A Look At The Week’s Economic Events

We take a look at two global news that happened last week. First up, we have the European Central Bank President, Mario Draghi, explaining the decision to cut the benchmark interest rate to a record low of 0.25%. Next, we’ll zoom in to Myanmar to see how the domestic reforms and foreign direct investment both contributed to its strong economic growth rate.

ECB slashed refinancing rate upon disappointing data

While the Eurozone might have officially stepped out of its longest recession in history after an expansion of 0.3% earlier this year, there has been disappointing news from the region.

Markit’s Eurozone Composite Purchasing Managers’ Index (PMI) of activity in the manufacturing and services industries dropped to 51.9 in October from 52.2 in September. On top of that, the Eurozone unemployment is forecasted to remain near its record high of 12.2% for the next two years.

In addition, Preliminary data from the Eurozone’s statistics office showed last week that inflation unexpectedly fell to 0.7% year-on-year in October, the lowest for nearly four years.

As a result of the disappointing data, The European Central Bank on Thursday cut rates to a new record low of 0.25%, surprising economists who expected the central bank to hold rates steady at 0.5%. The move is seen as an attempt by the ECB to counter deflation and help stimulate the continent’s economic activity.

Howard Archer, chief U.K. and European economist, comments that the inflation rate of 0.7% in October is no longer at a level that can be seen as consistent with the ECB’s mandate for a euro zone consumer price inflation rate of close to but just below 2%.

He added that while the drop in the inflation was obviously the trigger for the interest rate cut, the strength of the euro and the gradual euro zone economic recovery from an extended recession also supported the case for lower interest rates.

Myanmar: the next emerging market

On 6th November, the World Bank released the first edition of its Myanmar Economic Monitor on Wednesday and commended Myanmar on its strong 6.5% growth in the year ending March 2013. The bank also predicts that Myanmar will grow steadily in the short to medium term, with a projected 6.8% growth in the 2013-2014 year.

The strong growth rate can be attributed to 2 main reasons.

Internally, the government has shown progress in making political and economic reforms. Recently, the government passed a new foreign investment law that is expected to continually help improve the foreign investment environment.

Externally, foreign direct investment (FDI) has contributed significantly to the strong growth and optimistic outlook for the economy. One clear example is the unwavering support from the Japanese government. Earlier this year, Japan’s Prime Minister Shinzo Abe visited the nation and agreed to write off a total of US$5.24 billion debt (inclusive of an earlier $3.5 billion) Myanmar owed to Japan and even pledged more than half a billion dollars dedicated to developing infrastructure and power projects in the country. A Japanese joint venture which counts the biggest Japanese companies Mitsubishi Corp, Sumitomo Corp and Marubeni Corp will undertake infrastructure development in Myanmar and will notably increase Japanese presence there.

With the bright outlook of Myanmar ahead, Singapore companies who are affiliated or operate in Myanmar can stand to benefit from the buoyant trend. Three such companies are Yoma Strategic Holdings (SGX: Z59), Interra Resources (SGX: 5GI) and Ntegrator International (SGX: 5HC).  Investors interested in these companies will do well to perform the necessary due diligence on the selection of the companies to invest in.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.   Motley Fool Singapore contributor James Yeo does not own shares in any companies as mentioned.