Emerging markets analysis from Emerging Markets FX at Swedbank.
This publication is forcasting currency developments for selected emerging markets countries with a time horizon of 3 months.
1. Emerging markets outlook
Emerging markets analysis — 30 December 2011
Low growth and high debt – a tricky balancing act
We expect significant volatility on the currency market China is a centrally controlled economy and adjustments to
early next year with unusually large differences in currency economic conditions have worked relatively well in the past.
performance between different emerging markets. Weak Furthermore, leverage in the Chinese property market is
economic development in Europe, with significant budget much lower than in the West. The balancing act for Chinese
constraints and banks shrinking their balance sheets, will hit economic policy, however, is more difficult now as structural
most East European countries hard. In recent years a number inflation is higher than before. Assuming that China has
of these countries have only grown through exports to the a soft landing, we see continued support for commodity
eurozone, which is a growth factor that is now fading. The prices, especially for energy-related commodities. Supply
recent weakening of currencies has meant that imported is limited in many commodity markets and extraction costs
inflation is now increasing in many East European countries, are high. This provides continued support for countries like
forcing interest rate hikes or expectations of hikes in countries Russia. The Russian economy is growing on the back of
which are instead in need of economic stimulus. The situation strong domestic consumption. In the long run a membership
is most problematic for Hungary, which is the most indebted of the WTO is very positive for the modernisation of the
country in the region and has a government that is pursuing a Russian economy. We expect that economic growth in the
highly populist economic policy. ECB’s long-term repos at low US will be slightly below trend growth during 2012 year as
rates will ease the financial pressure on banks in the eurozone, a result of an extension of temporary tax cuts and monetary
but lending capacity will be extremely limited in 2012 and policy stimulus measures. For this reason we are positive
this will impact most East European countries hard. However, towards developments in Mexico which is also attracting
we do not share the highly negative view that many have on major foreign investments. Euro zone is in a recession and
China. We expect the Chinese economy to weaken, but do not there are large uncertainties over how things will play out.
expect a hard landing. The Chinese property market needs We therefore expect a negative trend for the euro against
to cool down and the oversupply needs to be absorbed, but the US dollar during the first quarter of 2012.
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2. Emerging markets outlook
Russia Poland
Stronger economic growth Strong growth and large reserves
Increased political uncertainty Negative debt trajectory
FX forecast 3 months vs euro FX forecast 3 months vs euro
Growth in the Russian economy was healthy in the third Poland’s economy has continued to grow at a good rate. GDP
quarter, with GDP growing by 4.8 percent. It is encouraging increased by an annual rate of 4.3 percent in the third quarter.
that domestic consumption and investments are now Domestic demand is still the driving force. Growth in the retail
contributing to growth. Retail trade is increasing by around sector has been consistently high. This is due to the significant
9 percent. Real wages are increasing and credit growth has rise in wages. Industrial production has gained renewed impetus
taken off on the back of historically low interest rates. Russia’s since the summer, growing by almost 9 percent in real terms
WTO membership is very positive in the long term and will in November. This high growth and the currency depreciation
help to reduce the narrow dependence on energy production. have resulted in higher inflation. In November inflation was 4.8
The rate of inflation has fallen during the year owing to lower percent, which is well above the central bank’s upper tolerance
food prices. We expect higher inflation in 2012 due to a weaker level of 3.5 percent. The key interest rate was raised by 100
RUB, even stronger growth in lending and an expansive fiscal points to 4.5 percent during the year. Underlying inflation and
policy. However, the central bank recently cut the repo rate inflation expectations are high and we therefore expect at least
to 8 percent, which is more of symbolic value ahead of the one more interest rate increase of 25 points in 2012. The major
forthcoming presidential election. However, during the year problem for Poland is its budget deficit which amount to around
short-term interbank rates increased and are now at levels 8 percent of GDP and government debt that is approaching
higher than 6 percent. In the medium term we believe that the the statutory ceiling of 55 percent of GDP. However, unlike
turmoil following the parliamentary election in December may many other countries in the region, Poland recently received
act as a catalyst for an orientation towards a modernization positive comments from Moody’s regarding the possibilities for
of the economy. We do not expect any ”Arab spring” in Russia improving budgetary performance.
as average incomes are significantly higher in Russia, but the
political challenges should not be overlooked.
Forecast Forecast
The ruble performed poorly in the autumn in conjunction with The zloty has continued to weaken as financial uncertainty has
uncertainty following the parliamentary election. The losses increased in Europe. Poland is affected by the risk of contagion
suffered by the governing United Russia party is of high via the banking system, large parts of which are foreign-
concern for Putin ahead of the presidential election in March, owned. Poland has better economic fundamentals than many
and we consequently expect an even more expansive fiscal neighbouring countries in Eastern Europe, but it is nevertheless
policy. We are positive on the ruble on the back of high interest highly sensitive to lower exports and restraint in the activities
rate carry and continued healthy domestic growth. of the banks.
Russia Spot Rate EUR/RUB Poland Spot Rate EUR/PLN
44 44 4,6 4,6
43 43 4,5 4,5
4,4 4,4
42 42
4,3 4,3
41 41
EUR/RUB
EUR/RUB
EUR/PLN
EUR/PLN
4,2 4,2
40 40
4,1 4,1
39 39
4,0 4,0
38 38 3,9 3,9
37 37 3,8 3,8
feb apr jun aug okt dec feb apr jun aug okt dec feb apr jun aug okt dec feb apr jun aug okt dec
10 11 12 10 11 12
Source: Reuters EcoWin Source: Reuters EcoWin
FX/FI research — Swedbank Large Corporates & Institutions Page 2 of 8
3. Emerging markets outlook
Emerging markets outlook
Hungary Czech Republic
High interest rate Low general government debt and credible budget policy
Lack of credible economic policy Extremely high dependency on exports to Europe
FX forecast 3 months vs euro FX forecast 3 months vs euro
In the autumn Hungary’s credit rating was cut to junk status Economic recovery since the 2008 financial crisis has been
by both Standard & Poors and Moody’s. The government modest in the Czech Republic. In real terms the economy has
has turned to the IMF and EU for financial assistance but been stagnant since 2007. The economic prospects appear
discussions broke off following strong disagreements. bleak, with leading indicators pointing to falling industrial
We believe that economic reality will eventually force the production. PMI has plummeted from a peak of more than 60 at
Hungarian government to give in and adjust its economic the start of the year to 48.5 at present. Consumer confidence
policy to the requirements of the IMF and the EU. The question has collapsed entirely to its weakest level since 1999. This is
is how messy things will get before this happens. Government not so surprising against the background of weak economic
debt is 75 percent of GDP but the major problem is the high growth, which means that the government needs to make
even tougher savings to achieve its target of a budget deficit
level of external debt. Total external debt amounts to 140
of 3.2 percent for 2012. In addition, wage increases have
percent of GDP. Hungary is consequently extremely sensitive
been very low and the retail sector has been weak. Inflation
to European banks’ continued shrinking of their balance
has risen as a result of the VAT hikes during the year, reaching
sheets. Growth prospects appear very bleak as exports, which
2.5 percent in November which is above the central bank’s
account for more than 75 percent of GDP, are now plummeting.
target of 2 percent. In 2012, however, we expect no change
The retail sector has been weak since 2007 and consumer to the key interest rate, which has been at a historical low
confidence has collapsed during the year. The weakening of level of 0.75 percent since 2010. The Czech economy is highly
the currency has led to higher inflation, forcing the central vulnerable to a recession in Europe since the country’s share
bank to raise the key interest rate by 125 points to 7 percent of exports as a percentage of GDP is among the highest in
during 2011. This is despite the very weak economic growth. Europe. Nevertheless, with government debt at less than 40
Hungary thus finds itself in a particularly vicious circle. percent of GDP the Czech Republic is one of the financially
strongest countries in Europe.
Forecast Forecast
Hungary is the most indebted economy in Europe. With junk While the Czech Republic has low government debt, its
bond credit rating, an unwillingness to make sustainable economy is highly sensitive to a recession in Europe and the
adjustments of the economy for the long term and a law that domestic economy is being weakened by budgetary savings.
reduces the central bank’s independence, it is difficult to be Market conditions for the forint are negative in the first
anything other than negative towards the development of the quarter of 2012.
currency. The high interest rate is the only factor preventing a
collapse in the forint.
Hungary Spot Rate EUR/HUF Czech Republic, Spot Rate, EUR/CZK
330 330 26,25 26,25
26,00 26,00
320 320
25,75 25,75
310 310 25,50 25,50
25,25 25,25
300 300
EUR/CZK
EUR/CZK
EUR/HUF
EUR/HUF
25,00 25,00
290 290 24,75 24,75
280 280 24,50 24,50
24,25 24,25
270 270
24,00 24,00
260 260 23,75 23,75
feb apr jun aug okt dec feb apr jun aug okt dec feb apr jun aug okt dec feb apr jun aug okt dec
10 11 12 10 11 12
Source: Reuters EcoWin Source: Reuters EcoWin
FX/FI research — Swedbank Large Corporates & Institutions Page 3 of 8
4. Emerging markets outlook
Turkey South Africa
High growth and strong bank sector Strong terms of trade
Risk of a hard landing following incorrect calibration of
Very high sensitivity to negative risk sentiment
monetary policy
FX forecast 3 months vs euro FX forecast 3 months vs euro
Turkey currently has one of the highest growth rates in the Prior to the financial crisis growth in South Africa was between
world. The country also has one of the world’s largest current 5 and 6 percent. At that time growth was being driven by
account deficits. This is the result of an incorrectly calibrated preparations for the 2010 Football World Cup. Growth over
and overly relaxed monetary policy over the past year. The lira the past year has been more modest, at around 3 percent.
has fallen by 20 percent against the U.S. dollar and inflation Exports have continued to increase at a fast pace, particularly
has risen sharply from 4.5 percent at the start of the year to to Asia which has been South Africa’s largest export market
9.5 percent in November. The current account deficit is now since 2009. Domestic demand is strong and this is reflected
around 11 percent of GDP and is largely financed by short- in significant import growth and car sales. Imports rose by 48
term portfolio inflows. The central bank has recently tried percent in November compared with the same period in 2010.
to slow the significant deprecitaion of the currency through Retail sales have been high over the past year, increasing by
interventions. During the year the key interest rate has been 7.5 percent. The deficit in the current account has increased
cut to 5.75 percent, while the overnight rate has been raised from -1.5 percent of GDP in 2010 to -3.8 percent in the third
to 12.5 percent. This has created significant uncertainty over quarter in line with the decline in the trade balance. Inflation
monetary policy, which has weakened the currency. We expect has risen to 6.2 percent from 3.4 percent at the end of 2010
that the central bank will soon be forced to adopt a more and is expected to increase slightly more as a result of the
restrictive monetary policy with regular policy rate hikes. The depreciation of the rand in the autumn. During 2010 the
lira now has a low valuation measured by the real effective central bank kept the policy rate unchanged at a record low
exchange rate and the nominal effective exchange rate with level of 5.5 percent. We do not expect any change in the policy
the USD is at a record low. Turkey is one of the countries with rate any time soon, but there is a risk of a hike in the first
the best conditions for growth in the medium to long term. In quarter if the domestic economy does not cool down.
the short term, however, the risk of a hard landing is high.
Forecast Forecast
Turkey currently finds itself in a sensitive position due to the The rand has recovered relatively well compared with many
size of its large current account deficit and the uncertainty other emerging market currencies since its collapse in
surrounding monetary policy. We expect a smooth adjustment September. We are neutral towards the rand at this point since
of the deficit, but the risk of a turbulent development is not we expect stable commodity prices and moderate growth. The
insignificant. We are therefore currently neutral on the lira. rand is sensitive to the downside if commodity prices fall and if
global risk sentiment weakens.
Turkey, Spot Rate, EUR/TRY South Africa, Spot Rate, EUR/ZAR
2,6 2,6 11,5 11,5
2,5 2,5
11,0 11,0
2,4 2,4
10,5 10,5
2,3 2,3
EUR/TRY
EUR/TRY
EUR/ZAR
EUR/ZAR
2,2 2,2 10,0 10,0
2,1 2,1
9,5 9,5
2,0 2,0
9,0 9,0
1,9 1,9
1,8 1,8 8,5 8,5
feb apr jun aug okt dec feb apr jun aug okt dec feb apr jun aug okt dec feb apr jun aug okt dec
10 11 12 10 11 12
Source: Reuters EcoWin Source: Reuters EcoWin
FX/FI research — Swedbank Large Corporates & Institutions Page 4 of 8
5. Emerging markets outlook
Mexico Brazil
Competitive manufacturing industry Strong domestic consumption
High sensitivity to a slowdown in the US High currency valuation and negative leading indicators
FX forecast 3 months vs euro FX forecast 3 months vs euro
Mexico has good possibilities of withstanding a recession in Brazil’s growth has slowed considerably. GDP increased by
Europe. The economy is growing at a rate of 4.5 percent and only 2.2 percent in the third quarter, compared with 7 percent
growth looks like continuing on the back of relatively strong in the same period in 2010. PMI has been under 50 since June
growth in the US. Automotive production is growing strongly and industrial production, at annual rates, has been declining
and statistics from November show a production rate of since September. Retail growth has fallen from a peak of 12
approximately 2.5 million vehicles, at annual rates, compared percent in 2010 to 5 percent in October and car sales have
with the previous peak of 2.1 million vehicles in 2008. slowed. Wages increased by 7 percent in November, which
Mexico has in recent years become much more attractive to is down significantly from the 12.5 percent increase at the
foreign auto-makers, who are drawn by the cheap currency, start of the year. Unemployment, however, is at its lowest in
modern times, which may explain why consumer confidence
relatively low wages and low transport costs. This positive
is relatively high. The central bank raised the policy rate from
development appears to be continuing. Nissan has stated that
8.75 to 12.5 percent in July this year. Surprisingly they started
it will be investing USD 2 billion in a new production plant
to lower the policy rate in September, despite inflation by
that will produce 600,000 vehicles a year. This will enable
that time didn’t show any clear sign of slowing. Inflation then
Nissan to produce 1.3 million cars in Mexico compared with
peaked in August at 6.8 percent and has since fallen to 5.7
the 1 million it currently produces in Japan. The domestic
percent in November 2011. Expectations on inflation are now
economy is maintaining good momentum, driven by increased falling rapidly and growth in lending is declining. We expect
consumer credit. Inflation is at 3.5 percent but surveys of further reductions in the interest rate from the current 11
inflation expectations point to lower inflation in future. We percent to 9.5 percent in 2012.
consequently expect the central bank to keep the policy rate
at 4.5 percent in the first quarter of 2012.
Forecast Forecast
The Mexican peso is very competitive at its current levels The real continued to weaken in the autumn as a result of the
and should be able to appreciate in value given that the US weaker economy and uncertainty about the Chinese economy,
economy is maintaining its momentum. Future investments in which is now one of Brazil’s key markets. We expect continued
auto production and a high interest rate differential are also weak growth and interest rate cuts and we are therefore
positive factors for the peso. neutral on the real.
Mexico, Spot Rate, EUR/MXN Brazil, Spot Rate, EUR/BRL
19,0 19,0 2,60 2,60
18,5 18,5 2,55 2,55
2,50 2,50
18,0 18,0
2,45 2,45
17,5 17,5
2,40 2,40
EUR/BRL
EUR/BRL
EUR/MXN
EUR/MXN
17,0 17,0
2,35 2,35
16,5 16,5
2,30 2,30
16,0 16,0 2,25 2,25
15,5 15,5 2,20 2,20
15,0 15,0 2,15 2,15
feb apr jun aug okt dec feb apr jun aug okt dec feb apr jun aug okt dec feb apr jun aug okt dec
10 11 12 10 11 12
Source: Reuters EcoWin Source: Reuters EcoWin
FX/FI research — Swedbank Large Corporates & Institutions Page 5 of 8
6. Emerging markets outlook
India China
Large domestic market and high carry Strong domestic consumption
High inflation and negative leading indicators Lower export growth
FX forecast 3 months vs euro FX forecast 3 months vs euro
GDP grew by 6.9 percent in the third quarter, which is the The Chinese economy is headed for a slowdown following the
lowest rate of increase since the start of 2009. This decline tighter monetary policy introduced at the start of 2010. PMI
has primarily taken place in the industrial sector. Industrial is below the 50 point mark and exports have lost momentum.
production has been unchanged over the past 12 months We expect that growth will slow to about 8.5 percent in
and leading indicators point to a continued slowdown within 2012. Domestic demand, however, is healthy and is leading
industry. The decline in the service sector, however, was lower to continued high import growth. Retail trade is growing by
and the farming sector has strengthened slightly. Inflation around 17 percent, wages are increasing by almost 20 percent
has come down from levels above 15 percent in 2010 but has and service sector PMI is showing continued good momentum.
stabilised at relatively high levels of just under 10 percent. The overheated property market has already started to cool
The central bank has signalled a pause after raising the policy down, according to opinion polls, and we expect a well-ordered
rate by 225 points this year and 375 points since the low adjustment as traditionally happens in China. Nevertheless,
point in 2009. The significant depreciation of the currency risks are now higher than at previous times of overheating
during 2011, in combination with high food prices, means periods as the unregulated non-bank credit system has
that we cannot rule out further interest rate hikes next year. grown in size. Inflation has peaked but will be higher than we
The considerable tightening of monetary policy has had a are used to owing to demographic development leading to a
significant dampening effect on monetary growth, which is tighter labour market. The central bank has started easing its
now almost unchanged from the year earlier period. The high monetary policy by cutting reserve requirements for some
rate of inflation has eroded purchasing power and, together banks. If the economy were to undergo more significant
with substantially higher interest rates, has weighed on the weakening, we would expect the government to introduce
domestic economy. This is reflected in such indicators as car strong stimulus measures for infrastructure investments.
sales, which performed very poorly in 2011.
Forecast Forecast
The Indian rupee is a currency that has a very strong We are not among those who expect a hard landing for China as
correlation with global risk sentiment. We do not expect a it is a centrally controlled economy. Nevertheless, we believe
stable investment climate in 2012 and believe that the rupee that the risks are unusually high in view of global weaknesses
and structurally high inflation in China. We expect the CNY to
will swing up and down with the changes in the risk sentiment.
strengthen at an annual rate of 4-5 percent against the USD,
which will also result in a strengthening against the euro in the
first quarter of 2012.
India, Spot Rate, EUR/INR China, Spot Rate, EUR/CNY
72,5 72,5 9,75 9,75
70,0 70,0 9,50 9,50
9,25 9,25
67,5 67,5
9,00 9,00
65,0 65,0
EUR/CNY
EUR/CNY
EUR/INR
EUR/INR
8,75 8,75
62,5 62,5
8,50 8,50
60,0 60,0
8,25 8,25
57,5 57,5 8,00 8,00
55,0 55,0 7,75 7,75
feb apr jun aug okt dec feb apr jun aug okt dec feb apr jun aug okt dec feb apr jun aug okt dec
10 11 12 10 11 12
Source: Reuters EcoWin Source: Reuters EcoWin
FX/FI research — Swedbank Large Corporates & Institutions Page 6 of 8
7. Emerging markets outlook
Contact information
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e-mail: andreas.torp@swedbank.se
Global Institutional Sales Mats Ericsson Tel: 46 8 700 91 61
e-mail: mats.ericsson@swedbank.se Fixed Income
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Claes Göthman Tel: 46 8 700 99 78
Charlotte Aleblad Tel: 46 8 5859 7715 Macro
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e-mail: charlotte.aleblad@swedbank.se Knut Hallberg Tel: 46 8 700 93 17
e-mail: knut.hallberg@swedbank.se Emerging markets
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Research Macro, FI & FX e-mail: martin.soderlund@swedbank.se
e-mail: per.sellden@swedbank.se
VP
FX
Cecilia Skingsley Tel: 46 8 700 99 76
Anders Eklöf Tel: 46 8 700 91 38
e-mail: cecilia.skingsley@swedbank.se
e-mail: anders.eklof@swedbank.se
Emerging markets
Research Credit Hans Gustafson Tel: 46 8 700 9147
VP e-mail: hans.gustafson@swedbank.se
Andreas Zsiga Tel: 46 8 700 92 11 Fixed income
e-mail: andreas.zsiga@swedbank.se Martin Tallroth Tel: 46 8 58 59 00 00
e-mail: martin.tallroth@swedbank.se
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8. Emerging markets outlook
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