Research & Strategy, London

TD Securities Emerging Markets Q1 2011 Outlook

Fishing for golden yields

Cristian Maggio Emerging Markets Strategist
17 January 2011
1 See disclaimer at the end of this document

Contents
OVERVIEW EM Overview EM Forecasts & Recommendations COUNTRY OVERVIEW EMEA - Turkey - South Africa - Poland - Hungary - Romania - Russia LATAM - Brazil - Mexico ASIA - India - Indonesia

3-9 10-16

18-24 25-31 32-38 39-45 46-51 52-58

60-66 67-73

75-80 81-84

Note: Data as of 17 January 2011 unless otherwise noted

2

EM Overview
- EM versus DM and the inflation risk - Strong performance driven by capital inflows - The law of unintended consequences - Unorthodox monetary policies - Appreciation against the EUR - REER valuations more balanced now

EM versus DM and the inflation risk
Equity markets (rebased)
120 MSCI EM 115 110 105 100 95 90 85 Jan-10 Mar-10 MSCI World

May-10

Jul-10

Sep-10 Nov-10

Jan-11

Source: Bloomberg

Local vs External Debt (indices rebased)
120 EMBIG 115 110 105 100 95 90 Jan-10 Mar-10 ELMI+

The most pronounced divergence in growth, inflation, and the direction of policy is between emerging market (EM) economies and the large developed markets (DM). The US stands out from this latter group and faces the dual challenge of both a disadvantageous starting point and a relatively slower rate of recovery. On the contrary, as many EMs return to full capacity, policymakers must prepare for the next stage by withdrawing stimulus in order to balance rising inflation with a recovery in the DM that is not yet assured. The challenge facing EM central banks has been exacerbated by the Fed’s so-called QE2, which, by targeting risky assets, is increasing food and energy prices. Since these typically carry a larger weight in the EM CPI baskets, this is contributing to the rise of inflation across the emerging world.

Index
MSCI EM MSCI World EMBI Global ELMI+

14 January 2011 Pre-crisis Change Peak
1,160 1,309 527 382 1,338 1,682 418 374 -13.3% -22.2% 26.1% 2.2%
4

May-10

Jul-10

Sep-10 Nov-10

Jan-11

Source: Bloomberg

but many currencies stand above 10%. followed by BRL (14. fixed income securities in particular. JPMorgan Most EM currencies posted spectacular total returns in 2010. While the effect of QE2 has been less strong than expected in Q4’10.1%).9% TR in 2010. The ZAR stands out with 18. has attracted foreign capital in an almost uninterrupted fashion. despite the somewhat sluggish performance in Q4’10.Strong performance driven by capital inflows 125 120 115 110 105 100 95 90 85 80 Jan-10 Mar-10 May-10 ELMI+ (rebased) Brazil Hungary Russia Mexico Turkey Indonesia Poland South Africa Jul-10 Sep-10 Nov-10 Jan-11 Source: Bloomberg. USD) -10 ZAR BRL IDR MXN INR TRY RUB PLN RON HUF Source: Bloomberg Values as of 31 Dec 2010 -5 0 5 10 15 20 ZAR BRL IDR MXN INR TRY RUB PLN RON HUF Source: Bloomberg Values as of 31 Dec 2010 5 . this is partly due to anticipatory moves in Q3 and unorthodox monetary policies and capital controls introduced to curb hot money inflows. FX total return (% vs. USD) 25 20 15 10 5 0 -5 -10 -15 -20 -25 Q1'10 Q2'10 Q3'10 Q4'10 2010 FX total return in 2010 (% vs. The great appeal of EM yields.

the speed of EM growth is also set to decelerate over the coming quarters. with several EM policymakers expected to continue delivering measures to curtail inflation and fight against hot money inflows. TD Securities As central banks try to curb FX appreciation. net private flows into EM assets (excluding sovereign money) have been close to a whopping $825bn in 2010 from $581bn in 2009.9% in 2011 from 4. world growth should decline to 3. flows are likely to exceed $830bn. It comes as no surprise that EMs are tryng to fend some flows off. lhs) 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: IIF. For similar reasons. investors have poured close to $90bn into EM equity funds alone. In 2010. 2010/11 forecasts) FDI Portfolio Commercial The recovery in the US economy is poised to gain traction in 2011 and beyond. Asian economies cooling down their growth and major EU countries (namely Germany) returning to trend growth are the main cause. Nonetheless. 6 .4% the previous year. In 2011. with upside risks coming from the extra liquidity provided by QE2 in the DM. According to IIF estimates. Growing interest rate differentials continue to attract foreign capital into EMs.The law of unintended consequences 500 400 300 200 100 0 -100 -200 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: IIF. TD Securities EM Capital flows (USDbn. dwarfing the 2009 record of $83bn. interventionism has become the norm. 140 120 100 80 60 40 20 0 7 6 5 4 3 2 1 0 Reserves and debt (USDtr) Reserves External Debt Reserve/Debt (%.

for example Brazil.000 800 600 400 200 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Bloomberg. and Indonesia. DM.200 1. 7 Reserves increases (% of total ytd) 80 70 60 50 40 30 20 10 0 -10 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Source: Bloomberg Brazil Indonesia Russia Romania . In addition.400 1. India. Malaysia. Hungary. the more concrete these risks will be. increasing the minimum holding period for foreign held securities or other unorthodox policies mix. increasing the appeal of local yields vs. EcoWin India Brazil Mexico Turkey Russia Soaring inflation requires monetary tightening. Unfortunately. Several other countries have subtly threatened to go the same route or even cut interest rates in order to weaken their currencies. and more of this medicine will be required to face down inflation this year. Against rising inflation. we see few alternatives for EM policymakers but to deliver more tightening. such as hiking the reserve requirements for banks. these actions only create an additional set of challenges for EM policymakers.Unorthodox monetary policies FX reserves (USDbn) 1. central banks may be holding back on interest rate hikes and use macro-prudential measures instead. Several central banks have already hiked rates in 2010. Central banks are increasingly less keen to boost rate differentials. The higher the FX appreciation. just to name a few. For this reason China. Brazil. have begun to introduce capital controls.

Nevertheless. the euro in particular this year. The euro correction could put some strains on emerging currencies in the mid-short term. the EUR in 2011. lhs) Ext debt / Exports (%. rhs) 80 60 40 20 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: IIF . especially when rate differentials are increasing. 8 7. EM crosses should remain equally attractive. The combination of a more robust outlook for US economic growth and ongoing fiscal tensions in Europe is expected to underpin the US dollar against the developed market majors.000 5. On the contrary. we note that EUR/USD depreciation will be the result of the expected US outperformance amidst global economic expansion.000 3.000 6. We prefer exposure vs. but interventionism could reduce the upside potential.000 0 External indicators 160 140 120 100 Reserves (USDbn. EMEA is likely to suffer the most. Debt (% GDP) US Brazil India S.000 1.000 2.Appreciation against the EUR Gross Govt. Africa Germany China Mexico Turkey UK Indonesia Russia 120 100 80 60 40 20 0 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E Source: IMF TD expects the USD to outperform the EUR in 2011.000 4. we generally prefer exposure to the euro as this would imply higher returns by the end of 2011. In a risk-on environment. EM crosses directly correlated to the dollar (Latam currencies for instance) are likely to benefit. However. while developing Asia should remain relatively insulated due to the regional growth dynamics. The dynamics are clearly not dictated by capital repatriation or risk aversion (unless the EU debt crisis explodes).

00 Source: Bloomberg. the Q4 correction has compromised the real effective performance of the MYR. The z-score of the REER (Real Effective Exchange Rate) of the most important EM currencies (with the inclusion of the EUR) now accounts for an almost equal number of cheap and rich currencies.00 3. Although this can not be considered a unique measure of FX valuation. The BRL and ZAR have remained the strongest performers. the ZAR seems overvalued and subject to mean reversal.00 1.REER valuations more balanced now REER (Z-score on 5y avg) PHP EUR MYR HKD MAD KRW TRY ARS RON VEF PLN SKK HUF TWD MXN INR SGD CZK ECS BGN KWD COP CNY RUB PEN SAR IDR EGP CLP ILS NGN ZAR THB BRL PKR REER Cheap Currency corrections during Q4’10 have rebalanced REER valuations. TD Securities .00 0. and most eastern European currencies.00 2. While we continue believing that REER appreciation of the BRL and the IDR is justified by the improvement of their fundamentals. which also justifies a secular shift towards higher values. We remain wary though of the negative effects on currencies that possible interventions would produce.00 -1. TRY. the strong appreciation in REER terms denotes a structural change in emerging countries. While IDR and RUB also remained in the group of countries with REER appreciation. 9 REER Rich -2.

Currency recommendations .EM Forecasts .Fixed Income recommendations (2) .Fixed Income recommendations (1) .Rate decision forecasts .Currency and rate forecasts .Fixed Income recommendations (3) .

00% 7.25% 1.75% 3.00% Q1 2011 -100bp +25bp +25bp +100bp +25bp +25bp - Q2 2011 +50bp +75bp +25bp +50bp - Q3 2011 +25bp +25bp +25bp +25bp - Q4 2011 +50bp -25bp +25bp - end-2011 5.50% 5.50% 7.00% Source: Bloomberg.50% 4.50% 6.25% 10.50% 6.00% 12.25% 1.50% 2.00% 4.50% 6.25% 0.25% 6.Rate decision forecasts Current Turkey South Africa Hungary Poland Romania Brazil Mexico India Indonesia Malaysia FOMC ECB 6.75% 0. TD Securities 11 .75% 4.50% 6.50% 3.00% 6.50% 5.

52 6.05 7.50% 11.5 60. TD Securities Q1 2011 Q2 2011 Q3 2011 Q4 2011 Brazil Rates USD/BRL EUR/BRL Mexico Rates USD/MXN EUR/MXN India Rates USD/INR EUR/INR Indonesia Rates USD/IDR EUR/IDR Malaysia Rates USD/MYR EUR/MYR 11.4 274 206 9.54 2.0 39.27 4.81 9.90 9.75% 8.24 6.12 14.98 1.33 1.00% 42.680 10.25% 3.00 4.05 EUR/USD* 1.98 3.12 1.67 2.91 3.75% 3.05 13.603 3.75% 29.50 1.1 7.00% 42.75% 28.54 6.21 3.0 44.50% 1.50% 1.06 4.813 2.26 7.19 7.95 12.35 1.7 35.26 3.26 3.10 16.1 7.75% 1.00% 7.25% 4.50% 43.50% 1.50% 1.55 7.50% 8.25% 8.02 15.75 3.25 3.3 32.10 5.75% 43.00% 278 232 4.00% 2.20 1.50% 7.50% 1.33 7.25% 2.416 2.95 3.6 6.8 59.86 1.50% 1.00% 4.91 5.750 11.98 30.75% 29.58 1.50% 8.2 6.977 3.75% 29.8 45.87 2.Currency and rate forecasts Spot Turkey Rates USD/TRY EUR/TRY S.65 1.063 11.50% 12.80 3.8 30.75% 3.5 52.50% 12.50% 1.73 4.20 1.17 6.030 3.65 1.34 6.00% 274 261 4. Africa Rates USD/ZAR EUR/ZAR Russia Rates USD/RUB EUR/RUB Hungary Rates EUR/HUF USD/HUF Poland Rates EUR/PLN USD/PLN Romania Rates EUR/RON USD/RON EUR/USD* Q1 2011 Q2 2011 Q3 2011 Q4 2011 5.50% 3.18 3.600 9.50% 6.12 12.87 2.17 12.62 12.25% 4.41 6.94 8.00% 275 250 4.2 6.25% 4.10 1.59 1.70 3.05 1.50% 3.05 4.05 * according to TD's EUR/USD forecast Source: Bloomberg.2 7.06 4.83 7.74 5.35 5.87 6.58 6.10 5.50% 6.68 2.68 2.730 9.82 4.40 7.1 6.00% 275 204 3.10 1.50% 12.75% 3.55 1.2 6.28 12.12 7.56 2.20 5.8 47.33 * according to TD's EUR/USD forecast 12 .02 3.8 40.

6% 7. ** medium.4% 12.8% 6.0% 7.1% EUR/MYR 4.3% 4.06 23.05 23. EUR Tail risk in terms of extreme political or financial market outcomes (* low.3% -16. *** high) 13 .0% UNDERWEIGHT (high political risk and EU risk but valuations attractive) Source: Bloomberg.7% UNDERWEIGHT (good fundamentals but EU risk exposure) ** * * *** Romania USD/RON 3. TD Securities Weights are b ased on assumption of a currency portfolio 50% vs.1% 7.2% 8.0% OVERWEIGHT (high carry but limited spot appreciation) South Africa USD/ZAR 7 -2.5% EUR/TRY 2.91 -21.20 -24.2% EUR/IDR 11.7% 7.3% 8.2% EUR/INR 60.0% EUR/ZAR 9 19.5% 3.8% 25.9 21.8% 12.26 1.1% 4.0% 25.68 1.7% 7.5% 15.9% LARGE OVERWEIGHT (very high yields despite intervention risk) Mexico USD/MXN 12.23 22.Currency recommendations Spot 17/1/2011 1 year Currency 1 year Carry Total Return Tail risk* ** Spot 17/1/2011 1 year Currency 1 year Carry Total Return Tail risk* * Turkey USD/TRY 1.54 2.8% ** Hungary USD/HUF 207 -26.8 24.4% 6.063 5.4% 34.7% LARGE OVERWEIGHT (fundamental backdrop and higher yields) Malaysia USD/MYR 3.2% 4.5 7.1% 6.8% EUR/MXN 15.2% 6.0% 6.2% 6.0 0.9% 6.2% 4.1% NEUTRAL (stable appreciation but low yields) 6.3% EUR/HUF 274 0.5% 34.2% Brazil USD/BRL 1.4% 14.2% 6.1% EUR/RON 4.06 3.8% 31.2% EUR/RUB 39.2% 7.1% -20.9% ** ** ** 10.977 24.3% UNDERWEIGHT (unclear fiscal effort and exposure to EU) Poland USD/PLN 2.2% 30.1% 12.2% OVERWEIGHT (high oil and currency undervalued) 3.5% LARGE OVERWEIGHT (spot appreciation and high carry) Indonesia USD/IDR 9.4 27.3% *** India USD/INR 45.0% NEUTRAL (rand still overvalued but attractive carry) Russia USD/RUB 30.2% 6.87 4.0 3.6% 26.2% -18.7% 3.8% 10.7% EUR/PLN 3.2% EUR/BRL 2.1% 31. USD and 50% vs.8% NEUTRAL (correlation to US but intervention risk) 5.

3 5.4 12.50% 4.3 4.50% TD Market 5.5 8.8 8.50% Rates Recommendation: Receive short rates as TD is forecasting additional repo rate cuts Bond Recommendation: Buy short-to-medium maturity bonds as the curve is likely to resteepen Source: Bloomberg.20% 4.2 12.80% 4.8 12.2 Oct-10 Jul-10 Jan-11 Oct-10 8.50% 6.50% 5.8 5.4 0Y 5Y 10Y 15Y 20Y 25Y 30Y 5.50% TD Market 4.9 7.8 0Y 2Y 4Y 6Y Jan-11 Mexico Oct-10 Jul-10 Brazil Jan-11 13.50% 5.50% 12.0 9.4 Jan-11 Oct-10 Jul-10 8.0 11.70% 5.4 8Y 10Y 12Y 14Y 16Y 18Y 20Y 22Y 11.0 0Y 1Y 2Y 3Y 4Y 5Y Market Now +6M 6.5 10. TD Securities * Charts represent Interest Rate Swap curve Rates Recommendation: 2y5y flattener although TD’s rate profile is in line with market Bond Recommendation: Buy belly of the curve as the next big move will be curve flattening Rates Recommendation: Receive short rates as our expectations are rates unchanged Bond Recommendation: Buy mid-to-long maturities as the curve is still too steep Rates Recommendation: Receive belly of the curve although the market is less aggressively priced than TD in 6m Bond Recommendation: Buy belly of the curve for LT investors as we like BRL bonds 14 .50% 5.60% 5.75% 5.50% +12M 6.0 6.50% 11.9 5.0 10Y 0Y 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 6.Fixed income recommendations* (1) Turkey 10.3 6.6 11.50% 12.8 11.6 12.0 12.50% TD Market 10.9 South Africa Jul-10 8.0 7.8 6.75% TD 5.3 7.4 7.5 7.50% 12.5 9.8 7.4 11.

a.4 7.0 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 0Y 1Y 2Y Jan-11 Russia Oct-10 Jul-10 3Y 4Y 5Y 6Y 7Y 8Y 9Y Market Now +6M 4.75% +12M 4.90% 6.0 7.5 8.8 6.0 0Y 2Y 4Y 6Y 8Y 10Y 12Y 14Y 16Y 18Y 20Y Jan-11 Oct-10 Jul-10 7.5 6.0 4.40% 4.8 5.2 7.75% 6.0 4.8 4.7 6.5 5.8 5.6 0Y 2Y 4Y 6Y 8Y 10Y 12Y 14Y 16Y 18Y 20Y Jan-11 Hungary Oct-10 Jul-10 7.10% 6.4 0Y 1Y 2Y Jan-11 Romania Oct-10 Jul-10 8.2 4.9 6. TD Securities * Charts represent Interest Rate Swap curve 15 10Y .75% Rates Recommendation: Neutral although TD’s rate profile is marginally more aggressive Bond Recommendation: Buy mid-to-long maturities as is still too steep indeed and will flatten Rates Recommendation: Neutral as the market is pricing 25bp hike as TD Bond Recommendation: Buy mid-maturity bonds as curve is likely to normalize Rates Recommendation: Receive rates up to 1y as the market is too aggressively positioned for rate hikes Bond Recommendation: Buy short-end bonds as curve is likely to normalize Rates Recommendation: Neutral as TD is forecasting no rate hikes Bond Recommendation: Buy short-to-mid dated bonds as curve will remain steep Source: Bloomberg.00% n.2 7.50% TD Market 5.2 6.75% TD 4.00% 7.6 6.0 5.5 6.3 7.4 4. 7.5 7.8 6.05% 3.0 6.Fixed income recommendations* (2) Poland 5.25% 6. 7.75% TD Market 6.4 6.50% 6.1 7.25% n.0 5.4 5.2 5.6 5.25% 5.0 6.6 4.5 4.0 6.00% 7.25% TD Market 7.6 6.a.

5 6.6 3.50% n.a.5 8. 7.a.2 3. onshore Bond Recommendation: Long duration as we like IDR assets and think curve is too steep Rates Recommendation: Neutral or pay short-end as more rate hikes will be delivered Bond Recommendation: Buy mid to long maturities as curve remains quite steep 10Y 16 .0 0Y 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y Jan-11 Oct-10 Jul-10 9.a.0 6.5 0Y 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y Jan-11 Indonesia Oct-10 Jul-10 5.5 7. TD Securities * Charts represent Interest Rate Swap curve Rates Recommendation: Pay short rates but liquidity is distorting off-shore money market curve (yields too low) vs.5 4.0 8.5 5.0 6.0 3. 3.25% 7.0 5.0 4.2 4.4 4.6 4.8 3.0 7.5 6.8 4. 2.00% n.75% TD 6.0 4.0 4. 6.75% n.0 0Y 1Y 2Y Jan-11 Malaysia Oct-10 Jul-10 3Y 4Y 5Y 6Y 7Y 8Y 9Y Market Now +6M 6.75% TD Market 6.5 5.75% +12M 7.a.50% n.Fixed income recommendations* (3) India 7.50% TD Market 2.4 3.00% Rates Recommendation: Continue paying rates as more tightening will be delivered and the curve will continue flattening Bond Recommendation: Long duration as we like IGBs and curve is steeper than IRS Source: Bloomberg.25% (repo) 6.0 5.

South Africa .Turkey .Poland .EMEA .Russia .Romania .Hungary .

Growth moderating .Brisk widening of the C/A deficit .Turkey .Lower inflation until end of Q1 .Lira under pressure BB / BB+ / Ba2 .Lower rates and higher RRR .Steep yield curve and good bond support .

The government may be tempted to reinforce their position increasing public spending ahead of the elections.7%. 19 IP WDA & SA (%yoy) IP NSA (%yoy) Composite leading indicator Source: TD Securities Source: Reuters EcoWin . as well as to that of the export sector. Support for the AKP stands at 44% according to A&G. as positive base effects vanish. we expect economic expansion to continue trending lower and possibly close 2011 at 4.0% from 7.5%. General elections in June 2011 should not be a surprise for the AKP still firmly leading the polls. but the CHP looks also stronger with 31% support after the change in leadership in May. which suggests we will not see fiscal tightening at least until H2 2011. giving the ruling party only a moderate margin to the opposition. However.2% the previous quarter. despite the sharp slowdown to 5. We have revised our 2010 growth projections higher at 8.5%yoy in Q3 (a full percentage point below expectations) from 10. Vote shares for the MHP stands at 10%. now losing momentum. Economic Indicators Private Inv. Both domestic and external demand are reflected in the performance of the key manufacturing sector.Growth moderating Economic Growth (%yoy) 25 15 5 -5 -15 -25 00 01 GDP 02 03 04 05 06 07 08 09 Source: Reuters EcoWin 50 30 10 -10 -30 -50 Private Cons. 2010’s performance has been mostly linked to the strength of household and investment spending. 25 15 5 -5 -15 -25 06 07 08 09 10 120 110 100 90 80 70 Turkish impressive growth is now decelerating on fading base effects.

especially when the tobacco tax falls out of the CPI calculations (the tax was introduced at the beginning of 2010 and added close to 2% to the headline). food and oil price pressures at the end of 2011. as we expect some extra spending before the June elections. 2011 redemptions will be lighter and borrowing requirements substantially lower than in 2010. hence meeting CBRT’s 2010 target at 6. before moving higher again to 6. we forecast the budget deficit at 3. 20 Inflation Expectations 12 10 8 6 4 06 07 08 +12m 09 +24m Source: Reuters EcoWin 10 Current CPI .5%. inflation should continue to decelerate.5% on closing output gap. Moreover.2%yoy and printed 6.Lower inflation until end of Q1 Inflation (%yoy) 12 10 8 6 4 2 05 CPI 06 07 Core (H) 08 Core (I) Source: Reuters EcoWin 09 10 The favourable comparison base will push inflation lower in the coming months. A lax fiscal policy will likely add to inflationary pressure in H2’11. Inflation is likely to bottom out at around 5% in March though. However. The 12m deficit already improved to TRY30bn in November from TRY56bn one year earlier on higher tax revenues. Government commitment to a moderate budget deficit in 2011 (projected at 2.8% of GDP) is a reassuring signal while credit growth keeps expanding. CPI came off the recent Sep ‘10 peak at 9. Inflation upside risks also lie on possible preelectoral spending.4% in Dec.2% of GDP next year. During early 2011.

not so far off the August 2008 peak at $49bn and likely to reach and perhaps exceed 6. On the contrary. increasing the RRR). Robust expansion of economic activities and lira strength until November 2010 have underpinned the steady worsening of the terms of trade. The 12m CAD widened at $40. To reduce Turkey’s exposure to risk appetite.7bn the previous year. to curb domestic import demand without penalizing exports. 12m) 50 40 30 20 10 0 -10 04 FDI 05 06 Portfolio 07 08 CAD Source: Reuters EcoWin 09 10 .6% of GDP in 2011. Not only the deficit is exploding again.8bn in October from $12. FDI used to cover roughly 50% of the gap before the crisis. sharply rising portfolio investment now provide 37% of the shortfall. the remainder has been mostly compensated by increasing non-resident deposits and repatriation of banks’ assets held abroad. As they together cover only 50% of the gap. The CBRT is concerned about the CAD dynamics.1bn (12m sum) covered less than 13%. 21 Current Account Trade Balance Source: Reuters EcoWin CA and Capital Flows (USDbn. but the quality of its coverage is also alarming. the CBRT has started adopting a set of macro-prudential measures (e. whereas the October reading at $5.g.Brisk widening of the C/A deficit External accounts (USDbn) 0 -20 -40 -60 -80 01 02 03 04 05 06 07 08 09 10 External account deterioration remains a major market concern. The current account deficit (CAD) is rapidly returning to pre-crisis levels.

Lower rates and higher RRR Inflation and Interest Rates (%) 25 20 15 10 5 0 04 CPI 05 06 07 08 09 10 o/n Borrowing Rate 1w Repo Rate Source: Reuters EcoWin A new strategy for the CBRT. We expect the CBRT to cut the repo by 100bp to 5. The CBRT too optimistically expects 5. the CBRT has scrapped its policy to leave rates unchanged at 7.50% in Q1.5% and 5.0%. The CBRT announced 2011 and 2012 inflation targets at 5. With the last Dec cut.00% “for a while”.0%. Lower repo rate to tackle hot money inflows and higher RRR to contain credit expansion. respectively. The bank had suggested they would cut the repo rate and increase the RRR only shortly before the decision. Lira strength and credit growth remained the major concerns. but TRY is now substantially weaker (not in real terms though). and also set for the first time the 2013 target at 5. in particular to curb credit growth. Governor Yilmaz reiterated policy rate and non-interest rate instruments will continue to be used jointly to ensure price and financial stability.4% of GDP in 2011 as a result of joint efforts with the government.5% target in 2010 and will continue nudging lower in coming months before resuming an upward trend in Q2’11 or later. 22 Policy and swap rates (%) 24 21 18 15 12 9 6 3 0 2006 2007 2008 2009 2010 2011 1yr Swap Rate Borrowing Rate 1w Repo Rate Source: Bloomberg . hence CPI. CPI has moved below the 6. The CBRT remains concerned that excessive TRY appreciation will soon drive the CAD to new all-time highs.

which is positive for TURKGB. we expect RRR for short-term TRY liabilities to increase at least to 12% from 8%.5 8.5 10. We expect the CBRT to cut another 100bp in steps of 50bp in Q1’11. the CBRT should compensate by hiking the RRR by no less than 3-4 times the amount of repo cuts. with no external borrowing. 23 Source: Bloomberg Foreign holding (% of total) 75 70 65 60 55 50 2005 Equities (lhs) Bonds (rhs) 45 40 35 30 25 20 15 10 2006 2007 2008 2009 2010 Source: Various National Sources . Moreover. To address the risk of higher CPI and deliver overall tightening. interest in bonds has sharply risen with 37% of government bonds now held by non-residents. cuts could be even larger. While foreigners remain top equity investors holding 67% of the domestic stock market. Depending on inflation. capitalizing on lower than expected CPI. The yield curve should remain relatively steep supported by low yields at its front end. Both ratios remain below the 2007-2008 boom (72% and 39%).5 0Y 2Y 4Y 6Y 8Y 10Y Oct-10 Jul-10 Lower expected repo rate on CBRT to cut again. Hence.0 7.0 9. but bonds continue to attract more capital on expectations of lower rates. in Q1 the debt rollover ratio should remain constantly below 100%. Bond holdings steadily on the rise supported by QE in developed countries.5 9. TRY13bn and TRY2bn in Jan-Mar. We estimate the government will issue TRY24bn.0 8. loan growth and TRY developments.Steep yield curve and good bond support Interest Rate Swaps Jan-11 10.

The CBRT announced they will increase daily auctions for FX purchases to $50m in 2011 from $40m in 2010 and discontinue the optional purchases. All this points at the continuation of FX reserve build up and marginal lira weakening.56 in Q1 and to 1.50 by the end of 2011. 24 0. trimming more of the lira’s allure.80 0. Central bank to increase FX purchases in 2011. Additionally.5 1.65 0. RRR hikes will limit growth potential. However. adding to bond positive momentum. However.70 0. The CBRT will purchase TRY2. The additional cuts to the policy rate the CBRT is likely to deliver should leave the TRY under pressure in H1’11.3 1.75 0.Lira under pressure Lira Performance 2.59 in Q2’11.7 1. A possible upgrade to investment grade next year (all three major rating agencies have Turkey on positive outlook) could improve the expected performance.1 1.90 0. We expect USD/TRY to edge higher to 1.5bn of TURKGB in 2011 to replace maturing bonds in portfolio. the bank will retain the flexibility to continue FX purchasing of pre-announced additional amounts on a weekly basis.3 2.9 1.85 0. Bloomberg . global recovery and resurging inflationary pressures in H2’11 will increase the odds of rate hikes and push the TRY stronger to 1.1 06 EUR/TRY 07 08 USD/TRY Source: Reuters EcoWin 09 10 Resident FX deposits 120 110 100 90 80 FX Deposits (USDbn) TRY/USD (rhs) 0.60 CBRT’s unorthodox monetary policy should leave the Lira under pressure in H1 2011.55 70 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Source: CBRT.

South Africa
- Hesitant growth in 2011 - Disinflation is over - C/A deficit wider again - Rates unchanged until Q4’11 - Curve flattening, this time is for good - Weaker ZAR vs. dollar, better against euro

BBB+ / BBB+ / A3

Hesitant growth in 2011
Activity and GDP (%yoy) 20 10 0 -10 -20 -30 00 01
GDP

7 5 3 1 -1 -3 02 03 04 05 06 07 08 09

Manf. Production

Retail sales
Source: Reuters EcoWin

GDP and Business Confidence 65 7 5 3 1 -1 -3 01 02 03 04 05 06 07 08 09 10 60 55 50 45 40 35 30

Economic expansion lost momentum in H2’10 and we now expect slower growth this year. Downward revision of annualized GDP growth to 2.8% in Q2 and further slowdown to 2.6% in Q3’10 suggest 2010-2011 growth at 2.9%-3.4%, respectively, will be slower than previously expected (3.0% and 4.0%). Manufacturing production rebounded to 2.5% in Oct after plunging at 1.3%yoy in Sep, but failed to consolidate the World Cup boost. While an expansionary monetary policy lends support to private demand (which has also stabilized around 6% in Oct), high unemployment (25.3% in Q3), strong rand and more restrictive fiscal policy will keep the output gap wide for long. Hence growth should remain moderate until 2012. Stable political environment for now. But the government’s resolve to trimming fiscal deficits in the next three years could create tensions in the coalition. Instances to increase spending have been raised from within the ANC, communist allies and the unions in the past. Requests that rand float is abandoned or mines nationalized are unlikely to receive official backing, but political noise could increase ahead of the ANC conference in 2012, adding volatility to asset pricing.
26

GDP (%yoy)

Business Activity (3mma)
Source: Reuters EcoWin

Disinflation is over
Inflation (% yoy)
14 12 10 8 6 4 2 0 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Bloomberg

Inflation pressures were easing sharply until Sep 2010. After bottoming out at 3.2%yoy and close to the lower end of the target band, CPI has rebounded to 3.6% in November. Higher global commodity prices will add to inflationary pressures, with the energy bill and
3%-6% target

food prices likely to weigh more in 2011. We estimate inflation at 3.6% at the end of 2010 and 4.9% in 2011. Increases in administered prices and nominal wages represent one of the major upside risks to our forecast. Rand weaker but still a concern for policymakers.
30 25 20 15 10 5 0 -5

Inflation Drivers (%yoy) 20.0 15.0 10.0 5.0 0.0 -5.0 05 PPI 06 07 08 09 10
Source: Reuters EcoWin

While a stronger rand helps containing imported inflation, authorities have shown concerns that exports may suffer. We expect a large widening of the CAD this year, which is likely to stem some currency appreciation pressure. However, if Rand strength continues we would not rule out the introduction of a Tobin tax, capital controls or other form of restriction to curb hot money inflows. With a weaker currency, however, CPI could push even higher.
27

Private Sector Credit

C/A deficit wider again
External balances (USDbn) 0 -10 -4 -20 -30 03 04 05 06 07 08 09 10 -6 -8 0 -2

C/A C/A, % of GDP

C/A, SA Trade Balance
Source: Reuters EcoWin

The improvement of the C/A deficit is most likely over. The 12m CAD has marginally increased to $11.3bn in Q3 from $11.0bn in Q2, but remained stable at 3.3% of GDP in the two quarters. Higher commodity prices (precious metals in particular) should support exports. However, as economic recovery advances and import demand accelerates we expect the terms of trade to deteriorate overall. We pencil in the CAD to widen to 3.5% in 2010 and to 4.8% next year. Negative outlooks are likely to be withdrawn, but no rating upgrade looming at the horizon. S&P and Fitch (both BBB+) continue to have S. Africa on negative outlook, noting that the external imbalances remain the major macroeconomic risk, while Moody’s (A3) is stable. The expected deterioration of external deficits should be compensated for by a tighter fiscal policy. However sharply rising portfolio flows mask the disappointing FDI performance. CAD coverage provided by the financial account remained at 150% in Q3, but volatility of portfolio flows leaves the country overly-exposed to market sentiment.
28

Financial Account (12m sum, ZARbn) 250 150 50 -50 -150 05 Other Portfolio 06 07 FDI Fin. acc. 08 CAD
Source: Reuters EcoWin

09

10

Equity inflows have partially rebounded vs. 12m net equity sales to foreigners improved to ZAR39bn in early Jan after bottoming at ZAR26bn in Oct. the bond momentum seems to have interrupted with sales declining to ZAR64bn after a brisk rise to an all-time high of ZAR95bn in Sep. On the contrary.50%.00%.Rates unchanged until Q4’11 14 13 12 11 10 9 8 7 6 Policy rate (lhs) Real rate (rhs) 6 4 2 0 -2 -4 Nominal and Real Rates (% ) 10 8 The SARB delivered another 50bp cut in Q4’10. 29 .50% low to curb Rand strength. Reversal of market sentiment 5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Bloomberg 100 80 60 40 20 0 -20 -40 -60 -80 2003 Portfolio flows (ZARbn. lowering rates to 5. We expect the SARB to remain on hold until Q3’10. then hike 50bp in Q4 to 6. inflation is already on the upside now and further FX weakness could worsen the CPI outlook even more. While a strong rand has definitely helped CPI to decelerate throughout 2010. The SARB surprised us one more time in November when they cut rates to an historically 5. Downbeat inflation helped the bank to deliver what we consider to be the final easing in this cycle. correcting bond flows. 12 month rolling) Bonds Equity 2004 2005 2006 2007 2008 2009 2010 2011 Source: Bloomberg remains a major threat to flows into both asset classes.

Based on historical evidence. The SARB will not initiate the hiking cycle anytime soon. 30 .2%. On the fixed income side.3 0Y 5Y 10Y 15Y 20Y 25Y 30Y Source: Bloomberg Oct-10 years have exhibited additional yield compression in the final quarter of 2010. this time is for good Bonds and Currency 12 11 10 9 8 7 6 5 03 04 05 06 07 08 09 10 The swap curve is likely to remain steep for now.8 5. the swap curve is steeper than before. respectively) against the wings that look too expensive. On the contrary. the back-end has resteepened to reflect the SARB’s dovish monetary policy. as stated by Governor Marcus after the last MPC meeting. but does not seem inclined to further cut rates either. we remain convinced that the next big move will be a sharp flattening anticipating tighter rates in Q4’11. Consistently. We expect 2y10y spreads currently at 180bp to flatten 150bp over the course of 2011. Short-term yields have continued falling supported by a dovish monetary policy.3 5.Curve flattening. Maturities out to 5 Jul-10 USD/ZAR SAGB benchmark 2yr (%) Source: Reuters EcoWin Interest Rate Swaps Jan-11 8. most of the value now lies on the belly of the curve (7y/16y SAGB yield 7.8 7. More so at the very short end of the curve. however.3 7.3 6.8%/8.8 6.

higher expected inflation on rising food prices and moderate growth rates compared to peers should over time all lead to nominal depreciation. the USD until Q3 to 7. but is a good deal against the euro. Hence. Frequent and disruptive strikes are an additional risk factor. Majors (rebased) 90 110 130 150 170 190 210 06 EUR/ZAR 07 08 USD/ZAR Source: Reuters EcoWin Rand appreciation in Q4’10 trailed EUR/USD moves. which outperformed other EM crosses with a total return of 19% in 2010. have both shown not very prone to accepting “excessive” FX strength. TD now expects the USD to strengthen substantially to the EUR over the course of 2011.Weaker ZAR vs. the SARB and the govt. is likely to experience some of the same type of reversal. External imbalances set to widen. the local unit will not have the support of wider rate differentials and additional reserve build up could add to downside pressure. Moreover. the EUR in 2011. 31 09 10 .25 vs. Given TD’s EUR/USD forecast. The Rand. dollar.12 and then lower at 7. we see scope for the ZAR to move stronger to 7. Before the tightening cycle kicks in. The Rand looks overvalued to the dollar. better against euro Nominal Effective Exchange Rate and CRB (%yoy) 40 30 20 10 0 -10 -20 -30 -40 96 CRB 98 00 NEER Source: Reuters EcoWin 02 04 06 08 10 ZAR vs.05 in Q4. we expect the rand to gradually lose strength vs.

Stronger Zloty despite EU problems .Widening C/A deficit but FDI to pick up in 2011 .Polish curve pricing in rate hikes .Inflation to stay above target A.Polish growth running at potential ./ A.Time to tighten has come .Poland ./ A2 .

2% in 2011. Real GDP growth at 1.5 0.5% in Q2. possibly improving growth prospects.5 1. Acceleration of sold IP trailed the development of German new orders.0 -0.Polish growth running at potential Growth Components (qoq. Infrastructure spending adds to growth potential. Led by domestic factors. GDP should receive an extra boost from govtled infrastructure upgrading for the Euro 2012 football championship.0 1.1% faster compared to prior quarter. figures accelerated to 4. IP remains the major driver pushed by both domestic and external demand.5 2. Cons.3%qoq in Q3’10 was 0. SA) 2. although exports have taken a breather in Q3’10 and remain exposed to EU debt spill-over risk. Going forward. Major support came from the steady expansion of private domestic demand. Investment Public Cons. On the supply-side.2% in Q3’10 from 3. Exports Source: Reuters EcoWin Economic Activity (%yoy.6%yoy and further improve to 4. should close 2010 up 3. now running at about potential.5 02 03 04 05 06 07 08 09 10 15 10 5 0 -5 -10 -15 Private demand continues supporting economic growth.0 0. 6mma) 20 15 10 5 0 -5 -10 -15 03 04 05 06 07 08 09 10 30 20 10 0 -10 -20 -30 -40 Sold IP Retail Sales Germany New Orders Source: Reuters EcoWin . Investment came in substantially lower on the quarter. In annual terms. 33 GDP Priv. while exports contributed negatively. the economy.

0 0. Polish fiscal policy remains too lax compared to regional peers and the state of the economy.0 2. the general govt. Parliamentary elections in 2011 won’t favour fiscal consolidation.3% higher than our previous estimates.5 5.5% of GDP in 2010.5% target set by the NBP. Consumer prices have there since climbed to 3. which is widely above the 2.0 03 CPI Source: Reuters EcoWin. but we doubt a better performance could be achieved during an electoral year. 34 Wages Employment Unit Labour Costs Source: Reuters EcoWin. deficit will reach 7. The benign inflation trend recorded last year ended in July when the CPI bottomed out at 2. TD Securities . While steady growth warrant consolidation.0 7.0 2.0 4. Cost-push factors (high food prices in particular). TD Securities Inflation has sharply re-accelerated in the last quarter of 2010. 1% VAT hike starting in 04 05 06 07 08 09 10 Jan’10 and demand-side pressure due to improving labour conditions should maintain CPI at 3. 0.Inflation to stay above target Inflation (%yoy) 5.5 0.0% in 2011.5 03 04 05 06 07 08 09 10 reduction of the gap to 6.5 10.0 1.0 -2. we expect a moderate Labour Market (%yoy) 12.0 3.0%yoy. while significant corrective measures are missing. In 2011. mostly on lower revenues.7%.2% (official 2010 inflation).

12m) 15 10 5 0 -5 -10 -15 -20 01 02 FDI 03 04 05 Net Source: Reuters EcoWin 06 07 08 09 10 quality has clearly worsened. The CAD is likely to reach 3. While exports and imports have increased by 20%yoy in Nov’10.Widening C/A deficit but FDI to pick up in 2011 12m Trade vs.8bn. Though the CAD coverage does not raise concerns.8% of GDP in Sep’10 from 2.0 -500.1% in Jan’10. The 12m CAD widened to 2. inverted) Source: Reuters EcoWin C/A and FDI (EURbn.0 -100.3% in 2011. the 12m trade deficit widened to €5. The gap is abundantly covered with over €35bn of less stable portfolio inflows.0 The C/A deficit is running wider on strong demand for imports.0 -5 -15 -25 02 03 04 05 06 07 08 09 10 -200. FDI flows have declined in 2010 but are likely to increase on privatization programme. in 2011-2013 the government is expected to deliver an ambitious privatization plan capable of attracting more FDI. However. (%yoy) Imp. Current Account 25 15 5 -300. The CAD followed a similar trajectory. exacerbated by the impact of the income deficit (€12. The decline of FDI over the course of H2’10 has shrunk the CAD coverage to 40% in Nov’10 from close to 100% at the beginning of last year. 35 C/A . (%yoy) CA (% GDP.4bn wider than the previous year).0 -400.9bn in Nov’10 and €1.0% of GDP in 2010 and 3. its overall Exp.

In Dec’10. with rising CPI and a dovish monetary policy.50%) while inflation was breaking through their 2. We expect the cycle to start with 25bp on Jan-19. We understand the NBP’s reluctance to increase rate differentials. but less than 100bp tightening in 2011 would probably be ineffective.5%yoy stronger to the euro. While a strong zloty would help contain inflation. Negative Zloty performance last year. the NBP has joined the club of countries fighting against the strength of their currencies.0 Real Broad Effective Exchange Rate (BIS) Real 3m Rate (%) Source: Reuters EcoWin . The zloty has not appreciated as suggested by the fundamental backdrop.0 0. 36 145 135 125 115 105 95 04 05 06 07 08 09 10 4. Compared to pre-crisis peaks.0 3. mostly due to EU debt woes and the spillover risk.5% central target. We were surprised seeing the NBP comfortable with the current policy rate (3. the unit is still 20% weaker to the euro and 15% weaker in REER terms.0 1.5% upper end of the target range. In addition.Time to tighten has come Money Market Rates 8 7 6 5 4 3 04 05 06 07 08 09 FRA9x12 Source: Reuters EcoWin 2 1 0 -1 -2 -3 10 Spread WIBOR3M Monetary Conditions The NBP is falling behind the curve. time to take action has come. the NBP could deliver less hikes than necessary if the PLN gains too much. Now that the CPI is threatening to leap above the 3. the PLN was 3. Volatility has also been elevated.0 2.

flatter curve anticipates rate hikes.6 5. Fiscal deterioration has led to sharply increased financing needs. The additional supply pressure on the bond market could cause yields to rise.0 2.0 6.0 3.2 5. 37 275 225 175 125 75 Spread (bp) .0 4.0 0Y 5Y 10Y 15Y 20Y Oct-10 Jul-10 Higher.0 06 PL 10yr 07 08 GE 10yr 09 10 Source: Reuters EcoWin unlikely to wane in the year of parliamentary elections. +110bp in 6m and +145bp in 12m (vs.4 5. Similarly.6 4.8 4. although the short-end of the swap and the FRA curve are already pricing more hikes than we expect in 2011. Loose fiscal policy and rate hikes still the major risks for government bonds.2 4. respectively).0 4. are already priced in and spreads should not widen further unless the EU debt crisis escalates.4 4.Polish curve pricing in rate hikes Interest Rate Swaps Jan-11 5. As the market started aggressively pricing in rate hikes this year.8 5. the whole curve shifted higher and flatter. we see scope for yield compression at the front-end of the curve. If our forecasts are validated by the NBP’s decisions. FRAs are now pricing in +80bp in 3m. instead. which are 325 Source: Bloomberg 10Y Bonds 7. +75bp and +100bp. our forecasts of +25bp.0 5. EU woes. the perspective of rate hikes should also weigh on POLGBs.

the zloty should also perform badly against the greenback. the govt. This is one of the worst performances in a basket of 24 EM currencies.20 to the EUR.21% in total returns vs. we are wary of the EU troubles and the zloty’s sensitivity to risk appetite. 38 Implied option volatilities (%) 45 35 25 15 5 04 05 06 07 08 09 10 EUR/PLN 3 Month PLN/USD 3 month Source: Reuters EcoWin . the USD. As TD forecasts EUR/USD to plunge to 1. We expect EUR/PLN to move to 3. Majors (rebased) 50 60 70 80 90 100 110 04 05 EUR/PLN 06 07 USD/PLN Source: Reuters EcoWin Disappointing Zloty performance last year should be compensated by appreciation in 2011. we expect the appreciation trend to the EUR to continue as the fundamental backdrop and higher rate differentials stand behind stronger valuations. Since Jan’10. We recognize that the NBP could try to curb excessive zloty strength. The appreciation should be gradual and reflect the positive macroeconomic performance of Poland this year. the Zloty gained 10. In such circumstances. but would also stand behind the PLN in case of spikes above 4. could also step in further supporting the currency. However.05 by Q4’11. the EUR and 3% vs.70 by the end of 2011. 08 09 10 However.Stronger Zloty despite EU problems PLN vs.

Current Account going back in the hole ./ Baa3 ./ BBB.Export-driven economic growth .Policy risk to weigh on bond yields .High inflation and loose fiscal policy .Persistent Forint weakness BBB.Unclear monetary policy .Hungary .

we expect the economy to have expanded by 1. Exports.0 -10.0% in Q2. (lhs) Exports (lhs) Retail trade (rhs) -5 -10 .0 5. are still leading the recovery. IP remains dangerously tied to the growth prospects of EU trading partners. Moreover. the fragility of the latter is testified by almost three years of negative retail sales.3% in 2011). Source: Reuters EcoWin 40 30 20 10 0 -10 -20 -30 Economic Activity (% yoy) 20 15 10 5 0 -40 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Bloomberg Ind. Industrial production remains linked to growth of major trading partners.0 0. Germany in particular (TD expects growth to slowdown by 1% to 2. sluggish investment recovery could be hampered by special sector taxes. Cons.0 02 03 04 05 06 07 08 09 10 30 20 10 0 -10 -20 Economic recovery is picking up. accounting for almost 85% of GDP. Household consumption should gain momentum in 2011 supported by tax reductions. but remains fragile and export driven.7%yoy in Q3’10 from 1. Investment Public Cons.0 10. On these grounds. Real GDP growth accelerated to 1.0% in 2010 and further accelerate to 2. 40 GDP Priv. The risk is that the output gap remains negative for long. Yet. Exp. However.Export-driven economic growth Economic Growth (%yoy) 15.5% in 2011. prod.0 -5. while private consumption has returned to a mild positive contribution.

41 Public sector balance and external debt 160 140 120 100 80 60 40 20 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Bloomberg 0. the spike in CPI triggered two consecutive 25bp hikes from the NBH in Nov-Dec’10. crucially depending on the total magnitude of hikes. While inflationary pressure is set to remain in place in 2011. rhs) -0. but would be much higher in the absence of structural reforms) and reduce the stock of public debt netting it out with HGB held by the private funds.High inflation and loose fiscal policy Inflation (%yoy) 10 8 6 4 2 0 02 03 Core CPI 04 05 CPI Source: Reuters EcoWin. debt (EURbn.7%yoy in Aug’10. is also forcing the contributors of private pension funds back into the state pension scheme in order to finance the 2011 budget (estimated at 2. introduced special taxes on the bank. telecom.8% of GDP budget target in 2010.7%yoy. The govt. Mostly driven by food prices and supported by a weak HUF amidst rising commodity prices.0 -2.5 . Government to achieve fiscal targets through special taxes and private pension raid.0 Ext. After the IMF’s SBA expired in Oct’10. Inflation closed 2010 at 4. after bottoming out at 3. lhs) Budget balance (HUFtrl.0 -1.5 -1. the govt.9%. TD Securities 06 07 08 09 10 Inflation accelerating faster than expected.8% by year end.5 -2. monetary tightening should contain it at 3. retail and energy sectors to finance the introduction of a flat tax for households and achieve the 3.

the 12m trade surplus has exhibited steady growth to €5. While imports have also risen. as we expect the C/A to revert to a deficit of 1.3% of GDP. The economic recovery of Hungary’s major trading partners. As the recovery gets more entrenched in domestic drivers.0% of GDP.4bn in Nov’10 from €4. Financial Account (4Q rolling. the C/A surplus has likely accounted for 1.4bn in Jan’10. The positive impact of a stronger trade balance also pushed the C/A Source: Reuters EcoWin Trade balance (EURbn. The C/A correction is likely to reverse in 2011.Current Account going back in the hole Trade Balance and Exports 5 3 1 -1 -3 -5 02 03 04 05 06 07 08 09 10 20 10 0 -10 -20 -30 The C/A returned to surplus on sharp export rise. In 2010. 0. 12m) Exports (%yoy 6mma) in the black (€1. . EURbn) 25 20 15 10 5 0 -5 -10 02 03 Other Portfolio 04 05 06 07 08 C/A Source: Reuters EcoWin 09 10 However. together with a substantially weaker Forint compared to pre-crisis levels.2bn in Q3’10).3% higher than our prior forecast. an expansionary fiscal policy will exacerbate the correction we have pencilled in for this year. 42 FDI Fin. acc. demand for import is also likely to accelerate and outpace that of exports. The performance of the external accounts is also reflecting the weakness of domestic demand. has supported a massive rebound of exports.

we see risk of easing in H2’11 unless the HUF collapses vs. Thereafter. while risks are definitely skewed to the downside in the remainder of 2011. The bank resumed monetary tightening to contain inflation overshooting the bank’s 3% medium-term target. However.00% from 5. policies.75%. We would expect the NBH to remain on a tightening bias and deliver no less than 25bp of hikes in the next three months. we think tightening should be entirely delivered before the March meeting. The market is still pricing in 35bp of hikes in 6 months and 45bp in 12 months.25%.75% with a moderate upside risk in Q1. FRAs are pricing in approximately 50bp of additional hikes in 12m which would increase the policy rate to 6. with a largely new MPC. 43 12 10 8 6 4 2 05 CPI 06 07 BUBOR 3M Source: Reuters EcoWin 08 09 10 . the parliament will re-appoint 4 out of 7 MPC members in March and the likelihood of further hikes looks very limited at that point.Unclear monetary policy Money market rates (%) 2 12 10 8 6 4 05 06 Spread 07 08 09 10 Source: Reuters EcoWin 1 0 -1 -2 -3 -4 FRA9x12 CPI & 3M Rate BUBOR3M The NBH hiked twice in Nov and Dec’10. we expect the NBH to become more accommodative on govt. We expect the NBH to increase rates to 6. While we consider this a possible scenario. From the current level of 5. the CHF. If any.

Policy risk to weigh on bond yields Interest Rate Swaps Jan-11 7.8 5. While they could easily rise further. we remain concerned of the lack of clarity on the monetary policy. The Orban administration has also created uncertainty on the fiscal front.6tn in Jan’10 compared to a peak of HUF3. triggering a downgrade to BBB.6 6.4 6. Yields of HGB appear attractive in the maturities out to 5y.8 6. EU troubles and policy risk premium have pushed spreads higher in Q4’10 and early 2011. as investors remain concerned of a possible spillover of the EU debt crisis to Hungary. event risks including possible further downgrades to junk status (all three rating agencies have Hungary on negative outlook now) will likely deter sustained capital inflows.4% and 7.4 7. Foreign holdings of HGB remained soft at HUF2. respectively. Swap rates have moved higher all across the curve.by Fitch on Dec 23.2 7.0 6.0%.0 5. while the slope has also increased (2y5y spreads stood at 44bp in Jan’10).2 6.6 0Y 5Y 10Y 15Y Source: Bloomberg Oct-10 Jul-10 20Y Higher rates reflect market hawkishness on monetary policy. At the front-end of the curve. 44 10Y Bonds and Spread to Germany 13 12 11 10 9 8 7 6 06 07 08 09 10 Source: Reuters EcoWin 1000 800 600 400 200 Spread (bp) 10Y Bonds (%) . 1yr and 5yr IRS are now yielding 6. while the long ones do not pay enough duration premium.4tn in Sep’08.

the risk of unorthodox monetary policy once the MPC is reshuffled gives scope for downside risks for the unit. The NBH should hike further. uncertainties on Hungary remain high.8 2. troubles of EU peripherals will keep pressure elevated on the HUF. 45 Source: Reuters EcoWin .5 3.Persistent Forint weakness EUR/CEE Performance (rebased) 80 90 100 110 120 130 07 RON 08 PLN HUF Source: Reuters EcoWin Despite economic improvements.0 04 05 06 07 08 09 10 to the EUR would likely determine the NBH to buy HUF or to deliver emergency hikes. but this scenario is 09 10 already priced in and should not have great influence on EUR/HUF from this point on. HUF downside remains limited by possible NBH intervention.5 2. On the other hand. We expect the forint to receive good support from the market in the absence of major external or domestic news.3 3. However. We expect the forint to hover around 275-278 to the euro throughout 2011 and to close the year at 274. The NBH remains largely concerned with market stability given the huge exposure of Hungarian households to FX loans (especially in CHF).3 2.0 2. Any sharp and prolonged depreciation of the HUF to the CHF and Foreign HGB Holdings (HUFtn) 3.

Inflation to remain elevated in H1’11 .Leu volatility and appreciation potential BB+ / BB+ / Baa3 .Romania .The light at the end of the tunnel .The NBR to cut 25bp in H2’11 .Political risk still not abating .

Retail sales sank another 7. 47 Industrial Production Retail Sales Source: Reuters EcoWin . The main culprit remains the package of austerity measures introduced last year. Household consumption is still hampered by the unsupportive economic backdrop.0% in Sep on a NSA basis.6%yoy in Nov’10 after a temporary improvement at -2. including a 25% public wage cut and 5% VAT hike.5% fall in Q2’10. SA (%yoy.5%yoy in Q3. Private Inv.0% before economic expansion kicks in in 2011 (+1. most likely closing 2010 at -2. Private consumption still growing negative.The light at the end of the tunnel Economic Growth (%yoy) 20 15 10 5 0 -5 -10 -15 03 04 05 06 07 08 09 10 100 75 50 25 0 -25 -50 -75 Austerity measures have deepened and prolonged the recession though its end is near. Real GDP continued contracting by 2.6% previously. Trade Balance Source: Reuters EcoWin Activity. worse than the 0.5% expected).9%yoy in Nov’10 from 2. Contraction is going to remain in place for another 2-3 quarters. On a positive note. Seasonallyadjusted IP growth quickened to 3. relative resilience of industrial production owes to GDP Private Cons. SA data exhibited less bad performance though. 6mma) 25 15 5 -5 -15 04 05 06 07 08 09 10 the good performance of the export sector.

While the budget cuts have induced more pain to Romanian households. purchasing power of households has sharply deteriorated. putting severe pressure on economic activity. As a result. but only for EUR loans.0% by year end. However. The 2010 inflation spike to 8. Positive base effects will materialize only in H2’11 with CPI dropping to 4. The impact of the comparison base is magnified by rising commodity prices (chiefly food and fuel). credit in Lei has kept shrinking since August 2009. Credit activity moderately to the upside. TD Securities Credits to households (%yoy) 125 100 75 50 25 0 -25 Jan May Sep Jan 08 EUR RON May Sep 09 Jan May Sep 10 Source: Reuters EcoWin .Inflation to remain elevated in H1’11 Inflation and Wages (%yoy) 13 11 9 7 5 3 1 04 CPI 05 06 07 08 09 10 25 20 15 10 5 0 -5 Inflationary pressure remains in place on negative base effects and cost-push factors. Surprisingly enough. FX (mostly EUR) loans to households have returned to a moderate growth in April and have continued to expand in the following months. Adjustments to administered prices skew the balance of risk for our forecast to the upside though.0% reflects a 24% VAT hike in July and a negative underlying trend. a pick up in real wages will support the economic rebound in 2011. 48 Net Wage (3mma) Source: Reuters EcoWin. A dysfunctional local money market has complicated financing in RON.

2%. Fiscal consolidation is key to receiving the final IMF payment and to roll over the SBA programme for another two years. the CAD should re-widen to 5.5% by the 09 10 end of the year. The CAD has stabilized at 5.2% the 6. However. the govt. 49 Current Account External Accounts (% of GDP) -2 -5 -8 -11 -14 -17 -20 00 01 02 03 04 05 06 07 08 09 10 Trade Balance Current Account Source: Reuters EcoWin . We expect both conditions to be met. With the domestic consumption picking up. But this is as far as the improvement will go. implemented all the harsh measures required to slash public spending and should overshoot only by a marginal 0.3% of GDP (€6.3bn) in Sep’10.Political risk still not abating Current Account and FDI (EURbn) 10 5 0 -5 -10 -15 -20 02 FDI 03 04 05 06 07 08 Net Source: Reuters EcoWin The correction of the external imbalances is likely to reverse with domestic demand recovering.8% fiscal deficit forecast in 2011. recently survived a second noconfidence vote and will continue to face opposition even from within the coalition. trailing the amelioration of the trade balance and will probably close 2010 at 5. but political risks remain. Snap elections remain a risk threatening our 4. Fiscal policy on the right track.8% fiscal target for 2010. The govt.

As demand-side pressure will be absent for long and the output gap remain negative for the whole 2011.6 6. As we expect rates to remain unchanged until Q4’11. Local markets continue to be affected by limited liquidity especially on long maturities.The NBR to cut 25bp in H2’11 Interest Rate Swaps Jan-11 7. its transitory nature should convince the NBR not to hike either. While current inflation does not warrant any possible cut.8 6.0 0Y 5Y 10Y 15Y 20Y Source: Bloomberg Oct-10 Jul-10 The NBR likely to remain on hold until H2’11. Positive base effects will materialize from July ’11 on and the NBR could consider delivering a minor 25bp cut in Q4’11. The curve is inverted in the maturities beyond 4yr where liquidity is particularly scarce. short-maturity bonds remain more attractive.2 6. unless the CPI remains strongly skewed to the upside. then to deliver moderate easing .0 6. we believe rates could be lowered to 6.4 7.4 6.2 7. Yields of ROMGB are currently trading in a narrow range hovering at around 7%. 50 Loans and savings rates (%) 18 15 12 9 6 3 0 06 Savings 07 08 Loans EUR 09 Loans RON Source: Reuters EcoWin 10 .00%. Note that many of these bonds were trading in yields north of 10% at the time of the political crisis in late 2009.

7%) and the USD (-1. The NBR enlarged its FX reserves by additional €5bn to €36bn in 2010. reserves still cover its 40 30 20 10 0 -10 -20 -30 -40 2004 Debt and Reserves (EURbn) Reserves 2005 2006 Ext. We forecast EUR/RON at 4. however. In the small and illiquid Romanian market. Moreover. In 2011. 51 . while the external public debt is increasing. In total return terms. we expect the economy to turn around and the RON to reflect better growth prospects. The ongoing recession and high CPI have not helped to improve risk appetite 09 10 for the Leu. domestic troubles and political instability. the currency was the secondworst performer against the EUR (+5.26 in Q2’11. this is enough to keep the currency stable.18 by year-end 2011.3%) out of 24 EM crosses. in 2010. The NBR has been dominating the small FX market with its sizeable reserves. EUR 08 vs. we think the NBR would not need to defend the currency if the environment remains risk on 2010 and unless the depreciation is sharp and persistent. then to creep lower to 4. However. USD Source: Reuters EcoWin The RON was battered by EU debt worries. debt 2007 2008 2009 Source: Bloomberg entirety.Leu volatility and appreciation potential RON vs. majors (rebased) 80 90 100 110 120 130 140 150 07 vs.

Rouble remains undervalued BBB / BBB / Baa1 .A slow transition to inflation targeting .Faster growth in 2011 .Curve potentially steeper .Russia .Hefty current account surplus .Upside risk for inflation .

9%yoy in 2009.5 04 05 GDP 06 07 08 09 10 30 20 10 0 -10 -20 -30 Investments Consumption Source: Reuters EcoWin Russia’s growth has been below expectations in 2010. Industrial production rebounded to 6.Faster growth in 2011 Economic Growth (%yoy) 40 7. We expect GDP to have grown only 3. Surging manufacturing production has led the expansion.5 -2.6%yoy in Nov’10.5 2. The economy shrunk by 7.7%yoy in Nov’10 from a low 5. The economic rebound has been chiefly tied to the surge in manufacturing production. while retail sales decelerated to 4.8%yoy in 2010. returning to growth only last year. but now stabilizing.5 -7.7%. The government has supported a number of key firms as well as ailing cities and towns across the country.7%yoy in Q3’10 from 5.1%yoy on a 12m basis in Nov’10 and almost constantly in double-digits since Jan’10.2% in Q2.5% in 2010. Economic activities eased to 2. Growth in 2011 will be further supported by the rebound in investment and by accelerating domestic consumption buoyed by credit expansion and public spending on social benefits (mostly pensions). if our oil price assumptions are validated.9% in July.5 -12. 53 Economic Activity (%yoy. up 10. 6mma) 15 10 5 0 -5 -10 -15 -20 -25 04 05 06 07 08 09 10 Source: Reuters EcoWin 15 10 5 0 -5 -10 Retail Sales Manufacturing . but performance should improve to 4. The unemployment rate kept improving at 6.

The government has scaled back the aid provided to the economy during the crisis. thanks to increasing tax revenues. total Source: Reuters EcoWin .Upside risk for inflation Inflation (%yoy) 35 25 15 5 -5 -15 05 06 07 08 09 10 Source: Reuters EcoWin 15 13 11 9 7 5 Consumer Prices Producer Prices Wage Developments (%yoy.3% in 2011. while priority was granted to social spending. when the summer drought and wildfire emergency disrupted wheat crops across the country.9% of GDP and should further shrink to 3.5% in 2011. which.8% in 2010 matched 2009 rates. What raises concerns though is the size of the non-oil budget deficit.5%yoy. In particular. food prices have played a major role last year. Accelerating domestic demand and a narrowing output gap (yet to remain negative for a while) should maintain inflationary pressure high and push headline figures to 7. although assuming some monetary tightening in 2011. Better fiscal outlook in 2011. especially pensions. In particular. This is above the CBR’s ambitious 6-7% target. uncapped. the CPI has quickened on surging commodity prices and weak rouble. From the Jul’10 low at 5. will get close to 10% in 2011. The budget deficit in 2010 was most likely contained to 3. 3mma) 30 20 10 0 -10 05 Higher inflation at 8. total Nominal average monthly wages. 54 06 07 08 09 10 Real average monthly wages. but non-oil deficit getting worryingly large. infrastructure spending has been delayed.

In 2011. Instead. reflecting a still unattractive investment environment. the FDI outflow increased to $11. non-strategic investors have also pulled money out of the country. 12m portfolio flows have stabilized around $16bn after a sharp rise in the early stage of 2010. On the financing side. the C/A surplus declined to 5.Hefty current account surplus Trade and Oil 200 175 150 125 100 75 50 25 0 02 03 04 05 06 07 08 09 10 Trade Balance (USDbn) Oil (USD) Source: Reuters EcoWin The current account correction is over.2% of GDP. may have anticipated a resumption of speculative money outflows. as imports have started picking up in H2. Capital outflows stemming from unattractive rates.0% of GDP.9bn in Q3’10 from $9.e.7bn in Q2. In the same period. we expect the correction to continue and the C/A to shrink to 3. i. FDI & Portfolio Flows (USDbn 12m) 100 80 60 40 20 0 -20 -40 -60 00 01 02 03 04 05 06 FDI 07 08 09 10 30 20 10 0 -10 -20 -30 -40 -50 Current Account Portfolio Source: Reuters EcoWin . however. the C/A surplus also widened to 6. 55 Current Account. Crude oil 130 110 90 70 50 30 10 prices around $75/bbl until mid 2010 and subdued imports allowed the 12m surplus on the trade balance to advance to $154bn in Jun’10. RUB weakness in Q4’10. However.0%.1% at the end of Q3’10 and will likely close 2010 lower at 5.

$497bn in Oct’10). The CBR has nonetheless used some of its reserves to limit the large outflows that took place in Q4’10. The rebound in oil prices to around $90/bbl has not been accompanied by additional accumulation of FX reserves ($479bn at the end of 2010 vs.A slow transition to inflation targeting FX Reserves and Oil 600 500 400 300 200 100 0 00 01 02 03 04 05 06 07 08 09 10 Reserves (USDbn) Oil (USD) Source: Reuters EcoWin 130 110 90 70 50 30 10 The CBR slowly moving to RUB floating regime. the CBR should also increase reliance of banks on the refinancing rate and reduce the excess liquidity in the system. we believe the CBR will leave the refinancing rate unchanged in 2011 but will increase the RRR to address CPI and liquidity issues. The slow transition to the inflation targeting regime means that the CBR will have to undergo technical adjustments to their policy rates. but no hikes to the refinancing rate. Tighter monetary policy in 2011. In fact. For these reasons. more volatility on the RUB is now allowed. as the real deposit rate is already negative with CPI running close to 9%. To strengthen the transmission mechanism. 56 Interest rates Refinancing rate 15 13 11 9 7 5 3 1 -1 2007 2008 2009 2010 Source: Bloomberg o/n Deposit rate Repo rate peak at 30 2011 . as the CBR is scaling down its role in the FX market and has widened the intervention band. including possible hikes to the deposit rate.

while the slope of the curve has remained mostly unaffected CDS spreads (USD 5y) 1600 1400 1200 1000 800 600 400 200 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Russia Turkey S Africa (2s5s at around 130bp) after the sharp steepening occurred in Jan-Mar’10.7 4. Indeed.7 7.Curve potentially steeper Interest Rate Swaps Jan-11 8. the slope of Source: Bloomberg the curve should increase only marginally from now on. dragged lower by the CBR’s monetary easing. 1yr yields have already started reflecting this scenario. The bank has been able to cut rates by 525bp to 7.7 5.2 0Y 2Y 4Y 6Y 8Y 10Y Source: Bloomberg Oct-10 Jul-10 Higher yields and steep curve. the CBR will have to deliver some form of monetary tightening in order to meet the 6-7% CPI target in 2011. However.2 4. as implementation of macro-prudential measures should reduce the impact of expected inflation.2 7. 57 . rates remain a large 215bp lower than they were at the end of 2009. The front-end of the curve should receive more support in the ST as the CBR is unlikely to hike the refinancing rate for the whole of 2011.75% until May’10.2 5.7 6.3% since the mid Oct’10 lows. 1yr swap rates soared approximately 85bp to 5.2 6. As the inflation outlook is rapidly worsening.

Jan. We believe the RUB will strengthen to 29. the Dollar in Q3. the RUB looks undervalued also in the perspective of stronger economic activity in 2011 and a potential upside surprise on this front. respectively.5 32. Commodity prices (oil prices in particular) remain crucially relevant to rouble’s valuations.May.5 05 06 07 08 09 Basket Source: Reuters EcoWin 10 EUR/RUB USD/RUB The Rouble has lost ground to the Euro and rangetraded vs.May.5 22.Jan08 08 08 09 09 09 10 10 10 11 Source: Bloomberg . However.May.Rouble remains undervalued Rouble performance 47. The CBR continues to manage the Rouble against a basket of 55% USD and 45% EUR. inverted) 27 29 31 33 35 37 39 41 350 43 Jan.80 in Q4. 58 Reserve and the Rouble 650 600 550 500 450 400 Reserves (USDbn.45.5 27. the intervention band was recently widened by 3% to 11.Jan. the basket to 32. given it deters speculative inflows).5 42. it could also hold the RUB weak for longer.Sep.37 and 29. lhs) RUB/basket (rhs.70 to the dollar in Q2 and to 28.5 37. While the larger band has determined higher volatility (which is cheered by the CBR and the govt. Faster growth will support a stronger RUB in 2011.Sep. Yet. the traditional patterns have somewhat weakened and we sense this will be an ongoing issue going forward.Sep.5% in order to move to CPI targeting. which translates into a sharp appreciation of the RUB vs. However. according to valuations based on historical oil-price assumptions.

Brazil .Mexico .Latin America .

Aggressive tightening ahead .Inflation threats BCB’s target .Brazil .CAD widening but coverage not an issue .Inverted curve favours belly receivers ./ Baa3 .Interventionism against Real strength BBB.Slower GDP growth ahead ./ BBB.

In general.2% the previous quarter and Q4’10 results should have closed the year at 7. 3mma) 20 15 10 5 0 -5 -10 -15 -20 01 02 03 04 05 06 07 08 09 10 GDP growth will continue decelerating. we expect 2011 GDP growth to moderate at or close to 4.0% of GDP in 2011 from 2.1%yoy in Nov (comparable with the 2004-2008 average). IP headed further south to 4. but it will also lose steam going forward. Household consumption remains one of the main contributors to economic expansion.5% in 2010. while retail sales eased at 9. Growth slowed down to 6.7%yoy in Q3’10 from 9.6%. is unlikely to meet the primary surplus target of 3.3% of GDP in 2011.Slower GDP growth ahead Economic Growth (%yoy) 9 7 5 3 1 -1 -3 00 01 02 03 04 05 06 07 08 09 35 25 15 5 -5 -15 -25 GDP. The govt. Net exports are progressively declining too. 61 Industrial Production Retail Sales Source: Reuters EcoWin . Risk is that growth in social security spending comes in higher than expected if minimum wages (impacting almost 50% of budget spending) are renegotiated above R$540 (provisional budget in Congress already authorized R$560). SA Private Consumption Exports Investments Source: Reuters EcoWin Economic Activity (%yoy. as the comparison basis becomes less favourable.5%. We see the consolidated deficit increasing to 3. Budget unlikely to meet primary target in 2011. Though supported by strong growth in domestic demand pushing tax revenues higher.7%yoy in October. spending growth should moderate too much.

50% in H1. strong domestic demand also boosting services prices is likely to maintain the CPI above BCB’s 4. IPCA inflation closed 2010 at 5. starting on 20 Jan.5 04 CRB 05 06 CPI 07 08 Food Source: Reuters EcoWin 450 400 350 300 250 200 09 10 Trade and Commodities 50 40 30 20 10 0 02 03 04 05 06 07 08 CRB Source: Reuters EcoWin Inflationary pressure back on rising commodity prices. However.5 2. Dilma Rousseff was sworn in on Jan 1 as Brazil’s first female President. Despite monetary unorthodoxy. Expectations are also worrisome.5 7.15% in Q3’10. which leaves us more sceptical on this cabinet’s real commitment to fiscal discipline. In the effort to match the successful legacy of her predecessor.5 -7. we do not expect significant policy shifts and only minor reforms on the first year of mandate. with 12m expected CPI peaking at 5. accelerating in the four months through December.5 12. A difficult legacy for Dilma.5% central target during 2011. a token of continuity with Meirelles-run BCB’s policies. we expect the BCB will resolve to hike Selic rates by a total 175bp to 12. 62 600 500 400 300 200 100 09 10 Trade Balance (USDbn) .5 -2. The increase is mostly related to higher food prices as agricultural commodities remain on the rise.9%yoy.Inflation threats BCB’s target Inflation (%yoy) 17. Dilma appointed Alexandre Tombini (a senior BCB officer and former MPC member) as the central bank’s new governor.35% in Jan from 5. Dilma also confirmed Mantega as FinMin. Most notably.

6bn in June.5% deficit in 2010 and advance to 3. exceeding 2. slightly less than our previous 3. In the 3 months through Nov 2010.8bn in the previous three. On the contrary.CAD widening but coverage not an issue Shrinking trade balance leading to a wider C/A deficit. booming portfolio flows stabilized just below $72bn (Nov). but with strong domestic demand.5bn in June ’10. are deterring hot money inflows through capital controls and unorthodox monetary policy. concerned about BRL strength. We expect these measures to fail in the LT.5% in December 2009. net FDI totalled $15.2bn from $25.3% call. The 12m sum also climbed to $38. but when the $14bn net inflows from Petrobras share offering will fall off the calculation base. Local authorities fighting hot moneys. Local authorities.4% of GDP in November 2010 from 1.0% in 2011. The 12m CAD kept increasing in Q4’10. 12m portfolio inflows should decline.9bn compared to $5. after briefly touching a new all-time high at $72. the deterioration of the CAD pushed by soaring imports will likely post a 2. 63 CAD Coverage (% of GDP) 5 3 1 -1 -3 -5 02 C/A 03 04 FDI 05 06 07 08 09 10 Portfolio Source: Reuters EcoWin . Rebounding commodity prices have helped to improve the external deficits until yearend 2009. reflecting a reacceleration of LT strategic inflows. while FDI accelerate.

We see scope for rating upgrades in 2011. we expect rates 175bp higher to 12.Aggressive tightening ahead Inflation and SELIC 9 8 7 6 5 4 3 2 04 05 06 CPI Source: Reuters EcoWin 20 18 16 14 12 10 8 07 08 09 10 SELIC Real Interest Rate (12m . 1ppt more than our Q4 forecast. The bank remained on the sidelines because of the elections first and strong BRL concerns after. 64 08 09 10 . Fitch and Moody’s already have Brazil on positive outlook. but is set to improve its ratings. Brazil’s performance fully warrants for the advancement. The BCB has paused for the whole Q4’10 although inflation moved substantially higher. although the administration change is a mild risk factor. with hikes starting on the Jan 20 meeting.CPI) 13 11 9 7 5 3 1 -1 06 Brazil 07 Mexico Source: Reuters EcoWin BCB ready to deliver monetary tightening. The Selic rate at 10. while S&P remains stable. already pricing Brazilian CDS inside Mexico’s curve. However. The market is ahead of the curve. In 2011. Brazil is rated at the lower-end of the investment grade status. we think the BCB will have no option but to resume monetary tightening soon.75% still is the highest among leading EMs. But the Dec RRR hike was also meant to address price growth. yet too accommodative for a CPI running at 6%. as inflation should creep higher and threaten the tolerance band.50%.

2 11. Apr) and a total of 230bp until Jan’12.0 11. wary that aggressive tightening could push the curve higher. Consistently.4 12. however. We expect tightening to be done by H1.4 11. Mar. The front-end of the curve has moved sharply higher (2yr rates now trading at 12. Swaps pricing in less hikes.4%) while the mid-long end remains inverted. 65 1Y Swap SELIC Source: Reuters EcoWin . is skewed to the upside.6 12. If the BCB wants to limit overall tightening. The risk to our forecast.8 11. they will have to act quickly and frontload most of hikes.6 11. Futures yield compression could be 55bp on 1yr maturities as we expect only 175bp of tightening. the BCB could even consider easing next year. but risk is more is delivered. but have widened thereafter. The DI futures curve has recently shifted higher to reflect aggressive expectations on the tightening cycle. we prefer exposure to the belly of the curve (2yr-3yr maturities) for receiver positions.0 0Y 1Y 2Y 3Y 4Y 5Y Source: Bloomberg Oct-10 Jul-10 6Y Swaps and SELIC 20 18 16 14 12 10 8 04 05 06 07 08 09 10 The front-end of the yield curve remains under pressure.8 12. Futures indicate 50bp hike on each of the next three Copom meetings (Jan. If inflation falls lower in H2’11.2 12.Inverted curve favours belly receivers Interest Rate Swaps Jan-11 12. Swap yields remained fairly flat until November.

70 since mid Nov.00 3.2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Bloomberg . more could come (e. lhs) BRL/USD (rhs) 0. While the BCB continues accumulating reserves.3% in spot return and 13. USD/BRL gained 4.5 0.7 0. Stronger BRL reflects the sound fundamental backdrop foreign investors want to have exposure to. the possibility for the SWF to trade FX derivatives and reintroduction of the reverse FX swaps. 60% compulsory deposit on spot USD short positions. we see USD/BRL hovering at around 1.50 3. Attempts to deter capital inflows are likely to fail in the long term.00 2. BCB and FinMin have introduced several restrictions and measures to curb speculative capital inflows.3 0.6 Brazilian authorities fighting against Real strength.Interventionism against Real strength Real Developments 4. Very attractive yields will be even more so after the upcoming tightening. volatility has increased while the USD/BRL 50dma has been hovering around 1. They comprise a higher IOF tax at 6% on FI securities.00 1. 20% RRR for banks’ cash deposits. Under such pressure the real has clearly suffered.50 2. Yet.65 in Q4’11.4 Reserves (USDbn. minimum holding periods) if the target of a weaker real is not achieved. 66 0.50 00 02 03 04 05 06 07 08 09 10 EUR/BRL USD/BRL Source: Reuters EcoWin Reserves and Real 350 300 250 200 150 100 50 0.g.68 in Q1’11 and slightly stronger at 1.6% in TR in 2010.

CAD still improving .Slower but steady growth in 2011 .Inflation to overshoot target .Peso appreciation continues BBB / BBB / Baa1 .Back to steepness .Mexico .Banxico on hold for whole 2011 .

TD’s positive outlook on US growth (3.5 -10. Most of Mexican exports go the US. The reason is a sharp rebound of Mexican GDP to 7. we expect Mexico’s GDP to expand by 3.4%yoy in Oct’10 from 1.9% in 2011.5 0. respectively.6% and a still buoyant 5.0 2.2% from prior 4. in November.5 7. Weakness in domestic demand has finally started phasing out. We have revised higher to 5.1% expected) should translate in a stronger driver for the industrial sector in Mexico. while the 12m sum reached $41bn and $253bn.0 -2. such as credit growth and further amelioration of the unemployment rate.0 -7. With the US economy expected to accelerate in 2011.6%yoy in Q2’10. Mexico should receive extra boost.5 5.5%yoy in June.Slower but steady growth in 2011 Economic Growth (%yoy) 10.8% our GDP growth estimates for last year. 68 US New Orders and Mexico Manufacturing 12.5 94 96 98 00 02 04 06 08 10 75 65 55 45 35 25 Mexico Manufacturing (%yoy) ISM New Orders (6m lead) Source: Reuters EcoWin/TD Securities . with retail sales also quickening to 4. Additionally supported by the steady improvement of domestic factors. the upward revision of Q1 data to 4.5 -2.0 04 GDP 05 06 07 08 09 10 20 15 10 5 0 -5 -10 -15 Investment Retail Sales Source: Reuters EcoWin Mexico’s growth to show positive surprise in 2010.5 -5.3% expansion in Q3.5 2.0 7.5 -7. both oil and non-oil exports kept rising by 32%yoy and 25%yoy. The US-led external sector remains the major support factor. In fact.5 -12.

7 3. Source: Reuters EcoWin .0 4. In particular. Core inflation instead stabilized around 3.5 3. Inflation threatening the upper-end of target range. the narrowing output gap (although set to remain negative until 2012) and the high commodity price environment should maintain inflation under pressure. Going forward.5 4. 69 Wages and Inflation Expectations (%yoy) 4. CPI Ex.8% in 2011 and 3. Banxico should not be pressured to hike either.0 6. The last available survey shares a similar view and expects 3.1 3. Which means headline CPI overshot Banxico’s 3% target after bottoming in Jul’10. MXN appreciation vs. USD should help contain inflation at 3. credit growth provided by well-capitalized Mexican banks. 2011-2014 Avg.6% in the latter part of the year. with the US most likely on hold for the rest of the year.4%.3 05 06 07 08 09 10 4.7 4.0 1. But risks to our forecasts are skewed to the upside.9 3.0 05 06 07 CPI Source: Reuters EcoWin.0 5. we believe the bank will not react over the course of 2011. As Banxico is more sensitive to LT expectations.3 4. 6mma 2011 CPI Ex.1 Wages. Positive base effects and stronger expected peso will mitigate those factors. it will remain dangerously close to the 4% upper-end of the target corridor.6% as the 2011-2014 average.9% by year-end 2011.0 2.9 4. Although we expect the CPI to improve marginally over Q4’11.0 3. TD Securities 08 09 10 Core CPI Annual inflation quickened in Q4’10 and closed the year at 4.Inflation to overshoot target Inflation (%yoy) 7. In particular.

Thus. We reckon this coalition may not be repeated in 2012.0 -20. with presidential elections scheduled in 2012.2bn. we forecast the CAD at 1. (3mma %yoy) Source: Reuters EcoWin 20 0 -20 -40 External accounts (% of GDP) 0. in particular. Yearend 2010 figures should see a further improvement of the CAD to -0. The 12m CAD has further narrowed to $3. ($bn) Imp.0 -10. with FDI to continue rising (up to $17. However.5bn or about 0.3% of GDP in Q3’10.0 00 01 02 03 04 05 06 07 08 09 10 Trade Bal.1%. gubernatorial elections in the State of Mexico will be an opportunity to test alliances between Calderon’s ruling PAN and leftish PRD against the PRI.0 -2.2% of GDP) in Q3.0 -15. Politics coming back to the fore.5 03 04 05 06 07 08 09 10 In contrast with the general trend in EMs.CAD still improving Trade.0 -1. 2011 is a preelectoral year. (3mma %yoy) Exp.5% of GDP in Q2’10. Mexican CAD is still shrinking. Yet. margins to agree on common reforms would be strained.0bn (0.5 -1.3bn or 0.0 40 -5.0 -0.2% of GDP in 2011. Good news is the coverage remains ample. 70 Current Account Trade Balance Source: Reuters EcoWin .0bn in Q3’10 and covering the CAD almost five times) and portfolio flows already booming at $15. while the trade deficit stabilized at $2.5 -2. Quality of CAD coverage also remains high by EM standards. with political parties to enter a confrontational phase soon. Violence escalation also remains a significant drag on Mexico’s growth. from $5. 12m rolling 0. we expect both deficits to rewiden and.

71 . favourable US growth prospects will have a positive impact on Mexico. Mexican CPI will remain moderately above target in the next quarters.CPI) 5 4 3 2 1 0 -1 06 07 08 09 10 Source: Reuters EcoWin Bank Lending (USDbn) 20 Consumer Mortgages Corporate 18 16 14 12 10 8 6 4 2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Bloomberg/TD Securities With rate differentials likely to remain unchanged in 2011. i. Banxico can hold for long. Risks to our forecast (rates unchanged in 2011) are to the upside. with the two largest commercial banks subsidiaries of Spanish banks and accounting for more than a third of the asset and loans in the industry. On the other hand.Banxico on hold in 2011 Real Rate (3M TIIE . Consumer and mortgage lending will both accelerate in 2011 thanks to solid banks that have completed the balance-sheet cleanup. but the Fed shouldn’t hike until 2012. the banking system is dominated by a few banks and remains exposed to European troubles. On the one hand. But crucially.50% for more than a year and is not willing to increase rate differentials now. allowing Banxico to delay rate hikes. The bank has left the official o/n rate on hold at 4. However. US growth is likely to accelerate this year. hikes already in Q4’11. Bank lending is gaining momentum.e. CPI expectations and core inflation will weigh on future decisions. supported by beneficial external conditions and well entrenched domestic growth.

3 5.0 5. unless the peso appreciates briskly and despite Banxico’s recent dovish rhetoric. Mid-long yields are likely to remain high. Risks of further steepening are related to worsening CPI or easing threat. involved in technical shortening of durations.8 8. TIIE futures price in 25bp of hikes in the next 6m and 75bp in 12m. 72 10.0 9.0 6. However.8 0Y 5Y 10Y 15Y 20Y 25Y Oct-10 Jul-10 Mexican 5Y Bonds 1000 800 600 400 200 0 06 07 08 09 10 Source: Reuters EcoWin Medium-long term yields have re-steepened on delay in monetary tightening.3 7. Recent moves from local pension funds (Siefores). The front-end of the TIIE curve should move lower as implied market expectations are rolled over and the start of the hiking cycle gets delayed.Back to steepness Interest Rate Swaps Jan-11 8. but stronger moves were recorded on longer maturities as inflation has been creeping higher while an imminent change to monetary conditions seems unlikely.3 4. which we consider too much. have put pressure on the longend of the curve.0 7.8 5.0 8. interest of external investors remains high as the inclusion in the WGBI (Oct’10) and strong portfolio flows (up to $15bn in Q3’10) testify.8 6.3 6.8 7.0 5Y MBono (%) Spread to US 5Y (bp) . The front-end of the curve has barely reacted. Yet. Pension funds shifting duration. we see limited scope for further easing.

USD Source: Reuters EcoWin The Peso continued to appreciate against the dollar during Q4’10 . major risk factors are related to the US outlook and possible – but unlikely – measures to curb MXN strength. With oil revenues. Positive growth outlook. FDI and remittances upbeat now. ample coverage for the 08 09 10 moderate C/A and budget deficits. We forecast USD/MXN at 11. the MXN outperformed EM currencies. Major risks remain unorthodox monetary policy and slower US growth. there’s limited Inflows (USDbn. save the TWD.Peso appreciation continues MXN Performance (rebased) 80 100 120 140 160 180 04 05 vs. in terms of spot return (3. about 23% weaker to the dollar compared to pre-crisis peaks. The result was partly due to the peso still being a laggard. BRL 06 07 vs. all support an extension of the positive MXN vs. 73 Remittances Oil exports revenues FDI Portfolio Source: Reuters EcoWin . USD performance.8%) and total return (4. In the past quarter.8%). Yet. unchanged monetary policy and rate differentials over the next 12m.95 in Q4’11. a new 2yr $72bn FCL from the IMF. 12m rolling) 60 50 40 30 20 10 0 -10 00 01 02 03 04 05 06 07 08 09 10 scope for such measures if appreciation remains moderate. while Banxico will continue building FX reserves.

Indonesia .India .Asia .

Rupee on slow appreciation trajectory BBB.WPI to accelerate on commodity prices .Booming portfolio flows but weak FDI ./ BBB./ Baa3 .Monetary tightening close to the end .Growth near pre-crisis levels .India .

1%.5 6. Manufacturing weakness (to 9.0 -5.0 12. we expect the industrial sector to post better performance going forward and support growth.5 8. Construction also lost momentum but remained close to double digits. while 2011 economic activity is likely to expand by 8.5 7.8%) and government expenditure (9.1% from 19. IP posted a marked slowdown. Industrial production not as bad as it looks. partially related to the trend in the infrastructure sector.0 10.0 05 06 Total 07 08 09 10 Source: Reuters EcoWin Recent rebound in industrial production reduces negative growth prospects.7% in November from prior 11.5 05 06 07 08 09 10 20.0 15.0 2.3%.8%yoy in Q3 from 16.0%). while services accelerated to 12.0 7. but still the major driver) has reversed in October. 3mma) 17.0 GDP Agriculture Construction Services Manufacturing Source: Reuters EcoWin Industrial Production (%yoy. On the expenditure side. Real GDP growth has recovered to almost pre-crisis levels with Q2 and Q3 expansion at 8.9%yoy. falling at 2.0 0.5 10. 76 Infrastructure industries .5%.5 5.3% from 7.0 5.0%) compensated for decelerating investment expenditure (11. We still forecast 2010 growth at 8.5 0. in Q3. As anticipated by robust PMI.5 15.3% in Q1.4% (fiscal year starts in April). the highest rate since Q4 2007.5 5.5 9. buoyant private consumption (9.2% from 9.Growth near pre-crisis levels Growth Composition (%yoy) 10.

0% April highs. Yet. deficit close to 7. However. expenditures (including fuel subsidies). we revise our year-end (March/March) expectations to 6. The telecom auctions provided a windfall worth about 1% of GDP that will compress consolidated govt.6% of GDP in FY 2010.4%yoy in December. still below the 11.0% in 2011.8% in 2011 despite fiscal consolidation. 0. 77 2004 2005 2006 2007 2008 2009 2010 Source: Bloomberg . this remains one-off and govt. fuel and food remain a concern as they make up more than 60% of the basket and high correlation between WPI and commodities (which we expect higher this year) suggests that prices will rebound in 2011. External debt position solid and extra revenues on telecom auctions. The benign trend in WPI inflation continued in Q4 but rebounded to 8. The net external position is positive as the FX reserves ($296bn on 3 Dec) fully cover all external debt ($262bn). Positive base effects should help the WPI to lose additional steam in the coming months.2%yoy in 2010 and 7.WPI to accelerate on commodity prices Wholesale Prices Inflation (%yoy) 11 9 7 5 3 1 -1 06 WPI 07 08 Fuel and power 09 10 Food articles Source: Reuters EcoWin 25 20 15 10 5 0 -5 -10 -15 400 300 200 100 0 -100 -200 -300 2003 External position (USDbn) Reserves Ext debt Price pressure stemming from global commodities will push the WPI higher than previously thought. respectively. Accordingly.4% higher than previously forecasted.7% and 1. should expand again the deficit to 7.

which ballooned to a new high of $53. but have hitherto failed to gain momentum. On the FDI side. 78 50 40 30 20 10 0 -10 -20 2003 Capital Inflows (12m USDbn) FDI Portfolio 2004 2005 2006 2007 2008 2009 2010 Source: Bloomberg .6bn in November.5bn. 12m FDI stood at $20. rebounding slightly higher in 2009. Strong services surplus and steadily improving remittances flowing in the current transfers account mean that the C/A deficit. In November. twice as high the October 2007 peak at $20. 12m rolling) 100 50 0 -50 -100 -150 02 03 04 05 06 07 08 09 C/A Source: Reuters EcoWin 10 Income Trade Balance Services Transfers External account deficits are stabilizing.5bn.5bn. flows have been resilient during the downturn. The 12m trade deficit improved to $123. Hot money inflows booming while FDI coverage remains disappointing. Money inflows are likely to continue fuelled by QE in developed markets. is only about 40% of the trade deficit. The impressive pace of portfolio inflows has continued and reached a new alltime record of $40. India’s trade balance started widening again in 2010 on sustained import growth.3bn in November from the September peak of $125. in line with the previous month. likely backstopping the widening C/A deficit.Booming portfolio flows but weak FDI Current Account (USDbn. but the trend remains downbeat for now.1bn in Q3’10. However.

The interim pause in December signals that the MPC is becoming more cautious now.5 5. As we expect the WPI to remain substantially above the 4% target and the RBI to resume tightening.00% and 6. raising the repo and reverse repo rates by a total of 75bp to 7.5 6. We expect the bank to deliver hikes for another 25bp on each quarter until Q3 2011.0 3.0 5. but the cycle is closer to the end. We continue to prefer longer durations as we like INR-denominated assets. but commodity prices could easily reverse the trend.5 0Y 2Y 4Y 6Y 8Y 10Y Source: Bloomberg The RBI has hiked the repo rate six times for total 150bp this year.25%.0 6. respectively.Monetary tightening close to the end Monetary Policy Instruments (%) 10 9 8 7 6 5 4 3 05 Repo 06 07 08 09 10 Source: Reuters EcoWin Reverse Repo Cash Reserve Interest Rate Swaps Jan-11 7.5 4.00%. the 75bp of extra hikes should reinforce the yield curve’s bear flattening.25% until November.0 4. 79 Oct-10 Jul-10 . The RBI has maintained their focus on inflation and hiked six consecutive times to 6. The front-end of the curve should still not pay off in the current environment. The reverse repo has been raised 200bp to 5. Inflation has come off recent peaks. The curve has moved sharply higher and should retain its bias for flattening in the coming quarter.

g. Although the RBI may try to limit the strength of the Rupee. A major risk remains the possible adoption of measures to contain inflation while curbing capital inflows (e. Large inflows to the Indian equity market have lent great support to the INR.600 1. On the contrary. virtually limiting the losses.400 room for further appreciation. 80 1. increasing the RRR instead of hiking rates).000 15. at current levels there’s 1.200 EUR/INR USD/INR Source: Reuters EcoWin 25.000 5.000 10. total returns of 10.800 1.000 0 2004 800 600 2011 2005 2006 2007 2008 2009 2010 Source: Bloomberg . We think the RBI feels less pressured to cap the Rupee’s upside now. In 2010.Rupee on slow appreciation trajectory Rupee Performance 75 70 65 60 55 50 45 40 35 00 01 02 03 04 05 06 07 08 09 10 November and December corrections have alleviated some appreciation concerns. We see USD/INR appreciating to 43.80 in Q1’11 end to 42.34% against the dollar have made the Rupee one of the most attractive currencies in the EM spectrum. the large cushion provided by the FX reserves also allows the RBI to support the unit in case of sharp capital flow inversion.000 Stock market Sensex (lhs) S&P500 (rhs) 1.000 20. Hot capital inflows to improve the Rupee outlook but we are wary of possible countermeasures.00 by end Q4’11.

BI is already behind the curve .Robust growth momentum .Tough measures against Rupiah strength BB/ BB+ / Ba1 .Indonesia .

The most surprising aspect of Indonesia’s growth is the stability during the crisis. 82 Exports Investment Private Cons.4% of GDP in 2010 and 1.5 02 03 GDP Govt. despite below-expectation 5. Although export growth lost momentum.Robust growth momentum Economic Growth (%yoy) 7. Economic progress entrenched in new structural patterns. Source: Reuters EcoWin Industrial Production and Exports (%yoy) 60 40 20 0 -20 -40 00 01 02 03 04 05 06 07 08 09 10 Exports Manufacturing Production Source: Reuters EcoWin 35 25 15 5 -5 -15 . banks and public sector allows for further credit growth and infrastructure spending. The limited leverage of households. 04 05 06 07 08 09 10 30 20 10 0 -10 -20 Strong domestic-based economic growth. Real GDP growth is likely to have risen 6% in 2010. provided limited stimulus and has already withdrawn part of it.5 6. Private demand has accelerated throughout last year. while investment has also nudged higher attracted by the favourable domestic environment. The conclusion is risky but Indonesia does really seem on new structural patterns. we expect the economy to advance by another strong 6% even if base effects are waning.8%yoy growth in Q3’10. Govt. Subsidy reduction remains crucial to consolidate the small budget deficit (we expect 1. In 2011.5 4.5 2.5 3.5 5. it has remained in double digits.6% in 2011).

0 0.0 5. BI may introduce longer holding periods on SBI and IDR-denominated govt. This is above the 6% upper target. we expect Dec’11 CPI to come in at 7. Interest Rates 20. Higher commodity prices.7bn in Q3’10 from $10.5% in 2011. If the trend continues. due to the history of sharp inflation spikes. To curb the related rupiah strength.2bn in Q1. and rising core inflation are now threatening to push CPI higher.0% in Dec’10. food in particular.8bn in Q3’10.0 10. but likely to narrow in 2011. In a scenario in which the bank tightens 100bp in 2011.2%yoy.0 02 03 04 05 06 07 08 09 10 Policy rate CPI (%yoy) Core (%yoy) Source: Reuters EcoWin 14 12 10 8 6 Inflation has accelerated throughout 2010 and stood at 7. The 12m C/A surplus kept declining to $8. the surplus is likely to shrink from around 1% of GDP expected in 2010 to 0. however. TD Securities .5%. BI should act soon. but Bank Indonesia has remained on the sidelines. Due to the strong rise of imports. Interest rates have been held at an all-time low 6.50% for 18 straight months.0 15. bonds. however.BI is already behind the curve Inflation vs. 83 12m rolling CA and capital inflows (USDbn) 30 25 20 15 10 5 0 -5 2004 2005 2006 2007 2008 2009 2010 FDI Portfolio C/A Source: Bloomberg. Portfolio flows have also surged to $16. Indonesia still running a C/A surplus. BI has already increased banks’ RRR by 3% to 10. and caps on total foreign capitals local banks can hold.

50% in 2011. although the Yudhoyono administration hasn’t delivered meaningful reforms yet.0 8.0% remains low by historical standards) and the disruption of the positive targets achieved in recent years (including rating upgrades in 2011). To avoid the risk of high inflation (CPI at 7.5 5.0 5.0 4.5 7. the risk for wider yields is now material. As not all the tightening we expect is priced in in USD/IDR Interest Rate Swaps Jan-11 9. limited fiscal deficit and a C/A surplus. We think.0 6. BI should hike the reference rate by 100bp to 7.0 7. we expect BI to start monetary tightening in Q1’11 with 25bp.600 in Q4’11.5 6. the dollar. 84 . With a sound growth outlook.5 8. We see USD/IDR at 8.5 0Y 2Y 4Y 6Y 8Y 10Y Source: Bloomberg Oct-10 Jul-10 the curve.Tough measures against Rupiah strength Exchange Rates 12500 11500 10500 9500 8500 06 07 08 JPY/IDR Source: Reuters EcoWin 140 130 120 110 100 90 80 70 09 10 The Rupiah remains attractive on a fundamental basis. authorities will try to prevent any strong move. however. Indonesia remains very attractive to foreign investors. while allowing only a gradual strengthening vs. to continue with another 50bp in Q2 and a final 25bp in Q3. the IDR would continue appreciating if it were free to move stronger. With BI’s rates soon to rise.

Commodity Strategist + 1 403 299 8649 david. Vice President & Director.randall@tdsecurities.budkiewicz@tdsecurities. Vice President & Director. Managing Director. Chief Currency Strategist David Tulk. FX Strategist Mazen Issa.com richard.mulraine@tdsecurities. Rates Strategy Millan Mulraine.issa@tdsecurities.com Calgary David Bouckhout.com cristian.com millan. Currency & Fixed Income Research + 65 6500 8047 + 65 6500 8047 annette.com marcin.com Singapore Annette Beacher. Senior Global Strategist Cristian Maggio.TD Research & Strategy Toronto Andrew Spence. Senior Portfolio Strategist Ian Pollick.com shaun.com adnann. FX and Rates Strategy Roland Randall.com roland. Emerging Markets Strategist Marcin Budkiewicz.spence@tdsecurities.tulk@tdsecurities.com 85 . Portfolio Strategist Jacqui Douglas. Global Head of Research Shaun Osborne.com jacqueline. Senior Macro Strategist + 1 212 827 7156 + 1 212 827 7187 + 1 212 827 7186 eric.kelly@tdsecurities. Senior Macro Strategist Adnann Syed. Head of Asia-Pacific Research. Senior Strategist. European Head of Rates & FX Research Richard Kelly.pollick@tdsecurities. Director. Managing Director.com New York Eric Green. Chief US Rates Research & Strategy Richard Gilhooly.com mazen.com richard.com London Osman Wahid. Junior Strategist + 44 20 7786 8439 + 44 20 7786 8448 + 44 20 7786 8436 + 44 20 7786 8437 osman.wahid@tdsecurities. Canada Macro Strategist + 1 416 308 4600 + 1 416 983 2629 + 1 416 983 0445 + 1 416 982 3297 + 1 416 307 7184 + 1 416 982 7784 + 1 416 983 0859 andrew.beacher@tdsecurities.green@tdsecurities.bouckhout@tdsecurities.osborne@tdsecurities.syed@tdsecurities.douglas@tdsecurities.com david.gilhooly@tdsecurities.com ian.maggio@tdsecurities.

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