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Emerging Markets Outlook December 2013

Emerging Markets Outlook December 2013

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Published by Swedbank AB (publ)
Emerging Markets Outlook December 2013
Emerging Markets Outlook December 2013

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Published by: Swedbank AB (publ) on Jan 08, 2014
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Emerging markets outlook
Emerging Markets FX Provides advice, analysis and foreign exchange products to clients within emerging markets.For further information, call +46 8 700 90 20Analyst: Hans Gustafson +46 8 700 91 47 Emerging markets outlookIs published four times a year and is forecastingcurrency developments for selected emerging market countries with a time horizon of 3 months.
New medicine for China, a short-term headache
Emerging markets analysis — 23 December 2013
In 2014, the market trend will continue to be characterised by uncertainty surrounding the effects of monetary policy in the
 and economic developments in
. In addition to these factors, important national elections will be held in several emerging economies. In general, we expect a tough climate for several currencies in emerging markets, albeit with considerable variation between them. In the US, the
Federal Reserve
 will begin to scale back its monthly bond purchases in January, which risks impacting the global investment climate negatively.
China’s leadership
 has announced new reforms aimed at bringing down the level of overinvestment and reducing the risk of bubbles in the economy. The reforms are positive for China to achieve long-term sustainable growth. In the short term, on the other hand, their implementation will weaken the economy and thus restrain price trends in many commodity markets. The starting point for the introduction of the new reforms is challenging, with an overheated property market and an excessive level of credit growth, causing the Chinese central bank to tighten monetary policy. The currency trend will also be affected by
political elections
in several countries in 2014. This means that fiscal policy may become somewhat more expansive to keep voters in a good mood in countries such as
whose credit ratings risk being lowered. In
, the political mood is so oppressed that there is scope for positive surprises, while the situation may be more problematic in countries such as
. In our assessment, the vulnerability will be greatest for currencies with large current account deficits, insufficient currency reserves and commodity-heavy exports. This group includes
Brazil, Indonesia and South Africa
. In our view, however, the
Indian rupee
has a certain resilience since the low exchange rate is expected to give a considerable improvement in the current account. In Russia, where the problems are of a more structural nature, the pressure on
the rouble
will remain. In the longer term, the
Mexican peso
will benefit from stronger growth in the US. The on-going recovery in the euro zone will give the
Polish zloty
greater stability.
The US dollar
has continued to weaken against
the euro
over the autumn. Going forward, we expect the dollar to strengthen on the back of higher relative growth in the US vs. euro zone. We also expect the ECB policy to be more cautious in relation to the monetary policy in the US and forecast EUR/USD at 1.32 in three months time.
FX/FI research — Swedbank Large Corporates & InstitutionsPage 2 of 8Emerging markets outlook
EUR/RUB in 3 months 46.20 (today 45.09)
EUR/PLN in 3 months 4.15 (today 4.16)Currency forecast vs. the euroCurrency forecast vs. the euro
Poland Spot Rate EUR/PLN
Source: Reuters EcoWin
 jan12apr jul okt jan13apr jul okt
    E    U    R     /    P    L    N
    E    U    R     /    P    L    N
Russia Spot Rate EUR/RUB
Source: Reuters EcoWin
 jan12maj jul sep nov jan13mar maj jul sep nov
    E    U    R     /    R    U    B
    E    U    R     /    R    U    B
The Polish economy has turned upwards. On the other hand, we expect a slow recovery and continued low interest rates and thus have a neutral view on the zloty against the euro. The recovery of the Polish economy has continued supported by stronger export demand from the euro zone. GDP rose by 1.9 percent in the third quarter, with a rise in real exports of 6.5 percent over the same period. Industrial production rose by 5 percent on an annual basis in November, largely driven by cars and electrical equipment. The Purchasing Managers Index has risen sharply in recent months and thus indicates a continued favourable trend in the industry in the immediate future. Private consumption is still lagging, although signs are beginning to emerge of improved household activity. The trend in retail sales has been positive over the past half a year and new car registrations have broken the negative trend that had persisted since early 2011. Consumer prices developed unexpectedly weakly in November with an increase of only 0.6 percent at annual rates, which is below the central bank’s lower limit of 1.5 percent. We consequently expect that the central bank will keep its policy rate unchanged at a record-low 2.5 percent at least until the autumn of 2014 or as long as the low inflationary pressure remains.
Increased optimism in industryWeak domestic demand
Growth disappointments continueNegative investment trendInterest from foreign investors is low, as reflected by the weak stock market trend and the fact that interest rates on bonds are considerably higher than at the start of the year. We expect continued pressure on the rouble as long as there is no progress at the structural level in Russia. The Russian economy has continued to develop weakly. GDP rose by only 1.2 percent in the third quarter of 2013, compared with the corresponding quarter in 2012. Having shown positive figures since June, exports declined by 5,5 percent at annual rates in October. Industrial production has now shown a declining annual rate since the peak in 2010. The Purchasing Managers Index is below 50, indicating a continued sluggish trend in industry for the immediate future. Previously strong private consumption has shifted down a gear in the past year. Retail sales are growing by about 3.5 percent at annual rates, which is a historically low level, and new car sales have shown a negative annual rate since the start of the year. Potential growth has probably fallen to less than 3 percent, which explains why the rate of inflation has not fallen more, despite the weakness of the economy. Russia has a major deficit in infrastructure investment since the Soviet era. The total rate of investment has been largely negative since the start of 2013. The surplus in the current account is declining rapidly and now amounts to about 2 percent of GDP. The rate of inflation rose to 6.5 percent in November, meaning that it continues to exceed the central bank’s target of 5-6 percent, thus impeding opportunities for rate cuts.
FX/FI research — Swedbank Large Corporates & InstitutionsPage 3 of 8Emerging markets outlook
EUR/TRY in 3 months 2.84 (today 2.86)
EUR/ZAR in 3months 14.12 (today 14.18)Currency forecast vs. the euroCurrency forecast vs. the euro
Turkey, Spot Rate, EUR/TRY
Source: Reuters EcoWin
 jan12apr jul okt jan13apr jul okt
    E    U    R     /    T    R    Y
    E    U    R     /    T    R    Y
South Africa, Spot Rate, EUR/ZAR
Source: Reuters EcoWin
 jan12apr jul okt jan13apr jul okt
    E    U    R     /    Z    A    R
    E    U    R     /    Z    A    R
The South African rand is one of the currencies that remain highly sensitive to renewed flight of capital from emerging markets. The current account has weakened at a rapid pace and thus also the risk of a lowered credit rating. The risk to our assessment would be if China’s growth was to be stronger than expected and commodities prices accelerate upwards.The Turkish lira remains highly vulnerable to possible concerns of decreased dollar liquidity as the deficit in the current account increases. Confidence in economic policy is also very low. In our assessment, pressure on the lira vs. the US dollar will remain and the central bank will need to raise its policy rate further to mitigate the decline. We are negative on the euro vs. the US dollar, providing a neutral forecast for the lira vs. the euro.The South African rand has found itself in a downward trend since the autumn of 2011. Exports are weak despite the rand having fallen by some 35 percent against the US dollar over that period and the current account deficit is of a record size. The basic problem is at the structural level. The labour market is pervaded by frequent strikes with high wage agreements that are, in turn, inhibiting the employment trend. Infrastructure investments have been neglected for many years, with the consequence that economic development is impeded by major bottlenecks in the economy. Among other effects, this has resulted in the electricity network being under-dimensioned and there being major shortcomings in port capacity and the rail system. The quality of the education system is among the lowest in the world. Consumer confidence is very low, as reflected by declining new car sales and the weakest retail sales since 2008. Credit growth is modest, rising by only 7 percent compared with the growth levels of 20-25 percent that prevailed before the financial crisis. The policy rate has remained unchanged at a record-low 5 percent since 2012. Over the past two years, the rate of inflation has hovered at around 6 percent, which is the central bank’s upper tolerance level for inflation.Over 2013, the Turkish lira fell by about 15 percent against the US dollar to a new bottom level, driven most recently by corruption scandals and the Federal Reserve’s announcement that it would be reducing its bond purchases. On the other hand, the weak exchange rate has yet to have a positive impact on economic growth. Industrial production rose by only 0.7 percent at annual rates in October and exports fell by 8.2 percent at annual rates during the same month. This trend stands in stark contrast to the recent positive trend in the Purchasing Managers Index, which has risen to its strongest level since 2011. In November, the rate of inflation was 7.3 percent compared with the central bank’s target of 5 percent. The central bank left interest rates unchanged at its November meeting but chose to tighten liquidity in the system so that interbank rates ended up at a higher level. Confidence in the central bank policy is very low, with credit growth in the bank system amounting to about 35 percent at annual rates, thus significantly exceeding the bank’s target. The trade balance has weakened for seven consecutive months, further increasing the deficit in the current account. An additional worrisome development is that the maturity on external debt has seen a decreasing trend since 2010.
South Africa
Low valuationWeak current account
Low confidence in monetary policyWeakened current account

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