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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.


Emerging markets outlook                                            Emerging Markets FX
Is published four times a year and is forecasting                   Provides advice, analysis and foreign exchange products to
currency developments for selected emerging market                  clients within emerging markets.
countries with a time horizon of 3 months.                          For further information, call +46 8 700 90 20
                                                                    Analyst: Hans Gustafson +46 8 700 91 47
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
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
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
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
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
Emerging markets outlook



Contact information

Swedbank Large Corporates & Institutions
Regeringsgatan 13
105 34 Stockholm




Fixed income and foreign                                  Research                                                   Sales
exchange
                                                          Credit                                                     Credit
SVP                                                       Ingvar Matsson Tel: 46 8 700 93 49                         Fredrik Boklund Tel: 46 8 700 99 17
Tomas Hedberg Tel: 46 8 700 99 75                         e-mail: ingvar.matsson@swedbank.se                         e-mail: fredrik.boklund@swedbank.se
e-mail: tomas.hedberg@swedbank.se
                                                          Robert Matulin Tel: 46 8 700 97 99                         Origination
                                                          e-mail: andreas.zsiga@swedbank.se                          Andreas Torp Tel: 46 8 700 99 53
                                                                                                                     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
VP
                                                                                                                     Claes Göthman Tel: 46 8 700 99 78
Charlotte Aleblad Tel: 46 8 5859 7715                     Macro
                                                                                                                     e-mail: claes.gothman@swedbank.se
e-mail: charlotte.aleblad@swedbank.se                     Knut Hallberg Tel: 46 8 700 93 17
                                                          e-mail: knut.hallberg@swedbank.se                          Emerging markets
                                                                                                                     Martin Söderlund Tel: 46 8 700 90 20
                                                          Per Selldén Tel: 46 8 700 99 01
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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FX/FI research — Swedbank Large Corporates & Institutions                                                                                                      Page 7 of 8
Emerging markets outlook



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interest referred to herein, the views expressed in this report accurately reflect their personal views about the market covered. The analyst(s)
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Reproduced by Swedbank Large Corporates & Institutions, Stockholm 2011.

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FX/FI research — Swedbank Large Corporates & Institutions                                                                                           Page 8 of 8

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Emerging Markets December 2011

  • 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. Emerging markets outlook Emerging Markets FX Is published four times a year and is forecasting Provides advice, analysis and foreign exchange products to currency developments for selected emerging market clients within emerging markets. countries with a time horizon of 3 months. For further information, call +46 8 700 90 20 Analyst: Hans Gustafson +46 8 700 91 47
  • 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 Swedbank Large Corporates & Institutions Regeringsgatan 13 105 34 Stockholm Fixed income and foreign Research Sales exchange Credit Credit SVP Ingvar Matsson Tel: 46 8 700 93 49 Fredrik Boklund Tel: 46 8 700 99 17 Tomas Hedberg Tel: 46 8 700 99 75 e-mail: ingvar.matsson@swedbank.se e-mail: fredrik.boklund@swedbank.se e-mail: tomas.hedberg@swedbank.se Robert Matulin Tel: 46 8 700 97 99 Origination e-mail: andreas.zsiga@swedbank.se Andreas Torp Tel: 46 8 700 99 53 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 VP Claes Göthman Tel: 46 8 700 99 78 Charlotte Aleblad Tel: 46 8 5859 7715 Macro e-mail: claes.gothman@swedbank.se e-mail: charlotte.aleblad@swedbank.se Knut Hallberg Tel: 46 8 700 93 17 e-mail: knut.hallberg@swedbank.se Emerging markets Martin Söderlund Tel: 46 8 700 90 20 Per Selldén Tel: 46 8 700 99 01 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 Pictures from Stock.XCHNG, sxc.hu and Getty Images. This research report has been compiled by Swedbank Large Corporations & Institutions, a division of Swedbank AB (publ). The document is not advisory and is merely intended to serve as information to a limited amount of qualified investors. The information in this document has been compiled from sources believed to be reliable. We accept however no responsibility for correctness or completeness. It is recommended that recipients of this document supplement the basis for their decision-making with any material that might be considered necessary. Opinions and recommendations contained in this document represent our present opinions but may change. Swedbank Large Corporations & Institutions accepts no liability whatsoever for any direct or consequential loss or injury of any kind arising from the use of this document. Recipients should be aware that Swedbank AB and its subsidiaries from time to time may have positions or holdings in securities of such companies or issuers directly or indirectly referred to herein or may be providing or seeking to provide corporate finance and dept capital markets services to such companies or issuers. This document must not be published or distributed in the United States or to other countries or persons to which publication or distribution is prohibited. The material may not be reproduced without the consent of Swedbank Market. Reproduced by Swedbank Large Corporations & Institutions, Swedbank AB (publ), Stockholm 2009. FX/FI research — Swedbank Large Corporates & Institutions Page 7 of 8
  • 8. Emerging markets outlook Information to the customer Analyst’s certification The analyst(s) responsible for the content of this report hereby confirm that notwithstanding the existence of any such potential conflicts of interest referred to herein, the views expressed in this report accurately reflect their personal views about the market covered. The analyst(s) further confirm not to have been, nor are or will be, receiving direct or indirect compensation in exchange for expressing any of the views or the specific recommendation contained in the report. Issuer, distribution & recipients This report by Swedbank Large Corporates & Institutions FX Fixed Income Research, is issued by the Swedbank Large Corporates & Institutions business area within Swedbank AB (publ) (“Swedbank”). 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