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BarCap - The EM Weekly

BarCap - The EM Weekly

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EM Views on a Page EM Dashboard

22 July 2010
2 18 19 20

Holding tight
Stronger-than-expected corporate earnings improved the equity market tone, but the reaction of EM assets, in particular FX, has been more subdued, pointing to a relative value re-pricing, more than a reassessment of macro fundamentals. We still believe that global growth – despite a slowdown – will continue at a relatively robust pace and, therefore, maintain our moderately bullish stance towards EM assets supported by favourable technicals. Against a short-term supportive backdrop, investors should keep in mind that risks have not disappeared, as the recent episodes of “reform fatigue” in Hungary and Romania suggest that sovereign risks for Southern Europe remain a threat.

EM FX Views on a Page EM Credit Portfolio Data Review & Preview Emerging Asia EMEA Latin America FX Forecasts and Forwards Official Interest Rates What we like Rates Rates Credit Credit Hungary: 2s5s flattener 2yr US-HK spread widening

21 22 24 26 27

Turkey Spread Curve Flattener Argentina Long EUR Discount

Macro Outlooks
Emerging Asia: Gliding down gently 7 Even with the ongoing moderation in export momentum, we see upside risks to our EM Asia Q2 GDP projections. Korea’s Q2 GDP next week is expected to indicate a strong pulse to the economy. EMEA: Fiscal weakness with stable inflation 9 Fiscal adjustment pressures in Hungary have had negative market consequences and led to political tensions in Romania. Expected fiscal improvements in Ukraine and the Czech Republic are leading to improvements in market sentiment. Looser monetary policy persists, as Hungary and South Africa held rates unchanged, as expected, while Israel and Russia are likely to remain on hold. Latin America: Moderation and its discontents 11 Despite ongoing slowdown fears epitomized by COPOM’s smaller-than-expected hike this week, incoming data from the region have not been generally disappointing. We believe recent signs of growth moderation should be put into context, and we emphasize some bright idiosyncratic stories underlying the larger countries’ trends.

Weekly EM Asset Performance
CLP/USD ZAR/USD TRY/USD RUB/USD MXN/USD BRL/USD KRW/USD TWD/USD INR/USD 2.7% 1.4% 0.8% 0.4% 0.1% 0.0% -0.1% -0.2% -1.1%

EM FX 26 bp 23 bp 18 bp 8 bp

CLP 2yr IRS Hun 5yr IRS India 2yr IRS Indo 5yr Gov -2 bp Pol 5yr IRS Mex TIIE 5yr -4 bp CZK 5yr IRS -4 bp SOAF 2yr IRS -9 bp Kor 2yr IRS -12 bp Braz Jan 12 -15 bp
Hun 5yr CDS Thai 5yr CDS Indo 5yr CDS Phils 5yr CDS Mex 5yr CDS SOAF 5yr CDS Braz 5yr CDS Turk 5yr CDS Rus 5yr CDS Arg 5yr CDS Shanghai Turkey ISE Bovespa FTSE JSE JSE All Russia RTS Sensex Bolsa -0.3% S&P -0.4% Kospi-0.9%

EM Rates
29 bp 14 bp 11 bp 11 bp 0 bp 0 bp 0 bp

Strategy Focus
Hungary: No easy healing 13 The IMF and the Hungarian government failed to come to an agreement regarding the sixth review under the SBA, and we think the differences are substantial enough to suggest that a quick fix is unlikely. While Hungary’s debt dynamics look better than those in the euro periphery, this is not a sufficient reason to go long Hungarian assets. Hong Kong: IPOs and loans to China not a concern, US-HK spreads to widen 16 Concerns have arisen over Hong Kong’s ability to provide capital for China, given market liquidity. This has led to a rise in Hibor rates and a tightening of US-HK spreads. We expect 2y US-HK spreads to widen to 35bp from 11bp in the coming months. Concurrently, we see Hibor rates moving lower, reflecting easing liquidity concerns.

-19 bp

0 bp -3 bp

EM Credit 5.7%

3.9% 3.9% 3.2% 2.9% 2.6% 1.1% EM Equity


NB: EM Assets Performance charts as of 22 July 2010 except CDS spreads, which are as of 21 July 2010. Source: Bloomberg, Markit, Barclays Capital

Barclays Capital | The Emerging Markets Weekly

What happened Global markets and macro Monetary policy Stronger-than-expected corporate earnings supported equity markets. EM assets, while responding favorably, evidenced a more cautious approach, particularly in EM FX. These patterns point, we think, to a re-pricing of relative values more than a fundamental reassessment of the proper answer to the many questions bearing on the economic outlook. Brazil’s Copom surprisingly raised Selic 50bp, to 10.75% (analysts expected 75bp, while markets priced a 65% chance of 50bp). The unanimous decision reflected lower perceived inflation risks. We (partially) disagree. Meanwhile, South Africa’s Reserve Bank kept its benchmark rate unchanged, with a statement that did not change much from previous versions, noting balanced risks for inflation and a somewhat uncertain economic context. In Poland, MPC officials continue to warn that interest rates may be hiked. Some indicate prudential reasons, while others point to the need to accommodate loose fiscal policy. The IMF mission left Hungary without passing the sixth review of the SBA and PM Orban seemed to have closed the door to further negotiations after stating that any future long-term policy agreement would only take place with the EU. This contradicts indications from government officials earlier this week that IMF negotiations could resume in September.


What we think EM assets We expect the positive momentum on EM markets to continue next week. While priced in to a large extent, stress test results should dissipate concerns about the state of the inter-bank market. EM assets should benefit through lower risk aversion, given supportive technicals and strong momentum in US dollar inflows into EM funds. In Brazil, we continue to expect 75-100bp of additional hikes spread through the remainder of the 2010. Our 7.3% growth forecast for 2010 already incorporates the softening in activity through which the country is transiting. In Poland, we do not see hikes until March, but uncertainty about MPC voting commands risk premia in local rates. In South Africa, we think the statement supports our view that the policy rate troughed in March and that it will be kept at 6.5% through mid-2011.

Monetary policy

What we like Asset class Rates Trade Hungary: 2s5s flattener Rationale We remain cautious, so hold onto tail risk trades. The flattener should benefit from upside

22 July 2010


Barclays Capital | The Emerging Markets Weekly


Holding tight
Stronger-than-expected corporate earnings improved the equity market tone, but the reaction of EM assets, in particular FX, has been more subdued, pointing to a relative value re-pricing, more than a reassessment of macro fundamentals. We still believe that global growth – despite a slowdown – will continue at a relatively robust pace and, therefore, maintain our moderately bullish stance towards EM assets supported by favourable technicals. Against a short-term supportive backdrop, investors should keep in mind that risks have not disappeared, as the recent episodes of “reform fatigue” in Hungary and Romania suggest that sovereign risks for Southern Europe remain a threat. Stronger-than-expected US corporate earnings hhhr

22 July 2010


Barclays Capital | The Emerging Markets Weekly

Another European development that has helped restore some confidence to markets has been the reassuring results of recent bond auctions of Southern European governments and banks. Restoring market access is critical to providing some guise of normality to the most affected economies and helping reduce the risks (overblown, in our assessment) of nearterm credit events. However, against these positive developments, markets seem to have shrugged off the difficulties that countries such as Hungary and Romania are having with IMF-sponsored programs. Indeed, they have treated these cases as isolated events, rather than drawing some illustrative lessons from them.
Against this fairly supportive backdrop, investors should be aware of “reform fatigue” risks

The “easy” successes of the early phase of the implementation of the hastily put-together programs in Hungary and Romania are now giving way to more traumatic discussions – and reforms. Reform fatigue has set in in those countries, as growth is lacking, fiscal performance is hampered by the lack of growth, and the politicians’ willingness to accept further harsh reforms has diminished; in Hungary, it is the administration that is reluctant to go along, in Romania, it is the opposition. This is the typical EM experience with IMF programs where the magnitude of the needed adjustment is large and distributed over a long period. In Hungary, the IMF left the country without approving the sixth review of the existing Stand-by Agreement and PM Orban seemingly closed the door on further negotiations. The sharp market reaction (CDS spreads rose 60bp; the HUF lost more than 2%) is telling about risks of negative feedback loops if “stabilisation fatigue” sets in. It remains to be seen whether Hungary is on the same frequency as Romania or Ukraine, countries that eventually recognised that IMF support is key for credibility and to continue accessing capital markets to refinance debt. Despite constitutional obstacles, the Romanian government eventually pushed through a large VAT hike and massive public sector wage cuts in early July. A few weeks later, the Ukraine agreed with the IMF to deliver new spending cuts and a very large (50%) increase in the domestic price of gas to shore up the state-owned energy company. These episodes highlight that investors need to remain mindful that the early successes with fiscal adjustments are no guarantee of their staying power. Unlike Romania, Ukraine and Hungary since late 2009, Greece and most Southern European countries do not face general elections anytime soon. Yet “stabilisation fatigue” is a common phenomenon that sets in a year or two into a tough program, and the outcome of that process is extremely difficult to predict. In short, the recent early success of the Greek courageous efforts should be applauded, but investors would be well advised to keep in perspective that sovereign risks very much remain a reality.

Figure 1: Despite the bottom in money market outflows, EM funds keeps receiving inflows
4000 3500 3000 2500 2000 1500 2008 160 140 120 100 80 60 40 20 2009 2010 ICI: Total Assets: Money Market Mutual Funds (Bil.$) EM Bond Funds AUM (USD bn, RHS) High Yield Fund AUM (USD bn, RHS)
Source: ICI, EPFR Global, Barclays Capital

Figure 2: Hungary CDS and the HUF have corrected sharply

450 400 350 300 250 200 150 100 Jul-09

295 290 285 280 275 270 265 260 Oct-09 Jan-10 Apr-10 EURHUF (RHS) Jul-10 HUF 5yr CDS

Source: Barclays Capital

22 July 2010


Barclays Capital | The Emerging Markets Weekly

What we like
With a fairly positive external context and su

22 July 2010


Barclays Capital | The Emerging Markets Weekly

steepeners, although outright bearish trades might be more sensible. Bad technicals (foreigners hold large exposures to PLN bonds) are supportive.
Credit: cautions on Hungary, switch out from Philippines into Indonesia, still favor Argentina versus Venezuela; Colombia remains our favourite pick in the low beta space

In EMEA credit, we remain cautious on Hungary credit and think that risk/reward is better elsewhere in the region (Romania and Croatia in particular, while Bulgaria $15s also look expensive to us). The front end of the Hungarian CDS curve looks too flat, however, and we recommend selling short-dated CDS for carry/roll-down. As for the Ukraine, our recommendation to sell short-dated CDS is very close to its target after the rally. We still like the short end of the Ukrainian bond curve and expect further normalisation of the curve shape. Finally in Turkey, the cash credit curve has re-steepened and the long end of the curve offers value versus the belly for spread-oriented investors, in our view. In Asia credit, the Philippines, despite the very tight spread level relative to its rating, has continued to outperform other sovereigns in the region. We attribute this to the strong technical bids (the proportion of ROP bonds held by residents is over 40%) but are somewhat sceptical that it will continue since the bonds are looking very rich. We prefer taking exposure to Indonesia’s bond curve, especially the belly of the curve (2014s, 2015s and 2017s). Finally, in LatAm, low beta credit Colombia remains our favourite pick, as we have highlighted in our previous weeklies (we prefer CO41s). We reached our z-spread target from 200bp to 180bp. The high beta space in LatAm remains attractive. Venezuela has lagged Argentina and, once uncertainty over potentially imminent supply is resolved, the “beta” convergence story could re-emerge, given the current extraordinarily wide spread differential (ie, Venezuela should move tighter simply from the improvement in the market tone). In particular, we think that after a strong run, Argentine yields may be approaching their tights, as the country may be near the levels at which new supply becomes possible. PDVSA bonds (especially local law) appear very attractive for those more accepting of supply risk. We have calculated that the recovery-adjusted spread for PDSVA 14s, 15s, and 17s are 300-450bp wider than similar-maturity Venezuela bonds.

22 July 2010


Barclays Capital | The Emerging Markets Weekly


Gliding down gently
Rahul Bajoria +65 6308 2153 rahul.bajoria@barcap.com Prakriti Sofat +65 6308 3201 prakriti.sofat@barcap.com

Even with the ongoing moderation in export momentum, we see upside risks to our EM Asia Q2 GDP projections. Korea’s Q2 GDP next week is expected to indicate the strong pulse of the economy.

EM Asia: Moderating export momentum remains favourable for growth
Over the past two months, Asian exports data have shown signs of increased moderation, consistent with softer US ISM and China PMI readings. For example, in Taiwan growth in export orders continues to decelerate to a more sustainable pace, with 6m/6m momentum (seasonally adjusted) easing to 31.3% in June, down from the 50.4% peak in November 2009. Part of the reason is the relatively large decline in benchmark memory chip prices, which fell by 27.6% in Q2. However, we expect rising export volumes to continue to offset the dampening impact of price falls. In Thailand, export momentum remains robust. June exports surprised significantly to the upside, rising 46% y/y. On a 3m/3m saar basis, the momentum is starting to build again, as demand for electronics, machinery and automobiles remains elevated. This is likely to support manufacturing production in the coming months and indicates upside risks to our growth target of 6% in 2010. This is also corroborated by the rising capacity utilisation in these sectors, which has risen above pre-crisis levels. Even with the moderation, we still see risks to our Q2 growth projections as biased to the upside. Next week, Korea’s Q2 GDP is expected to post another strong print, rising 7% y/y. With rising employment (Korea adding 272k jobs in the private sector in Q2 compared with 194k in Q1), we expect domestic demand to continue to rise. This we believe will fuel concerns that demand-pull pressures will mount further. We expect the BoK to hike the policy rate by an additional 25bp, to 2.5%, in August.

Export momentum has slowed to a more sustainable pace

Figure 1: Asian exports likely to moderate further in the coming months…

Figure 2: …as export orders come down to more sustainable levels

22 July 2010


Barclays Capital | The Emerging Markets Weekly

India: RBI credit policy review
RBI to hike policy rate by 25bp next week

Anchoring inflation expectations is likely to remain a key policy concern for the RBI. Indeed, we think the RBI is set to continue its calibrated exit from the accommodative monetary stance by hiking its policy rates by 25bp at the credit policy review next week. Given the tight liquidity situation, we believe it is unlikely that the RBI will raise the cash reserve ratio. In terms of the statement, we expect the RBI to reinforce its commitment to maintain price stability without hurting growth momentum. On inflation, we expect the WPI to remain above 10% until July and above 8% until October. By December, assuming normal monsoon rainfall, reduced food price inflation and lower non-energy commodity prices should bring WPI inflation close to 6% and give the RBI enough policy room to pause. Even if the monsoons fail and food inflation flares up, we see the probability of aggressive monetary action as quite low. We expect the RBI to hike its policy rate once more by 25bp in October, and then remain on hold until the end of FY 1011 (see India: Monsoons to douse the inflation fire, 8 July 2010).

Gradually easing inflation will give the RBI an opportunity to pause after October credit policy review

Philippines: BoP remains supportive of currency
Strong remittances and exports providing positive backdrop to PHP

Philippines saw another month of robust balance of payments with a surplus of USD502mn in June. For the first half of the year, the country has posted a BoP surplus of USD3.2bn (BarCap forecast: USD3.3bn) compared with USD2.2bn in the same period of 2009. The bulk of the support has come from remittances, which increased by 6.6% up to May, with exports also turning around sharply in line with the global electronics cycle. We expect remittances to grow by 10% through 2010 and exports to remain supported. We also expect foreign direct investment flows to rise gradually and equity inflows to continue given attractive valuations. This provides a favourable backdrop for the currency and we continue to expect USD/PHP to drift towards 45.25 in 3-months, with our 12month forecast being 44.

Figure 3: RBI expected to hike policy rates further next week

Figure 4: Philippines: Robust balance of payments

20 9 8 7 6 5 4 3 04 0 -5 05 06 07 08 09 10 11 IN: Repo rate (%) Reverse Repo rate (%) WPI: Non-food manufacturing (%6m/6m, saar, RHS) 15
USD bn

24 18 12

10 5

6 0 -6 -12 -18 04 05 06 07 FDI 08 09 10 11

Trade balance



Portfolio flows

Source: CEIC, Barclays Capital

Source: CEIC, Barclays Capital

22 July 2010


Barclays Capital | The Emerging Markets Weekly


Fiscal weakness with stable inflation

22 July 2010


Barclays Capital | The Emerging Markets Weekly

they have a solid majority of 118 seats in the 200 seat chamber. The government has pledged to bring the deficit to below 3% of GDP more rapidly than promised in the EU Convergence Report. It is contemplating cutting administration costs, freezing wages, and cutting back on pension indexation awards. Moody’s recently indicated that it expects to raise its A1 foreign currency credit rating on the Czech Republic if deficit improvements are successfully implemented. Fitch already has a Positive outlook on its A+ sovereign rating. The currency has been strengthening, with the yield curve shifting down as a result of these positive developments, notwithstanding the large government issuance.

Muted inflation pressures keep policy rates low
Low inflation pressure from wages, energy, and food prices

Global conditions have proved to be quite favourable for inflation targets. EMEA wage inflation fell sharply in 2009 as a result of the global recession (Figure 1). Wages have started to recover, but wage inflation remains at 1/3 to ½ its former levels. Both food and energy prices were stronger in 2010 because of a very low base in 2009 (Figure 2). The base is now flat and no longer pushing prices up. Last week, both Hungary and South Africa kept their rates on hold, as expected, and we are predicting that South Africa headline inflation fell further in June, as food inflation remains muted due to a bounce in agricultural output.

We predict Israel will keep its policy rate on hold next week

We expect the Bank of Israel to remain on hold for the fourth consecutive month in a shift towards slower rate adjustment. One factor behind this shift is delays in policy rate increases by major global central banks. Another is that monetary policy tightening has been going on for almost a year now. With the policy rate up 100bp and money supply stable, they have moved towards policy normalisation. Finally, recent indicators point to a worrisome growth deceleration led by declines in exports. Russia inflation is under pressure from higher food prices as they are experiencing the hottest summer in 130 years. The heat is reducing crop yields by an estimated 10%. Nevertheless, we expect the CBR to keep its policy rate on hold at 7.75% next week and we retain our view that it will cut rates at its August meeting as it concentrates more on general trends rather than this temporary factor.

Russia central bank expected to remain on hold

Figure 1: Wage pressures have been limited

Figure 2: Agriculture and energy inflation likely to be low on base effects
12 10 8 6 4 2 0 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% -80% 2005

45 40 35 30 25 20 15 10 5 0 2005











Russia and Ukraine: Average wage (% y/y) CE3: Average wage (% y/y, RHS)
Source: National Sources, Bloomberg

Agriculture prices (% y/y)
Source: CME, Bloomberg

Energy prices (% y/y)

22 July 2010


Barclays Capital | The Emerging Markets Weekly


Moderation and its discontents
Jimena Zuniga +1 212 412 5361 jimena.zuniga@barcap.com

Despite the ongoing slowdown fears epitomized by Copom’s smaller-than-expected hike this week, incoming data from the region have not been generally disappointing. We believe recent signs of growth moderation should be put into context and we emphasize some positive idiosyncratic stories underlying the larger countries’ trends. The recent string of disappointing activity data in the US and China, along with soft numbers in Brazil – crowned by a smaller-than-expected 50bp hike by Copom this week– have brought the threat of a slowdown in global activity, and in Latin America specifically, to the forefront of investor attention. In reality, incoming data from the region have not been generally disappointing; outside the eye-catching and admittedly important Brazil, they have actually surprised on the positive side on average in the past few weeks (Figure 1).

In Brazil, we see the Copom’s move to hike 50bp as a decision to spread out the tightening cycle in H2 and not a signal of its end

First Copom: Its decision to hike a softer-than-expected 50bp is in our view a fine-tuning of the pace of tightening and not a signal that the end of the cycle is near. Although inflation has surprised on the downside, most of the action is driven by food deflation, which is temporary. Regarding activity, we had been expecting an economic slowdown and see it as a healthy consolidation of growth following the cyclical and stimulus-led rebound. The outlook for GDP growth remains on track to round up a strong 7.3% this year. Hence, we do not see Copom’s change in pace as a signal of a pause or the end of the cycle, but instead a move to spread the tightening through the second half of the year when growth will likely be softer, but still well sustained (see Brazil: Copom watch: It is not the end, 22 July 2010). How about the rest of the region? Just this week, May retail sales in Mexico posted an encouraging 5.0% y/y gain, close to our forecast (5.5%) but well above the consensus expectations (3.4%). While boosted by the favourable base associated with last year’s influenza, the number also underscored a meaningful 0.8% m/m gain. In Colombia, industrial production expanded a somewhat lower-than-expected 7.5% y/y (Barclays Capital: 8.6%, consensus: 8.5%) but nothing as compelling as the upside surprise in retail sales growth at 13.1% y/y (Barclays Capital: 10.5%, consensus: 8.2%.)

Incoming data this week, rather than disappointing, continued to give proof of ongoing recovery

Figure 1: Surprise, surprise

Figure 2: Big economies’ growth has moderated through H1

22 July 2010


Barclays Capital | The Emerging Markets Weekly

This signals moderation has not been as stark and augurs strong Q2 GDP readings

These numbers hint that whatever signs of growth moderation may be appearing in the region, these seem to have been less, and not more, meaningful than expected. Outside Brazil (where incoming data are tracking our relatively unimpressive 4.0% q/q SAAR projection) we believe this is likely to pave the way for a stellar round of Q2 GDP releases as of next month and possibly invite further upward revisions in this year’s growth projections. Chile is likely to lead the way with an astounding 18.0% q/q SAAR gain (which we are revising from 15.0% to account for a faster-than-expected rebound after the earthquake); Mexico should follow suit with a strong 9.5% q/q SAAR expansion after a soft Q1; Colombia’s recent figures suggest upside risks to our 5.0% q/q SAAR projection; and Argentina’s private estimates point to a robust 7.5% q/q SAAR expansion, while official numbers track a utopian 15%. Moreover, we believe it is warranted to qualify the moderation that, predictably, we have begun to observe in some economies, particularly Brazil and Mexico. Figure 2 shows, that, indeed, some moderation in the pace of sequential expansion of the largest economies has already taken place by the end of H1 10, less meaningfully in Brazil until Q2, more so in Mexico. Our main observation is that an indefinite continuation of the blistering sequential growth rates of H2 09 in these economies would have been utterly unsustainable, and was never expected, in our view. These rates benefited from the colossal cyclical impulse associated with spare capacity, unemployment, and depleted inventories; and are only naturally moderating as the economies narrow their output gaps. On the same grounds we are expecting further, slight moderation in the sequential pace of expansion of these economies in H2 10. What is puzzling is the absence of any signs of moderation in the other main inflationtargeting economies, Chile and Colombia. In part, we believe this reflects a less spectacular cyclical bounce relative to those observed in H209 in Brazil and Mexico. However, there are also specific idiosyncratic factors supporting this pattern. In the case of Chile, the fast pace of expansion we are tracking for H1 is remarkable, given that the economy had to overcome a colossal shock from the February 27 earthquake, which subtracted roughly 1pp from GDP in March alone. In addition to the significant recovery from that plunge, we expect activity to continue to accelerate in H210 as the reconstruction stimulus kicks in against the backdrop of still very accommodative, though rapidly normalizing, monetary policy. In the case of Colombia, recent acceleration reflects in part the tardiness with which the economy joined the recovery trend, in our view, held back by the drag implied by trade disputes with Venezuela last year. Since that drag ran its course, the economy has been benefiting from high oil prices and significant monetary stimulus, and we believe the risks for Q2 and H210 are tilted to the high side. In addition to this cyclical recovery, GDP growth prospects are boosted by a bright outlook in the energy sector. Overall, we believe recent signs of growth moderation in the region should be put into context and we emphasize some of the appealing idiosyncratic stories underlying the larger country trends. These stories support our bullish FX calls in CLP and COP relative to the bigger economies’ currencies and highlight that moderation in the region is not all about discontents.

Although some moderation is indeed taking place in the biggest economies, it needs to be qualified, in our view

Interestingly, no signs of moderation are to be seen in the smaller economies

Chile’s outlook remains upbeat given the required reconstruction

Colombia’s growth risks also seem tilted to the high side

Overall, signs of moderation seem to have caused more discontent than warranted

22 July 2010


Barclays Capital | The Emerging Markets Weekly


No easy healing
The IMF and the Hungarian government failed to come to an agreement regarding the sixth review under the SBA, and we think the differences are substantial enough to suggest that a quick fix is unlikely. While Hungary’s debt dynamics look better than

22 July 2010


Barclays Capital | The Emerging Markets Weekly

streamlining the size of government, there has been little indication thus far that the government has plans for wider-reaching expenditure reforms.

The IMF could in principle be willing to show some “lenience” by allowing for a slightly wider 2011 deficit (say 3.5%), but we doubt that the EU would agree to this given the emphasis on reining in deficits across the entire bloc. The IMF cannot overrule the EU in this matter. Hence, we believe the 3.0% target is actually “cast in stone”. Again, this may not be easy to accept for a Fidesz party that just won two-thirds of the parliament seats and whose leader pledged to end the “dictate of the IMF and EU”. Overall therefore, we beliel -14tecessar4(y)3-8( )]TJ -0.00

22 July 2010


Barclays Capital | The Emerging Markets Weekly

start to hurt households, as unemployment remains high and wage growth is still slowing. This, in turn, could lead to more pressure on the exchange rate.

Strategy outlook – not a time to go long
It will be a bumpy process to restore investor confidence

We remain cautious on Hungarian markets. Risk premia have risen on Hungarian assets, but in some parts they are hardly stretched, in our view. Further price adjustments are possible, and given the fundamental background, we do not think this is the time to go long. The relative performance Z-scores in local swaps, bonds and FX vol look more attractive for positions in new bearish trades than in credit and spot FX. Our tail-risk recommendations, as outlined in our Emerging Markets Quarterly, 22 June 2010, should still be appealing to investors, namely owning a 2s5s IRS flattener and a HUF-put spread.

Local rates – further flattening
Risk premia are low on local rates – on swaps and bonds

We look for catch-up pressure on the local rates, particularly at the front end of the curve and on bonds. The pressure on the front end is justified by the expressed willingness of the NBH to hike interest rates if “risk premia” were to move higher. While we think this would have little effect on stabilising the forint, we certainly would not rule out such a move by the NBH. 2y swaps are currently 90bp above the (5.25%) policy rate, but this spread has been 60bp higher during previous periods of unchanged policy rates (Q1 08 and Q1 09). Rather than paying 2y, we prefer a 2s5s flattener, given that on a multi-year basis, the curve is still steep and has attractive market dynamics on 2s5s (gradual steepening/sharp flattening).

Foreign exchange – other challenges beyond the negative feedback loop
The risk premium on HUF spot is high, but the fundamental challenges are significant. In addition to the negative feedback loop from the CHF loans, the currency is facing a steadily growing squeeze on foreign funding. This was already evident last Friday with the -190bp 1y HUF-EUR cross-currency basis swap – the widest since March 2009. Trading liquidity in these instruments is low but the pressure to widen continues, in our view, on FX volatility and concerns about local corporate and household balance sheets from the past currency weakness. Risk premia on FX options are, surprisingly, not high yet, which probably reflects fears of FX intervention. This gives investors an opportunity to add to bearish HUF option structures such as the 6m 290-310 put-spread that we recommended in the Emerging Markets Quarterly, 22 June 2010.

Credit – Better value elsewhere, but valuations impede outright bearish trades
Better value in Romania and Croatia, but the front end of the Hungarian CDS curve looks too flat

We reiterate our cautious stance on Hungarian credit and think investors are better compensated for risks elsewhere in the region. We highlight Croatia and Romania in this context. However, despite our cautious stance, we think outright short Hungary credit positions do not look appealing from a risk/reward perspective at current levels. Hungary credit spreads have not only underperformed significantly over the past months in a global context but also within the region. The comparatively high relative performance Z-score suggests there are better ways to express a negative view towards Hungary than buying CDS protection outright. Our overall cautious stance on Hungarian credit notwithstanding, we highlight that short-term default risks remain limited, in our view. In particular, given the Hungarian government’s significant deposits (c.USD6.5bn at the central bank and mostly in foreign currency), 2010 bond maturities should easily be covered. We therefore continue to think the aggressive flattening of the Hungarian CDS curve is overdone and that selling short-dated CDS (up to 1y) offers value from a carry/rolldown perspective.

22 July 2010


Barclays Capital | The Emerging Markets Weekly


tracted from0.27 0 .0392 .188 43 0003 Tf -030009 Tc -0.0

22 July 2010


Barclays Capital | The Emerging Markets Weekly

This will materially reduce demands on system liquidity. The option to issue in China also eases Hong Kong liquidity. Capital raising between Hong Kong and China are substitutes for Chinese banks. To the extent that liquidity is insufficient to meet issuance demand, an issuer can simply increase the amount issued in China while

22 July 2010



Barclays Capital | The Emerging Markets Weekly

George Christou +44 (0)20 777 31472
Entry date 06-Jul-10 22-Jun-10 06-Jun-10 03-Jun-10 25-May-10 22-Apr-10 16-Mar-10 30-Oct-09 19-Aug-09 08-Jul-10 06-Jul-10 22-Jun-10 22-Jun-10 22-Jun-10 22-Jun-10 14-Jun-10 18-May-10 13-May-10 17-Mar-10 17-Mar-10 15-Jan-10 14-Jan-10 08-Dec-09

P&L to target/ P&L to stop Analyst 2.20 1.86 0.10 0.82 0.32 0.90 0.50 0.53 1.00 3.29 2.36 3.50 0.57 0.32 2.54 2.76 1.77 5.00 0.60 7.70 1.79 2.13 2.57 3.71 0.26 2.33 1.28 0.79 2.33 0.90 0.43 14.83 0.03 0.53 2.33 2.00 0.73 Date closed 25-Mar-10 6.99 7.23 10.88% 6.36 7.31 21-Jul-10 21-Jul-10 Melzi Melzi 21-Jul-10 10.98% 11.10% 10.93% Guarino Kolbe, Keller Guarino, Mondino Kolbe, Markus Guarino, Zuniga Guarino Kolbe Kolbe, Keller Guarino Redward Redward Chow, Keller Chow Badsha, Chow, Keller Melzi Redward Rachapudi Melzi Chow, Christou, Moubayed Chow Loureiro, Melzi, Salomon Loureiro, Melzi, Salomon Chow, Vogel Melzi, Zuniga Huang Rachapudi Chow, Hewitt Loureiro, Melzi Chow, Keller Chow, Pantyushin Chow, Keller Chow, Hewitt Melzi Rachapudi Huang Badsha Melzi Huang

Description Credit (9) Long 3mth ATMF put on BRA 37 Buy Lithuania 5y CDS, sell Croatia 5y CDS Long Argentina EUR warrant Buy Cote d'Ivoire 32 Long CO41s Long PE33 Short PE 19 Sell Ukraine 1y CDS Romania 5s10s CDS steepener (DV01-neutral) Brazil 1s10s DV01 steepener FX (14) Sell 1M JPY/KRW Sell 4m USDCNY NDF outright Long EUR call/HUF put spread (290;310 strikes) Long TRY vs USD (0.5) EUR (0.5) Long TRY/ short ZAR Cash Short BRL put spread (1.90-2.05); finance: sell US Sell USD/PHP 3m NDF 3M USD/MYR put spread short EUR/CLP Long EGP (3m Tbill, 80% USD,20% EUR funded) Long UAH (6m T-bills, USD funded) 9m Ibovespa bear put spread (strikes: 50k, 60k) 9m USD call/BRL put spread (strikes: 1.9, 2.1) Sell basket/RUB Rates (16) Long Chile 6M2Y DV01-neutral steepener 2y US-HK spread widener Long Indonesia 5y bond PLN 2s10s IRS DV01-N steepener Brazil: Buy 1y BE inflation Hungary: 2s5s IRS DV01-N flattener Long RUB Jan'13s funded 45:55 EUR, USD Long TRY Mar'12s funded 50:50 EUR,USD Rec ILS 5Y IRS Pay 10y TIIE India OIS: 2x5 flattener TWD: Sell 1y1y payer ZAR IRS 2v10 payer Long NTN-F 17s KRW Long 10y bond pay 10y swap Closed trades (1) 3m long MXN/short BRL Pay Jan11 Pre-DI

Entry 2.75 -18bp 6.05 55.00 281bp 73bp 720bp -2bp 68bp 13.75 6.78 280 1.74 4.80 1.79 46.81 1.05% 667 5.89 7.97 70,800 1.76 37.07

Current Tacrget Stop 2.25 -30bp 8.65 55.50 214bp 64bp 525bp 11bp 85bp 13.81 6.77 286 1.74 4.92 1.78 46.72 0.80% 670 6.03 7.91 64,462 1.78 34.36 128% 9.8bp 7.63% 78bp 4.96% 31bp 6.27% 8.21% 3.64% 6.91% 72bp 11.1% 125bp 12.10% 68bp 7.25 9.00 60.00 180bp 45bp 500bp 30bp 120bp 12.85 6.68 310 1.70 4.99 2.05 45.50 3.00% 615 5.75 7.75 50,000 2.10 33.00 200% 35bp 0 4.00 50.00 320bp 85bp 575bp -25bp 50bp 14.10 6.81 1.81 4.70 47.20 0% 701 6.10 8.15 35.00 100% 3bp

100bp -100bp

13-Jul-10 135% 12-Jul-10 15bp 05-Jul-10 7.89% 30-Jun-10 80bp 22-Jun-10 4.88% 22-Jun-10 53bp 22-Jun-10 6.18% 22-Jun-10 8.60% 22-Jun-10 3.80% 11-Jun-10 7.25% 14-Apr-10 122bp 23-Feb-10 20.0% 19-Feb-10 126bp 07-Dec-09 13.29% 03-Sep-09 86bp

7.40% 8.50% 120bp 60bp 6.00% 4.15% 0bp 70bp 5.50% 6.60% 7.50% 9.00% 3.50% 4.00% 7.80% 6.85% 70bp 0% 140bp 32.0%

160bp 110bp 11.70% 12.30% 40bp 105bp

Note: As of 21 July 2010. Methodology: P&L to target/P&L to stop is a measure of how much can be gained relative to how much can be lost. Both are calculated from the current value and reported in dollars. This measure does not take probabilities into account. Source: Barclays Capital

22 July 2010


Barclays Capital | The Emerging Markets Weekly

Currency Tactical bias Strategic directional view Cross-Strait agreement is still one of our favourite structural transformation stories. We expect an increase in two-way variations in the CNY exchange rate, along with moderate appreciation. Although still bullish, we are slightly more cautious on the KRW due to a smaller financial account surplus that reflects a more tepid interest rate outlook and tighter FX regulations. Robust BoP and strong growth outlook indicate PHP strength despite recent underperformance. With INR being overvalued on the REER and a higher CA deficit, we expect the currency to remain rangebound with a weakening bias. Structural reforms, putting the country on track to reach investment grade, and robust BoP suggest IDR strength. We remain bullish as the government pursues its multi-year restructuring programme, with the key catalyst being privatisations. With fewer rate hikes and larger equity outflows, we expect slower THB appreciation. Local equities markets and potential large IPOs will likely drive HKD. We expect SGD NEER to trade above the midpoint in the coming months as we near the October policy statement. Strong domestic demand due to reconstruction efforts is supportive. Growth peaking already; more a global beta play now. Bright energy sector outlook; above-consensus growth expectations Due to political noise. Search for yield supporting the currency. Better to trade via options. Current strategy/trades we like Sell USD/TWD Sell 4m USD/CNY NDF Sell 1m JPY/KRW 0.43 Sell USD/PHP 3m NDF 0.38 0.27 Buy 5y IDR bonds, FX unhedged Buy 3m USD/MYR put spreads 0.25 0.14 -0.48 0.09 Short EUR/CLP 3.25 3.15 3.00 2.65 0.29 3.50 3.30 3.30 3.25 Vol adj 6m Score returns (1-5)

Emerging Asia TWD CNY Bullish Bullish 0.44 0.50 4.25 4.00


Bullish Bullish


Neutral Bullish


Bullish Bullish Neutral

SGD Neutral Latin America CLP MXN COP Bullish Neutral Bullish

0.41 0.14 0.21

3.50 3.05 2.40 1.70

9m USD call/BRL put spread

BRL Bearish Emerging EMEA


22 July 2010


-0.16 1.70

Barclays Capital | The Emerging Markets Weekly

OAS (bp) 31-Dec 21-Jul EM Portfolio Arg, Ven, Ukr Other EM Asia Philippines Indonesia Vietnam Pakistan Sri Lanka EMEA Turkey Russia Lebanon South Africa Ukraine Hungary Lithuania Bulgaria Egypt Serbia & Montenegro Tunisia Qatar Abu Dhabi Latin America Brazil Mexico Venezuela Argentina Colombia Peru Panama Uruguay El Salvador Dominican Republic 269 888 191 207 178 196 324 681 434 235 185 187 331 160 1031 224 347 215 205 281 231 146 166 317 137 149 1032 708 177 155 154 215 353 438 304 959 220 212 189 196 323 661 405 275 233 257 333 175 527 387 326 278 214 376 148 181 152 356 153 163 1181 825 180 173 181 207 352 416 3mF 288 941 206 205 190 190 300 500 400 258 215 180 295 200 475 415 390 360 265 350 115 130 130 340 146 148 1225 750 153 156 163 175 321 300 6.8 6.2 6.9 7.2 7.6 7.3 5.8 4.9 2.9 5.8 6.9 6.3 3.9 5.5 4.0 4.9 4.5 3.1 5.6 4.6 1.7 6.9 4.4 7.5 7.2 7.7 5.4 7.5 7.2 10.3 9.3 9.7 6.8 5.5 OAD Weights (%) Benchmark 100 11 89 15 7.5 5.9 0.5 0.3 0.3 39 13.2 9.8 2.8 3.0 1.1 4.6 2.6 0.7 0.7 0.3 0.2 0.0 0.0 46 13.6 10.2 5.2 5.0 3.8 2.7 2.5 1.9 1.2 0.4 Model 100 15 85 15 5.1 8.0 0.5 0.6 0.3 40 15.0 14.0 2.9 1.5 2.2 2.5 0.4 0.7 0.1 0.1 0.4 0.2 0.0 46 12.5 9.0 5.0 7.6 3.8 1.5 2.0 2.5 0.4 1.3 over under under under over neutral over neutral over over over neutral under over under under neutral under under over over neutral under under under neutral over neutral under under over under over Returns (%) 1w 0.8 1.6 0.7 0.9 1.0 0.8 0.1 0.2 1.3 0.5 0.7 0.1 0.3 0.8 3.0 -0.3 1.2 0.5 0.2 0.3 0.1 -0.3 0.1 1.1 1.0 0.8 1.3 1.6 0.9 1.7 1.7 1.5 -0.5 0.8 YTD 6.0 5.9 6.0 9.5 9.0 10.1 9.3 12.5 6.9 2.9 3.8 4.6 5.4 2.9 24.5 -8.3 0.6 -2.5 2.9 3.2 4.7 6.9 7.0 7.6 7.2 8.2 3.2 4.6 10.1 10.0 10.2 13.3 8.2 10.5 BR37, BR41 MX41, MX33 VE23, VE28, VE34 Bonar 13, EUR Warrants, EUR disc, G17 CO41 PE 33, PE 19 PA36 UY25 ELSALV 35 DR18, DR27 DR 21 VE16, VE27 Boden 15 CO19 BR19, BR A BTUN 12s Qatar 19s,30s, 40s Egypt 40s Bulgaria 15s Egypt 20s Ukr 11s, 13s, Nafto 14s Hungary 15s Turkey 14s, 15s, 16s, 30s, 34s, 36s, 38s, 40s Turkey 19s,19Ns,20s,21s Russia 15s,30s,28s Leb 4% 17s (amort.) SoAf 20s,22s Indo 14s, 15s, 16s Bonds we recommend… Buying Selling

Note: Changes in view denoted in bold. Source: Barclays Capital

22 July 2010


Barclays Capital | The Emerging Markets Weekly

Rahul Bajoria Review of last week’s data releases
Main indicators Period

22 July 2010


Barclays Capital | The Emerging Markets Weekly

Eldar Vakhitov, Jeffrey Schultz, Daniel Hewitt, Alia Moubayed, George Christou, Christian Keller, Vladimir Pantyushin

Review of last week’s data releases
Main indicators Poland: Average Gross Wages (% y/y) Poland: Employment (% y/y) Israel: Unemployment rate (%) Hungary: Base Rate Announcement Poland: Sold Industrial Output (% y/y) Russia: Retail Sales (Real, % y/y) Russia: Unemployment Rate (%) Russia: Disposable Income (% y/y) Russia: Real Wages (% y/y) Poland: Core Inflation (% y/y) South Africa: Interest Rate Announcement Period Jun Jun May Jul20 Jun Jun Jun Jun Jun Jun Jul Previous 4.8 0.5 6.9 5.25 14.0 5.1 7.3 2.8 7.0 1.6 6.50 Barclays 1.0 6.8 5.25 14.0 5.5 7.3 3.6 6.9 1.5 6.50 Actual 3.5 1.1 6.5 5.25 14.5 5.8 6.8 1.4 5.5 1.5 6.50 Comments Low wage growth implies little inflation pressure Labour markets recovering Recovered to pre-recession levels Unchanged, as expected. We think further cuts will be postponed into 2011 given recent events Production is expanding on higher exports Welcome acceleration of consumer sector Higher employment will support future growth Weaker income growth may slow consumer sector recovery Downward inflation momentum Unanimous decision citing still balanced inflation risks and uncertain global environment

Preview of week ahead
Friday 23 July 09:00 09:00 Poland: Retail sales (% y/y) Poland: Unemployment Rate (%) Ukraine: Current Account (USD mn) Period Jun Jun Q2 Prev 2 8.7 12.9 -68 Prev 1 -1.6 12.3 -898 Latest 4.3 11.9 -184 Forecast 4.0 50 Consensus 4.2 11.6 -

Poland: Unemployment should continue to decline gradually while domestic demand remains weak. Ukraine: The external conditions remain favourable for Ukraine, while the domestic demand is just beginning to recover. We expect the current account to post a positive balance for the first time since Q3 2006.
Monday 26 July 08:00 15:30 Hungary: Retail Trade (% y/y) Israel: Base Rate Announcement (%) Period May Jul-29 Prev 2 -4.3 1.50 Prev 1 -4.0 1.50 Latest -5.0 1.50 Forecast 1.50 Consensus -3.5 1.50

Hungary: We look for a gradual recovery in retail sales Israel: We predict that the BoI will remain on hold for a 4th consecutive month.
Wednesday 28 July 09:00 10:30 Lithuania: Real GDP (% y/y) South Africa: CPI (% y/y) Period Q2 P Jun Prev 2 -14.2 5.1 Prev 1 -12.1 4.8 Latest -2.8 4.6 Forecast 4.4 Consensus 4.5

South Africa: We look for a further moderation in headline inflation, largely as a result of goods prices which are likely to have slowed further in June.
Thursday 29 July 07:00 07:00 10:30 South Africa: Money Supply (% y/y) South Africa: Private sector credit (% y/y) South Africa: PPI (% y/y) Egypt: Deposit rate Period Jun Jun Jun Jul-29 Prev 2 1.6 -0.7 3.7 8.25 Prev 1 1.7 -0.9 5.5 8.25 Latest 1.4 0.8 6.8 8.25 Forecast 1.1 6.1 8.25 Consensus 1.9 1.2 7.0 -

South Africa: Fading base effects should see headline growth in producer prices moderate marginally in June. We look for a mild improvement in headline PSCE growth in June, owing in part to favourable base effects.

22 July 2010


Barclays Capital | The Emerging Markets Weekly

Egypt: We think CBE is likely to keep rates on hold for a while, encouraged by a strengthening USD. We do not expect the first hike to occur before early 2011 unless inflation surprises upwards in sustained manner ahead of that date.
Friday 30 July 08:00 13:00 13:00 Turkey: Trade Balance (EUR bn) South Africa: Trade Balance (Rand bn) South Africa: Budget (Rand bn) Russia: Refinancing Rate Announcement Period Jun Jun Jun Jul-30 Prev 2 -5.0 0.5 -11.0 8.00 Prev 1 -5.5 -1.9 -25.1 7.75 Latest -4.8 -0.3 -20.9 7.75 Forecast 7.75 Consensus -2.0 -

Turkey: With our forecast of robust growth and gradually rising oil prices, we now expect the current account to reach 35 USD bn in 2010 (roughly 5% GDP), driven by the trade balance. Russia: Bank of Russia will likely keep the rates unchanged. However, we still expect another 25 bps cut in August on the back of declining inflation.

22 July 2010


Barclays Capital | The Emerging Markets Weekly

Alejandro Grisanti, Guilherme Loureiro, Marcelo Salomon, Sebastian Vargas, Jimena Zuniga Review of the week’s data releases
Main indicators Colombia – Ind. production (% y/y) Colombia – Retail sales (% y/y) Argentina – Consumer confidence Brazil – IPCA-15 inflation (% m/m) Mexico – Retail sales (% y/y) Brazil – BCB Selic target rate Brazil – FGV Consumer confidence Brazil – Unemployment rate Mexico – Bi-weekly CPI % 2w/2w Mexico – Bi-weekly core CPI % 2w/2w Argentina – Budget balance (ARS mn) Mexico – Trade balance (USD mn) Mexico – Unemployment rate Argentina – Trade balance (USD mn) Colombia – Overnight lending rate Venezuela – Unemployment rate Period May May Jul Jul May Jul Jul Jun Jul H1 Jul H1 Jun JunP Jun Jun Jul Jun Previous 7.6 7.9 47.6 0.19 -0.1 10.25% 118.7 7.5% -0.04 0.03 3017 179 5.1% 1905 3.00% 8.1% Barclays 8.7 10.5 NA 0.05 5.5 11.00% NA 7.5% 0.20 0.17 1200 350 5.1% 1150 3.00% NA Actual 7.5 13.1 48.2 -0.09 5.0 10.75% 120.0 7.0% 0.15 0.13 2716 Comments Consistent with a solid pace of expansion Signalling strong domestic demand In line with consumer spending Food deflation leading the way Consistent with a solid 0.8% m/m sa gain Sanctioning market expectations Strong current situation was the highlight of the index Labor force contraction explains most of the fall Core inflation still the culprit Benign prints concentrated in goods components The relevant primary surplus is ARS 700mn

Preview of the week ahead
Monday 26 July 9:30 Brazil – Current account (USD mn) Period Jun Prev 2 -5067 Prev 1 -4583 Latest -2020 Forecast -3200 Consensus NA

Brazil current account: The widening CA deficit reflects a weaker trade balance, along with higher interest payments (seasonal). The focus remains on the capital flows, as the effect of higher risk aversion in June should be felt especially in portfolio flows.
Tuesday 27 July Period Prev 2 Prev 1 Latest Forecast Consensus

22 July 2010


Barclays Capital | The Emerging Markets Weekly

Brazil IGP-M inflation: The end of iron ore pressures, along with unchanged food price behaviour, are the highlights of the low IGP-M release. Construction costs probably will continue to grind down, as wage bargaining in the sector is dissipating. Brazil monetary policy minutes:

22 July 2010


Barclays Capital | The Emerging Markets Weekly

FX forecasts Spot G7 countries EUR JPY GBP CHF CAD AUD NZD Emerging Asia CNY HKD INR IDR KRW LKR MYR PHP SGD THB TWD VND Latin America ARS BRL CLP MXN COP PEN EMEA EUR/CZK EUR/HUF EUR/PLN EUR/RON USD/RUB BSK/RUB USD/TRY USD/ZAR USD/ILS USD/EGP USD/UAH 25.12 285 4.10 4.26 30.48 34.35 1.52 7.55 3.86 5.70 7.90 25.20 288 4.10 4.30 30.80 33.57 1.55 7.70 3.81 5.65 7.90 25.60 290 4.15 4.35 30.30 33.03 1.55 7.60 3.80 5.66 7.90 25.40 285 4.12 4.30 29.50 32.82 1.55 7.80 3.75 5.60 7.80 25.40 283 4.05 4.30 29.50 32.82 1.50 7.90 3.70 5.55 7.80 0.4% 0.9% -0.1% 0.5% 0.8% -2.08% 1.1% 1.5% -1.3% -1.4% 0.0% 2.0% 1.1% 0.8% 0.7% -1.3% -4.13% 0.1% -0.8% -1.5% -2.3% -0.6% 1.1% -1.3% -0.4% -1.8% -4.8% -5.83% -1.4% 0.4% -2.9% -4.8% -3.5% 1.2% -3.4% -3.0% -4.4% -6.7% -7.73% -7.6% -1.1% -4.3% -9.4% -6.0% 3.93 1.76 517 12.75 1,864 2.83 3.94 1.80 510 12.70 1,850 2.85 4.05 2.00 500 12.60 1,840 2.85 4.30 1.90 480 12.65 1,800 2.87 4.60 1.90 480 12.70 1,800 2.87 -0.5% 1.5% -1.4% -0.8% -0.8% 0.9% 0.8% 11.3% -3.4% -2.2% -1.6% 0.8% 3.7% 3.5% -7.7% -2.8% -4.3% 1.2% 4.1% -0.7% -8.8% -4.4% -6.0% 0.5% 6.778 7.78 47.27 9052 1204.5 112.8 3.2140 46.53 1.3717 32.29 32.13 19074 6.760 7.78 46.50 9000 1175 113.2 3.19 45.50 1.3800 32.25 31.75 19000 6.710 7.78 45.50 9000 1150 113.0 3.17 45.25 1.3750 32.10 31.00 19500 6.630 7.80 46.25 8900 1100 113.0 3.12 45.00 1.3600 32.00 30.75 19500 6.480 7.80 46.50 8800 1075 112.5 3.05 44.00 1.3500 31.75 30.00 19000 -0.3% 0.0% -2.0% -0.7% -2.5% 0.0% -0.8% -2.4% 0.6% -0.1% -1.1% -1.2% -0.9% 0.1% -5.0% -1.8% -4.8% -1.0% -1.8% -3.5% 0.3% -0.7% -3.1% -0.5% -1.9% 0.4% -4.3% -4.2% -9.2% -2.2% -3.8% -4.8% -0.8% -1.1% -3.4% -3.2% -3.1% 0.6% -5.3% -7.8% -11.5% -2.6% -6.6% -8.1% -1.4% -2.1% -4.9% -10.6% 1.28 87 1.52 1.04 1.04 0.88 0.72 1.20 92 1.48 1.13 1.00 0.90 0.72 1.20 94 1.52 1.17 1.00 0.90 0.72 1.25 96 1.60 1.14 1.03 0.84 0.69 1.25 98 1.60 1.16 1.07 0.82 0.67 -6.4% 6.3% -2.7% 8.8% -4.2% 2.4% 0.7% -6.4% 8.7% -0.1% 12.1% -4.3% 3.2% 1.2% -2.5% 11.2% 5.2% 9.3% -1.6% -2.6% -2.2% -2.4% 13.9% 5.3% 11.9% 1.8% -2.7% -3.2% 1m 3m 6m 1y 1m Forecast vs outright forward 3m 6m 1y

Source: Barclays Capital

22 July 2010


Barclays Capital | The Emerging Markets Weekly

Start of cycle Official rate % per annum (unless stated) Advanced Fed funds rate BoJ overnight rate ECB repo rate Emerging Asia China: Working capital rate Hong Kong: Base rate India: Repo rate Indonesia: O/N policy rate Korea: O/N call rate Sri Lanka: Reverse Repo Malaysia: O/N policy rate Philippines: O/N lending Taiwan: Rediscount rate Thailand: O/N repo rate Vietnam: Base rate Emerging Europe and Africa Czech R: 2w repo rate Hungary: 2w deposit rate Poland: 2w repo rate Romania: Key policy rate Russia: refi rate South Africa: repo rate Turkey: 1wk repo rate Egypt: Deposit rate Israel: Discount Rate Latin America Brazil: SELIC rate
Chile: Monetary Policy Rate

Forecasts as at end of Level Last move Next move expected Q3 10 Q4 10 Q1 11 Q2 11



0-0.25 0.10 1.00

Easing: 17 Sep 07 Easing: 30 Oct 08 Easing: 8 Oct 08

5.25 0.50 4.25

Dec 08 (-75-100) Dec 08 (-20) May 09 (-25)

Apr 2011 (+25) Q2 12 (+20) Q2 11 (+25)

0-0.25 0.10 1.00

0-0.25 0.10 1.00

0-0.25 0.10 1.00

0.75 0.10 1.25

5.31 0.50 5.50 6.50 2.25 9.50 2.75 4.00 1.375 1.50 8.00

Easing: 12 Sep 08 Easing: 19 Sep 07 Tightening: 19Mar 10 Easing: 4 Dec 08 Tightening: 9 Jul 10 Easing: 20 Feb 09 Tightening: 04 Mar 10 Easing: 18 Dec 08 Tightening: 24 Jun 10 Tightening: 14 Jul 10 Tightening: 1 Dec 09

7.47 6.75 4.75 9.50 2.25 12.0 0 2.75 6.00 1.37 5 1.50 7.00

Dec 08 (-27) Dec 08 (-100) Jul 10 (+25) Aug 09 (-25) Jul 10 (+25) Jul 10 (-25) Jul 10 (+25) May 09 (-25) Jun 10 (+12.5) Jul 10 (+25) Dec 09 (+100)

Beyond 2011 Apr 11 (+25) Jul 10 (+25) Q4 10 (+25) Aug 10 (+25) Q2 11 (+25) Q1 11 (+25) Q4 10 (+25) Q3 10 (+12.5) Aug 10 (+25) -

5.31 0.50 5.75 6.50 2.50 9.50 2.75 4.00 1.50 1.75 8.00

5.31 0.50 6.00 6.75 2.50 9.50 2.75 4.25 1.50 1.75 8.00

5.31 0.50 6.00 6.75 2.75 9.50 2.75 4.25 1.625 1.75 8.00

5.31 1.00 6.25 7.00 2.75 9.75 3.00 4.50 1.625 2.00 8.00

0.75 5.25 3.50 6.25 7.75 6.50 7.00 8.25 1.50

Easing: 8 Aug 08 Easing: 24 Nov 08 Easing: 26 Nov 08 Easing: 4 Feb 08 Easing: 24 Apr 09 Easing: 11 Dec 08 Easing: 20 Nov 08 Easing: 13 Feb 09 Tightening: Aug 09

3.75 11.50 6.00 10.25 13.00 12.00 16.75 11.50 0.50

Apr 10 (-25) Apr 10 (-25) Jun 09 (-25) Apr 10 (-25) Apr 10 (-25) Mar 10 (-50) Nov 09 (-25) Sep 09 (-25) Mar 10 (+25)

Mar 11 (+25) Beyond Q2-11 Mar 11 (+25) Jul 11 (-25) Aug 10 (-25) Jul 11 (+50) Q2-11 (+50) Apr 11 (+25) Oct 10 (+25)

0.75 5.25 3.50 6.25 7.50 6.50 7.00 8.25 1.50

0.75 5.25 3.50 6.25 7.50 6.50 7.00 8.25 2.00

1.00 5.25 3.75 6.25 7.50 6.50 7.00 8.25 2.25

1.50 5.25 4.00 6.25 7.50 6.50 8.00 8.50 2.50

10.75 1.50 3.00 4.50 2.00

Tightening: 28 Apr 10 Tightening: 15 Jun 10 Easing: 19 Dec 08 Easing: 16 Jan 09 Tightening: 6 May 10

8.75 0.50 10.0 8.25 1.25

Jul 10 (+50) Jul 10 (+50) Apr 10 (-50) Jul 09 (-25) Jul 10 (+25)

Sep 10 (+50) Aug 10 (+50) Jan 11 (+25) Jun 11 (+25) Aug 10 (+25)

11.25 2.50 3.00 4.50 2.50

11.75 3.50 3.00 4.50 3.00

11.75 4.25 3.75 4.50 3.50

11.75 5.00 4.50 4.75 3.75

Colombia Repo Rate Mexico: Overnight Rate Peru: Reference rate

Note: Changes denoted in bold. Source: Barclays Capital

22 July 2010


Barclays Capital | The Emerging Markets Weekly

Piero Ghezzi Head of Global Economics, Emerging Markets and FX Research +44 (0)20 3134 2190 piero.ghezzi@barcap.com

EM Global
Michael Gavin Head of Emerging Markets Strategy

22 July 2010


Analyst Certification(s) We, Piero Ghezzi, Michael Gavin, Guillermo Mondino, Peter Redward, Matthew Vogel, Jose Wynne, Rahul Bajoria, Prakriti Sofat, Daniel Hewitt, Koon Chow, Christian Keller, Andreas Kolbe, Matthew Huang, Teresa Lam, George Christou, Eldar Vakhitov, Jeffrey Schultz, Roberto Melzi and Jimena Zuniga, hereby certify (1) that the views expressed in this

This publication has been prepared by Barclays Capital, the investment banking division of Barclays Bank PLC, and/or one or more of its affiliates as provided below. This publication is provided to you for information purposes only. Prices shown in this publication are indicative and Barclays Capital is not offering to buy or sell or soliciting offers to buy or sell any financial instrument. Other than disclosures relating to Barclays Capital, the information contained in this publication has been obtained from sources that Barclays Capital believes to be reliable, but Barclays Capital does not represent or warrant that it is accurate or complete. The views in this publication are those of Barclays Capital and are subject to change, and Barclays Capital has no obligation to update its opinions or the information in this publication. 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The information in this publication is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. This communication is being made available in the UK and Europe to persons who are investment professionals as that term is defined in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion Order) 2005. It is directed at, and therefore should only be relied upon by, persons who have professional experience in matters relating to investments. The investments to which it relates are available only to such persons and will be entered into only with such persons. Barclays Capital is authorized and regulated by the Financial Services Authority ('FSA') and member of the London Stock Exchange. 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