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                    Daily Brief
    Economics and Financial Market Commentary
            October 18, 2007 11:33 am
            Mick Riordan (x31289), Cristina Savescu (x80812),
  Eung Ju Kim (x85804), Doug Hostland (x36159), Shane Streifel (x33867),
                       Annette De Kleine (x34710)

You’ll find recent issues of this Daily and lots of other current analysis and high-frequency data at
          our intranet website: http://GEM or for external users: www.worldbank.org/gem

Credit rating downgrades on U.S. sub-prime mortgage debt. Standard &
Poor's lowered ratings on $23.4-of $268.5 billion non-prime (sub-prime and Alt-A)
U.S. mortgage securities sold in the first half of 2007, including downgrades on
$4.2-of $329 billion in AAA-rated securities. This follows downgrades announced
over the last two weeks by Moody's Investors Service and Fitch Ratings on $52
billion in securities issued in 2006.
U.S. first-time claims for unemployment insurance surprise to the upside.
Initial claims for unemployment insurance surged by 28,000 persons during the
week of October 12, offsetting recent improvements in labor force conditions, and
raising concerns that the beginning of a more pronounced slowdown in
employment growth may be in the offing [see Daily chart at http://GEM]. The
increase was the biggest since February of this year, while the four-week moving
average of claims, which smoothes for weekly distortions, also increased, but by
a more moderate 6,000 to 316,500. Companies may be growing more reluctant
to hire new workers, as the housing markets slumps yet further and credit
conditions tighten, putting into question demand forecasts for the remainder of
2007.
Equity prices decline in China and India Bombay Stock Exchange's Sensex
index fell by 6% in trading today, the largest decline in two months, in response
to statements made by the Securities & Exchange Board of India on tightening
restrictions to foreign investment rules. The Securities & Exchange Board will
decide on October 25 how to curb the $88 billion in investment made by
unregistered investors, including hedge funds, in Indian stocks. Despite the
decline, the Sensex composite index is up 13% from mid-September and 23%
over the year to date. In China, the Shanghai Composite fell by 3.5% in trading
today, in response to a statement made by China Securities Regulatory
Commission Vice Chairman Tu Guangshao indicating that China is studying a
plan to allow arbitrage between shares listed on the Shanghai and Hong Kong
exchanges. After markets closed, a spokesman for the regulator stated that Vice
Chairman Tu “misspoke”, but declined to confirm whether such a plan is being
considered. Despite the decline, the Shanghai Composite index is up 7% from
mid-September and 54% over the year to date.

Among emerging markets...in Central and Eastern Europe, Poland’s industrial
output growth slowed to 5.2% in September (y/y) from 8.9% during the previous
month; producer prices were up a moderate 2% (y/y). The Czech Republic’s
retail sales gained 7.3% in August (y/y) the slowest increase this year and down
from 8.9% the previous month. Excluding cars and motor fuel, retail sales gained
6.9%, and when adjusted for the number of days worked they were up 7.2%.
Turkey’s government reduced its primary budget surplus forecast for 2008 to
5.5% of GDP from the 6.5% target agreed with the IMF, as it plans to increase
spending by 10%. The ratio of public debt to GDP is projected to decline to 40%
this year from 45% at the end of 2006, complying EU membership standards for
public debt. The primary surplus is projected at 4.3% this year. The central
government’s surplus is projected at 4.5% of GDP, with state-run companies
contributing an additional 1%. The 2008 budget submitted to the parliament calls
for a 2.5% budget deficit.
In Latin America, Brazil’s central bank kept its interest rate at a record low
11.25%, brining to an end a cycle of two years of reductions, as there are
indications that the economy is reviving and inflation pressures are building.
Brazil’s economy expanded by 5.4% in the second quarter of 2007 (y/y) the
fastest pace since 2004, while retail sales climbed 9.9% in August (y/y) fueled by
cheaper imports and strong growth in consumer credit.
In Sub-Saharan Africa, Kenya’s growth accelerated to 7.1% in the second
quarter of 2007 (y/y) from 5.8% in the first quarter, boosted by transport,
communications and leisure industries, according to the National Bureau of
Statistics. The manufacturing sector grew 8.6%, while agriculture was up 5.4%.
Growth in the hotel and restaurant industry climbed to 11.1%, while the transport
and communications sector picked-up 11.8%.



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