JPM Midyear Emerging Mar 2018-06-08 2686356

Completed 08 Jun 2018 01:29 AM EDT
Disseminated 08 Jun 2018 01:29 AM EDT

Global Emerging Markets
Research
08 June 2018
Midyear Emerging Markets

Outlook and Strategy
Short-term volatility may pass, but cyclical challenges
will intensify in 2H18
Key topics
 Two competing cycles continue to drive the outlook for EM markets: global
synchronized upturns and tightening US monetary policy. As 2H conditions
have come early with markets focused on vulnerabilities given disappointing
non-US growth and still rising US rates, EM fixed income assets were left Contents
among the worst performing YTD. EM top trade recommendations..................... 3
 We are neutral across EM local markets and credits heading into 2H. Our Market Outlook for 2H18 ................................ 4
two-year strategic stance of looking to buy dips is shifting more neutrally as Special Focus: Assessing EM
Vulnerabilities............................................... 13
we shift toward a less structurally bullish part of the cycle for EM.
EM Macro Outlook........................................ 17
Special Focus: Assessing EM vulnerabilities EM Technicals .............................................. 21
 We take a deeper look at EM vulnerabilities with a focus on persistently high EM Local Markets Strategy .......................... 23
CAD countries. For the most part, debt and external vulnerabilities remain EM Hard Currency Strategy.......................... 27
contained, but markets will likely put the spotlight on countries with high EM Equity Strategy....................................... 31
near-term financing needs. Importantly, most CAD countries are not Appendix ..................................................... 33
overheated, unlike in 2012-13 in the run-up to the taper tantrum.
Macro developments Spreads and yields
Asset  1m YTD Level
 Forecasts still call for global growth to re-synchronize after the 1Q EM BIGD Spread +5 +53 336bp
disruption, but this is yet to be fully reflected in high-frequency data. EMBIG Return -0.07% -4.43%
Reflecting emerging uncertainties, we have downgraded EM growth (about GBI-EM Yield +25 +34 6.47%
GBI-EM US$ Return -2.90% -3.77%
0.2%-pts) to remain broadly stable in 2H18.
CEMBI Spread +16 +48 279bp
 A key risk to the growth outlook is that central banks, particularly in CAD, CEMBI Return -0.36% -2.77%
may be forced to tighten monetary policy to preserve financial stability. If ELMI+ -0.73% -1.43% 372
tightening is substantial, it could lower medium-term growth, narrow EM- CDX.EM 5y +14 +51 171bp
10y UST +3 +57 2.97%
DM growth differentials, and weigh down capital inflows in 2019.
S&P 500 3.73% 3.69% 2,772
Top trading themes Oil (WTI) -8.48% 7.13% 64.73
Note: As of 6 June 18 COB. Source: JPM, Bloomberg.

 We moved back MW EM FX having risk-managed down OW positions; stay
MW local bonds. In LatAm, cut OW ARS to move MW overall, holding
OW BRL and COP vs. UW MXN and PEN. In EMEA EM, closed OW PLN
leaving us OW CZK vs. UW RON; add outright longs in UAH, and stay
long ILS, KZT, and RSD. In EM Asia, closed OW IDR to move MW all
GBI-EM currencies, but hold outright longs in SGD and TWD. In LatAm
rates, closed OW Brazil, holding an OW via Colombia. In EMEA, take Emerging Markets Strategy
AC
profits on UW Romania and hold OW South Africa vs. UW Turkey and Luis Oganes
Czech Republic. In EM Asia, stay UW Thailand vs. smaller OW Indonesia. (1-212) 834-4326
In outright trades, hold bullish rates positions in India and China. luis.oganes@jpmorgan.com
J.P. Morgan Securities LLC
 Stay MW EM sovereigns and EM corporates, but expecting modest spread Jonny Goulden
tightening and positive returns by year-end. In LatAm, stay OW Ecuador and (44-20) 7134-4470
Colombia vs. UW Peru, hold 10s30s curve steepeners in Mexico, having jonathan.m.goulden@jpmorgan.com
taken profits on long Colombia versus Mexico in CDS. In Asia, stay UW in
the Philippines, Pakistan, and Indian EXIM Bank and hold long Thailand
versus Philippines in CDS. In EMEA EM, stay OW Egypt, Azerbaijan, Ivory
Coast, and off-index Qatar versus UW Romania and Turkey. In RV trades,
hold hedges with China CDS protection and negative bond-CDS basis trades,
buying bonds and CDS in Argentina and Indonesia.
See page 75 for analyst certification and important disclosures, including non-US analyst disclosures.
www.jpmorganmarkets.com
This document is being provided for the exclusive use of Rumi Mahmood at JPM PROSPECTS.
Luis Oganes AC
Emerging Markets Research
(1-212) 834-4326 Emerging Markets Outlook and Strategy
luis.oganes@jpmorgan.com 08 June 2018
J.P. Morgan Securities plc
Jonny Goulden AC
(44-20) 7134-4470
jonathan.m.goulden@jpmorgan.com
Contributing Authors
Global EM Research EM Asia Local Market Strategy EM Sovereign Credit Strategy
AC AC AC
Luis Oganes Vasan Shridharan Trang Nguyen
(1-212) 834-4326 (65) 6882-2803 (1-212) 834-2475
luis.oganes@jpmorgan.com vasan.shridharan@jpmorgan.com trang.m.nguyen@jpmorgan.com
J.P. Morgan Securities LLC JPMorgan Chase Bank, N.A., Singapore Branch J.P. Morgan Securities LLC
AC AC
Jonny Goulden Jonathan Cavenagh
(44-20) 7134-4470 (65) 6882-8424 EM Corporate Credit Strategy
AC
jonathan.m.goulden@jpmorgan.com jonathan.cavenagh@jpmorgan.com Yang-Myung Hong
J.P. Morgan Securities plc JPMorgan Chase Bank, N.A., Singapore Branch (1-212) 834-4274
AC AC
Michael Harrison Arthur Luk ym.hong@jpmorgan.com
(1-212) 834-7190 (65) 6882-1577 J.P. Morgan Securities LLC
AC
michael.p.harrison@jpmorgan.com arthur.luk@jpmorgan.com Alisa Meyers
J.P. Morgan Securities LLC J.P. Morgan Securities (Asia Pacific) Limited (1-212) 834-9151
AC
Amy Ho alisa.meyers@jpmorgan.com
(1-212) 622-9364 EMEA EM Local Market Strategy J.P. Morgan Securities LLC
AC AC
amy.ho@jpmorgan.com Saad Siddiqui Zubair Syed
J.P. Morgan Securities LLC (44-20) 7742-5067 (1-212) 834-5230
saad.siddiqui@jpmorgan.com zubair.k.syed@jpmorgan.com
Economics J.P. Morgan Securities plc J.P. Morgan Securities LLC
AC AC
Jahangir Aziz Anezka Christovova
(65) 6882-2461 (44-20) 7742-2630 Equity Research
AC
jahangir.x.aziz@jpmorgan.com anezka.christovova@jpmorgan.com Pedro Martins Junior
J.P. Morgan Securities Singapore Private
J.P. Morgan Securities plc (55-11) 4950-4121
Limited
AC AC
Nora Szentivanyi Milo Gunasinghe pedro.x.martins@jpmorgan.com
(44-20) 7134-7544 (44-20) 7134-8063 Banco J.P. Morgan S.A.
AC
nora.szentivanyi@jpmorgan.com milinda.gunasinghe@jpmorgan.com David Aserkoff
JPMorgan Chase Bank N.A, London Branch J.P. Morgan Securities plc (44-20) 7134-5887
AC
Sin Beng Ong david.aserkoff@jpmorgan.com
(65) 6882-1623 Latin America Local Market Strategy J.P. Morgan Securities plc
AC
sinbeng.ong@jpmorgan.com Carlos Carranza
JPMorgan Chase Bank, N.A., Singapore Branch (1-212) 834-7139
AC
Ben Ramsey carlos.j.carranza@jpmorgan.com
(1-212) 834-4308 J.P. Morgan Securities LLC
AC
benjamin.h.ramsey@jpmorgan.com Robert Habib
J.P. Morgan Securities LLC (1-212) 834-4876
AC
Nicolaie Alexandru-Chidesciuc robert.habib@jpmorgan.com
AC
nicolaie.alexandru@jpmorgan.com Lara Bes
JPMorgan Chase Bank N.A, London Branch (1-212) 834-3947
AC
Anthony Wong lara.bes@jpmorgan.com
anthony.wong@jpmorgan.com
Emerging Markets Outlook and Strategy
Luis Oganes AC
08 June 2018
(1-212) 834-4326
luis.oganes@jpmorgan.com
Jonny Goulden AC
(44-20) 7134-4470
EM top trade recommendations

EM Local Markets EM Hard Currency Markets
GBI-EM Model EMBIGD MP MW overall

MW FX overall MW Bonds overall
Portfolio
OW UW
Asia Azerbaijan EXIMBK India
- GBI-EM MP FX Rates
Colombia Pakistan
OW Indonesia
Cote D’Ivoire Peru
UW Thailand
- Trades FX Rates Ecuador Philippines
Short USD/SGD Long KRW 10y KTBi (6/10/2026) Egypt Romania
Short USD/TWD 1m NDF Pay 5y5y THB vs SGD IRS Qatar Turkey
Long S$NEER Basket EM Sovereign RV Long Risk Short Risk
(JPM weights) Long IGB 6.84 12/19/2022
Long CNY SDBC 3.88 04/19/20 LatAm Buy ARGENT 4.625 23 Buy Argentina 5y CDS
Receive HKD 1y1y IRS Buy MEX 3.75 28 Sell MEX 4.35 47
Short USD/HKD 3m fwd Asia Buy INDON 2.95 23 Buy 5y INDON CDS
Receive SGD 5y5y IRS
Buy 5y CHINA CDS
EMEA EM Sell Thailand 5y CDS Buy Philippines 5y CDS
- GBI-EM MP FX Rates EMEA EM Sell Lebanon 5y CDS Sell LEBAN 6% 23
OW CZK OW South Africa .
CEMBI MP MW overall
UW RON UW Turkey, Czech Republic
Asia Long Short
- Trades FX Rates
Short USD/UAH in 3m Receive 5y5y ZAR IRS, pay BCHINA 6.75% perp
NDF 5y5y US IRS POSABK 4.5% perp
06-Sep-18 USD/RUB 1x1 Pay 5y CZK IRS (levels HUAWEI 4.125% '26s
put spread (61.00/59.00), reference spot) HAOHUA 4.625% '23s
spot reference: 61.95 Long 5y Serbia nominal bonds HAOHUA 4.875% '25s
06-Dec-18 USD/ZAR call (4.5% Jan-2023) HAOHUA 5.125% '28s
(14.50), spot reference: Long R214 bonds funded in
12.72 Rand HAOHUA 3.9% perps
Short USD/ILS Receive 5y ILS IRS, pay 5y EUR DALWAN 4.875% '18s
Short USD/KZT in 3m IRS DALWAN 7.25% '24s
NDF INDYIJ 6.375% '23s
Long 12m EUR/RON INDYIJ 5.875% '24s
forwards
Short EUR/CZK EMEA EM Long Short
AABAR 0.5% '20s
Latin America INVCOR 5% '27s
- GBI-EM MP FX Rates FBNNL 8% '21s
OW BRL, COP OW Colombia EXIMUK 9.75% 25s
UW PEN, MXN DTEKUA 10.75% 24s
Latam Long Short
- Trades FX Rates
BINTPE T2 6.625% ‘29/24c
Buy 1x2 USD put / BRL MXN 5s20s steepeners
call spreads 3.33/3.25 BCOLO senior 5.95% ‘21s
Receive 5y1y TIIE FRA
maturing on 6/29/18 Cemex belly of the curve
Receive 5y TIIE vs. pay 5y IBR YPFDAR 8.75% ‘24s, 8.5% ‘25s
Long BRL/MXN
Switch into 5y Mbono from 5y
Source: J.P: Morgan
Udibono
Receive DI Jan21
Receive FRA DI Jul22/Jan23 vs.
pay Jan23/Jul23
Long UYU 2028 (inflation linked)
2s3s CLP flattener
Long Dec18 (273d) Lebac
1s3s IBR flattener
Long Bogato 2020
J.P. Morgan Securities LLC Emerging Markets Research
Luis Oganes AC Emerging Markets Outlook and Strategy
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
Exhibit 2: EM fixed income assets are now among the worst performing
Market Outlook for 2H18 YTD
Asset class returns to COB 6th June (%)
Staying neutral given near-term risks and a YTD 1m

Commodities 6.4%
less bullish part of the cycle -0.3%
3.7%
S&P 500 3.7%
Two competing cycles—a global synchronized upturn and MSCI World (DM) Lcl 1.9%
2.1%
tightening US monetary policy—continue to drive the JPM USD Index 1.0%
1.0%
outlook for EM markets into 2H18. Our outlook for 2018 0.5%
EM Local Markets (Local Currency) -1.0%
focused on EM fixed income markets being driven by two 0.1%
US HY
competing cycles (Exhibit 1). First, a forecast synchronized 0.3%
EM Equities -0.7%
global growth cycle with EM growth outperforming DM 0.9%
-0.8%
growth, which would be a major support for EM markets and Euro HY -0.7%
inflows. Second, a tightening US monetary policy cycle where Euro HG -1.0%
-0.6%
the J.P. Morgan forecast is for quarterly hikes by the FOMC European Equities (Euro Stoxx) -2.9%
-1.2%
through end 2019, with balance sheet reduction from G4 EM FX -1.4%
-0.7%
central banks becoming more pronounced in 2H18. The US Treasuries -2.0%
0.1%
implications for EM asset allocation for us were that the first Japanese Equities (Topix) -2.2%
0.2%
positive cycle would dominate in 1H as growth accelerated -2.8%
EM Corporates (Hard Currency) -0.4%
and EM-DM growth differentials widened. The second cycle -3.4%
US HG -0.1%
of tightening policy would start disrupting more as we moved
EM Local Markets (USD) -3.8%
into 2H with the growth impulse lessening while financial -2.9%
-4.4%
conditions continued to tighten. 1Q mostly saw this play out EM Sovereigns (Hard Currency) -0.1%
for EM local markets, with strong outperformance even as US EM Frontier Markets -4.5% 0.2%
rates moved higher. But arguably 2H conditions have come -7% -5% -3% -1% 1% 3% 5% 7% 9%
early, with EM trading weaker over the last two months as Source: J.P. Morgan
markets focused on vulnerabilities given disappointing non-
US growth and still rising US rates. This has left EM fixed Our two-year strategic stance of looking to buy EM dips is
income assets as among the worst performing YTD (Exhibit shifting more neutrally as the cycle moves on. Since
2). Also clouding the outlook are risks from US trade tensions 1H2016, we have had a stance of buying EM fixed income
and idiosyncratic EM political risks, as well as evolving dips as the EM growth recovery gave a persistent tailwind,
Italian politics and lack of a comprehensive backstop to following three years of downgrades and asset class
prevent spillovers within the Euro Area. Any resulting USD underperformance. This would also encourage inflows as
strength/EUR weakness remains a risk as it could in turn exert global investors returned to the asset class. These factors have
further pressures on EM FX and capital flows. been driving EM performance since 2016, and their ability to
drive markets further is looking more limited. EM growth
Exhibit 1: Two strong cycles continue to drive EM asset prices – EM returned to above-potential in 1Q18, with our economists
growth and rising US rates forecasting that we have seen the local peak in both EM GDP
EM real GDP growth (% oya), Fed Funds (%). Grey bars indicate Fed hiking cycles. growth and the EM-DM growth differential. EM bond and
Dark grey indicates JPM forecasts. equity portfolio inflows into EM reached $281bn in the two
EM real GDP growth (% oya) years to January 2018. Flows particularly returned to EM
Fed Funds (%)
10 local markets where foreign investors now own $766bn of
8
local bonds, which is 26% of the total and only 2% pts from
the highs in 2013. Much hinges on the outlook for US rates,
6 but less global policy accommodation and decreasing G4
central bank balance sheets lessen the push factors for
4
allocations into EM (Exhibit 3). This inevitably brings focus
2 back to how vulnerable EM countries are in the end of an
environment of abundant global liquidity. Given that the US
0 business cycle continues to mature, we think these concerns
-2 may not easily go away, and strategically that means we
90 92 95 97 00 02 05 07 10 12 15 17 should be shifting away from always looking to buy dips in
EM fixed income to a more neutral and tactical stance.
Source: J.P. Morgan
Luis Oganes AC
08 June 2018
(1-212) 834-4326
Jonny Goulden AC
(44-20) 7134-4470
Exhibit 3: DM central bank asset purchases peaked in 2H17, which Exhibit 4: Large drawdowns are relatively frequent, particularly for EM
could challenge the EM flows outlook as we head into 2019 local markets, even in positive return years
EM Bond and Equity Fund Inflows, $bn 12m cumulative (lhs, bottom x-axis) Index returns Max drawdown (%) Full year return (%)
G-4 Balance Sheet and forecast, $bn 12m chg (rhs, top x-axis) GBI-EM EMBIGD CEMBI GBI-EM EMBIGD CEMBI
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
2003 -4.3% -7.0% -5.6% 16.9% 22.2% 15.7%
250 3000 2004 -7.1% -10.4% -6.7% 23.0% 11.6% 10.3%
200 2500 2005 -6.1% -4.6% -3.1% 6.3% 10.2% 6.3%
150 2006 -10.5% -5.2% -2.4% 15.2% 9.9% 6.5%
2000
100 2007 -7.6% -4.5% -1.8% 18.1% 6.2% 3.9%
1500
50 2008 -27.7% -29.5% -28.8% -5.2% -12.0% -16.8%
1000
0 2009 -14.0% -2.7% -3.0% 22.0% 29.8% 37.5%
500 2010 -7.7% -5.5% -3.3% 15.7% 12.2% 12.5%
-50
-100 0 2011 -11.6% -5.7% -9.1% -1.8% 7.3% 3.0%
-150 -500 2012 -8.6% -3.1% -2.1% 16.8% 17.4% 15.2%
-200 -1000 2013 -15.7% -11.4% -7.9% -9.0% -5.3% -1.3%
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
2014 -14.4% -5.9% -5.8% -5.7% 7.4% 3.6%

2015 -17.7% -4.6% -5.1% -14.9% 1.2% 1.2%
Source: J.P. Morgan
2016 -9.8% -6.5% -2.7% 9.9% 10.2% 10.8%
We go into 2H neutral across EM local markets and EM 2017 -5.5% -1.7% -1.0% 15.2% 10.3% 8.0%
credit. In local markets, we took profit on our OW in FX in 2018 -8.9% -5.6% -3.1% -4.1% -4.2% -2.6%
March, then tried buying the dip during the sell-off only to Average -11.1% -7.1% -5.7% 7.4% 8.4% 7.1%
stop-out in May (see EM Strategy Update, 23 May). In Source: J.P. Morgan
hindsight, sitting on our hands at MW would have been better,
and as we go into 2H, we stay neutral in both EM FX and Macro assumptions: EM growth pace to
local rates. While policymakers have already been hiking rates
recently in EM, this is preempting inflation from FX ease in 2H18, but still at potential
weakness and global rates are likely to resume the upward Forecasts still call for global growth to resynchronize after
trend in 2H as DM inflation firms further. Entry levels are the 1Q disruption, but this is yet to be fully reflected in
better for both local bonds and FX, with GBI-EM losing 9% high-frequency Euro area data. One of the key features of
in USD terms from the highs of the year and rallies in 2H look the global economy in 2017 was the synchronized growth
possible, but these will be tactical (Exhibit 4). We also stay across DM and EM economies, which had not happened since
with a MW stance across EM sovereigns and corporates, the financial crisis. While this trend was largely expected to
having also moved neutral in May (see Moving marketweight continue this year, the Euro area and Japan registered
EM sovereign and corporate credit, 25 May). While EM important deceleration in sequential growth terms during
sovereign spreads have widened 80bp from January’s lows, 1Q18 (+1.6% and -0.6%q/q, saar, respectively) that left the
they are not yet cheap on our fair value models given the rise US as the only major DM economy still displaying steady
in US rates and volatility. Should oil prices also fall over 15% above-potential growth (+2.2%). The deceleration in the Euro
toward J.P. Morgan’s year-end forecast, this will likely put area and Japan in 1Q is expected to be reversed 2Q onward
some pressure on EM credit that it was spared in 1H18. with growth returning to above potential. However, while
there are tentative signs of recovery in some higher frequency
See the 12th edition of the EM Local Markets Guide 2018
data, other indicators still suggest continued weakness, and
for more details on recent developments in the asset class,
our economists have recently pushed back their expected
including a discussion of local benchmarks, instruments,
timing for the start of interest-rate normalization by the ECB
and the evolution of the domestic investor base.
and BoJ to mid 2019, which could keep yield differentials
favoring the USD amid continued Fed tightening. Moreover,
recent developments in Italy may hit Euro area growth further,
which could delay the expected rebound in the EUR (our FX
strategists have taken down their end-2018 EUR/USD target
to 1.20 from 1.25).
In light of the emerging uncertainties, we have

downgraded EM growth (about 0.2%-pts), and we now
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
expect it to remain broadly stable around potential in

2H18. Growth forecasts have been taken down most in How vulnerable are Emerging Markets?
LatAm, largely reflecting the idiosyncratic headwinds in
Brazil. Growth in EMEA too has been cut, reflecting the Persistently high CAD countries are already in focus, but
slowdown in Euro area prospects. In contrast, EM Asia is high-financing-need countries will also come into the
expected to be more resilient given its closer ties to the US spotlight as the cycle progresses. Following the taper
profit and capex cycles, which are expected to remain strong. tantrum, many EM countries have looked to reduce external
That said, there is still significant residual uncertainty around vulnerabilities. Our EM macro vulnerability assessment
EM capital flows. While the narrowing of EM-DM growth suggests that for the most part, debt and external
differentials are not large, much will depend on future USD vulnerabilities remain contained. However, markets have and
strength. If the latter sustains, which we do not expect in our will still focus on countries with persistent current account
baseline scenario, further pressures on capital outflows and deficits (CADs) in a tightening US policy environment. In
weaker FX can easily dampen business sentiment and with Exhibit 6, we can see that CADs have improved over the past
that domestic investment. On the other hand, a stabilization in five years, and the latest four-quarter rolling CADs are now
global financial conditions can provide a much-needed fillip within 3% of GDP. Argentina stands out as having one of the
to sentiment and investment. widest deficits together with the biggest deterioration over the
past five years. Turkey has returned to the same level of CAD
Exhibit 5: EM growth pace to ease in 2H18, but still at potential as during the taper tantrum. In terms of reliance on portfolio
Real GDP, % oya flows, which tend to be more fickle and reactive to global
2018 (%q/q, saar) financial conditions, South Africa stands out as heavily
1Q 2Q 3Q 4Q 2018 2019 Potential reliant. Argentina and Indonesia also fund much of their CAD
Developed markets with portfolio flows. In the Macro section, we narrow our
1.6 2.5 2.3 2.3 2.3 2.1 1.4
analysis down to the 10 largest CAD countries (CAD10) and
Emerging markets 5.1 4.5 4.4 4.6 4.7 4.8 4.6 see how their vulnerabilities have evolved since the taper
EM ex. CN 4.0 3.1 3.2 3.5 3.5 3.7 3.5 tantrum. Our work on debt and fiscal indicators showed that
EM Asia 6.4 5.9 5.8 5.7 6.0 5.9 5.8 although EM government debt levels have continued to rise, a
EM Asia ex. CN 5.7 4.8 4.9 4.7 5.0 5.0 4.8
number of EM economies have managed to reduce
vulnerability to external shocks by shifting debt to local
EMEA EM 2.6 2.7 2.5 2.8 2.8 2.9 3.0 currency, while FX debt is increasingly long dated (see EM
Latin America 3.2 0.8 1.6 2.5 1.9 2.8 2.1 Vulnerabilities section later). While rising issuance has seen
EM-DM differential 3.5 1.9 2.1 2.3 2.4 2.7 3.2 the EM sovereign debt stock surpassing the $1 trillion mark,
EM ex. CN-DM differential 2.4 0.5 0.9 1.2 1.2 1.6 2.1
EM sovereign debt repayments are unlikely to be a 2018
Source: J.P. Morgan concern, but will likely weigh more on markets as the cycle
progresses into 2019.
A key risk to the EM growth outlook is that central banks,
particularly in CAD economies, might be forced to tighten Exhibit 6: With the exception of Argentina, current accounts have
monetary policy to preserve financial stability. In the face improved since the TT, although some still depend on portfolio flows
% of GDP; size of bubble is portfolio inflows as % of CAD
of sustained USD strength, exchange rate adjustment in CAD
economies could overshoot. While central banks today have
greatly overcome their fear of floating, an excessive
adjustment (unwarranted by fundamentals) will prompt them
to defend their currency. Except for a few economies
(Argentina and Turkey), we do not expect interest rate to be
the first line of defense. Instead, FX interventions will play
the primary role in smoothing the adjustment. However,
interventions alone might not be sufficient and interest rates
might need to be hiked as has already occurred in Indonesia
and India (along with Argentina and Turkey). To date we have
made only limited and select upward revisions to EM policy
rate forecasts of 30bp since the start of the year for CAD
countries). But if the EM monetary tightening ends up being
much more substantial, it would lower medium-term growth,
narrow EM-DM growth differentials, and weigh down capital EM sovereign refinancing risks are expected to rise due to
inflows. higher maturities in the coming years, but frontier market
Luis Oganes AC
08 June 2018
(1-212) 834-4326
Jonny Goulden AC
(44-20) 7134-4470
repayments should remain low until 2022. In the near term, are in HY, but we think a fair bit of the heavy lifting is already
sovereign supply technicals look supportive with EM done with our Asia team estimating that China HY property
sovereign net issuance negative for the remainder of the year developers have completed close to three-quarters of their
given the record pace of EM sovereign gross issuance so far refinancing needs this year. Looking ahead, EM corporate
($112.2bn). From 2019 onward, however, there will be a maturities are expected to remain elevated at $234bn on
sizable uptick in EM sovereign maturities coming due average over the next three years with a peak of $257bn in
(Exhibit 7) given the large increase in hard currency issuance 2020 attributable to the elevated short-dated supply from
starting from 2009, a year after the start of the global financial China ($70bn) in 2017. While the upcoming maturities seem
crisis. Maturities this year are only $39bn but rise to $51bn in higher in absolute terms, they average about 10-12% of the
2019 and $79bn by 2022. However, for the more vulnerable current debt stock, which is just slightly higher compared to
sovereigns, upcoming frontier markets (NEXGEM) bond the 8-9% range for 2017-18. We believe the refinancing risk
maturities are limited, with refinancing needs likely to pick up to be manageable overall, especially for high-quality credits.
in 2022. Exhibit 28 (see later) shows that NEXGEM Indeed, about 70% of the maturities until 2020 are IG issuers
maturities for the rest of 2018 are only a modest $2.7bn with generally better access to markets and flexible funding
($0.8bn Sri Lanka, $0.5bn Nigeria, and $1.4bn Egypt), options. Apart from the benign maturity profile, corporate
followed by $5.5bn in 2019 and $6.2bn in 2020. Bond issuers continue to be focused on liability management in the
maturities will likely fall in 2020 to $4.2bn, before a marked near term, especially Latin America. The YTD amount of
pickup to $12.9bn in 2022, with over 10 NEXGEM countries unscheduled cash flows has reached $47bn, posing an upside
facing a bond maturity that year. Within this universe, of note risk to our $66bn assumption for the full year, which would
is Sri Lanka’s $5.8bn of maturities from now until the end of further reduce net financing.
2022 (and another $1.25bn in 2023), meaning there is a
Exhibit 8: Cash flows to remain elevated for EM Corporates
maturity every year until 2023. Other large NEXGEM US$bn
rollover needs until end-2022 are Egypt ($4.9bn), Pakistan
($4bn), and Ecuador ($3.9bn). For the larger EM countries
from now until end-2020, we estimate bond coupon and
maturity cash flows of $18.6bn for Turkey, $12.8bn for
Argentina, $11bn for Lebanon, $7.5bn for Ukraine, $5.2bn for
Ecuador, and $5.1bn for and Brazil.
Exhibit 7: From 2019 onwards there will be a sizable uptick in the
amount of EM sovereign maturities coming due
US$bn
Source: JP Morgan, Bloomberg, Bondradar.
Is it too early to worry about end-of-cycle

dynamics?
Predicting the end of business cycles is difficult, but given
the length of this expansion, EM asset risk-reward needs
assessing as the cycle matures. The current US business
cycle at 108 months is long given the seven cycles since the
1960s have on average lasted six years and the three low
Source: J.P. Morgan, Bloomberg. inflation cycles have last eight years; only the 119-month
EM corporate refinancing risk is not a major concern for 1990s expansion lasted longer. A US cycle tracker we have
2018, but maturities will also increase in the coming years used combining soft-and hard-, business- and household-
(Demystifying the “Wall of Maturities” from 2017). Out of the related data shows that in the past three cycles it has on
$175bn of maturities we expected this year, $86bn has already average taken seven quarters after the tracker has peaked for
materialized, leaving about $89bn for the rest of the year. In the onset of the NBER recession (Exhibit 9). From an asset
addition, Asia accounts for the majority of remaining allocation perspective, Exhibit 10 shows that in the phase
maturities at $53bn, mostly from China ($34bn) and Korea between the peak of the tracker and the start of the recession,
($11bn). The focus is on China where $10bn of the maturities US equities outperformed UST, which in turn outperformed
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
HY credit. For EM, EM equities outperformed SPX by a early warning indicator as they began to show tightening
considerable margin in the 1980s and 2000s expansion but not liquidity conditions from as early as April 2007. Ahead of the
in the 1990s when EM growth considerably underperformed Eurozone sovereign debt crisis, EM xccy basis swap spreads
US growth. This remains inconclusive for EM fixed income were widening from mid 2010 onward. At present EM xccy
assets as we get closer to the end of the US business cycle and basis swap spreads are not showing signs of funding stress,
may have to look for other early warning signals. having been range-bound over the past two years. Due to
improved current account balances in key EM countries, this
Exhibit 9: Our simple US cycle tracker has been flattening and has indicator may lose some of its efficacy, but it is still one we
historically peaked 7 quarters before a recession will continue to watch in coming quarters.
US cycle tracker
s.e. Exhibit 11: Cross-currency basis does not yet point to funding stress
1.8 bp, xccy basis swap spread; down move signifies tightening USD liquidity
Grey bars conditions
1.2 are NBER
10
0.6
-10
0.0
-30
-0.6 -50
-1.2 -70
EM xccy
-1.8 -90 EUR xccy
Mar-81 Mar-91 Mar-01 Mar-11
-110
Source: J.P. Morgan
-130
Exhibit 10: Asset class performance toward the end of a US business
-150
cycle
Apr 07
Oct 07
Apr 08
Oct 08
Apr 09
Oct 09
Apr 10
Oct 10
Apr 11
Oct 11
Apr 12
Oct 12
Apr 13
Oct 13
Apr 14
Oct 14
Apr 15
Oct 15
Apr 16
Oct 16
Apr 17
Oct 17
Apr 18
US Assets relative EM Assets relative
performance performance
US
High MSCI EMBI GBIE EM - Source: J.P. Morgan
SPX - Yield - US IG EM - G- M- US
UST UST - UST SPX UST UST GDP
Dec Has EM cheapened enough to buy again?
1988 - (1989 to
Jun
7.6% -8.7% 0.5% 26.5% 1.0%
1990) For EM FX, our BEER fair value estimates suggest that
1990 EM FX has gotten even cheaper during the recent sell-off.
Dec
1997 - (1998 to This has mainly been driven by LATAM FX diverging further
4.0% -7.4% -1.7% -17.6% 0.6% -0.6%
Dec 2000) from fair value, although EMEA EM and EM Asia FX
2000
Jun
continue to screen cheap, as has been the case since late 2016
2006 -
1.1% -2.2% -2.0% 30.3% 2.2%
14.0
6.0%
(2006 to (Exhibit 12). Of course, at this stage of the cycle, an important
Dec % 2007) question to ask is whether BEER models are the most
2007
(2018 appropriate for assessing value in EM FX. Relative exposure
2018
YTD
4.5% 1.7% -1.6% -3.8% -2.5% -1.7% 2.0% IMF to a potentially more adverse external funding environment
forecast)
could become a bigger driver of EM FX compared with
Source: J.P. Morgan
productivity differentials, terms of trade, interest rate
differentials, etc., which is broadly what makes up the inputs
One traditional early warning indicator to focus on as the for the BEER models (see Assessing EM FX Fair Value for
business cycle evolves is cross-currency basis swap more details). A Fundamental Equilibrium Exchange Rate
spreads. While not perfect, these should indicate any (FEER) model framework looks to determine the exchange
tightening of US dollar liquidity conditions. Exhibit 11 shows rate that is consistent with macroeconomic balance, which is
an average of xccy basis swap spreads for a range of EM generally interpreted as maintaining the current account
currencies alongside the EUR/USD basis swap spread. Both balance (CAB) in a “normal” position. To assess what is the
these measures spiked lower during the 2008 crisis and again “normal” CAB for EM economies, we took the average of the
during the Eurozone sovereign debt crisis as global liquidity IMF EBA Norm CAB target and Peterson Institute for
conditions tightened sharply. Going into the 2008 crisis, for International Economics (PIIE) target CAB (see these links—
example, EM cross currency basis swaps worked well as an IMF and PIIE—for more details). When coupled with CAB
Luis Oganes AC
08 June 2018
(1-212) 834-4326
Jonny Goulden AC
(44-20) 7134-4470
sensitivities to exchange rate shifts, we can estimate the real yields is currently at 3.2%, which is the highest level seen
exchange rate adjustments needed to bring CABs back to since September 2011 (Exhibit 14). That said, we note that
target, along with the adjustment needed to bring the basic part of the move higher in EM nominal yields was a re-pricing
balance back to target (Exhibit 13). Within EM Asia FX, the of a fundamental deterioration, with central banks generally
countries with large positive CABs (TWD, THB, MYR, and more hawkish than before, and weaker EM FX potentially
KRW) need to see currency appreciation, while for the hurting inflation expectations (FX pass-through) and portfolio
countries with CAB deficits the degree of depreciation needed inflows.
is fairly modest (if it is needed at all). For LatAm, results are
divergent, with BRL and CLP needing to appreciate, while the Exhibit 14: Spread between Real yields in EM and DM
picture is more negative for ARS. In EMEA EM, TRY is a GBI-EM yields deflated by actual 12M CPI. DM yield calculated as the weighted
average of 10Y UST, 10Y EUR and 10Y JPY (60%, 30%, and 10%).
standout to the downside, and to a lesser extent ZAR, while
4.0
ILS looks cheap on this metric. EM real yields minus DM real yields
3.5
Exhibit 12: EM FX continues to screen cheap according to BEER 3.2
models, particularly for LATAM 3.0
% deviation from fair value (unweighted average by region)
2.5
8
6 2.0
4
1.5
2
0 1.0
-2
-4 0.5
-6
0.0
-8 Mar10 Aug11 Dec12 May14 Sep15 Feb17 Jun18 Oct19
-10
Source: Bloomberg and J.P. Morgan
Mar-07 Mar-09 Mar-11 Mar-13 Mar-15 Mar-17
LATAM EMEA EM EM Asia These feedback loops from markets to fundamentals make
us more cautious on buying local markets just on
Source: J.P. Morgan valuations. First, central bank policy action in 1H18 has been
generally more hawkish than we had forecast. This can be
Exhibit 13: Exchange rate adjustments needed to bring back CABs to seen in the left section of Exhibit 15, which compares the
long run targets
% deviation
policy forecasts for 1H18 back in December 2017 vs. the
actual hikes or cuts delivered. Countries such as Argentina,
40 Exchange rate needs to appreciate to bring Turkey, Russia, and Indonesia saw significantly more hikes
30
Current account to target level than those forecast in December as markets (EM FX) fed into
inflation expectations and financial stability concerns. Second,
20 the much weaker EM FX and downward GDP growth
revisions suggest that investors will keep a cautious stance in
10
the 2H. This can be seen by EM markets broadly re-pricing a
0 more hawkish stance in recent weeks for both low and high
Exchange rate needs to depreciate to bring yielders (middle section of Exhibit 15). These feedback loops
-10 Current account to target level were not as evident in prior periods of EM weakness since
-20 2016 and are a reason we are not stepping back in to add risk
even though valuations (e.g., real yields) have cheapened.
-30 Finally, in the right section on Exhibit 15, the projected policy
KRW
TWD
MYR
ZAR
MXN
BRL
THB
CLP
ILS
CZK
CNY
COP
RUB
ARS
TRY
PLN
HUF
PEN
INR
IDR
PHP
path for 2H appears slightly more dovish now than in

dREER for C/A adj dREER for Basic balance adjustment
December, yet we see this as scaling back some of the
unexpected hikes that were delivered in 1H, and a response to
Source: J.P. Morgan downward GDP revisions, particularly in Europe (see third
Following the sell-off in local bonds the real yields profile section of Exhibit 15 and G. Fuzesi for details on Europe GDP
for EM markets has improved. The spread between EM real growth).
yields (GBI sub-indices deflated by 12M actual CPI) and DM
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
Exhibit 15: More hikes delivered in 1H than anticipated and less easing Exhibit 16: GBI-EM overshot to the downside, but expected returns for
for 2H18 (all in basis points) rest of the year are low
Policy changes for %, total return model based on quarterly returns of GBI-EM GD on % change in
next 6m - how many
EUR/USD, EM ex-China vs DM growth differential and commodities prices
Policy changes for 1H18 vs. hikes or cuts markets Changes in 2H18
Delivered are pricing-in currently forecasts Model fitted quarterly return
for next 6-months vs. 6.0
pricing one month ago Actual quarterly return on GBI-EM GD in USD (qtd for 2Q18)
2H18 2H18
Last- fcst. fcst.
1H Fcst. Delivere Fcst- 1m Fcst.
Last 1m in In
in Dec17 d Delivered ago Chg.
ago Dec1 Jun1
7 8 1.0
ARS -400 1,125 1,525 n.a. n.a. n.a. -600 -700 -100
BRL -25 -50 -25 80 -10 90 0 0 0 1Q18 2Q18 3Q18 4Q18
MXN 25 25 0 39 5 34 -50 0 50
CLP -25 0 25 21 9 12 50 25 -25 -4.0
COP -50 -50 0 1 -10 11 75 25 -50
PEN -25 -50 -25 n.a. n.a. n.a. 50 0 -50
HUF 0 0 0 13.5 - - 0 0 0
ILS 0 0 0 5.5 6 0 40 0 -40
PLN 0 0 0 3.5 3 0 25 0 -25 -9.0
RON 100 75 -25 n.a. n.a. n.a. 50 25 -25
RUB -75 -50 25 n.a. n.a. n.a. -25 -50 -25 Source: J.P. Morgan
ZAR 0 -25 -25 2.2 -6 8 0 0 0
TRY 100 500 400 n.a. n.a. n.a. 0 0 0 EM sovereign credit has significantly underperformed
CNY 0 0 0 n.a. n.a. n.a. 0 0 0
DM credit. While our long-term EMBIGD spread fair value
KRW 0 0 0 n.a. n.a. n.a. 25 25 0
IDR 0 50 50 n.a. n.a. n.a. 0 25 25
model still points to some richness in spreads (less than 1
INR 0 0 0 60 35 25 0 25 25 sigma), EMBIGD spreads have cheapened versus DM credit.
MYR 25 25 0 9 7 2 0 0 0 The 54bp of widening in EMBIGD spreads YTD means
PHP 25 25 0 n.a. n.a. n.a. 0 25 25 current levels are 104bp wider than post-financial crisis tights,
THB 0 0 0 7 11 -4 25 25 0
or at the 32nd percentile versus the post-crisis range (Exhibit
Source: J.P. Morgan
17). Within the EMBIGD, the HY component has cheapened
more and now stands at the 42nd percentile by the same
EM local markets look to have weakened well beyond our measure. In comparison, the CEMBI has widened 49bp and is
fair value estimates. Our simple total return model for the at the 13th percentile, while US high grade and US HY credit
GBI-EM GD index, which regresses total returns on the index are at the 10th and third percentiles, respectively. As such,
on the EM vs. DM growth differential, EUR/USD (to capture while our view on EM sovereign credit has turned neutral,
the broad USD environment), and commodities prices EMBIGD has already been underperforming its peers.
(proxying for terms of trade effects), suggests a significant
overshooting of GBI-EM returns to the downside in 2Q. The Exhibit 17: EMBIGD widening this year stands out versus other credit
fitted value of -0.50% for the quarter compares with the -7.9% markets
realized quarter to date. Without a strong bounce-back from Current spreads compared to end-2017 and versus the post-financial crisis range
over-sold conditions, however, our model suggests that Post-GFC Range Current
expected returns for 3Q and 4Q are likely to be only 2.5% in 6-Jun 29-Dec 29-Dec-17 %tile v s.
cumulative terms for 2H18 on this model as J.P. Morgan has 2018 2017 Tight 6-Jun-18 Wide Range
recently been downgrading its EUR/USD and EM vs. DM EMBIGD HY 504 419 315 766 42%
growth differential forecasts. EMBIGD 336 284 234 558 32%
EMBIGD ex -Venezuela 289 233 194 514 30%
Euro IG 75 54 28 211 26%
EMBIGD IG 188 153 132 372 24%
CEMBI 279 231 208 774 13%
CEMBI IG 182 158 137 552 11%
JULI ex -EM 139 116 106 437 10%
Euro HY 411 346 290 1,556 10%
CEMBI HY 426 356 319 1,751 7%
US HY 387 404 368 1,262 2%
Source: J.P. Morgan
10
Luis Oganes AC
08 June 2018
(1-212) 834-4326
Jonny Goulden AC
(44-20) 7134-4470
EM corporate valuations have also adjusted, with the Exhibit 18: Fundamentals suggest EM portfolio debt flows will slow but
+49bp YTD spread widening unwinding most of the not turn negative
$bn. Model regresses EM portfolio debt flows on EM GDP, log(EURUSD) and
tightening of 2017. At the same time, the relative spread to
log(Brent). R-sq of 55%. Dotted line indicates forecasted values.
US HG and HY has widened as well, though it is not as
100 EM portfolio debt flows (actual)
compelling on a longer term historical basis. The average EM portfolio debt flows (model)
spread over US HG is close to 60bp, correcting from a low of 80
below 40bp and moving close to the historical average. 60
Against US HY, CEMBI Broad HY has moved to a positive
spread pickup of 32bp vs. US HY after trading as much as 40
70bp tighter in late 2017. In addition, the BB and single-B 20
sub-indices offer a spread of about 100bp over the respective
US HY segments. While these levels are still not as attractive 0
compared to three to four years ago, we think there are -20
reasons for the overall tighter relationship given the maturing
Mar-09
Oct-09
May-10
Dec-10
Jul-11
Feb-12
Sep-12
Apr-13
Nov-13
Jun-14
Jan-15
Aug-15
Mar-16
Oct-16
May-17
Dec-17
Jul-18
Feb-19
of the asset class, higher weight of Asia, and active
involvement by local investors, which reduce the overall Source: J.P. Morgan
volatility. We continue to expect a relatively modest default
rate in the mid-2% area for EM HY corporates as we find the The bigger question is how longer term allocations to EM
overall credit cycle to be in an improving stage, but we note will evolve against this EM outlook. AUM of global pension
two areas of upside risk. One is China where onshore defaults fund assets has grown from $26.6tn to $41.4tn between 2007
have been on the rise due to tighter funding conditions, and and 2017,1 and institutional investors are generally not over-
our adjusted Asia default forecast has been raised to 2.8% allocated to EM debt (Mercer’s European Asset Allocation
from 2.2% to reflect these risks. Another segment is Russia, if Report for instance shows that only 21% of plans are allocated
more corporates become negatively affected by the to EM debt, 7%-pts off the peak in 2015). However, given the
geopolitical tensions. size of EM markets, foreign ownership of EM local bonds is
only 2.2%-pts lower that the taper tantrum peak of 27.6%,
Are EM flows a risk or a support? with large variation at the country level, meaning foreign
Short-term EM debt portfolio outflows are not expected to investors hold $766bn of EM local bonds. Flows into EM
continue through 2H. EM portfolio debt inflows have slowed funds have already started to come off their highs (Exhibit
since February on a 12-month rolling basis, and IIF estimates 19), and we are less convinced that global asset allocators will
point to small outflows in April and May. This decline in EM rush to make new EM allocations given the global business
portfolio debt flows has been largely driven by EM-dedicated cycle uncertainty as we move into 2019.
bond fund outflows, which tend to follow returns. Near-term
appetite for EM debt may remain shaky given recent volatility Exhibit 19: Recent EM portfolio debt outflows have been driven by EM-
dedicated bond fund flows
and the heightened focus on EM vulnerabilities, but we do not $bn
expect persistent EM portfolio debt outflows to year-end. A 400 EM-dedicated bond flows, 12m rolling sum
simple regression of EM portfolio debt flows on fundamental IIF Portfolio Debt Flows Tracker, 12m rolling sum
drivers (EM GDP, EUR/USD and oil prices) suggests that 300
flows will slow over the coming quarters but not turn negative
(Exhibit 18). 200
100
-100
Jan 06
Jan 08
Jan 10
Jan 12
Jan 14
Jan 16
Jan 18
Sep 06
May 07
Sep 08
May 09
Sep 10
May 11
Sep 12
May 13
Sep 14
May 15
Sep 16
May 17
Source: J.P. Morgan, IIF
1
Global pension assets study 2018, Willis Towers Watson (February 2018), see
https://www.willistowerswatson.com/-/media/WTW/Images/Press/2018/01/Global-
Pension-Asset-Study-2018-Japan.pdf
11
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
Have EM elections become a major source current episode on growth and inflation could hinder the
of downside risks again? market-friendly Macri’s reelection bid, potentially reinforcing
locals’ preference to dollarize portfolios against fears of a
The outlook for election outcomes in EM has generally return to more populist (and inflationary) policies. That said,
increased as a source of risk for major EM countries. In the government seems more eager to accelerate the fiscal
Turkey, the race for the residential/parliamentary elections is consolidation (leaving gradualism behind), which alongside
proving to be tighter than expected. Incumbent President strong international support is a positive harbinger for the
Erdogan looks likely to win the presidential elections, but— success of the forthcoming IMF agreement. Our base case is
although not our base case—the ruling AKP may lose the still for Macri’s Cambiemos to win the 2019 election, but in a
majority in parliament, which could lead to further political second round in a more contested race than what we had
uncertainty. In case of a decisive win by Erdogan or by the entertained a few months ago.
opposition, political uncertainty will decline sharply, but
Turkey will likely remain a principal focus of market concern Current EM fixed income recommendations
unless Turkey ends up with a strong and reform-minded
government. We are neutral in EM FX and local rates in our GBI-EM
Model Portfolio. In May we cut our tactical risk addition in
Mexican elections are fast approaching, with presidential EM FX where we tried to buy the dip as the global non-US
elections, nine governor seats, and the renewal of both data rebound still disappointed and the sell-off exceeded our
chambers on July 1. Polls have been consistently showing view of a shallow pull-back. That leaves us MW in FX and
left-wing Morena in first place, with AMLO holding a local rates. In EM Asia, we are MW across currencies in our
comfortable double-digit advantage over his traditional party model portfolio but continue to hold outright long positions in
rivals. At this point, questions have been directed at the SGD and short TWD. We are UW Asia rates, with an UW in
composition of congress, the odds of Morena reaching the THAIGBs vs. a smaller OW in INDOGBs in our model
simple majority, and the likelihood of it reaching consensus portfolio. In EMEA EM, we are MW in FX through OW CZK
with other parties in order to push forward with some of the versus UW RON. In outright trades we remain short
candidate’s left-wing proposals. While we believe there is a EUR/CZK, but short RON via EUR/RON forwards, and long
material risk of AMLO’s party reaching the absolute majority, ILS, KZT, and RSD outright, and we added short USD/UAH.
the risk of reaching the all-important constitutional two-thirds In EMEA EM local rates, we are MW holding OW South
majority is low, given current vote intentions. Nevertheless, a Africa versus UW Turkey and Czech. In Latam, we continue
simple majority in the lower house would grant Morena to hold OW FX positions in COP and BRL versus an UW in
control over the expenditure bill and bylaws. Also, the fiscal MXN and PEN, leaving us MW overall. We also stay with a
responsibility law could be amended with a simple majority small OW in duration via OW in Colombia.
vote. AMLO has toned down his comments regarding his plan
of backtracking on the new airport, but some doubts remain in Stay MW EM Sovereigns (EMBIGD) and EM corporates
place regarding other plans, like reviewing oil auctions and (CEMBI). In Asia, we recently moved Petronas back to MW
potentially backtracking on the education reform. While he from UW as the bar for low-beta underperformance has risen
has welcomed the renegotiation of NAFTA, recent frictions and stay with UWs in the Philippines, Pakistan, as well as
among NAFTA countries suggest that the negotiation could Indian EXIM Bank. In Latin America we hold our OW in
turn more complicated under the new administration. Ecuador, where the cabinet reshuffle has been met positively
by investors, and the private sector agenda has been pushed
In Brazil we have been saying that, even though we assume a forward; also stay OW Colombia versus UW Peru. In EMEA
market-friendly electoral outcome in 4Q, significant risks EM stay OW Egypt, Azerbaijan, Ivory Coast, and off-index
exist for an adverse result. Last month’s major truckers’ strike Qatar versus UW Romania and Turkey. In RV trades, hold
should contribute to constrain economic recovery before the hedges with China CDS protection and negative bond-CDS
elections, likely boosting antiestablishment sentiment. The basis trades buying bonds and buying CDS in Argentina and
event revealed massive support by the population, despite Indonesia. Hold 10s30s curve steepeners in Mexico. We look
51% saying that they were hurt by the strike in some form or to profit on outright trades in long Colombia versus Mexico
another. As a result, with demands for populism and anti- via CDS and hold long Thailand versus Philippines in CDS.
system sentiment stoked, we now see the outcome of the For EM Corporates, we think Asia is likely to continue to be
election as a very close call, with a 50% chance of non- more resilient, while we have been toning down our OW in
market-friendly outcome. Latin America due to the downward economic growth
Argentina’s presidential election is more distant in time revisions and political uncertainty. We keep a cautious view
(October 2019), but the sudden portfolio outflow that started on Russia in EM Europe and remain wary of the volatility in
end-April has taken a toll on President Macri’s approval Turkey. We are OW Ukraine credits within the region while
rating, which declined to 36% in May. The spillovers of the lightening the UW in Middle East given higher oil prices.
12
Luis Oganes AC
08 June 2018
(1-212) 834-4326
Jonny Goulden AC
(44-20) 7134-4470
Exhibit 21: With the exception of Argentina, current accounts have

Special Focus: Assessing EM improved since the TT, although some still depend on portfolio flows
% of GDP; size of bubble is portfolio inflows as % of CAD
Vulnerabilities
Spotlight on CAD10 and high bond
repayment countries
A critical factor separating economic conditions in EM
today from that prevailing before the taper tantrum in
2013 is that is that only a handful of countries are
overheated, although other vulnerabilities still exist.
During the taper tantrum, the fear in the markets was that EM
economies were overheating, fueled by credit expansion in
both the private and public sectors. Concerns about debt
sustainability and growth fundamentals led to an adverse
market reaction. However, this time around, there are few
signs of overheating as growth and inflation appear to be well
contained across EM (Exhibit 20). Consequently, any Despite improvement since 2013, some of the CAD
adjustment to external shocks is unlikely to involve large rate economies are, however, running large twin deficits.
hikes, a big reduction in current account deficits, or a steep Standard economic theory links current account deficits
slowdown in growth. (strictly, trade deficits) with the private saving-investment gap
and the fiscal deficit. Without an adjustment in the private
Exhibit 20: EM showing few signs of overheating saving-investment gap, current account and fiscal deficits
y-axis: CPI less target; x-axis: output gap must move in tandem, creating a twin deficit. A twin deficit
8.0 indicates vulnerability as countries with larger deficits require
TR more avenues to fund it and increases their reliance on
below potential, but external markets. On this metric, Argentina has seen a large
6.0 Overheating
CPI above target
deterioration (-7.9%pt) in its position and is now the country
4.0 with the highest twin deficit in EM at nearly 12% of GDP.
RO India along with South Africa have large twin deficits and
2.0
MX UY PH
subsequently were hit hard during the taper tantrum; however,
IN they have managed to improve their positions in recent years.
0.0 CO ZA TWCZAR HK Mexico and Chile have also improved their deficits and now
ID
KRMY HU PD
PE TH
CL possess the narrowest deficits in the CAD10.
RUILCN SG
BR
-2.0
above potential, but Exhibit 22: CAD10 countries all have twin deficits
Cooling CPI below target % of GDP and % pt chg
-4.0
-4.0 -2.0 0.0 2.0 4.0 6.0 4
Source: J.P. Morgan
2
0
In addition, debt vulnerabilities, for the most part, are also
-2
contained. Markets will likely focus on countries with
persistent current account deficits (CADs). In Exhibit 21, we -4
can see that CADs have improved over the past five years, -6
and the latest four-quarter rolling CADs are now within 3% of -8 Twin deficit (CA + FB)
GDP. Argentina stands out as having one of the widest -10
Chg over 5 years
deficits together with the biggest deterioration over the past -12
five years. Turkey has returned to the same level of CAD as
during the taper tantrum. In terms of reliance on portfolio
flows, which tend to be more fickle and reactive to global
financial conditions, South Africa stands out as heavily reliant Source: J.P. Morgan
where it is more than 200% of the CAD. Argentina (112%)
and Indonesia (100%) also fund their CAD with portfolio
flows.
13
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
Widening fiscal deficits have led to increases in year bonds recently. The rise in EM sovereign issuance over
government debt in EM. As credit-driven growth dried up, the past three years has also been accompanied by sizable
government spending increased to help EM economies push volumes of 15-year or longer issuance, which have totaled
through a period of low growth. Furthermore, a number of $112bn or one-third of total gross volumes since 2016. While
major elections in EM put greater pressure on public and Argentina has one of the highest repayment needs, its debt
social spending. On this metric, Brazil stands out to have profile overall exhibits a long average life of nearly 17 years.
deteriorated the most since the taper tantrum, while the Czech Many newer issuers also have a long average life, including
Republic has remained fiscally prudent. Sub-Saharan African countries Nigeria, Angola, Ghana, Ivory
Coast, and Senegal (all at least 13 years), with at most $2bn
Exhibit 23: EM government debt has continued to increase… (Nigeria) coming due in the next 2.5 years.
y-axis: % pt chg in government debt; x-axis %pt chg in fiscal deficit
25.0 fiscal deterioration
A more critical lens will likely be used to examine the
payment capacity of countries where near-term cash flow
20.0 BR
needs are heftier and where other buffers against spread
CO
15.0 repricing are more lacking. Larger maturities coming due
CN AR CL ZA near term are more isolated to a few countries. From now until
10.0
UY end-2020, we estimate bond coupon and maturity cash flows
5.0 SG
PE IDHK KR MX
RUTH of $18.6bn for Turkey, $12.8bn for Argentina, $11bn for
0.0 IN
MY TW Lebanon, $7.5bn for Ukraine, $5.5bn for Egypt, $5.2bn for
RO PD Ecuador, and $5.1bn apiece for Sri Lanka and Brazil. Among
-5.0 HU
TR IL these, Argentina, Egypt, and Ukraine have tightened in
-10.0 PH CZ spreads over the past five years, but all are engaging with the
-15.0 fiscal improvement IMF to varying degrees. Ecuador is the exception as spreads
-8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 have tightened and the debt stock has risen by $14bn over the
Source: J.P. Morgan past five years; however, we do not emphasize the spread
tightening in Ecuador as a negative starting point for
Our work on debt and fiscal indicators showed that although valuations given the regime shift from the Correa
EM government debt levels have continued to rise, a number administration to the Moreno presidency during this period.
of EM economies have managed to reduce vulnerability to Both Sri Lanka and Pakistan have non-negligible bond
external shocks by shifting debt to local currency (Exhibit 24), payment burdens in the next 2.5 years, and both have a fairly
while FX debt is increasingly long dated. While rising short-dated debt profile. Large cash flow countries Lebanon
issuance has seen the EM sovereign debt stock surpassing the and Turkey spreads have also widened over the past five
$1 trillion mark, we do not see sovereign repayment as a years, reflecting investor concerns about deteriorating credit
systemic source of concern in the near term. risks. Of the two, Lebanon has a shorter average life (7.5
years versus 11.6 years for Turkey), but with a smaller
Exhibit 24: …but sovereigns have increasingly shifted to local currency sovereign bond stock ($30.7bn versus $62.9bn for Turkey).
% of total government debt Bahrain is another potential source of concern where the
sovereign debt stock has tripled to $5bn in the past five years
89 24
% in lccy (Left) and where cash flows in the next 2.5 years amount to $4.2bn.
88
% in FX (Right) 22
87 FX reserves are suboptimal in only a handful of countries.
20 FX reserves are frequently discussed in terms of protecting a
86
18
country from vulnerability as it can be a mechanism to defend
85
against currency pressures and help smooth volatility and
84 16 avert balance of payments crises. Possessing adequate
83 amounts of FX reserves allows countries to have greater
14 flexibility and confidence in policymaking. For example the
82
12 IMF’s rule of thumb in running a currency board is to have
81
reserves in excess of 150% of base money. Conversely,
80 10 inadequate reserves give rise to pressure by the markets and
2010 2011 2012 2013 2014 2015 2016 2017 balance of payments issues. We take a look at the IMF’s ARA
Source: J.P. Morgan, IIF ratios and find that only a handful of countries have sub-
optimal FX reserves, namely, South Africa, Turkey, Chile,
EM hard currency issuance has become longer dated, with Malaysia, and China (Exhibit 25).
less liquid, sub-IG frontier markets also having issued 30-
14
Luis Oganes AC
08 June 2018
(1-212) 834-4326
Jonny Goulden AC
(44-20) 7134-4470
Exhibit 25: Only a handful of countries have sub-optimal levels of FX NEXGEM: Rising debt levels, but near-term
reserves
% of IMF AQA measure rollover needs not a yet a major concern
300 Debt ratios across J.P. Morgan’s Next Generation
Markets Index (NEXGEM) have risen significantly since
250
the 2008-09 crisis, reflecting rapid accumulation of
200 external debt among frontier markets. On average across
the index, external debt as a share of GDP rose to around 50%
150 of GDP at end-2017, a 16%-pt rise over its level in 2008. The
100 rise has been increasingly broad based, with almost all
NEXGEM economies accumulating additional external debt
50 over the past three years. The face value of bonds tracked by
0
the NEXGEM index stands at $131.7bn, having risen 10-fold
since the financial crisis. Many NEXGEM issuers have tapped
South Africa
Chile
Malaysia
China
Argentina
Korea
Poland
Mexico
Colombia
Indonesia
India
Romania
Thailand
Peru
Russia
Brazil
Turkey
Hungary
Uruguay
Philippines
international bond markets for the first time, joining the

advent of 30 debut issuers over the past 10 years (see Trillion
Source: J.P. Morgan, IMF Dollar Baby, 16 March 2018).
Exhibit 27: NEXGEM debt stock has risen 10-fold over the past 10 years
However, in the CAD countries with relatively open Face amount outstanding of the NEXGEM index, $bn
capital accounts, residents and not foreign investors often
play a more significant role in determining capital flows. 140
In these economies, how much FX reserves cover the 120
domestic money supply can be a critical indicator of NEXGEM Debt Stock
vulnerability. Low net reserves as a ratio to the money supply 100
(Exhibit 26) suggests the lack of protection in case there is
80
domestic capital flight. In our view, a ratio of less than 20%
begins to generate market focus on residents’ capital flows. 60
For example, despite China having net reserves of well over
40
$3 trillion, as a % of M2, it only covers 11.4%. This lack of
coverage explains why policymakers impose capital controls 20
on residents. Chile, Turkey, Hungary, Korea, and South
Africa are also vulnerable on this metric, although many of 0
these countries have macro-prudential measures that 2006 2010 2014 2018
safeguard the speed and magnitude of domestic liquidity Source: J.P. Morgan
withdrawal (e.g., limits on how much domestic pension and
insurance funds can buy in foreign assets). However, upcoming NEXGEM bond maturities are
limited with the concentration of refinancing needs likely
Exhibit 26: Low net reserves/M2 ratios expose countries to capital to pick up in 2022. Exhibit 28 shows that NEXGEM
flight risk maturities for the rest of 2018 are only a modest $2.7bn
% net reserves to M2 money supply ($0.8bn Sri Lanka, $0.5bn Nigeria, and $1.4bn Egypt),
140 followed by $5.5bn in 2019 and $6.2bn in 2020. Bond
maturities will likely fall in 2020 to $4.2bn, before a marked
120
pickup to $12.9bn in 2022, with over 10 countries facing a
100 bond maturity that year. Within this universe, of note is Sri
80 Lanka’s $5.8bn of maturities from now until the end of 2022
(and another $1.25bn 2023 maturity not shown in our chart),
60 meaning there is a maturity every year until 2023. The largest
40 NEXGEM rollover needs until end-2022 are followed by
Egypt ($4.9bn), Pakistan ($4bn), and Ecuador ($3.9bn).
20
-20
MY
MX
AR
CN
TR
HU
KR
ID
PD
PH
BR
RU
TH
CZ
IN
CL
ZA
HK
CO
RO
IL
PE
UY
Source: J.P. Morgan
15
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
Exhibit 28: Bond maturities for NEXGEM look manageable in the next A simple vulnerability metric that compares current
few years, picking up in 2022 account balances with changes in external debt suggests
Hard currency bond maturities until 2022, $bn that, in general, external liquidity metrics have
deteriorated. The majority of NEXGEM economies are now
Other, 1.1 characterized by rising external debt and current account
12
Zambia, 0.8 deficits. Despite this, only a handful of NEXGEM credits
Tunisia, 1.0 have experienced significant spread widening this year,
10 represented by the size of the circles in Exhibit 29. This
Sri Lanka, 1.5 dynamic of relatively resilient credit performance versus
8 Pakistan, 1.0 deteriorating debt ratios resonates with our debt sustainability
analysis, where we found a potentially significant negative
Mongolia, 1.0
Guatemala, impact on debt sustainability under simulated FX and growth
6 Other, 0.4 0.7 0.5 shocks in several frontier markets (see: NEXGEM: Spreads
Gabon,
Vietnam, 0.8
Other, 0.4
Tunisia, 0.5
tighten, debt ratios widen, October 4, 2017).
Sri Lanka, 1.5 Egypt, 2.5
4 Sri Lanka, 1.0 Other, 0.7
Honduras, 0.5 Sri Lanka, 1.0
Pakistan, 2.0 Egypt, 1.0
2 Sri Lanka, 0.8 Pakistan, 1.0
Nigeria, 0.5 Ecuador, 2.4
Kenya, 0.8 Ecuador, 1.5 Nigeria, 0.5
Egypt, 1.4 El Salvador, Mongolia, 0.5
0 0.8 Armenia, 0.5 Georgia, 0.5 Bolivia, 0.5
2018 Remaining 2019 2020 2021 2022
Source: J.P. Morgan
Exhibit 29: The majority of NEXGEM economies are now characterized by rising external debt and current account deficits
%, x-axis: Current Account to GDP, 2017; y-axis: External Debt to GDP, 3-yr chg. to 2017; size of the bubble shows relative YTD spread change as of May 31 2018
Source: National sources, J.P. Morgan, Moody´s
16
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
After being buffeted by the repricing in USD, capital flows

EM Macro Outlook into EM should normalize as long as dollar strength
remains contained. Recall, our thesis has been that EM-DM
Goodbye yellow brick road growth differentials and US dollar movements proxied by
EURUSD were the primary drivers of capital flows to EM.
Although EM fundamentals remain healthy, we have
Growth differentials remain supportive and should widen
downgraded 2018 growth 0.2%-pts on less support from
through the second half of the year as recoveries take hold
Euro area and Japan demand and idiosyncratic factors.
across most of EM. Downward revisions to LatAm and
We now expect a trend-like pace, and growth is expected to
EMEA growth was the main factor that pushed down growth
remain stable for the rest of 2018 at around 4.6%. The largest
differentials since our last outlook (Exhibit 31). Moreover, we
downside revisions came in the Latin America region (see
think the unexpected bout of dollar strength in 2Q18 has
regional discussion below) lead by Brazil and Argentina,
likely peaked and should turn to positively support flows into
driven by country-specific factors. EMEA growth has been
EM. Much of the decline in capital flows in 2Q18 was driven
revised down on slower Euro area growth, while EM Asia has
by the appreciation of the dollar, while the narrowing of
been relatively stable as continued strong US profit and capex
growth differential played a secondary role (Exhibit 32).
cycles are expected to keep external demand in the region
Overall, we see capital flows at 0.4% of GDP or about $53bn
strong and China offsets the impact of rising trade frictions
in 2018, slightly less than the $65bn forecast in our last
with more domestic policy support. However, there is a wide
update.
degree of uncertainty surrounding the baseline scenario. On a
positive note, our DM economists expect a meaningful
Exhibit 31: EM growth pace to ease in 2H18, but fundamentals are
recovery in Euro area growth in 2Q18 driven by a resumption intact
of capital investment. We also expect a rebound in the Real GDP, % oya
manufacturing PMIs after the inventory headwinds fade. The
2.50 June capital flows (% of GDP)
latest incoming data has been more encouraging relative to a
January capital flows (% of GDP)
few weeks ago, with our EM Nowcaster rebounding in week 5 2.00 June Growth diff (%-pt)
(Exhibit 30). Our EM EASI has recovered from a few weeks Jan Growth diff (%-pt)
of negative prints and has moved back to positive, largely 1.50
driven by better data out of Asia. But data flow continues to 1.00
weigh on Latin America with the country EASIs all
deteriorating over the past few days. That said, if central 0.50
banks have to tighten policy to preserve financial stability in
0.00
the face of more intense external financial pressures, then
2019 growth forecasts would have to be cut too, at least for -0.50
the CAD countries. This has the potential of narrowing EM- 15 16 17 18
DM growth differential and lowering capital inflows with the
Source: J.P. Morgan
attendant adverse impact on sentiment and lower investment.
Exhibit 32: What has driven the change in EM capital flows?
Exhibit 30: EM Nowcaster has recovered from patch of weak data
Dependent variable: EM (ex. China) capital flows
%q/q, saar
1Q 2Q 3Q 4Q
5.5 Change in Gth Diff (%-pt) -0.1 -0.2 -0.3 -0.4
JPM forecast Nowcast
Contribution (% of GDP) 0.00 -0.01 -0.02 -0.02
5.0 Change in EURUSD 1.6 7.9 -0.9 -0.9
Contribution (% of GDP) -0.05 -0.23 0.03 0.03
4.5 Change in implied capital flows
-0.05 -0.24 0.01 0.00
(% of GDP)
Source: JPMorgan 1 Change compared to January EMOS
4.0
On monetary policy, despite the added pressures from the
3.5 external side, we have made only limited, select revisions.
Our end-2018 EMX (EM ex. China) rate forecast has moved
3.0 up just 16bp since the start of the year, and we expect 30bp in
Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 additional tightening by high-yielder central banks in 2H18
Source: J.P. Morgan. Week 1= first week of second month of the quarter (first PMI of quarter) versus 38bp in DM (driven largely by the Fed). So far, high-
yielders have driven the entire upward adjustment to our rate
forecasts, while our forecasts for low-yielders are either
17
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
marginally lower or broadly unchanged (Exhibit 33, also see rise, we expect Euro area growth to recover in 2H. However,
back pages). Much of the hesitancy in penciling in a more the Asian cycle is much more closely tied to the US profit and
aggressive and sustained tightening stems from the capex cycles, and to the extent these are likely to remain
uncertainty around the path of the USD in the rest of the year. strong, despite tightening external financial conditions, we
If our baseline scenario of some weakening in USD expect EM Asia growth to remain robust in 2H. However, for
materializes, EM central banks are also likely to limit the the CAD countries (India, Indonesia, and the Philippines), it is
tightening to a minimum. But this baseline is open to possible that central banks are forced to raise interest rates to
significant risks as continued USD strength could prompt preserve financial stability, which, in turn, could adversely
more aggressive tightening. affect growth in 2019.
Exhibit 33: High-yielders have driven the entire upward adjustment to The interplay of these forces suggests regional policy
our rate forecasts divergence delineated around external stability. Among the
bp, YTD change in 2018 and 2019 policy rate forecasts current account deficit countries—India, Indonesia, and the
60 Philippines—the policy tone has already turned hawkish. In
this context, Indonesia’s tightening of policy has been
40 End-2018 preemptive, and we maintain our forecast for another 25bp
End-2019 hike in 3Q, moving in tandem with the expected 25bp hike in
20 the Fed Funds rate. Similarly, we expect firming core inflation
and a stronger US dollar to prompt further tightening from
0 both the RBI and the BSP later this year following 25bp hikes
by both in 2Q18. By contrast, quiescent core inflation could
-20 delay rate hikes among the current account surplus countries,
where we expect policy normalization to be slow and shallow.
DM
EMEA EM
Latam
EMX
EM AsiaX
High-yielders
Low-yielders
That said, though the current account surplus countries in the

past had between somewhat insulated from tightening
financial conditions, the risk of intensifying trade tensions
Source: J.P. Morgan; Latin America and EMX exclude Argentina could challenge that view.
EM inflation picture remains benign despite the recent
Box A - China risk factors: lingering trade
jump in oil prices and weaker currencies. First,
notwithstanding pockets of overheating, the overall EM tensions
output gap remains close to zero, and FX pass-through in EMs Following the strong GDP prints in 2017 and 1Q18, the
with negative output gaps has been muted. Second, the 2Q Chinese economy has continued with steady growth
rise in oil prices was already largely built into our inflation through 2Q. Going forward, we expect some moderate drag
forecasts, while our commodities team recently cut their 2019 on China’s GDP growth from lingering US-China trade
crude oil price forecast. Third, EM inflation has surprised to conflicts, with the economy’s sequential growth moderating to
the downside and is currently tracking 0.3%-pts below our a 6.3% q/q saar pace in 2H. Indeed, with a more cautious view
year-ahead expectation; core CPI in countries with positive on the external environment, the macro policy stance has
output gaps in particular has been unexpectedly quiescent. We turned from the tightening bias earlier in the year to a largely
look for EM inflation to edge higher to 3.2%oya in 2H18 from neutral one in our view. Meanwhile, China’s external debt has
3% in 1H18 with all three EM regions contributing to the risen steadily since mid 2016, with total foreign debt returning
modest increase. to the recent peak level seen in late 2014, reflecting the impact
of domestic financial deleveraging and higher onshore rates in
the past two years. In particular, short-term foreign debt rose
EM Asia: It’s getting late
$229 billion during 2017. However, the outstanding level of
The EM Asia forecast into 2H18 reflects the cross-currents foreign debt still seems manageable, considering ample FX
of a more uncertain growth backdrop amid an expected reserves (covering short-term foreign debt by 280% by end
continued tightening in external financial conditions. In 2017), and as external debt only accounts for a small portion
our 2018 year ahead, Hoping for continued productivity lift, (about 6%) of China’s total debt. Regarding near-term
we had hoped that productivity gains would sustain the global external flows, the re-accumulation of foreign debt in recent
profit and capex cycle, to which EM Asia is highly geared, quarters has also helped to stabilize capital flows and boost
thus delaying the onset of late cycle conditions, usually the balance of payments. The “other investment” item under
characterized by reducing slack, slowing profitability, and the BoP, mainly comprising trade credit, loans, and currency
ebbing capex. While the global capex cycle has both softened and deposits and partly reflecting underlying trends in net
and desynchronized in 1H18, with EU capex lagging the US external borrowing, turned around from a deficit of $317
18
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
billion in 2016 to a surplus of $74 billion in 2017, a crucial looking components also deteriorated. Yet this contrasts with
factor behind the $91 billion rise in FX reserves in 2017 (vs. a local surveys and stronger than expected April hard data.
decline of $444 billion in 2016). In this regard, assuming a South African GDP surprised to the downside in 1Q with
bearish environment of continued tightening in external weak activity across the board, but we expect a pickup in
financing conditions, Chinese corporate borrowers may be growth momentum to partially offset the 1Q disappointment.
forced to return to the onshore market for funding, which Therefore, we cut full-year growth in South Africa only to
could in turn hint at somewhat less benign BoP dynamics in 1.5% from 1.7%.
the near term, as well as exerting pressure on domestic
liquidity conditions. More importantly, if external borrowing Inflation continued to come on the soft side with Turkey a
by corporates face headwinds, then this could shift to the notable exception. Taking into account the growth weakness
domestic market, tightening liquidity and exerting upward in 1Q18 and risks to the downside, central banks would
pressures on money market and lending rates, and, in turn, appear to have more space to delay rate hikes or continue with
making it difficult to continue with banking sector policy rate cuts. However, the weakening of local currencies
deleveraging. In light of such potential pressures, and in line versus the USD and the cautious EM risk environment have
with the PBOC’s intention to gradually reduce financial actually caused some central banks to hike (Turkey) and
repression in the banking system, we expect two to three cuts others to be restrained regarding easing (Russia and South
of 50bp RRR cuts in the next 12 months. Africa). Turkey is also battling with political uncertainty and
macro imbalances, including rising private sector FX debt and
EMEA EM: Stronger domestic demand significant short FX position in case of corporates. However,
outweighed by external headwinds we think the CBRT will refrain from further hikes after a total
of 500bp of hikes (including 300bp in an emergency meeting
Downside risks have intensified resulting in a series of last month). Egypt is another country where the central bank
downward revisions since April. However, we still see has had to postpone easing plans, and there is a risk that key
trend-like GDP growth this year as CEE domestic demand rate cuts will continue to be delayed. In the case of low
remains resilient and oil exporters should be able to offset yielders, there are no meaningful changes relative to our
some of the external drag. Relative to our 2018 year ahead previous views: Hungary and Poland remain dovish, while
(published at end-2017), we see GDP growth 0.1%pt higher at Czech Republic and Romania are on track for more hikes later
2.9%. The performance remains strong for EMEA EM this year. In Romania macro imbalances are growing and
excluding the GCC where we still project above-potential institutions have been weakened; we have cut our growth
growth of 3.2% versus 2.8% expected late last year for 2018. forecast to 3.2% from 4% mostly due to domestic factors and
The region’s oil exporters, including the GCC, continue to see downside risks.
benefit from high oil prices, and risks are skewed to the
upside for them. However, Russia benefits from oil less than Exhibit 34: Large downward forecast revision in Latin America
others because of the budget rule, and it also suffers because J.P. Morgan Forecast Revision Index
of US sanctions. At the same time, the weaker external 104
environment combined with domestic forces in some isolated EM
cases (politics in Turkey, agriculture in South Africa) are EMEA EM
103
putting further downward pressure on the growth outlook for EM Asia
most oil importers. The tightening in external financial Latam
102
conditions has mainly impacted Turkey so far, and we cut our
growth forecast again to 3.3% from 4% previously, but the 101
slowdown in Euro area growth could have broader regional
100
impact.
99
Near-term downside risks continue to build in Emerging
Europe mainly because of risks to Euro area’s outlook. 98
The manufacturing PMIs over April-May and our nowcasters
Jan 17
Feb 17
Mar 17
Jun 17
Jul 17
Jan 18
Feb 18
Mar 18
Apr 17
May 17
Aug 17
Sep 17
Oct 17
Nov 17
Dec 17
Apr 18
May 18
are indicating downside risks to 2Q growth except for the

CEE region, where we already expect some slowdown.
Source: J.P. Morgan
Turkey is the country where the risks are most obvious due to
the combined impact from tighter monetary conditions, large
FX depreciation, and drop in consumer/business sentiment. In
Russia, data flow has been more mixed. In May, we saw the
first sub-50 Russia PMI print since mid 2016, and forward
19
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
Latin America: Growth engines run into Banxico’s significant prior tightening already provided
mechanical difficulties insurance against NAFTA/election stress. However, market
pressure for the authorities to deliver additional hikes in the
Latin America’s growth outlook has been knocked down face of renewed stress is testing this thesis. Inflation
sharply over the last month. The reassessment came on the expectations are ostensibly the key variable here as well.
back of an unexpectedly explosive funding crisis that erupted Finally, Colombia’s BanRep cut 25bp to 4.25% at end April,
in Argentina, combined with disappointing data in Brazil that and we see the cycle now over as inflation has bottomed and
has been further challenged by a truckers’ strike. These two should move higher, while growth is heading back to
countries had been projected to lead regional growth in 2018. potential. BanRep still has the luxury of managing the
As it stands, Latin America growth would come in at 1.9% business cycle as COP has outperformed the region on high
this year, down from the 2.8% we were forecasting at the start oil prices and a highly likely market friendly outcome in the
of the year. In Brazil, we revised our 2018 GDP call down June 17 second round presidential election, but we still see
from 2.4% to 1.2%, with weaker domestic demand. The lower BanRep normalizing rates sooner than the market expects
carry-over would reduce next year’s GDP growth by two- with an initial December hike.
tenths to 3.0%. Argentina’s baseline scenario has changed
following the sudden portfolio outflow that rocked financial Please refer to the back pages (page 33 onward) for our
markets in early May. Assuming the IMF program helps to macro forecasts.
ease financial stability concerns, we see real growth lower this
year at 1.5%y/y, yet recovering to 2.1%y/y in 2019. Mexico
and the Andeans started the year with solid growth
momentum, but we believe the balance of risks going forward
favors the latter group of countries, helped by terms of trade
and more political certainty. In Mexico, recovering real wages
and external demand is keeping the growth outlook stable
(2.2% in 2018; 2.4% in 2019), but overarching risks (NAFTA
and AMLO) keep us cautious. In Chile, we have revised 2018
annual GDP up to 3.8% after the 1Q release. Peru’s 1Q18
sequential growth also topped our expectations, but we hold
growth at 3.5%, while in Colombia the growth recovery in 1Q
was more gradual than we expected, and we nudge 2018 full-
year growth down to a still above-consensus 2.9%, while
revising 2019 up to 3.4%.
Recent market stress in Argentina and overall USD

strength / EM weakness have started to contaminate what
elsewhere in the region had looked like it was shaping up
to be a more routine management of inflation targets and
business cycles. In Argentina, the outlook is for BCRA to
keep high ex-ante real rates (well north of 10%) through the
rest of the year, but much hinges on sentiment related to
execution of the forthcoming IMF agreement. In Brazil,
COPOM is facing a big dilemma with a wider output gap,
inflation below the target, and well anchored inflation
expectations favoring the maintenance of low rates for longer,
while a sharp depreciation of the currency on the back of EM
dynamics and local political uncertainty has significantly
deteriorated the balance of risks and forced the Central Bank
to step up the interventions. For now we see the current 6.5%
Selic rate prevailing into 2019, but we acknowledge this is a
very close call amid a fluid market situation, and we do not
rule out hikes if currency weakness contaminates
expectations. In Mexico, we postponed rate cuts in our
forecast until 2Q19, which would bring the policy rate to
7.0% by the end of next year—assuming, as we do, that
20
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
near term. Retail bond flows are likely to remain shaky, and
EM Technicals lower return forecasts (GBI-EM: +5%, EMBIGD: +3-4%) on
a volatility-adjusted basis are a headwind for a strong
We see $50-60bn inflows for EM bonds in recovery in inflows. We have already lowered our full-year
2018, but downside risks are growing EM-dedicated bond inflows forecast to $50-60bn (from
$80bn) in acknowledgment of the risks, but for now risks are
Retail flows are more vulnerable to outflows than strategic biased to the downside in our view. A weak 2Q18 strategic
flows in our view. The recent four-week stretch of EM retail flow figure would likely prompt us to reduce our full-year EM
bond outflows (the longest since December 2016, see EM bond flows forecast to $40-50bn.
Flows Weekly) has raised concerns of further outflows in the
near term. Analysing EM retail bond outflow cycles since EM hard currency sovereign issuance continues its record
2010 shows that the most recent cycle of four weeks and pace with $112.2bn issued to date, which is nearly three-
$3.9bn of outflows was not particularly prolonged or deep, quarters of the way through our full-year forecast of
with average streaks of outflows lasting 11 weeks and $155.1bn (Exhibit 36). Many of the EM sovereigns we track
resulting in $12.6bn of outflows (Exhibit 35). Nonetheless, have front loaded their external market issuance in order to
retail EM bond inflows are likely to be more modest going get ahead of the Fed hiking cycle, and others have issued
forward in an environment of dampened risk appetite and beyond current fiscal year financing needs to pre-finance 2019
lower volatility-adjusted returns. One risk we have previously budgets. This has led to the largest issuance months ever in
highlighted is the unwinding of cumulative retail inflows four of the last five months with the only exception being in
since the taper tantrum. Since 2016, hard currency retail May. April was also the largest month on record for EM
inflows are $73bn, making them more vulnerable to unwinds sovereign hard currency issuance. Of the top 10 largest issuers
in our view. Local currency retail inflows of only $42bn since so far this year, six are from the MENA region led by Qatar
2016 means cumulative local currency retail flows since the ($12bn), Saudi Arabia ($11bn), Oman and Egypt ($6.5bn
taper tantrum are still negative. each), Lebanon ($5.5bn), and Turkey ($4bn). EM sovereign
hard currency debt stock now stands at $1.07 trillion with the
Exhibit 35: The most recent cycle of EM retail bond outflows was not MENA region now making up the same share as Emerging
protracted compared to previous episodes
Periods of at least 4 consecutive weeks of EM retail bond outflows
Europe (28% each) with LatAm still having the largest share
(32%) and Emerging Asia making up the remainder (12%).
Start Date Weeks of outflows Total outflow ($bn) Our full-year issuance forecast of $155.1bn remains relatively
21-Sep-11 4 -5.2 unchanged since last month, but forecasts at the country level
29-May-13 17 -23.6 were adjusted with upward revisions due to issuance we
02-Oct-13 9 -8.0 previously did not expect (Slovakia +$1.8bn, Lebanon
11-Dec-13 13 -16.3 +$1.5bn, and Latvia +$760mn). We have also added an
10-Dec-14 8 -7.2 additional $1bn to Sri Lanka’s forecast due to impacts from
27-May-15 20 -20.0 rising oil prices on current account and tighter financial
28-Oct-15 17 -16.1 conditions on capital flows. Downward revisions were driven
16-Nov-16 7 -12.8 by changing market conditions. In Turkey, wider spreads are
25-Apr-18 4 -3.9 creating more pressure on Turkish assets, so we reduce their
Average 11 -12.6 full-year issuance forecast by $1.25bn. In Iraq, we see a small
Source: J.P. Morgan, EPFR Global fiscal surplus, so we have removed the $1bn we had in our
original forecast. In Bahrain, we have also reduced our
Strategic flows are likely to still support EM-dedicated forecast by $1bn as they may choose to borrow domestically
bond flows for the rest of the year, but less so than depending on market conditions
previously. We have held the view that strategic flows would
drive total EM-dedicated fixed income flows this year as retail
flows waned in light of lower EM total returns and longer-
term institutional demand increased on the back of improving
EM fundamentals and attractive valuations (see Emerging
Markets Outlook and Strategy for 2018). Following a record
annual inflow of +$33.8bn last year, 1Q18 saw sizable inflows
(+$11.6bn), but we expect strategic inflows to slow for the
remainder of the year. While strategic flows are less sensitive
to near-term price action, metrics such as deteriorating Sharpe
ratios may reduce appetite from institutional investors in the
21
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
Exhibit 36: EM hard currency sovereign issuance continues on its $20.5bn and will remain low for the next few months before
record pace and is three-quarters of the way through full-year forecast picking up again in October ($32.6bn).
US$bn 2016 2017 2018YTD 2018F Exhibit 37: EM corporate technicals supported by higher cash flows
a Gross issuance (b + c) 145.8 178.9 112.2 155.1
(US$ bn) 2016 2017 2018YTD 2018F
b New issuance 130.1 156.0 104.7 147.6 Gross issuance (a) 326 482 210 442
c Taps 15.6 23.0 7.5 7.5* Estimated cash flows (b = c+d) 203 257 128 267
Amortizations (c) 118 173 86 175
d Estimated cash flows (e + f) 74.8 93.7 36.9 89.5
Coupons (d) 86 84 42 92
e Amortizations 32.8 46.5 13.9 38.7
Net issuance (e = a-c) 208 309 124 267
f Coupons 42.1 47.2 23.0 50.8
Net financing (f = a-b = e-d) 123 225 82 175
g Buybacks 9.8 8.1 6.1 6.1*
Tender/Buyback/Calls (g) 55 83 47 66
h Net issuance (a - e - g) 103.2 124.3 92.2 110.3
Net issuance after tender/buyback/calls (j = e-g) 153 226 77 201
i Net financing (h - f) 61.1 77.1 69.2 59.5 Net financing after tender/buyback/calls (k = f-g) 68 142 35 109
Source: J.P. Morgan, Bloomberg. *2018 tap and buyback forecast is YTD figure and data as of Source: J.P. Morgan, Bloomberg, Bond Radar. 2018YTD as of 5 Jun 2018
COB 5 Jun 2018
The pace of EM corporate external bond supply

moderated somewhat to $29.7bn in May 2018, tracking
slightly lower than May 2017 ($33.5bn) and also below the
average May supply ($36.7bn). Asia ($18.9bn) was the
highest contributor with $12.0bn from China. This was
followed by Latin America ($5.2bn), while supply from
Middle East & Africa ($3.0bn) and EM Europe ($2.6bn) was
limited. Pemex ($4.1bn) was the biggest issuer followed by
PLN ($2.0bn) and Qatar National Bank ($1.8bn). By sector,
financials ($13.2bn) made up the majority of the monthly
supply followed by oil & gas ($5.2bn) and real estate
($4.5bn). Additionally, issuance of Floating Rate notes
(FRNs) picked up notably in May, reaching an all-time
monthly record of $10bn and contributing 34% of the monthly
supply compared to a historical range of 0-23%. In addition,
short-dated bonds with less than three-year maturity
accounted for 25.6% of issuance, which is the highest level
since 2008. We think the rise in FRN and short-dated issuance
reflects investor concerns over rate risk and issuers catering to
the subsequent shift in demand, with such issuance from
China financials and real estate being the main contributors.
EM corporate supply reached $210bn YTD, which is in
line with the $209bn recorded in 2017. However, scheduled
cash flows of $126bn coupled with elevated liability
management of $47bn in the form of tenders/buybacks/calls
have kept net supply at $37bn. We think the overall technical
backdrop for EM corporates remains supportive, with net
financing minimal to negative in all of the regions except for
China. While we have been highlighting that China has
emerged as a drag on technicals this year due to the
weakening in demand, especially from China onshore
investors, issuance has been somewhat more measured over
the past month, providing the opportunity for the supply
overhang to get digested. Looking ahead, the last five-year
average June supply is $28.0bn, although it was more active
last year at $43.6bn. Scheduled cash flows are estimated at
22
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
We forecast +5.0% total returns from now to year-end,

EM Local Markets Strategy taking our full-year return forecast to a modest +1.0%.
The 8% decline in GBI-EM total returns since mid April takes
GBI-EM Model Portfolio: We are MW FX YTD returns to -3.8%, but our forecast implies some recovery
and duration heading into 2H18 between now and year-end. Carry returns are forecast at
+3.6%, and we expect some FX spot recovery (+1.1%) driven
In FX, we are MW overall and across all three regions by LatAm (+2.3%). Duration returns are likely to be close to
since the last EMOS. On 23 May we cut our remaining OW flat (+0.2%). The largest expected total returns to year-end are
EM FX position (see EM Strategy Update), having risk- Brazil (+13.0%), South Africa (+8.1%), and Mexico (+7.9%).
managed down our OW positions in previous weeks. In Negative returns to year-end are forecast in Argentina (-2.6%)
LatAm, we cut OW ARS on 24 May to move MW overall and Turkey (-2.6%) on the back of further FX depreciation.
(see Argentina: Reassessing our baseline scenario), holding
Exhibit 38: We expect a further +5.0% of total gains for GBI-EM GD
OW BRL and COP vs. UW MXN and PEN. In EMEA EM, To year-end forecast returns for GBI-EM GD USD
we closed OW PLN on 23 May, leaving us MW via OW CZK
vs. UW RON. In Asia, we cut OW IDR on 4 June (see 8% Spot FX Duration Carry Total
Strategy update: Closing our 0.25% OW IDR FX position). 7% 6.7%
In rates we stay MW overall but have reduced the size of 6%
both our OW in LatAm and UW in Asia. In LatAm our OW 5% 5.0%
4.6%
is now concentrated in Colombia—we moved MW Argentina 4%
on 24 May (see Argentina: Reassessing our baseline 3% 3.0%
scenario) and closed our long-standing OW Brazil position on
2%
18 May (see LatAm Local Markets Compass: Reducing Risk).
In EMEA EM, we take profit on UW Romania (see EMEA 1%
EM Local Markets Mid-Year Outlook) and stay MW overall 0%
with OW South Africa vs. UW Czech Republic and Turkey. -1%
In EM Asia, we reduced the size of UW Thailand on 23 May GBI-EM Global Asia EMEA EM Latin America
Diversified
(see Thai bond strategy), still partially hedged with OW
Indonesia. Source: J.P. Morgan
Exhibit 39: GBI-EM Model Portfolio recommendations and returns

GBI-EM GD Stats Model Portfolio Allocation GBI-EM GD Returns YTD MP Excess Returns YTD (bp)
Bond FX
Market
Index Index Index Contr. to Value FX Bond FX
Weight Yield Duration Duration Weight Position View View USD Local FX Bonds FX Total
GBI-EM 100% 6.47% 5.07 (0.005) -1.08% - MW MW -3.8% 0.5% -4.3% +6.5 -36.5 -30.0
EM Asia 22.79% 5.00% 6.00 (0.025) -0.50% - UW MW -0.6% -0.9% 0.2% -0.0 +4.6 +4.6
EMEA EM 42.71% 6.68% 4.87 - -1.00% - MW MW -5.8% 0.3% -6.1% +11.7 -17.9 -6.3
Latin America 34.50% 7.44% 4.71 0.02 +0.42% - OW MW -3.2% 1.8% -4.9% -5.2 -23.2 -28.3
Indonesia 9.21% 7.41% 6.25 0.02 +0.30% - OW MW -4.0% -2.0% -2.1% -1.2 +0.3 -0.9
Malaysia* 5.44% 4.22% 4.64 - - - MW MW 2.1% 0.2% 1.8% - +4.2 +4.2
Philippines 0.30% 5.46% 6.41 - - - MW MW -6.5% -1.9% -4.7% - - -
Thailand 7.84% 2.63% 6.63 (0.045) -0.80% - UW MW 1.8% -0.3% 2.1% +1.2 - +1.2
Czech Republic 4.28% 1.65% 5.19 (0.05) -0.99% +2.50% UW OW -4.1% -1.7% -2.4% +1.6 -0.7 +0.8
Hungary 4.59% 2.01% 4.27 - - - MW MW -6.3% -2.0% -4.4% - -4.3 -4.3
Poland 8.93% 2.59% 4.06 - - - MW MW -2.4% 1.7% -4.0% - -8.6 -8.6
Romania 2.55% 4.53% 3.78 - - -2.50% MW UW -2.2% -0.6% -1.6% +1.3 +4.6 +6.0
Russia 7.59% 7.16% 4.90 - - - MW MW -3.7% 3.7% -7.1% +2.2 -10.7 -8.5
Turkey 6.13% 15.80% 3.14 (0.04) -1.24% - UW MW -22.9% -7.2% -16.9% +13.9 +5.1 +19.0
South Africa 8.64% 9.27% 7.41 0.09 +1.22% - OW MW 1.7% 4.4% -2.6% -7.4 -3.4 -10.7
Argentina 0.97% 18.21% 3.49 - - - MW MW -25.6% -1.5% -24.4% -5.9 -13.5 -19.5
Brazil 10.00% 9.87% 2.89 - - +0.50% MW OW -12.1% 1.4% -13.2% +0.8 -5.7 -4.9
Chile 2.56% 4.86% 7.67 - - - MW MW -0.6% 1.7% -2.2% - - -
Colombia 7.83% 6.30% 4.73 0.02 +0.42% +1.00% OW OW 8.2% 2.6% 5.4% -0.0 -1.2 -1.2
Dom. Rep.** 0.10% 8.15% 3.69 - - - MW MW 0.1% 0.1% 0.0% - - -
Mexico 10.00% 7.83% 5.14 - - -1.00% MW UW -1.4% 2.5% -3.7% +0.0 -1.4 -1.4
Peru 2.79% 5.66% 7.40 - - -0.50% MW UW -1.6% -1.0% -0.6% - -0.8 -0.8
Uruguay 0.25% 10.06% 4.46 - - - MW MW -10.1% -2.9% -7.4% - -0.5 -0.5
Source: J.P. Morgan; YTD statistics as of June 6 COB. *FX returns calculated using Malaysia T-bills (up to 3m) **YTD returns from 30-Apr-2018
23
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
judgement on IGBs has been poor with oil / local technicals

EM Asia Local Markets: As the US cycle overtaking our standard valuation framework. However, with
advances loan growth to be constrained by the banks’ capital deficiency
Our overall EM Asia market strategy remains marginally and the RBI not on the verge of a large / prolonged tightening
constructive, although we are closer to neutral currently. cycle, we retain the position.
The constructive bias comes from assumptions that European
& Japanese Manufacturing PMIs will trough, China’s fiscal / Since the last EMOS, we have made the following
credit impulse will cease to be an incremental drag, and US recommendation changes:
twin deficits represent a medium-term weight on the USD.
We are keen to navigate the current phase conservatively 1) Squared our 0.25% OW IDR FX position to MW and
given the potential for US inflation to surprise on the upside returned our overall Asia FX weight to neutral in the GBI-
on rapidly declining slack and add to Fed tightening concerns. EM Model portfolio on 4 June. The small OW was
The US U3 unemployment rate has fallen from 4.07% to established on 26 April when the spot currency was ~4%
3.75% over the past two months, and the latest rate would be cheap on our traditional valuation metrics (PPP / REER / NIIP
consistent with average hourly earnings (AHE) rising to stabilization / Balassa-Samuelson framework) and the one-
~3.3% yoy in a year’s time from 2.7% today if the past month NDF FX implied yield was ~10.6%. Bank Indonesia’s
decade’s Philips curve relationship holds. Such a development proactive 50bps of policy rate tightening / focus on financial
must be juxtaposed with the fact that Fed policy, as it stands, stability since then had reduced the spot undervaluation to
is nowhere in restrictive territory. Exhibit 40 shows that even ~2.0% and resulted in a lower one-month FX implied rate of
under a scenario of the US FOMC hiking three times through ~6.0%. Continued foreign portfolio outflows, though, pose a
the rest of 2018, the Fed Funds Rate (FFR) adjusted for core challenge for funding the current account deficit.
PCE inflation would just about catch up with the natural rate
of interest r* on the Laubach-Williams estimate. There are 2) Closed our short USD/KRW positions while retaining
also other secondary concerns related to US-China trade SGD and TWD FX longs on 30 May 2018. This was on the
tensions and Italian financial market developments. viewpoint that BoK policy tightening appeared adequate
relative to the baseline consensus evolution of Korea’s output
Exhibit 40: Even on a scenario of 3 more FFR hikes in 2018, Fed policy gap over the next four quarters, KRW FX was roughly where
would still only be neutral it should have been on our standard valuation metrics, and a
% Blue bars represent Real FFR possible global manufacturing stabilization was better
9
US recession assuming expressed through the retention of SGD and TWD longs.
periods 3 hikes
6
through
the rest 3) Unwound our 5y SGD IRS receive vs. EUR IRS paid
3 positions on 31 May, while we reaffirmed the long 5y5y
of 2018
0 SGD IRS outright position. The former position had been in
the red for a while and had become even more untenable
-3 given the possibility that ECB accommodation remained in
place for longer than expected in light of Italian
-6
Mar-61 Mar-73 Mar-85 Mar-97 Mar-09 developments.
Laubach-Williams natural rate of interest r* (LHS)
Real Fed Funds Rate (RHS) 4) Reduced our Thai bond UW position in the GBI-EM
Asia Model portfolio from 1.20% to 0.80% on 22 May
Source: Laubach-Williams methodology, J.P. Morgan 2018. We had raised the size of the THAIGB UW on
1 February 2018 when a valuation model using the level and
Keep a balanced risk-management approach to Asia FX slope of Thai short-term rates, Thai CPI inflation, Thai public
and Rates. An approach of deliberate risk management debt to GDP changes, and 10yr UST yields had suggested
through 1H18 has cued us to 1) demand higher risk premia on 10yr THAIGB yields were ~45bps or 1.7 s.e. too low. With
EM Asia assets relative to our model “fair value” outputs; 2) the model deviation moderating to 20bps, we scaled back the
concentrate long FX exposures primarily in strong Thai bond UW to 0.80%.
NIIP/current account balance countries, and advocate a
neutral CNY vs. USD stance given a new regime of lower
tariffs in China would be akin to a currency appreciation,
while avoiding INR FX; and 3) maintain low but long
duration / risk in China (3yr CDBs) and India (5Yr IGBs) and
Indonesia (+0.3% OW in GBI-EM Model Portfolio). Our
24
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
Exhibit 41: EM Asia Local Markets Trade Recommendations

Open PNL
Recommendations Entry Date Entry Current (bps/%)
Short USD/SGD 6/22/2017 1.39 1.33 3.6%
Short USD/TWD 1m NDF 2/5/2018 29.4 29.7 -1.3%
Long S$NEER Basket
(JPM weights) 2/11/2018 124.41 126.23 1.2%
Long KRW 10y KTBi
(6/10/2026) 11/15/2017 1.80 1.80 19
Pay 5y5y THB vs SGD
IRS 2/15/2018 0 -7 -8
Long IGB 6.84
12/19/2022 6/21/2017 6.53 7.86 -105
Long CNY SDBC 3.88
04/19/20 9/25/2017 4.22 4.16 26
Receive HKD 1y1y IRS 3/22/2018 2.57 2.69 -1
Short USD/HKD 3m fwd 4/24/2018 7.832 7.832 -0.1%
Receive SGD 5y5y IRS 4/30/2018 3.03 2.99 5
Recently Closed PNL
Recommendations Close Date Entry Exit (bps/%)
Short USD/KRW 1m NDF 5/30/2018 1096.0 1079.8 1.28%
Receive 5y SGD vs EUR
IRS 5/31/2018 153 199 -44
Long TWD/THB 6m
forward 5/18/2018 1.11 1.07 -2.81%
Chg
GBI-EM Model Portfolio Entry Date Entry Current (bps/%)
UW THAIGB Rates
(▼weight on 22 May) 14/11/2016 2.30 2.64 9
OW INDOGB Rates 21/11/2017 6.89 7.37 -31
Neutral IDR FX (▼from
OW on 4 June) 4/26/2018 13910 13887 0.9%
Source: J.P. Morgan. PNL accounts for the impact of carry & roll.
25
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
EMEA EM Local Markets: Focus on In outright rates trades, we re-restructure our ZAR rates
receivers as spreads against USD. We have been holding
relative value as uncertainties are high outright receivers in ZAR 5y5y and long R214. With the risks
in 2H18 from higher core rates, we now hold these positions as spread
The outlook for EMEA EM in 2H18, much like 1H18, is trades against USD 5y5y. We also continue to hold UW
likely to be mixed. Our 2018 year-ahead outlook emphasized Turkey duration. This has been a high-conviction position
relative value and domestic macro themes as building blocks since 4Q17. The degree of yield curve inversion still suggests
of our portfolio. With the narrative for the US dollar in flux, it the market holds exaggerated expectations of the ability of the
central bank to reduce rates in the future. In the meantime,
is difficult to make a high conviction case for a strong trend in
EMEA EM local markets for the remainder of the year. In the inflationary pressures are still not under control and will
near term, rising core yields are the most significant risk and require further tightening of monetary policy.
limit the upside to EM local markets despite the 8.3% draw- In FX, we maintain our MW with our favored OW CZK
down since mid April. We continue to believe that a focus on against UW RON. This is consistent with the CEE reflation
relative value is the appropriate strategic approach to adopt in theme, and eventual EUR appreciation, as per J.P. Morgan’s
this period of high uncertainty. While we think EM asset house forecast, should further aid currency appreciation. The
prices should find some stability after the sell-off in 2Q, we lira’s macro imbalances should lead to underperformance
do not have strong expectations of a bounce-back either. against RUB, which also provides diversification benefits to
Acknowledging elevated uncertainties for the short- and our portfolio given its low correlation with global risk
medium-term outlook for EM asset prices, we hold a relative sentiment. Yet we await election results in Turkey to add
value portfolio of recommendations that has attractive risk- relative value positions vs. RUB, for example. In outright
reward characteristics both on our baseline scenario of trend- trades, we enter a new USDRUB 3m 1x1 put spread.
less EM returns and hedge against risks of rising core yields.
Where could we be wrong? In the year-ahead Outlook, we
We believe investors should adopt a more selective emphasized the view that EM assets will absorb tightening
approach to CEE “reflation” trades, and being bearish Fed policy with only periodic bouts of weakness. So far we
Czech rates is our favored expression. In our year-ahead think this assumption still holds, but we cannot dismiss the
outlook, we took the view that the reflation theme would risk of a broader-based sell-off should the Fed and ECB
evolve into a policy tightening theme in CEE, and this would tighten global monetary conditions sharply in unison. We
envelope both Poland and Hungary as well in addition to think this risk should be hedged against. Our bearish Turkey
Czech and Romania (whose central banks had begun hiking positions would hedge in such a scenario, and we increase
rates in 2017). Yet, with the ECB likely to postpone hedges with our USD/ZAR call and also hold our South
normalization (see Risk of an ECB QE extension from Africa rates receivers as spreads against US rates. In a more
September) against a backdrop of contained core-inflation bullish EM environment, we think our portfolio
pressures, we think investors should adopt a more selective recommendations will do well as the CEE reflation-themed
approach to reflation-themed CEE trades. As such, we hold 5y trades and bullish S. Africa rates positions should outperform.
CZK IRS payers. We also close our UW in Romania as Exhibit 42: EMEA EM Outright Trade Recommendations
valuations now seem fair. Within low yielders, our favored Outright trades - Rates Entry Date
Entry Current
Target
receiver is in 5y ILS (vs. 5y EUR rates). The central bank’s level level
Receive 5y5y ZAR IRS, pay 5y5y US IRS 06-Jun-18 560bp 560bp 500bp
policy rate remains pinned close to the zero-bound as any rate Pay 5y CZK IRS (levels reference spot) 21-Mar-18 1.76% 1.76% 2.10%
hikes would likely trigger significant currency appreciation. A Long 5y Serbia nominal bonds (4.5%
20-Feb-18 4.20% 3.96% -
steep curve makes relative value receivers attractive at current Jan-2023) *
levels. Lastly, we hold idiosyncratic positions in niche Long R214 bonds funded in Rand 21-Feb-18 8.85% 9.53% 8.40%
markets, recommending longs in Serbia (5y bonds FX Receive 5y ILS IRS, pay 5y EUR IRS 21-Nov-17 60bp 60bp 25bp
Entry Current
unhedged), KZT (3m NDF), and UAH (3m NDF). Outright trades - FX Entry Date
Level level
Target
Short USD/UAH in 3m NDF** 06-Jun-18 26.1575 26.1575 26.00
Our favored OW position in local bonds is in South Africa. 06-Sep-18 USD/RUB 1x1 put spread
We think the market should reward benign inflation (61.00/59.00), spot reference: 61.95
06-Jun-18 0.92% 0.92% -
conditions and a prudent central bank. True, economic reform 06-Dec-18 USD/ZAR call (14.50), spot
06-Jun-18 1.53% 1.53% -
momentum is likely to be painfully slow and positioning is reference: 12.72
Short USD/ILS 06-Jun-18 3.5670 3.5670 3.45
long. Yet South Africa in our view is still the most attractive
Short USD/KZT in 3m NDF 11-Jan-18 330.280 332.510 310.00
long rates position on account of valuations and much- Long 12m EUR/RON forwards *** 21-Nov-17 4.8347 4.7710 4.95
reduced tail risks in the EMEA EM region, so positioning is Short EUR/CZK 07-Sep-17 26.1530 25.6500 24.80
unlikely to immediately reverse. Source: J.P. Morgan, as of 06-June-2018. * Target is primarily a function of FX move (EURRSD
entry: 118.2592; target: 115 by year-end) ** Target and review points relate to outright NDF
***Total return includes previously closed long 6m EUR/RON forward
26
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
Latin America Local Markets: Stay Exhibit 43: GBI-EM GD returns by country
GBI-EM Returns in last four weeks, broken down by FX and Rates, in %
neutral FX and OW rates via Colombia Period 08-May-18 to 05-Jun-18 FX and Rates returns
Total returns (USD) FX Rates
External and local dynamics warrant a neutral stance in
LatAm FX while holding a small OW in rates via -10 -5 0 5 -15 -10 -5 0 5 -20 -10 0 10 20
-0.
Colombia, which is the only country where we find the GBI-EM GD
GBI-Asia
-1.5 -1.1
3
Region
0.6 0.3 0.3
fundamental backdrop supportive enough for bonds. On GBI-EMEA -1.6 -2.8 1.3
the local front, idiosyncrasies seem quite challenging, GBI-LatAm -2.4 -1.9
-0.
5
ARS
particularly on the political side. In Argentina, President BRL
-2.7 -7.2
-
4.5
-5.9 -4.3
Macri’s political image has deteriorated following the recent CLP 1.8 1.5
1.7
0.3
Latam
-
adjustments, and although markets have found some stability, COP
MXN
0.1 2.9
2.8
-3.
-2.1 1.5
the medium-term challenges remain in place. As such, we PEN -0.6 0.7
6-
- 1.3
remain neutral local bonds and FX in Argentina. Brazil’s UYU -8.6 0.4 9.0
RUB -10. 13.
political environment remains tense, with local press reporting ZAR
2.8
4 - 2
-0.1 0.5
the truck drivers’ strike has cost about 0.7% of GDP already, TRY -8.9 -6.4
0.5
-2.
EMEA EM
5
and although the worst might be over in terms of negotiations, PLN -1.1 -1.4
-0.
0.4
RON -2.0 -1.5
the fact that support from the population was so high (87% CZK -2.8 -1.9
5
-0.
8
according to Datafolha) suggests a challenging political HUF -3.4 -2.5
-0.
9
outlook ahead of October elections. We remain OW BRL and IDR
MYR
2.5 1.3
-
1.2
-0.6 0.8
fade some of the recent weakness, while we stay neutral local
Asia
1.4
-1.
PHP -1.1 0.1 -0.
2
rates. In Mexico, NAFTA tensions seem to have increased THB -0.5 0.1 6
following the confirmation from US government officials that Source: Bloomberg, J.P. Morgan
the exemption on steel and aluminum tariffs will not be Exhibit 44: Open LatAm rates and FX trades
applicable anymore to Mexico, which led to retaliatory taxes Rates Entry Entry lvl Last Link
on the US. Meanwhile, international investors’ demand for
MX 5s20s steepeners 14Jun17 43bp 39bp link
Mbonos is running at 10-year lows relative to the supply,
MX Receive 5y1y TIIE FRA 7Mar17 8.00% 8.26% link
which warrants an UW MXN stance and neutral view on
MX/CO Receive 5y TIIE vs. pay 5y IBR 23Jun17 134bp link
Mexican rates. In Uruguay, we continue to hold our long 271bp
Switch into 5y Mbono from 5y
inflation linked UYU 2028 bonds, and we hold a 2s3s MX
Udibono
20Sep17 3.60%
4.13%
link
flattener in Chile. BZ Receive DI Jan21 8Jan18 8.86% 8.93% link
Receive FRA DI Jul22/Jan23
BZ 22Mar17 -40bp link
On the external front, disappointing European data led to vs. pay Jan23/Jul23 -30bp
Buy UYU 4 3/8 2028 (inflation
GDP downward revisions from our economic team (G. UY
linked)
20Sep17 2.94%
3.52%
link
Fuzesi), while Italian and Spanish political changes helped Chile 2s3s flattener (CLP x
CL 9Jan18 36bp link
fuel further USD strength, and US yields that could move camara) 29bp
higher with volatile oil prices are taking a toll on EM AR Bogato 2020 27Feb18 102 103 link
inflows. The GBI-LatAm has lost 4.1% in last four weeks, AR Dec18 Lebac (273 days) 22Mar18 25.0% 35% link
and we believe local markets will continue to be impacted by CO 1s3s IBR Flattener 5Apr18 64bp 69bp link
external pressures. Colombia is the only country where we FX Entry Entry lvl Last Link
keep a bullish stance across FX and rates. Ivan Duque won the Buy 1x2 USD put / BRL call
first round of Colombia’s presidential election on Sunday and BRL spreads 3.33/3.25 maturing on 29Mar18 39bp 0bp link
6/29/18
will head to the June 17 second round as the favorite against BRL Long BRL/MXN 19Apr18 5.35 5.40 link
Gustavo Petro, with preliminary polling for second round
Source: J.P. Morgan
scenarios showing Duque with a solid lead in a head-to-head
matchup (see Colombia election: No surprises - advantage Exhibit 45: Open LatAm rates and FX trades in the Model Portfolio
Duque, B. Ramsey). Colombia is the one market showing Rates Entry Entry lvl Last
resilience to the external backdrop, with returns for GBI-EM CO OW Local Rates 26Jan18 6.22% 6.33% link
Colombia outperforming in the region (following Chile) in FX Entry Entry lvl Last
last four weeks (Exhibit 43), and we keep the constructive
BRL OW BRL 23Jun17 3.34 3.78 link
stance there despite the broader backdrop.
PEN UW PEN 8Jan18 3.22 3.27 link
COP OW COP 28Mar18 2,795 2,860 link
MXN UW MXN 4May18 19.06 20.36 link
Source: J.P. Morgan
27
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
(see Turkey: The CBRT hike rates 300bp in an emergency

EM Hard Currency Strategy meeting). We moved Bahrain back to MW from OW, as
EMBIG Model Portfolio: Stay MW with focus valuations alone are unlikely to withstand a more challenging
external backdrop amid mounting debt and high fiscal deficit.
on country selection We also squared back some of our low-spread UWs by
We scaled back risk in EM sovereigns over the last month, moving Petronas back to MW from UW as the bar for low-
moving EMBIGD back to MW from OW, as we see more beta underperformance has risen, and in spite of uncertainties
limited spread tightening given a softer data patch outside following Malaysia’s surprise election outcome (see Moving
of the US, and with EM vulnerabilities under greater marketweight EM sovereign and corporate credit). We have
scrutiny. A global growth uplift alongside a higher oil price also taken profits on our long Colombia versus Mexico RV
regime had been key reasons underlying our move to OW the trade in 5y CDS, with the escalation in trade tensions of late
EMBIGD early in 2018. However, a steady move higher in taking a toll on Mexican assets, and the spread differential
commodity prices this year has failed to translate into tighter reached post-US election levels. We keep our Mexico 10s30s
EM spreads. And while the net positive impact on EM curve steepener and remain OW Colombia and believe it is
fundamentals for oil exporters may be realized in the medium still too early to sell bond-CDS basis in Mexico as
term, the more important considerations at this juncture uncertainties around trade and the Mexican election will likely
revolve around the extent to which US exceptionalism can exert more pressure on CDS as portfolio hedges remain
continue to fuel a stronger dollar and expose pockets of sought after (see Colombia and Mexico Sovereign Credit).
external vulnerabilities in EM. The idiosyncratic stories in EM
will continue to dominate headlines, and differentiation rather Elsewhere, we hold our OW in Ecuador, where the cabinet
than taking a directional view is currently the key strategy in reshuffle has been met positively by investors, and the private
our portfolio. We had already revised our end-2018 EMBIGD sector agenda has been pushed forward (see Ecuador: A new
spread target higher in the last EMOS, and we moved back to face in the finance ministry). Stay UW Peru in Latin America,
MW in the EMBIGD following a retracement from the recent OW Egypt, Azerbaijan, Ivory Coast, and off-index Qatar
wides. Our spread target of 300bp for year-end coupled with versus UW Romania in EMEA EM, UW Indian EXIM
10-year UST forecast of 3.30% imply returns of roughly 3-4% Bank, Philippines, and Pakistan in EM Asia. In RV trades,
to year-end, but volatility-adjusted returns could prevent hold hedges with China CDS protection and negative bond-
meaningful inflows for EM sovereigns. CDS basis trades buying bonds and buying CDS in Argentina
and Indonesia. Stay long Thailand vs Philippines in CDS.
EM sovereign technicals are more favorable near term Exhibit 46: Open EM sovereign relative value trades
with negative net financing to year-end and high cash Region Trade description date Entry Current
flows in June and July. EM sovereign net issuance is LATAM Buy ARGENT 4 5/8 23 AND Buy 08-Feb-18 267 341
negative for the balance of the year, and June and July are two 5y Argentina CDS 265 335
high cash flow months for EM sovereigns, with combined -2 -6
cash flows of $24.4bn. The record pace of supply is now a LATAM Buy MEX 3 3/4 28 AND Sell 08-Feb-18 131 165
MEX 4.35 47 196 224
tailwind with two-thirds of 2018 EM sovereign financing
65 60
complete in just four months. EM sovereign gross issuance ASIA Buy INDON 2.95 23 AND Buy 05-Mar-18 93 117
YTD stands at $112bn, which is nearly three-quarters of the INDON 5y CDS* 89 124
way through our full-year forecast of $155bn. Supply is not -4 6
expected to be a headwind for EM sovereigns, as we forecast ASIA Buy CHINA 5y CDS* 05-Mar-18 57 57
negative net issuance of $10bn to year-end. CEEMEA Sell LEBAN 6 23 AND Sell 02-Apr-18 384 598
LEBAN 5y CDS 435 606
We shift our strategy to focus on differentiation rather 51 8
than a directional view, reducing high-spread OWs and ASIA Buy PHILIP 5y CDS AND SELL 06-Apr-18 75 88
low-spread UWs. As focus on EM vulnerabilities takes the THAI 5y CDS 40 47
driver’s seat, credit selection will be key, and we have squared -35 -41
our positions to reduce the previous stance to be OW high- Source: J.P. Morgan
Exhibit 47: Closed EM sovereign relative value trades
spread versus UW low-spread. We reduced risk in Argentina,
Entry
moving back to MW, as the focus on external fragilities Region Trade description Exit date Entry Exit
date
heading into an election year and amid tighter financial CEEMEA Sell TURKEY 4 7/8 26 AND 06-Apr-18 23-May-18 290 374
conditions globally argues for a more neutral stance, despite Buy TURKEY 6 5/8 45 376 450
an ongoing IMF negotiation (see Argentina: Reassessing our -86 -76
baseline scenarios). We stay UW Turkey with a reduced LATAM Sell 5y Colombia CDS AND 06-Apr-18 05-Jun-18 100 121
Buy 5y Mexico CDS 105 147
weight, and we took profits on our 10s30s curve flattener; 5 26
uncertainties remain high heading into the June 24 elections
Source: J.P. Morgan
28
(1-212) 834-4326 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
Exhibit 48: EMBIGD Model Portfolio recommendations

EMBIGD subindex spread (bp, y-axis) versus average credit rating (x-axis); blues denote current OW reds denote current UW recommendations
Source: J.P. Morgan.
Exhibit 49: EMBIGD Model Portfolio recommendations and returns

Portfolio Returns YTD Portfolio Attribution YTD
Benchmark return -4.57% Market position return (bp): -11
Portfolio return -4.60% Credit selection return (bp): 8
Portfolio Outperformance
Portfolio Performance(bp) -2 (bp): -2
As of June 06, 2018 Since Initiation YTD Changes & Returns

Spread
Current Initiation Spread Chg Spread Chg vs Spread Carry Credit
Credit selection returns View Position Spread Duration Date vs EMBIG Chg EMBIG Returns Returns Returns
(bp) (bp) (bp) (bp) (bp) (bp)
Azerbaijan OW 0.83% 217 7.1 25-Jan-18 (29) 40 (29) 1 (0) 1
Colombia OW 0.80% 193 9.1 6-Apr-18 (22) 23 (22) 1 (0) 1
Cote D'Ivoire OW 1.00% 385 6.6 11-May-17 (49) 59 7 (0) 0 (0)
Ecuador OW 0.80% 650 4.7 3-Apr-18 71 109 71 (1) 0 (1)
Egypt OW 1.00% 442 6.6 21-Nov-17 0 49 (3) (0) 0 (0)
Qatar OW 0.73% 122 6.9 11-Jan-18 (52) 12 (52) 2 (0) 2
EXIMBK India UW -0.71% 151 4.5 9-May-18 10 9 10 (0) 0 (0)
Pakistan UW -1.01% 471 4.2 5-Oct-17 94 96 44 0 (0) (0)
Peru UW -1.20% 138 10.5 9-Feb-17 (33) 22 (30) (0) 1 0
Philippines UW -1.00% 117 8.9 6-Apr-18 (22) 23 (22) (1) 0 (1)
Romania UW -1.24% 159 5.8 7-Jul-17 (4) 49 (3) 0 1 1
Turkey UW -0.80% 402 7.1 6-Apr-18 41 82 41 5 (0) 6
Closed position return (bp): -2 Current Credit selection return(bp) 10
Source: J.P. Morgan
29
Yang-Myung Hong AC Emerging Markets Outlook and Strategy
(1-212) 834-4274 08 June 2018
ym.hong@jpmorgan.com
EM Corporates: Moved to MW with wider Our revised spread target of 250bp implies modest gains
spread target of 250bp of +2.5% to year-end and about flat returns for 2018. Most
of the return for the remainder of the year would come from
We moved CEMBI back to MW from OW on May 25 carry as the spread tightening built into our forecast would
together with the EMBIG and also revised our CEMBI only offset the rise in UST yields. The full-year return
Broad spread target wider to 250bp. The overall backdrop expectation is still marginally better than EMBIG Diversified
for EM will remain the primary driver for EM corporates (-0.6%) and also higher than US HG (-1.8%). However, our
despite the more resilient performance and supportive negative scenario of 300bp spread would push the return
fundamental trend. CEMBI Broad has held up better within forecast down to -2.5%. While the higher quality regions and
EM fixed income at -2.6% return YTD due to the shorter HG segments are likely to remain relatively stable at a slightly
duration and higher quality composition. However, we noted negative return even in a negative scenario, the higher beta
that if EM FX remains volatile with sustained concerns on countries and HY credits will be the main variable, especially
EM external vulnerabilities, CEMBI spread may end the year those facing political uncertainty such as Turkey and Brazil.
closer to 250-275bp versus our previous spread target of
225bp. Indeed, following the recent change in the EM FX The fundamental credit metrics of EM corporates have
view, we revised our spread target to 250bp as the higher been favorable with the gross leverage ratio improving to
uncertainty and risk premium are likely to limit the scope for 2.7x in 2017, and we expect this trend to continue in 2018
spread tightening. In addition, we think a negative scenario of (EM Corporate Fundamental Checkup). Our default rate
further deterioration in sentiment on EM and sustained forecast also remains low at 2.6% for this year, despite some
pressure on the weaker/idiosyncratic countries such as upside surprise from unexpected credit events in Asia.
Turkey/Argentina and Brazil/Mexico could push spreads Nevertheless, we think corporates will not be free from the
wider beyond 300bp, though this is not our base case. overall EM backdrop, with more scrutiny on the sustainability
of the credit fundamentals amid the concerns over the FX
Exhibit 50: CEMBI Broad spread target revised to 250bp, with negative volatility and external vulnerability. In this sense, questions
scenario at 300bp are being raised whether the FX volatility and higher rates
(bp) (%) pose downside risk to the improving fundamental trend. The
CEMBI Broad spread recent developments around Italy and renewed headlines over
550 7.0
Yield (RHS) trade might not have meaningful direct implications on EM
500 6.5 corporates but nevertheless negatively affect sentiment and
450 6.0 lead to higher risk premium. In particular, the pressure on the
EUR reinforces the stronger USD, which has been an
400 5.5
overhang on EM due to FX vulnerability concerns and
350 5.0 specific country situations.
300 4.5 We think Asia is likely to continue to be more resilient
given the overall higher quality composition and recent
250 4.0
Spread target: 250bp backup in valuations and would prefer this region to the
200 3.5 others, which are more susceptible to headline risks and FX
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 volatility. We like 1) several recent new issues that came
Source: J.P. Morgan cheap (Chemchina and NTPC); 2) segments that suffer from
leveraged note unwinding (China bank AT1 and corporate
Exhibit 51: CEMBI expected to have flat return for 2018 but +2.5% from hybrids); 3) credits with valuations distorted by supply (China
now to year-end AMC); and 4) improving credits that have been ignored due to
CEMBI Broad 7-year UST yield (%)
market weakness (Huawei, Oil India, Greenko, Indika, etc.).
STW (bp) 2.55 2.80 3.05 3.30 3.55 3.80 4.05
We have been toning down our OW in Latin America due to
150 8.4 7.2 6.0 4.9 3.7 2.7 1.6
the downward economic growth revisions and political
175 7.1 5.9 4.7 3.6 2.5 1.4 0.3
200 5.8 4.6 3.4 2.3 1.2 0.1 -1.0
uncertainty, with Mexico elections coming up and lack of
225 4.6 3.4 2.2 1.1 -0.1 -1.1 -2.2 visibility in Brazil. We keep a cautious view on Russia in EM
250 3.4 2.2 1.0 -0.1 -1.3 -2.4 -3.4 Europe and remain wary of the volatility in Turkey where the
275 2.2 1.0 -0.2 -1.3 -2.5 -3.5 -4.6 trajectory of the currency and concerns over external
300 1.0 -0.2 -1.3 -2.5 -3.6 -4.7 -5.8 vulnerability will remain the driver of credit spreads rather
325 -0.1 -1.3 -2.5 -3.6 -4.7 -5.8 -6.9 than individual company developments. However, we are OW
350 -1.2 -2.4 -3.6 -4.7 -5.9 -6.9 -8.0 Ukraine credits within the region, while lightening the UW in
Source: J.P. Morgan Middle East given higher oil prices.
30
Banco J.P. Morgan S.A. Emerging Markets Research
Pedro Martins Junior, CFA AC Emerging Markets Outlook and Strategy
(55-11) 4950-4121 08 June 2018
pedro.x.martins@jpmorgan.com
David Aserkoff, CFA AC
(44-20) 7134-5887
david.aserkoff@jpmorgan.com
Exhibit 52: Global GDP above trend and accelerating into 2Q18
EM Equity Strategy 6.0
5.0
Constructive but acknowledge rising
4.0
risks
3.0
The building blocks of our constructive view on EM
equities are: (1) Above-trend global GDP growth: The J.P. 2.0
Morgan views on the global economy are benign with a
1.0
second year of global growth above potential. Underpinning EM DM Global
that are views that (a) household fundamentals are solid, but -
the 40% 2H17 energy price rise will dampen the consumer in 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E 1Q19E 2017A 2018E 2019E
1H18; (b) the capex recovery is on track and demand is Source: J.P. Morgan Economic Research
rotating toward service sectors in 1H18. (2) EM growth
premium to DM gaining momentum: The growth Exhibit 53: Positioning still favors the Emerging Markets
Global North America
differential between EM and DM has been historically an 20 Western Europe Pacific ex Japan 15%
Japan EM
important driver of the relative performance of their EM % of Total AUM MSCI EM % of MSCI AC World
13%
respective equity markets. J.P. Morgan economists forecast 15
EM GDP growth ahead of DM in 2018 and 2019. (3) Flows to 11%
EM equities respond to growth premium: We believe the
10 9%
primary reason for investors taking the risk of allocating in
emerging equity markets is premium EPS growth. Strong 7%
inflow of funds to EM asset classes buys EM economies time 5
5%
to work on their macroeconomic imbalances and has
historically driven equity performance. We think allocation to 0 3%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
EM equities as a share of total mutual funds’ assets under
Source: EPFR Global, MSCI, Datastream, J.P. Morgan, April 2018
management is at an early state (8% of total AUM). (4)
Substantial earnings growth for EM equities: The 2018 Our key bottom-up themes for 2018 are: (1) Trading higher
EPS growth forecast for EM is USD18% on bottom-up DM interest rates from a bottom-up perspective. Interest rates
aggregation of MSCI EM index constituents. are moving higher in DM (policy rates and central bank
tapering), and we believe investors should ride insurance rates
We acknowledge that the near-term outlook for EM and Asia banks upward on the NIM wave, as a result. (2)
earnings is challenging. Of the four broad macro variables From global trade to domestic growth. The drivers behind
we track to gauge direction of earnings revisions, only one EM economic growth are growing large and include a solid
shows a positive signal: higher commodity prices (pricing pickup in global trade fueling more benign EM dynamics via
power). We continue to forecast above-trend global GDP a sustained rise in private sector confidence and the EM credit
growth (operating leverage), but PMIs have lost strength. But impulse turning positive for the first time since 2014. (3) Price
there are clear near-term headwinds on two fronts: (1) higher support for commodities resulting in overcapacity industries
bond yields across EM point to marginal deterioration on cost maintaining supply discipline in China and a synchronized
of debt (higher spreads / interest expense); (2) weakness on global growth cycle.
EM FX, which is creating negativity on macro dynamics:
weaker FX > higher inflation expectation > monetary Benign base-case scenario acknowledged, investors are
tightening > lower GDP growth > fiscal tightening. We very interested to discuss risks. The general feedback is that
forecast returns for EM equities to be primarily driven by EM earnings growth should be higher than price appreciation
earnings growth as the outlook for valuation multiple re-rating this year, an implicit de-rating to compensate for risks: USD
is mixed in our view: (1) DM policy rates have bottomed; (2) strength, US late cycle, trade and tech risks. Symptomatically,
central bank balance sheet normalization; (3) limited room for earnings have been coming in strong YTD, but global equities
EM sovereign spread compression; (4) unlikely decline in the are nearly flat so far this year. USD strength is back as the #1
low levels of volatility. concern for investors. The stronger USD (DXY) from mid
April to early May is commanding a change in investors’
mentality back to historical standard in EM: fear of macro
fragilities. Countries with twin deficits close to 2.5% of GDP
are Argentina, Brazil, Colombia, Egypt, India, Indonesia,
31
Banco J.P. Morgan S.A. Emerging Markets Research
Pedro Martins Junior, CFA AC Emerging Markets Outlook and Strategy
(55-11) 4950-4121 08 June 2018
pedro.x.martins@jpmorgan.com
David Aserkoff, CFA AC
(44-20) 7134-5887
david.aserkoff@jpmorgan.com
Mexico, Peru, South Africa, and Turkey. In our client Exhibit 54: Long-term de-rating risk
discussions, questions were concentrated on Argentina and Avg and last fwd PE (lhs); % change between last and avg (rhs).
Turkey. Looking forward, J.P. Morgan does not forecast
continued USD strength: (1) the JPM USD trade-weighted
index is forecast to lose c. 2% of value up to 2018 YE; (2)
DXY to weaken c. 3% by 2018 YE, indicating loss of value
vs. reserve currencies.
Clients have not been taking lightly the fear of late-cycle

dynamics, notably in the US economy. There is a great
interest in monitoring markers for late-cycle signals in the US:
US core CPI, real rates, and risk of curve inversion (10-2 year
government bonds). Expected global growth rebound in 2Q18
Source: Bloomberg, MSCI and J.P. Morgan
becomes critical to reinforce the concept that we still are in
mid-cycle dynamics. Clients note that further downside risks
Country Asset Allocation:
to global growth could lead to a potential big shift in global
asset allocation: less equities / more bonds, less cyclicals /  OW: China, Korea, Thailand, Russia, and Brazil
more defensive—not J.P. Morgan base-case view. EM  UW: Taiwan, Philippines, Turkey, Mexico, Colombia
equities are moving from early- to mid-cycle dynamics:
Sector Asset Allocation:
strong earnings growth albeit some noise on the second
derivative. Macro fundamentals are strong: low inflation, lack  OW: Financials, Consumer Discretionary, Materials, and
of relevant twin deficits in big economies, and positive credit Energy
impulse. But does that matter if the US moves to late-cycle  UW: Utilities, Industrials, Consumer Staples, and
dynamics? A lasting disconnect between US and EM Telecommunication Services
monthly returns is a rare risk looking backward: in 82% of the
past 300 months (25 years), US and EM equities produced Upgrades
monthly returns in the same direction. Historical performance  Upgrade India IT to Neutral from UW
disconnect proved to be very short-lived. And, as expected, Downgrades
EM produces nearly 35% more/less returns vs. US equities in
good/bad months. Korea Banks to Neutral from OW
Exhibit 55: Emerging markets strategy heat map—OW sectors in light green, UW sectors in red
KR. Others India Fin. SA Mat. SA Others Philippines
India IT
China Fin. India Energy Russia Fin.
Korea CD SA Financials Thailand
Ex Banks India HC India Mat.
Russia Energy
Taiwan IT Korea IT Korea Ind. India CD India Others
China IT SA CD Indo. others
Korea Mat. China HC India CS Chile UAE
China CS Brazil MX Others Qatar Indo. Fin.
Korea Fin.
Financials MX Financials Turkey Fin.
China Banks China CD
Taiwan Mat. Korea CS Brazil CS Mexico CS Turkey others Malaysia
China
Taiwan Taiwan Ch. Energy Ch. RE Brazil Others MX Materials Poland
Telecom
Others Financials Ch. Others Ch. Utilities Ch. Ind. Brazil M&E MX Telecom Hunga. & CZ Greece
Source: J.P. Morgan Strategy, MSCI, Datastream. For color/black and white print, red/dark grey indicates UW, green/light grey indicates OW, and white indicates Neutral. Area of the sector indicates weight in
MSCI EM, We exclude countries with <0.5% weight of MSCI EM Index. Among smaller markets we are N Peru and N Colombia
32
Anthony Wong Emerging Markets Outlook and Strategy
(1-212) 834-4483 08 June 2018
Growth and Inflation Outlook and Forecasts

Real GDP Real GDP Inflation Inflation
%oya 2018 %q/q saar % Dec/Dec 2018 %oya
2017 2018 2019 Potential 1Q 2Q 3Q 4Q 2017 2018 2019 CPI target 1Q 2Q 3Q 4Q
Developed markets 2.3 2.3 2.1 1.4 1.6 2.5 2.3 2.3 1.8 2.2 1.9 - out 2.1 2.3 2.2
Emerging Markets 4.8 4.7 4.8 4.6 5.1 4.5 4.4 4.6 3.3 3.5 3.7 - 2.9 3.1 3.2 3.2
EM Asia 6.2 6.0 5.9 5.8 6.4 5.9 5.8 5.7 2.3 2.7 3.0 - 2.4 2.5 2.6 2.6
EMEA EM 2.8 2.8 2.9 3.0 2.6 2.7 2.5 2.8 5.9 5.6 5.5 - 4.1 4.5 4.6 4.6
Latin America* 1.7 1.9 2.8 2.1 3.2 0.8 1.6 2.5 4.1 3.7 3.8 - 3.5 3.4 3.6 3.6
EM Asia 6.2 6.0 5.9 5.8 6.4 5.9 5.8 5.7 2.3 2.7 3.0 - 2.4 2.5 2.6 2.6
China 6.9 6.7 6.4 6.4 6.9 6.6 6.3 6.3 1.8 2.5 2.9 3.5 2.2 2.1 2.2 2.3
Hong Kong 3.8 4.0 3.3 2.8 9.1 1.6 1.5 1.0 1.7 2.8 3.0 - 2.4 2.5 2.7 2.8
India 6.7 7.1 7.3 7.3 7.3 7.2 7.1 7.0 5.2 5.0 5.0 4.0 (+/-2.0) 4.6 5.4 5.2 4.8
Indonesia 5.1 5.2 5.2 5.0 6.1 5.4 4.7 4.7 3.6 3.5 3.0 3.5 (+/-1.0) 3.3 3.0 3.4 3.5
Korea 3.1 2.8 2.7 2.7 4.1 3.0 3.0 2.4 1.5 2.0 2.1 2.0 1.3 1.6 1.6 1.9
Malaysia 5.9 5.4 5.2 5.0 5.6 5.2 5.2 5.0 3.5 0.7 1.8 - 1.8 1.9 1.1 0.6
Philippines 6.7 6.7 6.9 6.3 6.3 6.7 7.2 7.5 2.9 3.1 4.4 3.0 (+/-1.0) 3.9 4.7 4.2 3.3
Singapore 3.6 3.2 2.6 3.0 1.7 1.8 2.8 2.8 0.4 1.7 1.3 - 0.2 1.2 1.7 1.8
Taiwan 2.9 2.7 2.4 2.4 0.8 2.0 2.6 2.4 1.2 1.5 1.9 - 1.6 2.0 2.3 2.1
Thailand 3.9 4.5 3.7 3.5 8.1 2.5 4.5 4.1 0.8 1.2 1.8 2.5 (+/- 1.5) 0.6 1.4 1.4 1.1
Latin America* 1.7 1.9 2.8 2.1 3.2 0.8 1.6 2.5 6.6 6.6 5.8 - 3.5 3.4 3.6 3.6
Argentina 2.9 1.5 2.1 2.5 4.2 -3.2 -2.4 1.6 24.8 26.6 19.8 10.0 (+/-2.0) 25.2 26.7 28.3 27.8
Brazil 1.0 1.2 3.0 1.3 1.8 0.0 1.8 2.8 2.9 3.9 4.3 4.5 (+/-1.5) 2.8 3.1 3.5 3.6
Chile 1.5 3.8 3.7 2.8 4.9 3.0 2.7 2.9 2.3 2.8 3.8 3.0 (+/-1.0) 2.0 2.5 3.1 3.1
Colombia 1.8 2.9 3.4 3.3 2.8 3.0 4.5 3.0 4.1 3.6 3.5 3.0 (+/-1.0) 3.4 3.2 3.5 3.7
Ecuador 3.0 1.2 0.0 2.3 2.0 -1.5 -2.0 -2.0 -0.2 1.5 1.6 - 0.4 0.0 0.7 1.4
Mexico 2.0 2.2 2.4 2.5 4.6 2.8 2.0 2.5 6.8 3.6 3.3 3.0 (+/-1.0) 5.3 4.5 4.1 3.8
Peru 2.5 3.5 4.1 3.5 6.1 3.2 3.8 3.6 1.4 2.5 2.0 2.0 (+/-1.0) 1.0 1.5 1.7 2.4
Uruguay 2.6 2.6 3.1 2.5 2.8 1.8 3.4 4.0 6.6 7.2 7.0 5.0 (+/-2.0) 6.1 6.5 6.8 6.8
Venezuela -12.0 -10.0 - 1.5 -2.0 0.0 1.0 2.0 2500.0 8500.0 - - 6067.4 12829.3 17041.6 11997.8
EMEA EM** 2.8 2.8 2.9 3.0 2.6 2.7 2.5 2.8 5.9 5.6 5.5 - 4.1 4.5 4.6 4.6
Croatia 2.9 2.4 2.7 2.0 — — — — 1.3 1.8 1.9 - — — — —
Czech Republic 4.6 3.6 3.5 3.3 1.6 4.5 3.7 3.0 2.4 1.7 2.1 2.0 (+/-1.0) 1.9 2.1 1.9 1.6
Hungary 4.0 4.2 3.6 3.2 4.9 4.3 4.0 3.5 2.1 1.9 2.9 3.0 (+/-1.0) 2.0 2.4 2.2 1.9
Israel 3.3 3.6 3.6 3.5 4.2 3.6 3.9 4.1 0.4 1.0 1.9 1.0-3.0 0.2 0.6 1.2 1.0
Kazakhstan 4.0 4.5 5.0 3.0 — — — — 7.0 5.0 6.0 5.0-7.0 6.9 6.7 6.8 6.2
Nigeria 0.8 2.8 3.2 4.0 — — — — 15.3 12.3 11.5 6.0-9.0 — — — —
Poland 4.6 4.5 3.7 3.5 6.6 4.3 3.8 3.8 2.1 1.4 2.5 2.5 (+/-1.0) 1.5 1.8 1.9 1.5
Romania 6.9 3.2 2.8 3.6 0.0 4.5 3.2 2.8 3.3 3.8 4.1 2.5 (+/-1.0) 4.7 5.3 5.3 3.9
Russia 1.5 1.6 1.6 1.3 2.6 2.8 2.3 1.5 2.5 3.9 4.0 4.0 2.3 2.4 3.2 3.9
Serbia 1.9 4.1 3.4 3.0 — — — — 2.4 2.8 3.0 3.0 (+/-1.5) — — — —
South Africa 1.3 1.5 2.0 1.5 -2.2 2.0 3.5 3.5 4.7 5.0 5.1 3.0-6.0 4.1 4.7 5.2 5.1
Turkey 7.4 3.3 3.6 4.0 2.0 0.8 0.8 3.5 11.9 11.8 9.5 5.0 (+/-2.0) 10.2 11.1 9.9 9.9
Ukraine 2.5 4.0 4.0 3.5 — — — — 13.7 10.2 8.0 6.0 (+/- 2.0) 13.8 12.5 11.4 10.3
MENA 1.3 2.9 3.2 3.5 — — — — 5.3 4.5 4.9 - — — — —
Egypt 4.2 5.2 5.6 4.0 — — — — 29.8 11.4 13.9 - 15.4 14.7 13.4 13.2
GCC 0.1 2.2 2.6 3.3 — — — — 0.5 3.7 3.5 - — — — —
Saudi Arabia -0.7 1.6 2.1 3.3 — — — — -1.1 4.8 3.8 - — — — —
Source: J.P. Morgan. *excludes Argentina, Ecuador and Venezuela. **includes MENA countries.
33
(1-212) 834-4483 08 June 2018
EM Fiscal Balance and Current Account Forecasts

Fiscal balance Current account
(% GDP) balance (% GDP)
2017 2018 2019 2017 2018 2019
Emerging Markets -3.3 -2.5 -2.6 1.1 1.0 1.0
Emerging Asia -2.8 -2.2 -2.5 2.0 1.4 1.4

China -3.0 -2.6 -3.0 1.4 0.9 0.9
Hong Kong 5.1 3.5 2.0 5.5 6.0 6.6
India -6.6 -3.3 -3.0 -1.8 -2.7 -2.9
Indonesia -2.7 -2.2 -2.0 -1.7 -2.2 -2.2
Korea 1.4 1.2 1.0 5.2 4.0 3.7
Malaysia -3.0 -2.8 -3.2 2.9 4.2 3.8
Philippines -2.6 -3.0 -3.0 -0.8 -1.0 -1.2
Singapore — — — 18.8 19.0 20.3
Taiwan -1.2 -1.5 -1.5 13.0 12.5 12.5
Thailand -3.4 -3.6 -3.5 10.4 7.2 7.0
EMEA EM -3.5 -1.8 -1.3 0.1 1.5 1.7

Croatia 0.8 -0.2 0.2 3.9 4.2 4.1
Czech Republic 1.6 0.7 0.4 1.0 0.4 0.9
Egypt -11.5 -9.8 -8.0 -6.5 -4.3 -2.8
GCC -6.0 -1.3 0.1 3.0 7.6 8.0
Hungary -2.0 -2.3 -2.5 2.9 1.7 1.9
Israel -2.0 -2.3 -2.3 3.0 2.2 2.5
Kazakhstan -4.7 0.6 0.4 -3.4 -0.3 -0.5
Nigeria -4.2 -4.0 -3.7 2.8 2.8 3.2
Poland -1.7 -2.0 -2.3 0.2 -0.3 -0.3
Romania -2.9 -3.6 -3.2 -3.4 -3.9 -4.3
Russia -1.5 1.3 1.3 2.2 4.1 2.8
Serbia 1.2 0.1 -0.3 -5.6 -4.5 -3.9
South Africa -4.3 -3.6 -3.6 -2.5 -2.9 -3.0
Turkey -1.5 -2.3 -2.0 -5.5 -6.1 -4.5
Ukraine -6.1 -4.1 -2.9 -1.9 -3.3 -3.3
Latin America -5.1 -5.1 -4.8 -1.5 -1.7 -1.8

Argentina -6.1 -5.1 -4.9 -4.8 -4.9 -4.2
Brazil -7.8 -7.7 -7.4 -0.5 -0.7 -1.1
Chile -2.7 -2.2 -1.5 -1.0 -1.2 -1.5
Colombia -3.6 -3.1 -2.6 -3.4 -2.8 -2.9
Ecuador -6.0 -5.1 -4.4 -0.2 0.4 0.5
Mexico -1.1 -2.1 -2.1 -1.6 -2.1 -1.9
Peru -3.2 -3.5 -3.0 -1.3 -1.1 -1.3
Uruguay -3.6 -3.4 -3.2 1.6 0.9 0.3
Venezuela -10.0 -10.0 - 2.2 1.3 -
Source: J.P. Morgan
34
(1-212) 834-4483 08 June 2018
EM Monetary Policy Forecasts

Current End of Period Forecast (%pa)
(%pa) Next change 3Q18 4Q18 1Q19 2Q19
Developed 0.78 1.03 1.16 1.30 1.46
Emerging 4.54 4.59 4.63 4.67 4.67

EM Asia 4.15 4.21 4.25 4.28 4.29
China 4.35 On hold 4.35 4.35 4.35 4.35
Hong Kong 2.00 13 Jun 18 (+25bp) 2.50 2.75 3.00 3.25
India 6.25 4Q 18 (+25bp) 6.25 6.50 6.50 6.50
Indonesia 4.75 27 Sep 18 (+25bp) 5.00 5.00 5.00 5.00
Korea 1.50 3Q 18 (+25bp) 1.75 1.75 2.00 2.00
Malaysia 3.25 On hold 3.25 3.25 3.25 3.25
Philippines 3.25 3Q 18 (+25bp) 3.50 3.50 3.50 3.50
Taiwan 1.38 3Q 18 (+13bp) 1.50 1.63 1.75 1.88
Thailand 1.50 3Q 18 (+25bp) 1.75 1.75 2.00 2.00
EMEA EM 4.98 5.00 5.03 5.06 5.17
Czech Rep. 0.75 3Q 18 (+25bp) 1.00 1.25 1.50 1.75
Hungary 0.90 On hold 0.90 0.90 0.90 0.90
Israel 0.10 1Q 19 (+15bp) 0.10 0.10 0.25 0.75
Nigeria 14.00 3Q18 (-50bp) 14.00 14.00 14.00 14.00
Poland 1.50 4Q 19 (+25bp) 1.50 1.50 1.50 1.50
Romania 2.50 Oct 18 (+25bp) 2.50 2.75 2.75 3.00
Russia 7.25 Sep 18 (-25bp) 7.00 6.75 6.75 6.75
Serbia 3.00 2Q19 (+25bp) 3.00 3.00 3.00 3.25
South Africa 6.50 Jul 19 (+25bp) 6.50 6.50 6.50 6.50
Turkey* 17.75 May 19 (-50bp) 17.75 17.75 17.75 16.75
LatAm 6.13 6.13 6.17 6.25 6.12
Argentina 40.00 June 18 (-100bp) 36.00 32.00 28.00 25.00
Brazil 6.50 Jul 19 (+50bp) 6.50 6.50 6.50 6.50
Mexico 7.50 Apr 19 (-25bp) 7.50 7.50 7.50 7.00
Chile 2.50 Oct 18 (+25bp) 2.50 2.75 3.00 3.25
Colombia 4.25 Dec 18 (+25bp) 4.25 4.50 5.00 5.00
Peru 2.75 Jan 19 (+25bp) 2.75 2.75 3.25 3.25
Source: J.P. Morgan. *Effective rate is a weighted average of the ON lending rate and the 1-week repo rate and changes on a daily basis.
35
Amy Ho Emerging Markets Outlook and Strategy
(1-212) 622 9364 08 June 2018
amy.ho@jpmorgan.com
Michael Harrison
(44-20) 7134-5720
michael.p.harrison@jpmorgan.com
Sovereign and Corporate Issuance and Cashflows

EM Sovereigns US$bn 2016 2017 2018YTD 2018F
a Gross issuance (b + c) 145.8 178.9 112.2 155.1
b New issuance 130.1 156.0 104.7 147.6
c Taps 15.6 23.0 7.5 7.5*
d Estimated cash flows (e + f) 74.8 93.7 36.9 89.5
e Amortizations 32.8 46.5 13.9 38.7
f Coupons 42.1 47.2 23.0 50.8
g Buybacks 9.8 8.1 6.1 6.1*
h Net issuance (a - e - g) 103.2 124.3 92.2 110.3
i Net financing (h - f) 61.1 77.1 69.2 59.5
Source: J.P. Morgan, Bloomberg. *2018 tap and buyback forecast is YTD figure and data as of COB 5 June 2018
EM Corporates US$bn 2016 2017 2018YTD 2018F

Gross issuance (a) 326 482 210 442
Estimated cash flows (b = c+d) 203 257 128 267
Amortizations (c) 118 173 86 175
Coupons (d) 86 84 42 92
Net issuance (e = a-c) 208 309 124 267
Net financing (f = a-b = e-d) 123 225 82 175
Tender/Buyback/Calls (g) 55 83 47 66
Net issuance after tender/buyback/call activities (j = e-g) 153 226 77 201
Net financing after tender/buyback/call activities (k = f-g) 68 142 35 109
Source: J.P. Morgan, Bloomberg, Bond Radar. 2018YTD as of 5 June 2018
GBI-EM Global Diversified Return Forecast

To year- 2018 Full-year Yield Local Return Spot Spot Return
Carry and Duration to YE
Spot FX to YE end YTD 2018 Current Forecast to year end Current Forecast to year end
GBI-EM Global Diversified 5.0% -3.8% 1.0% 6.47% 6.43% 3.9% 1.1%
Indonesia 4.2% -4.0% 0.0% 7.41% 7.20% 5.5% 13848 14025 -1.3%
Malaysia 3.8% 2.1% 6.0% 4.22% 4.20% 2.5% 3.97 3.92 1.3%
Philippines 2.6% -6.5% -4.1% 5.46% 5.35% 3.8% 52.39 53.00 -1.2%
Thailand 0.9% 1.8% 2.8% 2.63% 2.85% 0.0% 31.88 31.60 0.9%
Czech Republic 5.3% -4.1% 1.0% 1.65% 1.90% -0.3% 21.79 20.63 5.7%
Hungary 4.2% -6.3% -2.4% 2.01% 2.30% -0.1% 270 259 4.3%
Poland 4.5% -2.4% 2.0% 2.59% 3.00% -0.2% 3.62 3.46 4.7%
Romania 1.9% -2.2% -0.3% 4.53% 4.65% 2.1% 3.95 3.96 -0.2%
Russia 7.4% -3.7% 3.4% 7.16% 7.00% 4.8% 61.98 60.50 2.5%
South Africa 8.1% 1.7% 9.9% 9.27% 8.55% 10.6% 12.71 13.00 -2.3%
Turkey -2.6% -22.9% -24.8% 15.80% 16.50% 6.8% 4.56 5.00 -8.7%
Argentina -2.6% -25.6% -27.5% 18.21% 19.00% 7.6% 24.90 27.50 -9.5%
Brazil 13.0% -12.1% -0.6% 9.87% 9.50% 6.7% 3.81 3.60 6.0%
Chile 6.6% -0.6% 6.0% 4.86% 5.00% 1.7% 629 600 4.8%
Colombia 0.7% 8.2% 8.9% 6.30% 6.20% 4.1% 2830 2925 -3.2%
Dominican Republic 1.0% 0.1% 1.1% 8.15% 8.30% 4.1% 49.52 51.00 -2.9%
Mexico 7.9% -1.4% 6.4% 7.83% 8.00% 3.6% 20.32 19.50 4.2%
Peru 1.0% -1.6% -0.6% 5.66% 6.00% 0.7% 3.26 3.25 0.3%
Uruguay 2.2% -10.1% -8.1% 10.06% 10.50% 3.7% 31.05 31.50 -1.4%
-20% -10% 0% 10% 20%
Source: J.P. Morgan
36
Amy Ho AC Emerging Markets Outlook and Strategy
(1-212) 622 9364 08 June 2018
amy.ho@jpmorgan.com
EM Asia sovereign issuance forecast

2018 Gross YTD Total 2018F
Issuance MoM 2018 Issuance YTD New YTD Gross 2018F 2018F Total
US$mn Forecast Forecast Revision Issuance YTD Taps Buybacks Issuance Coupons Amortizations Cashflows
China - - - - - 55 - 55
Fiji - - - - - 13 - 13
Hong Kong 1,000 - - - - - 70 - 70
Indonesia 5,239 - 5,223 - - 5,223 3,088 2,900 5,988
Malaysia - - - - - 141 - 141
Maldives - - - - - 18 - 18
Mongolia - - - - - 206 127 333
Pakistan 1,000 - - - - - 478 - 478
Philippines 2,000 - 2,000 - 983 2,000 1,439 - 1,439
South Korea 1,000 - - - - - 720 967 1,687
Sri Lanka 3,500 1,000 2,500 - - 2,500 252 - 252
Vietnam - - - - - 106 6 112
EM Asia 13,739 1,000 9,723 - 983 9,723 6,585 4,000 10,585
Source: J.P. Morgan
Latin America sovereign issuance forecast

2018 Gross YTD Total 2018F
Issuance MoM 2018 Issuance YTD New YTD Gross 2018F 2018F Total
Argentina 9,000 - 9,000 - - 9,000 3,332 369 3,700
Aruba - - - - - 22 52 74
Bahamas - - - - - 103 - 103
Barbados - - - - - 42 1 43
Belize - - - - - 32 - 32
Bermuda - - - - - 93 - 93
Bolivia 500 - - - - - 99 - 99
Brazil 3,000 - - 1,500 - 1,500 1,729 14 1,743
Chile 3,038 - 3,038 - - 3,038 301 - 301
Colombia 1,000 - - - - - 1,416 - 1,416
Costa Rica 500 - - 23 - 23 292 - 292
Dominican Republic 1,500 - 1,000 - - 1,000 804 7 811
Ecuador 5,500 - 3,000 - - 3,000 1,287 200 1,487
El Salvador - - - - - 467 - 467
Guatemala - - - - - 155 - 155
Honduras - - - - - 125 - 125
Jamaica 600 - - - - - 439 59 497
Mexico 6,200 - 4,383 645 574 5,028 2,704 - 2,704
Panama 1,500 - 1,200 - - 1,200 730 - 730
Paraguay 530 -70 530 - - 530 165 - 165
Peru - - - - - - 708 - 708
Suriname - - - - - 51 - 51
Trinidad & Tobago - - - - - 102 - 102
Uruguay 2,250 250 1,750 - 227 1,750 647 - 647
Venezuela - - - - - 813 2,053 2,866
Latin America 35,118 180 23,901 2,168 802 26,069 16,657 2,754 19,411
Source: J.P. Morgan.
37
Amy Ho AC Emerging Markets Outlook and Strategy
(1-212) 622 9364 08 June 2018
amy.ho@jpmorgan.com
EMEA EM and Global EM sovereign issuance forecast

2018 Gross YTD Total
Issuance MoM 2018 Issuance YTD New YTD Gross 2018F 2018F 2018F Total
Albania - - - - - 30 - 30
Angola 3,000 - 3,000 - - 3,000 143 - 143
Armenia - - - - - 66 - 66
Azerbaijan - - - - - 133 174 306
Bahrain 2,500 -1,000 1,000 - - 1,000 875 750 1,625
Belarus 600 - 600 - - 600 155 800 955
Bulgaria - - - - - 207 - 207
Cameroon - - - - - 71 - 71
Congo - - - - - 8 10 19
Ivory Coast 2,101 - 2,091 - - 2,091 257 - 257
Croatia 883 -282 883 - - 883 677 876 1,553
Czech Republic - - - - - 384 2,337 2,722
Egypt 6,476 - 6,476 - - 6,476 1,081 1,360 2,441
Ethiopia - - - - - 66 - 66
Gabon - - - - - 144 - 144
Georgia - - - - - 34 - 34
Ghana 2,500 - 2,000 - 702 2,000 393 - 393
Hungary 1,500 - - - - - 960 1,939 2,899
Iraq 1,000 -1,000 - - - - 230 - 230
Israel 2,000 - 2,000 - - 2,000 519 400 919
Jordan 1,250 - - - - - 193 - 193
Kazakhstan - - - - - - 333 - 333
Kenya 2,000 - 2,000 - - 2,000 259 - 259
Kuwait - - - - - - 254 - 254
Latvia 760 760 408 351 - 759 177 493 670
Lebanon 5,500 1,500 3,000 2,500 - 5,500 1,467 2,264 3,731
Lithuania 2,250 - - - - - 529 1,915 2,444
Macedonia 623 - 612 - 110 612 63 - 63
Montenegro 620 - 617 - 227 617 56 - 56
Morocco - - - - - 198 - 198
Namibia - - - - - 67 - 67
Nigeria 4,000 - 2,500 - - 2,500 531 500 1,031
Oman 6,500 - 6,500 - - 6,500 744 - 744
Poland 3,500 - 1,226 - - 1,226 1,980 3,675 5,655
Qatar 12,000 - 12,000 - - 12,000 1,199 2,000 3,199
Romania 5,700 - 2,449 - - 2,449 1,020 1,753 2,772
Russia 7,000 - 1,500 2,500 3,104 4,000 2,222 3,675 5,897
Rwanda - - - - - 27 - 27
Saudi Arabia 11,000 - 11,000 - - 11,000 1,594 - 1,594
Senegal 2,239 - 2,239 - 200 2,239 160 - 160
Serbia 1,000 - - - - - 283 1,171 1,454
Slovakia 1,770 1,770 - - - - 136 328 464
South Africa 3,000 - 2,000 - - 2,000 1,019 - 1,019
Tajikistan - - - - - - 36 - 36
Tanzania - - - - - - - -
Tunisia 2,000 - - - - - 198 - 198
Turkey 7,500 -1,250 4,000 - - 4,000 3,645 5,000 8,645
Ukraine 1,500 - - - - - 1,615 - 1,615
United Arab Emirates 2,000 - 1,000 - - 1,000 787 - 787
Abu Dhabi - - - - - - 556 - 556
Dubai 1,000 - - - - - 163 - 163
Sharjah 1,000 - 1,000 - - 1,000 69 - 69
Zambia - - - - - 237 - 237
EMEA EM 106,272 499 71,103 5,351 4,342 76,454 27,459 31,421 58,880
All EM 155,129 1,679 104,727 7,519 6,127 112,246 50,702 38,175 88,877
Source: J.P. Morgan
38
Michael Harrison Emerging Markets Outlook and Strategy
(1-212) 834-7190 08 June 2018
michael.p.harrison@jpmorgan.com
Exchange rate end-of-period forecasts and forwards

versus USD Jun 18 Sep 18 Dec 18 Mar 19 Forwards Jun 18 Sep 18 Dec 18 Mar 19
EUR 1.16 1.18 1.20 1.23 EUR 1.18 1.19 1.20 1.21
JPY 111 108 106 104 JPY 109 109 108 108
GBP 1.32 1.33 1.35 1.38 GBP 1.35 1.35 1.36 1.36
AUD 0.76 0.75 0.74 0.73 AUD 0.77 0.77 0.77 0.77
CAD 1.26 1.25 1.24 1.23 CAD 1.29 1.29 1.28 1.28
NZD 0.70 0.69 0.68 0.67 NZD 0.70 0.70 0.70 0.70
CHF 1.03 1.01 0.99 0.97 CHF 0.98 0.98 0.97 0.96
NOK 8.06 7.84 7.63 7.36 NOK 8.05 8.05 8.02 7.99
SEK 8.79 8.60 8.38 8.09 SEK 8.66 8.66 8.59 8.52
EMEA EM Jun 18 Sep 18 Dec 18 Mar 19 EMEA EM Jun 18 Sep 18 Dec 18 Mar 19
ILS 3.50 3.45 3.45 3.40 ILS 3.57 3.54 3.52 3.50
CZK 21.77 21.19 20.63 19.92 CZK 21.66 21.66 21.54 21.35
PLN 3.64 3.54 3.46 3.36 PLN 3.61 3.61 3.60 3.59
HUF 272 265 259 252 HUF 268 268 267 265
RON 4.05 4.01 3.96 3.88 RON 3.96 3.96 3.97 3.98
RUB 61.50 61.00 60.50 60.00 RUB 62.68 62.68 63.23 63.71
TRY 4.50 4.75 5.00 5.25 TRY 4.78 4.78 4.96 5.15
ZAR 12.90 13.00 13.00 13.10 ZAR 12.89 12.89 13.04 13.18
Latin America Jun 18 Sep 18 Dec 18 Mar 19 Latin America Jun 18 Sep 18 Dec 18 Mar 19
ARS 25.00 26.00 27.50 29.00 ARS 25.37 27.50 29.46 31.18
BRL 3.80 3.75 3.60 3.45 BRL 3.82 3.85 3.88 3.92
CLP 625 610 600 590 CLP 629 629 629 630
COP 2800 2875 2925 2950 COP 2832 2843 2856 2869
DOP 49.50 49.80 50.00 50.30 DOP - - - -
MXN 20.00 19.75 19.50 19.00 MXN 20.39 20.69 21.00 21.31
PEN 3.27 3.27 3.25 3.24 PEN 3.26 3.27 3.28 3.29
VEF* 100,000 200,000 350,000 1,000,000 VEF - - - -
UYU 31.00 31.00 31.50 31.50 UYU - - - -
EM Asia Jun 18 Sep 18 Dec 18 Mar 19 EM Asia Jun 18 Sep 18 Dec 18 Mar 19
CNY 6.36 6.33 6.30 6.28 CNY 6.43 6.43 6.45 6.48
HKD 7.84 7.83 7.81 7.81 HKD 7.83 7.83 7.82 7.81
INR 67.25 68.00 68.75 69.50 INR 67.98 67.98 68.71 69.40
IDR 13900 13950 14025 14100 IDR 14055 14055 14227 14389
KRW 1075 1070 1065 1060 KRW 1066 1066 1062 1057
MYR 3.96 3.94 3.92 3.90 MYR 4.00 4.00 4.01 4.02
PHP 52.50 52.75 53.00 53.50 PHP 52.70 52.70 52.97 53.23
SGD 1.33 1.32 1.31 1.30 SGD 1.33 1.33 1.33 1.32
THB 31.90 31.75 31.60 31.50 THB 31.73 31.73 31.62 31.52
TWD 29.70 29.55 29.30 29.00 TWD 29.45 29.45 29.22 28.98
*Refers to DICON, formerly SIMADI
Source: J.P. Morgan
39
(1-212) 622 9364 08 June 2018
amy.ho@jpmorgan.com
Asia and Latin America Credit Ratings

S&P Moody's Fitch Recent S&P Action Recent Moody's Action Recent Fitch Action
Rating Outlook Rating Outlook Rating Outlook Rating Date Outlook Date Rating Date Outlook Date Rating Date Outlook Date
China A+ Stable A1 Stable A+ Stable 21-Sep-17 21-Sep-17 24-May-17 24-May-17 6-Nov-07 15-Oct-13
Fiji B+ Stable Ba3 Stable NR NR 1-May-15 1-May-15 6-Sep-17 6-Sep-17 NR -
Hong Kong AA+ Stable Aa2 Stable AA+ Stable 21-Sep-17 21-Sep-17 24-May-17 24-May-17 25-Nov-10 25-Nov-10
India BBB-u Stable Baa2 Stable BBB- Stable 25-Feb-11 26-Sep-14 22-Jan-04 16-Nov-17 01-Aug-06 12-Jun-13
Indonesia BBB- Stable Baa2 Stable BBB Stable 19-May-17 19-May-17 13-Apr-18 13-Apr-18 20-Dec-17 20-Dec-17
South Korea AA Stable Aa2 Stable AA- Stable 7-Aug-16 7-Aug-16 18-Dec-15 18-Dec-15 6-Sep-12 22-Jul-16
Malaysia A- Stable A3 Stable A- Stable 8-Oct-03 27-Jul-11 16-Dec-04 11-Jan-16 8-Nov-04 22-Jul-16
Mongolia B- Stable B3 - B- Pos 19-Aug-16 19-Aug-16 18-Jan-18 18-Jan-18 22-Nov-16 17-Nov-17
Pakistan B Stable B3 Stable B Neg 31-Oct-16 31-Oct-16 11-Jun-15 11-Jun-15 17-Sep-15 25-Jan-18
Philippines BBB Pos Baa2 Stable BBB Stable 8-May-14 26-Apr-18 11-Dec-14 11-Dec-14 10-Dec-17 10-Dec-17
Singapore AAAu Stable Aaa Stable AAA Stable 25-Feb-11 2-May-08 14-Jun-02 14-May-03 14-May-03 7-Mar-08
Sri Lanka B+ Stable B1 Neg B+ Stable 14-Sep-10 20-Nov-17 27-Jul-11 12-Dec-17 29-Feb-16 9-Feb-17
Taiwan AA-u Stable Aa3 Stable AA- Stable 25-Feb-11 11-Jun-10 20-Jul-99 24-May-06 12-Oct-16 12-Oct-16
Thailand BBB+ Stable Baa1 Stable BBB+ Stable 31-Oct-06 9-Dec-10 26-Nov-03 28-Oct-10 8-Mar-13 22-Jul-16
Vietnam BB- Stable B1 Pos BB Stable 23-Dec-10 6-Jun-12 29-Jul-14 28-Apr-17 15-May-18 15-May-18
Source: Bloomberg
Argentina B+ Stable B2 Stable RD Stable 30-Oct-17 10/30/2017 29-Nov-17 29-Nov-17 31-Jul-14 4-May-18
Barbados SD NR Caa3 Stable NR - 6-Jun-18 27-Sep-17 9-Mar-17 9-Mar-17 NR -
Belize B- - B3 Stable NR - 23-Mar-17 - 11-Apr-17 11-Apr-17 NR -
Bolivia BB- Stable Ba3 Stable BB- Stable 23-May-18 23-May-18 8-Jun-12 1-Aug-17 13-Jul-16 13-Jul-16
Brazil BB- Stable Ba2 Stable BB- Stable 11-Jan-18 11-Jan-18 24-Feb-16 9-Apr-18 23-Feb-18 23-Feb-18
Chile A+ Stable Aa3 Neg A Stable 13-Jul-17 13-Jul-17 16-Jun-10 24-Aug-17 11-Aug-17 11-Aug-17
Colombia BBB- Stable Baa2 Neg BBB Stable 11-Dec-17 11-Dec-17 28-Jul-14 22-Feb-18 10-Dec-13 9-May-18
Costa Rica BB- Neg Ba2 Neg BB Neg 25-Feb-16 25-Feb-16 9-Feb-17 9-Feb-17 19-Jan-17 18-Jan-18
Cuba NR - Caa2 Stable NR - NR - 23-Apr-14 8-Nov-17 NR -
DomRep BB- Stable Ba3 Stable BB- Stable 20-May-15 20-May-15 20-Jul-17 20-Jul-17 18-Nov-16 18-Nov-16
Ecuador B- Stable B3 Stable B Neg 29-Jun-17 29-Jun-17 19-Dec-14 19-Dec-14 18-Oct-13 25-Aug-16
El Salvador CCC+ Pos B3 Stable B- Stable 3-Oct-17 14-Dec-17 23-Feb-18 23-Feb-18 6-Oct-17 6-Oct-17
Guatemala BB- Stable Ba1 Stable BB Stable 18-Oct-17 18-Oct-17 1-Jun-10 30-Jun-16 20-Jun-14 20-Jun-14
Honduras BB- Stable B1 Stable NR - 18-Jul-17 18-Jul-17 22-Sep-17 22-Sep-17 NR -
Jamaica B Stable B3 Stable B Pos 6/3/2015 3-Jun-15 21-Nov-16 21-Nov-16 11-Feb-16 31-Jan-18
Mexico BBB+ Stable A3 Stable BBB+ Stable 12/19/2013 18-Dec-17 5-Feb-14 11-Apr-18 8-May-13 3-Aug-17
Nicaragua B+ Stable B2 Pos B+ Stable 2/11/2016 11-Feb-16 13-Jul-15 20-Jul-17 16-Dec-15 16-Dec-15
Panama BBB Stable Baa2 Pos BBB Stable 2-Jul-12 2-Jul-12 31-Oct-12 29-Sep-17 2-Jun-11 2-Jun-11
Paraguay BB Stable Ba1 Stable BB Pos 11-Jun-14 15-Jun-16 20-Mar-15 20-Mar-15 29-Jan-15 14-Dec-17
Peru BBB+ Stable A3 Stable BBB+ Stable 19-Aug-13 19-Aug-13 2-Jul-14 2-Jul-14 23-Oct-13 23-Oct-13
T&T BBB+ Neg Ba1 Stable NR - 21-Apr-17 27-Apr-18 25-Apr-17 25-Apr-17 NR -
Uruguay BBB Stable Baa2 Stable BBB- Stable 5-Jun-15 9-May-18 29-May-14 13-Jul-17 7-Mar-13 22-Jul-16
Venezuela SD Neg C Stable C - 13-Nov-17 29-May-18 9-Mar-18 9-Mar-18 3-Nov-17 -
Source: Bloomberg
40
(1-212) 622 9364 08 June 2018
amy.ho@jpmorgan.com
EMEA EM and Developed Markets Credit Ratings

Angola B- Stable B3 Stable B Stable 11-Aug-17 11-Aug-17 27-Apr-18 27-Apr-18 23-Sep-16 25-Apr-18
Bahrain B+ Stable B1u Neg BB- Stable 1-Dec-17 1-Dec-17 4-Mar-16 28-Jul-17 1-Mar-18 1-Mar-18
Botswana A- Stable A2 Stable NR - 15-Feb-10 27-Oct-17 12-Mar-01 24-Nov-11 NR -
Bulgaria BBB- Pos Baa2 Stable BBB Stable 1-Dec-17 1-Jun-18 22-Jul-11 22-Jul-11 1-Dec-17 1-Dec-17
Croatia BB+ Stable Ba2 Stable BB+ Stable 23-Mar-18 23-Mar-18 11-Mar-16 10-Mar-17 12-Jan-18 12-Jan-18
Czech Republic AA- Stable A1 Pos A+ Pos 24-Aug-11 24-Aug-11 12-Nov-02 20-Apr-18 4-Mar-08 1-Sep-17
Egypt B Stable B3 Stable B Pos 11-May-18 11-May-18 7-Apr-15 7-Apr-15 19-Dec-14 16-Jan-18
Estonia AA- Stable A1 Stable A+ Pos 13-Jan-12 19-Oct-12 26-Jun-07 31-Mar-10 5-Jul-11 10-Nov-17
Gabon NR - B3 Neg B Neg NR - 3-Jul-17 3-Jul-17 13-Oct-17 13-Oct-17
Georgia BB- Stable Ba2 Stable BB- Pos 22-Nov-11 22-Nov-11 11-Sep-17 11-Sep-17 15-Dec-11 16-Mar-18
Ghana B- Pos B3 Stable B Stable 24-Oct-14 6-Oct-17 19-Mar-15 23-Sep-16 17-Oct-13 12-May-17
Hungary BBB- Pos Baa3 Stable BBB- Pos 16-Sep-16 25-Aug-17 4-Nov-16 4-Nov-16 20-May-16 10-Nov-17
Israel A+ Pos A1 Stable A+ Stable 9-Sep-11 4-Aug-17 17-Apr-08 17-Apr-08 11-Nov-16 11-Nov-16
Jordan B+ Stable B1 Stable NR - 20-Oct-17 20-Oct-17 26-Jun-13 26-Jun-13 NR -
Kazakhstan BBB- Stable Baa3 Stable BBB Stable 17-Feb-16 8-Sep-17 22-Apr-16 26-Jul-17 29-Apr-16 29-Apr-16
Kenya B+ Stable B2 Stable B+ Stable 19-Nov-10 14-Oct-16 7-Nov-12 13-Feb-18 12-Dec-07 9-Feb-18
Kuwait AA Stable Aa2 Stable AA Stable 20-Jul-11 20-Jul-11 4-Mar-16 26-May-17 4-Sep-08 4-Sep-08
Latvia A- Pos A3 Stable A- Stable 30-May-14 22-Sep-17 13-Feb-15 13-Feb-15 20-Jun-14 20-Jun-14
Lebanon B- Stable B3 Stable B- Stable 1-Nov-13 2-Sep-16 25-Aug-17 25-Aug-17 14-Jul-16 14-Jul-16
Lithuania A Stable A3 Stable A- Stable 2-Mar-18 2-Mar-18 8-May-15 8-May-15 25-Jun-14 25-Jun-14
Morocco BBB- Stable Ba1 Pos BBB- Stable 23-Mar-10 16-May-14 25-Jun-07 24-Feb-17 19-Apr-07 22-Jul-16
Nigeria B Stable B2 Stable B+ Neg 16-Sep-16 16-Sep-16 29-Apr-16 7-Nov-17 23-Jun-16 25-Jan-17
Oman BB Stable Baa3 Neg BBB Neg 10-Nov-17 10-Nov-17 26-Feb-16 16-Mar-18 3-Jan-17 3-Jan-17
Poland BBB+ Pos A2 Stable A- Stable 15-Jan-16 13-Apr-18 12-Nov-02 12-May-17 18-Jan-07 22-Jul-16
Qatar AA- Neg Aa3 Neg AA- Stable 25-Aug-17 25-Aug-17 26-May-17 4-Jul-17 28-Aug-17 5-Jun-18
Romania BBB- Stable Baa3 Stable BBB- Stable 16-May-14 16-May-14 6-Oct-06 21-Apr-17 4-Jul-11 22-Jul-16
Russia BBB- Stable Ba1 Pos BBB- Pos 23-Feb-18 23-Feb-18 22-Apr-16 25-Jan-18 9-Jan-15 22-Sep-17
Saudi Arabia A-u Stable A1 Stable A+ Stable 17-Feb-16 17-Feb-16 4-Mar-16 14-May-16 22-Mar-17 22-Mar-17
Serbia BB Stable Ba3 Stable BB Stable 15-Dec-17 15-Dec-17 17-Mar-17 17-Mar-17 15-Dec-17 15-Dec-17
South Africa BB Stable Baa3 Stable BB+ Stable 24-Nov-17 24-Nov-17 23-Mar-18 23-Mar-18 7-Apr-17 7-Apr-17
Tunisia NR NR B2 Stable B+ Neg 18-Dec-13 NR 25-Nov-13 14-Mar-18 3-Feb-17 27-May-18
Turkey BB-u Stable Ba2 *- NR BB+ Stable 1-May-18 1-May-18 1-Jun-18 NR 27-Jan-17 27-Jan-17
Ukraine B- Stable Caa2 Pos B- Stable 19-Oct-15 19-Oct-15 25-Aug-17 25-Aug-17 11-Nov-16 11-Nov-16
UAE NR - Aa2 Stable NR - NR - 4-Mar-16 26-May-17 NR -
Zambia B Stable B3 Stable B Neg 1-Jul-15 25-Aug-17 19-Apr-16 26-Jan-18 28-Oct-13 24-Feb-16
Source: Bloomberg
Australia AAAu Neg Aaa Stable AAA Stable 25-Feb-11 6-Jul-16 21-Oct-02 13-Nov-03 28-Nov-11 28-Nov-11
Austria AA+ Stable Aa1 Stable AA+ Stable 13-Jan-12 29-Jan-13 24-Jun-16 24-Jun-16 13-Feb-15 13-Feb-15
Belgium AAu Stable Aa3 Stable AA- Stable 13-Jan-12 28-Feb-14 16-Dec-11 16-Dec-11 23-Dec-16 23-Dec-16
Canada AAA Stable Aaa Stable AAA Stable 29-Jul-02 18-May-07 3-May-02 24-May-06 12-Aug-04 22-May-07
France AAu Stable Aa2 Pos AA Stable 8-Nov-13 21-Oct-16 18-Sep-15 4-May-18 12-Dec-14 12-Dec-14
Germany AAAu Stable Aaa Stable AAA Stable 13-Jan-12 13-Jan-12 29-Apr-93 28-Feb-14 10-Aug-94 6-Nov-07
Greece B Pos B3 Pos B Pos 19-Jan-18 19-Jan-18 21-Feb-18 21-Feb-18 16-Feb-18 16-Feb-18
Iceland A Stable A3 Stable A Stable 17-Mar-17 17-Mar-17 1-Sep-16 1-Sep-16 8-Dec-17 8-Dec-17
Ireland A+ Stable A2 Stable A+ Stable 5-Jun-15 5-Jun-15 15-Sep-17 15-Sep-17 15-Dec-17 15-Dec-17
Italy BBBu Stable Baa2 *- NR BBB Stable 27-Oct-17 27-Oct-17 25-May-18 7-Dec-16 21-Apr-17 21-Apr-17
Japan A+u Pos A1 Stable A Stable 16-Sep-15 13-Apr-18 1-Dec-14 1-Dec-14 27-Apr-15 27-Apr-17
Netherlands AAAu Stable Aaa Stable AAA Stable 20-Nov-15 20-Nov-15 5-May-98 7-Mar-14 10-Aug-94 11-Jul-14
New Zealand AA Stable Aaa Stable AA Stable 29-Sep-11 29-Sep-11 21-Oct-02 13-May-99 29-Sep-11 26-Jan-16
Norway AAA Stable Aaa Stable AAA Stable 9-Jul-75 28-May-09 30-Sep-97 13-May-99 13-Mar-95 18-Dec-07
Portugal BBB-u Stable Ba1 Pos BBB Stable 15-Sep-17 15-Sep-17 25-Jul-14 1-Sep-17 15-Dec-17 15-Dec-17
Spain A-u Pos Baa1 Stable A- Stable 23-Mar-18 23-Mar-18 13-Apr-18 13-Apr-18 19-Jan-18 19-Jan-18
Sweden AAAu Stable Aaa Stable AAA Stable 23-Jan-14 23-Jan-14 4-Apr-02 15-Nov-03 8-Mar-04 18-Dec-07
Switzerland AAAu Stable Aaa Stable AAA Stable 17-Feb-11 1-Dec-03 29-Jan-82 15-Nov-03 10-Aug-94 11-Jun-07
United Kingdom AAu Neg Aa2 Stable AA Neg 27-Jun-16 27-Jun-16 22-Sep-17 22-Sep-17 27-Jun-16 27-Jun-16
United States AA+u Stable Aaa Stable AAA Stable 5-Aug-11 10-Jun-13 2-Aug-11 18-Jul-13 21-Mar-14 21-Mar-14
Source: Bloomberg
41
(1-212) 622 9364 08 June 2018
amy.ho@jpmorgan.com
Local Currency Ratings (GBI-EM Broad Countries)

Brazil BB- Stable Ba2 Stable BB- Stable 11-Jan-18 11-Jan-18 24-Feb-16 9-Apr-18 23-Feb-18 23-Feb-18
Chile AA- Stable Aa3 Neg A Stable 13-Jul-17 13-Jul-17 16-Jun-10 24-Aug-17 11-Aug-17 11-Aug-17
China A+ Stable A1 Stable A+ Stable 21-Sep-17 21-Sep-17 24-May-17 24-May-17 9-Apr-13 15-Oct-13
Colombia BBB Stable Baa2 Neg BBB Stable 11-Dec-17 11-Dec-17 28-Jul-14 22-Feb-18 22-Jul-16 9-May-18
Hungary BBB- Pos Baa3 Stable BBB- Pos 16-Sep-16 25-Aug-17 4-Nov-16 4-Nov-16 6-Jan-12 10-Nov-17
India BBB-u Stable Baa2 Stable BBB- Stable 25-Feb-11 26-Sep-14 16-Nov-17 16-Nov-17 1-Aug-06 12-Jun-13
Indonesia BBB- Stable Baa2 Stable BBB Stable 19-May-17 19-May-17 13-Apr-18 13-Apr-18 20-Dec-17 20-Dec-17
Malaysia A Stable A3 Stable A- Stable 27-Jul-11 27-Jul-11 4-Sep-98 11-Jan-16 22-Jul-16 22-Jul-16
Mexico A- Stable A3 Stable BBB+ Stable 18-Dec-17 18-Dec-17 5-Feb-14 11-Apr-18 22-Jul-16 3-Aug-17
Peru A- Stable A3 Stable A- Stable 19-Aug-13 19-Aug-13 2-Jul-14 2-Jul-14 23-Oct-13 23-Oct-13
Philippines BBB Pos Baa2 Stable BBB Stable 8-May-14 26-Apr-18 11-Dec-14 11-Dec-14 10-Dec-17 10-Dec-17
Poland A- Pos A2 Stable A- Stable 15-Jan-16 13-Apr-18 18-Sep-02 12-May-17 22-Jul-16 22-Jul-16
Romania BBB- Stable Baa3 Stable BBB- Stable 16-May-14 16-May-14 6-Oct-06 21-Apr-17 22-Jul-16 22-Jul-16
Russia BBB Stable Ba1 Pos BBB- Pos 23-Feb-18 23-Feb-18 22-Apr-16 25-Jan-18 9-Jan-15 22-Sep-17
South Africa BB+ Stable Baa3 Stable BB+ Stable 24-Nov-17 24-Nov-17 23-Mar-18 23-Mar-18 7-Apr-17 7-Apr-17
Thailand A- Stable Baa1 Stable BBB+ Stable 14-Apr-09 9-Dec-10 4-Sep-98 28-Oct-10 22-Jul-16 22-Jul-16
Turkey BBu Stable Ba2 *- NR BBB- Stable 1-May-18 1-May-18 1-Jun-18 7-Mar-18 22-Jul-16 27-Jan-17
Source: Bloomberg
Note: all rating tables are as of April 11, 2018
RATING SCALE STANDARD TERMINOLOGY AND PROCEDURES

Moody's S&P Fitch Moody's S&P Fitch
Upper Investment Grade Aaa AAA AAA
Aa1 AA+ AA+
Not currently subject
Aa2 AA AA to change STABLE STABLE STABLE
Aa3 AA- AA-
A1 A+ A+
A2 A A Possible long-term change
OUTLOOK (+ or -) OUTLOOK (+ or -) OUTLOOK (+ or -)
A3 A- A- Likely to be put on review
Lower Investment Grade Baa1 BBB+ BBB+
Baa2 BBB BBB
Baa3 BBB- BBB- Likely change in short term REVIEW (+ or -) CREDITWATCH (+ or -) RATING WATCH (+ or -)
Non-Investment Grade Ba1 BB+ BB+
Ba2 BB BB
Ba3 BB- BB- UPGRADE / DOWNGRADE UPGRADE / DOWNGRADE UPGRADE / DOWNGRADE
Lower-Non-Investment Grade B1 B+ B+ AFFIRMED / STABLE AFFIRMED / STABLE AFFIRMED / STABLE
B2 B B
B3 B- B- Moody's ratings are qualified by outlooks and reviews while S&P and Fitch ratings are qualified by outlook and watches.
Caa1 CCC+ CCC+ A review/watch is indicative of a likely short-term movement.
Caa2 CCC CCC An outlook suggests that a review/watch or a long-/intermediate-term movement is likely.
Caa3 CCC- CCC-
Ca CC CC (+) positive outlook +* positive review/watch
C C C (-) negative outlook *- negative review/watch
Default SD RD WR Rating Withdrawn
D D
Source: J.P. Morgan and rating agencies.
42
AC
Diego W. Pereira Global Emerging Markets Research
(1-212) 834-4321 Mid-Year Emerging Markets Outlook and Strategy
diego.w.pereira@jpmorgan.com 08 June 2018
JPMorgan Chase Bank Sucursal Buenos Aires
AC
Lucila Barbeito
(54-11) 4348-7229
lucila.barbeito@jpmorgan.com
public partnership capex for around 0.6%-pt. Also, we expect
Latin America consumption and investment to strengthen in 2H19, but a
Argentina B+/B2/B larger fiscal drag should weigh on overall activity.
Reassessing our baseline scenario, while We expect USDARS to reach 27.5 by end-2018 and 32.5 by
waiting for the IMF Stand-By Arrangement end-2019. Despite the peso plunge, the REER remains around
5%-10% overvalued. Moreover, we believe the new policy mix
 Acute capital flight forced the government to negotiate would aim to prevent the real exchange rate misalignment from
with the IMF widening. Also, a tighter fiscal policy would allow the central
 We now see GDP growth at 1.5%y/y, inflation at bank to start trimming the policy rate, but the ex-ante real
26.6%y/y in 2018 policy rate is unlikely to move below 8%-10%. The high real
rate could still put upside pressure on the currency via portfolio
 The peso is to depreciate further, with USDARS inflows. If so, we believe BCRA would need to intervene
reaching 27.5 by year-end actively in the market buying reserves. On the other side, we
expect BCRA to be less active in FX intervention if USD
Acute capital flight rocked the Argentinean financial strengthens. This asymmetric FX intervention policy should
markets in the last month. The abrupt portfolio outflow help BCRA to elevate the stock of net FX reserves, a much
spearheaded by international investors, and followed by needed macro-prudential shield.
residents dollarizing their portfolios, came to be the first real
stress test for the Macri administration. The peso plunged We now project inflation to end 2018 at 26.6%,
21.0% against the USD in May, and there is little doubt the decelerating to 19.8% in 2019. Given the high real rates we
protracted bout of risk aversion of recent weeks will drag on assume FX pass-through at the bottom of the historical 20%-
growth and boost inflation. Weaker economic performance, 40% range and thus revise December headline inflation to
in turn, could trigger a reassessment of the political outlook 26.6%oya, from 22.2%. In addition to FX pass-through to
going into the 2019 election year, prompting new bouts of tradable prices, non- tradable prices will see renewed upward
uncertainty in coming quarters. That said, the unfolding pressure as soon as wage settlements (at 15%) are reopened in
negotiations for an IMF Stand-By Arrangement, amid 4Q18. For 2019, we see inflation decelerating to 19.8%.
acceleration of the fiscal consolidation, should help to slow
the re-dollarization of local portfolios and ease financial The unfolding negotiations with the IMF for a Stand-By
stability concerns. Arrangement will likely define new fiscal targets ahead.
Treasury Minister Dujovne had already reduced the 2018 target
Argentina is likely to reach an agreement with the IMF for to 2.7%, but this figure could be reduced further to 2.5%.
an Exceptional Access Stand-By Agreement in the coming Meanwhile, the 2019 target was ratified at 2.2% of GDP, but
days. Following recent stress test, we believe the new policy the intention now seems directed to lower the imbalance by (at
mix will have three pillars, likely formalized in the Letter of least) half a point with main adjustment valves being capex and
Intent to the IMF: 1) a tighter fiscal policy with faster cuts in government consumption (pensions and social plans cuts seem
public sector spending; 2) a gradual easing of the currently off the table for now). The weaker peso sets total Treasury
extremely tight monetary policy, to minimize output costs and financial needs for 2018-19 close to US$30bn. Thus, an IMF
prevent further REER misalignment, while still seeking to line of around that amount would be enough to cover the bulk
consolidate the disinflation; and 3) asymmetric FX intervention of the federal government financing needs through the next
to prevent a new round of REER appreciation. We expect a eight quarters.
line in the US$24-34bn range.
The current account deficit will narrow ahead, on a
On the activity front, we revise down GDP growth in 2018 narrower public sector deficit and higher private sector
to 1.5% from 2.4%. For 2018, we base our forecast revision savings. Going forward, private sector precautionary savings
mainly on three factors: 1) the combination of higher inflation should mount, while we expect investment to decelerate. In
and real rates, 2) the step up in fiscal consolidation efforts, and other words, the private and financial savings-investment gap
3) on the supply side, the loss of 2018 agricultural output on should widen further into surplus. Meanwhile, we believe the
the back of the drought. Embedded in our revision is a public sector is to move into effective fiscal consolidation, with
technical recession in 2Q and 3Q18 with sequential activity the compression of saving-investment deficit, thus reducing
growth tentatively resuming in 4Q18. For next year, we project vulnerability risks ahead and better ring-fencing the economy
lackluster 2.1%y/y real GDP growth, based on the reversal of from global shocks.
the negative supply shock that is shaving about 1%-pt from
real growth this year and additional impulse from private
43
J.P. Morgan Securities LLC Banco J.P. Morgan S.A. Global Emerging Markets Research
AC AC
Katherine Marney Cassiana Fernandez Mid-Year Emerging Markets Outlook and Strategy
(1-212) 834-2285 (55-11) 4950-3369 08 June 2018
katherine.v.marney@jpmorgan.com cassiana.fernandez@jpmorgan.com
AC
Ben Ramsey Cristiano Souza
(1-212) 834-4308 (55-11) 4950-3913
benjamin.h.ramsey@jpmorgan.com cristiano.souza@jpmorgan.com
Bolivia Ba3/BB/BB Brazil Ba2/BB-/BB-
Elections to the forefront Aftermath of the truckers’ strike

 President Morales’ reelection bid to frame next year  The stoppage will weigh on the economic recovery and
 Pushing the envelope with twin deficits to boost growth pressure inflation to some extent
and shore-up political support  The truckers’ strike may have impacts on the political
 Ample savings still gives breathing room scenario
 We expect the COPOM to keep rates at 6.5% but
President Morales reelection bid is likely to frame the next acknowledging it is a very close call
year. A favorable ruling by the constitutional court in October  External accounts remain solid, but there are concerns
2017 eliminated a limitation on indefinite reelection enabling about the fiscal numbers
Morales to run for a fourth term between 2020-2025. Early
polls show a tighter race between President Morales and a set Additional signals of growing antiestablishment sentiment.
of hypothetical opposition candidates. Nonetheless, opposition A major truckers’ strike hit Brazil in May, with protesters
itself remains quite divided, and the assumption is that Morales demanding an immediate reduction in diesel prices. It was
is likely to successfully win reelection. supported by a majority of Brazil’s population, according to
polls, and escalated to the point of causing fuel and food
Throwing it all behind growth. The economy expanded at shortages in parts of the country, disrupting supply chains with
4.2% in 2017, below the official growth target at 4.5%. While significant losses to sectors as the expected recovery was
activity remains sturdy, the marginal benefit to growth from already losing momentum. As such, we see the political
leaning heavily on twin deficits to fuel private consumption instability ahead of the elections favoring the extremes at the
and investment seems to be diminishing. Undershooting their expense of the center. The current record-high rejection of
growth targets for two years straight has cost the government President Temer is a challenge for the establishment, which has
valuable political capital. In our view, all this points to more caused the favoring of candidates perceived as outsiders. In
spending pressure in 2018 and reliance on twin deficits, to this sense, polls continue to show Congressman Jair Bolsonaro
fulfill its official growth target at 4.7% as the 2019 elections ahead, now with center-leftist candidates Ciro Gomes and
come into focus. Marina Silva taking turns in second place, depending on the
poll, trailed by Geraldo Alckmin (from the PSDB party) and
The government intends to push the envelope with twin Fernando Haddad (from the Worker’s Party). We now think
deficits once again in 2018. The budget assumes a fiscal that the outcome of the election will be a very close call, with a
deficit at 8.3% of GDP and a current account deficit close to 50% chance of a non-market-friendly outcome. We think the
6% of GDP. While high capital expenditure (at 17% of GDP) elected government will face significant challenges unifying
and capital import-heavy nature of the investment program the country to approve the necessary reforms and overcome the
give the government a degree of flexibility to reduce these fiscal drags.
imbalances, the urgency to do so is still lacking. The budget
suggests that public spending will remain a central growth The disruption in production with the strike led to a
motor. As the election approaches, authorities seem loath to downward revision in GDP growth. GDP expanded 1.8%q/q,
adjust a yawning deficit, and see more expansionary fiscal saar in 1Q, marking the fifth straight quarter of expansion after
policy as a form of bolstering growth that would, in turn, boost a deep eight-quarter recession. To some extent, this reflected
its own base of support. Conversely, further spending pressures an ongoing recovery as confidence has been restored after
may mount as election season kicks into high gear, particularly changes to the economic policy framework were made.
if Morales faces a tighter election. Public debt is still relatively However, on top of a tightening in EM financial conditions—
low at 38% of GDP, up following last March’s US$1bn which particularly affected Brazil given the country’s huge
issuance of the 28s. Government savings are close to 13% of fiscal challenges and the uncertainty around economic policy
GDP and reserves are still 30% of GDP, which give the after this year’s election—the damage to activity for this year
government a cushion to stay out of markets, although given caused by the truckers’ strike appears significant as disruptions
still-high financing needs, the authorities could opt for another in supply chains interrupted production in several sectors. We
issuance to stabilize reserve levels if needed. estimate that this paralysis alone could shave 0.7%-pt of this
year’s GDP, and we think this will also continue to weigh on
business and consumer sentiment, leading to an even more
44
Banco J.P. Morgan S.A. J.P. Morgan Securities LLC Global Emerging Markets Research
Cassiana Fernandez
AC
Diego W. Pereira
AC Mid-Year Emerging Markets Outlook and Strategy
(55-11) 4950-3369 (1-212) 834-4321 08 June 2018
cassiana.fernandez@jpmorgan.com diego.w.pereira@jpmorgan.com
J.P. Morgan Securities LLC JPMorgan Chase Bank Sucursal Buenos Aires
AC
Vinicius Moreira Lucila Barbeito
(1-212) 834-4144 (54-11) 4348-7229
vinicius.moreira@jpmorgan.com lucila.barbeito@jpmorgan.com
gradual normalization in economic growth. As a result, we cut Chile A+/Aa3/A

our 2018 full-year GDP growth forecast from 2.4%y/y to 1.2%,
largely driven by weaker consumption and investment growth. The cyclical recovery gains traction
The lower carryover from this year, in addition to a larger
 We revised 2018 full-year GDP growth up to 3.8%y/y
fiscal drag, likely will reduce next year’s GDP; thus we
reduced our 2019 growth forecast by two-tenths to 3%.  Inflation to reach 2.7% by year-end
 We see BCCh on hold at least through October
The strike could have had durable impacts on the
inflation dynamics. As this strike is primarily a negative Raising 2018 GDP growth to 3.8%y/y. Chile’s 1Q18
supply shock, it also should push inflation higher for some economic activity was more robust than we had anticipated,
time. In fact, gasoline and food prices have jumped higher, growing 4.2%oya and solidifying the upward trend that started
given the shortages across the country. We think fuel prices a year ago. Importantly, one fewer business day than in 1Q17
will normalize relatively fast as fuel is starting to be subtracted 0.1%-pt from the result. Seasonally adjusted, GDP
expanded 4.9%q/q, saar, and non-mining 4.5%q/q, saar. Thus,
delivered. However, the strike appears to have generated
for a third consecutive quarter GDP, ex. mining, the relevant
permanent losses in the food sector as perishable products
gauge for output slack, grew above both potential (estimated at
had to be discarded and other inputs (such as livestock feed)
2.4%) and trend growth (at 3.2%). Consumption of household
were not delivered, leading to losses of livestock and at services and investment in machinery and equipment led a
livestock breeders. We judge that the impact on prices mainly 7.0%q/q, saar, jump in domestic demand. Meanwhile, net
will be seen in the next few months. We raised this year’s exports dragged on growth, due to an increase in imports of
IPCA inflation forecast to 3.9%oya, from the 3.6% we had goods and services greater than that of exports. On the supply
predicted since the beginning of March. side, most sectors strengthened led by mining and followed by
trade and services. On net, based on the 1Q18 surprise we
Amid all the uncertainties, a cautious COPOM kept rates raised our 2018 GDP growth forecast to 3.8%y/y, a 0.2%-pt
at 6.5%. The COPOM surprised in its May meeting by upward revision from our previous forecast. We kept 2019 real
keeping the SELIC stable at 6.5%, ending the longest easing GDP growth at 3.7%y/y.
cycle since 2007 with a total 775bp cut. As a forward
guidance, the committee signaled rates stable in the next Inflation is not dead. The headline CPI rose 0.3%m/m in
meeting. However, the COPOM is now facing its biggest April, above J.P. Morgan and consensus expectations of
dilemma with a wider output gap, inflation below the target, 0.1%m/m. Thus, annual headline inflation inched up to
and well anchored inflation expectations favoring the 1.9%oya, 10bp below the lower bound of BCCh’s target range.
maintenance of low rates for longer, while a sharp Headline inflation has hovered around the floor of the target
range for the last 11 months, and we had expected low inflation
depreciation of the currency on the back of EM dynamics and
(i.e., just below 2%) until June. Yet, April’s print was the
local political uncertainty has significantly deteriorated the
second 1-sigma upside surprise of the year, with the previous
balance of risks and forced the Central Bank to step in with surprise in January. Core CPI, ex. food and energy (BCCh’s
interventions. For now we see the current 6.5% Selic rate preferred core metric), increased 0.3%m/m in April, putting
prevailing into 2019, but acknowledge this is a very close call annual core inflation at 1.6%oya, roughly in line with March,
amid a fluid market situation, and we do not rule out hikes if and the tenth consecutive month below the 2% mark. In our
currency weakness contaminates expectations. baseline scenario, we see core inflation consolidating above
2%oya in 3Q18, and accelerating further in 4Q18, printing
External accounts remain solid, but there are fiscal risks. close to 3%oya. Following April’s print, we tweak our end-
The weak activity and the depreciated BRL should help 2018 inflation forecast higher to 2.7%.
contain imports ahead, while exports could continue to
benefit from external demand. With that, we forecast the Unemployment declined to 6.7% in April, but qualitative
current account deficit to inch up to 0.7% from 0.4% in 2017, data suggest the labor market is still months away from
but foreign direct investment inflows of 3.0% of GDP could healing. The unemployment rate declined from 6.9% in March
more than offset that. The concern is still the fiscal accounts to 6.7% in April, in line with our call. The rate is, thus,
as subsidies to fuel prices put some pressure on the primary unchanged compared to the print one year ago. Yet it is worth
balance target for this year, even though we still believe it noting that the participation rate is 0.3%-pt higher, at 59.8% in
will be respected, and the lower growth will lead to a higher April 2018 versus 59.5% in 2017. In terms of job creation,
level of gross debt than we anticipated, at 76.5% this year
and 78.3% in 2019.
45
J.P. Morgan Securities LLC J.P. Morgan Securities LLC Global Emerging Markets Research
Diego W. Pereira
AC AC
Katherine Marney Mid-Year Emerging Markets Outlook and Strategy
(1-212) 834-4321 (1-212) 834-2285 08 June 2018
diego.w.pereira@jpmorgan.com katherine.v.marney@jpmorgan.com
AC
JPMorgan Chase Bank Sucursal Ben Ramsey
Buenos Aires (1-212) 834-4308
AC
Lucila Barbeito benjamin.h.ramsey@jpmorgan.com
(54-11) 4348-7229
payrolls gained 2.1%oya, and the employment rate reached Colombia Baa2/BBB/BBB
55.8%, inching up 0.3%-pt with respect to the same period one
year ago. Duque with a strong lead at the finish line
Labor market conditions continued to improve, but  Conservative Uribista candidate Duque won the first
subdued employment quality to prevent upward wage round and is the favorite in the June 17 runoff
pressures in 2018. Despite the early signs of a cyclical  Duque is fiscally conservative but we don’t discard
improvement, we called for the unemployment rate to remain “responsible” tweaks to the Fiscal Rule
rather elevated in the first months of 2018, the flipside of
higher participation offsetting (or even outpacing) jobs  Growth is recovering and the next rate move is a hike
creation. This is basically transpiring as per the most recent
Ivan Duque won the first round of Colombia’s presidential
labor reports. While employment is growing, our upbeat view
on the labor market improving gradually was also based on the election on May 27, and will head to the June 17 second
quality of employment creation. In this regard, throughout round as the favorite against Gustavo Petro, who finished a
2017, we highlighted self-employment as the main source of relatively distant second. Duque is a technocratic 41 year old
new jobs, at the cost of wage-earners positions. In 1Q18 an Senator from former President Uribe’s right wing Democratic
improvement was evidenced by an acceleration of wage- Center party. Petro is a 58 year old veteran politician: a former
earners jobs vis-à-vis self-employed. Yet the figures for April M-19 guerilla, congressman, Senator and Bogota mayor. Petro
cast a bit of a shadow on this front, as self-employment job narrowly edged out the centrist Sergio Fajardo for second place.
creation outpaced wage-earner jobs in April (+4.1%oya versus Duque represents continuity in terms of the overall orthodox
+1.9%, respectively). framework of Colombia’s macroeconomic policy, with an
ostensibly more pro-business stance. He and Uribe, a popular
Another dimension is sectoral job creation, focusing on but polarizing figure in Colombian politics, have been strongly
cyclical sectors versus those sectors that have benefited critical of the peace process with the FARC. Petro, for his part,
from the reforms implemented in the past. We had has espoused a center left agenda that focuses on relatively
highlighted that job creation throughout 2017 was mostly radical land reform and a strategic orientation of the
concentrated in three sectors, a consequence of the reforms Colombian economy away from oil and mining (Ecopetrol
passed in the last four years (health and social assistance would focus on renewables for example). In the first round
services, public sector administration, and education), which result, Duque received 7.57mn votes (39.1%), versus 4.85mn
helped to mask the cyclical activity downturn in overall for Petro (25.1%). Fajardo’s 4.59mn votes (23.7%) fell just
employment creation. Job creation in cyclical sectors has short of Petro. Former Vice President Vargas Lleras (center
outperformed in four of the last six months. The problem is right) had 7.3% of the votes.
that it failed to do so in the last two months, with March and
April again casting shadows on the labor market recovery.
Preliminary polling for second round scenarios shows Duque
with a solid lead on Petro in a head-to-head matchup. Duque
We see BCCh on hold at least through October of this year.
would win by a 52% to 37% margin in a hypothetical second
We do not expect the Board to turn more hawkish during the
round according to the average of three mid-May polls. Petro has
second quarter, as inflation is likely to remain very low. Any
indication of a hawkish turn will reverberate in a stronger peso, a higher negative image, which should be more calcified given
putting further downside pressure on tradable inflation, thus his long history in public life, and higher rejection rates (42%
delaying the expected convergence to the 3% target mid-point. say they would “never” vote for him, versus 26% for Duque).
Moreover, despite the narrowing activity slack, we do not We expect Fajardo’s voters to split on round two, and Vargas’s
expect any material upward pressure stemming from the labor to lean strongly to Duque. The math looks too challenging for
market via wages as discussed above. Yet, our own 2018 Petro, and we maintain our view that the market-friendly Duque
inflation forecast is a bit higher than BCCh’s base case is likely to be the next president.
scenario. If we are correct, and if 2019 activity expectations
remain above 3% by then, we see scope for BCCh to start a The Fiscal Rule in focus. The independent committee that
very gradual tightening cycle in 4Q18, hiking 25bp. governs Colombia’s Fiscal Rule affirmed compliance in 2017,
with the achievement of a 3.6% of GDP headline deficit based
on a 1.9% of GDP structural deficit (the theoretical balance
consistent with structural revenues assuming growth running at
potential and oil at its long-term prices). The committee also
made changes to the macro parameters dictating the cyclical
46
J.P. Morgan Securities LLC Banco J.P.Morgan, S.A., Institución de Global Emerging Markets Research
AC
Katherine Marney Banca Múltiple, J.P.Morgan Grupo Mid-Year Emerging Markets Outlook and Strategy
(1-212) 834-2285 Financiero 08 June 2018
katherine.v.marney@jpmorgan.com Gabriel Lozano
AC
AC
Ben Ramsey (52-55) 5540-9558
(1-212) 834-4308 gabriel.lozano@jpmorgan.com
benjamin.h.ramsey@jpmorgan.com
outlook, effectively anticipating a longer period of economic Costa Rica Ba2/BB-/BB

slack, and a more gradual path of headline deficit consolidation
than was previously outlined. Even so, the fiscal consolidation A fiscal plan is on, but still a long way to go
effort remains relatively steep in next year’s target. The
committee is no longer looking for a 0.9%pt tightening to 2.2%  Carlos Alvarado took office on May 8 and started
of GDP next year, but the deficit target remains a challenging working immediately on a fiscal plan
2.4%. By 2022, the target is 1.5% (from 1.0% before).  The plan is expected to reduce the deficit by 0.3%-pts,
still short of a broad-based adjustment
A Duque administration may still seek a “responsible  This is a step in the right direction but will require
relaxation”. In the context of the Rule, the incoming further efforts
government will need to address growing pressure on current
expenditures from transfers, in particular pensions and health Carlos Alvarado from the Citizen’s Action Party (PAC) won
costs. Candidate Duque has proposed another tax reform, with the second-round of the presidential elections with 61%
the main aim to decrease the burden on the corporate sector and versus 39%. Carlos Alvarado—the second PAC president in a
close loopholes. How to do this in a revenue positive, or even row—started his mandate on May 8 and committed from the
neutral way, is indeed challenging. Duque has in the past start of his administration to stabilize fiscal dynamics as soon as
suggested he could look to tweak the Fiscal Rule by extending possible, stressing the importance of a fiscal pact in the short
the time period by which the final structural deficit target is term. By approving a fast track authority for a fiscal reform, the
achieved. While we fully expect Duque to show commitment to government has now the ability to bypass any potential blocking
fiscal consolidation, it remains to be seen if his administration from opposition law-makers. Gridlocks in the Assembly were
may seek to adjust on the margin the Rule’s framework. In our the main hurdles to encompass fiscal reform in previous
view, deficit reduction remains paramount to stabilize and administrations. The new government moved forward and
reduce debt levels, but the consolidation path embraced by the approved the first changes to the budget in order to set the
Rule up until now seemed excessively ambitious with wheels in motion, but an adjustment of 0.3%-pts of GDP would
questionable political viability. In the context of the not be enough to stabilize debt in the short term. The first
communication of a clear plan on both the revenue and changes include freezing public officials’ salaries and
expenditure side and an ongoing trajectory of deficit reduction, introducing current spending cuts, avoiding the imposition of a
we do not think modest changes to the current Fiscal Rule value-added tax. The government is still struggling to cut
would be destabilizing to market or rating agency assessments spending given that more than 90% of expenditures are already
of Colombia. committed. Going forward, the government will need to use the
fast-track authority to push forward with economic reform, but
The demand side GDP data showed a mixed 1Q, but still we do not foresee an important impact given that economic
leave us with the outlook for a recovery ahead. Even so, activity is also expected to remain modest in the near term, as
with the 1Q headline result undershooting our forecast, we compared to previous years.
nudged our longstanding 3.0% full year growth call down to
2.9%, with lower investment vis-à-vis our prior forecast, even The economy is expanding slightly below our forecast of
if the consumption outlook seems solid. For 2019 we now see 3.6% for this year, but a solid expansion in the US plus stable
3.4% from 3.3%, our previous forecast. Consumption should inflation should continue to support growth around 3.5%.
continue to improve through the year, supported by better real Sentiment is deteriorating on the back of fears that an
income and healthier consumer confidence. Investment, for its impending fiscal adjustment is taking its toll on growth, but we
part, seems poised to bounce back strongly after elections do not expect a major blow to economic activity in the context
move into the rearview mirror, expecting as we do a market of solid external demand. After an expansion of 3.5% in 1H17,
friendly/pro business result, and given the backdrop of stronger the economy expanded slightly below 3% in 2H17. However,
oil prices. we continue to project 3.6% growth this year.
Next move is a hike. As for monetary policy, we think Monetary policy is expected to be less stringent, after a
BanRep’s prolonged easing cycle is now over with the policy restrictive cycle that brought the policy rate to 5.0% in
rate at 4.25%. The stronger growth outlook combined with our February, up from 1.75% in 1Q17. In the context of inflation,
call for inflation to move up to 3.6% by year-end underpins our which was virtually unchanged from last year, and lackluster
call for the first hike in December, with the policy rate settling growth, we do not expect the continuation of the hiking cycle.
at 5% by end-1Q19.
47
J.P. Morgan Securities LLC Global Emerging Markets Research
Mid-Year Emerging Markets Outlook and Strategy
Gabriel Lozano AC
(52-55) 5540-9558 08 June 2018
gabriel.lozano@jpmorgan.com
Only if fiscal consolidation lacks traction could we witness Dominican Republic Ba3/BB-/BB
additional rate increases to avoid a weaker currency and stem
inflationary pressures. In an environment of higher rates in the Growth delivers in 1Q18
US as well, the impact on interest payments is an additional
challenge for the new government.  Economic activity remains on track as tourism,
remittances and US growth remain strong
The current debt-to-GDP ratio is not sustainable, in our
 Monetary policy to remain vigilant of the Fed and
view, given expectations of revenues to remain close to 15%
of GDP and expenditures stubbornly above 20%. The effort to rising inflation
increase income tax and broaden the tax base through a new  External and domestic accounts do not pose a
13% VAT could ease fears, but further efforts are needed to challenge to stability
stabilize public finances and guarantee that fiscal consolidation
is in motion. Moody’s downgraded Costa Rica by one notch to Economic activity started on the right foot this year. A
Ba2 in February, maintaining a negative outlook. The risk of scenario of steady growth and inflation levels close to the
lack of progress on the fiscal pact could result in another central bank target is still in place after the economy expanded
downgrade from credit rating agencies which currently hold a 6.4% in 1Q18 and as inflation is stabilizing around 4%oya.
negative outlook on the sovereign. Our current metrics show After growth moderated in 2H17, with the economy
that for this year, public debt is expected to end close to 69% expanding below 4.0%, bringing full-year growth to 4.2%, the
of GDP, which is consistent with 3.6% growth. economy is fast-responding to solid external demand
conditions. In fact, the services sector should continue to
We see material risk for another downgrade from at least strengthen, with stronger external conditions, particularly in
another credit rating agency unless there is a comprehensive the US, supporting remittances and tourism. While we project
reform in the first year of the new administration. We think the a modest expansion, slightly above 4.0%, we see important
new administration should take advantage of the support from
upside risks on the back of strong external demand and
PUSC and former officials from the PLN to push forward with
spillovers into the domestic economy.
a long-term strategy and guarantee the support from
international financial organizations, which recently have
endorsed the initial efforts from the PAC. With pressure on the Inflation should remain sticky and could trigger rate hikes,
fiscal front, the risk for higher borrowing costs could endanger but we maintain a neutral bias. Consumer prices continued
not only debt-convergence even further, but also could result in to grind higher at the end of last year, averaging 3.9%oya on
even tighter monetary conditions, a weaker exchange rate, and the back of energy-related pressures. With the economy
downside risks to economic activity. gaining traction, energy prices are now feeding some into the
economy and demand-side pressures are more evident. Yet, we
maintain our inflation forecast at 3.8% this year, as we foresee
less pressure from energy prices in 2H18. Given easing
pressures on this front, we expect monetary policy to remain
neutral in the short term, although financial conditions in the
US probably will dictate the bias of the central bank,
particularly within the context of sticky consumer prices and
strong economic activity. Accordingly, we see some upside
risks to the current policy rate, which stands at 5.25%. The
monetary policy rate has remained unchanged since August of
last year.
Current account dynamics continue to improve on the back

of solid remittances and tourism. With tourism rebounding
sharply in 4Q17, after the economy suffered significantly from
weather-related conditions in 3Q17, our expectations are high
for a recovery in external accounts this year. The September
contraction of 13%oya was the most severe since early 2002,
when tourism arrivals declined by 22%, but the fast recovery
observed in the following months signaled healthy conditions
abroad, particularly in the US and Europe. Tourism and
48
Banco J.P.Morgan, S.A., Institución AC
de Banca Múltiple, J.P.Morgan Ben Ramsey Mid-Year Emerging Markets Outlook and Strategy
(1-212) 834-4308
Grupo Financiero 08 June 2018
AC benjamin.h.ramsey@jpmorgan.com
Gabriel Lozano
(52-55) 5540-9558 Katherine Marney
AC
gabriel.lozano@jpmorgan.com (1-212) 834-2285

Katherine Marney katherine.v.marney@jpmorgan.com
remittances continue to anchor external accounts and remain Ecuador B-/B/B3

an important driver of the services sector. Tourism has grown
on average 4.0%oya in Jan-Feb, and we expect a similar pace Inflection point?
for the rest of the year. Bolstered by improved labor market
conditions in the United States and assuming only a moderate  Martinez at the helm sends the strongest signal yet of a
impact from Trump administration policies, we expect change in direction by the government
remittances to rise at a high-single-digit pace in 2018. We  Hitting the ground running on economic measures and
expect CAD at 1.9% of GDP this year followed by a modest an ambitious fiscal adjustment
deterioration in 2019 mainly related to improving conditions
in private consumption and energy imports. One important  …but the devil is the in details and a coherent, credible
global risk is the gradual hardening of monetary conditions, plan will be a key signal to markets
which could challenge debt convergence, but given upside  Narrower fiscal deficit, slower economic growth
risks to economic activity, we do not foresee deterioration in compared to the debt-fueled burst in 2017
the fiscal outlook.
New finance minister, new direction? As President Moreno
We expect the current administration to move in favor of a begins his second year in office, he made his strongest move
fiscal overhaul in the next year to anchor external and towards embracing a more pragmatic, business-friendly
domestic accounts. While the macroeconomic environment approach with the appointment of Richard Martinez as
does not look particularly challenging in spite of growth Minister of Economy. As head of the local chamber of industry,
stabilizing slightly above 4.0%, enacting a fiscal plan sooner Martinez had been the private business sector’s main policy
rather than later should prevent the sort of pressures observed advocate and interlocutor with the government before taking
recently in other Central American economies. over the job. While he has limited experience with public
finances, Martinez has enlisted more orthodox economists as
We do not expect credit rating changes in the foreseeable advisors and in his team at the Ministry, which should realign
future with major credit rating agencies currently holding policy delivery with Moreno’s more pragmatic policy direction.
a “stable” outlook for the sovereign. In fact, Moody’s
upgraded Dominican Republic recently by one notch and
The new minister hit the ground running. Transparency in
currently holds a Ba3 rating, while S&P and Fitch hold a BB-
debt statistics to comply with an audit was an early signal, as
grade (all with a stable outlook). Public debt should maintain a
modest declining trend and an outright improvement could take public debt in April printed at 47% of GDP (up from 34%
place if further progress on the fiscal agenda is made. We under the prior definition) and included 10% of GDP in
continue to expect a fiscal balance of -2.1% of GDP this year. “contingent liabilities”. Shortly after, the government presented
the long-delayed “urgent” economic law to Congress that
The government has moved in the direction of financial included many of the pro-business tax incentives: namely a tax
market openness. The Dominican Republic issued in amnesty, a phase-out of the capital outflow tax and an
February a local-currency five-year bond due in 2023 with a exemption on income tax for new investments. The law would
yield to maturity of 8.9% and six-month coupons. With steady resurrect a fiscal stabilization fund that would eventually divert
fiscal accounts and debt on a sustainable path, last month’s hydrocarbons revenues above and beyond the budgeted amount
issuance would allow the government to reduce debt towards longer-term savings. Local observers were encouraged
refinancing and maturity risks. External accounts are consistent by Martinez’s appointment, although the mood remains
with a credit rating of BB- and Ba3, although the fiscal metrics cautious pending more details on the financing plan, and clear
are a bit better. The adequate fiscal outlook, in spite of the signs that the government will stay on its newly charted course.
importance of addressing a fiscal pact soon, is a shot in the arm
to the macroeconomic outlook of the Dominican Republic. The devil is in the details. The question for markets is
whether Martinez can present a credible and coherent plan to
achieve the proposed reduction in the fiscal deficit.
Convincing investors following false starts will be key as the
government contemplates returning to markets to close the
books for 2018. Martinez has shown reluctance towards
closing the fiscal gap with raising taxes. Instead, belt-
tightening at about 1% of GDP per year will come from
49
J.P. Morgan Securities LLC Banco J.P.Morgan, S.A., Institución Global Emerging Markets Research
AC
Katherine Marney de Banca Múltiple, J.P.Morgan Mid-Year Emerging Markets Outlook and Strategy
(1-212) 834-2285 Grupo Financiero 08 June 2018
katherine.v.marney@jpmorgan.com AC
Steven Palacio
AC
Ben Ramsey (52 55) 5382-9651
(1-212) 834-4308 steven.palacio@jpmorgan.com
reductions to capital expenditures and, to a lesser extent, from El Salvador B3/CCC+/B-

current expenditure. The renegotiation of Ecuador’s pre-sale
agreements with China and Thailand will add to revenues this Above-trend growth amid ebbing fiscal risk
year. Embedded in the economic plan is a proposed revision to
 Political developments helped reduce stalemate
the public debt ceiling which would suspend the current 40%
of GDP limit and commit to a gradual reduction to a zero  Alongside pension reform, this has eased fiscal risks
primary deficit over three years. Longer-term, the government  Looking for broad-based, above-trend growth in 2018
sets the loftier goal of committing to a fiscal sustainability plan
that aims for primary surpluses and debt converging back to The latest political developments have helped reduce
40% of GDP. deadlock and fiscal risks. This year’s congressional elections
saw opposition party ARENA securing a de facto majority in
Lowering the deficit to 5.1% of GDP in 2018 seems feasible. Congress. While there seems to have been a general discontent
The fiscal deficit through May is tracking significantly with the Salvadorian political class, the drop in the incumbent
narrower compared to 2017, and should be consistent with a party’s standing suggests that a large share of the voting
1% of GDP decline in the deficit to 5.1% of GDP. The revision population sees most of the blame resting on FMLN’s
would knock gross expected financing needs for the year down shoulders. This is consistent with the high rejection rates of
to US$12bn, above the US$10bn approved in the budget. The the current government shown in polls prior to the election.
original budget contemplated US$4bn of international bonds, The election results, thus, in our view, create the right
of which US$3bn was done in January. We continue to see at incentives for big political parties to drop the long-standing
least another US$2.5bn issuance this year, depending on stalemate and deliver results ahead of next year’s presidential
market access. Treasury deposits and better oil levels have election. In fact, a long-needed pension reform had already
provided a cushion for Ecuador to muddle through for now, but been approved before the election, as parties perceived the
we would expect Ecuador to try to return to markets by July, increasing political costs of the ongoing political impasse. The
and perhaps once more before year-end to close its books. This reform helped reduce short-term financing pressures (see here).
strategy implies that Martinez will have to return to Congress With ARENA dominating the Assembly and better prospects
with a more robust fiscal sustainability plan in exchange for for it to win the presidency next year, incentives appear
approval of more financing later in the year. The new aligned for short-term fiscal hurdles to be sorted. Altogether,
economic team may engage the IMF for technical assistance, the country already managed to reduce its financing needs last
but we still think the President remains loath to accept the year and is likely to achieve a large 1.1% primary fiscal
conditionality—and political cost—of a full program. surplus this year, which should allow the fiscal burden to
decline for the first time in a decade.
The change in direction could reconfigure the political
landscape. Politics in the legislative assembly, which had Favorable external conditions to keep growth above
grown accustomed to being a rubber stamp during the Correa potential at 2.5% in 2018. The monthly GDP proxy suggests
years, have grown more relevant following the definitive split that after hitting a speed bump in 4Q17, activity was back up in
within Alianza Pais. Moreno’s economic pivot will likely drive 1Q. Sequentially, seasonally-adjusted data also suggest that
a greater wedge between the two camps. As such, Moreno will activity turned the corner, although it is still failing to show
have to increasingly turn to smaller opposition parties for the meaningful acceleration. In particular, it is encouraging to see
passage of legislation. While the landscape could turn choppier, that manufacturing bounced back sharply (8% ar) last quarter,
we think this increases necessity for Moreno to stick with his boosting on its way related-services, such as transportation,
more market-friendly turn. commerce, and storage. This is consistent with our view that
strong global growth, and the ensuing pickup in trade activity,
Nudging down growth for 2018. The economy hummed will continue to favor El Salvador. Additionally, the sustained
along at a strong 3% in 2017 following a -1.6% contraction in strength in remittances should also allow growth to maintain an
2016, fueled by strong consumption and steady access to above trend rate of expansion, as large inflows should trickle
external funding. We expect this pace to slow in 2018 to 1.2% into the real economy and boost domestic demand, particularly
(down from 1.8%, previously), as the recovery loses steam consumption. This should translate into healthy growth in
amid tighter liquidity and fiscal consolidation, which should domestically-driven services, allowing not only for growth to
weigh on consumption. Investment could receive positive stand at an above-trend rate of 2.5%oya this year, but also for
tailwinds from construction and better oil prices. the expansion to be relatively broad-based.
50
J.P. Morgan Securities LLC Banco J.P.Morgan, S.A., Institución de Banca Global Emerging Markets Research
Ben Ramsey
AC
Múltiple, J.P.Morgan Grupo Financiero Mid-Year Emerging Markets Outlook and Strategy
AC
(1-212) 834-4308 Gabriel Lozano 08 June 2018
benjamin.h.ramsey@jpmorgan.com (52-55) 5540-9558
AC
Katherine Marney gabriel.lozano@jpmorgan.com
AC
(1-212) 834-2285 Steven Palacio
katherine.v.marney@jpmorgan.com (52 55) 5382-9651
steven.palacio@jpmorgan.com
Jamaica B3/B/B Mexico A3/BBB+/BBB+
Setting the groundwork for next step NAFTA talks sour; elections approach
 Growth remains stagnant despite progress on reforms  NAFTA talks have soured; 2018 deal highly unlikely
 Tight fiscal policy should lower debt to below 100% of  AMLO looks more and more likely to become president
GDP in 2017  Despite uncertainty growth continues to march on
 Compliance with SBA targets on track as Jamaica  Banxico on hold as inflation falls; MXN risks more hikes
prepares to stand on its own feet after 2019
Reciprocal trade tariffs across NAFTA countries suggest
The economy is stagnant despite reforms progress. Growth negotiations have hit a speed bump. Last week the US decided
was 1.2%oya in 4Q17 (ending in March). Better external not to extend the tariff exemption on Mexican, Canadian and EU
demand and tourism arrivals were important growth drivers. steel and aluminum exports to the US. This in our view,
Security, high unemployment, and competitiveness challenges suggests that the US administration might be growing frustrated
weigh on Jamaica’s growth potential—estimated 1.5% by the about the slow progress of NAFTA negotiations, particularly
IMF. We pencil in growth strengthening to 1.7% in 2018/19. about Mexico and Canada’s unwillingness to palate the “poison
pills” administered by US authorities, such as the acceptance of
Stellar compliance with IMF program anchors policy. The higher regional content in auto exports within the region,
program remains on track after five years. Reducing public scrapping trade and investment dispute-resolution mechanisms
sector wages remains critical to reining in the fiscal deficit. and the so called “sunset clause”. While the apparent aim of the
Progress to freeze public sector salaries at 9% of GDP has been US administration was to force Mexico into yielding in these
slow, although now more than half of the unions have agreed key NAFTA topics, the effect appears to have been just the
to a freeze; upon approving the third program review, the Fund opposite, with Mexico imposing tariffs on a handful of US
highlighted other progress, steps to formalize inflation products. With elections fast approaching in Mexico (Jul) and
targeting, reforms to the Central Bank and introducing greater later in the US (Nov) the timeframe for a NAFTA deal to be
FX flexibility for the JMD. concluded this year appears extremely tight. Hence, we maintain
our call for a final deal to be wrapped in 2019. In fact, we think
Preparing for the next stage post-IMF. The government that, at the very least, the recent imposition of two-way tariffs
reported a primary surplus at 7.7% of GDP for 2017 and aims increases the risk of negotiations breaking down.
for a 7% deficit through FY19 for the sixth straight year and its
last under IMF stewardship. Successive primary surpluses and AMLO’s lead widens; focus is now shifting to congress
liability management operations should reduce government composition. AMLO continues to enjoy a comfortable lead in
debt to below 100% this year from 135% of GDP in 2014. presidential polls, and, contrary to expectations that once
With its progress, Jamaica is preparing to transition away from campaigns kicked in his lead could narrow, AMLO’s lead has
fund assistance, and does not intend to renew after the current widened. Barring a big mistake by AMLO it appears fair to say
agreement expires in 2019. The government established a he is set to win the presidency. The dispute between center-of-
fiscal council that once Jamaica exits its SBA will monitor right candidate Anaya and centrist candidate Meade has further
compliance with a 2014 fiscal framework and the aim to contributed to cement AMLO’s standing, as continued
reduce debt to 60% of GDP. Indeed, popular fatigue with fiscal corruption accusations involving “traditional” parties have
austerity seems the main risk, although buy-in by the main further boosted AMLO’s anti-systemic strategy. With the
political parties and private sector remains strong, which has presidential race seemingly wrapped up, the focus is now
safeguarded compliance. Maturities over the next few years are shifting toward AMLO’s support in congress, which will
moderate; Jamaica could opportunistically return to markets to determine his room to maneuver if he is elected president.
refinance upcoming maturities if needed. Recent polls suggests his support in both chambers of congress
is nearing a simple majority, which would imply control over
Higher oil prices to widen current account deficit (CAD). fiscal policy. AMLO has campaigned on a “zero-deficit”
Jamaica’s CAD averaged 9.2% of GDP in 2012/14, before policy, but expects to expand fiscal spending and has yet to
dropping 8%-pts to 1.2% of GDP in 2016 with the collapse in provide a credible strategy to fund extra spending. AMLO is
global oil prices. However, with global oil prices rebounding, unlikely to reach a super-majority in congress, which would
the CAD widened to an estimated 5% of GDP in 2017, and preclude him from undertaking constitutional amendments.
should keep deficits wide in 2018. Still, he could adopt policies that could spook investors, such
51
Banco J.P.Morgan, S.A., Institución J.P. Morgan Securities LLC Global Emerging Markets Research
AC
de Banca Múltiple, J.P.Morgan Diego W. Pereira Mid-Year Emerging Markets Outlook and Strategy
Grupo Financiero (1-212) 834-4321 08 June 2018
AC
Steven Palacio diego.w.pereira@jpmorgan.com
(52 55) 5382-9651 JPMorgan Chase Bank Sucursal Buenos Aires
steven.palacio@jpmorgan.com AC
Lucila Barbeito
(54-11) 4348-7229
as halting the implementation of structural reforms and freeze Panama Baa2/BBB/BBB

gasoline prices, among others. The announcement of his
cabinet if elected president will be an important sign of his GDP to remain strong despite moderation
policy bias, as will be the 2019 fiscal budget—to be approved
no later than December 31.  GDP likely to slow but remain solid at 5.2% in 2018
 Fiscal accounts regaining positive trend
Banxico is currently on hold, but risks are still tilted  External accounts to deteriorate some on higher oil...
toward additional tightening. Since changing its forward
 …but remain well manageable amid strong FDI
guidance to incorporate short-term inflation targets as the chief
driver of its policy decisions, Banxico has kept its policy rate
GDP growth seemingly accelerated in 1Q, leaving behind
unchanged at 7.5% following a 450bp hiking cycle and has
the mid-2017 lull. Having slowed markedly in the middle of
stressed meeting such forecasts are a pre-condition for them to
last year, activity seems to be regaining momentum, with the
remain on hold. Inflation has actually undershot Banxico’s
monthly GDP proxy pointing to a sequential gain of nearly 6%
forecasts recently, consistent with the Bank’s decision to keep
ar (our seasonal adjustment) in 1Q. Tailwinds spanning from
rates unchanged since February. We continue to think inflation
solid external demand to continuing relevant infrastructure
will remain well behaved and end the year at 3.8%, but there
projects should boost growth this year. In fact, the pace of
are meaningful upside risks, which, if materialized, will likely
acceleration in 1Q would have been stronger than expected.
trigger additional tightening. We had expected Banxico to
That said, the recent strike in the construction sector is likely to
begin normalizing its policy rate late this year, bringing the
subdue growth in the current quarter, keeping our full-year
policy rate to 6% by mid-2019. However, we now expect
growth forecast unchanged at 5.2%oya from 5.4% in 2017.
Banxico to begin cutting in 2Q19, but only modestly to 7%.
Postponing the cutting cycle would follow FX related risks
Fiscal accounts are gradually improving again. The
while expectations for it to be more moderate follows the fact
marginal fiscal slippage that began in 2014 still ran through
that despite slowing growth, several indicators suggest there is
2017, although the increase in the country’s fiscal burden was
no slack in the economy, with the labor market looking
small, and, at 37.8% of GDP, the burden is very manageable.
particularly tight. Given our forecast for growth to remain near
Furthermore, there was underlying improvement in fiscal
trend this year and next and with no signs of cooling in the
accounts, with the government attaining a small primary
labor market, we think the scope for Banxico to normalize has
surplus last year which helped offset an increase in the interest
become more limited.
bill, keeping the headline deficit broadly unchanged with
respect to 2016 at 1.9% of GDP. According to the
Growths to improve marginally, but headwinds are likely to
government’s fiscal plan the primary fiscal surplus is likely to
linger. Fundamentals continue to argue in favor of solid growth
rise markedly to 0.7% of GDP, while net interest payments
this year, as falling inflation and a tight labor market propel
real wage income. External demand has also been robust, and should only deteriorate marginally. Together, these two trends
will likely remain supported by fiscal stimulus in the US, would render a decline in the headline fiscal deficit to 1.4% of
which should boost import demand. In fact, supported by some GDP. In turn, this should aid a move lower in the country’s
of these factors GDP bounced 4.6% ar in 1Q, but the outsized fiscal burden and start reversing the minor deterioration in this
jump is likely to prove transitory. Despite the improving metric seen in past years.
fundamental backdrop, key pockets of uncertainty remain in
place, and should manifest in subdued business spending. External accounts deterioration should be modest.
NAFTA negotiations appear to have hit a bump and our base- Panama’s improved fiscal position has also been accompanied
case scenario remains that they will not be finalized until next by a much more noticeable improvement in the country’s
year—with US withdrawal risks crawling back to the forefront, external balance, with the current account deficit falling
particularly after tariff-exemptions were withdrawn. precipitously from about 13.5% in 2014 to “just” 4.8% of GDP
Additionally, the high probability of left-wing candidate in 2017. To be sure, falling oil prices helped bring by a
AMLO wining the presidential election and the little certainty narrower deficit, but an increasing services surplus also aided
there is about his eventual governing policies are likely to keep the sharp drop in the external deficit. Oil prices have stepped
investment on hold at least until early 2019, when we expect to up this year, and are likely to weigh on external accounts. We
have more clarity on AMLO’s stance on key macroeconomic expect the oil bill to rise about half a percentage point,
policies. We, thus, continue to expect growth at a below-trend offsetting continued improvement in the services balance. We
2.2%oya this year. look for the current account shortfall to widen slightly to 5.1%
of GDP this year, but remain loosely financed by robust FDI.
52
Diego W. Pereira
(1-212) 834-4321 08 June 2018
diego.w.pereira@jpmorgan.com
AC
Lucila Barbeito
(54-11) 4348-7229
Paraguay BB/Ba1/BB A low fiscal deficit. Granted, a larger nominal GDP drives the
domestic liabilities lower on flow and stocks, most importantly
No surprises on the political front the public sector deficit and debt. Despite fiscal deficits have
been the norm since 2012, the fiscal responsibility law has
 The presidential election transpired without surprises limited the fiscal slippage, as the law enacted in October 2013
 We see for the next five years a continuation of the limits the overall deficit to 1.5% of GDP. Currently, the last
blueprint in place 12-month fiscal balance stood at -1.3% of GDP through 1Q18,
likely converging to the vicinity of 1% once the revised GDP
 Nominal GDP revised 31.5% higher series are accounted for. The public sector external debt
reached US$5.6bn in 1Q18, while the overall public sector
The presidential election transpired without surprises: debt is US$7.7bn. With the revised nominal GDP, we estimate
Mario Abdo Benitez will take the main office on August public sector external debt at around 14% and 19% of GDP,
15th. Paraguay held Presidential and Congress election on respectively.
April 22, with the incumbent candidate Mario Abdo winning
the main office with 46.4% of the votes. Moreover, ANR won Regarding external balances, the current account has
42 deputies (out of 80), giving the president a majority in the deteriorated, but it is still mostly financed by FDI. The
lower chamber. Yet, in the Senate chamber, ANR got 17 seats, merchandise trade balance deterioration in 2017 (-$0.8bn)
thus short of an absolute majority. explained the current account reversal from a US$0.4bn
surplus in 2016 to a US$0.4bn deficit in 2017 (estimated at
Regarding the economic agenda, we see the next five years 1.0% of the revamped nominal GDP). In the first four months
as a continuation of the blueprint in place, with the need to of 2018, the trade balance deteriorated further, by US$0.6bn.
step up the macroeconomic and financial consolidation. However, inward direct investment continues to anchor
Structural reforms that would help economic growth reach 6% external flows. Net direct investment reached US$356mn in
in the coming years have been entertained in the campaign, 2017, thus financing 97% of the CAD. Moreover, total capital
without many details as of yet. President elect Abdo Benitez inflows reached US$594.7mn, with international reserves
has been emphatically stating that Paraguay should keep gaining US$877mn in 2017, and currently stand at US$8.6bn
borrowing in the international capital markets to fund road and (+US$0.5bn YTD).
port projects that are key for growth. Economic growth will
continue to be at the forefront of the government’s agenda, Inflation has proved to be well behaved in the last years,
with a (very) low tax burden in place. A step up in
and the central bank has adopted policy measures to
infrastructure spending would then be financed via bond anchor inflation expectations at lower levels. Inflation has
issuance. We, thus, expect to see public sector debt moving averaged 3.7%oya since January 2013.The central bank
higher in the coming years, as has been the rule in the last four decided to step up its effort to push long-term inflation lower
years, yet without compromising fiscal stability. by adjusting the inflation target to 4.0% from 4.5% in February
2017, keeping a 2%-tolerance range. In 2017, consumption
Nominal GDP revised 31.5% higher. The new base year for prices grew 4.5%, and by April 2018 ran at 3.6%oya. We
the national accounts was set at 2014 (1994, previously), with a currently expect inflation to crawl higher in 2H18, converging
larger weigh of manufacturing and services at the cost of to 4.4% by December 2018. The PYG has slipped 4.4% against
primary sectors. The revisions to the national accounts depict a the USD since late April, reaching levels of 5760. We forecast
larger economy with nominal GDP (in USD) at US$36.4bn by USDPYG at 5700 by December 2018.
2016, 31.5% higher than the estimate under the prior base year.
Per capita GDP reached US$5.3 thousand by 2016, from
US$4.0 thousand before.
In terms of real economic growth, the revised series show

the economy grew 27% since 2012 (or 4.1% on average in the
2012-2017 period). Of course, a more diversified economy
helps to smooth out consumption and growth in time. Since
2009, real growth variance printed 15.7%, compared to 38.8%
under the prior base year. While we wait for 2017 figures, we
estimate real growth last year logged 4.3%. We expect upbeat
activity momentum to linger through 2018 (+4.2%y/y),
although we flag in the grayish dynamism for Argentina and
Brazil a downside risk.
53
Diego W. Pereira
(1-212) 834-4321 08 June 2018
diego.w.pereira@jpmorgan.com
AC
Lucila Barbeito
(54-11) 4348-7229
Peru BBB+/A3/BBB+ them, cigarettes, alcoholic beverages, vehicles, fuels and non-
alcoholic beverages. The MinFin and BCRP calculate the
Growth revives; BCRP on hold overall impact on headline inflation between 20bp and 30bp,
the bulk in the next 30 days (May and June). Beyond taxes, we
 We keep our 3.5%y/y growth projection for this year, believe forecasts risks are still skewed to higher inflation, on
but flag upside risk pass-through from gasoline prices to transportation prices.
 Fiscal revenues gain traction as activity recovers;
current spending growth remains elevated We hold to the base case for BCRP remaining on hold until
 BCRP is to remain on hold until the year-end the year-end. The BCRP maintained the monetary policy
interest rate unchanged at 2.75%, as expected. The central bank
Real GDP grew 6.1%q/q, saar in 1Q18, the strongest projects realized inflation to return to the target range in the
sequential pace since 3Q16. Annual growth reached 3.2%oya, second quarter, and to gradually converge to 2.0% by the end
up from 2.3% in 1Q17 and 2.5%y/y last year. Moreover, the of the year. Regarding activity, the central bank sees clear
demand-side breakdown is also encouraging: private signs of a greater dynamism, although GDP remains below its
consumption and investment accelerated, despite the political potential level of growth. Most indicators of business
uncertainty that weighed on the private sector (see An orderly expectations improved in April and continue to be on the
transition, but challenges abound, D. Pereira, March 26, optimistic side. Moreover, several indicators of economic
2018). On net, domestic demand grew 3.2%q/q, saar. activity, consumption, and investment show a recovery as well.
Meanwhile, net exports contributed negatively as imports grew On net, the Board deemed as appropriate to maintain an
2.9%q/q, sa, outperforming exports at 2.6%. expansionary policy stance until it is certain that this
We keep our 3.5%y/y growth projection for this year, but convergence will take place in a context of anchored inflation
flag upside risk. As expected, external factors continue to expectations.
support activity, with terms of trade historically explaining Fiscal revenues gained traction as activity recovers; one off
around 50% of the business cycle. On the domestic front, regularizations also helping. Fiscal revenues increased 14.0%
the government recently increased excise taxes, which will YTD (by April), driven by tax revenues (+21.9% YTD). Worth
likely raise inflation and could take a bit of a toll on domestic noting, a fiscal windfall stemming from tax regularization has
demand growth. Moreover, the government is contemplating explained 41% of the revenues increase YTD. Thus, with tax
further fiscal measures, some of which may affect domestic
revenues up 0.4%-pt of GDP, the last 12 months fiscal deficit
demand growth. We see the government continuing to
logged 2.6% of GDP, improving substantially when compared
accelerate public sector investment in reconstruction and
to the 3.0% printed for 1Q18. The primary deficit reached
infrastructure and we have already incorporated that into our
baseline activity projection. In all, we keep the 2018 real GDP 1.4% of GDP, while interests 1.3% of GDP.
projection unchanged. The difficult task of consolidating the fiscal accounts ahead.
The government targets a 3.5% of GDP fiscal deficit in 2018,
Headline inflation remains low, yet core inflation printed in
line with the 2% target. Lima’s headline CPI printed a low with fiscal consolidation ahead driving the defcit to 2.1% of
0.02%m/m in May, which was below our expectations. Yet, it GDP by 2020. Yet, the current spending, up 9.8% YTD, is
is worth noting that lower residential electricity prices likely to keep an elevated growth rate on existing commitments
subtracted 13.6bp on the month. Despite the low May print, the and limited flexibility to the downside. We thus see limited
last 12-month headline inched higher to 0.93%oya, 57bp above scope for the government to consolidate the fiscal accounts
the cyclical trough observed in March at 0.36%oya. When structurally via reducing expenditures. Moreover, the recent
excluding food and energy, core prices logged +0.17%m/m, resignation of MinFin Tuesta after only two months in office
driving the over-year-ago core inflation print to 2.0%oya, shows the difficulties the administration faces in regards to
which is in line with our call. Core inflation seems to have increase taxes, paramount to the fiscal consolidation ahead.
reached a plateau averaging 1.97% in the last five months. We While in the near term cyclical improvement in tax collection
is likely to stabilize the deficit, and in the medium term, we see
expect core prices to trend higher in the coming months,
limited scope for the government to consolidate the fiscal
ending the year at around 2.35%oya.
accounts structurally, particularly after seeing the difficulties in
We revised our 2018 inflation forecast to 2.65% from 2.3%, raising tax rates.
previously. In May, the government announced the revision
higher of the Impuesto Selectivo al Consumo (“ISC”), an
indirect tax on certain goods. In all, the ISC tax increase
impact on final prices will depend on the elasticity of the
demand of the taxed products with higher tax rates; among
54
J.P. Morgan Securities LLC J.P. Morgan Securities LLC Global Emerging Markets Research
Diego W. Pereira
AC
Ben Ramsey
(1-212) 834-4321 (1-212) 834-4308 08 June 2018
diego.w.pereira@jpmorgan.com benjamin.h.ramsey@jpmorgan.com
AC
Lucila Barbeito
(54-11) 4348-7229
Uruguay BBB/Baa2/BBB- range between 11%-13% for 2Q18. Worth noting, the
indicative growth pace is higher than the one entertained back
Lower growth on drought and neighbors in 2Q17 (11%-9%), yet below the 1Q18 (14%-16%). That said,
the 1-month T-bill yield reached 7.7%, from 8.5% by the end
 2018 GDP expected to grow 2.6%y/y of 2017. Lower front end yields amid the peso slippage suggest
 Inflation to close 2018 above target ceiling the monetary authority is comfortable in seeing the REER
 2019 fiscal target unlikely be met correction. The Central Bank purchased dollars to prevent
excessive upward pressure on the exchange rate by US$1.6bn
We expect 2018 GDP growth to print 2.6%y/y. In 2017, real YTD, although has sold on a net basis US$55mn in May. On
GDP growth expanded 2.6%y/y, despite the drag suffered from net, the BCU has accumulated US$5.3bn since 3Q2016 in FX
the refinery maintenance shutdown, which subtracted more than reserves, with the stock of gross reserves at US$18.0bn and net
0.5%-pt to 2017 GDP growth. Yet, it is worth noting that the FX reserves at US$8.4bn.
recovery was also marked by plunging investment amid
recovering consumption. On net, the statistical carry over for We expect the headline fiscal deficit to close 2018 at 3.4%
2018 stands at 0.8%-pt. Admittedly, the decoupling between of GDP, implying a 0.2%-pt correction from 2017. The last
investment and consumption poses a question in regards to the 12-month headline reached 3.7% of GDP by April, with the
recovery extension. Year-to-date, a good touristic season seems primary balance at -0.4% of GDP, while the interest bill
unlikely to offset the effects of the drought on soybean remained rather stable at 3.3% of GDP. Going forward, we
production (-59%y/y) and thus exports. Moreover, the main believe it is unlikely that the fiscal deficit converges to the
trading partners’ growth prospects have been materially revised 2.5% GDP government target by 2019. In this regard, we
lower. In all, we trim real GDP growth to 2.6%y/y from 3.0%, continue to flag the upward trend in fiscal spending, which is
previously. Importantly, a railroad tender, considered paramount likely to close the year above 30% of GDP. After a correction
for UPM to move ahead with the US$2.3bn capex plan for a in 2015, upward pressures resurfaced by mid-2016, and we
new paper pulp mill, has attracted three bids, and the believe fiscal spending is unlikely to consolidate lower before
government will announce the results before July. the general election scheduled for late 2019. However, when it
comes to the actual fiscal balance, activity growth and the
We forecast December 2018 inflation above the target growing tax burden masks the structural deterioration.
ceiling, at 7.4%. May monthly CPI printed +0.81%m/m, Recently, MinFin Astori emphasized the need for
driving the over-year-ago variation to 7.21% from 6.65%oya in comprehensive pension reform to help stabilize overall
March. Headline inflation is thus again above the BCU inflation spending. Pensions account for 36% of total current spending,
target band and in our view it will remain above target for the increasing from 9.0% of GDP in 2014 to 10% in 2017. While
months to come, explained in part by the currency slippage. The the current pace of growth is seen as unsustainable in the
UYU has slipped 11.0% against the USD since mid-April, and medium term, we do not expect any reform prior to the 2019
FX pass-through to CPI is estimated at 12%. In all, we expect general election.
December 2018 inflation at 7.4%, assuming USDUYU at 31.50
by then. There is still upside risk stemming from wage The government targets total bond issuance of US$2.7bn in
negotiations amid higher than expected inflation. 2018. We see fiscal uses to reach US$3.4bn this year, of which
the primary fiscal deficit and interest account for US$1,824mn
Regarding non-tradable prices, we wait for the first wage and debt amortization for US$1,788mn. On the sources side,
negotiations settlements. Of the 227 Salary Councils that will the government counts with multilateral disbursements for
operate in 2018, the largest amount is due in June (176 US$350mn, and other sources for US$322mn, leaving the gap
groups). The government established guidelines for nominal at US$2.7bn for the whole year. In this regard, on April 12th
adjustments. The guidelines embed nominal adjustments Uruguay issued U$S 1.75bn in a new USD global bond
stipulated for 24 months (with the option to 30 months), with amortizing in 2055 (with an average life of 36 years). Of the
corrections for inflation every 18 months. The government total amount issued, US$1.5bn was new cash and the
proposes for the first year wage adjustments of 8.5% for remainder was used to finance preferred tenders. Importantly,
‘dynamic’ sectors, 7.5% for ‘intermediate’ sectors, and 6.5% as of end-April 2018, liquid assets increased to around 6.0% of
for ‘stagnant’ sectors. The guidelines going into the wage GDP, enough to cover debt service payments for the next year
negotiations are roughly in line with our assumptions. Any and a half.
meaningful deviation of nominal wage negotiations from the
government guidelines could induce an impact on both
inflation (higher) and activity (lower). In terms of monetary
policy, the BCU maintains a contractive stance. The
authority set as an indicative guideline for Broad M1 growth a
55
Ben Ramsey
(1-212) 834-4308 08 June 2018
Venezuela C/SD/RD Western Hemisphere countries, and the EU) to isolate

Venezuela have continued. In the wake of the vote, the Lima
Maduro “wins” and attempts to entrench Group stated that the member country governments would each
take steps to deal with the regional migration crisis and to
 Maduro “won” the May 20 election but failed to win intensify the collective scrutiny on Venezuelan financial
legitimacy and international isolation continues operations within the respective countries’ jurisdictions. The
 Oil output continues to decline and Conoco is another US has placed an incremental financial sanction prohibiting
challenge even if bondholders haven’t moved PDVSA’s factoring of receivables, or the sale/posting as
collateral of any other state assets. The OAS has begun a
Venezuela’s electoral council (CNE) declared that process that could take high ranking Maduro officials to the
President Maduro won reelection with 68% of the vote, Hague on human rights charges, while also taking up the
amid historically low turnout. The result was not unexpected, Venezuela case again in the context of that body’s Democratic
despite the ongoing deep economic crisis and surveys that by Charter. Despite the high profile release of political prisoners,
and large showed the president’s low popularity, and voting the White House has signaled that policy toward Venezuela
intentions that ranged from competitive to a clear opposition remains unchanged.
advantage (depending on turnout and other factors). Recall the
opposition umbrella group MUD declined to participate in the As for oil output, PDVSA has little ability to revert what
May 20 event after dialogue talks at the turn of the year in the has become precipitous decline. OPEC’s reporting showed
Dominican Republic failed to yield an agreement on basic Venezuela lost a staggering 464kb/d of output in 4Q17,
electoral conditions. The final blow that ended those talks was 649kb/d down over the last year (29% down), and almost a
the government’s unilateral decision to bring the elections million barrels over a two-year horizon. As of April,
forward to the first half of the year. Presidential elections production stood at 1.5mbd. The acceleration of output decline
traditionally happen in 4Q, and the current term ends in is due to a combination of factors including: the
January 2019. Despite the MUD’s strategic decision, former aforementioned sharply deteriorating macro backdrop and
Governor Henri Falcon broke ranks and decided to run anyway, related departure of workers; the indirect impact of US
buoyed by polls showing he had a strong chance to receive sanctions on PDVSA’s financial relationships with services
more votes than Maduro, and presenting a relatively orthodox providers and JV partners; operational paralysis that followed a
economic stabilization plan, punctuated by a (controversial) recent top management purge; and the subsequent steep
dollarization proposal. His decision to run was strongly learning curve of the new military leadership at the companies
criticized by most opposition leaders, and only gained the helm. Since April, Operational woes have been compounded
support of a minority of the traditional opposition by Conoco’s pursuit of a US$2bn arbitration award, leading to
establishment. attachments in key facilities in the Dutch Caribbean. A
judgment in the US may not be far behind. The difference
Very low turnout. According to the CNE, the official election between Conoco’s claim and other (stalled) awards is that the
result showed turnout of 46%. This compares with around 80% former is against PDVSA, not the Republic (which has alter-
in both Chavez’s 2012 reelection and the 2013 snap election of ego and sovereign immunity defenses). All told, we estimate
Maduro. Press reports suggest even this figure could have been PDVSA could easily lose another 500kb/d of output this year.
inflated; Reuters reported only 32% participation as of 6pm,
the moment polling stations are supposed to close. Despite Bond default (mostly) continues. The Republic owes
some expectations to the contrary, Falcon refused to recognize considerably more bonded debt service in 2018 (US$5.4bn)
the final result, while the lone opposition board member of the than PDVSA (US$2.9bn). With this in mind, the default on
CNE also decried the process. Maduro’s strategic objective Republic bonds seems definitive, but PDVSA’s commercial
heading into May 20 seemed to be to provide enough of an activities abroad are exposed to Conoco-style litigation. Thus,
argument to gradually erode the resolve of the international PDVSA’s bonds may selectively be kept current depending on
community, especially the Lima Group countries—where key litigation risks. As of now, only the US$107mn payment of
member Mexico is on the verge of an election that could lead Citgo-collateralized PDVSA 2020s has been made on time this
to a softer stance toward Maduro. In the event, the low turnout year (clearing agencies also released a delayed coupon
and Falcon’s lack of recognition could even reinforce payment on PDVSA ’22Ns).
additional actions to isolate the regime.
More international isolation. The already concerted efforts of

the international community (the US, the Lima Group of
56
AC Global Emerging Markets Research
Giyas M Gokkent
Mid-Year Emerging Markets Outlook and Strategy
(44-20) 7134-6789
giyas.gokkent@jpmorgan.com 08 June 2018
AC
Jessica Murray
(44-20) 7742 6325
jessica.x.murray@jpmorgan.com
Eastern Europe, Middle East and Africa

Bahrain B1-/B+/BB- Bulgaria Baa2/BBB-/BBB
Strong growth, but mounting debt Buoyant growth and an imminent bid for
 Growth is projected to remain strong at 3.1% in 2018, euro membership
supported by GCC grants  1Q18 GDP slightly undershot our expectation due to
 However, large fiscal imbalances and limited buffers weakness in domestic consumption (despite boomy
are fueling a gradual erosion in confidence investment)
 Yet, we expect robust growth of 3.7% this year
We are projecting growth to remain resilient at 3.1%oya in
 Bulgaria is expected to apply for ERM-2 entry by end
2018, from 3.9%oya last year. Economic growth has been
buoyed by the US$7.5bn (20% of GDP) in GCC grants, with June, despite ECB hesitations
90% of funds allocated and just over a quarter disbursed for a
variety of projects ranging from airport expansion to 1Q18 GDP in Bulgaria was slightly softer than expected,
infrastructure and housing. Key projects are progressing but maintained a decent pace. In over-year-ago terms, GDP
was flat at 3.5% swda, compared to our expectation of
including refinery and aluminum sector expansion. Latest
acceleration to 3.8%oya. In sequential terms, growth
indicators including higher profits by listed firms (up 14%oya)
and sharply higher nonoil imports (up 15%oya) suggest that accelerated 3.2%q/q saar. The disappointment relative to our
forecast, given the strong carryover effect of the first quarter,
growth has been particularly strong in 1Q.
squeezed our full-year GDP forecast to 3.7%oya, from 4.1%
previously. Fixed investment saw a strong acceleration in 1Q,
While the recovery in oil prices has improved the outlook,
reaching 7.2%oya swda from 4.5% the prior quarter, and could
the fiscal deficit remains large at a projected 10.1% of GDP
reflect an increase in EU fund absorption. Construction trends
in 2018, down from 15.1% of GDP in 2017. With limited
were also positive in 1Q18; total works accelerated to 15%oya
fiscal adjustment, Bahrain’s fiscal breakeven oil price is the
swda in 1Q18, from 4% the prior quarter, driven mostly by
highest in the GCC at about $115/bbl this year.
building works (+21%oya) and boosted by civil engineering
works (+7.6%oya).
With large financing requirements, public debt is projected
to rise to 92% of GDP in 2018, from 90% last year and
The ECB’s convergence report highlighted some of the
44% in 2014. The authorities have raised $2bn in the first four
roadblocks facing Bulgaria’s ERM-2 admission, but
months, including $1bn through an international sukuk
authorities have since reiterated their intention to apply for
issuance in March. However, a further conventional bond issue
admission by mid-2018. ERM-2 is a precursor to euro
has so far been postponed amidst challenging market
adoption and rating agencies have cited joining the mechanism
conditions. With a continued supply of debt issuance, credit
as grounds for positive rating action. However, application to
rating cuts and heightened risk aversion, sovereign yields on
ERM-2 does not guarantee entry and Bulgaria will need to be
10Y Eurobonds have widened by over 200bps since the start of
accepted by euro area members and the ECB. The recent
the year to 8.85%. Central bank FX reserves, at $2.1bn in
convergence report shows that Bulgaria satisfies three of five
April, are down from $2.3bn at end-2017 and remain below the
convergence criteria, relating to price stability, fiscal position,
historical average of around two months’ coverage. While we
and long term interest rates. The exchange rate criterion would
believe that the dollar peg will be maintained and confidence in
be met via successful ERM-2 participation but the sticking
the peg is underpinned by potential support from Saudi Arabia,
point is the legal compatibility criterion. The report states that
confidence in the peg could be eroded without more significant
‘Bulgarian law does not comply with all the requirements for
fiscal adjustment. It remains to be seen to what extent the 2019
central bank independence, the monetary financing prohibition,
budget will include necessary fiscal reforms including new
and legal integration into the Eurosystem.’ Bulgarian
taxes.
authorities therefore must work to remedy this. Other concerns
for the ECB likely relate to the wide gap of real economic
We expect policy rates to rise by 75bps over the course of
convergence between Bulgaria and euro-area members;
the year in line with Fed rate hikes. While the O/N rate has
Bulgaria has GDP per capita of just EUR 7,100 compared to
been at the same level as the upper limit of the Fed funds target
the EA average of EUR 32,700. Additional roadblocks relate to
rate at 1.75%, CBB has been keeping its 1M deposit rate high
concerns over corruption and organized crime; the judicial
at 2.65% to maintain the attractiveness of the dinar.
system is currently under formal monitoring by the EC and
there is significant room for improvement.
57
J.P. Morgan Securities plc Global Emerging Markets Research
AC
Jessica Murray Mid-Year Emerging Markets Outlook and Strategy
(44-20) 7742 6325 08 June 2018
jessica.x.murray@jpmorgan.com
AC
José Cerveira
(44-20) 7742-3556
jose.a.cerveira@jpmorgan.com
Croatia Ba2/BB+/BB+ Czech Republic A1/AA-/A+
Mediocre growth amid political tensions CNB to continue tightening policy

 Acceleration in 1Q18 GDP growth is probably not  We expect the CNB will hike the key policy rate by
sustainable 25bps in August, and another 25bps in November
 2H18 should benefit from tourist sector, where growth  Real wage growth is picking up, as the labor market
opportunities remain persists in extremely tight conditions
 Ruling coalition likely to maintain fragile majority in  GDP growth disappointed in 1Q18, mainly we think on
parliament the impact of slower Euro area growth
We revised 2018 growth lower to 2.4%oya on the back of The tightening cycle that began with the removal of the
weak momentum in 1Q18. Unadjusted GDP growth in 1Q EUR/CZK peg last year is set to continue in 2H18, with a
accelerated to 2.5%oya from 2.2%, yet growth remained below likely 25bp rate in August and another in November. Since
rates recorded during 1Q-3Q17. The series was revised and the last hike in February, the CNB has been signaling a pause
2017 GDP growth was lifted to 2.9%oya vs 2.8%. Unadjusted in the tightening cycle until end-2018, when its projections
data give the impression that growth was very strong in 1Q18, suggest a next move. This dovish stance has been motivated, in
yet the SA data paint a different picture; in seasonally-adjusted our view, by the Koruna’s rally until February and the ECB’s
terms, growth decelerated quite sharply, to 1.5%oya from easy policy. It was also helped by a string of food-driven
2.3%oya in 4Q17. Furthermore, on a sequential basis, downside surprises to CPI (falling from 7.8%oy in October, to
momentum was very weak, picking up only 0.2%q/q from a 1.8% in April), which lowered the near-term CPI outlook.
poor 0.0%q/q in 4Q17. The strong carry over effect from weak However, the underlying picture did not change as much:
sequential growth in 4Q17 and 1Q18 growth puts downward headline and core CPI are near target, unemployment keeps
pressure on full year GDP growth. We revised FY 2018 growth falling (2.3% in April), wages picked up in 1Q up at 6.6%oya
to 2.4%oya, from 2.6% previously. in real terms (fastest since 2003) and the currency is now
deviating significantly from the official assumption (EUR/CZK
Growth momentum should pick up in 2H18, as the tourism
averaging 25.2 in 2Q18 and 24.8 in 3Q18). It’s true that
season takes hold. Tourism is estimated to account for 25% of
inflation will drift lower to 1.6%oya in 4Q18, but only to
GDP (direct contribution: 11%), with the bulk of activity
accelerate later and remain above target throughout 2019. We
occurring between July-September. There are suggestions that
expect the CNB board will remain forward looking,
the market is reaching full capacity, with labor shortages
acknowledging increasing risks to inflation at the monetary
reported as an obstacle for businesses, yet we see room for
policy horizon (12-18 months ahead), and therefore hiking
expansion. Opportunities include: (i) extension of the usual
twice more this year, by 25bps in August and November.
season, (ii) diversification of product away from ‘sun and sea’,
towards health, eco and sporting tourism, and (iii) development
GDP growth caught a cold from the euro area’s slowdown
of high-end hotels (~60% of Croatia’s hotel capacity is in the
in 1Q18. Czech growth decelerated to 1.6%q/q saar in 1Q18,
mid-range). In terms of additional labor supply, there are
from 3.2%, with external trade driving the weakness. Net
reports that less than a third of work permits allocated to
exports subtracted 2.7%-pts from the quarterly (sa annualized)
foreign workers this year have been taken up.
growth rate as exports decelerated meaningfully to 1.9%q/q
The ruling party faces pressure from the opposition saar (from 7.5%), while import growth was strong at 5.9%q/q
regarding concerns of conflict of interest, relating to saar. Weakness in exports confirms some impact from lower
Agrokor. The controversy forced the deputy PM (also the Euro area growth in 1Q18, but the strength in imports is more
economy minister) to resign, and the main opposition party likely related to a boost in the most import-intensive elements
(SDP) submitted a motion to dissolve parliament. A of domestic demand. Domestic demand stood indeed, solid
parliamentary vote on the motion is expected to take place in across the board, with GFCF up 14.8%q/q saar (adding a 3.7%-
September, and given the government’s slim majority (51%), pt contribution to GDP growth). Household spending remains
the political situation is fragile. Our base case is for the ruling the sturdiest growth underpin, accelerating to 2.9%q/q saar
coalition to navigate the situation, maintain its support, and (from 2.5%) even as durable sales normalize from the vehicle
avoid early elections. However, there is clearly risk associated sales boom of 2013-2017. Government spending slowed from
with the ruling coalition’s support currently hinging on just one a high pace of 7%q/q saar in the previous quarter, to 5.9% in
lawmaker. 1Q18, still a strong level.
58
Giyas M Gokkent
(44-20) 7134-6789 08 June 2018
giyas.gokkent@jpmorgan.com
JPMorgan Chase Bank N.A, London Branch
AC
Nora Szentivanyi
(44-20) 7134-7544
nora.szentivanyi@jpmorgan.com
Egypt B3/B/B Hungary Baa3/BBB-/BBB-
Reforms driving growth Growth supportive policies to prevail

 Accelerating activity reduces unemployment to the  Growth momentum remains solid on the back of
lowest level since 2010 robust domestic demand
 Fiscal measures and recent volatility may keep the  NBH to keep accommodative stance; new measures to
MPC in pause mode a while longer despite disinflation stimulate credit growth could come in 2H18
While we believe there could be upside risks to our growth The latest activity data suggest the Hungary economy
projections, we retain our projections for real GDP growth continues to weather the Euro area slowdown quite well
at 5.2%oya in the 2017/18 fiscal year for now, from and the government’s 4% growth target is on track.
4.2%oya in 2016/17 on the back of reforms and improving Sequential GDP growth slowed only marginally to 4.9%q/q
sentiment. The latest PMI figures have remained at multi-year saar from 5.4% in 4Q while in over-year-ago terms, growth
highs, the number of tourist arrivals rose 54% in 2017 and was flat at 4.4%. We continue to see full-year GDP growth at
Suez Canal receipts have grown 15%oya in the first two 4.2% which implies broadly stable growth in 2H18. The 1Q
months of 2018. As a result of these positive developments, details confirmed that domestic demand continued to fuel the
unemployment has come down to 10.6% in 1Q2018 – the expansion with gains of 5.4%q/q saar in household
lowest level since 2010. While potential security incidents and consumption and 25.9%q/q saar in fixed investment—the latter
protests against fiscal measures remain a risk to the outlook, driven by public capex spending related to EU-funded projects.
we expect growth to accelerate to 5.6% in 2018/19, supported As a result, import demand stayed robust (11.5%q/q saar).
by monetary policy easing and increased investment. Exports growth held up (5.2%q/q saar) despite the slowdown
in the Euro area and outperformed the rest of the CEE region.
Although we expect gradual disinflation will provide space The import-intensive nature of the expansion has driven further
for further monetary easing, recent EM volatility, as well deterioration in external balances, with the trade surplus
as imminent fiscal measures, is likely to stay the hand of halving from a year earlier. Even so, the current account should
the Monetary Policy Committee at its next meeting on remain in surplus through 2019. The fiscal stance remains
June 28. While it is still possible that the MPC could cut its simulative, with further cuts in payroll taxes and other
policy rates by 100bps at its next meeting, bringing the O/N measures to boost competitiveness topping the government’s
deposit rate to 15.75%, recent developments have reduced the policy priorities.
likelihood significantly, in our view. The authorities recently
hiked water prices by almost half and raised Cairo metro fees Strong growth performance amid moderate inflation is
sharply in a prelude to electricity and fuel price hikes next likely to encourage the NBH to stick to its growth
month. At the same time, increased global risk aversion has supportive policies for the foreseeable future. The CPI print
resulted in some reversal of portfolio inflows. May central for May is expected to show mild acceleration in headline
bank data point to outflows of $2.45bn by investors using the inflation to 2.5%oya on the back of higher fuel prices but
CBE's repatriation mechanism – segregated deposits which demand sensitive inflation will likely stay below 2%. Despite
were not a part of reserves. As a result, foreign holdings of the 3% weakening of the forint and higher oil prices since early
Tbills are estimated to have declined to about $20bn (30% of April, inflation is unlikely to reach the 3% target before late
outstanding Tbills), from $23bn in April. This has pushed the 2019. As such, we think the NBH’s policy framework will
average auction yield on 12M Tbills from under 17% in April remain geared towards preventing HUF appreciation, with
to 18.6% at the end of May. and EGP has weakened by 2% short-term market rates likely to stay anchored around current
against the dollar. Despite market volatility, net international lows well into 2019 and the base rate on hold until 2020. Risks
reserves were essentially unchanged at $44bn in May (about are tilted towards an even longer period of rate stability. At the
seven months of imports of goods and services), likely same time, the NBH’s commitment to anchoring the long end
supported by fresh $2bn in IMF disbursement following the of the yield curve through the discount IRS auctions has, in our
conclusion of the third review. While significant challenges view, weakened. Instead, new measures to stimulate credit
remain, we are optimistic on the near-term outlook for the growth more directly could be forthcoming as credit growth
Egyptian economy given ongoing reforms anchored by an continues to lag the pace needed to sustain GDP growth around
IMF program. 4%, according to the NBH.
59
JPMorgan Chase Bank N.A, London Branch Global Emerging Markets Research
Yarkin Cebeci AC Mid-Year Emerging Markets Outlook and Strategy
(44-20) 7134-7547 08 June 2018
yarkin.cebeci@jpmorgan.com
AC
Nicolaie Alexandru-Chidesciuc
(44 20) 7742-2466
nicolaie.alexandru@jpmorgan.com
Israel A1/A+/A+ Kazakhstan Baa3/BBB-/BBB
A very gradual rise in price pressures Powering ahead

 Economic growth remains robust.  Macro fundamentals continue to improve and we
maintain a bullish view overall.
 Price pressures strengthen but very gradually.
 Disinflation continues and the NBK will likely be in
 BOI keeps the neutral bias.
position to implement limited easing.
Economic growth has been robust and broad-based and we The year started on a strong foot as both economic activity
see no reason for momentum loss in the coming months. and the C/A balance have strongly improved. First, the
Growth momentum has remained strong thanks to the 1Q18 GDP printed at 4.1%oya from 3.3% in 4Q, slightly better
continued improvement in labor market conditions, low than the 3.8% that we expected. We note mild risks to the
interest rates and decent export demand. Preliminary data upside given the high oil prices, but prefer to keep the 4.5%
showed growth accelerating to 4.2% q/q saar in the first quarter growth forecast unchanged. The 1Q improvement was driven
of the year. Private consumption has been the main driving by the largest economic sectors – services, industry – and this
force behind growth in recent quarters. Given the continued is encouraging for full-year growth. The non-oil economy was
improvement in labor market conditions (unemployment rate an important driver behind the acceleration in growth. Both
has stabilized below 4%), stronger wage growth and near zero services and construction activity accelerated in 1Q. The latter
interest-rate environment, there is hardly any reason to see a jumped to 5.9%oya from -1.3% in 4Q and the former reached
change in this trend in the coming months. The low interest 3.7%oya from 3.1%. We see this as an indication of
rate environment along with robust domestic and external acceleration in domestic demand growth – likely both
demand has led to a recovery in investment appetite. investment activity and private consumption accelerated in 1Q
Importantly, despite the shekel strength, exports have from 4Q17. Oil output had a significant contribution to the
contributed to GDP growth, supporting the view that Israeli acceleration in IP dynamics where the value added moved to
exports are increasingly dominated by high value-added hi- 5.4%oya in 1Q from 3.6% in 4Q. Taking into account the high
tech sectors which do not get hit by currency strength. We see base effect in the case of oil, the industrial sector is likely to
GDP growth expanding to 3.6% in 2018 and the strength in see stabilization in 2Q and possibly later. The slowdown
high frequency data supports this constructive view. expected in the Chinese economy would call for a moderate
slowdown in IP growth during 2H18.
Despite the recent shekel weakness and the rise in global
The C/A deficit is close to being eliminated. The 1Q18 print
energy prices, yearly inflation remains significantly below
was -US$95mn versus +US$108mn expected. The difference
the target range. Given the price reductions initiated by the
to our forecast was driven by our overestimating the trade
government, the currency stability, enhanced price awareness
balance. The average Brent for 1Q18 was $67/bbl suggesting
by the population and especially increased competition in the
that Kazakhstan will likely record a C/A surplus in 2Q18, in
economy, price pressures are unlikely to recover rapidly in the
line with our forecast of about US$200mn. The rolling C/A
near term. The shekel weakness and higher energy prices will
deficit fell to -US$4bn from -US$5.3bn in 4Q17and -US$9bn
likely push inflation into the target range in summer months,
at the peak in 1Q17. If errors were added, the deficit would be
but we still see yearly inflation at 1.0% at the end of this year.
-US$5.7bn compared to -US $11.1bn at peak in 2Q16. The
The main price pressure could emerge from the recent recovery
improvement is driven by both higher oil prices and higher oil
in wage growth.
output. The trade surplus reached US$19.2bn but it is almost
fully offset by the deficit of the primary income account of -
We expect the BOI to remain on hold at least until 1Q19.
US$18.3bn. Rolling FDI was strong at US$4.6bn and will
The BOI has been keeping rates unchanged for the last three
likely continue to improve given investments to increased
years and have been keeping their policy guidance sentence
output in other oil fields.
(that it intends to maintain the accommodative policy as long
as necessary in order to entrench the inflation environment The National Bank of Kazakhstan (NBK) is likely to
within the target range) unchanged for most of this time. The continue to ease monetary policy. The bank cut on Monday
emergence of significant wage pressures could force the BOI and indicated cuts are close to their end. However, inflation
to an earlier hike, while continued shekel appreciation slowed to 6.2%oya in May and we believe it will reach 5% at
combined with weak price pressures could push the start of the year-end (the target is 5% to 7% for 2018). The policy rate
policy normalization further back. could reach 8.5% from 9% currently.
60
Giyas M Gokkent
(44-20) 7134-6789 08 June 2018
JPMorgan Chase Bank, N.A., Johannesburg Branch
AC
Sonja Keller
(27-11) 507-0376
sonja.c.keller@jpmorgan.com
Lebanon B3/B-/B- Nigeria B2/B/B+
Urgent need for reforms Oil sector remains key underpin as

elections near
 With ongoing regional and political tension, activity is
expected to remain subdued  Growth should rise to 2.8% this year but economic
diversification and reforms remain desirable
 Facing twin deficits, Banque du Liban is expected to
continue with unconventional transactions  Political cycle steps into focus, but oil sector remains
core to the outlook
Following Parliamentary elections held in May for the first
time since 2009, talks are underway to form a cabinet, Economic momentum remains on track to reach 2.8%y/y
which will face an economy struggling with low growth, GDP growth this year, in our view, from 0.8% in 2017. A
twin deficits, and high debt. Prime Minister Saad Hariri's rise in agricultural output gains, solid performance in the oil
Future Movement bloc has only won 20 seats out of 128 sector and a decent recovery in the trade sector has lifted
parliamentary seats, losing a third of the seats it held growth momentum with 2% recorded in 1Q18. While the
previously. Hezbollah and its allies (Amal and President performance of the services sector remains soft, after two years
Michel Aoun’s Free Patrtioc Movement) won at least 70 seats. of contractions, a mild recovery is underway on the back of
While the results are unlikely to ease Western concerns over greater FX availability and easing squeeze on purchasing
the influence of Hezbollah, Saad Hariri has remained as the power. This is also reflected in gains in the all-economy PMI.
PM under Lebanon’s sectarian power sharing rules. Looking ahead, a key challenge remains to diversify the
economy away from hydrocarbon and to proceed with reforms
With the Syrian conflict still weighing on trade, investment, lifting economic growth above the population growth rate.
and tourist flows, activity remains subdued. We expect The political cycle will step in focus now as President
growth to remain subdued at 2%oya in 2018, from 1.5% in Buhari declared his intention to contest the February 2019
2017. The key construction sector remains weak, with permits National Elections on his party’s APC ticket. While Buhari
down 15% in 1Q. However, tourism has been faring better, has built alliances in the run up to his announcement, he also
with the number of visitors up 9% in 2017and up 2%oya in faces several key challenges over the remainder of his tenure
Jan-Feb 2018. and in the run up to National Elections. Having come in with a
promise and mandate to address safety and corruption,
With the fiscal deficit large at a projected 9% of GDP in considerable work remains with security issues relevant in the
2018 (9.8% in 2017), the central bank has continued to North with Boko Harem, the middle belt with frequent violent
conduct unconventional transactions. Against the clashes between herdsmen and farmers, as well as in the South-
background of large financing requirements, the central bank’s South Nigeria Delta.
securities portfolio rose to a quarter of its balance sheet in
April, up from 15% prior to the Arab spring. Banque du Liban The MPC has kept the official policy rate unchanged at
has conducted a number of unconventional transactions since 14% in April. While a rate cut in 2H18 remains a possibility,
2016, with the latest amounting to a US$5.5bn debt swap with the policy stance continues to be effectively managed via
the Ministry of Finance in May. In effect, BdL received OMOs. The CBN has seemingly been willing to supply FX
Eurobonds as payment for LL T-bills and later sold $3.03bn of into the I&E window during the recent period of capital
these to banks. Banks paid for the eurobonds out of their repatriation. The overall manner in which it has navigated the
portfolio of FX certificates of deposit at BdL. The transaction less supportive global backdrop over the last two months as
well as higher FX reserves (above US$47bn in May) are
extended public debt maturity profile and lowered interest
providing investors with some comfort. That said, the CBN’s
payments. BdL reduced its FX CD liabilities by selling a
reaction function is unlikely to be independent of the oil
portion of the Eurobonds (reducing its securities portfolio) to sector’s performance.
the banks, which in turn will get higher yield. However, there
is concern that banks’ sovereign exposure has increased. With Revenue forecasts under the 2018 Federal budget are
public debt projected at 154% of GDP in 2018, from about optimistic and premised on a relatively high GDP growth
153% of GDP last year, yields on Eurobonds have risen assumption. We therefore continue to see upside risks to the
significantly. While BdL FX reserves remain high at around 13 Federal budget deficit of 1.8% of GDP. Government’s
months of imports of goods and services, confidence could refinancing strategy in favor of external debt has bought some
increasingly be eroded without urgent fiscal reforms. space in terms of debt servicing costs, yet the attendant rise in
FX liabilities likely raise medium-term funding pressures.
61
Nora Szentivanyi
(44-20) 7134-7544 08 June 2018
nora.szentivanyi@jpmorgan.com
AC
(44 20) 7742-2466
Poland A2/BBB+/A- Romania Baa3/BBB-/BBB-
Benign CPI to sustain NBP rate stability On track for further macro deterioration
 Sequential GDP growth normalizing after 1Q surge  Growth is slowing and is increasing the pressure on the
 NBP is unlikely to shift from its wait-and-support fiscal policy
stance before late 2019  The central bank has tightened, but is likely to take a
pause for the near-term
Growth is on track for a modest sequential slowdown in the
current quarter after the 1Q18 peak. GDP growth The adjustment from excessive growth has started, but it is
significantly outperformed the rest of the region in 1Q18, with not clear how it will play out given the uncertainty around
growth picking up pace to 6.6%q/q saar, from 4.1% in 4Q18. fiscal policy. Activity slowed sharply in 1Q18 and reached
Details confirmed that Poland is weathering well the recent 4%oya from 6.7% (on a sequential basis growth stalled after
deceleration in Euro area growth, with strong domestic demand only 1.2% saar in 4Q17). On the back of the weak 1Q print, we
more than offsetting the weakness in the export sector (exports downgraded full-year growth to only 3.2% from 4% and see
contracted by 4.3%q/q saar). However, the dominating role of downside risks. Those are driven by both external and
inventories adds opacity over the true underlying strength of domestic factors. Regarding the former, a slowdown in Italy is
each demand component. Indeed, while gross capital formation relevant given trade links, but a German slowdown would be
surged 67%q/q saar, fixed investment rose a more moderate more damaging. In case of domestic factors, risks are coming
8% q/q saar. Corporate investment was quite muted, while from both fiscal policy and politics. We think that domestic
local governments ramped up their expenditures. The latest factors are not likely to derail the economy, but a sizable
activity data look consistent with a return to a more normal 4- external shock has the potential to lead to a sharp growth
5%q/q saar growth pace in 2Q, in line with our forecast. IP slowdown given the widening twin deficits.
expanded 0.5%m/m in April and the PMI held close to its 1Q
average, while construction activity decelerated after The budget deficit is widening faster than expected and
unsustainably strong 1Q growth. Although the 1Q surprise adjusting the second pension pillar is unlikely to be enough.
points to upside risks to our full-year growth forecast of 4.5%, Data over January-April 2018 shows a budget deficit of -0.7%
we are mindful of the risk of further downgrades in Euro area of GDP compared to a surplus of 0.2% of GDP for same period
growth, especially Germany’s. of 2017. This would indicate that the full-year budget deficit
can reach at least 3.7% of GDP. Our current forecast is 3.6% of
Subdued inflation continues to support the NBP's GDP, but growth revisions to the downside have magnified the
accommodative policy stance. Inflation came in weaker than risks of fiscal slippage. The government continues to
expected in May, picking up to 1.7%oya from 1.6% in April emphasize that it wants to keep the deficit below 3% of GDP
and easing from 1.9% in January. Even with the recent and, so far, the only sizable measure that has been discussed is
weakening in PLN and higher oil prices, inflation will likely transforming the second pension pillar into an optional system.
undershoot the NBP’s March forecast this year due to Note that there is strong opposition from civil society and
unexpectedly weak core inflation and somewhat lower food professional associations to such a move. Assuming that all
inflation. We see inflation averaging 1.7% this year versus the current participants (in excess of 7mn people) shift back to the
NBP staff’s latest 2.1% projection and 1.1% core inflation first pillar, public pension, then the budget revenues would
versus the NBP’s 1.6%. The slowdown in core inflation since gain about 0.4% of GDP. This would bring the deficit closer to
the start of the year (to 0.6% in April) owes to a sharp slide in 3% but not enough. Consequently, additional tightening
service price inflation, although this is largely explained by measures would be required.
volatile and administered items. We expect core inflation to
end the year 1%-pt higher, driven higher by a combination of The National Bank of Romania hiked the policy rate to
tight resource utilization, fading effects of earlier zloty 2.5% at the May meeting, but over the near term a dovish
appreciation and some second round effects from higher oil shift is likely. This is driven by the weak 1Q GDP as well as
prices. The combination of ECB rate hikes and a rebound in inflation close to its peak; external risks have also increased
core inflation should form the basis of eventual rate hikes, while regional central banks are rather dovish. We think that
though not before 4Q19. We believe the NBP will need to the NBR remains behind the curve, but on its own it cannot fix
adjust its policy to the ECB’s rate normalization but will not the macro imbalances. Inflation reached 5.2%oya in April and
feel under pressure to react immediately as the high starting will likely peak close to 5.5% over the summer months.
point for the policy rate (1.5%) provides a cushion.
62
J.P. Morgan Bank International LLC Global Emerging Markets Research
AC
Anatoliy A Shal Mid-Year Emerging Markets Outlook and Strategy
(7-495) 937-7321 08 June 2018
anatoliy.a.shal@jpmorgan.com
Russia BBB-/Ba1/BBB- recovered roughly half of its April losses—the CBR reverted to
a dovish rhetoric as a result although it did not send a definitive
Adjusting to the sanctions shock signal about its short-term actions. Our base case remains for
the CBR to extend the pause through the June and July
 Impact of new sanctions on growth been limited so far meetings, but risks of an earlier return to rate cuts has increased.
 Inflation has remained well behaved and, after a pause, We expect a total of 50bp in cuts by end-2018.
the CBR will likely return to easing
 Fiscal policy in spotlight following March elections—so New budget spending initiatives total around 1.1% of GDP.
far authorities managed to stick to the budget rule President Putin’s program for the next six years focuses mainly
on infrastructure (0.4% of GDP), healthcare and fighting
New US sanctions largely offset the positive impact from poverty. The additional expenditures are thus skewed toward
higher oil prices this year and we expect growth to be little physical capital and human capital spending, which may be a
changed from last year’s 1.5%. Following the introduction of positive for growth in the long-term.
new US sanctions in April and a somewhat softer than
expected GDP print in 1Q, we lowered our 2018 forecast to The financing for new spending initiatives has long
1.6% from 1.7% and see further modest downside risks to it. remained an intrigued but clouds clear now. Roughly one
We have expected the sanctions to affect activity via three third of extra budget spending (0.4% of GDP) will be funded
main channels: 1) operations and exports of affected by additional sovereign borrowings and this will result in a de-
companies, 2) confidence channel, and 3) the credit impulse, as facto mild relaxation of the budget rule. We view this
external markets have closed for Russian borrowers. That said, relaxation as a lesser devil compared to a potential change of
so far there has been little sign of substantial impact to the oil threshold in the budget rule (currently $40.8/bbl). The
economic activity via the first two channels and growth data, rest will need to be financed via an increased tax burden and
on balance, has remained relatively strong. The first (and only) the current set of suggested revenue measures suggests that
sign of weakness was in May PMIs, although alternative local most of the burden will weigh on consumer via three main
business surveys did not confirm this signal. initiatives. First, the tax “maneuver” in the oil sector, which
includes the increase in the mineral extraction tax and a
Meanwhile, inflation has remained surprisingly well decrease in the export duty, should lead to an increase in
behaved. The pass-through from April’s exchange rate domestic fuel prices and hence a cut in the implicit subsidy to
depreciation has remained modest, while the surge in petrol energy consumers (around 0.2% of GDP). Second, the
price inflation was compensated by downside surprises in food. increase in pension age—from a current 55 and 60 years for
Base effects helped as well and inflation remained stable at women and men, respectively—could generate substantial
2.4%oya through May even as sequential momentum firmed to savings for the PAYG system, but we expect that a big portion
slightly above 4% ar. Our initial reaction to the fx shock was to of the savings will be given back in the form of larger pension
revise our end-2018 CPI forecast to 3.9%oya from 3.5%, but as indexations (we assume a net effect of around 0.3% of GDP).
NEER recovered roughly half of its losses, while food inflation Third, the government has discussed an increase in the VAT
remained very low, we revised it down to 3.7%. Aside from rate from 18% to 20% and the potential elimination of a lower
currency effects, the pickup in inflation is expected to be (10%) tax rate for select products, which could fill the rest of
driven by firming underlying inflation as consumer demand the funding gap.
remains strong, wage inflation outpaced productivity gains and
output gap has largely closed. The likely tax maneuver in the Fiscal impulse is likely to be not as negative next year. The
oil sector—the increase in mineral extraction tax and a cut to current budget plan assumes continued fiscal consolidation
oil export duty—and the potential increase in VAT rate are next year, of around 1% of GDP. Yet, in case the infrastructure
upside risks to our 2019 inflation forecast of 4%. spending will roll not out as fast as expected and because it
will be financed via issuance, this could reduce the size of the
Modest pass-through from exchange rate and stabilization (negative) fiscal impulse. Furthermore, additional spending
in Russian asset prices re-opens the door to monetary appears to be skewed toward items with potentially larger
policy easing. Increased market volatility following the fiscal multipliers (capex), while revenue measures are skewed
introduction of new US sanctions made the CBR adopt a more toward increases in indirect and other consumer taxes, with
cautious stance and take a pause at the April meeting, as well typically lower multipliers. This could further reduce the size
as signal a reduced flexibility for easing ahead. However, of the negative fiscal impulse, in our view.
inflation continued to surprise on the soft side and the RUB has
63
Giyas M Gokkent
(44-20) 7134-6789 08 June 2018
AC
José Cerveira
(44-20) 7742-3556
jose.a.cerveira@jpmorgan.com
Saudi Arabia A1/A-/A+ Serbia Ba3/BB/BB
Higher reserves, but subdued activity Growth surges

 With fiscal measures weighing on activity, we retain  Growth accelerated in 1Q18 to 4.6%oya, the fastest
our growth projection at 1.6% in 2018 pace in nearly a decade
 But high-frequency data signal some deceleration in
 Higher oil prices expected to improve fiscal and
the second quarter
external balances and prop up FX reserves
 Dinar strength creates a dilemma for the central bank
Despite the recovery in oil prices, economic activity
remains subdued and we retain our growth projection of Growth accelerated to the fastest pace in nearly a decade,
1.6%oya in 2018, after a 0.7% contraction last year. The propelled by supply shocks unwinding and strong domestic
latest PMI figures have been hovering near record lows, profits demand. Growth picked up to 4.6%oya in 1Q18, from 2.4% in
of listed firms have been under pressure (down 16%oya in 1Q), 4Q17, with domestic demand expectably the key driver of the
and deposit and credit growth have been anemic following the acceleration. Performance was solid across all subcategories:
introduction of new taxes and fees. household spending was up 3.0%oya (from 1.9%), government
consumption up 2.3%oya (from 1.1%) and investment (GFCF)
Higher oil prices have not fully reflected in 1Q, with the accelerated by 14.9%oya (from 12.4%). In contrast, the
12M rolling sum fiscal deficit still high at 9% of GDP. The external sector is, for the second consecutive quarter, a
authorities have indicated that this is, in part, due to the shift significant net drag on GDP growth, as exports have been
from monthly to quarterly Aramco dividends resulting in fiscal growing faster than imports.
oil revenues to rise only 2% in 1Q. Budgetary revenues rose by
15% oya, driven by a 63% increase in nonoil revenues. The High-frequency data points to deceleration in 2Q18. Data
sharp increase in nonoil revenues was mainly due to the on industrial production and international trade for April point
introduction of VAT in January which more than tripled tax to some deceleration in activity in 2Q. Overall industrial output
receipts from goods and services, accounting for almost half of grew 2.2%oya in April, considerably below the 1Q average of
nonoil revenues and exceeding expectations. Expenditures rose 5.9%, with the weakness being led mostly by manufacturing,
by 18% in the same period, with significantly higher current which fell 0.1%oya in April (after an already weak March: -
expenditures offsetting a small decline in capital expenditures. 0.3%oya), from a 5.3% average in 1Q. At the same time,
We are projecting the deficit to decline to 3.9% of GDP in exports grew (in nominal euro terms) 4.2%oya (8.5%oya in
2018, down from 8.9% of GDP last year. With a sharply lower 1Q), while imports accelerated to 16.7%oya (from 12.5% in
financing requirement, we are projecting public debt to rise 1Q). The positive exception in the high-frequency data comes
only slightly to 18.7% of GDP, from 17.6% in 2017, easing the from retail trade, which was up 4.7%oya in April, compared to
pressure on international reserves and reducing borrowing a 3.2% average in 1Q, suggesting that household consumption
requirements. remained resilient. Also, we think the impressive pace of
import growth is difficult to explain unless investment is
Higher oil prices are projected to raise the current account performing strongly. All in all, this early peak into 2Q signals
surplus to 6.1% of GDP in 2018, reducing the pressure on some deceleration overall, with continued strong domestic
reserves. After a decline at the start of the year, international demand and negative contribution from net trade.
reserves have increased in April to $507bn (up $19bn from the
trough in February), mainly due to external surpluses and Dinar appreciation pressures add pressure for further
foreign borrowing. With the authorities fulfilling their plans for easing by the NBS. In total disconnect with the dollar-driven
foreign borrowing this year, we do not expect further external EM FX sell-off, demand for the Serbian dinar has apparently
debt issuance in 2018. not eased at all. Throughout the last month, the NBS has had to
continuously intervene to prevent appreciation, and in the past
Monetary policy is expected to continue tightening in the week, the scale of interventions has sharply increased. If this
context of the peg to the dollar, with another 75bps in rate level of intervention persists, the NBS may decide to
hikes expected in 2018. SAMA raised its reverse repo rate by reconsider on further easing of monetary policy, something the
25bps in March to 1.75% and is expected to hike quarterly with MPC has signaled to not be too keen on, even with core
another 25 bps expected in June to match Fed rate hikes inflation below 1%.
64
JPMorgan Chase Bank, N.A., Johannesburg Branch Global Emerging Markets Research
AC
Sonja Keller Mid-Year Emerging Markets Outlook and Strategy
(27-11) 507-0376 08 June 2018
sonja.c.keller@jpmorgan.com
JPMorgan Chase Bank N.A, London Branch
AC
Yarkin Cebeci
(44-20) 7134-7547
South Africa Baa3/BB/BB+ Turkey Ba2/BB-/BB+
Set-back in cyclical recovery as 1Q18 GDP A principal focus of market concern

drops yet little follow-through to policy  Turkey suffers from increased political/policy
 Broader cyclical economic growth recovery should uncertainty in the run up to the June 24 elections.
continue even as GDP has so far disappointed  External balances will likely improve but remain to a
 SARB likely to hold rates unchanged this year with source of concern.
inflation outlook comfortably within target range  CBRT responded strongly to credibility erosion.
 Fiscal performance broadly on track with some risks
from contingent liabilities and wage bill Against a backdrop that has turned more challenging for
the EM, Turkey has been a principal focus of market
We have trimmed our 2018 growth projection to 1.5% concern. On top of the concerns over macro developments
(from 1.7%) following a disappointing start to the year as such as large external imbalances and sharply higher inflation,
GDP dropped 2.2%q/q ar in 1Q. A confluence of a Turkey is also suffering from the rise in political uncertainty.
sizeable drop in agriculture production, declines in mining Political experts have the habit of naming every election in
and IP, and a stagnation in the tertiary sector led to the Turkey as the most important one in history, but this time they
weakest performance in nine years. Yet, distortions from may well be right. After the presidential/parliamentary
evolving seasonality in the trade sector and regional elections on June 24th and – in case a second round is needed –
dynamics within agriculture probably contributed 1.5%-pts to on July 8, Turkey will formally change its regime from a
the decline. Manufacturing production was also weak due to parliamentarian democracy to executive presidency. The
extensive planned refinery outages, yet the outlook is for a presidential system will result in further centralization of power
recovery in 2H18 while mining production probably moves but checks and balances will still exist. As always,
sideways. While the purchasing power drag on consumer implementation will be the key. Those checks and balances
should grow in line with a drift higher in sequential inflation, could easily be circumvented in practice and that could
real wages could continue to support consumer spending and potentially lead to social and political tensions. A key risk with
our expectations remain for a recovery in capex growth. the new system could arise if the president is from a party
which does not have majority in parliament. Coalitions are
The SARB is expected to keep rates steady at 6.5% this always possible and could be quite instrumental in bringing
year with the next move in the policy rate likely higher. At political tension down in a sustained way. However, if the
its last meeting, the MPC signaled a modest tightening bias, president and/or the parliament shows no will to compromise
yet as long as inflation projections remain comfortably within (something which is not very rare in the country’s political
the target band throughout the forecast horizon, as is currently history), then there could be a significant risk of political
the case, policy tightening likely will be delayed until 2019 deadlock. If this rise is avoided, elections could result in a sharp
particularly given the growth surprise in 1Q. We expect decline in political uncertainty. A strong and reform-oriented
inflation to average 4.8% this year and 5.1% next year with government would be needed in order for political risk to
some upside risk from pending administered price remain contained and for macro/market variables to improve.
announcements and the currency. In our view, the SARB’s
reaction has been evolving and the real policy rate probably The combination of increased uncertainty, weaker
will be near 2% in the medium-term. sentiment, higher inflation and sharp monetary tightening
is likely to take a toll on growth. Last year’s strong growth
The fiscal trajectory by Treasury, as presented in the 2018 was due mainly to government stimulus measures and use of
budget, is broadly achievable with a likely 3.6% the credit guaranty fund scheme. As the stimulus has already
consolidated deficit this year, from 4.3% last year. In our expired and the impact of the credit guaranty scheme
view, fiscal risks have softened substantially as tax buoyancy diminishes, growth should naturally slow down this year. On
has recovered and appears close to Treasury’s 1.5 target. top of this, recent market volatility and the sharp monetary
Beyond some risk from the public sector wage negotiation tightening delivered by the CBRT have had quite a large
currently underway, the key uncertainty emanates from impact on domestic demand. Certain measures introduced by
developments at state-owned entities, as previously indicated the government in the run-up to the elections – such as bonus
by authorities. It is currently unclear whether a further fiscal payments to the pensioners – will only partly offset the
injection will take place this year.
65
Yarkin Cebeci
(44-20) 7134-7547 08 June 2018
AC
(44 20) 7742-2466
weakening in domestic demand. On the other hand, the lira Ukraine Caa2/B-/B-
weakening and the resulting improvement in price
competitiveness will likely support merchandise and especially Better fundamentals, but the IMF program
services exports. Hence, although we expect GDP growth to remains key
slow sharply from 7.4% last year, it should still be at a
respectable rate of 3.3% this year. We see growth recovering  Growth continues to accelerate
modestly to 3.6% in 2019.  The central bank remains cautious
 The IMF program likely to be put back on track later
External imbalances remain a key source of concern. this year
Robust domestic demand, higher energy prices, and especially
anomalously strong gold imports have widened Turkey’s cur- The macro picture is encouraging. The Ukrainian economy
rent account deficit in recent months. Turkish companies have is continuing its recovery as growth accelerated to 3.1%oya in
faced no problem in roiling over their debt obligations and 1Q18, above most forecasts. The activity in 1Q18 was
thanks to capital inflows, the burgeoning CAD has been impacted by weather conditions. The external position has
financed without much difficulty. Furthermore, weaker import improved given that C/A deficit was only 1.9% of GDP in
demand, continued export penetration into EU markets and the 2017 and was fully financed with FDI. Fiscally, the situation
sharp recovery in tourism should lead to some improvement in looks less optimistic as revenues have under-performed and
external balances. We expect the CAD to shrink from the there is a risk that the budget deficit could be 1% to 1.5% of
current level of 6.5% of GDP to 6.1% by the end of this year GDP wider than agreed with the IMF (2.5% of GDP).
and further to 4.6% by the end of 2019. However, the deficit Nevertheless, to put things into context, Ukraine managed to
will likely remain wide by any standard and corporate outperform fiscal targets by a large margin over 2015-2017.
indebtedness will likely increase further. Moreover, the short
FX position of corporates is unlikely to decrease in any way. The IMF program is off track, but attempts to fix it are
Hence, Turkey we expect will remain vulnerable to shifts in ongoing. On top of the budget slippage, Ukraine has to fulfill
global risk appetite. two other important conditions in order to receive the fifth
disbursement worth US$1.9bn (this would open the door to
Price dynamics have worsened substantially and inflation additional financing of up to US$2bn from the EU, the World
will likely remain sticky. Although the government has Bank and others). The other two conditions for resumption of
recently been more vocal about its determination to bring the program are: 1) adoption of the high anticorruption court
inflation down, the sharp lira weakening and the worsening (HACC) law and the setting-up of the court; 2) implementation
in inflation expectations have done significant damage to of the hike in gas prices based on the formula that was already
price dynamics. Furthermore, although the slowdown in agreed for the previous disbursement – this likely implies a
economic activity could limit price pressures in H2, the hike close to 40% currently. The HACC was passed today, but
bonus payments that the government has promised to make to the IMF still needs to assess the compliance with its request. In
pensioners in June and August will likely be inflationary. case of positive review, an IMF team would probably visit
Such worsening in inflation dynamics has encouraged us to Kyiv to discuss the details about the hike in gas prices and the
revise up our end-2018 inflation forecast to 11.8% from 2018 budget law.
10.8%. We see inflation peaking at 13.8% in July.
The public sector needs to cover maturities of US$2.2bn until
The CBRT responded to the credibility erosion by hiking end of this year and US$5.1bn in 2019. FX reserves of the
rates sharply and simplifying its interest rate framework. NBU – currently at US$18.1bn – could easily fall below the
Sharp worsening in price dynamics, continued credibility $10bn mark until end of 2019.
problems and persisting market volatility have been
increasing pressure on the CBRT to tighten its monetary The National Bank of Ukraine will likely remain on hold
policy further. The CBRT responded by hiking its policy rate until April 2019 with risks of tightening before year end.
by a cumulative 500bp to 17.75% in the last 1.5 months. The The central bank communicated that it sees monetary policy
Bank also simplified its interest rate framework by switching rather tight already and that falling inflation should not force
from the controversial late liquidity window facility to the 1- more rate hikes. If the IMF program is not resumed, then the
week repo facility as the main monetary policy tool. Further bank is ready to increase the policy rate. April inflation was
political policy uncertainty and credibility erosion could call slightly below our forecast: 13.1%oya from 13.2%; we
for further hikes. expected 13.2%. Core inflation was flat at 9.4%oya,
66
AC
Nicolaie Alexandru-Chidesciuc Mid-Year Emerging Markets Outlook and Strategy
(44 20) 7742-2466 08 June 2018
significantly above the 6% inflation target. Food inflation

refuses to slow down in a meaningful manner and only shifted
lower to 17.2%oya from 17.3% in March. Given that this
category accounts for more than 50% of the consumer basket,
inflation may slow only if food inflation slows.
On the political front there is no clarity regarding the

outcome of either the presidential or parliamentary
elections in March and October 2019, respectively. It seems
that all options are on the table given that current opinion polls
(see here) are showing Yulia Tymoshenko, the leader of
Fatherland, as the likely winner, but the share of undecided
voters is very large (40%-50%), thus any result is possible.
67
JPMorgan Chase Bank, N.A., Hong Kong Global Emerging Markets Research
AC
Haibin Zhu Mid-Year Emerging Markets Outlook and Strategy
Carol Wei Liao
(852) 2800-7039 (852) 2800-2801 08 June 2018
haibin.zhu@jpmorgan.com carol.w.liao@jpmorgan.com
Grace Ng Shaoyu Guo
(852) 2800-7002 (852) 2800-2163
grace.h.ng@jpmorgan.com shaoyu.guo@jpmchase.com
Emerging Asia
China A1/A+/A+ picture, China has agreed to substantially increase imports
from the US in the next few years. Our calculations suggest
Steady growth; lingering trade tensions that a US$100 billion increase in China’s merchandise imports
from the US by 2020 is likely (focusing on imports such as
 Steady economic momentum through 2Q; we expect agricultural products, energy, airplanes, autos, and
some moderation in 2H18 semiconductors), but a US$200 billion increase would be very
 Macro policy stance (including fiscal and monetary challenging. Meanwhile, service trade is an area in which the
policies) has turned from a tightening bias to neutral, US could widen its current surplus with China by US$40-50
as policymakers express a cautious external view billion by 2020. Overall, assuming a meaningful increase in
imports from the US, and a structural widening in the service
 US-China trade tensions linger; China’s current deficit, China’s current account surplus could turn into a deficit
account could fall into deficit by 2020 by 2020.
The Chinese economy entered 2018 with solid growth

momentum, as real GDP expanded 6.9% q/q saar in 1Q.
High-frequency monthly data suggest that the economy will
continue with steady growth through 2Q, and we expect real
GDP growth to ease only modestly to 6.6% q/q saar, to be
followed by some moderation to an average 6.3% q/q saar pace
in 2H. On the domestic side, real estate activity growth may
ease moderately, while infrastructure investment growth will
likely stabilize somewhat. On the external front, the negative
impact from US-China trade conflicts may begin to kick in
gradually in 2H. Overall, our forecast for 2018 GDP growth is
6.7% yoy.
On macro policy, we recently noted that as Chinese

policymakers have expressed a more cautious view on the
external environment, especially in the face of lingering
US-China trade conflicts, the tightening bias on macro
policy earlier in the year has faded. Looking ahead,
regarding monetary policy operations, further reserve
requirement ratio (RRR) cuts are likely, in our view, with
potentially 2-3 cuts of 50bp over the next 12 months. On the
fiscal policy front, public-private partnership (PPP) tightening
appears to have been relaxed lately. On the other hand, while
the regulatory authorities may be willing to adjust the pace of
regulatory tightening on a discretionary basis, the broader
policy direction to prevent financial risks—in particular
deleveraging and strengthened financial regulations—is
unlikely to be reversed.
With regard to US-China trade tensions, our baseline

scenario assumes a bumpy path of negotiation. Indeed, a
few days after both governments signed an agreement to avoid
an imminent trade war, the Trump government indicated that
the plans to impose tariffs on US$50 billion of Chinese imports
and curb investment in sensitive technology sectors would go
ahead, while the US Commerce Secretary’s visit to Beijing on
June 2-3 was not followed by a joint statement and neither side
released details on the talks. Aside from the back-and-forth in
the near-term negotiation process, regarding the broader
68
JPMorgan Chase Bank, N.A., Mumbai Branch Global Emerging Markets Research
AC
Sajjid Z Chinoy Mid-Year Emerging Markets Outlook and Strategy
(91-22) 6157-3386 08 June 2018
sajjid.z.chinoy@jpmorgan.com
Toshi Jain
(91-22) 6157-3387
toshi.jain@jpmorgan.com
India Baa3/BBB-/BBB but instead remain data-dependent and hike on an

opportunistic basis. That said, if core momentum remains
Palpable buffers, hidden fissures particularly elevated in the next couple of prints and/or there
is a further surge in global crude prices, the August policy
 1Q GDP growth surprised to the upside, taking 2017- could come into play.
18 growth to 6.7%oya; we forecast 2018-19 growth at
7.1%oya CAD tripled to 2% of GDP and the underlying current
 With the hardening of core inflation and rising crude account has deteriorated more sharply. Despite oil prices
prices, RBI hiked rates by 25bps at the June review; averaging just $57/barrel in 2017-18, India’s CAD tripled to
we expect another 25bps in 2018 2% of GDP. If oil averages $75/barrel, the CAD would widen
further towards 3% of GDP. Furthermore, the deterioration in
 The CAD tripled to 2% of GDP in 2017-18, and we
the underlying current account balance (excluding oil and gold)
expect it to widen to 3% if oil averages US$75
has been much sharper, declining by more than 2 percentage
 That said, India is now much more fortified against points of GDP, from 4.6% of GDP in the second half of 2014
global shocks, with better starting conditions, positive to 2.2 % of GDP in the second half of 2017. This appears
real rates, and significantly higher FX reserves related to the nearly 20% real appreciation of the trade-
weighted exchange rate between 2014 and 2017, likely
1Q18 GDP surprised to the upside, but internals less reflecting the large, positive terms-of-trade shock on account
constructive. 1Q GDP growth accelerated to 7.7%, from 7% in of lower oil prices (a “Dutch disease” phenomenon , see India
4Q17. That said, headline growth was helped by favorable base in 2018 vs 2013: palpable buffers, hidden fissures and Dutch
effects and powered by strong government spending. Instead, disease?, 31 May 2018). Given the widening of the CAD and
core GVA growth (GVA excluding agriculture and tightening of global monetary conditions, the BoP is likely to
government spending), reflecting the private sector business be in deficit in 2018-19, compared to the strong surplus in
cycle, slowed from 7.4% to 7.2% despite a very favorable base 2017-18. Already, the broad trade-weighted exchange rate
effect. In our view, the strong recovery over the last two (based on the 36-currency REER index) has depreciated by
quarters was payback for the earlier weakness from more than 5% since the start of the year, but on the back of a
demonetization and the GST. nearly 20% appreciation over the last three years.
Growth to modestly accelerate in 2018-19. We forecast GDP India more fortified against global shocks than it was going
growth to accelerate from 6.7%oya in 2017-18 to 7.1% in into 2013. In contrast to 2013, India’s starting points have
2018-19, helped by waning drags from net exports and improved significantly and there are considerably higher
authorities reflating the rural economy in a pre-election year. buffers in place. First and foremost, inflation has averaged less
That said, this is less than what the RBI and government than 4% over the past year and real rates are positive, versus
forecast. Our more muted acceleration expectation is 10% inflation and negative real rates in the year leading up to
predicated on the adverse terms-of-trade shock from higher oil the “Taper Tantrum”. Second, India has institutionalized an
prices, the recent tightening of monetary conditions, and the inflation-targeting framework which helps anchor both
continued deleveraging of the banking sector. inflation and medium-term currency expectations, and which
was missing in 2013. Despite the twin deficits (aggregate of
RBI hiked rates by 25bps, penciling in another 25bps hike. current and fiscal deficit) increasing over the past year (8.4%
After two successive strong core inflation prints in March of GDP) they are significantly lower than their levels in 2012-
and April, oil prices rising by 12% since the April policy and 13 (11.7% of GDP). Finally, FX reserve buffers have increased
tightening of global financial conditions, some monetary sharply and FX reserves/gross financing requirements have
policy tightening in India was inevitable, although the timing increased to 140%, from 100% in 2013.
was uncertain. As it turned out, RBI raised its 2H 2018-19
inflation forecast by 30bps and moved proactively in June,
increasing policy rates by 25bps to 6.25%. Given the RBI’s
reaction function we now pencil in another rate hike of 25bps
in October. With the RBI reiterating its “neutral” stance—
instead of moving to a tightening bias—we believe the MPC
is signaling that it does not intend to go on a rate-hiking cycle,
69
JPMorgan Chase Bank, N.A., Singapore Branch Global Emerging Markets Research
Sin Beng Ong
(65) 6882-1623 08 June 2018
sinbeng.ong@jpmorgan.com
Indonesia Baa2/ BBB- /BBB Beyond the current quarter, we are looking for an
improvement in the trade balance, which should help
Pre-emptive and adaptive narrow the current account deficit reflecting, among other
things, a lagged response to the weaker currency and fiscal
 Indonesia’s policy response to recent volatility has been policy that is focused on switching expenditure to
well coordinated and pre-emptive consumption from investment. At this juncture, we maintain
our forecast for a US$6-7 billion balance-of-payments deficit,
 Policy likely to be adaptive to external conditions, and
which pencils in a modest narrowing in the overall balance
will be calibrated accordingly following a US$3.8 billion deficit in 1Q18, and reflects the
 Bank Indonesia reaffirmed commitment to macro, gradual narrowing of the current account deficit in 2H18,
financial stability, watching US$ and capex imports consistent also with the central bank’s view.
We view the recent policy actions positively, noting the That said, the credit impulse in this cycle looks to be lagging
unprecedented degree of pre-emptive policy coordination the expansion in capex and thus the rate hikes are not expected
between the central bank, the ministry of finance, the to materially slow the capex cycle, unlike in prior cycles, given
financial services authority Otoritas Jasa Keuangan (OJK), that credit does not seem to figure prominently in the capex
and the deposit insurance agency, Lembaga Pinjamin cycle this time around.
Simpanan (LPS). This focus on financial stability has been
clearly signaled via the policy action by Bank Indonesia to It is also for this reason that we expect some easing of macro-
preemptively raise rates. prudential regulations on credit, in line with the guidelines laid
out by the governor in a prior paper (see “Indonesia: the
In particular, there are four guiding principles for Bank macroprudential framework and the central bank's policy mix,”
Indonesia’s reaction function, as laid out in its recent policy BIS Papers No 94 189, Perry Warjiyo, November 23, 2017).
statement on May 30 stressing the objective of maintaining
financial stability, reflected in the exchange rate. These are:
1. To maintain its policy rate stance in a manner that is pre-

emptive, front-loaded, and ahead of the curve to maintain
currency stability. This suggests that the policy reaction
function will be adaptive and responsive to external
financial conditions.
2. To intervene in the FX and government bond market in a

manner that stabilizes and also maintains liquidity in local
markets.
3. To undertake domestic money market operations that would

help maintain domestic banking system liquidity.
4. To continually and actively communicate with market

participants, investors, and analysts the policy objectives to
prevent and pre-empt overshooting of the exchange rate
beyond its fundamentals.
We maintain our forecast of another 25bp hike in 3Q18 to

bring the policy rate to 5.0%, moving in tandem with the
expected 25bp hike in the Fed Funds rate, and expect that
the reaction function will be adaptive to external
conditions. Thus, should the US$ continue to appreciate
unabated in 2H18, BI’s policy rate will like respond with
further hikes.
70
AC
Sin Beng Ong Mid-Year Emerging Markets Outlook and Strategy
(65) 6882-1623 08 June 2018
sinbeng.ong@jpmorgan.com
Malaysia A3/A-/A- due in large part to the recent rise in oil prices. This has
effectively reduced the four-quarter average deficit to 2.2% of
Macro revisions from election surprise GDP from 3.3% in 1Q17. Moreover, the rise in oil prices
provides a useful offset, with revenues expected to rise by
 Unexpected general election outcome, policy changes around 0.6-0.8% of GDP per US$10/bbl increase in oil prices.
expected to shift macroeconomic variables While PH has noted that it would replace the GST with the
 Fiscal and inflation forecasts could be at risk SST, the assessment is complicated by whether this would be a
full roll-back or not, especially given the success of the GST in
 Re-imposition of fuel subsidies could lower inflation bolstering revenues.
but raise fiscal costs
Balance-of-payments and market pressure impact to be
In a surprise outcome, the incumbent Barisan Nasional mitigated by BNM. While the risk of outflows remains, the
(BN, National Front coalition) lost its parliamentary central bank has put in place mechanisms to reduce volatility.
majority in the 14th General Election, held on May 9, One of the key intents of the changes to the Foreign Exchange
winning 79 out of 222 seats. The opposition Pakatan Harapan Act (FEA) in 2016 was to reduce FX market volatility by
(PH, Alliance of Hope) won 113 seats, while Parti PAS won 18 managing domestic capital flows (see Malaysia: BNM speech
seats, and other independent parties won 12 seats. This is the lays groundwork for thinking around market development, 20
first time since independence in 1957 that BN has lost its November 2017). So far, the data have affirmed the success of
parliamentary majority in a general election. Our prior these measures, reflected in the strong March rise in FX
macroeconomic projections had presumed a status-quo reserves, which we use as a proxy for balance-of-payments
outcome. In light of the result, we may have to revisit those flows. In the past, foreign holdings of local fixed income
assumptions, especially given PH’s election manifesto, and securities have been the marginal mover of the overall balance
three pledges in particular: to replace the goods and services of payments, given that much of the inflows from the current
tax (GST) with the prior sales and services tax (SST), re- account surplus were recycled out. That these outflows have
impose fuel subsidies, and review megaprojects, especially now turned to net inflows suggests that measures, including a
with foreign countries (see Malaysia: Minding macro ripples regulation mandating conversion of export proceeds into local
from the changing of the guard, 11 May 2018). currency, have helped stabilize the overall balance of
payments.
Our prior macro assumptions had presumed a status-quo
outcome for the elections. Given the actual outcome, we may
have to revisit our assumptions, especially in the context of
PH’s election manifesto. If the manifesto is implemented, we
expect the following risk biases to macro forecasts:
Growth – possibly slower fixed investment. Possibly lower

investments if the mega projects are delayed. Specifically,
China’s share of FDI inflows had risen materially since 2015,
reaching a peak of 1% of GDP in 1H17. Any delay in related
projects could have an impact on fixed investment and thus
growth. However, this could be offset by private consumption
if inflation remains benign.
Inflation – some downside if subsidies are imposed. The re-

imposition of fuel subsidies would help stabilize fuel prices,
which have been the main driver of headline inflation since
2015 even as core inflation has been more stable. Thus, the
subsidies could lower the inflation trajectory over the course of
2018 and could also be supportive of private consumption.
The fiscal position could deteriorate, but starting

conditions are positive. Despite the risk of a re-imposition of
subsidies, which would be assumed to be pegged at current
retail prices, the risk to the fiscal deficit is broadly balanced,
71
JPMorgan Chase Bank, N.A., Mumbai JPMorgan Chase Bank, N.A., Global Emerging Markets Research
Branch Singapore Branch Mid-Year Emerging Markets Outlook and Strategy
AC
Sajjid Z Chinoy AC
Benjamin Shatil 08 June 2018
(91-22) 6157-3386 (65) 6882-2311
sajjid.z.chinoy@jpmorgan.com benjamin.shatil@jpmorgan.com
Toshi Jain
(91-22) 6157-3387
toshi.jain@jpmorgan.com
Pakistan B3/B-/NR Philippines Baa2/BBB/BBB
Macroeconomic pressures building Twin deficits to persist

 Macroeconomic stability concerns have risen to the  Philippine activity stabilizing at a high level
fore, with FX reserves falling to just two months of  Solid government spending to continue through 2H18
imports and twin deficits rising  This implies persistently large twin deficits,
 General elections in July keenly awaited as one cannot necessitating further RRR cuts to release system
rule out the possibility of the next government seeking liquidity
IMF assistance  Price pressures broadening; expecting 3Q monetary
 The State Bank of Pakistan (SBP) has allowed the policy tightening
currency to depreciate and delivered a 50bps policy
rate hike to ease external pressures Our forecast for the Philippine economy into 2H18 reflects
a solid fiscal impulse that is bolstering growth, reducing
 We project more rate hikes by the SBP to narrow the domestic slack, and in part fueling a broadening of price
current account deficit (CAD) and ease inflation pressures. Even as the high-frequency data suggest some
slowing in demand after a very strong few quarters, activity
Twin deficits put pressure on macro-stability; all eyes on levels remain high, with firm demand for capital goods imports
July elections. The CAD has widened considerably, and is continuing to depress the external balances. While our forecast
currently tracking 5.3% of GDP for FY18 (year-ending June does not anticipate the trade or current account deficits
2018), while the revised estimate of the fiscal deficit stands at widening significantly into the second half of the year, the
5.5% of GDP compared to the initial target of 4.1% of GDP. incoming data on government spending also suggest that
General elections in July to elect a new government are keenly demand will remain robust, implying that deficits will
awaited. Given external funding pressures, one cannot rule out nonetheless persist around current levels.
the next government seeking assistance from the IMF.
As government spending growth settles at decade highs, the
The SBP has allowed a 10% currency depreciation. To ease fiscal deficit is widening. We have discussed in recent notes
external pressures, SBP has allowed a 10% depreciation in the the impact of higher expenditure on fiscal financing needs,
PKR over the past six months. The CAD has widened from with external debt issuance expected to increase materially,
1.7% in FY16 to 5.3% of GDP in FY18, led by a surge in potentially pushing up public external debt to GDP ratios. But
imports. The sharp widening of the CAD has resulted in a steep domestic financing is also rising, with the net effect of
fall in FX reserves to $10bn in May 18, amounting to just two reducing domestic banking sector liquidity back toward 2012-
months of import cover. 13 levels. It is in this context that we view recent cuts to the
required reserve ratio (RRR); i.e., a response to tighter
The SBP delivered a rate hike, underpinned by external domestic liquidity conditions. With government spending
pressures and inflation. The SBP hiked policy rates by 50bps expected to remain strong, further RRR cuts will likely
in May to ease external pressures and contain inflation. While
materialize over the next couple of quarters.
headline inflation remains soft, core inflation has accelerated in
the past few months, reflecting strong growth. Inflation is
likely to rise further in the coming months, reflecting the With demand remaining firm, slack reducing, and external
lagged impact of recent FX depreciation and oil price hikes. deficits persisting into 2H, monetary policy is likely to tilt
We expect more monetary tightening by the SBP in the coming toward further tightening. Against this backdrop, we expect
months in order to narrow the CAD and contain inflation. headline inflation to remain elevated in a 4.5%-4.6%oya range
in the next few months before moderating into year-end. But
Growth overheats to a 13-year high. Helped by large underlying price pressures are likely to be persistent, reflecting
slippage on the fiscal front we estimate growth to rise to a 13- continued strength in domestic activity, firming credit growth,
year high of 5.8% in FY18. Strong growth without an adequate as well as rising supply-side costs. We look for one more 25bp
supply response has translated into widening imbalances and hike from the BSP in 3Q.
rising inflation
72
JPMorgan Chase Bank, N.A., Seoul Branch JPMorgan Chase Bank, Global Emerging Markets Research
Seok Gil Park
AC
N.A., Mumbai Branch Mid-Year Emerging Markets Outlook and Strategy
(82-2) 758-5396 Toshi Jain 08 June 2018
seok.g.park@jpmchase.com (91-22) 6157-3387
JPMorgan Chase Bank, N.A., Mumbai Branch toshi.jain@jpmorgan.com
AC
Sajjid Z Chinoy
(91-22) 6157-3386
South Korea Aa2/AA/AA- Sri Lanka Baa3/BBB-/BBB-
Balancing global optimism with local Macro-stability concerns to drive policy

factors  The IMF program remains on track, with the fund
generally satisfied with fiscal reforms
 GDP growth to muddle through slightly above
potential; inflation to approach 2% before year-end  That said, external vulnerabilities remain high due to
 Monetary policy to wind down accommodation, but low FX reserves and a high debt amortization
only gradually schedule
 To ease external pressures, we expect CBSL to
We expect GDP growth to muddle through, slightly above continue with the policy of calibrated LKR
the potential rate. Korea’s real GDP growth will slow down depreciation and potentially more sovereign issuance
to 3.0%q/q saar in 2Q, by our estimates, after bouncing by 4.1%
in 1Q, continuing the quarterly swing which started in 3Q17  Inflation remains subdued, but CBSL unlikely to ease
due to the unusual timing of the lunar holidays. That said, rates due to external vulnerability concerns
average 1H18 GDP growth is cruising above the potential rate
as global demand for Korean products remains intact, as IMF program on track; fourth review completed. The IMF
customs exports rose 1.9%m/m sa further in May following executive board completed its fourth review under the
the 2.4% gain in April. However, the medium-term growth program and approved the disbursement. The IMF was
outlook is less encouraging, as terms of trade are gradually satisfied with the progress made on fiscal consolidation and
turning less favorable to constrained corporate profitability reforms, particularly the Inland Revenue Act (IRA) and
and capex growth. Automatic Fuel Pricing (AFP) mechanism for petroleum
products. The IMF advised the government to continue with
structural reforms, including upgrading the central bank law
Meanwhile, we expect consumer inflation to inch up
to pave the way for the inflation targeting framework.
through 2018. In 1Q, headline CPI inflation was weighed
down by regulatory drags, including telecommunication price
cuts and the extension of the free-school-meal program by Despite an increase in FX reserves, external
some local governments, masking supply-side price pressure vulnerabilities remain. Sri Lanka’s high external debt of
on service prices from the minimum wage hike. We expect 60% of GDP and large external debt amortization schedule in
the CPI inflation to gradually rise, and possibly approach 2% 2018-19 increase external vulnerabilities. While FX reserves
before year-end. rose to US$10bn in April from US$8.0bn in December, they
still amount to just 5.5 months of import reserves.
Furthermore, despite fiscal consolidation, the twin deficits
We expect the Bank of Korea (BoK) to gradually wind
down accommodations. The median Monetary Policy remain elevated, with the current account deficit (CAD)
Committee believes the GDP growth outlook as sanguine but expected to widen to 3.2% of GDP in 2018 on the back of
is challenged by several risks, including trade protectionism, higher oil prices. Given the pressures on the external front,
amid continued concerns about financial stability from the the central bank has allowed the LKR to depreciate by 4% in
accommodative monetary policy stance, such as household 2018 and is likely to continue with its policy of calibrated
sector debt growth and potential capital flow reversal arising depreciation in the LKR.
from the negative interest rate differential between Korea and
the US. That said, views on the progress of the output gap and GDP growth expected to modestly recover in 2018. GDP
its link with inflation dynamics are still widely divided among growth in 2017 decelerated sharply to 3.1%oya from
members. We expect the BoK to hike by 25bp in August, but 4.5% in 2016 due to weather-related shocks. In 2018, as
believe the pace of rate normalization will be very gradual. weather conditions ease, we expect growth to recover
modestly
Korea’s external position should remain healthy. While to 3.5%.
we expect the current account surplus to narrow as terms of
trade turn gradually less favorable, the pace should be CBSL likely to remain on hold despite subdued inflation.
relatively modest. In terms of capital and financial account After reducing interest rates for the first time in three years,
flows, local residents’ overseas investment is likely to keep the CBSL remained on hold at the May policy. While
rising, but its impact on the value of the KRW should be headline and core inflation are still subdued, the tightening of
filtered by FX hedging behavior. external financial conditions is likely to keep the CBSL on
hold in the near future.
73
Seok Gil Park Mid-Year Emerging Markets Outlook and Strategy
Toshi Jain
(82-2) 758-5396 (91-22) 6157-3387 08 June 2018
seok.g.park@jpmchase.com toshi.jain@jpmorgan.com
Sajjid Z Chinoy
(91-22) 6157-3386
Thailand Baa1/BBB+/BBB+ Vietnam B1/BB-/BB
Growth broadening as supports strengthen Managing liquidity amid strong inflows

 Growth drivers continue to broaden in Thailand  We expect growth in Vietnam to decelerate this
 Underlying support for domestic demand also is quarter following a very strong 1Q
strengthening  Outlook into 2H hinges on external cycle
 Inflation pressures rising moderately; BoT on track  A sharp rise in equity inflows is supporting external
to normalize policy in 3Q balances—but is unlikely to be sustained
 Balance of payments remains well supported; strong  Domestic liquidity still flush amid trend narrowing in
services inflows offsetting oil price drag fiscal deficit
Incoming data from Thailand continue to support our External demand, particularly in the tech sector, is
judgment that growth is both accelerating and guiding our narrative on Vietnam’s economic growth this
broadening through 2018. 1Q GDP looked particularly year. But this support to growth is a derivative of the global
strong, reflecting broad-based gains in domestic demand capex cycle, which appears to be moderating into midyear
alongside a firm external backdrop. Similarly, fundamental after a strong run through late 2017 and early 2018. A more
drivers of domestic activity are firming. Despite Thailand’s moderate external demand backdrop thus implies some
large oil trade deficit, agricultural incomes tend to move in deceleration in headline GDP growth this quarter and
line with global oil prices—the recent move higher suggests potentially through 2H18. Indeed, even as external demand
farm income growth is on a more solid footing this quarter. has bolstered export growth, imports already have begun to
slow down through April, pointing to some easing in
The balance of payments should remain well supported, domestic activity.
underpinning FX resilience. If imports firm faster than
exports, the trade surplus will continue to narrow. The rise in The external balances are widening toward multi-year
oil prices, if sustained, will also weigh on the trade balance. highs, supporting the exchange rate. At the same time,
But the overall current account will remain in solid surplus, solid FDI and a sharp increase in equity portfolio investment
in our view, reflecting the persistently large surplus in tourist inflows have widened Vietnam’s overall balance of payments
receipts. The non-goods surplus has now been higher than the (BoP) surplus, fueling continued FX reserves accumulation,
trade balance for an extended period, for the first time since and stabilizing the VND. Amid this sustained BoP surplus,
the devastating flooding in 2011. This implies that the we continue to watch domestic liquidity conditions closely.
balance of payments will remain well supported, pointing to Banking sector liquidity looks increasingly loose, potentially
continued currency resilience. fueling asset price appreciation. Indeed, following a sharp
rise in foreign buying of Vietnamese equities through late
As demand accelerates, price pressures are rising, albeit 2017, the risk is that a pullback of foreign capital could
modestly. One important factor behind soft inflation in reverse the recent period of stability in the external balances
recent quarters has been the disinflationary impact of fresh and exchange rate, potentially reversing the acceleration in
food prices. As supply now moderates, we expect food prices asset price inflation over the past few quarters.
to stabilize, removing a significant drag on the CPI index.
Indeed, the dispersion of price rises across the index has The fiscal deficit is on a trend narrowing, supporting
begun to broaden, suggesting a turn in the inflation outlook domestic liquidity, and potentially forming a catalyst for
through 2H18. one further credit rating upgrade. As growth has
accelerated, fiscal metrics have improved, and we expect the
Against this backdrop, we maintain our long-held view primary deficit to continue narrowing through 2H18. If
that monetary policy will drift toward a modest realized, the trend narrowing in the deficit also implies
tightening stance, with a 25bp hike penciled in for 3Q. We potential for further positive credit rating moves.
believe the rationale for normalization will reflect financial
stability concerns, which have begun—and will continue—to
assume more precedence in the Bank of Thailand’s
commentary.
74
Luis Oganes AC
(1-212) 834-4326 Emerging Markets Research
luis.oganes@jpmorgan.com Emerging Markets Outlook and Strategy
J.P. Morgan Securities plc 08 June 2018
Jonny Goulden AC
(44-20) 7134-4470
Disclosures
Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per
KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or
intervention.
Research excerpts: This note includes excerpts from previously published research. For access to the full reports, including analyst
certification and important disclosures, investment thesis, valuation methodology, and risks to rating and price targets, please contact your
salesperson or the covering analyst’s team or visit www.jpmorganmarkets.com.
Important Disclosures
Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for
compendium reports and all J.P. Morgan–covered companies by visiting https://www.jpmm.com/research/disclosures, calling 1-800-477-
0406, or e-mailing research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgan’s Strategy, Technical, and Quantitative
Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-
0406 or e-mail research.disclosure.inquiries@jpmorgan.com.
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
recommendation or a rating. In our Asia (ex-Australia and ex-India) and U.K. small- and mid-cap equity research, each stock’s expected
total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it
does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P.
Morgan’s research website, www.jpmorganmarkets.com.
J.P. Morgan Equity Research Ratings Distribution, as of April 02, 2018

Overweight Neutral Underweight
(buy) (hold) (sell)
J.P. Morgan Global Equity Research Coverage 46% 41% 13%
IB clients* 52% 49% 39%
JPMS Equity Research Coverage 45% 43% 13%
IB clients* 72% 67% 57%
*Percentage of investment banking clients in each rating category.
For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table
above.
Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered
companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst
or your J.P. Morgan representative, or email research.disclosure.inquiries@jpmorgan.com. For material information about the proprietary
models used, please see the Summary of Financials in company-specific research reports and the Company Tearsheets, which are
available to download on the company pages of our client website, http://www.jpmorganmarkets.com. This report also sets out within it
the material underlying assumptions used.
Explanation of Emerging Markets Sovereign Research Ratings System and Valuation & Methodology:
Ratings System: J.P. Morgan uses the following issuer portfolio weightings for Emerging Markets sovereign credit strategy: Overweight
(over the next three months, the recommended risk position is expected to outperform the relevant index, sector, or benchmark credit
returns); Marketweight (over the next three months, the recommended risk position is expected to perform in line with the relevant index,
75
Luis Oganes AC
Jonny Goulden AC
(44-20) 7134-4470
sector, or benchmark credit returns); and Underweight (over the next three months, the recommended risk position is expected to
underperform the relevant index, sector, or benchmark credit returns). NR is Not Rated. In this case, J.P. Morgan has removed the rating
for this security because of either legal, regulatory or policy reasons or because of lack of a sufficient fundamental basis. The previous
rating no longer should be relied upon. An NR designation is not a recommendation or a rating. NC is Not Covered. An NC designation is
not a rating or a recommendation. Recommendations will be at the issuer level, and an issuer recommendation applies to all of the index-
eligible bonds at the same level for the issuer. When we change the issuer-level rating, we are changing the rating for all of the issues
covered, unless otherwise specified. Ratings for quasi-sovereign issuers in the EMBIG may differ from the ratings provided in EM
corporate coverage.
Valuation & Methodology: For J.P. Morgan's Emerging Markets Sovereign Credit Strategy, we assign a rating to each sovereign issuer
(Overweight, Marketweight or Underweight) based on our view of whether the combination of the issuer’s fundamentals, market
technicals, and the relative value of its securities will cause it to outperform, perform in line with, or underperform the credit returns of the
EMBIGD index over the next three months. Our view of an issuer’s fundamentals includes our opinion of whether the issuer is becoming
more or less able to service its debt obligations when they become due and payable, as well as whether its willingness to service debt
obligations is increasing or decreasing.
J.P. Morgan Sovereign Research Ratings Distribution, as of April 2, 2018
Overweight Marketweight Underweight

Global Sovereign Research Universe 17% 60% 23%
IB clients* 78% 29% 75%
Note: The Sovereign Research Rating Distribution is at the issuer level. Please note that issuers with an NR or an NC designation are not included in the table above.
Explanation of Credit Research Valuation Methodology, Ratings and Risk to Ratings:

J.P. Morgan uses a bond-level rating system that incorporates valuations (relative value) and our fundamental view on the security. Our
fundamental credit view of an issuer is based on the company's underlying credit trends, overall creditworthiness and our opinion on
whether the issuer will be able to service its debt obligations when they become due and payable. We analyze, among other things, the
company's cash flow capacity and trends and standard credit ratios, such as gross and net leverage, interest coverage and liquidity ratios.
We also analyze profitability, capitalization and asset quality, among other variables, when assessing financials. Analysts also rate the
issuer, based on the rating of the benchmark or representative security. Unless we specify a different recommendation for the company’s
individual securities, an issuer recommendation applies to all of the bonds at the same level of the issuer’s capital structure. This report
also sets out within it the material underlying assumptions used.
We use the following ratings for bonds (issues) and issuers: Overweight (over the next three months, the recommended risk position is
expected to outperform the relevant index, sector, or benchmark); Neutral (over the next three months, the recommended risk position is
expected to perform in line with the relevant index, sector, or benchmark); and Underweight (over the next three months, the
recommended risk position is expected to underperform the relevant index, sector, or benchmark). J.P. Morgan Emerging Markets
Sovereign Research uses Marketweight, which is equivalent to Neutral. NR is Not Rated. In this case, J.P. Morgan has removed the rating
for this particular security or issuer because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The
previous rating no longer should be relied upon. An NR designation is not a recommendation or a rating. NC is Not Covered. An NC
designation is not a rating or a recommendation.
For CDS, we use the following rating system: Long Risk (over the next three months, the credit return on the recommended position is
expected to exceed the relevant index, sector or benchmark); Neutral (over the next three months, the credit return on the recommended
position is expected to match the relevant index, sector or benchmark); and Short Risk (over the next three months, the credit return on the
recommended position is expected to underperform the relevant index, sector or benchmark).
Implicit in a J.P. Morgan credit rating is the analyst’s consideration of the underlying risks to the investment thesis. Risks may reflect
company-specific, industry-specific, and, when relevant, macro factors. These factors are given weight to the extent that they impact a
company’s cash flow and leverage metrics, for example.
76
Luis Oganes AC
Jonny Goulden AC
(44-20) 7134-4470
J.P. Morgan Credit Research Ratings Distribution, as of April 02, 2018

Overweight Neutral Underweight
Global Credit Research Universe 27% 56% 17%
IB clients* 65% 65% 60%
Note: The Credit Research Rating Distribution is at the issuer level. Please note that issuers with an NR or an NC designation are not included in the
table above.
Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based
upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.
Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US
affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS,
and may not be subject to FINRA Rule 2241 restrictions on communications with covered companies, public appearances, and trading
securities held by a research analyst account.
Analysts' Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various
factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.
Other Disclosures
J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing
name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.
QIB Only
All research reports made available to clients are simultaneously available on our client website, J.P. Morgan Markets. Not all research content is
redistributed, e-mailed or made available to third-party aggregators. For all research reports available on a particular stock, please contact your sales
representative.
Options related research: If the information contained herein regards options related research, such information is available only to persons who have
received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options,
please contact your J.P. Morgan Representative or visit the OCC's website at https://www.theocc.com/components/docs/riskstoc.pdf
Private Bank Clients: Where you are a client of the private banking businesses offered by JPMorgan Chase & Co. and its subsidiaries (“J.P. Morgan
Private Bank”), research is issued to you by J.P. Morgan Private Bank and not by any other division of J.P. Morgan, including but not limited to the J.P.
Morgan corporate and investment bank and its research division.
Legal Entities Disclosures

U.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC. U.K.: JPMorgan Chase N.A., London
Branch, is authorised by the Prudential Regulation Authority and is subject to regulation by the Financial Conduct Authority and to limited regulation by
the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from J.P. Morgan on
request. J.P. Morgan Securities plc (JPMS plc) is a member of the London Stock Exchange and is authorised by the Prudential Regulation Authority and
regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England & Wales No. 2711006. Registered Office 25
Bank Street, London, E14 5JP. South Africa: J.P. Morgan Equities South Africa Proprietary Limited is a member of the Johannesburg Securities
Exchange and is regulated by the Financial Services Board. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated
by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong and/or J.P. Morgan Broking (Hong Kong) Limited (CE
number AAB027) is regulated by the Securities and Futures Commission in Hong Kong. Korea: This material is issued and distributed in Korea by or
through J.P. Morgan Securities (Far East) Limited, Seoul Branch, which is a member of the Korea Exchange(KRX) and is regulated by the Financial
Services Commission (FSC) and the Financial Supervisory Service (FSS). Australia: J.P. Morgan Australia Limited (JPMAL) (ABN 52 002 888 011/AFS
Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (JPMSAL) (ABN 61 003 245 234/AFS Licence No: 238066) is
regulated by ASIC and is a Market, Clearing and Settlement Participant of ASX Limited and CHI-X. Taiwan: J.P. Morgan Securities (Taiwan) Limited is
a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private
Limited (Corporate Identity Number - U67120MH1992FTC068724), having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina,
Santacruz - East, Mumbai – 400098, is registered with Securities and Exchange Board of India (SEBI) as a ‘Research Analyst’ having registration number
INH000001873. J.P. Morgan India Private Limited is also registered with SEBI as a member of the National Stock Exchange of India Limited (SEBI
Registration Number - INB 230675231/INF 230675231/INE 230675231), the Bombay Stock Exchange Limited (SEBI Registration Number - INB
010675237/INF 010675237) and as a Merchant Banker (SEBI Registration Number - MB/INM000002970). Telephone: 91-22-6157 3000, Facsimile: 91-
22-6157 3990 and Website: www.jpmipl.com. For non local research reports, this material is not distributed in India by J.P. Morgan India Private Limited.
Thailand: This material is issued and distributed in Thailand by JPMorgan Securities (Thailand) Ltd., which is a member of the Stock Exchange of
Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission and its registered address is 3rd Floor, 20 North Sathorn
Road, Silom, Bangrak, Bangkok 10500. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by
the OJK a.k.a. BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a Trading Participant of the Philippine Stock Exchange and a
member of the Securities Clearing Corporation of the Philippines and the Securities Investor Protection Fund. It is regulated by the Securities and
Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil.
Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a
77
Luis Oganes AC
Jonny Goulden AC
(44-20) 7134-4470
broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by or
through J.P. Morgan Securities Singapore Private Limited (JPMSS) [MCI (P) 099/04/2018 and Co. Reg. No.: 199405335R], which is a member of the
Singapore Exchange Securities Trading Limited and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) [MCI (P) 059/09/2017], both
of which are regulated by the Monetary Authority of Singapore. This material is issued and distributed in Singapore only to accredited investors, expert
investors and institutional investors, as defined in Section 4A of the Securities and Futures Act, Cap. 289 (SFA). This material is not intended to be issued
or distributed to any retail investors or any other investors that do not fall into the classes of “accredited investors,” “expert investors” or “institutional
investors,” as defined under Section 4A of the SFA. Recipients of this document are to contact JPMSS or JPMCB Singapore in respect of any matters
arising from, or in connection with, the document. Japan: JPMorgan Securities Japan Co., Ltd. and JPMorgan Chase Bank, N.A., Tokyo Branch are
regulated by the Financial Services Agency in Japan. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn
Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities
Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities
and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of
Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079
and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai:
JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai
International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.
Country and Region Specific Disclosures

U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMS plc.
Investment research issued by JPMS plc has been prepared in accordance with JPMS plc's policies for managing conflicts of interest arising as a result of
publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. Further
information about J.P. Morgan's conflict of interest policy and a description of the effective internal organisations and administrative arrangements set up
for the prevention and avoidance of conflicts of interest is set out at the following link https://www.jpmorgan.com/jpmpdf/1320742677360.pdf. This report
has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not
relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only
with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home
jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. This material does not take into
account the specific investment objectives, financial situation or particular needs of the recipient. The recipient of this material must not distribute it to any
third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the term "wholesale client" has the
meaning given in section 761G of the Corporations Act 2001. J.P. Morgan’s research coverage universe spans listed securities across the ASX All
Ordinaries index, securities listed on offshore markets, unlisted issuers and investment products which Research management deem to be relevant to the
investor base from time to time. J.P. Morgan seeks to cover companies of relevance to the domestic and international investor base across all GIC sectors
as well as across a range of market capitalisation sizes. Germany: This material is distributed in Germany by J.P. Morgan Securities plc, Frankfurt Branch
which is regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end
satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and
Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months
prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock
options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Korea: This report
may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Limited, Seoul Branch. Singapore: As at the
date of this report, JPMSS is a designated market maker for certain structured warrants listed on the Singapore Exchange where the underlying securities
may be the securities discussed in this report. Arising from its role as designated market maker for such structured warrants, JPMSS may conduct hedging
activities in respect of such underlying securities and hold or have an interest in such underlying securities as a result. The updated list of structured
warrants for which JPMSS acts as designated market maker may be found on the website of the Singapore Exchange Limited: http://www.sgx.com. In
addition, JPMSS and/or its affiliates may also have an interest or holding in any of the securities discussed in this report – please see the Important
Disclosures section above. For securities where the holding is 1% or greater, the holding may be found in the Important Disclosures section above. For all
other securities mentioned in this report, JPMSS and/or its affiliates may have a holding of less than 1% in such securities and may trade them in ways
different from those discussed in this report. Employees of JPMSS and/or its affiliates not involved in the preparation of this report may have investments
in the securities (or derivatives of such securities) mentioned in this report and may trade them in ways different from those discussed in this report.
Taiwan: This material is issued and distributed in Taiwan by J.P. Morgan Securities (Taiwan) Limited. According to Paragraph 2, Article 7-1 of
Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers (as amended or supplemented) and/or other
applicable laws or regulations, please note that the recipient of this material is not permitted to engage in any activities in connection with the material
which may give rise to conflicts of interests, unless otherwise disclosed in the “Important Disclosures” in this material. India: For private circulation only,
not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to
persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money.
JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The
recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The
information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell
securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of
the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian
securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer
registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no
circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that
the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of
Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in
Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein,
and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the
DFSA rules. Brazil: Ombudsman J.P. Morgan: 0800-7700847 / ouvidoria.jp.morgan@jpmorgan.com.
78
Luis Oganes AC
Jonny Goulden AC
(44-20) 7134-4470
General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co.
or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to
JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market
for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change
without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any
financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not
intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own
independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S.
affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or
announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P.
Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.
"Other Disclosures" last revised May 26, 2018.

Copyright 2018 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or
redistributed without the written consent of J.P. Morgan. #$J&098$#*P
79

JPM Midyear Emerging Mar 2018-06-08 2686356

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

JPM Midyear Emerging Mar 2018-06-08 2686356

Uploaded by

Copyright:

Available Formats

Completed 08 Jun 2018 01:29 AM EDT

Disseminated 08 Jun 2018 01:29 AM EDT

Midyear Emerging Markets

Top trading themes Oil (WTI) -8.48% 7.13% 64.73

Note: As of 6 June 18 COB. Source: JPM, Bloomberg.

EM top trade recommendations

GBI-EM Model EMBIGD MP MW overall

Staying neutral given near-term risks and a YTD 1m

2014 -14.4% -5.9% -5.8% -5.7% 7.4% 3.6%

In light of the emerging uncertainties, we have

expect it to remain broadly stable around potential in

Source: JP Morgan, Bloomberg, Bondradar.

Is it too early to worry about end-of-cycle

path for 2H appears slightly more dovish now than in

Source: J.P. Morgan

Source: J.P. Morgan, IIF

Exhibit 21: With the exception of Argentina, current accounts have

international bond markets for the first time, joining the

Source: J.P. Morgan

Source: National sources, J.P. Morgan, Moody´s

After being buffeted by the repricing in USD, capital flows

That said, though the current account surplus countries in the

are indicating downside risks to 2Q growth except for the

Recent market stress in Argentina and overall USD

The pace of EM corporate external bond supply

We forecast +5.0% total returns from now to year-end,

Exhibit 39: GBI-EM Model Portfolio recommendations and returns

judgement on IGBs has been poor with oil / local technicals

Exhibit 41: EM Asia Local Markets Trade Recommendations

(see Turkey: The CBRT hike rates 300bp in an emergency

Exhibit 48: EMBIGD Model Portfolio recommendations

Source: J.P. Morgan.

Exhibit 49: EMBIGD Model Portfolio recommendations and returns

As of June 06, 2018 Since Initiation YTD Changes & Returns

Clients have not been taking lightly the fear of late-cycle

Growth and Inflation Outlook and Forecasts

EM Fiscal Balance and Current Account Forecasts

Emerging Asia -2.8 -2.2 -2.5 2.0 1.4 1.4

EMEA EM -3.5 -1.8 -1.3 0.1 1.5 1.7

Latin America -5.1 -5.1 -4.8 -1.5 -1.7 -1.8

EM Monetary Policy Forecasts

Emerging 4.54 4.59 4.63 4.67 4.67

Sovereign and Corporate Issuance and Cashflows

EM Corporates US$bn 2016 2017 2018YTD 2018F

GBI-EM Global Diversified Return Forecast

EM Asia sovereign issuance forecast

Latin America sovereign issuance forecast

EMEA EM and Global EM sovereign issuance forecast

Exchange rate end-of-period forecasts and forwards

Asia and Latin America Credit Ratings

EMEA EM and Developed Markets Credit Ratings

Local Currency Ratings (GBI-EM Broad Countries)

RATING SCALE STANDARD TERMINOLOGY AND PROCEDURES

Bolivia Ba3/BB/BB Brazil Ba2/BB-/BB-

Elections to the forefront Aftermath of the truckers’ strike

gradual normalization in economic growth. As a result, we cut Chile A+/Aa3/A

outlook, effectively anticipating a longer period of economic Costa Rica Ba2/BB-/BB

Current account dynamics continue to improve on the back

gabriel.lozano@jpmorgan.com (1-212) 834-2285

remittances continue to anchor external accounts and remain Ecuador B-/B/B3

reductions to capital expenditures and, to a lesser extent, from El Salvador B3/CCC+/B-

Jamaica B3/B/B Mexico A3/BBB+/BBB+

as halting the implementation of structural reforms and freeze Panama Baa2/BBB/BBB