS-NS, which represents the nationalistic and populist part of the government, focuses on Kosovo, and seems not to care that certain anti-Western statement could have negative consequences for the local economy.

All in all, due to the dissonant tones in the government regarding various issues (Kosovo, relations with EU, Kosovo's debt), we believe that the messages sent by certain parties and their officials in the name of the government are far from being convincing. The row in the DS-DSS-NS-G17 Plus ruling coalition concerns the priorities of the government, meaning that there is no agreement on what the government should do. DSS-NS keeps chanting Kosovo, Kosovo and only Kosovo, while DS and G17 Plus insist on policy dubbed "Kosovo and EU". Besides, the communication conducted via media between ruling coalition members is becoming tenser. For example, DSS spokesperson Andreja Mladenovic said that DSS will not talk about state policy with G17 Plus. As a reply, G17 Plus claims that DSS lost touch with reality. Despite the apparent poor relations and huge differences in the ruling coalition it is impossible to say whether the current government will fall any time soon.

The Serbian central bank (NBS) announced on Monday (March 3) that it gave a preliminary approval to Bank of Moscow to establish a bank in Serbia. In order to obtain a licence, the Bank of Moscow needs to demand one from NBS in the next 60 days, meet technical conditions for starting operations in Serbia, as well as to secure EUR 10mn for capital. The NBS has 30 days to decide about the demand for issuing a licence. We remind that the Serbian central bank has not been issuing banking licences to foreign banks for a number of years, preferring foreign bank capital to enter the country through privatization. This approach has in a way forced foreign banks that are eager to enter Serbia's market to do so by taking part in the privatization process.

PPI inflation in industry accelerated to 11% y/y in January 2008 from 9.8% y/y in December 2007, according to data of the Serbian statistics bureau. The major driver of price growth acceleration remained energy, as the price growth in that sector picked from 16% y/y in December to 22% y/y in January. Despite the continuous acceleration of retail prices of foods, the price growth in food production decelerated slightly in January (+13.9% y/y in January, reaching 15.9% y/y in December). The price growth in manufacturing of coke and oil derivatives also slowed down (+40.2% y/y in January, 45% y/y in December). In manufacturing, the price growth stood at 9.1% y/y in January, down from 10.3% y/y in December. On the other hand, in mining, price growth accelerated to 30.8% y/y in January from 4.7% y/y in December, reflecting a considerable price increase in the exploitation of oil and gas. The price growth in utilities decelerated to 9.2% y/y in January from 10.2% y/y in December. Concerning utility prices, the government approved an electricity price hike for March, while it will also have to decide on a demand for an upward adjustment of gas prices. We continue to believe that oil and food sectors will be the main sources of PPI inflation pick-up.

Newly formed UniCredit Bank BiH will have assets of KM 3.5bn, UniCredit Bank BiH CEO Berislav Kutle said. He added that the merger of Zagrebacka banka BiH and HVB Central Profit Banka following worldwide merger of UniCredit and HVB has been successful finalized yesterday. Kutle added that UniCredit Bank BiH has become the second largest bank in BiH. In view of the fact that UniCredit is also a majority shareholder in Nova Banjalucka Banka in RS, which itself disposes of some KM 800mn assets, that total UniCredit's portfolio surpassed KM 4bn, thus challenging the first position of Raiffeisen BiH which had KM 3bn assets at end June 2007. UniCredit Zagrebacka Banka Mostar posted KM 29.7mn net profit last year, while HVB Central Profit Banka netted KM 14.9mn profit.

Largest power company in BiH, Elektroprivrede BiH (EP BiH), could construct new hydro power plants on its own. The company could take some KM 250-300mn loans and thus finance part of the power capacity expansion projects, its newly appointed CEO Amer Jerlagic said in an interview for Nezavisne Novine. He added that in order to make such a move the company needs a government decision and the adoption of a strategy on the sector which would set the rules on how new investments would be realised, including a possible joint ventures with strategic investors. The WB said some KM 700mn are necessary for an upgrade of FBiH mines and power plants, while the FBiH government said it is preparing some project to bring KM 7bn foreign investments in the sector. Jerlagic said that the only certain plan, for now, is that the EP BiH would invest KM 40mn in network rehabilitation in the next four years.

He also said the company has accumulated loss of around KM 800mn since 2002, part of which is an operational loss and the remaining are amortization losses since according to the WB some 97% of its assets are so old that should be written off. As a result, the company’s value has decreased from the previous KM 4bn to around KM 2.7bn. The new CEO said he is against speedy privatisation of the firm because he is confident EP BiH's value would increase upon a good management, realization of investment programme and expected steady rise in power demand and power prices. Jerlagic estimated that if the FBiH government waits for the sale until 2015 it could get at KM 10bn for its stake.

Algerian PM Abdelaziz Belkhadem said on Sunday he hoped constitutional revisions will be scheduled during the People's National Assembly's spring session. The constitution is to be changed to allow President Bouteflika to run for a third term, and also to expand presidential powers. The president, although politically strong under the current constitutional arrangement, does not take precedent over the executive in many key areas. Bouteflika has proposed a shift from a parliamentary to a presidential system, strengthening the powers of the president, who is currently the main driving force behind economic reforms, repayment of Algeria's debt and the USD 60bn infrastructure development program aimed at stimulating economic growth. Bouteflika's second and final five-year term as head of state ends this year, but political allies in recent months have urged the 70 year old to change the basic law to enable him to stay on. The National Rally for Democracy (RND), Islamic Movement for Peace and Society (MSP) and the MSP, FLN and RND support Bouteflika's bid. The referendum on the constitutional amendments was due to be held in 2007 but was postponed indefinitely until the government secures its success.

Oriental Weavers, one of Egypt’s largest carpets and rugs producers, on Sunday unveiled its ambitious plan to build an EGP 1.3bn (USD 238mn) industrial complex to boost output as demand grows, mainly from the US and Germany, the company said in a statement. The first phase of the project, which includes 17 sites on a 190,000sqm plot, would start by end of 2009 and funds would be secured through debt raising (55%) and shares issue (45%). Egyptian exports of readymade clothes, apparel and textiles exceeded USD 1bn in 2006 and are expected to reach USD 3bn by 2010.

Egyptian exports to Arab countries increased by 25% in 2007, according to the Foreign Trade ministry annual report. Egyptian non-petrol exports to Arab countries reached USD 5.43bn in 2007 compared to USD 4.43bn a year earlier, the Egyptian Minister of Trade and Industry, Rachid Mohamed Rachid said. The top destinations of Egyptian exports among Arab countries were Saudi Arabia with USD 973mn, Libya with USD 760mn and Syria with USD 611mn. The report showed that Egyptian total exports increased by 22% in 2006/2007 to EGP 84.35bn. The Arab summit next week is likely to increase cooperation among the Arab countries and further stimulate Egyptian exports, the minister said.

In an effort to boost exports, Egypt’s government has subsidized exports and the QIZ (Qualifying Industrial Zones), which have had an indirect effect on export growth. A contractual deal aiming at boosting exports from the QIZ, exclusively between Egypt and Jordan, permits duty-free entrance of goods to the US provided they include Israeli constituents. Also the rising international prices of Egypt’s main exports, such as steel and cement, over the past three months have also boosted total exports.

The report indicated that for years the EU has been Egypt's main trade partner and currently accounts for 35% of Egypt's imports and more than 40% of its exports. The Egyptian market has been opening up gradually, especially since the EU-Egypt Association Agreement that came into force in June 2004. The top three export partners are: Italy, the USA and Spain. And its top three import partners are: the USA, Germany and China. Egypt mainly exports mineral fuels and oils, cotton and iron and steel; while as it mainly imports consumer electronic and capital goods, nuclear reactors and boilers, cereals, food products, and chemicals.

Saudi Arabia's Commerce and Industry Minister Hashim Yamani has submitted his resignation; it was announced on Monday, to be replaced by Abdullah Zainal Alireza. In recent months Yamani has been facing growing criticisms from the media as CPI inflation hit record levels, reaching 7% y/y in Jan 08, its highest in twenty five years. Currently there is an intensifying debate in the GCC concerning the dollar pegging policy. Several economists and central bankers have been calling for a revaluation or severing from the ailing dollar.

However, these calls have fallen largely on deaf ears among GCC authorities, who face a strategic and choice as to their political and economic alliance with the US. However, this policy is starting to cause political casualties, with Yamani and UAE central bank governor being clear examples. The new Saudi commerce minister Alireza was the chairman of Jeddah Chamber of Commerce and Industry and headed the team that negotiated the Kingdom’s accession to the World Trade Organization.

In an effort to curb inflation, the Qatari cabinet on Monday agreed to freeze all rent hikes on contracts inked after Jan 1/05, for the next two years. A 27.7% spike in rents boosted inflation in the gas-rich state to 13.74% in Q4/07 as demand for housing units is largely outweighing supply. The ongoing economic boom, coupled with a large-scale USD 130bn spending program on infrastructure projects, are luring growing numbers of expatriates into the country, thus creating unprecedented demand for new residential units. Qatar's previous rent cap of 10% per year expired last month, when the cabinet passed a new rent law. Dubai and Abu Dhabi capped rent increases at 5% this year, down from 7% last year, to help contain inflation, which hit a 20-year peak of 11% in 2007, according to still unofficial estimates.

Oil prices will not fall below USD 60-70 per barrel as this is the minimum level at which alternative fuels, such as biofuels or tar sands, are economically viable, Saudi Oil Minister Ali al-Naimi said in remarks published on Sunday by Algeria's APS news agency. US crude closed at USD 101.84 a barrel on Friday and London Brent crude finished at USD 100.1. Oil at these prices has put pressure on OPEC to refrain from cutting output when it meets in Vienna on March 5. The minister rejected theories predicting a quick exhaustion of oil supply and said that Saudi Arabia, thanks to continued exploration, might be able to find another 200bn barrels of oil to add to its reserves. But there was no justification for building output capacity beyond levels already planned, he said. State oil firm Saudi Aramco aims to lift supply capacity to 12mn b/d, enough to meet 14% of current world demand, by the end of 2009. Naimi said last year that further expansion of Saudi production capacity may not be needed beyond 2009 as consumers grow more energy efficient and switch to alternative fuels.

Despite Saudi Arabia’s tightened lending rules to prevent lower borrowing costs from fuelling inflation which reached historic level of 7% y/y in Jan 08, broad money supply (M3), considered a major indicator for future CPI inflation trends, accelerated to SAR 815.2bn (USD 218bn) in Jan, the kingdom’s Monetary Agency (SAMA) said on Monday. M3 in Dec 07 was up 19.6% y/y. Money supply growth, driven by oil prices at record highs near USD 100 a barrel, is fuelling inflation across the Gulf region, while central banks shadow US interest rates to deter bets on the appreciation of their dollar-pegged currencies. The Saudi central bank has lowered borrowing costs by 75bps since Sept 18 and raised the share of depositor funds banks must keep in their vaults to 9% from 7% for the first time since 1980. The ongoing acceleration in money supply is not a surprise as it is linked to the economic boom and high oil prices, which is a GCC-wide phenomenon, not merely a Saudi one.

State-owned Qatari Diar real estate has raised USD 2.5bn debt facility to fund its recent takeover of Chelsea Barracks in London, it was announced on Sunday. BNPI, HSBC, Qatar National Bank, Calyon Bank and Al Rayyan were the loan arrangers. No details concerning coupons and maturity dates were disclosed. Diar, a daughter company of Qatar Investment Authority, tasked with managing some USD 50bn of hydrocarbons revenues, is currently engaged in similar up-scale property developments in Egypt, Syria and Morocco, Yemen and Sudan in addition to large-scale property acquisitions in Europe, mainly in the UK. The Chelsea Barracks acquisition is described as the largest ever Islamic finance-related takeover in Britain.

Bahrain's CPI inflation accelerated to 4.64% y/y in Jan 08, up from 4.07% y/y in Dec 07 and down from 4.8% y/y in Nov 07, pulled up by rising food prices, the government's Central Information Organisation (CIO) said on Sunday. Food, beverage and tobacco costs surged 2.1% in January from Dec 07 while housing costs were steady, the data showed. Compared to other GCC countries, the influx of expatriates is much more moderate and public spending lower, which is easing rent and other inflationary pressures. Inflation was 2.05% in 2006, according to central bank data. The government has recently allocated USD 107mn to cushion price inflation of basic foods. Inflation in Bahrain could ease to 3.1% in 2008 from 3.2% last year, according to official estimates.

US Secretary of State Condoleezza Rice urged the PA to quickly renew talks with Israel despite continuing violent clashes between the IDF and Hamas militants in the Gaza Strip. Palestinian President Mahmoud Abbas had on Monday that he would freeze talks with Israel in light of the conflict. Rice, who is due to arrive in Israel on Tuesday afternoon, will head directly for Ramallah for talks with PA President Mahmoud Abbas and PM Salam Fayyad. She will later dine in Jerusalem with Olmert. Rice will meet with Defense Minister Ehud Barak and Foreign Minister Tzipi Livni also on Tuesday. In her talks with Israeli leaders, Rice is expected once again to raise Egypt's request to increase the number of its soldiers on the border by 750. Rice is also expected to seek Israel's response to the plan to reopen the Rafah crossing into Egypt, and to Fayyad's plan to transfer control of the crossings between Gaza and Israel to the PA.

Hotels and furnished rental apartments in Lebanon experienced a drop of 14.4% in occupancy in 2007 down from 2006, underscoring the toll on the tourism industry exacted by the enduring political and security unrest, according to Tourism Ministry figures published by Byblos Bank. The ministry registered a total of 441,306 persons using hotels and furnished apartments and spending 984,433 nights in such facilities in 2007, figures which represent decreases of 5.8% y/y and 14.4% y/y from 2006, respectively. Clients in all hotels and apartments stayed an average of 2.23 nights per person in 2007, down from 2.46 nights per person in 2006 and 2.49 nights in 2005, the ministry numbers showed. Visitors came from 148 countries and spent a total of USD 59mn in 2007 on lodging in hotels and furnished apartments, down 14.5% y/y and by 13.2% from 2005. The figures embody the industry's withering since the peak year of 2004, when a total of 560,444 visitors spent 1.48mn nights spending a total of USD 89mn on accommodation. Arab nationals, including Lebanese citizens, comprised 74.3% of all visitors compared to 70.3% in 2006. Lebanese citizens represented 108,691 clients, or 24.6% of the total, up from 19.2% in 2006. Lebanon was followed by Saudi Arabia with 10.4% of total visitors, Jordan (8.2%), Iraq with 6%, Kuwait, Syria and the UAE.

Moroccans had the longest typical stay of Arab nationals, with an average of 10.18 nights per person, followed by Sudan (2.92 nights) and Tunisia (2.68). Lebanese nationals stayed an average of 1.78 nights. As for non-Arabs, Belarus citizens led with an average of 36.1 nights per person, followed by Moldova (30.84), Uzbekistan (26.25), Eritrea (22) and Ukraine (21.25), the ministry said.

Morocco’s central bank Governor Abdellatif Jouahri, who was speaking at a meeting in Casablanca, said that Morocco's public finance is balanced, while the balance of payments has generated over the last seven years a hard currency surplus that covers up to 11 months of imports. In addition, inflation has remained moderate at 2%. Jouahri added that reforms in the financial and banking sector have strengthened the domestic financial and banking systems but further reforms were needed in the fields of administration, justice, education and vocational training. Despite the unfavourable international environment, which is expected to decrease demand for Morocco’s exports to 5.6% in 2008 against 7.6% in 2007, Morocco’s economy is expected to achieve a 6.1% nominal growth rate in 2008.

Morocco's trade deficit expanded by 41.2% y/y to MAD 12.4bn in Jan 08 driven mainly by a surge of oil and other imports, the latest figures of the foreign trade regulator ODC showed. Oil imports have almost doubled over the past year, rising by 92.4% y/y to 11.4% of total imports. This has been due to a declining price of crude oil in Jan 07 when the price slid due to the warm winter and record high prices on when crude oil crossed the USD 100 per barrel level. The price of imported crude oil was up by 62% y/y, which coupled with an increased volume of imports due to the colder weather and a developing manufacturing sector, resulted in the surge in the energy bill. Other imports, excluding petroleum derivatives, also maintained a strong growth rate rising 18.6% y/y to MAD 19.9bn in January. Agricultural imports were up by 25% y/y while prices of processed foodstuff, beverages and tobacco jumped by 131% y/y in January.

Morocco's exports rose by 7.7% y/y to MAD 10bn in January lagging behind rapidly growing imports. Phosphates and derivatives remained the main export commodity rising by 48.2% y/y in January. However, other exports including textiles nudged up very moderately by 2.2% y/y to MAD 8.4bn. Morocco reduced its agricultural exports by 12.7% y/y due to shortages on the local market and energy products, exports of which fell by 87.6% y/y. It is important to note that Morocco's textile exports are recovering only slowly from the effect of increased competition on the EU market from Asian textiles seeing an increase of 3.7% y/y in January. Europe remains the most significant trading partner of Morocco accounting for 66.6% of total trade exchange, following by Asia with 16,3% and the Americas with 12%.

The main sources of finance for the widening trade deficit are tourism receipts, expatriate remittances and private investment. However, January saw a 11.8% drop in travel receipts to MAD 4.25bn and a moderate increase of remittances by 1.7% y/y to MAD 4.2bn. Net capital inflows from private investment were strong in January amounting to 2.6bn but are still inadequate to cover the widening trade gap. However, we expect Morocco's external position to improve in the coming months, with the new agricultural harvest coming to the market and the progress of the tourism season likely to yield increased revenues.

John Fru Ndi, the leader of the opposition SDF party, has accused President Biya of trying to avoid the real issues plaguing Cameroon by raising an unfounded debate. Biya had declared that "apprentice sorceries" were seeking to use violence to achieve what they could not achieve through the ballot box. The statement was widely interpreted to mean that Biya felt the opposition was trying to topple him forcibly. In a statement Monday, Fru Ndi said Biya was shifting the debate from the hardship facing Cameroonians and anger against his plan to stay on after 2011. He accused Biya of manipulating public opinion and trying to position himself as a victim. Fru Ndi reaffirmed his support for last week's demonstrations, calling it the legitimate right of Cameroonians to press for better living conditions.

Customs duties on imported cement have been downed more than 20%, as the government continues trying one measure after the other to keep cement prices from rising. Cement prices have gone up more than 12% over the past year. A joint release by the ministry of trade and the minister of finance said Friday the measure will last only for six months, from 1 march to 31 August 2008. Main producers CIMENCAM was spoiling to up prices again after it announced two weeks ago that at current market prices they were losing up to XAF 4000 on each 50kg bag of cement. Officials hope the customs rebate will encourage more operators to get into the sector which was liberalized late last year. Prices have been pushed up mainly by scarcity but cost of production is now exerting an additional strain. Construction work was up 20% over the past three years. To meet a growing demand, now estimated at over 1.4mn t/y, CIMENCAM self-imposed an export ban two weeks ago. The current production is under 1.2mn t/y.

The Public Accounts Committee of Parliament has hinted of plans to question one the most powerful ministers in the government, the Minister of Presidential Affairs Kwadwo Mpiani, to account for funds released to the 'Ghana @ 50' secretariat which organized the country's Golden Jubilee, a member of the committee dropped the hint in Accra over the weekend. He said the initiative is on the back of complaints to the committee by contractors and vendors whose bills have not been settled though the secretariat has ceased to exist legally. He said the committee will also demand a special audit of the secretariat which was headed by energy consultant, Charles Wireko Brobbey.

Ahead of the celebrations the government approved an amount of USD 20mn. This was besides donations in cash and in kind amounting to several millions of dollars. Mpiani, who is also the chief of start at the office of the president, once told the committee that USD 5.9mn of the amount was spent on purchasing executive cars for foreign dignitaries' use throughout the year as Ghana hosted a number of international activities during the year. Another USD 7.8mn was spent on infrastructure mainly regional and district durbar grounds to be used for national and public functions.

Kenya's headline inflation rate accelerated to 19.1% y/y in February from 18.2% in January as prices rose by 2.4% in February alone, the statistical office said. As in the previous month, the increase is mostly a result of the higher food prices, which were affected by shortages related to the post-election violence. Thus, food price inflation is now up to 25% y/y, but we expect some decline in the index during March as supply chains normalize. In fact, the February acceleration in inflation seems rather modest compared with January, when prices were up 12.4% during the month. Apart from food, the price growth is affected by higher fuel prices. The stat office measure of core inflation, which excludes food prices, accelerated to 9.3% y/y from 7.6% in January. Yet, the CB measure, which excludes both food and energy prices, has remained very low and actually decelerated in January to 5.1% from 5.3% in December.

Key reforms are to be entrenched into the constitution as Parliament convenes later on this week. The crucial changes expected to be incorporated include the naming of ODM Members of Parliament to the expanded Cabinet and a review of the civil service and government structure. Members of parliament will enact laws creating the posts of Prime Minister and two deputies. They will also change Parliament’s Standing Orders to reflect these changes.

Under the new coalition government, the position of Opposition leader will most likely no longer exist, implying that Parliament is likely to operate without Shadow Cabinet ministers for the first time since multi-party politics was re-introduced in 1992. Parliamentary committees will also be affected by the new coalition since the law requires that watchdog committees, including the Public Accounts and Public Investment committees, be headed by opposition MPs. These reforms come following the signing of a peace deal last week between President Kibaki and his chief opponent Raila Odinga meant to end the post-election crisis. Over 1,000 people were killed while 350,000 were displaced in violence sparked by the disputed presidential election results.

In the meantime, the US has pledged that it will provide an additional KES 2bn to facilitate the implementation of the power-sharing deal to end Kenya political turmoil. US ambassador to Kenya, Michael Ranneberger, said the money will be used to provide logistical support for the speedy implementation of the deal.

The Kenya Association of Manufacturers (KAM) in a report titled the Economic and Business Intelligence report for February 2008 has estimated the loss caused by post-election violence at KES 100bn. This is in contrast to the KES 60bn estimated by the government. A slowdown in economic activity had been predicted as a result of the elections and the destruction of life and properties that followed. KAM said all indications by the end of last year showed the economy would continue to grow at an estimated 7% and events of January have thrown all the pundits back to the drawing board. Though key fundamentals for momentary economic revival are still intact, the outcome of political negotiations and settlements will be crucial in defining both the political and economic situation.

The Treasury plans to start the sale of Safaricom shares in mid-March for a period of three weeks and stock market trade can start in early May, according to information by the Business Daily. The IPO is yet to be approved by the capital market regulator and the stock exchange after final documents are presented, but this is believed to be a matter of course and should not bring significant problems. There is no clarity around the pricing so far with the whole stake previously expected to be valued around KES 55-75bn.

The IPO will be a major test for investor confidence after the resolution of the political crisis and it will be very important for authorities to score success. Thus, expectations are pricing will be adjusted downward in order to ensure sufficient interest in the IPO. On the other hand, the ease with which violence spread in a country previously thought to be stable, is bound to increase the country risk assessment of investors. Especially taking into account that the agreement on a coalition government is only the first step in a long process of needed reforms and the political dialogue is likely to remain difficult.

Nigerian industrial conglomerate Dangote Group has awarded a USD 1.6bn contract for cement facilities to Chinese company Sinoma International Engineering, the China Securities Journal reported. The equipment, procurement and construction (EPC) contract, signed during President Umaru Yar’Adua’s visit to China, envisages the construction of seven cement producing lines with daily capacity of 6,000 tonnes each. The two companies also signed a letter of intent on another EPC worth USD 1.2bn for the construction of four more production lines with 6,000-tonne daily capacity, and two with 3,000-tonne capacity. Both projects will be completed in the course of five years.

Governors of the country’s 19 northern states, united under the Northern Governors Forum, have called on the opposition candidates in the 2007 presidential race to withdraw their legal suits against the election of President Umaru Yar’Adua. The All Nigeria People’s Party’s (ANPP) candidate Muhammadu Buhari, who is also a former military ruler, and Action Congress’s Atiku Abubakar (former Vice President of the ruling PDP) sought an annulment of last April’s elections over reported irregularities and fraud, which were the reason both local and international observers deemed the polls not credible. However, while many state tribunals annulled the election of state governors, senators and members of the lower house of parliament, the main election tribunal ruled last week that Yar’Adua had been lawfully elected. It should be noted that a possible annulment of the election would create a power vacuum and would have come at a time when Yar’Adua’s works are seemingly gaining some public support. Both Abubakar and Buhari vowed to appeal the ruling at the Supreme Court. But the northern governors called on them to accept the ruling saying there was not point in challenging it when attention should be focused on further reforms and development. They also underlined that they should consider the impact of their action on northern unity. Buhari, Abubakar and Yar’Adua are all representatives of the northern, mostly Muslim, states. In line with the rotational principle, it was traditional that a northerner should take the presidential post, after the two mandates of Olusegun Obasanjo, who comes from the predominantly Christina south.

Standard and Poor’s is to publish its rating report on Nigeria in April, managing director Konrad Reuss announced at the weekend in Abuja. He leads a team of experts of the company who are conducting an annual evaluation of the economy. S&P assigned a sovereign rating of BB- to Nigeria in 2006 reflecting the government’s commitment to reforms and fight against corruption. Reuss said the country had a strong balance sheet backed by a sound macroeconomic outlook, which resulted in a stable foreign exchange rate, low debt levels and strong fiscal position. Reuss declined to comment on whether there would be an upgrade but said the country’s economic performance was impressive, in particular of non-oil sector. He also pointed to the challenges for the government, which include widespread poverty, infrastructure deficiency, as well as securing at all levels of government for continuation of reforms and prudent policies. Finance minister Remi Babalola in turn said the government expected an improved rating this year due to the achieved progress.

Residential prices continued remained unchanged in February for the third consecutive month, according to the latest data released from Standard Bank. Measured over the 12 months to February, price growth remained unchanged on a y/y basis and down sharply from the double-digit growth seen early last year. According to Standard Bank, the recent stagnation is a function of recent rate hikes as well as the recent introduction of new credit regulations. The bank said it expected price growth to be noticeably lower this year than the 8.3% growth registered last year. According to its latest surveys, rival bank Absa reported price growth of 9.1% y/y.

The national statistics office, Statistics SA, said yesterday that it would release January PPI data on Thursday following a one week delay due to technical difficulties. Statistics SA is currently revising its entire data series for PPI and changing the methodology for calculation. Statistics SA said last week it had changed the weightings and added new products to its producer price index basket. In the new basket, the importance of each industry would be proportional to the value it contributed to the economy and would be based on 2005 value added metrics. Also likely to impact the new series is a doubling in the weighting attributable to minerals and electricity, both components which are likely to have risen significantly over the past six months.

The seasonally adjusted Investec Purchasing Managers Index (PMI) declined sharply in February, falling by 5.7points to 46.4 from 52.1, the lowest level since 1999 and further evidence of the continuing slowdown in economic activity. Today's data point to a further deterioration in the manufacturing sector, although a potential rebound next month exists given that the lagged impact of the severe power shortages in January may still be reflected in this month's data. The latest GDP data for the fourth quarter of 2007 showed the manufacturing sector staging a largely technical rebound to a q/q growth rate of 8.2% following a contraction of -2.5% in the prior quarter. Current indications suggest the sector may post a renewed contraction in Q1 2008 and coupled with the likely decline in mining output, slowing consumer slowdown and global weakness, GDP growth may slow substantially in the first quarter, possibly below 2%.

In the breakdown, the business activity index fell sharply from 50.5 to 42.4, with the new orders component also falling back to 46.2 from 51.5 in the prior month. Also contributing negatively, the employment component fell sharply to 44.1 from 56.2 and below 50 signaling a potential contraction in the employment market. However, once again, the most notable feature of this month's report was a sharp rise in the prices paid component, which jumped from 79.5 in December back towards record highs of 86.8 and suggesting that recent supply-side disruptions as well as the rise in certain commodity prices are placing renewed upward pressure on prices. The data suggest the South African economy appears to be entering a true stagflationary environment and will present the central bank with a unique policy dilemma not encountered since the adoption of the inflation-targeting regime (2001 was a temporary case). Although current data suggest that MPC may raise rates yet again to stem rising inflationary expectations the clear risk to growth could well force the MPC to remain onhold.

The National Treasury has announced a deficit of ZAR 3.9bn for January in a monthly report on national expenditure and revenue, compared to a deficit of ZAR 3.17bn for the same period one year ago. January is the tenth month of the 2007/08 fiscal cycle, with a projected surplus for the full fiscal cycle at 1% of GDP, recently revised higher from 0.5% of GDP. The cumulative surplus for the first ten months of the fiscal cycle stands at ZAR 6.6bn, compared to a surplus of ZAR 3.85bn for the comparable period in the previous fiscal cycle.

In monthly terms, revenues increased by 14.6% y/y in January to ZAR 37.18bn (ZAR 32.44bn in the prior year), and moderating from last month's 21% y/y increase. Revenues as a percentage of full-year budget estimates amounted to 79.6%, compared to 79% one year ago. Expenditure during the month amounted to ZAR 41.1bn compared to ZAR 35.61bn one year ago, or 15.5% y/y. Expenditure as a percentage of full-year budget estimates amounted to 80% compared to 80.1% one year ago. For the first ten months of the fiscal cycle, total revenue stands at ZAR 440.5bn up from ZAR 380.2bn (15.8% y/y) for the comparable period in the previous fiscal cycle, while on the same metric cumulative expenditure stood at ZAR 433.87bn up from ZAR 376.39bn or 15.2% y/y.

The treasury recently revised upward its projected full-year surplus to 1% of GDP (0.5% previously), with recent trends suggesting the revised estimate is likely to be met. Overall, the treasury's longer-term projections (for the next three fiscal cycles) remain conservative, with fiscal surpluses projected for each of the next three fiscal cycles. However, a sharper slowdown in economic activity (below 3%) would significantly increase the forecast risk to current estimates, while the risk of higher fiscal expenditures going forward has also risen given the recent change in leadership within the ANC. Furthermore, including public sector parastatals such as Eskom, the net borrowing requirement over the next three fiscal cycles has actually increase and is expected to average between 1% and 2% of GDP.

The South African Communist Party (SACP) strongly criticized current government policy making saying it was weak and muddled. Following a central committee meeting this past week, the SACP also warned mining house and government over potential job losses in the sector related to the power crisis. The party’s central committee meeting follows a similar meeting a week ago by trade union federation Cosatu and follows preparations for the upcoming tripartite alliance summit. The summit will primarily focus on policy issues and will provide an early indication of the extent to which current policy may change post the Mbeki era. Although newly elected ANC president Jacob Zuma has said on numerous occasions that policy will not change significantly, given his legal entanglements he remains beholden to the left. Zuma reportedly faced a strong rebuke from the trade federation a week ago after he hinted that the country’s labour regulations were hampering economic growth.

Some USD 50mn which is part of the USD 133mn paid illegally to 22 shell companies by Bank of Tanzania in 2005/6 has been recovered. Finance minister Mkulo said most of the private companies which benefited from the country’s external payments arrears account have accepted to return the money to the government.

President Kikwete gave a three-man high level taskforce six months to scrutinize an Ernst&Young audit report, summon the culprits and make sure they refund the money to the central bank. The latest development will boost the government’s image among the public, investors and donors who demanded action against grand corruption and embezzlement of public funds.

Resource-rich African countries keen on developing their minerals must not ignore the agricultural sector if they are to beat mounting inflation, the IMF managing director Dominique Strauss Kahn said. Inflation in much of Africa has been on the increase due to higher food and petroleum prices. Food prices have risen on demand from growing economies such as China, and on bad weather in 2007, Kahn said. He said southern African countries such as Tanzania which are rich in minerals are showing signs of abandoning the agricultural sector for minerals and oil wealth. Tanzania’s agriculture sector which employs over 80% of the rural population and feeds close to 40 million people has experienced dwindling contribution from over 50% to around 45% of GDP in recent years.

A quick-fix solution is urgently needed in Tanzania’s semi autonomous islands of Zanzibar to avert a repeat of the January 2001 post election violence that left over 20 people dead. The isles leading opposition party, Civic United Front has challenged president Kikwete to show leadership by pushing his ruling party to seal a power sharing peace agreement which has been negotiated since 2005 disputed general elections won by Mr. Kikwete’s party. The president, who is also national chairman of the ruling CCM, has promised to find a lasting solution in the politically divided Spice islands soon after taking power in 2005, but hardliners from his party are said to be resisting attempts to form a unity government.

Zanzibar president Mr. Karume has also ruled out any possibility of forming a unity government wit the opposition. The latest successful conclusion of Kenya’s post election political crisis, which partly involved Kikwete as chairman of the African Union, has convinced CUF that his ability to settle Zanzibar decade-long conflict is above average.

Addressing 5,000 supporters in Harare yesterday, the independent presidential candidate Simba Makoni accused President Mugabe of running a corrupt government that had driven Zimbabwe into poverty. Makoni said that at Zimbabwe's independence Mugabe had spoken of unity and growth, but had got corrupted by power along the way. On the controversial issue of land reform Makoni said he would not reverse the program, but instead would pursue a transparent and equitable land redistribution exercise. Makoni also said he would address the energy crisis facing the nation and he would remove price controls to help revive the manufacturing and mining sectors. On Saturday, Dumiso Dabengwa, a senior member of the ruling ZANU-PF, said he would support Simba Makoni during the launch of Makoni's presidential campaign.