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March 2014
PLEASE REFER TO THE LAST PAGE FOR ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES.
CONTENTS
Overview
Tactical opportunities amid shifting winds ........................................................................... 3
Growth in EM remains generally weak and China faces formidable challenges. Yet we view
these as manageable and expect a continuing gradual adjustment, rather than an EM crisis.
We believe cheaper valuations, lighter positioning, higher EM policy rates and ongoing
external adjustments argue against treating EM assets as a clear short. While far from calling
for any broad-based recovery in EM assets, we do see a number of opportunities for tactical
long and short positions to take advantage of the varying economic and political prospects in
EM countries.
Trade summary .....................................................................................................................................23
EM credit portfolio ................................................................................................................................26
Macro Outlooks
Asia: Shaken, stirred but not disturbed................................................................................ 27
Weather disruptions have temporarily reversed north Asias export-led outperformance. But
we expect growth in north Asia to re-accelerate in Q2, and attention to refocus on shrinking
output gaps, which will renew expectations for rate normalisation especially for
economies more synchronised to the US. While external risks have turned the corner in the
south, political cycles in Indonesia and India, coupled with signs of drought in southeast
Asia, could constrain domestic demand.
Emerging Europe, Middle East and North Africa: Growth and inflation divergence ........ 32
Regional growth has divergent trends: Central Europe is accelerating, Russia and Turkey are
slowing and MENA is broadly stable. A divergence in inflation has also occurred: it is stuck
above targets in Russia and Turkey and is well below targets in Central Europe. C/A balances
are improving across the region. Russia-Ukraine tensions remain a major political risk.
Sub-Saharan Africa: Positive growth outlook despite challenges ..................................... 36
Sub-Saharan Africa is expected to continue to show strong economic growth, though the
regions large twin deficits are also gaining less positive attention. Its FX markets are on the
back foot, complicating the outlook for monetary policy. In the country section of this
Emerging Markets Quarterly, we provide more detailed views on six countries in Sub
Saharan Africa, namely Ghana, Kenya, Mozambique, Nigeria, South Africa, and Zambia. For
further coverage, please also see the recently published Africa Markets Guide 2014, with
coverage of 20 economies across the continent.
Latin America: The productivity challenge .......................................................................... 41
With the exception of Venezuela and Mexico, growth expectations are gradually stabilizing
in LatAm. As the region enters a period of slower growth, the challenge for policymakers is
how to compensate for lower terms of trade, which should start to erode domestic demand.
We believe the new wave of growth will come through productivity enhancing reforms, and
Mexico is taking the lead.
EM political heat map...........................................................................................................................45
25 March 2014
Country Outlooks
Emerging Asia
China: Growth recovery in a volatile market ....................................................................................48
Hong Kong: Burgeoning credit exposure to mainland China .......................................................52
India: All eyes on elections ..................................................................................................................55
Indonesia: The Jokowi effect ...............................................................................................................59
Korea: Regaining vitality ......................................................................................................................63
Malaysia: Biased to raise rates ............................................................................................................67
Philippines: BSP getting ready to pull the trigger ............................................................................71
Singapore: A tale of two halves ..........................................................................................................75
Taiwan: Still in growth support mode ...............................................................................................79
Thailand: Uncertainty set to continue ...............................................................................................83
Emerging Europe, Middle East and Africa
Egypt: Realism takes hold....................................................................................................................87
Ghana: Testing the boundaries ......................................................................................................91
Gulf States: Trouble within ..................................................................................................................95
Hungary: Recovery boosts Fidesz ......................................................................................................99
Iraq: Politics delay 2014 budget law ............................................................................................... 103
Kenya: Making headway despite challenges................................................................................. 107
Lebanon: With or without you......................................................................................................... 110
Morocco: Challenges resurface as growth slows......................................................................... 114
Mozambique: Fiscal gap set to widen ............................................................................................ 118
Nigeria: Undermined by uncertainties............................................................................................ 121
Poland: Smooth sailing ..................................................................................................................... 125
Romania: On track as political noise intensifies ........................................................................... 129
Russia: Vulnerable giant ................................................................................................................... 132
South Africa: Challenging year ahead ............................................................................................ 137
Turkey: In search of a new equilibrium.......................................................................................... 142
Ukraine: Tighten your belts .............................................................................................................. 146
Zambia: Copper price jitters likely to be short lived..................................................................... 152
Latin America
Argentina: A heterodox stabilization plan ..................................................................................... 154
Brazil: Looking more like a glass half-full....................................................................................... 159
Central America and the Caribbean: New governments, same challenges............................. 163
Chile: Curb your pessimism ............................................................................................................. 167
Colombia: Re-election and recovery on track............................................................................... 172
Mexico: The long and winding road to faster growth ................................................................. 176
Peru: Keep an eye on inflation ......................................................................................................... 180
Uruguay: BCU to refocus on inflation; uneventful primaries ............................................................ 183
Venezuela: Survival instinct or structural change ........................................................................ 186
Overview of key economic and financial indicators .................................................................... 190
Global forecasts (1): GDP and inflation ......................................................................................... 191
Global forecasts (2): External and government balances........................................................... 192
Official interest rates and forecasts ................................................................................................ 193
FX forecasts and forwards ............................................................................................................... 194
25 March 2014
OVERVIEW
Growth in EM remains generally weak and China faces formidable challenges. Yet we view
these as manageable and expect a continuing gradual adjustment, rather than an EM crisis.
We believe cheaper valuations, lighter positioning, higher EM policy rates and ongoing
external adjustments argue against treating EM assets as a clear short. While far from calling
for any broad-based recovery in EM assets, we do see a number of opportunities for tactical
long and short positions to take advantage of the varying economic and political prospects in
EM countries.
FX: Go long high-yielding currencies where C/A adjustments are advanced, growth
momentum has stabilized, and policy credibility has improved (INR, BRL and IDR). Remain
cautious where adjustment is slow and political risk high (short ZAR, TRY and RUB).
Rates: Buy bonds of our favoured high yielders, picking spots where risk premia are
highest relative to policy rate expectations (5y India, 10y Indonesia and 3y Brazil). Pay
rates where growth is picking up and inflation or premia are low (Poland and Korea).
Credit: Rotate from Russia into Brazil and Indonesia in sovereign and corporate credit.
We see opportunities in high-yielding LatAm corporate credits in particular. We remain
positive on Venezuela, which we express in a relative value trade recommendation
against Ukraine. In China, we prefer core versus non-core SOEs.
EM assets had a difficult start to the year. Although the earlier-than-expected Fed tapering
in December had a relatively benign impact on the US Treasury market, EM assets sold off in
the correlated manner typical of risk-off periods. Investor concerns about EM shifted from
tapering effects to weakness in China data. Deterioration in EM sentiment was further
exacerbated by continuing negative headlines from various EM markets, particularly in
EEMEA, related to political tensions and event risk. This initially went against our
differentiation theme for 2014, which we had set out in early December (Emerging
Markets Quarterly: Differentiation continues, 10 December 2013).
FIGURE 1
EM assets had a tough start, but have improved since February
Total returns index
EM LC bonds
25 March 2014
Increasing
differentiation in 2014
FIGURE 2
EEMEA has suffered, largely on (geo)political events
3
2
1
0
-1
-2
-3
-4
Dec-13
Feb-14
EM HC bonds
Credit
Local bonds
EEMEA
LatAm
FX
EM Asia
This has since changed, however. EM asset performance has improved since February and
correlation has dropped, creating a better backdrop for differentiation in asset performance.
The three developments we highlighted as crucial for EM asset performance in 2014 remain
the same: 1) Fed policy for capital flows; 2) global recovery to support the EM
adjustment process; and 3) China growth for commodity prices and general EM
sentiment. However, the order has reversed: since December, markets have grown much
more concerned about China and less concerned about Fed tapering.
US Treasury market conditions have been more supportive for EM than many anticipated
(10yr UST yields have averaged 2.77%YTD), and growth data out of the euro area have
remained encouraging. In contrast, in China, growth indicators have disappointed while signs
of stress in the financial system have increased. This has triggered sharp falls in Chinasensitive commodity prices, raising concerns about growth in EM more generally and leading
to further capital outflows from EM. Thus, developments in China have taken centre stage.
At the same time, EM economies have continued to adjust as a consequence of depreciated
currencies and higher interest rates. Growth should remain slow, as increased net export
contributions cannot offset the slowdown in domestic demand. External imbalances are
adjusting as a result, albeit with different speeds. Importantly, these economic developments
are overlaid with elevated political risks in many EM countries, as important elections
approach and/or parts of the population voice their dissatisfaction with existing regimes.
Amid this macroeconomic and political diversity, we believe differentiation should take hold
albeit with different themes than a few months ago. Cheaper valuations, lighter foreign
positioning and higher EM policy rates weigh against seeing EM assets as a clear short, in our
view. Although we are far from calling a broad-based recovery in EM assets, we see a number
of opportunities for tactical long and short positions to take advantage of the changing
economic and political prospects among EM countries. Before we discuss these, we explain
what we consider the key macro drivers of our strategy view.
The global growth recovery remains broadly intact, and our forecast for global growth to
accelerate modestly to 3.4% in 2014 is unchanged. However, growth performance in the G3
economies has been uneven, and we have made further downward growth revisions to a
number of EM economies. US growth data for Q4 2013 were stronger than we expected,
suggesting somewhat better momentum for growth going into 2014. Although weather
FIGURE 3
Outflows have continued
40
FIGURE 4
despite a supportive US Treasury market backdrop
USD bn
%
3.5
30
20
1.0
3.0
10
0
0.5
2.5
0.0
-10
-20
2.0
-30
1.5
-0.5
Equity
LC Bonds
Source: EPFR global, Barclays Research
25 March 2014
HC Bonds
BC Bonds
Feb-14
Dec-13
Oct-13
Aug-13
Jun-13
Apr-13
Feb-13
Dec-12
Oct-12
Aug-12
Jun-12
Apr-12
Feb-12
-40
1.0
Aug-11
-1.0
Feb-12
Aug-12
UST 10y
Correl. to EM credit, RHS
Feb-13
Aug-13
Feb-14
FIGURE 5
Barclays growth, inflation and current account forecasts
Real GDP
Inflation
Current account
(% annual change)
(% annual change)
(% GDP)
Barclays
Barclays
Barclays
vs. consensus
2014
2014
2012
2013
2014
2015
2015
2015
2012
2013
2014
2015
2012
2013
2014
2015
Global
3.1
2.9
3.4
3.8
0.0
0.0
-0.1
-0.1
2.8
2.6
3.0
3.1
-0.1
0.0
0.3
0.3
US
2.8
1.9
2.7
2.6
0.3
0.0
-0.1
-0.5
2.1
1.5
1.8
2.1
-2.7
-2.3
-2.0
-2.0
Japan
1.4
1.5
1.0
1.2
-0.5
-0.1
-0.4
-0.1
-0.1
0.4
2.8
2.3
1.0
0.7
0.1
0.3
Euro area
-0.6
-0.4
1.3
1.5
0.2
0.1
0.2
0.1
2.5
1.4
0.9
1.1
1.4
1.7
2.5
2.4
Advanced
1.4
1.2
2.1
2.1
0.1
0.0
0.0
-0.2
1.9
1.3
1.6
1.8
-0.6
-0.3
0.0
-0.1
Emerging
5.0
4.8
4.7
5.4
-0.2
0.1
-0.1
0.0
4.6
4.9
5.4
5.3
0.7
0.5
0.8
0.9
Brazil
1.0
2.3
1.9
2.4
0.1
-0.2
0.1
0.3
5.4
6.2
5.9
5.9
-2.4
-3.7
-3.3
-2.5
Mexico
3.9
1.1
3.0
3.8
-0.7
0.0
0.0
-0.2
4.1
3.8
3.8
3.7
-1.2
-1.8
-2.7
-2.2
China
7.7
7.7
7.2
7.4
0.0
0.0
-0.2
0.1
2.6
2.6
2.7
3.5
2.3
2.0
1.9
2.0
India
6.7
4.5
4.7
5.6
0.0
0.0
-0.7
-1.2
9.0
7.4
5.9
5.4
-4.2
-4.8
-2.1
-2.5
S. Korea
2.0
2.8
4.1
4.2
-0.1
0.0
0.6
0.5
2.2
1.3
2.0
2.3
4.3
5.9
4.9
4.4
Indonesia
6.3
5.8
5.3
5.6
0.3
0.4
-0.1
-0.2
4.0
6.4
6.2
5.3
-2.8
-3.3
-2.5
-1.9
Poland
2.1
1.6
3.1
3.5
0.2
0.0
0.1
0.0
3.6
1.0
1.1
2.0
-3.5
-1.3
-1.2
-1.1
Russia
3.4
1.3
0.7
1.4
-1.9
-0.7
-0.6
-0.7
5.1
6.8
6.7
5.7
3.6
1.5
2.7
3.9
Turkey
2.2
3.9
2.2
3.5
-1.1
-0.7
0.0
-0.3
8.9
7.5
8.1
6.9
-6.2
-7.8
-5.7
-6.0
S. Africa
2.5
1.9
2.2
2.8
-0.5
-0.4
-0.4
-0.5
5.7
5.8
6.4
6.0
-5.2
-5.8
-5.8
-5.3
Note: 1. Consensus forecasts are as of March 2014 for G10 and EM Asia countries, as of February for LatAm and EEMEA countries. 2. Both Barclays and consensus
forecasts for India are for FY. WPI is reported for India. Source: Consensus Economics, Barclays Research
FIGURE 6
Gap between DM and EM momentum has widened further
56
EM Asia
56
LatAm
EEMEA
54
54
52
52
50
50
48
48
25 March 2014
EM
2013-Dec
2014-Jan
Mexico
Brazil
Poland
Turkey
Feb-14
S. Africa
Global
Feb-13
Russia
Feb-12
Indonesia
Feb-11
S. Korea
46
India
46
Feb-10
China
58
FIGURE 7
mainly driven by weakness in China, Russia and Brazil
2014-Feb
In contrast, we have lowered our aggregate forecast for EM economies further, to 4.7% (from
5.0%). In Latin America, Mexico was the main downward revision (to 3%), as disappointing
Q4 data suggested slower momentum going into 2014 than we had expected. Turmoil in
Venezuela now makes us forecast a GDP contraction there. Most recent indicators from Brazil
suggest some stabilization and we have left our already weak forecast (1.9%) unchanged. The
main revisions were in EEMEA, where growth momentum continues to diverge: while the
smaller, open CE economies continue to recover along with the euro area, the outlook for
Russia, Turkey and South Africa has deteriorated since the last EMQ. We slashed our Russia
forecast on the back of disappointing data even before its involvement in the Ukraine crisis.
Economic sanctions by the West could drive Russia into recession. In Turkey, increased
domestic tensions since our last forecast in early December have hurt confidence, which,
along with sharp emergency interest rate hikes should weaken growth significantly. South
Africa continues to be burdened by political and labour tensions and weak commodity prices.
Growth performance in EM Asia (ex-China) has been somewhat better than expected: the
manufacturing exports-oriented economies (Korea, Taiwan) have continued to do well, as
expected. At the same time, some of the economies hitherto considered more fragile, such
as Indonesia and India, have performed slightly better than expected, allowing for modest
upward revisions. However, weak growth indicators from China cast a shadow over the
regional outlook and, indeed, over the global economy. Although we have left our 7.2%
annual growth forecast for China unchanged, a likely very weak Q1 growth number could
add risk to this forecast (see below).
Fed policy remains crucial for the outlook for capital flows into EM. Although the Feds
tapering started earlier than expected, the accompanying communication has helped to
keep 10y yields anchored and the yield curve steep. Our reading of Fed communication,
combined with our forecasts of a moderate growth recovery and rising core inflation
(mainly in H2), suggests to us a steady pace of tapering (with a final $15bn taper in October
2014) and a first rate hike in June 2015. The key risk to this forecast could be a strongerthan-expected US recovery, accompanied by rising inflation in H2. In such an event, the
Treasury curve could adjust more abruptly we already forecast 10y yields to reach 3.5%
by end-2014 likely putting EM markets under renewed pressure.
In contrast, the BoJ and ECB are more likely to ease. We expect the BoJ to lower its GDP and CPI
forecasts in its semi-annual Outlook Report at end-April and to ease policy further at its mid-
FIGURE 8
Chinas slowdown raises questions about CNY appreciation
135
130
1.2
560
1.1
540
1.0
125
0.9
120
0.8
0.7
115
110
Feb-11
Feb-12
Feb-13
Feb-14
25 March 2014
FIGURE 9
and has created fear in China-sensitive commodity markets
520
500
480
0.6
460
0.5
440
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Uncertainty about China has become a major risk to the global recovery. Weak activity data
since December, coupled with the countrys first onshore bond default and CNY weakness,
have raised new fears of a hard landing in China. With IP and fixed asset investment
momentum notably lower, property investment and starts down, and retail sales growing at
their slowest pace in nine years, we estimate that Chinas economy slowed sharply at the start
of 2014, to a sequential pace of c.5%, compared with our earlier estimate of 6.6%. At the recent
National Peoples Congress, the government set its annual 2014 growth target at around
7.5%, which would require a significant uptick in sequential growth for the rest of the year.
We still believe that the Chinese authorities have the means and the will to implement policies
to buttress growth in coming quarters. However, in contrast to 2009, todays total public and
private debt ratio of over 200% (compared with 135% at end-2008) limits the scope to do this
via credit-financed investment. Indeed, allowing selective defaults in onshore corporate bonds
and trust products signals policymakers determination to deal with moral hazard and
excesses in domestic credit markets. Policy responses will thus have to strike a balance
between supporting growth without further fuelling imbalances (eg, a property price bubble).
FIGURE 10
Where domestic credit growth was high, it is now slowing
2.5%
m/m,
6mma
FIGURE 11
External deficits are adjusting, albeit at different speeds
(trade balance, seasonally adjusted)
USD bn
2.0%
USD bn
-6
-8
-10
1.5%
-12
1
25 March 2014
BRL
INR, RHS
IDR
TRY, RHS
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jul-13
Jan-14
SA
Turkey
Jan-12
Jan-13
Brazil
Russia
-18
Oct-11
Jul-12
India
Indo
-1
Jul-11
0.0%
Jan-12
-16
Apr-11
0.5%
-14
Jan-11
1.0%
ZAR
Since the prospect of Fed tapering emerged in May 2013, EMs with C/A deficits and large
external financing needs have been under particular pressure. They have experienced the
sharpest currency depreciation, creating pass-through into inflation and pressure on FXleveraged balance sheets. Some central banks reacted early with decisive policy adjustments
(India); others tried to delay but were ultimately forced by markets into hikes (Turkey). The
necessary external adjustments also occurred at different speeds, depending on the extent of
real effective exchange rate adjustments and on the momentum of domestic credit markets
and the composition of export and imports in specific countries.
Narrowing of external
deficits
Indias C/A adjusted rapidly due to an administrative measure that curbed gold imports, but
also on a surge in its goods and service exports. Indonesias C/A deficit also narrowed
significantly in Q4, helped by the front-loading of mineral ore exports ahead of the January
ban, but also by increased manufacturing exports, especially to the US and Japan. In Turkey
and South Africa the deficits remained stubbornly high, but have more recently shown signs
of adjustment. We expect this to continue in Turkey in coming months as imports slow
further and exports to Europe pick up. In contrast, South Africas need for infrastructurerelated imports, and its commodity-heavy exports, also affected by supply-side disruptions,
seem set to stand in the way of a more pronounced adjustment. The C/A in Brazil is
expected to show more adjustment in Q2, as import demand slows further.
rapidly in India
some in Indonesia
less in Turkey and South
Africa thus far
FIGURE 12
Inflation has converged and we see it staying relatively tame
6%
5%
4%
3%
2%
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
EM Asia
25 March 2014
EEMEA
FIGURE 13
If sustained, the recent rise in agricultural prices could pose
a risk
90%
% y/y
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
WB EM Food index
Overall, we expect this adjustment process through slower growth and weaker currencies to
continue, avoiding the EM crisis that some observers fear. Most monetary policy rate
adjustments are probably over the hikes in the C/A deficit countries as well as the significant
cuts in Central Europe, where low inflation had kept real rates high. We expect South Africa
and Russia to hike further this year. Both started tightening late and their real rates are low and
their currencies remain vulnerable. We expect a final 25bp hike from Brazil in April and then a
pause until more hikes in 2015. Turkey will likely try to avoid additional hikes, but could be
forced by the market in case of political turmoil and higher-than-expected inflation.
One risk to our relatively benign inflation outlook for EM in general could be the recent surge in
global agricultural prices. Food has a larger share in EM CPI baskets, which implies large
exposure to global food prices as well as potentially poor local harvests due to many extreme
weather conditions this winter. However, other non-agricultural commodity prices have
behaved more favourably and global trends seem to support a moderate inflation outlook.
A bigger risk to our view of a continuing gradual EM adjustment is a hard landing in China,
possibly combined with a faster-than-expected secular increase in US inflation in H2. Such a
combination would result in falling global trade, particularly of key EM commodity exports,
and turn capital flows away from EMs. This could more seriously derail the EM adjustment
process, including by forcing central banks into additional interest rate hikes in response to
capital outflows and currency pressures.
FIGURE 14
Currencies and interest rates adjusted in real terms
%, chg.
FIGURE 15
Policy rates were hiked where needed, we expect little more
bps, chg.
-18
600
-16
-14
-12
-10
-8
-6
-2
0
400
100
300
-100
0
BRL
INR
IDR
25 March 2014
ZAR
TRY
REER (% chg.)
400
300
100
500
500
200
-4
600
200
0
-200
-300
Turkey
Brazil
Indonesia
Russia
India
S.Africa
Malaysia
Philippines
China
Czech R
Colombia
Korea
Peru
Thailand
Israel
Chile
Mexico
Egypt
Poland
Romania
Hungary
Remainder of 2014F
In South Africa, the latest opinion poll from IPSOS suggests another clear African National
Congress victory (at the national level) in the 7 May election, despite an intensification of
protests over poor service delivery and slow socio-economic transformation. The elections
in Brazil are not gaining much attention yet, as the focus is firmly on the World Cup soccer
tournament, to be hosted by Brazil in June. However, protests last summer suggest that this
could change once the games are over and elections approach. In other countries, domestic
tensions have flared without any elections scheduled. Venezuela and Thailand have
continued to experience mass public protests and unrest that have affected economic
management and led to further deterioration in economic conditions.
More worrying from a global perspective, Russias involvement in Crimea has significantly
complicated Ukraines situation and initiated geopolitical tensions that could create
repercussions well beyond the two countries. We believe that even without an escalation of
sanctions, the already weak Russian economy will be hurt by the adverse confidence effects
already visible in recent weeks. If sanctions were to seriously disrupt trade flows between the
West and Russia, possibly even including Europes gas imports from Russia, this could not only
drive Russia into recession but also create risk for the euro areas still fragile recovery.
Geopolitical events are difficult to trade from an investor perspective, but they cannot be
ignored, as the sell-offs in Russia-related assets, including the DAX, have shown. We
caution against assuming that the tension between the West and Russia will blow over
quickly. We think the recent history of such events (eg, the Georgia conflict in 2008) may
not be the best guide, as the conflict in Ukraine has already become more complex and the
risk of escalation is higher.
Two key concerns and their impact on flows: China and Russia
We see two main sources of concern for investors currently, which could have contagion effects for other EM markets: the growth slowdown
in China; and the political tensions between Russia and the West (over Ukraine/Crimea). Both are important given the size of the Chinese and
Russian economies and the size of their markets in global portfolios. Therefore, fundamental developments in both and changes in perceived
riskiness in equities and bonds of these markets could have a significant spillover effect on other EMs.
However, the type of the spillover/contagion is likely to vary. We view the slowdown in China as temporary, although until there is clarity on
the countercyclical measures used to address this slowdown, investors may be nervous about the impact of the slowdown on both Asian
economies and commodity-producing economies. This contagion may weigh particularly on equity markets where foreign investors have a
heavy exposure. The Korean and Brazilian equity markets are probably at the apex of these concerns and may be most vulnerable to
contagion effects, in our view. Conversely, a China recovery into the remainder of the year (as per our baseline scenario) could lead to equity
inflows to these markets.
The spillover from political tension between Russia and the West likely works through a different avenue in terms of flows. The tensions are
likely to hurt Russian growth and Russian markets. But the economic spillover to other markets else may be limited apart from Baltic states
and some central European economies. If we do not face a scenario of generally elevated oil prices (because of these tensions), then the
problems that weigh on Russian markets might actually support other benchmark EM bond markets. We may see a re-allocation out of
Russian equities and bonds into other EM benchmarks. We have already seen some anecdotal evidence of this in both local and hard
currency bonds.
25 March 2014
10
FIGURE 16
Institutional investors are holding onto EM bond funds
70
FIGURE 17
but appear to be losing confidence in EM equity funds
200
60
150
50
40
100
30
50
20
10
0
-10
Jan-09
Jan-10
Jan-12
Jan-11
Bond inst.
Jan-13
-50
Jan-09
Jan-14
Jan-10
Jan-11
Jan-12
Equity inst.
Bond retl.
Jan-13
Jan-14
Equity retl.
FIGURE 18
Investor concern heightened over Chinese growth
FIGURE 19
Value of total foreign equity holdings higher in non-Asian
markets, with the exception of Korea
2008
FIGURE 20
EM local bonds enjoying better total foreign inflows
FIGURE 21
which may be more evenly distributed among the high
yielders, avoiding Russia for now
USD mn
USD bn
20,000
140
15,000
120
Hungary
Poland
Turkey
Malaysia
SA
Latest
Thailand
India
Russia
Brazil
Korea
Sep-13
Mar-14
Sep-12
Mar-13
Mar-12
400
350
300
250
200
150
100
50
0
Indonesia
Sep-11
Sep-10
Mar-11
Sep-09
Mar-10
Sep-08
Mar-09
Sep-07
Mar-08
Sep-06
Mar-07
100
10,000
80
5,000
60
40
20
Pol
Bra
*Not available for Brazil and Poland. ** Not available for Brazil, Poland, Mexico.
Source: National Statistics Sources, Barclays Research
25 March 2014
Latest
Thailand
SA
Russia
Turkey
Korea
Poland
Brazil
Mexico
Mar-14**
Feb-14*
Jan-14
Tur
Hungary
SA
Dec-13
Nov-13
Oct-13
Sep-13
Indo
Indonesia
Hun
Malaysia
Mex
Aug-13
Jul-13
-5,000
India
Mar-06
USD bn
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
Mexico
USD bn
Index
60
58
56
54
52
50
48
46
44
42
40
2008
11
FIGURE 22
Barclays global survey shows that investors still keen to buy
equities *
50%
40%
FIGURE 23
particularly in the US and the euro area
40%
30%
30%
20%
20%
10%
0%
10%
Commodities
Credit
Emerging
Markets
Equities
Short-end,
Long-end,
high-quality high-quality
0%
Europe
US
Europe exUK
UK
Japan
FIGURE 24
Investors are nervous over developments in China
FIGURE 25
and attitudes towards the CNY have changed
35%
30%
40%
30%
25%
20%
20%
15%
10%
5%
0%
10%
Worsening
Fed
euro
stimulus
tensions reduction
DeWeak
DM
Geoanchoring growth
growth
political
inflation
in China deterioration develop
expectations
/EM
ments
Other
0%
Tolerate strength
again to allow
rebalancing
FIGURE 26
Investors relaxed about Russia/Ukraine political risks
FIGURE 27
Some expectations for a more reflationary global backdrop
60%
40%
50%
30%
40%
30%
20%
20%
10%
10%
0%
25 March 2014
0%
Gold / precious
metals
Base metals
Agricultural
commodities
12
FIGURE 28
Heat map of EM fundamental vulnerabilities to a sudden stop in capital flows
Macro and financial (im)balances
External balance
Chg. in ext.
debt since
FX reserves /
2007 (% GDP) ext. debt (%)
Foreign holding
of local bonds
(%)
FX reserves/
foreign holdings
of local bonds
Fiscal balance
Primary
balance (%
GDP)
Govt.
debt (%
GDP)
C/A + FDI
(% GDP)
External
debt (%
GDP)
2013F
2013F
2013F
2013F
>2, <-3
<30, >65
<1, >10
>100, <50
<20 >30
>-1, <-3
<40, >60
<0, >10
<3, >18
Turkey
-6.7
46
12
30
27
Russia
1.2
34
70
24
219
0.9
35
-5
1734
-0.2
10
S. Africa
-5.0
38
13
30
33
117
Poland
-1.3
68
13
28
34
150
-0.9
46
-1.7
58
Hungary
4.4
114
11
25
46
187
1.4
81
Romania
0.7
68
18
34
24
562
-0.7
39
27
114
-1
Ukraine
-6.5
81
25
14
3819
-2.3
42
29
171
24
Last
Banking
LTD ratio
(%)
Monetary policy
Ratings
Chg. in LTD
since 2007
(%)
Inflation,
3m avg.
(y/y %)
Real
Rating better or
policy
worse since
rates (%)
Jan 2007
Outlook by
Moodys, S&P
and Fitch
<80, >100
<0, >19
<3.5, >9
>2, <0.5
23
109
31
7.7
1.1
Better
S/N/S
15
120
-2
6.3
0.8
Worse
S/N/N
18
-6
96
5.7
-0.4
Worse
N/N/S
13
14
110
12
0.6
1.8
Unchanged
S/S/S
14
-11
109
-21
0.2
2.6
Worse
N/N/S
1.2
2.5
Unchanged
N/P/S
0.7
5.3
Worse
N/N/N
Last
Heat Map
criteria
>300, <150
Pos, Neg
EEMEA
Nigeria
9.2
0.9
522
15
611
-1.6
20
13
57
-15
7.9
4.1
Unchanged
S/-/S
Ghana
-5.7
27
13
51
23
193
-4.8
55
25
67
-18
13.8
4.0
Worse
N/N/S
Serbia
-2.3
83
31
54
n/a
n/a
-2.3
64
29
21
126
25
2.6
6.9
Unchanged
S/N/S
EEMEA avg.*
-0.9
44.3
8.6
75
25
-0.4
29
13
112
5.4
1.4
India
-2.0
24
62
1704
-3.8
64
-2
116
8.2
0.8
Unchanged
S/N/S
Korea
4.0
34
79
15
591
0.5
37
64
-3
1.1
1.5
Better
S/S/S
Taiwan
8.7
29
286
n/a
n/a
-3.2
37
13
60
-5
0.4
1.9
Unchanged
S/S/S
Indonesia
-1.4
30
34
34
269
-0.8
30
-9
11
94
25
8.0
-0.3
Better
S/S/S
Philippines
3.5
22
-11
128
n/a
n/a
0.6
54
-4
82
-6
4.1
-0.6
Better
P/S/S
Thailand
-1.2
36
123
18
833
-2.2
47
32
111
16
1.9
0.0
Unchanged
S/S/S
Malaysia
2.5
37
123
30
280
-1.7
55
17
29
81
3.4
-0.5
Unchanged
P/S/N
n/a
3.8
108
22
70
106
32
1.1
-0.3
Unchanged
S/S/S
-1.6
51
13.9
92.7
4.8
0.6
Asia
Singapore
29.2
418
-77
22
n/a
Asia avg.*
2.3
48.5
-0.3
89
12
LatAm
Brazil
-0.8
14
117
15
320
1.9
68
21
134
28
5.7
5.1
Better
S/S/S
Mexico
0.2
30
11
47
37
123
-0.4
38
131
-10
4.2
-0.7
Better
S/S/S
Chile
1.0
45
14
34
118
-0.5
13
120
3.1
0.8
Better
S/S/S
Peru
-0.4
31
0.4
98
57
11
1.5
21
-8
100
3.2
0.2
Better
P/S/S
P/S/S
Colombia
0.1
23
51
910
0.7
32
90
-6
2.1
0.9
Better
Argentina
-0.9
29
-18
21
50
-2.2
43
-12
90
61
33
-13.6
Worse
S/N/N
Venezuela
5.4
47
27
21
n/a
n/a
-10.7
70
37
49
-9
56.5
n/a
Worse
P/S/S
LatAm avg.*
0.0
24.1
5.7
76
23
0.0
52
12.5
118.9
15
10.4
1.0
EM avg.*
0.6
39.1
4.4
80
20
-0.7
44
13.1
107.3
6.9
1.0
Note: Rating is median/composite rating of Moodys/Fitch/S&P. * Reflects liabilities of the financial sector. Source: National statistics offices, Barclays Research
25 March 2014
13
Koon Chow
koon.chow@barclays.com
Durukal Gun
durukal.gun@barclays.com
Mike Keenan
mike.keenan@barclays.com
Hamish Pepper
hamish.pepper@barclays.com
The soft patch in US data meant that the USD was kept in a range against the EUR. We see
more upside potential in the USD later this year, but a range trading environment in Q2
versus the EUR would be broadly helpful for EM FX, in our view. The stability of US dollar
and US rates could pull investors into carry trades in EM, where yields are high or, at the
very least, make investors more reluctant to short those currencies.
The attractive FX valuations in some places have been carried forward. Our BEER valuation
models show only a handful of currencies remain overvalued, including the RUB, CNY and
HUF. In the alternative FEER estimates (Figure 30), only the TRY appears (moderately)
overvalued. This provides a helpful backdrop for currencies, particularly where a
fundamental inflection point has been passed and where yields are high.
On a negative note, the growth trends in some of the major EM economies has been
disappointing in Q1 (including China). Moreover, our expectation that stronger global
manufacturing would pull up EM manufacturing activity has not generally played out. In the
December Emerging Markets Quarterly, we wrote that we anticipated the manufacturing
sector in Poland, Mexico, Korea and India to do particularly well. We thought this would
filter through to exports, manufacturing data and overall GDP growth and would indirectly
provide support for these countries currencies by attracting equity portfolio inflows.
The reality was that there was no marked pick-up in activity in these countries in the first
quarter (Korean IP disappointed), and their equities markets continued to slide with no
obvious increase in foreign appetite (a simple average of the Polish, Mexican, Korean and
FIGURE 29
1.9% YTD drop in GEMS masks divergent performance
FIGURE 30
EM currencies, with few exceptions, are general cheap
% Misval.
% chg.*
8
20
10
2
0
-10
-2
-20
-4
-30
-6
25 March 2014
BEER misval.
RUB
HUF
CNY
TRY
PLN
BRL
THB
MXN
MYR
KRW
IDR
INR
THB
BRL
MYR
CZK
SGD
MXN
Q4 2013
IDR
ZAR
YTD
KRW
TWD
PLN
CNY
TRY
ZAR
HUF
RUB
-10
INR
-40
-8
14
Buy INR, BRL and IDR. We recommend being long the high-yielding currencies where
the macroeconomic rebalancing (the narrowing of the C/A deficit) is advanced and the
central bank has taken steps to prevent an overshoot depreciation that could otherwise
be triggered by FX hedging demand or worsening inflation. We recommend being long
INR, BRL and IDR, all of which appear to have passed an inflection point on the C/A and
have high yields. They have the added positives of receding political risk (India and
Indonesia) and a backdrop of central bank steps that have made FX hedging by
corporates less expensive (persistent, albeit a lower pace of swaps intervention in Brazil
and an improvement in the NDF fixing protocol in Indonesia). We believe the blend of
currency valuations and high rates risk premia is particularly persuasive on Brazil where
the real risk premia provides more than 430bps pa of compensation against the risk of
real depreciation for the next 10 years. We expect most of the returns on INR, BRL and
IDR to be from carry as the central banks in these countries are likely to use further spot
appreciation to rebuild FX reserves.
Short RUB, ZAR and TRY. Investors should be defensive on currencies where political
fallout could still be significant. Chief here, in our view, is the RUB, where the
developments in Ukraine/Crimea have increased the external cost of funding for Russia,
potentially weighing on growth and leading to more private capital outflows. We
recommend being short RUB. We continue to recommend being short TRY and ZAR,
and view the political risks for these markets to be on a lower scale compared to
Russia, although they are unlikely to ease this side of the local elections in Turkey (30
March) and the general elections in South Africa (7 May). Turkey is starting to see its
C/A deficit narrow, unlike South Africa. We think the adjustment is likely to come at an
uncertain price on growth and inflation, which could weigh on both currencies.
FIGURE 31
Manufacturing currencies have stopped outperforming
110
FIGURE 32
Brazil offers greatest real and nominal FX premium
FX misvaluation versus real rates
20%
105
10%
100
0%
-10%
95
-20%
90
-30%
85
Mar-13
-40%
Jun-13
Sep-13
Dec-13
Mar-14
25 March 2014
SA
Russia*
India
FX misvaluation (BEER)
10y real rates
Brazil
*We assume real rates based on long-term inflation. ** 10y linker CDS US
TIIPs. Source: Bloomberg, Barclays Research
15
Position for more volatility in EM Asian currencies but not necessarily a turn in trend.
The PBoC announced that effective from 17 March it would widen the trading band on
USDCNY to +/-2% from +/-1%. This is similar to April-July 2012, when a similar
widening of the fluctuation band together with a backdrop of China cyclical weakness
contributed to CNY depreciation and some contagion to other Asian currencies. There
may be some repeat of this in the coming month/quarter, with CNY weakness (we look
for 6.20 in one month versus USD) as well as heightened volatility on CNY. There is a
possibility of this spilling over to EM Asian currencies; the THB, KRW, MYR were the
most affected in April-July 2012. We do not anticipate a change in the CNY trend we
still expect gradual medium-term appreciation but warn of temporary contagion.
FIGURE 33
RUB: Intense capital outflows even before political risks
increased
USD bn
Large
outflows/mixed
intervention
20
15
10
5
0
-5
-10
-15
-20
FIGURE 34
CNY: Similar to 2012, when band widened during a slow
cyclical period and renminbi fell
Large outflows/
rising FX-sales
intervention
6.50
6.45
6.40
Band widening
to 2%
6.35
6.30
6.25
6.20
6.15
FX intervention
Source: CBR, Barclays Research
25 March 2014
Feb-14
Aug-13
Feb-13
Aug-12
Feb-12
Aug-11
Feb-11
Aug-10
Feb-10
Aug-09
Feb-09
6.10
Band widening to
1% in April 2012
6.05
6.00
Sep-11
Mar-12
Sep-12
USD/CNY spot
Lower trading bound
Mar-13
Sep-13
Mar-14
USD/CNY fixing
Upper trading bound
16
The key theme in EM rates in Q1 was an increased differentiation. In Q1, the Barclays EM
local index returned 0.15% at the index level, compared to -0.23% in Q4 2013. FX
contributed -0.16%, while carry and yield compression added a further 0.3%. Although the
broad returns are flat YTD, the performance distribution has a high dispersion, particularly
within vulnerable countries with large current account deficits (India, Indonesia, Turkey,
South Africa, and Brazil).
USTs stabilization, policy actions, and nascent signs of turnaround in current account
deficits. A number of developments have enabled this to happen, and we think it will have a
lasting impact in continuing to facilitate differentiation. UST yields have corrected lower and
have been broadly range trading since January. This, in conjunction with lower cross asset
market volatility, has put investor focus squarely on idiosyncratic EM issues and
developments. There have also been a number of monetary policy shocks, with large
interest rate hikes in Turkey (550bps for the repo rate on 28 January), Russia (150bps on 3
March), and a surprise hike in South Africa (50bps on 29 January). Current account deficit
countries appear to have reached an inflection point in their deficits, in our view, so that
even with the continuing paucity of portfolio capital outflows, the pressures on currencies
and monetary policy is reduced.
We look for range trading in US Treasuries and then re-trending higher in H2. As we break
into new higher territory, we may see the sensitivity of EM yields to the US increase again.
Our baseline scenario is still for 10y UST yields to end the year at 3.50% from the current
2.80%, as the tightening labour market in the US and a re-acceleration of growth from the
recent spell of cold weather pushes up core inflation and leads to a re-pricing of US rates.
For now, however, we think there is some breathing space.
We recommend positioning in EM rates along the lines of a number of key themes, some of
which we expect to have a longer shelf life than others:
We recommend longs (Brazil, India and Indo.) where there are generous rates premia
and where the current account adjustments could be a catalyst for a re-assessment
by investors. Our favoured candidates are the Brazil 3y, the India 5y and Indonesia 10y
nominal bonds. Among the current account deficit countries, we believe these three
have the best combination of factors to pull down yields and to stabilize the exchange
rates. Brazil, India and Indonesia (alongside Turkey and South Africa) have suffered
FIGURE 35
Differentiation trend intensified in EM local currency
bonds
9.0%
8.0%
7.0%
FIGURE 36
particularly among the vulnerable EM countries
YTD returns
%
15
10
6.0%
5.0%
4.0%
-5
3.0%
-10
2.0%
-15
1.0%
-20
0.0%
Mar-12
Sep-12
25 March 2014
Mar-13
Sep-13
Mar-14
Source: Barclays Research
17
UST range trading should contain the volatility of local rates markets, providing an
opportunity for carry trades. In this vein, we recommend being long Mexico Mbono 42
and Thai 7y bonds FX hedged. We believe Mexico is a particularly strong candidate for
this theme as the overreaction of local yields to last years backup in US Treasuries has
not been fully reversed. The domestic cyclical and structural backdrop is also supportive
of a lower and flatter yield curve, in our view: growth is recovering slowly, inflation
remains muted, and the implementation of last years reforms appears positive for
Mexicos long-term fiscal outlook, which could pull down long-tenor yields. The Thai
rates curve is one of the steepest in EM Asia, but a cyclical recovery seems a long way in
the distance given the ongoing political uncertainty in the country, which continues to
weigh on growth. We see the most gains from accreting carry roll-down in both Mexico
and Thailand, but do not rule out a further bull-steepening in the latter, as we think rate
cuts still possible in Thailand.
FIGURE 37
Yields in C/A deficit countries are diverging
INR
ZAR
TRY
BRL
Mar-14
Dec-13
Sep-13
Jun-13
Mar-13
Dec-12
IDR
25 March 2014
Country
India
Sep-12
Jun-12
Mar-12
FIGURE 38
with the restoration of pre-QE yield levels supporting
India, Brazil, SA and Indonesia
10yr Real,%
Current - Avg.
2.7
1.2
144
Brazil
6.6
6.7
-3
SA
1.8
1.9
-9
Thailand
1.8
2.1
-22
Turkey
3.7
4.4
-70
Poland
2.2
3.1
-93
Indonesia
1.5
2.6
-111
Korea
1.5
2.8
-136
Mexico
2.4
3.9
-148
US
0.5
2.7
-225
18
Short or paid in markets where policy makers are battling large capital outflows
(Hungary and Russia). These provide attractive tail-risk shorts in EM rates and are
hedges against our rates carry trade recommendations. Hungary (we recommend
paying 5y) and Russia (we recommend a duration neutral 2s5s flattener) are the best
candidates for this, in our view, because they are suffering from significant capital
outflows. This is weighing on their respective exchange rates, which likely has negative
implications for both inflation and corporate balance sheets. Hungary is still in an easing
cycle, which makes the back end of its curve more vulnerable than the front. In Russia, a
bear-flattener seems superior to outright payers because growth is likely to be
depressed in the foreseeable future, which would anchor long end yields.
FIGURE 39
Growth recoveries in Malaysia, Korea and Poland will bring
rate hike risks onto the radar
Pct. pt.
8%
FIGURE 40
and the rates premia will need to adjust
400
300
4%
200
0%
100
-4%
-8%
-100
Korea
Malaysia
25 March 2014
Poland
Current
ILS
IDR
KRW
INR
THB
USD
PLN
AUD
MYR
TRY
MXN
HUF
COP
BRL
ZAR
-200
RUB
Dec-13
Dec-12
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
-12%
May 2013
19
Compared with other EM asset classes, EM sovereign and corporate credit has been
relatively resilient at the index level (Figure 34). From a total return perspective, EM credit
has been helped by the retracement in US Treasury yields (benefiting longer-duration
sovereigns in particular), but we note that even from a spread/excess return perspective,
both EM sovereign and corporate credit performance at the respective Barclays index level
has been close to flat year-to-date. Issuance, though roughly in line with prior years, has
fallen behind our expectations for supply this year (Figure 42). This is particularly the case
for EEMEA corporates, indicating that supply in EM remains largely sized to demand:
relatively light supply from EEMEA coincides with the regions underperformance (YTD total
return of 0.4% at the aggregate index level, comprising both corporates and sovereigns),
versus LatAm (2.1% YTD total return) and Asia (2.7% YTD total return).
For Q2, we expect political and geopolitical concerns to remain an important driver of volatility,
with the Russia-Ukraine conflict likely to lead to a structural re-pricing wider of Russia credit.
China-related concerns (growth, trust product defaults, onshore bond defaults, the rise in
USDCNY fixing and spot CNY and CNH and their implications for FX product exposures) are
also likely to remain on investors minds. These developments have some specific consequences
for our recommendations on Chinese credits, which we outline below, but are also likely to have
broader adverse effects on sentiment towards EM credit as a whole.
On a more positive note, however, we do not expect US Treasuries to be a significant
headwind. While rates volatility at the short-end could lead to some flattening of credit
curves, EM spread sensitivity to UST yields has subsided and, with upward pressure on UST
yields likely to accelerate only in H2, we think UST yields are unlikely to be a dominant topic
in Q2. Moreover, and perhaps most importantly, EM seems to be anchored by the
comparison to DM. We think the strong performance of DM credit should help EM spreads
stay contained, at least for those parts of EM that are not directly affected by adverse
political developments (Figure 43).
On balance, we think that EM spreads are likely to move sideways on aggregate over the
next quarter, but with generally heightened volatility as well as differentiation among credits
and regions. We recommend positioning along the following lines:
FIGURE 41
EM credit at index level has outperformed other EM asset
classes YTD, but with sharp regional divergences
3.0
350
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
EEMEA: 0.4%
LatAm: 2.1%
EM Asia: 2.7%
30%
250
25%
200
20%
150
15%
100
10%
50
5%
0%
EM hard-ccy
EM hard-ccy
EM USD
sovereigns (gross) sovereigns (net*) corporates (gross)
-7.0
EM local
gov.
EM FX
EM equities
25 March 2014
35%
USD bn
300
-6.0
EM USD sov. EM USD
corp/quasi
FIGURE 42
However, issuance has fallen behind schedule, particularly
for EEMEA corporates
2014 YTD
2014 full-year forecast
YTD in % of full-year forecast (RHS)
Note: *net of interest payments and redemptions. As of 15-March. Source:
Bloomberg, Barclays Research
20
Re-allocate from Russia into Brazil, Indonesia. The risk of prolonged RussianWestern tensions following the Russia-Ukraine conflict and the threat of further
sanctions against Russian individuals and businesses remain clear negatives for
Russian credit, in our view. The muted growth outlook and the adverse implications
for capital flows could also put downward pressure on Russias ratings in the
medium term, in our view. Although Russia has underperformed meaningfully
already as positions are adjusting to the recent developments, we think this is a
structural shift higher in spreads that is likely to extend further. While broader riskoff from the Russia-Ukraine developments is a possible scenario, we think that
substitution effects may support other parts of EM. In particular, we have become
positive on Brazil: despite the recent one-notch downgrade from S&P to BBB- (which
was largely priced in), the outlook has been moved to stable. Combined with positive
signals on the fiscal front, better-than-expected growth data and still-attractive
valuations against peers, this leads us to lift the sovereign to tactically overweight.
We also suggest expressing the Russia/Brazil theme in corporates/quasi-sovereigns
(switching from Gazprom into Petrobras, for example, or going long BANBRA T1
bonds outright). We also think that Indonesia should benefit from some reallocations from Russia perceived improvements in economic data have triggered a
turnaround in sentiment and the upcoming maturities of offshore bonds provide a
good technical backdrop for issuance from quasi-sovereigns, in our view.
Ukraine versus LatAm HY sovereigns long PDVSA 17Ns, short Ukraine 17Ns.
We reiterate our overweight recommendation on Venezuela. The central bank has
finally published the exchange agreement that sets the (more flexible) rules for the
new FX market (SICAD II). There are still issues to be clarified, but the FX market
changes could significantly reduce Venezuelas economic distortions and
imbalances, which we think should be very supportive for Venezuela/PDVSA debt.
The outlook for Ukraine, however, still looks challenging. Swift financial aid from
the West and the apparent commitment of the new Ukrainian government to an
IMF-led reform path are positive, in our view, but implementation risks to any
reform programme, not least in light of the threat of retaliatory measures from
Russia, are likely to re-ignite concerns that a debt rescheduling/restructuring may
become unavoidable at some stage. We suggest being long the PDVSA 17N,
against being short the (high cash-price) Ukraine 17N. We also remain
FIGURE 43
Russia has been the underperformer but Brazil and Global
EM credit are also at record-cheap levels vs US credit
2.5
2.3
FIGURE 44
EM sovereign spread versus rating likely different
trajectories for Russia and Brazil
EM USD Sov Index OAS
300
Spread ratio
Tur
Rus
2.1
250
1.9
1.7
1.5
1.3
Ind
Soaf
200
Pan
150
1.1
Pol
0.9
0.7
May-10 Dec-10 Jul-11
100
25 March 2014
Mex
Mly
Rom
Bra
Col
Phil
Per
50
A-
BBB+
BBB
BBB-
21
25 March 2014
Chinese credit buy China CDS, stick to core (CNOOC) versus non-core SOEs:
We recommend using the China sovereign CDS to hedge against concerns around
further CNY depreciation or increased stress in onshore funding. In cash bonds we
recommend an overweight stance on core SOEs (such as CNOOC) while
underweighting non-core SOEs and financials. We recently turned neutral (from
previous overweight) on the Chinese investment grade property companies. We
think high grade issuers hybrid bonds offer better volatility-adjusted returns
compared to Chinese SOEs and we recommend switching into HUWHY 6% perps
(issued in 2012).
We also think a number of high yielding LatAm credits stand to benefit from
idiosyncratic developments. In particular, we recommend Colombian energy
producer Pacific Rubiales; we view Pacific Rubiales as a solid credit with an
impressive operational track record. We view PRECN a potential rising star; we
think an upgrade (from the current Ba2/BB+/BB+) is possible in late 2014 or 2015.
We also recommend Pan-LatAm telecoms company Digicel; although the
companys fundamental profile appears stable, the long thesis here is primarily
based on valuations: we think DLLTD looks unusually cheap compared to global
comps in, for example, the US HY communications index. We also recommend
Brazilian sugar producers USJ and Tonon, which we believe are attractive if sugar
prices are able to maintain gains in the 17 range, and present some upside
potential if sugar prices rise beyond that level. Finally, we recommend Brazilian
beef producer Marfrig following a strong 4Q13 performance, which came in ahead
of company guidance and our expectations. We see scope for spreads to compress
a further 100bp.
22
TRADE SUMMARY
Country
Rates
Credit
Foreign Exchange
Emerging Asia
China
India
Indonesia
Korea
Malaysia
Philippines
25 March 2014
23
Rates
Credit
Foreign Exchange
Latin America
Argentina
Brazil
Colombia
Peru
Mexico
Venezuela
25 March 2014
24
Rates
Credit
Foreign Exchange
EEMEA
Hungary
We are underweight HGB, given our currency Remain overweight USD bonds. With
issuance needs for 2014 largely met and
view and the low HGB yields.
economic fundamentals improving, we
see value in Hungary 41s in particular.
Switch from Croatia/Serbia.
MENA
Poland
Romania
Take profits in USD paper, some value left Short EUR/RON: The RON is likely to rise on
in EUR bonds. With further supply and
foreign investor bond re-weighting flows.
an approaching election period, we do not
think Romania has significant room for
spread tightening. Some value remains in
EUR-denominated bonds, which continue
to trade wide to USD.
Russia
South
Africa
SubSaharan
Africa
Turkey
Ukraine
25 March 2014
25
EM CREDIT PORTFOLIO
OAS (bp)
OAD
Weights (%)
1w
Bonds we recommend
3m F
Buying
EM Portfolio
312
334
331
7.2
100
100
0.3
1.8
1.8
0.3
887
1048
1046
5.1
12.1
13.6
over
2.2
-1.3
-1.3
1.0
Other
216
221
220
7.4
87.9
86.4
neutral
0.0
2.2
2.2
0.2
EM Asia
228
204
198
8.0
15
16
neutral
-0.1
4.2
4.2
0.3
Philippines
129
126
126
9.1
5.8
5.4
under
-0.2
3.6
3.6
0.4
Indonesia
264
231
221
7.6
7.9
8.2
neutral
0.0
4.6
4.6
1.4
Sri Lanka
406
321
306
5.4
1.0
1.5
over
0.2
7.7
7.7
1.8
Vietnam
303
240
240
3.5
0.4
0.5
neutral
0.3
3.6
3.6
0.7
Mongolia
527
590
590
5.4
0.3
0.3
neutral
0.0
-1.0
-1.0
1.6
EEMEA
269
305
315
6.1
45
43
under
0.5
1.0
1.0
0.1
Turkey
311
302
302
7.6
10.1
10.2
neutral
-0.5
3.4
3.4
0.8
5-10y sector
Russia
187
288
313
5.7
10.0
9.0
under
0.8
-3.6
-3.6
-0.6
Qatar
101
94
89
7.0
3.8
4.2
over
0.3
2.6
2.6
0.6
Poland
117
109
109
5.6
3.7
2.8
under
-0.1
2.1
2.1
0.4
Lebanon
395
376
376
4.7
4.3
4.2
neutral
0.3
2.7
2.7
1.1
Ukraine
725
1055
1130
3.8
2.9
2.3
under
4.6
-4.6
-4.6
-0.1
Ukraine '14s
Hungary
269
268
248
6.5
3.5
3.7
over
0.1
2.9
2.9
2.1
Hungary '41s
South Africa
221
208
228
7.1
2.3
1.6
under
0.3
3.3
3.3
-0.8
Selling
30y sector
Russia '22s, '23s, '42s, '43s
Lithuania
146
154
154
5.4
1.5
1.5
neutral
0.2
1.7
1.7
0.5
Croatia
308
284
284
5.4
2.2
2.2
neutral
0.3
3.5
3.5
0.9
Egypt
454
356
336
6.8
0.3
0.4
over
0.8
8.8
8.8
2.4
Egypt '40s
Latvia
149
137
137
4.5
0.6
0.6
neutral
0.1
1.6
1.6
0.4
Latin America
364
387
375
8.1
38
41
over
0.2
1.8
1.8
0.5
Brazil
178
181
166
8.0
7.7
8.3
over
0.4
2.4
2.4
1.7
BR25
BR41
Mexico
127
134
129
9.7
9.0
8.7
neutral
-1.0
2.5
2.5
0.8
MX44
MX23
Venezuela
1070
1174
1144
5.4
5.8
6.8
over
0.5
-0.9
-0.9
4.8
PDVSA17N
Argentina
740
830
810
5.5
3.4
4.5
over
3.0
0.9
0.9
3.3
G17, Boden 15
USD Par
Colombia
153
165
155
8.8
4.2
5.0
over
-0.3
2.0
2.0
1.3
CO44
CO19
Peru
145
149
144
10.0
2.5
2.5
neutral
0.1
3.0
3.0
0.9
PE33
Panama
191
194
199
9.6
2.0
1.7
under
-0.1
3.6
3.6
0.1
PA36
Uruguay
191
194
199
10.2
1.5
1.5
neutral
0.2
3.6
3.6
0.0
UY25
El Salvador
365
440
420
8.0
1.0
1.0
neutral
0.6
-1.6
-1.6
2.9
ElSalv25s
DR18
Dominican Republic
374
349
369
5.9
0.7
0.5
under
-0.1
3.1
3.1
-0.1
Rest of Index
331
373
352
4.9
1.4
0.9
under
-0.4
1.7
1.7
0.2
UY36
25 March 2014
26
Another data point indicating that the disruption to the recovery is temporary is the
semiconductor equipment book-to-bill ratio provided by the Semiconductor Industry
Association (SIA). The ratio remained firmly above the 1.0x waterline for the past five
months, which indicates that global semiconductor equipment bookings continued to
exceed billings, despite the weather-related disruptions in the US. Given that this index
FIGURE 1
Asian exports pause amid poor weather conditions
FIGURE 2
Weakness in the CNY affected market sentiment
100
6.50
80
6.45
60
6.40
40
6.35
20
6.30
6.25
-20
6.20
-40
6.15
Port strike
Weather
-60
disrupts
GFC
momentum
-80
Feb-02
Feb-05
Feb-08
Feb-11
Feb-14
Port of Long Beach: inbound containers (% 3m/3m, saar)
North Asia exports (% 3m/3m, saar)
Source: CEIC, Haver Analytics, Barclays Research
25 March 2014
6.10
Band widening
to 2%
Band widening to
1% in April 2012
6.05
6.00
Sep-11
Mar-12
Sep-12
USD/CNY spot
Lower trading bound
Mar-13
Sep-13
Mar-14
USD/CNY fixing
Upper trading bound
27
Exacerbating the growth fears for the north Asia economies has been the volatility in Chinas
capital markets. A weak start to 2014 for Chinas economy accentuated depreciation fears
for the CNY, as well as the impact of a potential hard landing. While we do not discount
event risks, we see Chinas slowdown as largely the result of policies to trim excess capacity
in some industries (steel, for example) and clamp down on corruption. While we have
revised lower our Q1 2014 growth forecast, we expect stronger growth from Q2 as the
focus of policy turns towards sustaining growth above 7% this year. We also expect Chinas
consumption growth to hold up better in 2014, and this should eventually work as a
tailwind for the north Asian economies, which are well placed to tap the Chinese consumer
given their strong distribution networks and product brand premiums.
South recovers in Q1, but growth differentials will widen again from Q2
Reduction in vulnerabilities
have led to an improvement in
sentiment in India and
Indonesia
On the other hand, south Asia, where exports are less correlated with global demand, has
benefitted from improved sentiment, as selling pressure in FX and capital markets stabilised
in Q1. PMI readings in these economies have also picked up, as vulnerabilities eased,
monetary policy settings were not tightened further, and fears of a deep slowdown abated.
While domestic demand slowed further in Q4 13 in the south, we expect only a moderate
pick-up in 2014, and one that will not be uniform across these economies. We expect
domestic growth across most of south Asia to be tepid, on a continued softening in demand
growth in economies such as India, Indonesia and Thailand. While the Philippines and
Malaysia have continued to perform well, we think they may face headwinds from fiscal
(Malaysia) and monetary tightening (Malaysia and the Philippines) in coming quarters.
Moreover, a recent period of dry weather in Asean stoked drought fears, driving up prices of
some commodities, which could benefit countries such as Malaysia and Indonesia in Q2, as
they offload palm oil inventories at higher prices.
FIGURE 3
South Asia PMIs are outperforming north Asia
FIGURE 4
Equity market performance has improved in south Asia
65
110
60
105
55
100
50
95
45
90
40
85
35
Feb-06
Feb-08
Feb-10
South Asia
Feb-12
North Asia
25 March 2014
Feb-14
100 = 1 May
80
May-13
Jul-13
Sep-13
North Asia
Nov-13
Jan-14
Mar-14
Asean
28
Since the previous edition of the EMQ, external balances in Asia have improved markedly.
This decline in external financing requirements has led to a sharp rebound in asset prices in
the vulnerable countries, especially India and Indonesia. Economies such as Malaysia, which
had also been affected by contagion fears, have also seen improvements in sentiment, as
improved risk perception has supported asset prices amid better economic data. For the
south as a whole, we estimate that the current account balance turned positive in Q4,
predominantly on the back of larger surpluses in Malaysia and Thailand, and also helped by
sharp reductions in current account deficits in India and Indonesia.
Resource exporters in south Asia have seen improvements in their terms of trade. Higher
soft commodity prices should act as a tail wind in the adjustment process of their current
account deficits. But given high inventories, we expect the impact on inflation and growth to
lag by about three months. In particular, we expect Malaysia and Thailand to see an increase
in their current account surpluses on higher rice and palm oil prices. Indonesia, too, has
seen a large improvement in its current account deficit, on the back of weaker domestic
growth, frontloading of mineral exports ahead of the January ban on ore exports and
improved manufacturing exports, especially to the US and Japan. India remains the
frontrunner in the deficit adjustment process. We forecast its current account will register a
deficit of 2.1% of GDP in FY13-14, expanding marginally to 2.4% in FY14-15.
External balances remain supportive in north Asia. Despite a decline in trade surpluses in
Q1, we expect current account balances for the north Asian economies to move in line with
global demand. Indeed, we forecast Koreas current account surplus will total USD65.5bn
(4.9% of GDP) in 2014 and Taiwans USD51bn (10% of GDP). While Asean markets have
seen a return of portfolio capital, equity markets in Taiwan and, to a certain extent, Korea
have remained solid. The regulatory regime to deal with market volatility has also been
strengthened. Apart from the Chiang Mai Initiative's Multilateralisation (CMIM) mechanism,
several bilateral arrangements have been made between countries in south Asia and Japan
and China in past year, which give the south a stronger buffer for periods of stress.
FIGURE 5
South Asias current account balances have improved
12%
FIGURE 6
Soft commodity prices have outperformed industrial metals
125
8%
120
6%
115
110
4%
105
2%
100
0%
95
-2%
90
85
-4%
-6%
Dec-05
Dec-07
North Asia
Dec-09
Dec-11
Dec-13
South Asia
Note: North Asia = China, Korea, Taiwan. South Asia = India, Philippines,
Indonesia, Thailand, Malaysia. Source: Haver Analytics, Barclays Research
25 March 2014
130
10%
80
Mar-13
Sep-13
Palm Oil
Coal
Mar-14
Copper
29
Overall, we expect the economies of north Asia to outperform those in the south, as the former
continue to benefit from stronger global demand in 2014. This has implications for output gaps,
which have been closing. While this is already evident in the more industrialised north Asia, it is
also happening in a number of the export-oriented economies in south Asia. We think the
Philippines output gap turned positive in H2 13 and we expect output gaps to close in Malaysia
(in H1), Korea (H2), Taiwan (H2) and Singapore (H2). For India and Indonesia, despite a more
sanguine outlook for growth, we expect these economies to remain laggards in this regard.
FIGURE 7
Growth synchronisation with global GDP will close output gaps, push countries into monetary policy normalisation
Country
Trade openness
(% of GDP)
Singapore
74.4%
0-1
394%
Taiwan
73.6%
0-1
140%
Malaysia
65.7%
0-2
Reasonably diversified, but high trade openness raises leverage to global cycles
162%
Philippines
57.3%
0-2
Korea
49.6%
0-2
102%
Thailand
41.5%
1-2
149%
India
29.1%
1-2
Trade openness rising, but domestic demand remains key for GDP growth
55%
China
23.1%
1-2
49%
Indonesia
16.5%
1-2
48%
71%
Positive output gaps have significant implications for monetary policy. We expect policy
rates to be hiked in Korea, Malaysia, the Philippines and Taiwan in 2014. According to our
estimates, their output gaps have improved materially, and monetary stances now appear
accommodative given rising inflation. This will add more pressure on central banks to hike
rates, especially against the backdrop of the Federal Reserve revising its own assessment of
rate hikes in the US. Indeed, we think the Feds own forecast of rates going to 2.25% by the
end of 2016 may prompt central banks in Asia with positive output gaps to hike preemptively, to avoid having to match the pace of the Fed hikes in 2015. We expect more
market attention on policy synchronisation in the coming months. Inflation is also picking
FIGURE 8
Weather is dry and warmer, pushing up commodity prices
30
FIGURE 9
Output gaps across the region are closing
0.3
20
0.2
10
0.1
0.0
-0.1
-10
-0.2
-20
-30
Mar-06
Mar-10
Mar-12
25 March 2014
Mar-14
-0.3
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
EM Asia GDP index Deviation from trend (%)
Asia ex China GDP index Deviation from trend (%)
Asia ex China, India GDP index Deviation from trend (%)
30
On the other hand, we think India and Indonesia have finished their rate hiking cycles, as
policy credibility amid Fed tapering has been restored and their currencies have stabilised.
Inflation remains high, but recent downside surprises provide some comfort for maintaining
the status quo in policy rates.
The balance of political risk remains against south Asia, in our view. Major economies such
as India and Indonesia have elections scheduled for Q2 14. So far, this has not weighed on
local asset prices, but we sense that higher risks could start being priced in once the
electoral campaigning officially begins.
In India, voting in the national election will begin on 7 April and will be conducted in nine
stages, with final results on 16 May. The latest opinion polls indicate Narendra Modis BJP as
the leading contender to form the next government (see the India chapter for more details).
While the parties have yet to announce detailed economic agendas, the BJP has indicated its
preference to prioritise the infrastructure, power generation and manufacturing sectors,
along with the implementation of a goods and service tax, and measures to increase FDI as
easy wins to boost growth momentum. However, political uncertainty is unlikely to ease
before mid Q2 2014.
Indonesias parliamentary elections are slated for April and the presidential election for July.
The recent confirmation of Joko Widodo (Jokowi) as the presidential candidate for
Indonesian Democratic Party of Struggle (PDI-P) is a positive development for markets. His
lead in polls indicates that he could win the presidential race. The focus will now turn to his
policy platform, which, based on his current policy initiatives and plans for Jakarta, we
believe will be market friendly. However, legislation needs to pass through the parliament,
so consensus building will remain important.
Thailand is another country where considerable political unrest has had a negative bearing
on growth, and the central bank appears forced into a rate cutting cycle, despite rising
inflation, albeit moderate. We think Thailands political unrest could continue in Q2, and
may lead to downward growth revisions in coming months. Apart from these three
economies, we think in the rest of EM Asia, political conditions will likely remain benign.
FIGURE 10
Political risks will likely peak in Q2 2014, with elections in India and Indonesia
Current focus
Growth implications
Indonesia
General elections the largest democratic Voting will take place in nine phases,
Ahead of the elections, the government
exercise in history, with 814mn people
beginning 7 April and ending 12 May. The has not made a major push for reforms.
eligible to vote
results will be declared on 16 May.
Economic agenda of the respective
parties are not yet fully clear.
Legislative elections on 9 April;
Polls put Jakarta Governor Jokowi as the Growth typically sees a boost prepresidential elections on 9 July
frontrunner in presidential election race. elections. Focus shifting to policy
Consensus building to remain important platforms of different political parties.
due to a likely fragmented parliament
25 March 2014
31
Regional growth has divergent trends: Central Europe is accelerating, Russia and Turkey
are slowing and MENA is broadly stable. A divergence in inflation has also occurred: it is
stuck above targets in Russia and Turkey and is well below targets in Central Europe.
C/A balances are improving across the region. Russia-Ukraine tensions remain a major
political risk.
Growth trends in the region are diverging. Russia and Turkey, the two largest economies,
find their growth retreating from relatively high levels. Based on an expected slowdown in
domestic demand, we have cut our growth forecasts for both countries. However, neither is
likely to fall into recession, assuming economic sanctions on Russia remain benign. In
Central Europe, the economies are in the early stages of recovery, and we expect a further
pick-up in growth in 2014 and 2015. In the Middle East, growth is picking up in oilexporting countries and is roughly stable at a moderate level in Israel.
In Russia, even before the conflict with Ukraine started, growth had undergone a change in
momentum. In 2013, it decelerated by 2pp to 1.3% due to declines in domestic demand.
Private investment declined due to a drop in corporate profits, and public investment fell
due to completion of large projects in 2012. A deceleration in consumption is under way as
the squeeze in corporate profits is slowing wage increases and bank lending to households
decelerates from unsustainably high levels. We expect further growth deceleration to 0.7%
in 2014.
In Russia, tightening of monetary policy will hold back both investment and consumption,
with the latter to be adversely affected by lower private sector wage increases and a freeze
in public wages. Export revenue will be limited by lower global oil prices. Furthermore,
investor sentiment will be adversely affected by the Russia-Ukraine conflict. Russias
annexation of Crimea led the EU and US to enact mild sanctions. In our main scenario, we
expect the sanctions to be intensified gradually, but a political solution to be found that
avoids serious economic sanctions. However, in the event the latter are introduced, they
would likely push the Russias economy into recession. Even prolonged uncertainty will
likely have a damaging effect on the Russian economy and cause ripple effects elsewhere.
On RUB depreciation, we expect it to have a positive effect on growth; however, it will be
FIGURE 1
Growth likely to improve in Central Europe, but decline in Russia and Turkey
6
5
Central Europe
MENA
3
2
1
0
-1
2014F Barclays
Morocco
Egypt
UAE
S. Arabia
Russia
Israel
Turkey
Serbia
Croatia
Romania
Hungary
Poland
Czech R.
2013 Barclays
Ukraine
-4%
-2
2015F Barclays
Note: Arrows denote changes of 0.2pp or more since December EMQ. Source: Haver Analytics, Barclays Research
25 March 2014
32
In Turkey, a rotation from consumption-led to export-led growth will lead to slower growth
and a gradual narrowing of its high C/A deficit. Subdued capital flows into EM are forcing this
adjustment after growth had been driven by foreign-funded credit growth for some time. A
marked increase in domestic tensions ahead of the local elections in end-March and the
presidential elections this summer has weighed on business confidence, and a resolution to
the political conflict is not in sight. Large external financing needs and FX mismatches on
corporate balance sheets leave Turkey vulnerable and could trigger the need for further rate
hikes in event of significant TRY depreciation. Against this backdrop, we expect growth to
moderate to 2.2% in 2014 from estimated 3.9% y/y in 2013.
Growth in Central Europe (CE) improved in 2013, bringing these economies out of
recession/slowdown. Several factors will likely support growth acceleration in 2014-15. The
recovery was sparked by a pick-up in exports, primarily to core euro area, where we expect
further moderate growth improvements during 2014-15. In a second stage, domestic
demand is picking up, with consumption rising on base effects, improvement in labour
market conditions, stronger consumer confidence and, last but not least, less fiscal drag.
Some early signs of investment recovery are starting to emerge, although existing excess
capacity will likely delay a full investment surge until later in the recovery cycle. Given very
low inflation across the region, monetary policy should stay expansionary with policy rates
at or near all-time lows. The only slight negative effect in 2014 may come from lower
agricultural growth, after a strong harvest in 2013.
In the Middle East, aggregate demand is relatively stable, albeit with significant intraregional differences between oil exporters and oil importers. Growth in Saudi Arabia and the
UAE should accelerate, supported by government spending and higher credit growth. In
Egypt, growth disappointed in H2 13 on the back of heightened political volatility, and we
downgrade our forecasts for 2014 and 2015. Israel has managed to maintain growth at
about 2.5-3%. While this is below medium-term potential and appears to be receding
slightly, it is still decent by global standards.
FIGURE 3
Credit growth still high in Russia and Turkey, low in CE
35%
30%
35%
25%
20%
25%
15%
10%
15%
5%
5%
0%
-5%
-10%
Jan-11
Jan-12
Russia
Jan-13
Turkey
25 March 2014
Jan-14
CEE-4
-5%
Jan-10
Russia
Jan-11
Jan-12
Turkey
Israel
Jan-13
Jan-14
33
In Russia, in contrast to CBR expectations, inflation has not declined sufficiently towards the
target and, with heavy RUB depreciation (in excess of 10% year-to-date), it will likely shift
higher. We have increased our inflation forecasts to 6.7% y/y at end-2014 and 5.1% at end2015, both well above the targets (5% and 4.5%, respectively). The CBR is transitioning to
inflation targeting (implying RUB flexibility), a five-year process that was set to be
completed at end-2014. However, the exchange rate pressure has set this process back.
In early March, the CBR increased its FX intervention levels and raised its policy rate 150bp
to 7.0% in an effort to stabilize the RUB. Subsequently, the CBR has kept the higher rates
unchanged and indicated they would have to stay high. The measures appear to have
helped stabilize the RUB. However, we think that further pressure on the RUB will force
another 100bp rate increase in Q2. Rates will likely remain elevated throughout 2014 as the
CBR tries to lean against inflation pass-through.
In Turkey, the inflation outlook remains challenging, with exchange rate pass-through
driving core inflation higher and raising uncertainties surrounding food prices. TRY
weakness will likely push inflation higher with a lag, and food prices could surge due to the
relatively dry winter, leading to historically low water reservoir levels. In addition, there is a
risk of potential post-election adjustments to energy prices (~10% hike would add about
0.5pp to headline inflation). In our opinion, inflation could surpass 9% around mid-year
before moderating to 8.3% y/y for end-2014 and 6.7% for end-2015, both well above the
5% target.
In CE and Israel, the low inflation environment persists with inflation mostly below targets
and continuing to surprise on the downside in recent quarters. The main factor holding
inflation down is falling domestic energy prices (averaging -2.8% y/y in February). After
previous rapid increases, global oil prices have been within a relatively narrow range (Brent
at $100-120 per barrel) for the past three years with a slight downward drift. Local factors
are also in place: eg, Hungary lowered administrated energy prices as a pre-election ploy,
and Israel started to benefit from lower-cost offshore natural gas production. Food inflation
has been moderating due to lower global food prices and is negative in Hungary and
Romania, where the 2013 harvest was particularly strong. Core inflation has decelerated due
to low wage pressures and weak domestic demand. Policy rates are near or at all-time lows
only Hungary is likely to deliver additional small rate cuts. Meanwhile, rate hikes are not on
the horizon, with inflation mostly well below target ranges. Rate hikes will probably be
delayed until inflation starts to rise again and heads towards the middle of target ranges.
FIGURE 4
Inflation high in Russia and Turkey, and low in CE and Israel
12%
FIGURE 5
Limited room for monetary policy easing, except Hungary
8%
CPI (% y/y)
7%
10%
6%
8%
5%
6%
4%
3%
4%
2%
2%
1%
25 March 2014
Czech R.
Israel
Poland
CEE-3 avg
Hungary
Romania
Israel
Feb-14
Romania
Feb-13
Russia
Russia
Turkey
0%
Feb-12
Turkey
0%
Feb-11
34
C/A improvements
Improving C/A balances in
the region
Since the previous EMQ, we have improved our forecasts for Russia and Turkeys C/A
balances. In Russia, we expect RUB depreciation to cause a turnaround in trend, leading to
increases in the C/A surplus in 2014 and 2015. In Turkey, rotation away from consumptionled growth, currency depreciation, and better external demand will help C/A adjustment. In
other countries, C/A improvements are expected to continue. Strong exports should lead to
rising surpluses in Hungary and Israel and narrowing deficits in Poland, Romania, and Czech
Republic, releasing these countries from previous heavy reliance on external financing.
The uproar over the Russia-Ukraine tensions and annexation of Crimea presents serious
economic risks. So far the EU and US have introduced only mild sanctions that will have little
economic impact. Russia, the US and the EU are clearly trying to find a diplomatic solution
that will avoid heavy sanctions and violence. It remains to be seen how successful they will
be. While we expect sanctions to be upgraded gradually, our main scenario is that they will
not be intensified to the point of having a serious impact on the Russian economy. But the
risk of hardening of sanctions at some point is not negligible, and this would likely push
Russias economy into recession and directly damage growth prospects of the euro area,
given significant economic linkages between the two. This would have knock-on effects on
world growth and damage CE growth prospects in particular.
In Turkey, the 30 March local elections have effectively turned into a referendum on Erdogan,
and the AKP and the results will determine Erdogans strategy for the presidential election in
August. We do not expect a new political equilibrium to be achieved, leaving investors with a
high level of political uncertainty, at least until the presidential elections in August.
Central Europe politics are relatively stable, confined to regional/local issues. According to
polls, Hungary parliamentary elections on 6 April will likely result in the re-election of the
government of PM Orban, which could retain its super-majority. Czech Republic has a new
three-party government in place led by the socialist but supported by right-centre parties. In
Romania, the ruling coalition split, but PM Ponta managed to form a new majority and
reiterated its commitment to the IMF programme. However, the coalition split raises
uncertainty ahead of the presidential elections in November.
12%
6%
-2
4%
-4
2%
-6
0%
Feb-14
-8
4%
2%
Feb-10
Feb-11
Feb-12
Feb-13
EEMENA CPI
EEMENA core
Food CPI
Energy CPI
25 March 2014
Russia
3%
2012
2013
2014F
2015F
Turkey
8%
Poland
5%
Hungary
10%
Romania
Israel
6%
FIGURE 7
Current account balances likely to improve further
Czech R.
FIGURE 6
Downward inflation from energy and food
35
Jeff Gable
+27 11 895 5368
jeff.gable@barclays.com
Ridle Markus
+27 11 895 5374
ridle.markus@barclays.com
Peter Worthington
The broad story on economic growth remains a positive one for the 131 countries under
coverage in Sub Saharan Africa. We see weighted GDP growth at 5.0% y/y in 2014, above
the average of 4.6% in 2013. The 2014 figure is 0.2pp lower than our forecast in the last
EMQ. The figures apparent resilience is less about the rotation of global growth back to
developed markets, and more to do with a combination of the SSA region's multi-year focus
on infrastructure build-out, fresh investment in the resource sector in several countries, and,
less helpfully for the medium term perhaps, fiscal slippage in several important markets.
Commodity prices do look more challenging now than in 2013, particularly for countries
with a high exposure to precious and base metals. However, so far the lagged realisation of
past investment commitments has generally boosted economic growth in the region, but
raises questions about future investment commitments a for 2015 and beyond.
Within the major economies, we have lowered our GDP growth estimates for South Africa
by a few tenths as the strike in the platinum sector looks likely to be a very long one. A brief
period of rolling blackouts in early March served to remind us just how critically tight the
electricity supply situation remains until new generation capacity is brought online (around
year-end), and an expectation of gradual monetary tightening weighs on our previous
estimates. We now look for the economy to grow by 2.2% this year, only slightly higher
than 2013. In Nigeria, the main driver of the economy remains the non-oil sector, and we
expect a similar story for 2014 (with, perhaps, some additional pre-election spending boost
in the later stages of the year). Coming off a very strong end of 2013 (real GDP rose by 7.7%
y/y in Q4), average growth of 6.8% this year is likely.
FIGURE 1
Economic growth remains firm in several countries
9
FIGURE 2
Commodity exposure in SSA
AO
8.1
6.9
6.8
6.7
6.1
5.5
5.0
5
4
2.2
3
2
1
0
MZ
TZ
NG
ZM
Mar'14 forecast
GH
Dec'13
KE
SSA*
Sep'13
SA
Oil
Gold
Platinum
Diamonds
Copper
Cobalt
Aluminium
Chrome
Coal
Iron ore
Cocoa
Timber
Tea
Fish
Canned tuna
Cane sugar
Coffee
BW
GH
KE
MU
MZ
x
x
SA
SC
x
x
x
x
x
TZ
UG ZM
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
The thirteen countries that make up our SSA aggregate are Angola, Botswana, Ghana, Kenya, Mauritius,
Mozambique, Namibia, Nigeria, Seychelles, South Africa, Tanzania, Uganda and Zambia
25 March 2014
36
In East Africa, growth in Kenya and Tanzania is expected to accelerate this year, to 5.5% y/y
and 6.9% y/y, respectively, thanks to investment in infrastructure (transport in Kenya's case,
and a combination of transport and gas and electricity in Tanzania). Uganda's outlook will
be boosted by expected improvement in domestic demand, and we see growth accelerating
to 6%. Further south, fresh copper mine capacity should help offset the negative impact of
lower copper prices on Zambia this year and allow the economy to still grow by more than
6%, whilst Mozambique's infrastructure spend (and, perhaps, some pre-election spending
too) should lead to another above-7% growth rate there.
For the sake of completeness, it is also worth noting that both Zambia and Nigeria are
expected to restate their National Accounts in the near term, updating base years and
accounting methodologies. Delayed many times already, when the restatements are finally
published, the result is likely to be a 25% or more increase in the level of measured GDP, thus
altering significantly any typical GDP ratios (and possibly making Nigeria the continent's
largest economy).
FIGURE 3
Monetary policy developments and outlook
Current (%)
Cummulative ch.
since Jan-13 (bp)
Next move
expected
Angola
9.25
25 Nov13
-100
2015
Botswana
7.50
10 Dec 13 (-50)
-200
2015
Ghana
18.00
6 Feb 14 (+200)
+300
Apr-14
Kenya
8.50
7 May 13
-250
2015
Mauritius
4.65
17 Jun 13 (-25)
-25
Apr-14
Mozambique
8.25
16 Oct 13 (-50)
-125
2015
Nigeria
12.00
10 Oct 11 (+275)
2015
South Africa
5.50
28 Jan 14 (50)
50
Mar-14
Uganda
11.50
3 Nov 13 (-50)
-50
2015
Zambia
10.25
28 Feb 14 (+50)
100
Apr-14
Country
For South Africa, we see inflation breaching the 6% upper target soon, and for that breach to
be fairly long-lived, but at a peak of about 7% in our base case, we expect the breach to be
modest by historical standards. The rand could play a major spoiling role in these forecasts,
however. The monetary policy call in South Africa is a tricky one, as a generally weak
economic outlook meets with an inevitable (if delayed) FX pass-through and a central bank
37
Nigeria's inflation fell to 8% by end-2013, from which we expect a gradual increase back to
about 10% in H2 as the currency effects and these FX pressures have shifted the bias in our
policy rate forecast towards further tightening, though our base case remains for rates to be
on hold at 12.00%. We will learn more when the new governor takes office in June. Ghana
faces greater challenges, with the cedi having depreciated more than 25% in the last 12
months and the market still struggling to find a comfortable level. In addition to FX
depreciation, removal of fuel subsidies in 2013, increased utility tariffs and higher VAT at
the start of 2014 have led headline inflation to reach 14% y/y, and we believe risks lean to
the upside. Ghana's central bank hiked by 200bp in February, taking the policy rate to 18%,
but with FX pressures unabated and market yields already well into the 20s, we think
another 100bp in rate hikes is likely and the risk is for even more.
Zambia's currency has also been under extreme pressure and we believe further monetary
policy tightening is probable. In East Africa, we see Kenya (8.50%) and Uganda (11.50%) on
hold as inflation (and FX) pressures look manageable. In the region's smaller markets, we
also see the potential for a tightening of policy, with Botswana likely to move modestly
higher should the gap with South African rates rise further, and Mauritius' MPC signalling a
willingness to tweak rates higher to help contain inflation expectation.
FIGURE 4
CA balances remain wide
FIGURE 5
Several SSA currencies are on the back foot
10
10
5
0
-5
-5
-10
-10
-15
-15
-20
-20
-43
25 March 2014
2014F
MUR
UGX
AOA
TZS
KES
NGN
SCR
MZN
BWP
NAD
ZMW
GHS
Nig
Ang
Bot
Zam
Nam
SA
Mau
Uga
Ken
Gha
-30
Tan
Moz
-25
-25
1-year
38
Beyond the external account discussion, the second uneasy fact is that public finance in
Sub-Saharan Africa is generally more stretched in 2014. In the west, we expect that preelection spending could add 1-2 points to Nigeria's fiscal deficit this year (taking it to 3.1%
of GDP), Ghana looks to have suffered another year of fiscal slippage in 2013, and higher
domestic interest rates will further complicate the outlook this year. In East Africa, big
pushes on infrastructure in all of the economies, along with some politically driven spending
(the rolling out in mid-2013 of a devolved government in Kenya, and pre-election spending
in Mozambique) are expected to press deficits higher this year, whilst in Southern Africa
Zambia's government is coming to grips with the impact of last year's large rises in public
sector salaries. South Africa's 4% of GDP deficit may seem modest in this company, but at
BBB its peer-group is more global, and the country's very slow deficit consolidation is
testing the patience of the rating agencies, and, at times, investors.
Perhaps unsurprisingly, many countries in the region have tabled plans to seek out financing
from external markets in 2014 for the fiscal shortfalls and to ease the burden on domestic
markets. Nigeria, Ghana, Kenya, Tanzania, Zambia, Cote dIvoire and South Africa are all
eyeing hard currency issuance. That may place more focus on the country's credit ratings at
a time when, faced with this environment of pressurised public finance and external
accounts, the view from global credit rating agencies has turned less sanguine for SSA
countries in the last six months. Over that period Ghana, Zambia, Uganda and Mozambique
have had their sovereign rating cut by one notch by at least one of the big three agencies,
with several others, including South Africa, under negative outlook. This may mean a more
tepid response from global credit markets to SSA issuers in 2013 as opposed to the very
warm welcome received in 2012 and 2013.
FIGURE 6
Fiscal deterioration in several markets
FIGURE 7
Upside risks to inflation
18
16
-2
14
-4
12
-6
10
-8
-10
25 March 2014
2014F
Gha
Zam
Ken
Tan
Moz
SA
Mau
Nam
Nig
Uga
Bot
Ang
-12
4
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
39
The headline event will be the 7 May general election in South Africa. The latest IPSOS poll,
as reported in the local press on 23 March, suggests that the governing African National
Congress (ANC) should secure another clear majority at the national level, with the declared
support of 66% of voters, close to its share in the 2009 election (please see Global EM
political outlook: The heat is on, 6 March 2014). While some opposition parties appear to be
gaining support, others appear to be losing it. The current official opposition, the
Democratic Alliance (DA), seems likely to continue the trend increase in its vote witnessed
since the 1994 election (the DA took 16% of the vote in 2009) with the IPSOS poll putting
its support at around 22%. Meanwhile, the new Economic Freedom Fighters, which targets
the disenfranchised and the poor with a nationalist/populist program, could also have an
important impact. Notably, however, the poll was conducted before the publication of the
Public Protectors report on the improper use of state funds to upgrade President Zumas
private residence. This may exacerbate the growing discontent in some circles of traditional
ANC supporters with the current ANC leadership, but just how much of this unhappiness
will be converted into votes for the opposition or simply lower voter turnout will only be
known on the day. Some slippage in votes for the ruling party may also result from the
apparent split of the largest organised labour federation, COSATU, which has traditionally
aided the ANC at election time with strong logistical and funding support.
At this stage there is little evidence to suggest that the ANC is about to discard the National
Development Plan as the key driver of medium-term policy and so we do not, as a baseline,
expect this much-covered election to be a major macro or market driver for South Africa.
However, the exact dispersion of the votes and the conclusions that politicians and the
government draw from the result could serve to tweak the next administrations policy at
the margins. Appointments to key economic ministries and to the Deputy Presidency will
provide tangible clues as to the next governments policy inclinations.
Elsewhere in the region, Mozambique will hold elections in October, and Tanzania and Nigeria
are the notable elections for next year. The outlook has improved for a smooth election
process in Mozambique, as the ruling party and leading opposition have found common
ground on some issues relating to election law. This raises hopes that the sporadic and lowintensity violent political confrontation that re-emerged late last year could again abate. In
Tanzania, efforts are ongoing to confirm a new constitution, but despite the sharp divisions on
the issue we do not expect any domestic security challenge. In contrast, political tensions in
Nigeria have increased as splits within the ruling party continue to widen, the early removal of
the central bank governor continues to make headlines, and the violent action against civilians
by terrorist group Boko Haram look to have entered a more intense phase.
25 March 2014
40
Alejandro Grisanti
+1 212 412 5982
alejandro.grisanti@barclays.com
Marcelo Salomon
+1 212 412 5717
Growth prospects are beginning to stabilize in a portion of Latin America. While the worst
appears to be behind us, with the exception of Mexico and Venezuela, we forecast growth
for the region for 2014 and 2015 at or below potential. Challenges to the breadth and the
speed of the next recovery phase are great, especially as consumption may not remain the
engine of growth. Productivity-led growth, with stronger investment flows and a supportive
reform agenda, is critical for a new leg of sustained growth acceleration in the region.
marcelo.salomon@barclays.com
Mexican growth continued to disappoint at the end of 2013. Q4 real GDP printed a weak 0.2%
q/q, putting last years growth rate at a modest 1.1%, or the lowest since the strong 4.7%
contraction in 2009. This has led us to revise our 2014 forecast down to 3.0% from 3.7% (see
Mexico GDP: The economy hit the brakes, dampening the 2014 outlook, February 21, 2014),
raising the question of how much of the slowdown is cyclical and how much is structural.
We still believe that much of the slowdown is cyclical, and the stimulative monetary/fiscal
policy mix this year, along with a strong industrial production rebound in the US as of Q2, will
help return growth to higher levels. However, it also stresses the point that the reforms will
help push growth to a structurally higher level, but this will only happen in the longer term.
Secondary laws regulating the constitutional reforms approved last year are the biggest
political challenge in 2014, and a stronger pipeline of FDI is likely to start building only after
2015. Banxicos intention to stay on hold should be validated by a well-behaved inflation rate
that is likely to fall back below 4.0% in March as the effect of the tax hikes prove short lived.
The largest growth revision we are making this quarter is for Venezuela. Large popular
protests against the steep deterioration of economic conditions reflect political and
economic mismanagement, which has led to a strong increase in inflation and restrictions in
the access to foreign currency. The latter has directly influenced the scarcity of
consumption goods. A strong repressive stand against these popular movements only adds
to the negative sentiment and could ultimately lead to a stronger slowdown of the
FIGURE 1
Barclays real GDP growth forecasts vs consensus
FIGURE 2
Outlook for policy rates in LatAm
Country
Current
Next
2013
2014
2015
Brazil
10.75
Apr 14 (+25)
10.00
11.00
12.00
Chile
4.00
Beyond 2015
4.50
4.00
4.00
Colombia
3.25
Jul 14 (+25)
3.25
4.75
5.00
2013
2014
2015
2013
2014
2015
LatAm
2.2
2.1
3.5
-0.4
-0.4
0.5
Argentina
3.1
-1.5
4.4
-0.7
-1.7
3.3
Brazil
2.3
1.9
2.4
0.1
-0.1
0.1
Mexico
3.50
Mar 15 (+25)
3.50
3.50
4.50
Chile
4.2
4.2
4.7
0.2
0.3
0.4
Peru
4.00
Beyond Q4 14
4.00
4.00
5.00
Colombia
4.2
4.8
4.5
0.1
0.2
-0.1
Mexico
1.1
3.0
3.8
-0.1
-0.4
-0.2
Peru
5.0
5.1
5.7
0.0
-0.4
0.0
Venezuela
1.1
-1.8
2.5
-0.4
-0.8
1.3
25 March 2014
41
We believe the announcement of the new FX system, Sicad II, is a move in the right direction
and could alleviate the scarcity problem that has been disrupting the supply chain and push
growth to a better level. However, this is a story for the second half of 2014. New
investment in the oil sector could also be a factor that supports growth, but operational and
managerial problems still seem to be affecting progress in these projects; therefore, we do
not expect this to make a significant contribution to GDP until next year. We are revising our
growth forecasts down to -1.8% this year and +2.5% in 2015, from 0.3% and 3.0%,
respectively. But despite the political and economic noise, we remain of the view that
Venezuelas capacity and willingness to pay its external obligations remain unscathed.
The news out of Brazil has been more encouraging. After Q4 2013 real GDP growth
surprised on the upside, higher frequency data for January (IP and retail sales) helped dispel
fears that Brazil could be moving into a recession. 2014 growth expectations have been on a
steep downward trend since late 2013, falling from 2.30% in the last Focus Consensus
Survey of 2013 to finally stabilize at 1.7% in the first week of March this year. The better
growth numbers also prevented us from downgrading our 1.9% growth forecast for 2014,
but the trade-off between growth and inflation in Brazil is getting worse. Better news on the
growth side, along with the governments new 1.9% GDP primary surplus target, has eased
market concerns of an imminent sovereign ratings downgrade. While we are skeptical that
the government will deliver such a high primary fiscal surplus, especially in an election year,
we agree that the better growth outlook and signs that the government is attempting to
prevent the ratings downgrade have changed the mood.
However, the medium- and longer-term challenges to reignite growth without pressuring
inflation in Brazil have been growing. The next president-elect will have to unwind repressed
regulated prices (delayed gasoline, public transportation and utility price hikes to name a
few) as well as past tax incentives in order to reorganize the fiscal accounts. Hence, the
government will need to tighten the policy mix even further in 2015 (we expect an
additional 100bp of rate hikes, lifting the Selic rate to 12%, and the primary surplus to rise
to 1.7% of GDP in 2015, from 1.3% in 2014) to bring inflation down to 5.6% revised up
from 5.4%. We also expect real GDP to recover next year, but only to a modest 2.4%.
FIGURE 3
Terms of trade moderating after 2011
220
FIGURE 4
Future growth will rely on productivity, which remains a
challenge across most of the region
Argentina
Brazil
Chile
Colombia
Mexico
Peru
200
180
160
6.0%
5.0%
Chile
4.0%
3.0%
140
2.0%
120
Argentina
Peru
Colombia
Venezuela Brazil
1.0%
100
80
2000
2002
2004
25 March 2014
2006
2008
2010
2012
Mexico
0.0%
-2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0%
TFP Gap with US (- below US/ + above US; avg per year)
Source: Conference Board, Barclays Research
42
Over the 10 year period ending in 2011, the strong terms of trade (ToT) expansion (Figure
3) has helped lift income and growth across most of the LatAm Region. Countries like Chile,
Peru and Argentina experienced an average terms of trade growth rate of 5% or more per
year (Chiles ToT expanded by 10% on average per year). These are smaller than the
whopping 21% observed in Venezuela, but meaningfully higher than 1% observed in
Mexico. Colombia and Brazil, while also benefitting from the commodity boom, saw more
modest expansions (4% and 2%, respectively). But this has changed since 2011: across the
region ToT have stabilized or have been moving down.
We believe that this has been one of the main drivers behind the slowdown of both current
and potential growth in the region. Normalization of monetary policy in the US, boosting the
cost of foreign funding and provoking a strong upward movement in local yields across EM
amplified the cyclical slowdown. But policymakers across the region will have a very large
challenge ahead to compensate for the reversal of fortunes that that lack of ToT tailwinds
will have for the region.
Figure 4 plots the average growth rate in which the gap between productivity growth in
LatAm economies and the US widened or contracted versus each countrys average percapita growth rate in the 2000-2013 period. The strong positive correlation between
productivity growth and per-capita growth is very clear. Moreover, with the exception of
Peru, the region appears to be parked in a bad equilibrium, where low productivity has
probably prevented growth from accelerating in a more consistent manner. When we cross
this data with our estimated pace of income growth coming from the surge in terms of
trade between 2001 and 2012, the discrepancies are even bigger. Venezuela and Chile were
the largest beneficiaries, and while growth in the latter has moved up, productivity has
consistently underperformed that of the US. While average income growth rates in Peru,
Colombia, Argentina and Brazil were clustered at similar levels, only the first was able to
move toward a better growth-productivity equilibrium.
FIGURE 5
Average yearly income growth generated from ToT expansion (%, 2001-2012)
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Venezuela
Chile*
Colombia
Peru
Argentina
Brazil
Mexico
LatAm
Note: Chile (2001-2010) Source:
25 March 2014
43
An agenda of productivity-enhancing reforms needs to be adopted across the region. This has
been the story in Mexico since last year, and we believe that the legislative component of the
reforms (approving secondary regulation of the constitutional changes of 2013) will set the
stage for an increase in investment and productivity over the longer term. While Peru stands in
a privileged place, the sense of urgency is much higher in Brazil, Argentina and Venezuela.
Politics
Energy rationing and public
demonstrations ahead of the
World cup could challenge
President Dilmas strong
support for re-election in Brazil
While the majority of Brazilian voters will only focus on politics and the October presidential
elections after the World Cup (June-July 2014), President Dilma is holding on to a very strong
lead. According to the latest Datafolha polls (February 19 and 20) her vote intentions stabilized
at 47%, which means if the elections were held today she would be re-elected in the first
round. However, a lot could happen between now and October. We believe two critical issues
could start to erode her political support this quarter. The first and more important risk is the
looming energy crisis that could impose a rationing program similar to that in 2001. Very dry
weather conditions and record low levels of water reservoirs have impaired the hydro-energy
production grid in Brazil. While some is being supplied by fuel-led plants (despite the much
higher cost), the system is working very close to full capacity and if it doesnt rain soon the
government may be forced to start rationing the supply of energy. The second could be new
public demonstrations during the World Cup. While Brazil winning the world cup should give
her candidacy a shot in the arm, that is a story for the next quarter.
In Colombia, President
Santoss re-election remains
the most likely scenario, but it
is not clear if this would
happen in the first or second
round.
Although it is strange to have a boring election in Latin America, we believe that the risks of
political noise amid the run-up to the 25 May presidential election in Colombia are contained.
Although a recent poll by Datexco has shown a rise in the prospects of the Green Party
candidate, Enrique Penaloza, and a possible victory for him in the second round, that still
seems an uphill road. He lacks a strong political machine to move the voters and has not built
a consensus among the left. Therefore, we believe President Santos re-election remains the
most likely scenario, given his leading position in other pools such as Ipsos-Napoleon Franco.
At this junction, it seems just a matter of whether this happens in the first or second round.
As we have mentioned before, in Mexico the political parties will be focused on the
discussion and eventual approval of secondary legislation for the telecommunications,
competition, political and energy reforms. The federal government is designing these new
laws that will likely be submitted to Congress in the coming weeks. We believe that the risks
of their not passing pass are low, as the government party requires only a simple majority
for approval. Furthermore, opposition parties PAN and PRD face internal disputes to renew
their leadership, which reduces their ability to control their respective congressional groups.
Of Venezuela and Argentina, we are more constructive on the latter. Public opinion in
Argentina has moved towards the center as the public looks for more moderate political
leaders and someone who has better relations with the international market. This transition in
the political arena will likely act as an anchor of expectations that will support the Argentine
assets. On the other hand, in Venezuela, public opinion remains highly polarized and although
the level of demonstrations has diminished, we still believe that sky-rocketing scarcity and
inflation will maintain a very volatile political framework. We expect, sooner rather than later,
the opposition to start negotiations with the government with likely improvements in the
institutional framework, such as a more balanced national electoral council.
25 March 2014
44
high
2013
S
moderate
low
L, G
G
L, G
2015
J
P
L
L
G
G (6)
P
P
L
P
L
P, G
G (16)
G
L (30)
P*
G*
P (25)
G*
P*
G*
G (30)
P (25)
G*
G*
P*
L
P
G, P (15)
P, G
P, G (14)
G (7)
L, G
P, G
P, G, L
P, G
G(9)
G
P(25)
P(6)
G (25)
P(9)
G
G
G(4)
P, G
L
G
25 March 2014
45
25 March 2014
46
Country outlooks
25 March 2014
47
Economics
Jian Chang
+852 2903 2654
jian.chang@barclays.com
Key recommendations
Rates: Easier liquidity, lower rates. The PBoC sounded less hawkish in its February
Rates Strategy
Rohit Arora
monetary policy report, stating that it would maintain appropriate levels of liquidity and
create a stable monetary-financial environment. The outlook for fixed income markets
has changed in favour of receivers/long bonds. We think low inflation and slower GDP
growth provide further support for such a stance, would be biased to receive on spikes.
FX: We think the recent CNY depreciation and widening of the USDCNY trading band is
designed to discourage one-way CNY appreciation expectations and moderate the pace
of capital inflows and FX reserve accumulation, rather than support exports. We expect
further near-term CNY depreciation on weakness in economic activity and continued
concerns about domestic financial sector risks. However, further upside in USDCNY is
likely to be limited due to significant currency weakness year-to-date. Further out, the
PBoC will likely favour modest CNY appreciation, albeit at a slower pace than in recent
years, as growth momentum picks up in H2 and trade surpluses return.
hamish.pepper@barclays.com
There was no shortage of bad news for the Chinese economy at the start of 2014. While the
Lunar New Year makes it difficult to assess underlying strength, manufacturing PMIs fell for
a third consecutive month to an eight-month low in March. Average Jan-Feb activity data
missed expectations by a wide margin, confirming a significant slowdown in Q1. In the
financial markets, after a near default of a trust product in January, March saw the first
onshore corporate bond default. The sharp depreciation of the CNY over Feb-Mar also
triggered sell-offs in commodities and worries of a property bubble burst.
We expect a marked
slowdown in Q1, followed by a
pick-up in q/q momentum
We lower our Q1 GDP forecast to 7.3% y/y but maintain our 7.2% full-year forecast. This
implies a marked slowdown in sequential momentum to about 5% q/q saar (Figure 1). We
expect the government to implement a more proactive fiscal policy and accelerate planned
investment projects to prevent growth from sliding further and to achieve its around 7.5%
FIGURE 1
We expect a recovery after the sharp deceleration in Q1
20
18
16
14
12
FIGURE 2
FAI growth slowed across all three major components
30
% y/y YTD
40
25
35
20
15
10
8
6
4
2
0
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Source: Haver Analytics, CEIC, Barclays Research
25 March 2014
10
5
0
-5
30
25
20
15
10
5
0
-5
Jan-10
Jan-11
Manufacturing
Jan-12
Jan-13
Jan-14
Infrastructure
Real estate
48
In our view, the weaker-than-expected Jan-Feb activity data highlight the governments
challenge to push for reforms while maintaining stable growth. We have argued that
reforms tend to slow growth in the near term before any longer-term benefits are felt. Since
December, the government has shown more commitment to cutting overcapacity and
controlling pollution, including measures like closing down factories. It has released new
local government performance evaluation criteria, downplayed the importance of GDP
growth and added environment standards and debt levels to the top of the priorities list.
These changes are curbing the investment enthusiasm of local governments. The ongoing
anti-graft campaign was broadened with more austerity measures to cut public spending
and a strict ban on gift-giving, which contributed to a deceleration in Jan-Feb holiday sales.
Reflecting the above, IP growth fell to a 5-year low of 8.6% y/y over Jan-Feb, from 9.7% in
December and 10% in Q4. In sectors with overcapacity issues, such as steel, aluminium, and
cement, production slowed markedly. Fixed asset investment growth also decelerated to its
slowest pace since December 2002, at 17.9% y/y ytd, led by the manufacturing sector
(Figure 2). We estimate that infrastructure investment growth also slowed to 18.8% y/y
(Dec: 21.1%). Retail sales growth fell to a 9-year low of 11.8%, though in real terms it was
more stable. Soft external demand was also not helpful (Figure 3). For details, see China:
Weak Jan-Feb data highlight the challenge to balance reform and growth, 13 March 2014.
The housing market also shows increasing signs of weakness, which is weighing on
investment and consumption. Property sales were flat over Jan-Feb, down from +17.3% in
2013 (Figure 4). Property starts fell by 27.4% y/y, and 3mma growth of -2.8% was a 9month low. The cooling housing market led to slow Jan-Feb sales of furniture, construction
materials and household appliance (Figure 5). Amid slowing sales and house price inflation,
some developers are facing financing difficulties, including bankruptcies. The CNYs recent
sharp deprecation has added to concerns about a potential bursting of the property bubble.
While the risks are real, we are not expecting a disorderly adjustment in the housing market.
Looking ahead, we expect the government to accelerate the start of investment projects to
stabilise growth. The government targets a budget deficit of CNY1.35trn in 2014 (2.2% of
GDP), compared with the 1.9% deficit in 2013. Premier Li said in March that reasonable
investment growth is needed in 2014. Leveraging private investment, the central
FIGURE 3
Weaker external demand has not helped
%3m/3m, saar
80
60
40
20
0
-20
-40
-60
-80
Feb-08 Feb-09
Exports
% y/y 3mma
35
30
25
20
15
10
5
0
-5
-10
-15
-20
Feb-10 Feb-11 Feb-12 Feb-13 Feb-14
US ISM: New orders less inventories (RHS)
25 March 2014
FIGURE 4
Waning growth in property sales and starts
100
80
60
40
20
0
-20
Feb-09
Feb-10
Feb-11
Feb-12
Feb-13
All buildings: floor space started
All buildings: floor space sold
Feb-14
49
We continue to expect more but selective defaults, further exposure of financial risks, and
greater financial market volatility in Q2 (see China: Implications of a first onshore corporate
bond default, 5 March 2014). We think recent events show the governments recognition of
the need to reduce moral hazard and excessive risk taking. But we believe the likelihood of
a financial meltdown remains small. Debt repayment pressures in a slowing and highly
leveraged economy certainly present risks, but Chinas government operates on a bottomline basis. It has committed to monitor and prevent systemic and regional financial risks.
The government would assess the investor base and potential impact before allowing more
defaults to occur. Debt rollovers or extensions will continue. While the chance of policy
mistakes is high, Chinas financial system is not fully-market based and the government still
has capacity to take action. Bank runs or capital flight remain unlikely, in our opinion.
We expect the PBoC to maintain easier liquidity conditions in H1, keeping interbank interest
rates low, ie, 7d repo rates at 3-4% (Figures 6, 7). This should help to prevent a liquidity
crisis, reduce shadow bank lending, promote bond financing, and lower average financing
costs. In our view, the PBoC shifted to a more neutral stance in January, in contrast to Q4
2013 (see China PBoC Watch: Less hawkish, more flexible, 12 February 2014). In February,
the PBoC also pledged to ensure appropriate liquidity and a stable monetary and financial
environment. RRR cuts are likely in the event of significant capital outflows or to avoid a
liquidity crisis after a credit event. Interest rate cuts are likely if growth disappoints further in
Q2. Well-contained inflation and slower property price rises provide room for an easing bias.
On 17 March, the PBoC widened the USDCNY trading band to 2% from 1%, a move that
highlights its determination to proceed with its long-held currency reform and convertibility
agenda, in our view. The PBoC reiterated that two-way currency volatilities will be a norm
and it will (gradually) exit from the day-to-day FX intervention. We think the main purpose
of the PBoC guiding the CNY weaker in mid-end February was to create two-way
expectations to deter speculative capital inflows and prevent an over-valued currency, and
not to actively use the currency to boost exports or growth. Increased uncertainty on the
FIGURE 5
Property sales and housing-related retail sales
% y/y
60
FIGURE 6
PBoC has ensured ample liquidity in the interbank market
% y/y
110
50
11
70
40
50
30
30
20
10
10
-10
0
-10
Feb-08
%
13
-30
Feb-09
Feb-10
25 March 2014
Feb-11
Feb-12
Feb-13
-50
Feb-14
9
7
5
3
1
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
50
FIGURE 8
CNY weakness continued amid a band widening
6.50
6.45
8
7
6.40
Band widening
to 2%
6.35
6.30
6.25
6.20
6.15
6.10
6.05
4
3
Feb-11
Band widening to
1% in April 2012
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
6.00
Sep-11
Mar-12
Sep-12
USD/CNY spot
Lower trading bound
Feb-14
Mar-13
Sep-13
Mar-14
USD/CNY fixing
Upper trading bound
FIGURE 9
China macroeconomic forecasts
2010
2011
2012
2013
2014F
2015F
10.4
9.3
7.7
7.7
7.2
7.4
10.0
9.7
7.9
8.0
7.2
7.2
9.2
10.9
8.6
7.8
7.1
7.2
12.0
9.5
7.7
8.9
7.9
7.7
Activity
0.4
-0.4
-0.2
-0.3
0.0
0.2
31.3
20.3
7.9
7.9
8.3
8.8
38.8
24.9
4.3
7.3
8.5
8.8
5,943
7,336
8,242
9,264
10,261
11,707
238
136
193
189
199
229
External sector
Current account (USD bn)
CA (% GDP)
4.0
1.9
2.3
2.0
1.9
2.0
182
155
230
260
278
302
106
116
112
118
125
141
549
695
737
839
899
967
2847
3181
3312
3821
3920
4050
Public sector
Public sector balance (% GDP)
-1.7
-1.1
-1.7
-1.9
-2.2
-2.1
16.8
15.2
14.9
15.3
15.7
16.0
Prices
CPI (% Dec/Dec)
4.6
4.1
2.5
2.5
3.5
3.5
FX (USD/CNY, eop)
6.59
6.32
6.23
6.06
6.07
5.95
1y ago
Last
Q1 14F
Q2 14F
Q3 14F
Q4 14F
7.7
7.7
7.3
7.2
7.1
7.2
2.1
2.5
2.5
2.5
2.7
3.5
FX (USD/CNY, eop)
6.21
6.06
6.20
6.15
6.08
6.07
6.00
6.00
6.00
6.00
6.00
6.00
25 March 2014
51
Jian Chang
+852 2903 2654
jian.chang@barclays.com
Hong Kong has been the hub of credit supply to mainland Chinese corporations and
individuals in recent years. As of September 2013, the Hong Kong banking systems gross
credit exposure to mainland China had jumped by 32% y/y to HKD3.5trn, equivalent to 21%
of total banking sector assets (Figure 1). This is more than four times the HKD0.86trn at
end-2008. This data includes Hong Kongs direct and indirect, on- and off-balance-sheet
exposure to China-related non-bank counterparties.
Jerry Peng
+852 2903 3291
jerry.peng@barclays.com
On a net basis, Hong Kong had net claims of HKD2.3trn on mainland banks and non-bank
sectors as of end-2013. This is a marked increase from the HKD0.58trn at end-2010 and
-HKD0.15trn in 2009. The increase in net claims has been driven by rapid expansion of the
asset side of the banking sector balance sheet, while liabilities to China have risen much
more modestly (Figure 2). Since a majority of the transactions are conducted through banks
rather than directly with mainland non-bank entities, the credit expansion is recorded as
claims on mainland banks, though ultimately it reflects exposure to non-bank sectors.
It is not a surprise that Hong Kong has been a net supplier of credit to China since 2010. A
combination of factors low interest rates in Hong Kong since the Fed launched QE in
November 2009, tight liquidity conditions in the mainland, particularly in 2010-11 and H2
2013, and continued expectations of CNY appreciation (except for 2012) has driven the
surge. In the last six months of 2013, there was a steady rise in onshore funding costs, and
the CNY appreciated rapidly from September.
leading to increased
arbitrage activity
These factors created sizeable onshore-offshore interest rate and exchange rate arbitrage
opportunities. Borrowing in HKD or USD and depositing the funds in higher yielding mainland
investment products has been a popular carry trade. Moreover, Chinese corporates have a
strong incentive to raise funds offshore, while Hong Kong banks have a strong incentive to
hold more interbank assets in the mainland. Capital inflows in the guise of trade finance have
been prevalent. For example, Hong Kongs bank loan data show trade finance surged by
44%y/y in 2013, with its share rising to 9.1% from 5.2% in 2009 (Figure 3).
FIGURE 1
Rising exposure to mainland China
FIGURE 2
Hong Kongs claims on and liabilities to mainland China
%
25
HKD trn
4.0
3.5
3.0
3.5
20
3.0
Claims on Banks
Claims on non-banks
Liabilities to banks
Liabilities to non-banks
2.5
2.5
15
2.0
10
1.5
2.0
1.5
1.0
0.5
0.0
1.0
0.5
0.0
Sep-07
HKD trn
4.0
-0.5
-1.0
Sep-08
Sep-09
25 March 2014
Sep-10
Sep-11
Sep-12
0
Sep-13
-1.5
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
52
The strong financing demand from mainland borrowers is also reflected in robust CNH bond
issuance. In the first two and a half months of this year, CNH bond issuance has totalled a
record CNY191bn, already more than half the CNY383bn for all of 2013 (Figure 4). Chinese
companies account for 84.5% of the issuance YTD, up from 79% in H1 2013.
This sizable mainland credit exposure in the facing of rising China credit defaults and a
decelerating economy pose significant risk to the banking system in Hong Kong. Our equity
bank analysts expect more NPLs for Hong Kongs banking system in 2014. Overall, however,
we think the risks remain manageable. Bank lending to mainland customers is mostly backed
by guarantees or collateralised. The Hong Kong Monetary Authoritys macro stress testing in
September 2013 suggests that the banking sector should be able to withstand severe macro
shocks, similar to those experienced during the Asian financial crisis. Meanwhile, we note
that recent sharp depreciation of the CNH and increased volatility, easier onshore liquidity
and Fed tapering are likely to dampen arbitrage activity and excessive risk taking.
Hong Kongs property market has been subdued since the government announced stricter
demand-curbing measures in February 2013 (see CNH Markets: Facing competition, 19
March 2013). Transactions have stayed at multi-year lows of 4,000-5,000 units per month
since Q2 13. Property prices ended 2013 with the slowest pace of increase since 2009, at
8%, and they have been flat since last summer (Figure 5). We think the government is
unlikely to relax the tightening measures. The budget report estimates total land supply of
20,000 residential flats this year, up from 18,000 in 2013. The government is committed to
increasing housing supply to 470,000 units in the coming 10 years. Overall, we believe the
risks to property prices remain to the downside amid steady Fed tapering. At the March
FOMC meeting, the Fed quickened the expected pace of its rate hike cycle. The median
forecast of the fed funds rate rose by 25bp, to 1.0%, at the end of 2015.
We forecast Hong Kong GDP growth of 3.4% y/y in 2014, up from 2.9% in 2013. Growth in
Q4 13 was stronger than expected (3.0% y/y), supported by a rebound in private
consumption. Investment remained weak while trade growth accelerated on improved
demand from advanced economies. In 2014, we expect continued weakness in the property
market to weigh on private consumption growth (Figure 6). Investment growth is likely to pick
up, driven by the rollout of public infrastructure projects, such as the airport expansion and
major railway upgrade projects. The government expects the economy to grow 3-4% in 2014
on the back of an improved global environment. The 2014 budget report also emphasised
fiscal sustainability in view of the ageing population and shrinking labour force.
FIGURE 3
Hong Kong loan growth breakdown
FIGURE 4
CNH bond issuance has accelerated
CNY bn
%y/y
100
80
80
70
60
60
50
40
40
20
30
20
10
-20
-40
Jan-08
0
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14
Jan-09
Jan-10
25 March 2014
Jan-11
Jan-12
Jan-13
Jan-14
Mar
MTD
53
FIGURE 5
Subdued housing transactions and flat property prices
20
thousand units
Index (1999=100)
FIGURE 6
Weak property market likely to weigh on consumption
18
240
16
220
14
30
20
200
12
180
10
10
160
140
6
4
120
100
0
-10
0
80
Jul-06
Jan-08
Jul-09
Jan-11
Jul-12
Jan-14
House price index (RHS)
Residential transaction volume
Source: CEIC, Barclays Research
40
260
-20
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Source: CEIC, Barclays Research
FIGURE 7
Hong Kong macroeconomic forecasts
2010
2011
2012
2013
2014F
2015F
6.8
4.8
1.5
2.9
3.4
3.8
6.7
5.9
3.8
3.9
4.6
4.5
6.1
8.4
4.1
4.2
3.4
4.0
Investment/GFCF (% y/y)
7.7
10.2
6.8
3.3
7.9
6.0
-0.2
-1.4
-2.2
-0.9
-1.2
-0.6
Exports (% y/y)
16.8
3.9
1.9
6.5
6.7
6.5
Imports (% y/y)
17.4
4.6
2.9
6.9
7.2
6.7
229
249
263
274
288
309
12.6
Activity
16.0
13.8
4.1
5.6
9.5
CA (% GDP)
7.0
5.6
1.6
2.1
3.3
4.1
3.3
-7.5
-18.9
-26.2
-28.2
-29.9
-15.7
0.2
-13.2
-14.9
-12.9
-12.9
12.5
-3.4
29.0
17.4
14.2
14.2
879
985
1031
1166
1280
1408
269
285
317
311
322
335
4.1
3.8
3.2
0.6
1.0
1.0
0.6
0.6
0.5
0.5
0.5
0.5
Public sector
Prices
CPI (% Dec/Dec)
2.9
5.7
3.8
4.3
3.7
4.4
FX (USD/HKD, eop)
7.78
7.77
7.75
7.75
7.77
7.77
1y ago
Last
Q1 14F
Q2 14F
Q3 14F
Q4 14F
2.9
3.0
3.2
3.3
3.6
3.6
3.6
4.3
4.4
4.3
3.9
3.7
FX (USD/HKD, eop)
7.76
7.75
7.77
7.77
7.77
7.77
0.5
0.5
0.5
0.5
0.5
0.5
25 March 2014
54
Economics
Siddhartha Sanyal
+91 22 6719 6177
siddhartha.sanyal@barclays.com
Rahul Bajoria
+65 6308 3511
Key recommendations
Rates: Receive 5y OIS. Indias policy adjustments and an ongoing differentiation within
rahul.bajoria@barclays.com
emerging markets have put Indian assets in a sweet spot. But the rates market so far has
struggled to follow-through amid pessimism in the onshore market. But given the
strong momentum, we think the near-term path of least resistance for yields is lower,
and we recommend tactically initiating a 5y OIS receiver. However, if there is uncertainty
ahead of the election results in May, we think 1s5s flatteners may offer a better riskreward and would look for opportunities to convert receivers into flatteners.
Rates Strategy
Rohit Arora
+65 6308 2092
rohit.arora3@barclays.com
FX Strategy
FX: Positive INR momentum will likely continue in the near term, on the back of a
Hamish Pepper
narrowing current account deficit, softer inflation, enhanced policy credibility and strong
capital inflows. Moreover, lower vulnerabilities given continued undervaluation, make
the INR one of our favoured high-yield EM currencies. As such, we recommend being
short USDINR targeting 59.0 (1m; stop loss at 62.50). The general election remains a risk
and further out, an expected stronger USD will likely limit INR appreciation.
FIGURE 1
BJPs projected vote share has risen significantly relative to
previous elections
40
Seats
Vote share
(%)
35
FIGURE 2
Opinion polls confirm lead of the BJP-led coalition (NDA)
300
250
30
200
25
150
20
100
15
50
0
INC
BJP
25 March 2014
Feb 2014E
2014E
2013E
2009
2004
1999
1998
1996
1991
10
NDA
UPA
55
The progress of the two larger parties in acquiring new alliance partners has been limited.
The momentum of the new political party, AAP, has slowed, with opinion polls showing
subdued national support for the anti-corruption party. The economic agendas of the key
parties have yet to be fully detailed. However, the BJP has indicated its preference to
prioritise infrastructure, power generation and the manufacturing sector, along with
implementing a goods and service tax and measures to increase FDI as ways to boost
growth momentum (see Inside India: The game of thrones, 4 March 2014).
The rupee (INR) has strengthened significantly since September 2013. The slew of measures
by the Reserve Bank of India (RBI), including policies designed to attract near-term capital
flows (see India: Rajans roadmap to confidence, 5 September 2013), have been markedly
beneficial. Inflows due to these unconventional measures have totalled nearly USD35bn.
More fundamentally, Indias current account deficit, has improved rapidly since mid-2013.
We estimate the current account deficit will be USD38bn in FY 13-14 (2.1% of GDP) and
USD50bn in FY 14-15 (2.4% of GDP), markedly lower than the USD88bn (4.8% of GDP)
deficit in FY 12-13. The improvement has been driven by stronger exports (both
merchandise and services), much lower gold imports, softer non-oil/non-gold imports, and
steady remittances. INR weakness and government efforts to curb various imports, on top
of sluggish domestic demand, have also helped in the rapid adjustment.
The INR has also recovered, gaining more than 10% against the USD since early September
and reversing a large part of its ~20% fall over June-August. The INR has also outperformed
a basket of its EM peers by more than 1100bp since early September, which has reversed a
similar magnitude of underperformance in the previous three months (Figure 4). We remain
sanguine on INR fundamentals, but think the election results will have strong influence on
the trajectory of the currency (see India: Pre-election INR rally to continue, 11 March 2014).
Capital inflows, such as foreign direct investment (FDI), remain supportive (USD21.5bn during
April 2013-January 2014). Investment flows from foreign institutional investors (FIIs) into
equities have remained steady as well (USD11.6bn FYTD). FII investment in Indian debt has
seen large swings outflows of USD10.3bn during April-December, followed by more than
USD6bn of inflows since January. On balance, we expect an overall balance of payments
surplus in FY 14-15, in the absence of any major disappointment in the elections.
FIGURE 3
Current account deficit a rapid turnaround
FIGURE 4
INR has outperformed EM peer currencies since September,
after underperforming previously
130
125
-5
120
-10
115
-15
-20
110
-25
105
-30
-35
May-11
Apr-12
Mar-13
Jan-14
Dec-14
Barclays tracking estimate of current account deficit (USD bn)
Current account: existing forecast (USDbn)
Source: Haver Analytics, Barclays Research
25 March 2014
100
95
Jan-13
Apr-13
INR
Aug-13
Nov-13
Mar-14
56
Inflation surprises lower; we expect the RBI to stay on hold near term
Inflation prints softer;
we think core inflationary
pressures are low
Inflation has been volatile but is now moving lower. After a late-2013 upsurge, largely
reflecting food (eg, vegetables) price spikes, inflation prints have normalised this year as
wholesale (WPI) and retail (CPI) inflation were 4.7% and 8.1% y/y, respectively, in February
2014 (Jan WPI: 5.1% and Jan CPI: 8.8%). Core inflation also remains soft: core WPI and CPI
were 3.2% and 7.9% y/y, respectively, in February. We think that weak growth momentum,
large spare capacity in the manufacturing sector, a lack of pricing power within industry,
and the recent stability in INR should limit upside pressure on core inflation. This view also
takes into account the possibility of some more upticks from adverse base effects.
Even with tepid growth and softening inflation, the RBI is unlikely to lose its focus on
managing inflation expectations. The central bank surprised with a 25bp hike in the repo
rate to 8% at its policy meeting in January. It also shows an inclination to adopt the
recommendations of the Dr. Urjit Patel committee on monetary policy framework, which
expects CPI inflation to be close to 8% by January 2015. As such, the RBI has indicated that
rates are appropriate now, but CPI inflation and inflation expectations will need to be
lowered over time to generate sustainable growth. On balance, we expect the RBI to stay on
hold in the coming months, while post-election developments and the new governments
economic policies will likely have a considerable influence on monetary policy in H2 2014.
Growth recovery still weak, but with early indications of green shoots
Growth is still weak, but
headwinds are easing
Growth momentum remains weak, but we see some emerging green shoots of recovery.
Real GDP growth came in at 4.7% y/y in Q4 13, and we forecast growth of above 5% in
2014. We think the headwinds buffeting India are easing at the margin, as bottlenecks in
key industries such as power generation, mining and the financial sector are being cleared.
While this may not be a conclusive signal of stronger activity just yet, we think these
improvements could facilitate a growth recovery in FY 14-15. This is supported by improved
exports and PMIs as well. We maintain our FY 13-14 GDP forecast at 4.7% and expect
growth to improve to 5.6% in FY14-15. Following the elections, if business confidence
improves, growth could turn stronger, as key industries start to regain momentum. Growth,
however, will continue to face challenges from the RBIs tight monetary policy stance, which
along with restrained spending capacity could act as a constraint if the new government
remains committed to achieving the current fiscal deficit target of 4.1% of GDP.
FIGURE 5
Subdued capacity utilisation suggests benign core
inflationary pressures
FIGURE 6
Repo rate towards upper end of historical range despite
weak growth prospects
20
10
10
8
6
-10
-20
-30
-40
Dec-05
11
-2
-4
Dec-07
Dec-09
Dec-11
Dec-13
Level of Cap Utilization: Net Response (%, 1Q lead)
Core WPI (% y/y, RHS)
25 March 2014
3
Mar-09
Jun-10
MSF Rate
Sep-11
Repo Rate
Dec-12
Mar-14
57
FIGURE 8
Recovering PMIs hint at a modest uptick
65
10
60
55
50
-2
45
%, y/y
14
-6
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
40
Feb-06
Feb-08
Feb-10
Feb-12
Composite PMI
Manufacturing PMI
Services PMI
Feb-14
FIGURE 9
India macroeconomic forecasts
FY 10-11
FY 11-12
FY 12-13
FY 13-14F
FY 14-15F
FY 15-16F
9.3
6.2
4.6
4.7
5.6
6.4
11.9
7.4
4.6
3.7
6.6
7.7
8.6
8.6
4.7
3.2
5.9
6.6
14.0
8.0
0.8
0.4
5.3
6.8
-0.3
-2.7
-1.0
1.1
-1.3
-1.7
Exports (% y/y)
19.7
14.9
5.2
9.0
11.0
11.0
Activity
Imports (% y/y)
15.8
20.8
6.8
3.3
12.2
13.0
1713
1874
1850
1851
2049
2197
-47.9
-78.2
-87.8
-38.2
-50.0
-53.8
External sector
Current account ($bn)
CA (% GDP)
-2.8
-4.2
-4.7
-2.1
-2.4
-2.4
-127.2
-189.7
-195.7
-150.1
-165.7
-180
9.4
22.1
19.8
23.7
25.0
27
52.6
45.7
69.5
27.5
42.2
50
306
345
390
430
450
455
305
294
293
300
315
330
-8.1
-8.1
-7.4
-7.2
-7.0
-7.0
66.0
65.6
64.5
63.5
61.0
61.0
WPI (% Mar/Mar)
9.7
7.7
5.7
5.7
5.5
5.6
CPI (% Mar/Mar)
10.0
9.4
10.4
8.3
7.6
7.0
Public sector
Prices
FX, eop
44.6
50.9
54.4
59.0
61.0
63.0
1y ago
Last
Q1 14F
Q2 14F
Q3 14F
Q4 14F
4.8
4.7
4.8
5.4
5.2
5.6
5.7
6.4
5.7
5.9
5.0
5.0
10.4
9.9
8.3
7.2
6.0
6.3
54.4
61.9
59.0
61.0
61.0
61.0
7.50
7.75
8.00
8.00
7.75
7.50
Note: Fiscal year runs from 1 April to 31 March. Source: GoI, RBI, Bloomberg, Barclays Research
25 March 2014
58
Key recommendations
FX: Constructive IDR: We recommend being short 12m USDIDR NDF (strike: 12,300,
target: 11,200, stop: 12,500). We believe Jokowis confirmation is positive for the IDR
against a backdrop of reduced vulnerabilities. We also expect the upcoming change to an
onshore (JISDOR) NDF fix on 28 March to improve NDF market liquidity and support
portfolio inflows by giving investors a better instrument to hedge FX risk. However, in the
near term, the IDR rally may be capped as BI manages it relative to a basket to maintain
export competitiveness and reduce the gap between gross and net FX reserves.
Rates: Stay neutral IndoGBs, for now. We believe policy and price adjustments in
Indonesia have been sufficient, which in an environment of increased differentiation
within EM makes Indonesian assets look attractive. However, at current levels, we think
a lot of optimism is priced, and we do not find the risk-reward to be overweight
asymmetric. In fact, Indonesias improving fundamentals have been getting priced since
late January 10y bond yields have rallied from 9% to 8%, and foreign inflows have
been a significant ~USD2.5bn, compared with USD4.4bn in 2013 as a whole. Moreover,
global risks remain high. Although our bias is to move overweight (if economic data do
not disappoint and yields rise above 8.5%), we do not recommend chasing the rally at
current levels and remain comfortable with our neutral stance.
Credit: Our current stance on the credit is neutral. That said, we see Jokowis candidacy
as a positive. We have pointed to two potential triggers to increase exposure: 1) an early
announcement of Jokowi as a presidential candidate; and 2) stable (or at least more
than USD100bn) foreign reserves for March (due in early April). We may review our
FIGURE 1
Investment some signs of hope from terms of trade
20
FIGURE 2
Current account: Sharp turnaround in non-oil & gas goods
balance
15
12
10
10
-5
-4
15
-10
0
-15
-5
-20
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
ID: Investment (% y/y)
25 March 2014
USD bn
-8
-12
04
05
06
07
08
09
10
11
12
13
59
We believe Jokowis confirmation is positive news for the IDR in the context of a significant
reduction in Indonesias vulnerabilities over the past 6-9 months: increased policy credibility
(rate hikes plus concerns on two-tier market being addressed), the sharp reduction in the
current account deficit, moderating inflation and rising FX reserves. The upcoming change
in benchmark for IDR NDFs is another positive development that should support portfolio
inflows by giving investors a better instrument to hedge FX risk (see Indonesia: IDR NDFs
revamp A positive development, 19 February 2014).
However, near-term
appreciation will likely be
limited, given BIs bias to keep
IDR REER competitive and
rebuild FX reserves
However, the sharp year-to-date strengthening in the IDR, BIs focus on keeping IDR REER
competitive to manage the current account deficit and a bias to rebuild FX reserves to
reduce the gap between gross and net reserves will likely limit the extent of any further
rally. We forecast USDIDR at 11,400 in 1m and 3m. Upside risks to our forecast emanate
from a larger trade deficit, driven by the mineral ore export ban and concerns about EM on
account of weakness in Chinese activity and the Russia-Ukraine stand-off. Over the
medium term, we expect USDIDR gradually to drift lower to 11,300 in 6m and 11,200 in
12m as the current account adjustment process continues and more clarity on the new
governments policy agenda emerges. However, a strong dollar environment will tend to
cap the extent of appreciation.
25 March 2014
60
We expect Bank Indonesia to keep policy rates unchanged through 2014 (BI: 7.5% and
FASBI: 5.75%) as it lets the 175bp of hikes undertaken last year pass through to the real
economy amid a better-behaved FX market. However, we believe BI will maintain its tight
bias to support investor confidence, with a policy focus remaining squarely on current
account deficit management and ensuring within-target inflation. Barring renewed market
stress on account of EM concerns or inflation spike driven by an upwards adjustment to
administered prices, we believe the next move from BI would be easing, but only in H1 15.
Policy rate hikes continue to pass through to the real economy, with a time lag of 6-9
months. Working capital interest rates rose 80bp, to 12.2%, in January, compared with
11.4% in June 2013. There has been some stabilisation in deposit rates, with the 1m time
deposit rate holding at 7.9% in January, unchanged from December. It has, however, risen
230bp since June 2013 when it was 5.6%. It is worth noting that some of the smaller banks
are offering rates as high as 10-12% for large deposits. Overall net interest rate margins
remain under pressure, making banks more cautious in their lending activities.
We are revising down our year-end 2014 inflation forecast 60bp to 5.4% y/y (BI target: 3.55.5%). This is on account of: 1) a change in base year to 2012 from 2007, which shaves off
20-30bp; 2) a downside surprise in February inflation relative to our forecast; and 3) the
rupiah strengthening by nearly 8% year-to-date. If the government increases fuel prices by
roughly a third, we estimate this would boost inflation by 250-270bp. The central banks
reaction function will depend on second-round effects; however, under the new governor,
we believe the willingness to hike is higher to ensure that inflation expectations remain
anchored. We maintain our 2015 year-end inflation forecast of 5.5%.
FX reserves rose nearly USD6bn to USD102.7bn in February from their recent low in
November. The build-up is supported by trade and portfolio flows, but also FX swap/dollar
term deposit accretion. Indonesias import cover ratio is 6.6 months, and short-term
25 March 2014
61
We expect the government to revise its 2014 fiscal deficit target higher by 50bp, to 2.2% of
GDP, as it adjusts its macro assumptions. We raise our forecast by 20bp to 2.1%, slightly
better than the target on our assumption of capex under-spending. Year-to-date, the
government has completed over 41% of its gross issuance target of IDR370.4trn. However,
a higher deficit would imply IDR50trn of additional issuance, which could weigh on markets.
We expect the budget revision to come through in Q2, likely May.
As for a fuel price hike, the government has the authority to adjust prices and does not need
approval from parliament. While the political cycle makes it challenging, President
Yudhoyono does not have much to lose if he hikes fuel prices, given that he cannot run in
the presidential race. We think it is 50:50 whether hikes will materialise. In terms of timing,
we think they would likely be after the parliamentary but before the presidential elections.
The 2014 budget allocates IDR210.7trn for fuel subsidies up from IDR199.9trn last year.
FIGURE 3
Indonesia macroeconomic forecasts
2010
2011
2012
2013
2014F
2015F
6.2
6.5
6.3
5.8
5.3
5.6
4.8
5.3
7.1
4.6
3.8
4.2
4.7
4.7
5.3
5.3
5.3
5.2
8.5
8.3
9.7
4.7
4.5
4.8
Activity
0.9
1.5
-1.6
2.1
1.7
1.2
Exports (% y/y)
15.3
13.6
2.0
5.3
5.4
5.5
Imports (% y/y)
17.3
13.3
6.7
1.2
2.5
4.0
710
846
874
864
885
1002
5.1
1.7
-24.4
-28.5
-21.7
-18.6
External sector
Current account (USD bn)
CA (% GDP)
0.7
0.2
-2.8
-3.3
-2.5
-1.9
30.6
34.8
8.6
6.2
6.9
7.1
11.1
11.5
13.7
14.8
10.0
12.0
15.5
2.0
11.1
7.9
6.0
10.3
202
225
252
264
281
298
96.2
110.1
112.8
99.4
103.5
107.2
-0.7
-1.1
-1.8
-2.3
-2.1
-2.0
0.6
0.1
-0.6
-1.1
-1.0
-0.9
25.9
24.1
23.7
27.0
24.0
23.1
Public sector
Prices
CPI (% Dec/Dec)
FX, eop
Real GDP (% y/y)
CPI (% y/y, eop)
FX (domestic currency/USD, eop)
Overnight policy rate (%, eop)
7.0
3.8
3.7
8.1
5.4
5.5
8,991
9,068
9,670
12,189
11,300
11,000
1y ago
Last
Q1 14F
Q2 14F
Q3 14F
Q4 14F
6.0
5.7
5.4
5.2
5.2
5.5
5.0
8.1
7.2
6.8
5.3
5.4
9,719
12,189
11,400
11,400
11,300
11,300
5.75
7.50
7.50
7.50
7.50
7.50
25 March 2014
62
Regaining vitality
The more convincing revival of domestic demand is finally giving the Park administration
the space to pursue structural policies to lift trend growth and reinvigorate the services
economy. This should add to the safe-haven appeal of Korean assets and the growth
momentum generated by rising consumer confidence and property prices.
Economics
Wai Ho Leong
+65 6308 3292
waiho.leong@barclays.com
Key recommendations
Rates: Pay 5y5y NDIRS, underweight duration. There are nascent signs of a recovery in
Bill Diviney
+65 6308 3607
domestic demand. However, so far, rates markets have focused on global growth
uncertainties. We think those expectations could be disappointed. Moreover, the
favourable technical factors observed in February (eg, strong demand from insurance
companies) are receding, in our view.
bill.diviney@barclays.com
Rates Strategy
Rohit Arora
FX: Continued concern about the strength of Chinese and US economic activity, as well
as recent CNY weakness, is likely to limit near-term KRW appreciation. Further out, a
likely pickup in domestic demand bodes well for a return of inflows to Korean equities,
and we think there is room for the KRW to reverse some of its year-to-date
underperformance (-2.0% against the USD), in the context of low vulnerability and a
pickup in global manufacturing activity.
rohit.arora3@barclays.com
FX Strategy
Hamish Pepper
+65 6308 2220
hamish.pepper@barclays.com
Due to a weaker start to exports, we now expect Q1 GDP to grow at a slightly slower pace
of 0.9% q/q sa (previously: 1%; Q4: 0.9%), but to re-accelerate to 1.2% (previously: 1.1%)
in Q2. There is no change to our full-year forecasts for 4.1% (Bank of Korea: 3.8%) in 2014
and 4.2% in 2015. One silver lining is the strength of the recovery in the EU (where weather
was normal), which enabled Korean exports to average 0.6% y/y growth in January and
February (January-February US shipments: -8.1%; EU: +17.7%). We look for momentum to
recover more meaningfully from March, as air freight to the US normalises after a record
number of airport closures. Looking ahead, the launch of the Samsung smart phone the
Galaxy S5 (ahead of the likely release of a competing Apple model) is expected to be a
factor of support for electronics production and shipments from Q2.
Another factor of support is the growing sense that growth is broadening out into domestic
demand, particularly consumption. The Bank of Koreas (BoK) consumer sentiment index,
which rose to 107 in November from 99 at end-2012, rose further to 108 in February
helped by a steady increase in wages and a sustained recovery in house prices (Korea
Property market bottoms out, aiding the recovery in domestic demand, 7 November 2013).
FIGURE 1
Business confidence plays catch-up with US ISM
FIGURE 2
Shipbuilders could make more deliveries in 2014
80
30
60
25
20
40
180
15
20
10
5
0
-20
160
-10
Feb-09
Feb-10
Feb-11
Feb-12
Feb-13
-15
Feb-14
IP (% 3m/3m saar)
US ISM New Orders - Inventories (3mma, RHS)
Source: Haver Analytics, Barclays Research
25 March 2014
USD bn
60
55
50
45
140
-5
-40
-60
Feb-08
200
120
100
Nov-11
Aug-12
May-13
Daewoo's shipbuilding backlog (# vessels)
40
35
30
Feb-14
USD bn
63
More importantly, in our view, the more stable growth outlook has allowed government policy
to refocus its attention on dealing with structural challenges to offset the effects of an aging
population and to grow the economy out of its household debt burden. Aimed also at creating
more jobs for women and the young, the three-year economic innovation plan announced on
25 February will focus first on revitalising five key services industries: healthcare, education,
tourism, finance and software. Our sense from onshore meetings in March was that the
government is moving more quickly and cohesively than usual. To speed things up, the
Ministry of Strategy and Finance (MOSF) is now forming inter-ministry taskforces for each of
the five industries each led by a minister and drawing advice from private sector experts
that will report with actionable strategies by end-Q2. Even so, the Park administrations ability
to implement these recommendations will likely depend on the Saenuri partys performance in
the 4 June local elections. Although technically not a mid-term test, a poor showing by the
ruling party could galvanise the opposition to resist the passage of the bills in the National
Assembly more strongly. This is less likely, however, as long as President Parks popularity
rating continues to hold up above 60% in recent opinion polls. 2
We expect exports to continue to hold up well, despite concerns of a more abrupt slowdown
in China. One factor is the recovery in shipbuilding. Korean shipbuilders, the largest in the
world in gross tonnage, reported substantial increases in new orders in 2013, benefiting from
a drive towards fuel efficiency and increasing demand for energy exploration platforms. For
instance, Samsung Heavy, the worlds second-largest shipbuilder, received more than
USD13bn in orders in 2013 (2012: USD9.6bn). It is currently building a 600,000-ton floating
LNG processing platform for Shell the worlds first and a vessel worth an estimated USD6bn.
With shipbuilders stepping up vessel deliveries this year, Koreas current account surplus is
not likely to narrow too much from last year. Indeed, the current account surplus was
USD3.6bn in January 2014 a new record for January despite the weaker JPY, timing of
Lunar New Year holidays and disruptions to air freight to the US due to poor weather. To us,
this affirms the rising global brand premium of Korean exports. Coupled with a steady
improvement in the foreign earnings of Korean civil engineering firms, we recently
upgraded our 2014 current account surplus projection to 4.9% of GDP (USD65.5bn) and
adjusted our 2015 current account forecast to 4.4% or USD64bn (from USD47.6bn). The
trend in corporate foreign cash holdings, which continues to reach new highs, reflects this,
in our view. For instance, foreign-currency deposits held by Korean companies (or
exporters) rose 54% y/y to USD47.4bn at end-February 2014 and this is limiting the ability
of USDKRW to grind higher during bouts of risk aversion.
FIGURE 3
Apartment buying has picked up, even at the height of winter
FIGURE 4
Prices bottoming, but is it time to buy rather than rent?
200
120
150
110
100
100
50
90
80
-50
70
-100
Feb-09
Feb-10
Feb-11
Feb-12
Feb-14
Seoul, % y/y
60
Feb-04
Feb-06
Feb-08
Feb-10
Feb-12
Feb-14
Jeonse
25 March 2014
Feb-13
Parks One-Year Scorecard: Could Do Better, Wall Street Journal, 24 February 2014
64
Some of the current account surplus is being channelled into asset markets. The housing
recovery that began in July 2013 has continued to gather pace. According to data compiled
by Kookmin Bank, national home prices accelerated in February, up 0.15% m/m on a
seasonally adjusted basis, the eighth straight monthly increase (January: +0.18%; December:
+0.19%). More homes were bought and sold in February this year than in the same month
since statistics began in 2006. According to the Ministry of Land, Infrastructure and
Transport, home transaction volumes totalled 78,798 units in February, up 66.6% y/y and up
34% m/m an indication that it is not typical for apartment buying to occur during the cold
winter months. The recovery also appears to be broader based this time, led initially by price
increases outside of Seoul from June. However, more recently, even Seoul prices have picked
up. The Seoul metropolitan area, home to 21% of Koreas 50mn people and a main driver of
house price appreciation in the past, showed the first m/m increase in prices in 26 months in
October. Indeed, prices in some of the more fashionable Seoul districts have started to
stabilise. In Gangnam, house prices increased 0.12% m/m on a seasonally adjusted basis in
February, the third straight monthly rise (January: +0.04%; December: +0.10%).
Meanwhile, inflation should turn incrementally less benign. From a 1% average in JanuaryFebruary, we expect headline inflation to hit 2% by end-Q2 and re-enter the BoKs target
range by end-Q3 (2.6%), led by base effects, the removal of subsidies for school meals and
the gradual re-emergence of demand-side pressures. With growth now broadening into
domestic demand, supported by the governments shift towards structural reforms (see
Korea: A clear structural reform agenda to offset ageing demographics, 28 February 2014),
we expect the BoK to adopt an incrementally more hawkish tone in its policy statements.
Following the recent nomination of Lee Ju Yeol as candidate for the BoK governorship,
inflation is likely to become a bigger focus of market attention, with policy becoming more
data dependent (see Korea: BoK governor nominee announcement supportive of our H2
normalisation call, 3 March 2014). In a submission ahead of his 19 March Parliamentary
committee hearing, Mr Lee argued that the economy needed to prepare for the eventuality
of higher interest rates in the interests of maintaining price stability. To us, these
comments are consistent with the tone at recent BoK MPC meetings. With growth
continuing to broaden into domestic demand, and policy shifting decisively towards
structural reforms and away from short-term monetary and fiscal boosters, we maintain our
view that the BoK will begin normalising interest rates in H2 14 probably from late Q3,
when we expect Koreas negative output gap to have closed.
FIGURE 5
Continued strong current account surplus
FIGURE 6
supporting gains in the (still below fair value) KRW
80
120
70
110
60
100
50
40
90
30
80
20
70
10
60
0
-10
Jan Feb Mar Apr May Jun
2008
2011
Source:
25 March 2014
2010
2013
50
Mar-94
Mar-98
KRW REER
Mar-02
Mar-06
Mar-10
Mar-14
20-year avg
65
FIGURE 7
Inflation likely to pick up in 2014
5.0
FIGURE 8
catching up with well-anchored inflation expectations
6.0
Forecast
4.0
5.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
-1.0
Dec-10
0.0
Feb-08
Dec-11
Food
Dec-12
Energy
Dec-13
Services
Dec-14
Goods
Feb-09
Feb-10
Feb-11
Inflation Expectations
CPI inflation (% y/y)
Feb-12
Feb-14
Feb-13
FIGURE 9
Korea macroeconomic forecasts
2010
2011
2012
2013
2014F
2015F
6.3
3.7
2.0
2.8
4.1
4.2
5.7
1.9
1.0
2.1
3.6
3.8
4.4
2.4
1.7
1.9
2.8
3.1
5.8
-1.0
-1.7
3.8
8.1
7.7
0.1
1.9
1.1
0.7
0.8
0.5
Exports (% y/y)
14.7
9.1
4.2
4.3
6.5
7.3
Activity
Imports (% y/y)
17.3
6.1
2.5
3.5
6.1
7.9
1,015
1,115
1,128
1,202
1,325
1,444
64.3
External sector
Current account (USD bn)
29.4
26.1
48.1
70.7
65.5
CA (% GDP)
2.9
2.3
4.3
5.9
4.9
4.4
40.1
31.7
39.8
60.7
52.9
47.9
-22.2
-16.4
-18.9
-15.5
-15.0
-15.0
21.9
3.6
-19.3
-33.8
2.0
12.0
360
399
409
407
418
428
292
306
327
346
373
404
Public sector
Public sector balance (% GDP)
1.4
1.5
1.5
1.6
2.0
2.5
-1.6
-1.6
-2.1
-2.0
-1.0
-0.5
32.8
31.2
35.4
36.6
35.8
35.4
Prices
CPI (% Dec/Dec)
3.0
4.2
1.4
1.1
3.0
2.1
1,139
1,153
1,071
1,055
1,050
1,025
1y ago
Last
Q1 14F
Q2 14F
Q3 14F
Q4 14F
1.5
3.9
4.1
4.1
4.1
4.0
1.5
1.1
1.3
1.9
2.6
3.0
1112
1055
1070
1060
1050
1050
2.75
2.50
2.50
2.50
2.75
2.75
2.81
2.65
2.65
2.65
2.65
2.90
25 March 2014
66
Economics
Rahul Bajoria
+65 6308 3511
rahul.bajoria@barclays.com
Key recommendations
Rates: Overweight cash, neutral duration on MGS: We think IRS is fairly pricing in
Rates Strategy
monetary policy tightening risks. In fact, market pricing of c65bp of tightening in the
next two years exceeds our view of a 50bp policy tightening in 2014 and a pause
thereafter. However, given the possibility of an overshoot and EM contagion risks
(through the channel of high foreign ownership of bonds), we remain neutral. We would
look for opportunities to reduce duration and enter payers.
Rohit Arora
+65 6308 2092
rohit.arora3@barclays.com
FX Strategy
Hamish Pepper
account surpluses and likely BNM rate hikes bode well for MYR appreciation against the
USD, in our view. While continued cautious global sentiment is a downside risk for the
high-beta MYR, we do not expect this environment to persist and recommend being
long MYR against the THB (target: 10.19; stop: 9.75; spot ref: 9.83), where the BoT is
likely to remain dovish as political uncertainty weighs on an already weak economy.
hamish.pepper@barclays.com
Growth drivers are firming up in Malaysia, according to the incoming real sector indicators.
In recent months, momentum in the manufacturing and industrial sectors has improved,
and export growth has also perked up. Private investment activity has shown a steady
increase, while major catalytic projects under the Economic Transformation Programme
(ETP) have continued to contribute positively to growth momentum. Q4 13 GDP expanded
5.1% y/y, on strong investment spending, and despite the large fiscal consolidation. As a
result, GDP ex-government rose to an 11-quarter high (Figure 2). Domestic demand
moderated, largely on account of this fiscal consolidation, but remains the key driver of
economic growth. In 2014, we expect the rebound to continue on stronger global growth
and off a low base. Indeed, we think the tailwinds of improving external demand, positive
terms of trade shock through higher palm oil prices, and resilient domestic demand are
likely to keep growth above 5% this year. The biggest headwind for growth that we see is
FIGURE 1
Private spending likely to play a larger role in 2014
FIGURE 2
Domestic demand resilient, amid low unemployment
15
16
14
12
10
8
6
4
2
0
-2
-4
Dec-03
10
5
0
-5
-10
Jun-06
Dec-07
Jun-09
GDP
Source: CEIC, Barclays Research
25 March 2014
Dec-10
Jun-12
Dec-13
2.6
3.1
3.6
4.1
Dec-05
Dec-07
Dec-09
Dec-11
Dec-13
67
The key concern for policymakers appears to be the sustainability of private consumption
amid administered price hikes. There have been a few initial signs that consumption
momentum is slowing down, and consumer sentiment indices show that private
consumption may moderate at the margin. So far, auto sales have slowed and consumer
credit growth has also moderated, although the latter may be more a reflection of macro
prudential measures to curb personal loans than actual slowing demand for loans.
BNM is forecasting growth of 4.5-5.5% for 2014, which is a wider range than the Finance
Ministrys forecast of 5-5.5% growth made in October 2013. The drag appears to be coming
from net exports, due to a disproportionately large upgrade in import growth relative to
exports. At the same time, the central bank has revised its assessment of domestic growth
for 2014 to 6.9% from its forecast of 5.9% in October 2013. We maintain our forecast of
5.4% real GDP growth in 2014 and see upside risks to the official BNM forecast, given the
global economic backdrop has improved, unemployment levels remain low, and BNM
expects wage growth to remain high. In fact, manufacturing wage growth has been rising,
and should continue to support private consumption growth, in our view. At the same time,
private investment growth has been robust. The sharp increase in capital imports in the past
three months, complemented by ongoing project investments through the mass rapid transit
system in Kuala Lumpur, petrochemicals projects in southern Malaysia and road projects in
eastern Malaysia, have kept activity levels elevated.
FIGURE 3
Wage growth remains robust in Malaysia, supporting private
consumption
20
FIGURE 4
Inflationary pressures becoming more generalised
3.8
3.3
15
2.8
2.3
10
1.8
1.3
0.8
0.3
-5
Mar-09 Dec-09
Oct-10
Aug-11
Jun-12
Mar-13
25 March 2014
Jan-14
-0.2
Nov-11
Aug-12
May-13
Feb-14
Supply side inflation (PP contribution to CPI)
Demand driven inflation
68
We maintain our CPI inflation forecast of 3.2% for 2014, but see upside risks to this figure.
This would be the highest level since 2008, followed by even higher inflation in 2015, once
the goods and services tax (GST) is imposed. The inflation growth dynamics continue to have
implications for monetary policy, in our view. As real rates will remain negative for longer, the
central bank is evaluating its options to hike rates. Already, BNM has a modestly hawkish bias,
and as more signs of demand-side price pressures emerge, we see it possibly turning more
hawkish. We expect the central bank to hike rates in Q2 14, followed by another hike in Q3,
although the latter is likely to be contingent on BNMs assessment of inflation in 1H 14.
Fiscal policy has been an area of success for the government. Following on from the 2014
budget in October, the government reduced its fiscal deficit to 3.9% of GDP, overshooting
the consolidation target of 4.0% for 2013. For 2014, the government is targeting to reduce
the countrys fiscal deficit to 3.5% of GDP. It will also implement a goods and service tax
(GST) at 6% from 1 April 2015. According to the Ministry of Finance, the move to boost
revenues is in order to achieve a 3% deficit target in 2015. We expect this, accompanied by
accrual accounting practice from 2016, to lead to better outcome budgeting, and support
the fiscal target of a balanced budget by 2020.
BNM appears to have been comfortable allowing the MYR to move in line with the market, and
broadly in line with fundamentals. The current account balance is starting to stabilise, and we
think it could be marginally higher in 2014, especially given the positive terms of trade. Due to dry
weather and concerns of a drought, the price of palm oil, which comprises of 12% of Malaysias
exports in 2013, has risen sharply so far this year, and is up c15% since 1 February. While this
could stoke inflation concerns, it does have a positive impact on Malaysias current account.
Indeed, the trade surplus has started to recover, and we expect the surplus to rise y/y in the
coming months, supported by better external demand. Looking ahead, we expect Malaysias
current account surplus to be around USD12.1bn in 2014, or 3.7% of GDP. Capital flows, on the
other hand, are likely to be negative, on a smaller global liquidity pool and tapering concerns, as
well as structural diversification by institutional investors in Malaysia.
FIGURE 5
We expect two 25bp rate hikes in 2014
FIGURE 6
Palm oil prices have risen recently given declining stocks
4,300
3,800
3,300
1200
1600
2000
2,800
-2
2400
2,300
-4
-6
Oct-05 Dec-06 Feb-08 Apr-09 Jun-10 Aug-11 Oct-12 Dec-13
Policy rate (%, RHS)
Source: CEIC, Barclays Research
25 March 2014
1,800
Mar-09
Jun-10
Sep-11
Dec-12
2800
Mar-14
69
FIGURE 8
Fiscal deficit consolidation looks on track
0
20
18
Forecast
16
-1
-2
14
-3
12
-4
10
-5
-6
-7
-8
2
Dec-08
2001
Mar-10
Jun-11
Sep-12
Dec-13
2003
2005
Mar-15
2007
2009
2011
2013
2015F
FIGURE 9
Malaysia macroeconomic forecasts
2010
2011
2012
2013
2014F
2015F
7.4
5.1
5.6
4.7
5.4
5.3
9.1
5.8
9.8
6.6
6.5
6.9
6.9
6.8
7.7
7.6
6.8
7.0
11.9
6.2
19.9
8.2
7.5
9.3
-1.7
-0.7
-4.2
-2.0
-1.0
-1.5
Exports (% y/y)
11.1
4.6
-0.1
-0.3
3.8
3.0
Imports (% y/y)
15.6
6.1
4.7
1.9
5.3
5.0
248
289
305
312
328
364
27.0
33.5
18.6
11.7
12.1
11.0
CA (% GDP)
10.9
11.6
6.1
3.8
3.7
3.0
42.3
49.6
40.7
32.5
32.7
28.0
-4.5
-3.0
-7.1
-1.4
-1.9
-3.0
-1.5
10.7
-0.4
-3.2
-6.7
-2.0
82.4
93.2
99.9
115.0
110.0
115.0
106.5
133.6
139.7
134.9
133.0
136.0
-5.6
-4.8
-4.5
-3.9
-3.5
-3.0
-3.5
-2.8
-2.4
-1.7
-1.3
-0.9
51.1
51.6
53.3
54.8
54.0
52.5
Activity
External sector
Public sector
Prices
CPI (% Dec/Dec)
2.1
3.0
1.2
3.2
3.0
3.5
FX (eop)
3.08
3.16
3.06
3.25
3.20
3.15
1y ago
Last
Q1 14F
Q2 14F
Q3 14F
Q4 14F
4.1
5.1
5.3
5.3
5.7
5.4
1.6
3.2
3.1
3.5
2.9
3.0
3.11
3.25
3.26
3.24
3.20
3.20
3.00
3.00
3.00
3.25
3.50
3.50
25 March 2014
70
We expect the central bank to hike the policy rate by 50bp to anchor inflation
expectations and allay investor concerns. We also believe liquidity management
measures are likely. Although the President is focused on infrastructure projects, we
think broader reform momentum is fading.
Key recommendations
FX: Increased BSP hawkishness is supportive of the PHP; however, the central banks
Credit Strategy
Avanti Save
+65 6308 3116
avanti.save@barclays.com
FX Strategy
willingness to accept appreciation is limited. We believe the central bank prefers the PHP
to move broadly in line with other currencies in the region. Further, we believe that
reform as a catalyst for peso strength is fading.
Hamish Pepper
+65 6308 2220
hamish.pepper@barclays.com
are much tighter than the EM sovereign benchmark and we expect spreads to remain
rangebound in Q2. For 2014, we expect modest spread compression, as global investors
recognise both ample onshore liquidity conditions and the improving balance sheet of the
Philippines. Across the curve, we like the PHILIP 21, 24 and 34.
Bangko Sentral ng Pilipinas turned hawkish in its February meeting, stating that it still had
room to hold policy rates, though noting that the scope was narrowing, which, in our
opinion, indicated its strong commitment to inflation management. Governor Tetangco said
recently that pre-emptive action can be less disruptive and that markets should prepare for
higher global rates. We expect the reverse repo rate to be raised by 50bp to 4%, split equally
between Q2 and Q3 to ensure inflation expectations remain anchored. With the BSP more
watchful on liquidity, we also believe that measures such as hikes in the SDA rate or
potentially in reserve requirement ratios (RRR) are likely in the May policy meeting, with
some risk of an adjustment on the 27 March meeting.
FIGURE 1
Positive output gap creating pressure on underlying inflation
2.5
ppts
% y/y
2.0
FIGURE 2
SDA balances have fallen as banks comply with BSPs policy
limiting trust department access
2,500
PHP bn
1.5
1.0
0.5
0.0
-0.5
-1.0
2,000
1,500
1,000
-1.5
-2.0
-2.5
0
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Output gap 4qtr avg
25 March 2014
500
0
07
08
12
13
09
10
11
SDAs
14
71
Given the limited stock of bonds with the BSP, the impact of changes in the reverse repo
rate is limited. With overall systemic liquidity being flush, we believe that the effective
monetary policy rate is the SDA rate (special deposit account) as reflected in overnight
interbank rates trading close to the SDA rate. Therefore, we believe that SDA rate hikes at
least 50bp in the coming 3-6 months are key for monetary policy tightening to impact
market interest rates.
In recent commentary, Governor Tetangco said that the BSP is watchful of liquidity
increases, a marked change from a comment he made in mid-February: liquidity rise not
worrisome (Bloomberg). Nearly PHP500bn has left SDA accounts since the central bank
limited access by trust departments to the SDA facility, which has resulted in a sharp
increase in broad money aggregates. While Deputy Governor Guinigundo maintained in
early March that strong liquidity is temporary, we think the central bank now acknowledges
the risks this level of liquidity could pose. As such, we believe a RRR hike would be the most
cost effective way to absorb excess liquidity, given that the BSP no longer pays any interest
on reserves. Further, adjustments to RRR levels tend to be directly passed onto end
consumers, so they have a limited impact on NIMs, while at the same time ensuring that
lending interest rates trend higher to manage credit growth.
We estimate that the spare capacity in the economy has been shrinking given the solid
growth over the past two years 6.8% in 2012 and 7.2% in 2013. On a 4-quarter moving
average basis, we think the output gap turned positive in H2 2013 and we expect it to rise
further, which would increase underlying inflationary pressures. We forecast GDP growth of
6.5% in both 2014 and 2015. We continue to forecast inflation will average 4.3% in 2014
(BSP: 4.3%, 2013: 3%), which is above the mid-point of the 3-5% inflation target range. In
2015, the inflation target range is being lowered to 2-4% and we forecast inflation will
average 3.5% (BSP: 3.3%), which again is above the mid-point of the target range.
After rallying by 2.2% in early February on positive global risk sentiment, the peso has
stalled given: (i) concerns around under-reporting of imports, which may be overstating the
strength of the trade account; and (ii) investor concern that the central bank may be falling
behind the curve. We believe the issue of under-reporting of imports is not new and should
be seen in the context of structural under-reporting of remittances. In our opinion, the
increased hawkishness of the central bank since the February meeting is positive for its
FIGURE 4
Real estate credit growth remains strong
Repo
% y/y, 3mma
Reverse repo
o/n rate
% y/y, 3mma
Production
Real estate
Total
SDA rate
Manufacturing
Consumer
Wholesale retail (RHS)
40
30
50
20
40
10
30
20
-10
10
6
5
4
3
2
1
05
06
07
08
09
25 March 2014
10
11
12
13
14
-20
60
0
10
11
12
13
14
72
The 2013 fiscal deficit was PHP164.1bn (1.4% of GDP), much below the governments
target of PHP238bn (2% of GDP), reflecting slow disbursals. The government is targeting a
deficit of PHP266.2bn (2% of GDP) in 2014. While there may be slippage on reconstruction
efforts, under-spending remains a problem, though officials have indicated that spending on
pre-procurement will accelerate. Nevertheless, we revise down our 2014 fiscal deficit
forecast by 40bp to 2.1% of GDP. In 2015-16, the government is targeting fiscal deficits of
2% of GDP (2015: PHP285.3bn and 2016: PHP322bn), which should keep the public debtto-GDP ratio on an improving trajectory.
President is focused on
infrastructure projects
Philippines to maintain a
presence in dollar market
but supply to be contained
The sovereign remains focused on funding locally and reducing its external debt. In 2013,
the Philippines issued only USD500mn of new money alongside a debt buyback tender. We
think another buyback of long-end RoP paper is likely in Q4 14, with new money issuance
up to a maximum USD500mn. Note, in 2012 the Philippines raised USD1.5bn from external
funding. For 2015, we believe the sovereigns bias will be to maintain a presence in the
offshore market to ensure liquidity and investor interest but we believe that supply will
remain very contained, likely around USD1bn.
25 March 2014
The Philippines economy has weathered the impact of Typhoon Haiyan well with GDP
only slowing to 6.5% y/y in Q4 from 6.9% in Q3 and 7.7% in H1. Note, H2 growth was
expected to moderate as mid-term election-related spending faded. We maintain our 2014
growth forecast of 6.5% (government target: 6.5-7.5%) as reconstruction efforts get
underway, although there is likely to be a continued drag from trade, services and
agriculture. Budget secretary Florencio Abad has indicated that the government will spend
PHP120bn on reconstruction, with PHP30bn released over January-February. We believe
consumption and investment will remain the key drivers of economic growth. We also
maintain our 2015 growth forecast at 6.5%.
73
2011
2012
2013
2014F
2015F
7.6
3.6
6.8
7.2
6.5
6.5
8.2
4.5
5.2
8.2
7.5
6.9
3.4
5.7
6.6
5.6
6.1
5.9
19.1
-2.0
10.4
11.7
11.5
9.0
-0.6
-0.9
1.6
-1.7
-0.5
-0.5
Exports (% y/y)
21.0
-2.8
8.9
0.8
4.5
5.0
Imports (% y/y)
22.5
-1.0
5.3
4.3
5.5
6.0
200
224
251
271
290
323
8.7
7.0
7.1
10.6
9.3
8.7
CA (% GDP)
4.3
3.1
2.8
3.9
3.2
2.7
-13.3
-17.0
-15.2
-14.6
-17.5
-19.2
0.6
1.3
1.0
1.6
1.8
2.1
6.6
4.3
5.2
-2.8
-3.4
-2.6
60.0
60.4
60.3
59.1
60.8
63.3
62.4
75.3
83.8
83.2
87.1
91.9
-3.5
-2.0
-2.3
-1.4
-2.1
-2.0
-0.2
0.8
0.7
1.4
0.5
0.4
58.5
56.9
56.2
52.9
49.8
47.2
CPI (% Dec/Dec)
3.6
4.2
3.0
4.1
3.3
3.8
FX, eop
43.9
43.9
41.2
44.4
44.0
43.5
1y ago
Last
Q1 14F
Q2 14F
Q3 14F
Q4 14F
7.7
6.5
5.8
6.7
6.6
6.9
3.2
4.1
4.1
4.6
4.2
3.3
40.9
44.40
44.50
44.00
44.0
44.0
3.50
3.50
3.50
3.75
4.00
4.00
Activity
External sector
Public sector
Prices
25 March 2014
74
Economics
Wai Ho Leong
+65 6308 3292
waiho.leong@barclays.com
Bill Diviney
Key recommendations
FX: Gradual NEER depreciation: The SGD NEER has recently been trading around the
Hamish Pepper
midpoint of our estimate of the 2% band. Given our expectations of slower economic
growth, a dovish MAS and a strengthening USD, we forecast the SGD NEER to drift
gradually lower towards 100bp below the midpoint of the band over the next 12 months.
Rates: Receive SGD 3y2y vs USD. We recommend receiving SGD rates versus US rates
FX Strategy
hamish.pepper@barclays.com
Rates Strategy
Rohit Arora
+65 6308 2092
We expect the Monetary Authority of Singapore (MAS) to maintain its gradual and modest
appreciation stance for the SGD NEER in its April Monetary Policy Statement (date not set;
likely 14 April). We expect the slope of the SGD NEER band to be kept at 2% (our estimate)
with no change in the midpoint or width of the policy band (currently 2%, we estimate).
However, the tone of the statement is likely to be slightly dovish, extending the cautious tone
in October 2013. We highlight five reasons for the bar for further tightening to be higher now.
rohit.arora3@barclays.com
First, our sense is that the authorities may be willing to tolerate a higher rate of core
inflation. Our baseline assumption is for core inflation to rise from 2.2% in January 2014 to
between 2.5% and 3% in H2 before rolling down from Q1 15. The role of monetary policy
is to temper, but not fully offset inflation. The central bank may not be uncomfortable if
core inflation ranges between 2% and 3%. Increasingly, rising wages are seen as a catalyst
to change firms behaviour, encouraging companies to innovate, invest in capital equipment
and reduce their reliance on low-paid foreign workers. This adjustment is crucial for the
economy to move towards innovative and knowledge-intensive activity.
FIGURE 1
Singapore PMI recovery lagging the global improvement
58
FIGURE 2
Sentiment-sensitive activity to be a larger drag on growth
250
PMI
56
210
54
52
Non-landed
170
50
130
48
46
Feb-10
Feb-11
Manufacturing
Feb-12
Electronics
25 March 2014
Feb-13
Feb-14
Global
90
Dec-93
Dec-97
Dec-01
Dec-05
Dec-09
Dec-13
75
Third, unit labour costs are not likely to rise as much as before, but rather to continue along
the flat trajectory that started Q3 13. Since the introduction of the SGD3.6bn Wage Credit
Scheme in 2013, the government shares the wage rise increments for low-income workers.
This has reduced the costs borne by manufacturers and has slowed ULC growth.
Meanwhile, productivity growth is falling short of the governments target of 2-3%, growing
just 1.1% in 2013, and productivity remains below its 2011 peak. In the coming years,
government efforts will focus on laggard services sectors, including hospitality and
construction, among an initial shortlist of 18 industries.
Fourth, we think aging will temper the potential appreciation of the SGD, by pushing up
social expenditures. Indeed, the governments emphasis on healthcare spending is rising, as
was spotlighted in the recent budget (see Singapore: Budget 2014: Staying the course, 13
February 2014). With healthcare costs likely to rise substantially in the coming years, the
structural fiscal surplus will narrow, requiring the government to seek new sources of tax
revenue, most likely from wealth and asset taxes. The continuing emphasis on prudential
controls will also reduce the appeal of SGD assets to overseas buyers. On real estate, some
of the cooling measures could be relaxed if needed, although in terms of timing, it is likely
too soon for this at present. While the scope of the measures were recently relaxed to
exempt homebuyers seeking to refinance their mortgages, the total debt servicing ratio
(TDSR) ceiling introduced by MAS on 29 June 2013 is unlikely to be relaxed.
We expect growth to be a tale of two halves in 2014. We think Singapore will continue to
benefit from the recovery in demand in the US and Europe, albeit with a lag given Singapores
place as a swing producer in the electronics supply chain. However, we expect sentimentsensitive activity to be weaker given the subdued outlook for the property market.
FIGURE 3
Manufacturing and services drove the acceleration in H2
25
FIGURE 4
but electronics exports recovery has lagged IP growth
120
3m/3m saar
3m/3m saar
100
20
150
80
15
60
10
40
20
100
50
0
-20
-5
-50
-40
-10
Dec-07
Dec-08
Manufacturing
Dec-09
Dec-10
Construction
25 March 2014
Dec-11
Dec-12
Services
Dec-13
Others
200
-60
-100
Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14
Electronics NODX, SA
76
Growth is not likely to accelerate in 2014. GDP was revised sharply higher for Q4 13 in the
second estimate, from -2.7% q/q saar in the advanced estimate to +6.1%. We expected a
sizable upward revision for Q4 given the surge in industrial production and net exports in
December, but the second estimate showed upward revisions across industries, particularly
services. Growth in services was led by the wholesale/retail segments and a sharp rebound
in financial services, which offset a deceleration in domestic demand. Overall, we continue
to look for growth of 3.5% in 2014 a slowdown from 2013s 4.1% with the lagged passthrough from stronger external demand offset by weaker domestic demand.
Activity weakened at the beginning of the year, however. Exports contracted in January,
following the surprise surge towards the end of 2013. Aside from Lunar New Year
distortions, which also affected Koreas and Taiwans exports, poor weather in the US likely
affected electronics shipments, and this has been evident in comparatively stronger export
growth to Europe. Manufacturing activity in Singapore has already shown signs of an
upturn. The manufacturing PMI continued to edge higher in February, lagging the
improvement in global PMIs. Meanwhile, despite the weakness in headline IP and exports in
January, momentum on a 3m/3m basis has improved. As the production of hard-disk drives
resumes in Thailand, and given that the launch season for electronics products starts in
March, we expect Singapores electronics sector to finally start contributing to growth in
Q2. Stronger activity in the biomedical and transport engineering industries from new
capacity will also provide a boost to growth this year.
Meanwhile, headline inflation has continued to edge lower, even as core has crept higher.
The main drag on headline inflation has been private transportation costs, due largely to the
high year-earlier base for CoE (car ownership license) prices, following the governments
curb on car loans in 2013. Conversely, the MASs core CPI measure which excludes this
volatile driver of the headline CPI, as well as accommodation costs has picked up in recent
months, rising to 2.2% in January (Dec: 2.0%), the highest since October 2012. However,
the rise in core inflation has been driven mainly by the supply side increases to hospital
charges and school fees, and higher food prices. Compounding the latter was the higher
cost of raw food prices trucked in from Malaysia, after diesel prices in Malaysia were raised
by more than 11% last September. The regions recent drought poses additional upside
risks to food inflation. However, there are still few signs of demand-pull inflationary
pressures, and with inflation expectations remaining well anchored, the MAS is likely to look
through the recent rise in core inflation.
FIGURE 5
Inflation to bottom in Q1, gradually picking up in 2014
8
FIGURE 6
Supply-side cost pressures have shown signs of easing
130
125
120
115
110
0
-2
Feb-09
105
Feb-10
Feb-11
Feb-12
Feb-13
Feb-14
Core Items ex-Food
Food
Non-Core Items (Pte Rd Trpt and Accommodation)
25 March 2014
100
95
Dec-03
Dec-05
Dec-07
Dec-09
Dec-11
Dec-13
77
FIGURE 8
Output gap to close only gradually
105
103
101
99
97
95
93
91
89
87
85
Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14
Barclays SGD NEER (100 = first week of April 2013)
SGD NEER spot and forwards
Forecast band (2% slope, +/-2% width)
Neutral
Forecast
4
2
0
-2
Modest
appreciation
-4
-6
Recentered
downwards
-8
Dec-00
Zero
appreciation
Dec-03
Dec-06
Modest
appreciation
Dec-09
Dec-12
Dec-15
FIGURE 9
Singapore macroeconomic forecasts
2010
2011
2012
2013
2014F
2015F
15.1
6.0
1.9
4.1
3.5
3.4
Activity
Real GDP (% y/y)
Domestic demand contribution (pp)
Private consumption (% y/y)
Fixed capital investment (% y/y)
6.6
4.9
6.0
1.2
2.6
2.2
6.4
4.4
4.1
2.7
2.3
2.5
6.4
6.0
8.7
-2.6
7.8
5.5
9.5
1.3
-4.4
2.2
1.2
1.0
Exports (% y/y)
18.3
3.0
1.4
3.6
3.6
3.8
Imports (% y/y)
16.1
2.8
4.0
3.0
3.5
3.9
234
272
284
295
307
324
58.9
63.3
49.4
54.4
50.7
46.9
25.3
23.2
17.4
18.4
16.5
14.5
65.4
70.8
62.8
67.8
59.6
57.0
21.7
26.9
47.5
36.8
28.3
25.1
-41.3
-75.6
-69.2
-75.8
-59.8
-58.9
1043
1088
1176
1130
1154
1174
226
238
259
273
286
295
Public sector
Public sector balance (% GDP)
0.3
1.2
1.1
1.1
-0.3
0.4
101
103
108
105
104
102
Prices
CPI (% Dec/Dec)
4.6
5.5
4.3
1.5
2.2
2.2
USD/SGD (eop)
1.29
1.30
1.22
1.27
1.27
1.28
1y ago
Last
Q1 14F
Q2 14F
Q3 14F
Q4 14F
0.6
5.5
5.1
2.7
3.0
3.2
3.5
1.5
1.0
2.7
2.2
2.2
USD/SGD (eop)
1.24
1.27
1.27
1.28
1.27
1.27
Note: *Singapores large gross external debt mainly reflects liabilities of the financial sector a situation typical for a regional financial centre. #Singapores large
domestic public debt is not related to fiscal funding (the government generally runs surpluses), but is for development of the domestic debt market and to meet the
investment needs of the pension fund. All proceeds are invested by the sovereign wealth funds and the MAS. Source: Haver Analytics, Barclays Research
25 March 2014
78
The Central Bank of China (Taiwan) is expected to provide support for growth, which is
currently led by a narrowly centred recovery in exports. Adding to concern is the delay in
passing key economic bills through Parliament, which could stall a recent drive to attract
FDI. Meanwhile, the structural boost the economy is gradually receiving from tourism
and the onshore CNY business will likely drive domestic demand and asset prices.
Key recommendations
FX: Continued market perception that recent CNY weakness will negatively affect
proximity currencies in north Asia is likely to weigh on the TWD. Further ahead, export
growth is likely to pick up, but currency appreciation is likely to be limited by still-low
economic growth and benign inflation, in an environment of broad USD strength.
Our sense is that the growth outlook remains a source of concern, despite an export-led
acceleration in momentum to 1.8% q/q sa in Q4 (Q3: 0.1% q/q). One factor is that Taiwan
is more highly leveraged to the global electronics cycle, particularly to the ailing PC supply
chain, and more correlated to the G3. Another factor is that export growth continues to be
narrowly based on semiconductors in the first two months, while PCs, petrochemicals,
mobile phones, machinery and panel shipments remained weak. As a result, we expect Q1
GDP to moderate more sharply, to 0.7% q/q (from 1.8% q/q). Exports grew in the first two
months, on average, but just barely (+0.4% y/y; Dec: 1.2%; Nov: 3.4%; Oct: 0.7%),
hampered by weather-related disruptions to air freight shipments to the US. Reflecting
these concerns and the lunar new year holidays, the Central Bank of China (Taiwan)
boosted excess reserves in the banking system to a four-year high of TWD53bn/day in
January (Q4 average: TWD32.8bn; 2012: TWD17.1bn; TWD5-7bn when growth is above
trend), and the highest monthly level of liquidity support since October 2009 (TWD65.9bn).
That said, we are comfortable with our above-consensus 2014 GDP forecast of 4%
(government: 2.82%) on account of two factors. First, we continue to expect the recoveries
in the US and Europe to support a pickup in exports from March, with an increase in
equipment investment in the US in particular likely to drive growth. Second is the fasterthan-expected development of the CNY capital market in Taiwan, prompting rapid growth in
financial services (lending and underwriting). Since 25 November, when Taiwans Financial
FIGURE 1
An investment-driven growth model shapes up
12
FIGURE 2
An electronics-led recovery
40
10
8
6
4.0% 4.5%
IP (% 3m/3m saar)
80
30
60
20
40
10
20
2.1%
2
0
-2
-4
Forecast
-6
2007 2008 2009 2010 2011 2012 2013 2014f 2015f
Consumption
Change in Inventories
Source: Haver Analytics, Barclays Research
25 March 2014
Capital Formation
Net Exports
-10
-20
Feb-11
-20
Aug-11
IP
Feb-12
Aug-12
Feb-13
Aug-13
-40
Feb-14
79
A third factor that should support growth in 2014 is structural: an ambitious drive to attract
FDI into Taiwan, spearheaded by the National Development Council (NDC; formerly known
as the CEPD). The NDC plans to offer tax incentives in eight free economic pilot zones
(FEPZs). This is also targeted at Taiwanese firms based overseas, particularly in China. In
2013, Taiwan approved more than USD8bn of foreign investments, mainly from Taiwanese
firms in China. With the FEPZ strategy and tax incentives, we estimate it could secure
another USD8bn in FDI commitments in 2014. When realised, we estimate these
investments could lift trend growth 0.2pp on an annual flow basis. Over time, this should
narrow Taiwans structural net FDI deficit, reversing the drag from the overall financial
account on its balance of payments. We believe this sets the stage for domestic demand to
become a more important growth driver in 2014, which we expect to contribute 3pp to our
4% forecast (2013: 1.5pp of 2.1%). One concern, however, is the delay in the passage of a
bill to enable the tax incentives for the FEPZs in the legislature. However, our sense is that
the bill will be passed before the end of the current parliament session, which ends on 18
June. This would pave the way for the formal launch of the FEPZs in Q2.
Political deadlock in
Parliament could constrain
Taiwans FTA strategy
Meanwhile, the KMT-led government is having greater difficulty ratifying the services chapter
of the Economic Cooperation Framework Agreement (ECFA inked with China in June 2013)
in the current sitting of Parliament. With local elections looming in November, the risk is that
the government may defer the ratification to next year if this is stalled beyond the current
session. Delay could put at risk Taiwan's FTA ambitions: the Trans-Pacific Partnership, the
Regional Comprehensive Economic Partnership (Asean plus six) agreements and other
bilateral agreements. The president warned on 13 March that delays could hurt Taiwans
credibility in the international community. A saving grace for the country is that it is making
progress on expanding the early harvest ECFA agreement on goods trade with China to
continue to include critical export items such as chemicals and machinery which account for
13.5% of Taiwans exports. For these items, it has lost competitiveness in the Chinese market,
as Asean exporters pay no tariffs (while a 6.5% duty applies to Taiwan).
FIGURE 3
FIGURE 4
3.5
Mainland visitors, mn
9,500
7,500
5,500
3,500
1,500
-500
-2,500
-4,500
-6,500
-8,500
Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13
3
2.5
2
1.5
1
0.5
0
Jan
Mar
2009
May
2010
25 March 2014
Jul
2011
Sep
2012
Nov
2013
Travel
Transport
Services balance, USDmn 4Q rolling sum
Source: CEIC, Barclays Research
80
The evolution of cross-Strait ties, which has awakened Taiwans services economy, has
entered a more exciting phase. In February, China and Taiwan held their highest-level talks
since the start of cross-Straits ties in 2008, resulting in an agreement to open
representative offices in each others countries. Chinese media (China Daily) described the
summit as a promising new starting point. We believe this could usher in a period of more
rapid progress on the economic integration agenda that started in 2009.
Another sign of deepening ties is tourism, which is already adding USD6bn to the current
account surplus each year. A hotel and retail boom is underway, due to the influx of 2.87mn
mainland Chinese tourists in 2013. Taiwan is planning to expand the number of Chinese
cities where residents are eligible to apply for individual travel to Taiwan, beyond the current
26. We expect 20% of the projected 3mn mainland visitors to Taiwan in 2014 to be
individual travellers, up from 7% in 2012. According to the tourism bureau, Taiwan will raise
the daily limit for independent Chinese visitors to 4,000/day from 3,000/day. These visitors
are of higher quality, as they are more likely to spend more on a per person per day basis. In
our view, this will help maintain our current account surplus projection for 2014 at a solid
10% of GDP (2013: 11%), reinforcing the safe-haven appeal of Taiwanese assets.
All of this is also pointing to stronger consumption in 2014. First, there are indications that
employment is picking up, particularly in the services economy, which should sustain
further improvement in consumer confidence. The employment opportunity sub-index of
the consumer confidence index jumped to a 20-month high in February 2014 (to 109.75),
up from end-2013 (106.2) and the low of 104.70 in June 2013. Second, inflation is low. We
continue to expect inflation to remain muted at 0.9% in 2014 (2013: 0.8%), but for prices to
rise at a slightly faster pace in 2015 (1.8%).
Moreover, the stronger services economy continues to stoke property prices, in our view.
Prices rose for the tenth successive quarter in Q4 13, by 2.7% q/q sa, re-accelerating from
the pace in Q3 (1.9%; Q2: 6%). Since the low in December 2008, home prices have risen
89% as of December 2013. Construction activity is also being sustained at a higher level.
Despite the weaker economy, housing building permits jumped 37% y/y, to 129,307 units,
in 2013. We expect prices and transaction volumes to rise further, following the passage of
an amendment to the luxury tax on 12 March that allows the finance ministry to grant
exemptions on a caseby-case basis. Another potential source of upside is more decisive
measures to boost home affordability, particularly for first-time mass market buyers. This
could come ahead of the local elections in November this year.
FIGURE 5
Strong upturn in residential house prices is underway
320
FIGURE 6
but not enough to drive demand-side inflation yet
4
3
270
2
1
220
0
-1
170
120
Dec-05
-2
-3
Feb-09
Dec-07
Dec-09
Home prices, sa
Source: Haver Analytics, Barclays Research
25 March 2014
Dec-11
Dec-13
Feb-10
Food
Feb-11
Energy
Feb-12
Feb-13
Feb-14
81
FIGURE 7
Employment conditions are improving again
FIGURE 8
TWD REER well below 18-year average: Little downside risk
115
4.5
100
4.0
3.5
85
3.0
70
2.5
55
40
25
Feb-04
Feb-06
Feb-08
Feb-10
Feb-12
1 Std Dev
120
110
Average
2.0
100
1.5
90
1.0
Feb-14
KMT
returned
to power,
Mainland
tourism
boost
130
1 Std Dev
80
Mar-96 Mar-99 Mar-02 Mar-05 Mar-08 Mar-11 Mar-14
Barclays TWD REER, Jan 2005 =100
FIGURE 9
Taiwan macroeconomic forecasts
2010
2011
2012
2013
2014F
2015F
10.8
4.2
1.5
2.1
4.0
4.5
8.1
0.6
0.2
1.4
3.1
3.4
4.0
3.1
1.6
1.8
2.9
2.9
21.1
-2.3
-4.0
3.4
9.5
9.6
2.7
3.6
1.3
0.6
1.0
1.1
Exports (% y/y)
25.6
4.5
0.1
3.8
6.2
5.9
Imports (% y/y)
27.7
-0.5
-2.2
4.0
6.6
6.0
428
465
475
488
507
549
39.9
41.7
50.7
50.8
50.9
50.0
Activity
External sector
Current account (USD bn)
CA (% GDP)
9.3
9.0
10.7
10.4
10.0
9.0
26.5
28.3
31.6
30.5
32.9
32.2
-9.1
-14.7
-9.9
-11.2
-6.5
-2.5
8.7
-17.3
-21.7
-25.7
-24.0
-24.0
102
123
131
142
149
156
382
386
403
402
421
444
Public sector
Public sector balance (% GDP)
-3.3
-2.2
-2.5
-2.0
-1.0
-1.0
33.5
34.8
35.6
35.8
35.5
34.4
Prices
CPI (% Dec/Dec)
FX, eop
1.2
2.0
1.6
0.3
1.5
1.6
30.37
30.29
29.14
29.95
30.00
28.75
1y ago
Last
Q1 14F
Q2 14F
Q3 14F
Q4 14F
1.4
2.9
3.6
3.9
4.7
3.8
1.4
0.3
1.4
0.7
0.1
1.5
29.88
29.95
30.50
30.00
30.00
30.00
1.875
1.875
1.875
1.875
2.000
2.125
0.386
0.388
0.385
0.385
0.485
0.585
25 March 2014
82
The political uncertainty in Thailand looks set to continue despite a recent easing in
tensions. The standoff between the protesters and caretaker government of Yingluck
Shinawatra has entered its fifth month. Growth is suffering on account of weakness in
domestic demand. We recently lowered our 2014 growth forecast to 3.0%.
Key recommendations
Rates: Long duration in 7y, short cash: Thai bonds have rallied significantly since
Rates Strategy
Rohit Arora
+65 6308 2092
rohit.arora3@barclays.com
FX Strategy
Hamish Pepper
December 2013, and we see the momentum continuing. In our view, deteriorating
growth, low inflation, lower supply and the Thai curves relative steepness to the region
still warrant an overweight duration stance, which should also counter any potential
uptick in global bond yields. We recommend the 7y sector in ThaiGBs given the
steepness of the curve. We recommend hedging FX risk.
FX: Continuing uncertainty, a dovish BoT and slow economic growth are likely to
encourage further capital outflows and weigh on the THB over the next three months.
We recommend being long MYRTHB (target: 10.19; stop: 9.75; spot ref: 9.83) on
account of growth, policy rate, terms of trade and current account differentials.
Credit: Political uncertainty is affecting both growth and business sentiment. We think a
prolonged political deadlock, softer growth and a rising fiscal burden could lead to a
Negative Outlook for the sovereign rating. Thai CDS has outperformed in recent weeks
retracing towards 27bp over Malaysia from the high ~40bp area in January. We think this
an attractive opportunity to buy Thai CDS against Malaysia or the Philippines.
The economy was already struggling at the end of 2013, and the political protests have
exacerbated this weakness. High household debt, external risks on account of Fed tapering
and weak production are constraining growth. Once the political protests started in
November 2013, tourism, which was the only sector performing well, also started to see
significant declines, and arrivals are now contracting on a momentum basis. As a result,
GDP drive has also been lost, and we recently cut our 2014 growth forecast to 3.0%, from
4.3% previously. This is now in line with the central banks forecast, though it recently said
that further revisions may be required, as the political situation does not bode well for
growth in 1H 2014 (see BoT warns of slump in GDP growth, Bangkok Post, 1 March 2014).
FIGURE 1
Private consumption has softened considerably
15
FIGURE 2
Tourist arrivals have started slowing down
50
10
40
30
20
10
-5
-10
-10
-20
-15
-20
Dec-95 Dec-98 Dec-01 Dec-04 Dec-07 Dec-10 Dec-13
GDP: Private consumption (% y/y)
Source: CEIC, Barclays Research
25 March 2014
-30
-40
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Feb-13
Feb-14
83
The Bank of Thailand cut the policy rate by 25bp to 2.00% in a very close call at its 12
March meeting. The move was largely to support sagging business and consumer
confidence. With falling inflation expectations, there was room for a rate cut. However, the
positive impact of a rate cut on growth may be limited, as private credit growth has
continued to lose momentum despite several interest rate cuts over the past year. Given the
close nature of voting patterns in recent MPC meetings, we think that the threshold for
further rate cuts has increased considerably. We expect future decisions to be driven by
three things: 1) inflation expectations; 2) the balance of risks to growth (which remain to
the downside); and 3) financial stability risks, which have eased given falling credit growth.
Given the political turbulence, we see room for underperformance by the THB, which will
also be driven by swings in global risk sentiment. And with the support from a large current
account surplus having disappeared, we think a renewed bout of risk aversion could trigger
another round of THB weakness. On the current account, we expect the small deficit in
2013 to turn into a small surplus in 2014, as weak domestic growth, low capital import
demand and some recovery in service sector revenues support a stronger current account
balance in 2H 2014. However, outflows through the capital account may continue, as Fed
tapering-related risks, the weak growth backdrop and low interest rates are unlikely to
attract incremental inflows in the near term. While we do not believe credit risks have
escalated materially, as noted by recent statements from Moodys and S&P, any further
escalation in the political protests may lead us to reconsider this view.
FIGURE 3
Consumer confidence is falling
FIGURE 4
Recent policy decisions have been very close
84
82
3.75%
3.50%
80
78
76
2.75%
2.50%
72
2.25%
70
Feb-08
Feb-10
Feb-12
25 March 2014
3.00%
74
68
Feb-06
3.25%
Feb-14
0
Jan-11
2.00%
Aug-11
May-12
Nov-12
Jul-13
1.75%
Mar-14
84
There are three key areas of dispute between the government and protesters. The first is
around the legitimacy of the February election. The PDRC insists that the caretaker Prime
Minister should quit. The Constitutional Court has now scrapped the February poll results;
therefore, new elections need to be held. However, it is unclear when these will be
conducted and whether the opposition will participate (see, Thailand: Elections annulled,
uncertainty prolonged, 21 March 2014).
Governments constrained
ability to borrow has halted
payments to farmers under the
rice-pledging scheme
The second issue is around the rice-pledging scheme. As the current administration is a
caretaker government, the finance ministry is constitutionally prevented from borrowing
money to pay for the rice-pledging scheme. While this is mostly a cash flow issue (most tax
collections come in H2 of the fiscal year, running October to September), the governments
struggle to bolster its finances has prompted protests by farmers demanding payment
(outstanding amount is around THB130bn, or USD4bn). The cancellation by China of a
large order for Thai rice has compounded the governments financial difficulties.3
The third is an enquiry into allegations of corruption in the rice-pledging scheme against the
government, which is being led by the National Anti-Corruption Commission (NACC). If
charges are laid, caretaker Prime Minister Yingluck could be impeached.4
FIGURE 5
Thailand has been resilient to multiple disruptive events in the past decade
60
50
Military Coup
40
Airport
seizure
30
Forecast
20
10
0
-10
-20
-30
-40
Sep 05
Japan earthquake
Oct 07
Nov 09
Dec 11
PDRC
protests
Jan 14
25 March 2014
see China cancels deal to buy Thai rice due to graft probe: Thai minister, Reuters, 4 February 2014
see NACC reveals timeline for PM's indictment, NNBT, 3 March 2014
85
FIGURE 6
Rising household debt constrains impact of monetary policy
FIGURE 7
Credit growth has slowed despite rate cuts
20
85
80
5.0
15
75
70
4.0
10
65
3.0
5
60
55
45
40
Sep-04
2.0
50
-5
Mar-05
Mar-06
Sep-07
Mar-09
Sep-10
Mar-12
Sep-13
Sep-06 Mar-08
1.0
Sep-12 Mar-14
Sep-09 Mar-11
FIGURE 8
Thailand macroeconomic forecasts
2010
2011
2012
2013
2014F
2015F
7.8
0.1
6.5
2.9
3.0
4.0
8.4
0.8
7.8
1.1
1.8
3.7
4.8
1.3
6.7
0.2
2.5
4.0
9.4
3.3
13.2
-1.9
4.9
5.5
-0.5
-0.7
-1.4
1.7
1.5
0.3
Exports (% y/y)
14.7
9.5
3.1
4.2
5.6
4.5
Imports (% y/y)
21.5
13.7
6.2
2.3
4.5
5.2
319
346
366
384
389
413
10.0
4.1
-1.5
-2.8
2.4
2.0
0.5
Activity
External sector
Current account (USD bn)
CA (% GDP)
3.1
1.2
-0.4
-0.7
0.6
29.8
17.0
6.0
6.4
6.1
5.0
4.5
5.0
-2.0
1.4
-3.0
-3.0
20.6
-5.6
16.3
1.9
4.0
3.0
96.5
106.5
133.3
139.8
143.0
145.0
172
175
182
167
168
167
Public sector
Public sector balance (% GDP)*
-0.8
-2.7
-2.8
-2.5
-2.2
-1.5
42.4
40.3
44.0
45.7
46.3
47.0
3.1
3.5
3.6
1.7
2.4
2.5
Prices
CPI (% Dec/Dec)
FX, eop
Real GDP (% y/y)
30.1
31.2
30.6
32.7
32.0
32.0
1y ago
Last
Q1 14F
Q2 14F
Q3 14F
Q4 14F
5.4
0.6
1.8
2.9
3.7
3.8
2.7
1.7
2.1
2.5
2.7
2.4
29.3
32.7
32.5
33.0
32.5
32.5
2.5
2.3
2.0
2.0
2.0
2.0
Note: * Indicates fiscal year projection (October to September). # indicates only the central government deficit, does not include emergency decree-related shortfall.
Source: Barclays Research
25 March 2014
86
EEMEA: EGYPT
Economics
Alia Moubayed
+44 (0)20 3134 1120
alia.moubayed@barclays.com
FX Strategy
Key recommendations
FX: Tactically positive. Disbursements of financial support from Kuwait, Saudi Arabia
Koon Chow
+44 (0)20 7773 7572
and the UAE (GCC-3) are likely to keep the EGP stable, at least until a legitimately elected
government is in place, as expected, in Q3 2014. We think this provides a good
opportunity to buy 3m (10.27%) and 6m (10.59%) T-bills to earn carry, although some
bureaucratic hurdles may slow the transaction process.
koon.chow@barclays.com
Credit Strategy
Andreas Kolbe
+44 (0)20 3134 3134
Credit: Extend duration into Egypt 40s. We lifted Egypt credit to overweight in our
andreas.kolbe@barclays.com
December 2013 Emerging Markets Quarterly based on the improved financing outlook.
Although the fiscal outlook has somewhat deteriorated since then and Egypt spreads
have tightened meaningfully recently, we think some value remains, particularly in Egypt
40s. With the financing backstop from the GCC remaining in place, we think Egypts
diversification appeal in a broader EM credit context and the steepness of the spread
curve will attract further investor demand (Figure 1).
Over the coming few months, Egyptians will go to the polls at least twice to elect a new
president and Parliament, expected in mid-May and late July, respectively. As we noted in
Global EM political outlook: Egypt, Field Marshal Al-Sisi could announce his candidacy at any
time after he resigns from his defence minister post. A recent poll indicates that popular
support for his presidential bid stands at about 54.7%, significantly ahead of other
candidates. Another survey conducted by the Egyptian Centre for Public Opinion Research
(Baseera) in late February says that just over half of the respondents would vote for him,
while 45% said they were undecided as to whom they would vote for (Figure 2). While polls
FIGURE 1
Egypts spread curve has steepened meaningfully we see
value particularly in Egypt 40s
900
150
Z-sprd, bp
800
100
700
50
600
500
-50
400
-100
300
-150
200
Oct-11
-200
Apr-12
Egypt 40s
Oct-12
Egypt 20s
25 March 2014
Apr-13
Oct-13
slope (40s-20s), RHS
FIGURE 2
Field Marshal Abdel Fattah Al-Sisi has the most support but
many remain undecided
%
60
50
40
45
51
30
20
10
0
Did not
decide
Abd ElHamdeen
Fatah Al-Sisi Sabbahi
0.3
0.3
Abd
ElMonem
Aboul
Fotouh
Am r
Moussa
87
With an uncertain political outlook, heightened security volatility and severe energy
shortages, economic activity remained lacklustre. Q4 13 GDP registered only 1.4% y/y,
compared with 2.2% y/y in Q4 12, reflecting the persistent contraction in investment
growth and a slowdown in consumption and exports (Figure 3). PMI in January and
February remained at just 50, while tourism and exports growth stayed negative (Figure 4).
The weak activity indicators led the government to revise its growth forecasts to 2.0-2.5% in
FY 13/14, down from its official target of 3.5% announced by the outgoing cabinet. With no
major improvement in investment expected over the coming three months, we think that
growth in H1 14 (H2 FY 13/14) is unlikely to rebound significantly and, thus, we revised our
growth forecast down from 3.1% to 2.2% in FY 13/14.
Having said that, and given its emphasis on investment, the fiscal stimulus announced last
October and recently in January should have its impact felt on growth starting in Q3 14 (Q1
FY14/15). Out of EGP29.7bn stimulus approved in October, almost 53% was allocated to
investments (settlement of arrears to contactors, national housing, and drinking water and
sanitation programs). The package approved in January allocated almost EGP18bn, or 45% of
the total, to investment projects (housing and basic infrastructure, as well as contributions to
the Suez Canal Development Project) (Figure 5). Finally, the recently announced initiative from
the CBE to provide financing through the banks of up to EGP10bn for low and middle income
housing should boost residential investment further and support growth.
FIGURE 4
PMI remains below 50 in the first two months of 2014
-6
Q4 07
Q4 08
Q4 09
Q4 10
Q4 11
Q4 12
Q4 13
Feb-14
25
Dec-13
-4
Oct-13
30
Jun-13
-2
Aug-13
35
Feb-13
Oct-12
40
Dec-12
Jun-12
45
Output
New export orders
Aug-12
50
Apr-12
Feb-12
55
Jun-11
PMI
New orders
Employment
Aug-11
60
Apr-11
10
Apr-13
% y/y
Oct-11
FIGURE 3
H1 FY13/14 growth at 1.2% y/y was lower than expected;
we thus revise our growth forecast the FY to 2.2% y/y
Dec-11
25 March 2014
Source:
88
With growth in the first half of 2014-15 below target, we have also revised our fiscal
forecasts. Revenue performance remains weak on the tax and non-tax sides compared with
rising spending, confirming Egypts growing reliance on external grants. Tax revenues
increased only 7.1% y/y during the first seven months of the fiscal year, compared with a
35.4% y/y increase last year, reflecting the slowdown in economic activity. On the other
hand, spending continued to rise, though at a slower 15.4% y/y, compared with 29.8% y/y
in the same period last year. As such, the overall and primary deficit reached 5.9% and 1.5%
of GDP, respectively, during the first seven months of this fiscal year. The composition of
spending, however, is starting to shift. While wage growth maintained its pace from last
year (21% y/y), growth in debt service obligations slowed sharply, reflecting the reduction
in local debt yields over the past months. Moreover, growth of spending on subsidies fell to
10.7% y/y, compared with 50% y/y during the same period last year.
While we had accounted for some slippage in fiscal performance, the above developments
merit a slight upwards revision of our deficit forecasts from 11.5 to 11.7% of GDP. The new
minister of finance recently announced that the FY 13-14 deficit is likely to hover at 11-12%
y/y, almost 1ppt of GDP higher than the target under the outgoing government. The minister
also indicated that the government is aiming to reduce the deficit to 10-10.5% percent in
FY14-15, hinting at the possible introduction of a one-off 5% income tax, the introduction of a
VAT and the implementation of a property tax, along with a bolder approach to the energy
subsidy rationalisation. After all, the authorities are aware of the need to accelerate fiscal
consolidation notably after the elections period, given the anticipated phase-out of GCC
support by year end.
Egypts fiscal and external position will continue to be backstopped in the short term by the
disbursement of GCC funds and the supply of petroleum products (Egypt: Financing outlook
positive post-referendum). Following disbursements of over USD12bn during July 13 to
February 14, the GCC-3 countries pledged to supply Egypt with fuel until end-2014, which
adds to another USD5bn of financial disbursements still expected over the coming six
months (Figure 6). At the same time, the UAE announced recently the funding of a project
to build more than 1mn housing units over five years, which is valued at USD40bn and to be
implemented by the Dubai-based Arabtec in conjunction with the Egyptian armed forces. In
FIGURE 5
The fiscal stimulus packages should support a growth
rebound in H2 14, given the emphasis on investment
EGP bn
35
First package
FIGURE 6
Disbursements of GCC aid has helped stabilise the
currency and shore up reserves (July 2013-February 2014)*
USD bn
Second package
30
25
15.9
20
15
10
5
0
Source:
10
2.6
0.8
Wages and Goods and
salaries
services
1.4
6.2
Subsidies Investments
25 March 2014
15.8
6.6
4.3
Net
acquisition
of financial
assets
20
18
16
14
12
10
8
6
4
2
0
17.9
12.7
8 8.0
3
Interest free
deposit at
CBE
4.0 3.7
1.0
Grants
2.9
0.0
Energy
products
Pledged
Project
related
devpt.
Spending
Total
Disbursed
Note: *Barclays estimates for Jan-Feb 2014. Source: Ministry of Finance, Barclays
Research
89
Beyond Q4 14, once a new government is in place and legitimately supported by a new
Parliament, there could be a rapprochement with the IMF with the aim possibly of securing
an IMF-GCC supported program, which is much needed to ease liquidity and encourage
portfolio investment flows back into the country. The countrys large external financing
needs, which we estimate at about USD16.2bn in FY 14/15 make this imperative (Egypt
Quarterly Outlook: Positive momentum).
FIGURE 7
Egypt macroeconomic forecasts
2009/10
2010/11
2011/12
2012/13
2013/14F 2014/15F
5.1
1.8
2.2
2.1
2.2
3.7
Activity
Real GDP (% y/y)
Domestic Demand Contribution (pp)
5.0
3.9
6.3
1.1
1.7
3.0
4.1
5.5
5.9
2.8
2.3
3.0
7.8
-5.6
0.7
-7.8
-3.0
2.0
0.2
-1.7
-3.0
1.0
0.5
0.7
-3.0
1.3
-2.3
4.1
4.5
8.0
-3.2
8.4
10.8
-1.1
1.0
3.0
218.9
235.9
262.6
271.7
277.0
318.4
-4.3
-6.1
-10.1
-5.6
-6.0
-6.7
External Sector
Current Account (USD bn)
CA (% GDP)
-1.97
-2.6
-3.9
-2.1
-2.2
-2.1
-25.1
-27.1
-34.1
-31.5
-33.3
-35.2
5.8
1.2
3.7
3.0
3.0
4.5
-4.1
-2.7
2.6
5.5
6.0
3.0
33.7
34.9
34.4
43.2
54.5
62.4
15.4
14.8
13.1
15.9
19.7
19.6
32.8
23.5
12.2
11.6
13.1
15.8
-8.1
-10.1
-10.6
-13.7
-11.7
-11.0
-2.1
-3.9
-4.0
-5.3
-2.9
-2.5
73.2
76.6
78.9
89.2
90.8
92.4
CPI (% June/June)
10.1
11.8
7.2
9.8
10.4
11.1
5.70
5.96
6.06
7.02
6.97
6.88
1y ago
Last
Q1 14F
Q2 14F
Q3 14F
Q4 14F
2.2
1.0
2.0
2.3
2.8
3.4
Public Sector
Public Sector Balance (% GDP)
Primary Balance (% GDP)
Gross Public Debt (% GDP)*- Gen Gvt
Prices
7.6
9.8
10.3
10.4
10.5
10.8
6..80
6.96
6.96
6.97
6.90
6.88
9.75
8.25
8.25
8.25
8.25
8.25
Note: *Consolidated domestic debt of the Budget sector, NIB, and SIF. This level of compilation entails the deduction of Budget Sector borrowings from NIB, MOF
securities held by the SIF and NIB, the SIF bonds, and NIB borrowings from SIF. Source: IMF, Haver Analytics, Egyptian Ministry of Finance, CBE, Barclays Research
25 March 2014
90
EEMEA: GHANA
Key recommendations
Credit: Remain underweight, better value in Zambia. Ghanas credit metrics show little
Dumisani Ngwenya
+27 11 895 5346
sign of improvement as the countrys fiscal and external imbalances increasingly fuel
concerns about debt sustainability. Ghanas intent to seek additional non-concessional
market financing in international markets may also weigh on investor appetite in
secondary markets. Spreads have underperformed SSA peers meaningfully, and investor
positioning has likely been defensive in credit. However, international investor exposure
in Ghana local markets at least partially offsets this, and we think a significant
turnaround in policy would be required for sentiment to turn more positive again. We
see better value in other high-yielding SSA sovereigns, particularly Zambia.
dumisani.ngwenya@barclays
.com
Credit Strategy
Andreas Kolbe
+44 (0)20 3134 3134
andreas.kolbe@barclays.com
Rates and FX: We maintain a bearish view on the cedi (GHS). Depreciation pressures have
persisted into 2014, with the cedi weakening a further 7% after depreciating 20% in 2013.
Heightened USD demand means that recent regulatory changes have had limited effect on
easing pressures on the currency. Fundamental factors are unfavourable, with the current
account deficit expected to remain in double digits this year (-12.3% of GDP in 2013). We
believe weak fundamentals will continue to weigh on the currency despite tighter
monetary policy. On balance, we project the cedi to weaken further to about 2.90/USD by
year-end. Following the 200bp increase in the policy rate in February 2014, market yields
reversed their easing trend, which lasted for most of H2 2013. At the short end of the
curve, the 91-day yield has increased 395bp since the end of 2013, while the first bond
auction for 2014 saw the 3y yield jump to 23%. Our view that further policy tightening is
probable, along with ongoing fiscal challenges, suggests further upside potential to yields.
We continue to expect yields to peak above 25% in the months ahead, while the country
remains susceptible to a large foreign sell-off in local bonds.
FIGURE 1
Ghanaian yields have spiked in recent months
FIGURE 2
Fiscal deficit at risk of being missed again in 2014
0
24
-2
22
20
-4
18
-6
16
-8
14
-10
12
-12
10
8
Jan-10
-14
Jan-11
Policy rate (%)
Jan-12
91-day
25 March 2014
Jan-13
Jan-14
1 Year Note
2008
2009
2010
2011
91
A former minister of state at the finance ministry, Dr Osei, noted recently that the current
wage bill is unsustainable, proposing that the government defer further payment of the
single spine salary (SSS) and retrench some public sector workers. Finance Minister
Terkper disagreed, however, noting that since the migration to the SSS was substantially
completed, the government cannot go back to previous systems. Finance Minister Terkper
is awaiting a report on the wage issues before taking action, while the government
proposed a moratorium on wage increases in the most recent budget. The reality is that
more urgent action is needed to address the countrys large fiscal deficit, which was 10.2%
of GDP in 2013. While Finance Minister Terkper is under pressure to show some fiscal
consolidation, we fear that some of the measures taken to improve revenue collection and
contain spending (eg, by reducing various subsidies) may not be adequate to stabilise
public finances. The 2014 budget shows a 17.7% y/y increase in fiscal spending, and the
fiscal deficit target remains a large 8.5% of GDP. The governments problem is not just the
issue of the size of the fiscal deficit, but also its history of being missed to the upside; the
credibility of governments policies will be weakened further if fiscal slippages continue.
On 26 February, the IMF released a statement on Ghana that said In the absence of further
measures, the mission sees the fiscal deficit target of 8.5% of GDP at risk. The IMF called
for urgent measures to address macroeconomic imbalances, adding that, despite recent
measures, additional fiscal savings are required to address short-term vulnerabilities,
contain rising public debt and reduce interest rates. We share the IMFs views that the
deficit target is at risk of being missed again, particularly as we believe that revenue targets
appear ambitious in the current environment (the 2014 budget assumes a 25% y/y increase
in revenues) and that it may be very difficult to contain wage increases when inflation
continues to rise. Coupled with the risk of overruns on the wage bill, the continuing increase
in bond yields suggests that interest costs may once again be a major contributor to the
deficit target being missed.
Meanwhile, the debt situation remains challenging: we estimate that debt may have been
c.55% of GDP by end-2013 (last official print: 52% of GDP at the end of September 2013).
Sustained large fiscal deficits and the countrys appetite for debt to expand infrastructure
mean that questions about debt sustainability are becoming more frequent among market
commentators. In a paper released in mid-2013, the IMF noted that the countrys debt risk
has risen yet remains moderate. That said, this is contingent on fiscal consolidation being
realised as planned and continues beyond the medium term.
FIGURE 3
Rising debt levels becoming a concern
FIGURE 4
Current account deficit a significant source of vulnerability
70
60
-2
50
-4
40
-6
30
-8
20
-10
10
-12
-14
0
2008
2009
2010
2011
25 March 2014
2012
2008
2009
2010
Domestic debt
2011
CA balance (% GDP)
Source: BoG, Barclays Research
92
The large fiscal deficit is also largely responsible for the persistently large, double-digit
current account deficit. In Ghana: Under pressure, December 2013, we highlight the plight
of the gold sector in 2013, which saw production decline 4% y/y and gold earnings 13% as
lower prices contributed to the sectors woes. The outlook for the sector is uncertain, with a
number of mining companies having announced plans to retrench workers and scale back
production. In 2013, gold and cocoa export receipts declined USD1.3bn. The outlook for the
cocoa sector remains upbeat, though the sharp run-up in cocoa prices over the past twelve
months is also unlikely to continue (+43.6% y/y), in our view. Furthermore, Tullow Oil
announced in January that it is scaling back oil production amid delays on gas processing,
with production projected to average 100,000bpd in 2014, on par with last years levels. As
such, oil revenues may be flat in 2014 unless oil prices move substantially higher (our
Barclays commodities team expects oil prices to remain flat in 2014). In contrast to the
somewhat uncertain outlook for exports, we believe that imports are likely to remain strong
despite the weaker exchange rate, driven by the importation of capital and consumer
goods. Against this backdrop, we project a current account deficit of 12% of GDP, only
marginally better than the 12.3% recorded in 2013. The current account deficit is likely to
be financed through still-strong FDI and Eurobond proceeds, while the government is also
looking at additional loans.
The increased risk has acted the countrys sovereign ratings negatively. In October 2013,
Fitch Ratings downgraded Ghanas sovereign rating to B from B+ with the outlook stable.
The downgrade was mainly a result of the governments failure to fully implement fiscal
consolidation, and the countrys external vulnerability also increasing. In December, S&P
revised its outlook for Ghana lower from stable to negative and warned that it may lower
the countrys rating (B) over the next 12 to 18 months due to the weakening fiscal and
external profiles.
Following sharply weaker growth in Q3 2013, overall growth in 2013 appeared to have
declined sharply to 5.7% (our estimate) from 7.9% in 2012. Official data from Q3 show
economic growth slowed to 0.3% y/y, compared with 6.7% and 6.1% in Q1 and Q2,
respectively. The decline in Q3 was largely attributed to the industry sector (-11.8% y/y
versus +2.5% in Q2) following a contraction in the mining subsector. The struggling gold
sector saw production decline, while oil production was also cut back. While the agriculture
sector continued its decline as well (-3.8% versus -3.9% in Q2), the services sector
FIGURE 5
GDP growth has weakened significantly in Q3 13, dragging
overall growth for 2013 lower
20
FIGURE 6
Upside risks to inflation suggest further policy rate hikes in Q2
22
18
20
16
14
18
12
16
10
14
12
10
2
0
2010
2011
2012
Real GDP (% y/y)
25 March 2014
2013
6
Jan-07
Jan-09
Policy Rate (%)
Jan-11
Jan-13
CPI (% y/y)
93
The outlook for monetary policy is also somewhat uncertain as rising inflation remains a
problem for the Bank of Ghana, despite initial confidence that it could contain inflation. The
depreciation in the cedi (nearly 26% against the USD over the past twelve months), subsidy
reductions and rising food prices remain negative effects. Headline inflation rose further to
14.0% y/y in February, from 13.8% in the preceding month, with food inflation (43.6% of
basket) and utilities inflation underpinning the increase. In addition to food (+7.5% y/y in
February) and utilities inflation (+38.9%), transport inflation (+26.8%) is also rising, with
further increases expected given the currencys woes. Overall, the non-food component
increased 19% y/y in February, compared with 14.2% in September 2013. The medium- to
long-term outlook for inflation deteriorated amid continuing exchange rate depreciation and
likely further increases in fuel and utilities prices. Our projections indicate that inflation may
move above 15% in the near term, well outside the Bank of Ghanas year-end target of 9.5%
and its band of +-2pp. As such, we believe that another 100bp is likely to contain inflation
pressures in the short to medium term. This is in addition to likely further FX regulations.
FIGURE 7
Ghana macroeconomic forecasts
2010
2011
2012
2013F
2014F
2015F
8.0
15.0
7.9
5.7
6.1
6.6
32.2
39.6
40.7
41.6
40.8
45.0
-8.2
-9.0
-12.1
-12.3
-12.0
-11.1
Official reserves
4.7
5.5
5.3
5.6
6.1
3.7
3.2
3.0
3.1
3.2
Activity
External sector
Months of imports
Public sector
Fiscal balance (% GDP)
-6.5
-4.1
-11.8
-10.2
-9.0
-7.5
46.3
43.7
47.0
54.9
63.7
62.9
8.6
8.6
8.8
13.5
12.8
9.6
Prices
CPI (% Dec/Dec)
USD/GHS (eop)
1.47
1.55
1.88
2.38
2.90
3.50
Q3 13
Q4 13
Q1 13F
Q2 14F
Q3 14F
Q4 14F
11.9
13.5
15.1
15.1
14.9
12.8
USD/GHS (eop)
2.18
2.38
2.65
2.75
2.80
2.90
16.00
16.00
18.00
19.00
19.00
18.50
25 March 2014
94
Trouble within
The spat between Qatar on the one hand and Saudi Arabia, UAE and Bahrain on the other is
unlikely to be resolved soon, but nor is it likely to have an immediate major economic effect
on the parties. However, the isolation of Qatar and escalation of rhetoric do not bode well for
investment sentiment and raise questions about the GCC as a political and economic bloc.
Abu Dhabis rollover of USD20bn of debt has reduced significantly Dubais refinancing risk.
Economics
Alia Moubayed
+44 (0)20 3134 1120
alia.moubayed@barclays.com
Credit Strategy
Andreas Kolbe
+44 (0)20 3134 3134
andreas.kolbe@barclays.com
Bayina Bashtaeva
+44 20 7773 7428
bayina.bashtaeva@barclays.com
Credit: Long DUBAIH 17s (DHCOG), MAF perps, DARALA 16s, value in Qatar long-end.
While an escalation of the recent tensions between Qatar and Saudi Arabia, UAE and Bahrain
(GCC-3) is not our base case, risks for the GCC credit space, particularly Qatar, could rise if the
recent developments lead to a re-adjustment of cross-border holdings of securities. However,
from a fundamental stand point, we note that Qatari corporates RasGas, Nakilat and Ooredoo
(Qtel) do not operate in any of the three countries. Moreover, the GCC credit space should
remain relatively well supported by local liquidity and limited linkages to other EM regions that
have been at the centre of recent investor concerns (Russia/Ukraine in particular). Hence, we
continue to see value in select higher-yielding credits in the region, such as DUBAIH 17s
(DHCOG), MAF perps or DARALA 16s, as well as the Qatar sovereign long-end, given the
persistent steepness of the Qatari spread curve (Figure 1).
In an unprecedented development in the history of the GCC, Saudi Arabia, UAE and Bahrain
withdrew their ambassadors from Qatar after relations between them soured on account of
various controversial issues (see Saudi Arabia, UAE and Bahrain withdraw ambassadors from
Qatar, 5 March 2014). The GCC-3 wanted Qatar to put an end to its interference in their internal
affairs, to stop sheltering Muslim Brotherhood figures who rally against them, and cease support
for the group in Egypt and other parts of the Middle East. We do not think Qatar will escalate
beyond its defiant response that its foreign policy is non-negotiable. This stance, however,
as well as the insistence of Saudi Arabia and UAE on specific measures such as closing AlJazeera media outlets and restricting movements in the GCC of MB-affiliated activists,
indicates that intra-GCC relations are severely compromised and that the divide runs deep
on strategic issues, notably GCC foreign and security policy.
FIGURE 1
Qatars spread curve remains among the steepest in EEMEA
140
FIGURE 2
Qatars trade with its neighbors is not significant, but
political and economic isolation could hurt sentiment
16
120
14.2
14
100
12
80
10
60
40
20
0
Mar-13
7.8
5.2
4.3
May-13
Jul-13
Sep-13
25 March 2014
Nov-13
Turkey
Russia
Hungary
Jan-14
4.7
0.8
0
GCC-3*
UAE
1.7
0.1
0.6
0.3
0.8 0.6
0.2 0.0
Kuwait
Iran
Haver Analytics,
95
Qatars trade with its neighbours is in fact not significant (as is intra-GCC trade in general)
and amounted only to c. USD11bn in 2012, or less than 5.7% of Qatars GDP. The GCC-3
countries account for 14.2% and 5.2%, respectively, of Qatars imports and exports, with
the UAE being the largest trade partner, on account of gas imports from Qatar through the
Dolphin pipeline (Figure 2). Recent threats by Saudi Arabia to block or restrict access to its
air space for Qatari flag-carrying aircraft, or to block Qatars land and sea borders, would
certainly impose material costs to its national airline and severely restrict Qatars ability to
import goods, particularly food. If tensions were to escalate in that direction, however, to
involve economic sanctions or border closures, the UAE could be negatively affected by any
potential retaliatory decision by Qatar regarding gas supply through the Dolphin Energy
pipeline owned by Mubadala. The latter carries about 2bn cubic feet of gas per day from
Qatar to the UAE and Oman, which represents about 4.3% of total Qatari exports and
roughly 30% of the UAE's gas needs, we estimate. While we do not think that interrupting
gas flows is an option, the Qatari government could opt to impose higher royalties or taxes
on UAE counterparts, but we believe this is unlikely at this stage.
We would expect Kuwait to play a role in mediating some solution in the short term but,
given the deep divide, this may not yield results. Should Qatar choose to escalate this
situation by retaliating, we think it will find itself increasingly isolated, which could open the
door for Iran to accelerate the planned rapprochement following recent bilateral visits and
announced intentions to deepen trade and economic relations between the two parties, to
the dislike of other neighbours and GCC partners.
Away from the intra-GCC infighting, Dubais outlook continues to strengthen. In line with
our expectations, an agreement was signed between Abu Dhabis Department of Finance,
UAEs Central Bank and the Dubai government to refinance Dubais USD20bn debt, which
the emirate borrowed in 2009 to fend off a financial crisis. The roll-over comprises a
USD10bn, five-year loan which was offered to Dubai by the Abu Dhabi government through
two state-owned banks, and USD10bn of five-year bonds that Dubai issued to the UAE
central bank. The agreement extended Dubais debt maturity by another five years at a cost
of 1%, below the 4% charge in 2009. Therefore, Dubais remaining maturities for 2014
should not exceed USD5bn, of which USD1.25bn is for the Dubai government and
USD1.4bn for Borse Dubai which we expect to be refinanced through a combination of
issuance, repayments and restructuring. Thus, we expect Dubais debt to remain around 4041% of GDP over the coming 12-18 months (Figure 3).
FIGURE 3
Dubais debt to GDP is likely to stabilize in the short term, as
refinancing risks have abated
Dubai's government debt
45
60
40
50
35
40
30
30
25
20
20
10
15
0
2008 2009 2010 2011 2012 2013 f 2014 f 2015 f
Govt debt (USD bn)
25 March 2014
FIGURE 4
Credit growth acceleration should help support growth
amidst expected slowdown in government spending
% y/y
30
25
20
15
10
5
0
UAE
Kuwait
Saudi
Arabia
2011
Qatar
2012
Bahrain
Oman
2013
96
Support from Abu Dhabi should help ease Dubais refinancing risks and give the emirate
enough room for manoeuvre to deal with its financial obligations and sovereign debt
maturing at the level of its Government Related Entities (GREs), while reducing sovereign
risks considerably. The reduction in borrowing costs from 4 to 1 percent could result in
fiscal savings of about USD600mn annually for the Dubai government, In addition, the
announced IPO of the shopping mall and retail unit of Emaar, through which the latter
expects to raise about USD2.5bn, could benefit the sovereign from the upstreaming of
dividends should Emaar decide to redistribute some of the proceeds to shareholders.
Investment Corporation of Dubai (ICD), a quasi-government entity under the auspices of
the Dubai department of finance, owns c.29% of Emaars shares.
Unlike previous years, much of the expected growth in the non-hydrocarbon sector is unlikely
to be driven by government led fiscal stimulus. The 2014 budget in Saudi Arabia reflected the
announcement made last December by the Saudi Minister of Finance about the need to curb the
rate of spending increases over the coming year, in light of expected downward pressures on
production and prices in the global oil markets. Accordingly, the budget stipulates a rise of only
4% y/y in spending compared to 2013, the lowest projected increase since 2003. With an
expected revenue target of around SAR1.1trn, we anticipate the fiscal surplus to shrink further in
2014 to around 5.1% of GDP down from 7.4% in 2013. The same pattern of fiscal consolidation
is also observed in Kuwait, where the new FY 2014/15 budget, due to enter into force at the
beginning of April, projects spending growth to decelerate to around 4% y/y, compared with an
average growth rate of around 15% last FY. Further, across the region, and notably in Kuwait and
Oman, governments have announced a review of their subsidies systems, which highlights
growing concerns about the need to create savings though subsidy reforms.
While government spending is likely to slow and its contribution to growth fall in the years to
come, credit growth will remain robust as investment sentiment improves and project
implementation picks up, notably in the UAE ,in our view. Here, average credit growth reached
7.1% y/y in 2013, its fastest pace since Q4 09, compared with an average of 2.7% in 2012,
while in Kuwait, it reached 7.25% y/y in 2013, compared with only 2.8% y/y a year earlier.
Credit growth in Saudi Arabia, however, decelerated from a peak of 16.4% y/y in 2012 to
around 12.5% y/y in 2013 and 12.3% in January 2014, while private sector credit growth in
Qatar slowed sharply in 2013, though remains elevated at about 12% y/y (Figure 4). Much of
this healthy credit expansion reflects the improvements in bank liquidity in 2013 and
translated into continued improvements in PMI in Saudi Arabia and UAE (Figure 5).
FIGURE 5
Saudi Arabia and UAE PMI point to continued expansion of
economic activity
65
FIGURE 6
Bahrains growth remains moderate
8
(% y/y)
60
4
2
55
50
-2
-4
Saudi Arabia
Source:
25 March 2014
UAE
Nov-13
Aug-13
May-13
Feb-13
Nov-12
Aug-12
May-12
Feb-12
Nov-11
Aug-11
May-11
Feb-11
Nov-10
45
-6
Sep-11
Jan-12
May-12
Non-financial
Sep-12
Jan-13
Financial
May-13
Sep-13
Real GDP
97
In Bahrain, however, the political situation remains volatile and has worsened during Q1 14,
notably around the third anniversary of the 2011 uprising. After two rounds of national
reconciliation talks between the opposition and the government, the parties failed to make
any headway on a settlement between the ruling Al-Khalifa family and the majority Shiite
population. The killing of three Bahraini police in March aggravated the situation and stalled
the political process, while the decision by the authorities to toughen jail sentences for
offending the King compounded the problems.
The spill-over of this turbulence into economic activity is, however, likely to remain limited.
Real GDP growth in Q3 13 expanded by 4.6% y/y with support coming almost equally from
both the oil and non-oil sectors, bringing growth for the year to date to 4.7% (Figure 6), in
line with our GDP growth estimate for 2013 of 4.3%.
FIGURE 7
GCC macroeconomic forecasts
Real GDP (% y/y)
2011
2012
2013 E
2014 F
2015 F
2011
2012
2013 E
2014 F
2015 F
GCC
8.1
5.8
4.0
4.2
4.3
10.5
5.5
1.0
0.0
-0.4
Saudi Arabia
8.6
5.8
3.8
4.0
4.1
11.0
5.7
-0.6
-1.2
-1.5
UAE
3.9
4.4
4.5
5.1
5.5
6.6
6.3
4.1
3.1
2.3
Kuwait
10.2
8.3
3.0
2.6
2.5
15.0
11.9
1.0
0.0
-0.5
Qatar
13.0
6.2
5.3
5.1
5.2
15.7
1.7
0.6
0.2
0.0
Oman
4.5
5.0
4.2
3.9
3.9
2.4
3.4
4.1
1.7
1.5
Bahrain
2.1
3.4
4.3
4.0
4.2
3.4
-8.5
15.1
2.8
2.0
2011
2012
2013 E
2014 F
2015 F
2011
2012
2013 E
2014 F
GCC
6.7
5.8
5.5
5.6
5.8
3.2
2.4
2.9
3.4
3.4
Saudi Arabia
8.0
5.8
5.0
5.3
5.5
3.9
2.9
3.5
3.8
3.6
UAE
2.6
3.5
4.8
5.4
6.3
0.9
0.7
1.1
2.3
2.6
Kuwait
3.3
4.0
4.6
4.5
4.3
4.7
2.9
2.5
3.2
3.5
Qatar
10.8
10.0
9.4
8.3
7.9
1.9
1.9
3.1
3.8
3.9
Oman
5.8
5.8
5.7
5.3
5.5
4.0
2.9
2.1
2.2
2.6
Bahrain
1.7
6.6
3.7
4.0
4.2
-0.4
2.8
3.3
3.3
3.1
2011
2012
2013 E
2014 F
2015F
2011
2012
2013 E
2014 F
2015 F
GCC
23.5
24.2
22.4
21.2
20.0
11.2
13.8
9.8
8.1
7.4
Saudi Arabia
23.7
23.2
20.1
18.5
16.7
11.6
14.0
7.4
5.1
4.5
UAE
14.6
17.3
16.1
15.8
15.5
4.1
8.6
8.5
8.3
8.0
Kuwait
41.8
43.2
42.1
40.6
39.4
30.8
32.5
32.9
30.6
29.0
Qatar
30.3
32.0
30.1
28.7
27.4
7.7
11.8
9.5
8.9
8.3
Oman
12.8
10.4
9.9
8.8
7.6
6.3
5.7
4.8
3.8
3.2
Bahrain
11.2
7.3
12.8
11.5
10.9
-0.3
-2.0
-4.4
-4.8
-5.0
Note: *Kuwait and Qatar fiscal year (FY) starts 1 April until 31 March.
Source: National ministries of finance and central banks, IMF, Haver Analytics, Barclays Research
25 March 2014
98
EEMEA: HUNGARY
Hungarys growth recovery has boosted Fideszs re-election prospects. Other economic
fundamentals have also improved, with inflation lower, the current account surplus
growing, and the fiscal deficit securely below 3% of GDP, allowing a rise in capital
spending. Yet private sector investment remains weak, possibly limiting the durability of
the recovery. Loose monetary policy has made the HUF increasingly vulnerable.
Key recommendations
FX: We are moderately negative on the HUF and recommend using levels of about 310
Koon Chow
+44 (0)20 7773 7572
per EUR to accumulate EUR. Policy rates are near historic lows and HUF liquidity is
ample, which is a source of outflow pressure to repay external loans (the stock of
maturing CHF mortgages is 10% of GDP with 10-15y maturity) and from foreigner
selling of HGBs. The 3% GDP current account surplus provides some offset.
koon.chow@barclays.com
Durukal Gun
+44 (0)20 3134 6279
durukal.gun@barclays.com
Rates: We are underweight HGB, given our currency view and the low HGB yields.
After the spread between EM average and HGB yields reached a multiyear wide in
January, foreigner outflows accelerated. The belly of the HGB curve is probably the most
exposed to re-pricing, as the front end has the anchor of dovish monetary policy and the
back end is the anchor of our relatively positive credit view. Nov20 HGB is the most
vulnerable HGB, given high foreign ownership.
Credit Strategy
Andreas Kolbe
+44 (0)20 3134 3134
andreas.kolbe@barclays.com
Credit: Remain overweight. Hungary credit has likely been a consensus long for many
investors, given the fundamental improvements and the countrys close linkages to the
euro area recovery. Overweight investor positioning and the recent new supply have likely
contributed to the tightening momentum having stalled. However, with Hungarys
issuance needs in international markets now largely met for 2014, we continue to think
that Hungary credit offers value. Given the relatively steep curve versus most EEMEA
peers, we see value in Hungary $41s in particular and also reiterate our recommendation
to switch into Hungary from Serbia and Croatia.
FIGURE 1
Hungary yields decline below EM average
%
Yields
cross/inflows
slow
12
11
10
FIGURE 2
Growth slowly reviving on exports and investments
HUF bn
120
130
2008 = 100
5500
5000
120
110
110
4500
4000
100
100
3500
7
6
3000
2500
4
Mar-09
Mar-10
Mar-11
25 March 2014
Mar-12
Mar-13
HGB 5y yields
2000
Mar-14
90
90
80
80
70
Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13
GDP
Priv.Cons.
Imports
Invest. (RHS)
Exports
99
Fidesz is apparently on the verge of another election victory and polls indicate it could retain
its super majority. We expect more unorthodox policies in the second term of this
government. PM Orban has reiterated his intentions, including increasing Hungarian
ownership of the banking system to 50%, presumably through buying out loss-making
foreign-owned banks (due to high taxes and NPLs). Another goal is to lower energy prices
for businesses also (to US levels) with energy supplied by non-profit companies (again
through buying out loss-making foreign-owned companies, a process that has already
begun). The Russia-financed building of two new nuclear generators is an important element
of ensuring energy supply, but is not likely to help lower energy costs. Land reform, reindustrialisation, full employment, and demographic planning are other goals PM Orban
mentioned. We think Fidesz will continue to be proactive in increasing government control of
economic sectors, but at the same time try to encourage export-oriented FDI inflows, though
its success has been limited (net FDI has been negative in 2013). A new FX mortgage bail-out
scheme is expected after the election. The central banks Funding for Growth Scheme (FGS)
lending to small enterprises, government job creation, and EU-financed public capital
investments are important elements of the growth strategy.
Improving growth
Growth recovery may prove to
be fragile
Growth recovered in 2013 to 1.2% from the 2012 recession (-1.7%) and we expect it to
increase 2.2% in 2014 and 2.6% in 2015 (Figure 2). The relatively mild trajectory reflects our
view that the recovery is somewhat fragile, overly dependent on government stimulus, rather
than strong underlying market trends (Figure 3). In 2013, growth was helped by a low base
from 2012 (in particular in Q4 13, when real GDP accelerated to 2.7% y/y), the strong
agricultural harvest, less fiscal tightening, and considerable monetary policy loosening. The
strong increase in investment of 16.5% y/y in 2013 reflected almost entirely public sector
projects funded by increased EU transfers (transport, public administration, public utilities, and
energy investment spending were up over 50%). Private sector investment appears to have
stalled, as overall bank loans to businesses continued to fall (Figure 4), notwithstanding cheap
NBH funding to small businesses (FGS). It remained particularly weak in sectors that have
been subject to heavy taxation and regulation (finance & insurance, communication, and real
estate) and FDI net inflows have stagnated. On the plus side, industrial production has been
bolstered by exports-oriented car production (volumes up 21% in 2013), and recently
announced production increases by Mercedes and Audi ensure further gains in 2014.
FIGURE 3
Evidence that growth recovery is underway
20
15
10
5
0
-5
-10
-15
-20
-25
-30
Jan-09
FIGURE 4
Overall bank credit to businesses still declining
20%
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
40%
35%
15%
30%
25%
10%
20%
15%
5%
10%
5%
0%
0%
-5%
-5%
-10%
-15%
-10%
-20%
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Total MFI corporate loans (const ex. rate, % y/y, LHS)
HUF MFI corporate loans (% y/y, RHS)
FX corporate loans (const. ex rate, % y/y, RHS)
IP (% y/y, SWDA)
Hungary: Retail Sales Volume (WDA, Y/Y % Chg)
Source:
25 March 2014
Source:
100
Headline inflation was just 0.1% y/y in February, compared with a 3% target. It was affected
by government administrative price cuts in energy and utilities that lowered inflation 2-2.5pp.
In the opposite direction, increased tobacco, alcohol and financial transaction taxes raised
prices 1-1.5pp. This leaves underlying inflation at 1-1.5%. Also, food prices are falling (-0.4%
y/y) due to the very strong 2013 harvest following the poor 2012 one (when food inflation
peaked at 8% y/y). A measure suggested by NBH research that abstracts from all these effects
is core inflation excluding indirect tax effects, which was up 1.6% y/y in February. We expect
inflation to pick up in the second half of this year, reaching 2% at end-2014. This is due
primarily to powerful base effects as most electricity and utility price cuts fall out of the base
(in H2 13, overall inflation declined -1.0pp) and normalisation of food prices. An important
factor will be the 2014 agricultural harvest; we are assuming an average harvest, in contrast to
the excellent one in 2013. Admittedly, there are still downside risks to inflation from light
domestic demand and low global commodity price pressures.
Even so, this still leaves inflation far below the 3% target and underlying real rates at about
1%. However, in our view, monetary policy has become excessively accommodative for the
circumstances. The NBH has lowered its policy rate continuously for the past 20 months,
appears likely to lower it to at least 2.5% and may not stop there. At the same time, it has
been increasing liquidity in the system through its FGS. This has caused M1 money supply
growth to increase to over 20% y/y (Figure 5), and bank holdings of 2-week NBH securities
increased to about HUF4,900bn at end-December. This excess liquidity has made the HUF
vulnerable to a market sell-off, in our view. Indeed, the HUF has sold off about 5% this year
(Figure 6). Further rate cuts and FGS lending could lead to further weakness. At this point,
the NBH has become so focused on promoting growth that it no longer seems as concerned
about a HUF sell-off. Thus, we see further HUF downside risk.
The current account surplus has been increasing steadily, reaching 3.1% of GDP in 2013,
compared with 1% in 2012. The deepening of the trade surplus has been the main factor,
more due to low imports than strength in exports. Rising car exports have been the main plus
factor while food, fuel, and energy import costs were flat. An increase in EU transfers also
supplemented the current account surplus. In addition, unlike in other countries, income
payments fell. We think further slight strengthening of the current account surplus will occur
during 2014-15.
FIGURE 5
High money supply increase puts risk on the HUF and inflation
12
25
10
20
15
10
0
Inflation target
2
0
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Feb-13
-5
-10
Feb-14
M1 (% y/y, RHS)
25 March 2014
FIGURE 6
Currency weakness as rates stay low
10
320
310
300
290
280
270
4
Mar-12
Jul-12
Nov-12 Mar-13
5y T-bond (%)
Jul-13
260
Nov-13 Mar-14
EURHUF (RHS)
Source: Bloomberg
101
Balance of payments financing has dropped considerably. FDI inflows have fallen sharply, to
near zero. Portfolio financing has dropped as foreign investors have decreased holdings of
HGB, reducing their share to about 36% from a peak of 44% at end-2012. This has been
offset by large global bond sales. Furthermore, bank outflows moderated somewhat, as
banks have already withdrawn so much capital.
The fiscal deficit is well contained below 3% of GDP; thus, EC conditions are satisfied. With
greater revenue collection because of tax increases on banking and energy, as well as a
pickup in growth, the government was able to raise its capital spending considerably (up
25% in 2013), reversing decreases in previous years. Government bond financing has
increasingly been geared towards retail investors, where net financing surged to 3.5bn in
2013. This easily absorbed the outflows of foreign holdings (1.5bn over the past nine
months). In addition, AKK (the government debt agency) has re-entered the global bond
markets with issuance of USD2bn in November 2013 and an additional USD3bn in Q1 14
(following USD4bn in Q1 13).
FIGURE 7
Hungary macroeconomic forecasts
2010
2011
2012
2013
2014F
2015F
1.0
1.6
-1.7
1.2
2.2
2.6
0.0
-0.8
-3.5
0.6
0.7
1.8
Activity
Real GDP (% y/y)
Domestic demand contribution (pp)
Private consumption (% y/y)
-3.0
0.4
-1.6
0.2
1.4
1.9
-8.5
-5.9
-3.7
5.9
6.1
5.0
1.1
2.4
1.8
0.6
1.5
0.8
Exports (% y/y)
11.3
8.4
1.7
5.3
6.3
6.1
Imports (% y/y)
10.9
6.4
-0.1
5.3
5.5
6.1
128
138
125
130
137
144
0.3
0.6
1.3
4.0
4.9
4.9
CA (% GDP)
0.2
0.5
1.0
3.1
3.5
3.4
3.2
4.3
4.6
6.4
7.7
8.3
1.1
0.8
2.6
-0.4
-0.6
-0.5
185.3
172.1
163.7
141.6
145.4
141.1
45.0
48.9
44.7
37.7
35.7
34.7
-4.4
4.1
-2.2
-2.4
-2.9
-2.9
Public sector
Public Sector Balance (% GDP)
Primary Balance (% GDP)
-0.3
8.4
2.3
2.4
1.9
1.9
82.4
82.2
79.9
79.4
79.1
77.4
CPI (% Dec/Dec)
4.7
4.1
5.0
0.4
2.0
2.1
EUR/HUF, eop
279
311.1
291
297
315
320
1y ago
Last
Q1 14F
Q2 14F
Q3 14F
Q4 14F
-0.8
2.7
2.1
2.5
2.2
2.2
2.2
0.1
0.2
0.4
1.0
2.0
304.3
310
314
315
315
315
5.8
2.7
2.6
2.5
2.5
2.5
2.78
2.66
3.50
4.01
Source: Central Statistical Office, National Bank of Hungary, Ministry of Finance, Haver Analytics, Barclays Research
25 March 2014
102
EEMEA: IRAQ
Economics
Alia Moubayed
+44 (0)20 3134 1120
alia.moubayed@barclays.com
Commodities
Key recommendations
Credit: Election-related uncertainties may make market participants hesitant to add to
Helima L. Croft
+1 212 526 0764
helima.croft@barclays.com
Christopher Louney
+1 212 526 6721
christopher.louney@barclays.com
positions in Iraq 28s at present. Also, given the deteriorating fiscal position, a new
eurobond issue later this year is a possibility. That said, we think Iraqi spreads are generous
based on the countrys credit metrics. Given Iraqs diversification potential and aboveaverage yield in a Global EM Credit context, we recommend holding on to positions and
suggest seeking renewed buying opportunities when election-related risks dissipate.
Michael Cohen
+1 212 526 3606
michael.d.cohen@barclays.com
Credit Strategy
Andreas Kolbe
+44 (0)20 3134 3134
andreas.kolbe@barclays.com
Violence in Iraq has intensified since our previous EM Quarterly (Iraq Quarterly Outlook:
Realism taking hold), as Iraqi forces raided the home of Ahmed Al-Alwani, a controversial
Sunni MP from Ramadi, and cleared the main Sunni protest camp in Anbar province in late
December. Anbar, home to the countrys Sunni community, was the epicentre for the armed
resistance to the American occupation of Iraq and has remained so for opposition to Prime
Minister Malikis government. These moves set off violent demonstrations, and the Islamic
State of Iraq and Al Sham (ISIS) capitalised on the chaos in the regions two largest cities
and seized control of Fallujah and Ramadi earlier this year, the first time Iraqs Al Qaeda
affiliate had captured Iraqi territory since the US troop withdrawal in 2011 (Iraq: Things Fall
Apart, 6 January 2014).
The instability in Anbar comes on the heels of a particularly violent year in the country.
According to the United Nations, 8,868 people were killed in attacks in 2013, the highest
yearly death toll since the conclusion of the civil war in 2008. Nearly 8,000 of the fatalities
were civilians, with the vast majority coming from the countrys Shiite community. The
death toll YTD for 2014 has reached more than 2,688 (Figure 1).
FIGURE 1
Alarming uptick in violence in Iraq (number of casualties)
1,200
FIGURE 2
2010 electoral alliances could drastically change on 30 April
(% of seats in Parliament)
Monthly total
1,000
Kurdistan
Alliance
13%
800
Iraq
National
Movement
(Iraqiyya)
28%
600
400
National
Iraqi
Alliance
22%
200
0
Jan-08
Jul-09
Jan-11
Jul-12
25 March 2014
State of Law
Coalition
27%
Jan-14
Source: Iraqi Parliament, Barclays Research
103
The upcoming April elections could add to the volatility. In many respects, the 2010
elections helped steer Iraq onto its current negative political and security trajectory. Prime
Minister Maliki has been heavily criticized for allegedly waging a political campaign against
rival Sunni politicians in the run-up to, and aftermath of, the controversial 2010 polls. His
opponents have also accused him of failing to honour the terms of the power-sharing
agreement that allowed him to secure a second term in office even though his coalition did
not win the most seats in parliament. If the April polls are similar to the 2010 election, it
could push Iraq closer to the brink of another civil war (Geopolitical Update: A cold front).
However, pre-election political dynamics suggest that many of the 2010 alliances could
change drastically (Figure 2). On the one hand, the main bloc of Al Iraqiyya (Iraq National
Movement) is disintegrating and three alliances (mostly Sunni) will be competing in the next
elections: the United bloc, headed by Osama al-Nujaifi, the current speaker of the house; the
Iraqi Front for National Dialogue, headed by current Deputy Prime Minister Saleh al-Mutlaq,
and the National Iraqiya bloc led by the former head of the Iraqiya bloc, Ayad Allawi, a secular
Shiaa. On the other hand, Shiite parties allied in the current governing coalition led by PM
Maliki, the State of Law Coalition, seem to have fallen apart, while the Shiite cleric, Muqtada alSadr recently announced his decision to retire from politics and quit the National Iraqi Alliance.
Finally, how the Kurdish parties will decide to ally themselves with other contenders, amid the
ongoing negotiations between Baghdad and Erbil over the exports of the Kurdistan Regional
Government (KRG) oil, remains unclear.
2014 budget law highlights the persistent divide over KRGs oil exports
The budget 2014 has yet to be
approved
Indeed, Iraqs 2014 budget continues to be delayed, partly because of objections from the
Kurdistani Alliance (KA) in Parliament. The KA is objecting to the fact that the KRG has yet to
receive the 17% share of budget revenues for which it is eligible by law in return for the sale of
its oil exports. Kurdish parliamentarians, among others, are also questioning the assumptions
on which the 2014 budget law is based. The proposed 2014 budget targets spending of
IDQ164.5trn (USD141bn), 16.4% more than in the 2013 budget. Budgeted revenues, on the
other hand, are estimated at about IDQ139.6trn (USD 119.7bn) based on the assumption that
Iraq will sell 3.4mn bpd in 2014, compared with the 3.1mn bpd in 2013 (Figure 3). The budget
also assumes that 400,000 bpd should be exported by the KRG, compared with 250,000 bpd
registered in 2013, something that the KA and other Kurdish parties contest. Finally, the draft
law stipulates that all Iraqi oil revenues, including from Kurdistans oil sales, should be
FIGURE 3
2014 budget could result in further fiscal outlook deterioration
% GDP
$/barrel
20
-15
Deficit (% GDP)
Source:
25 March 2014
2015f
-10
2014f
40
2013e
-5
2012
60
2011
2010
80
2009
2008
100
2007
10
2006
120
2005
15
FIGURE 4
Oil production hit its highest levels in many years
mbpd
4.0
3.5
3.0
2.5
2.0
Feb-08
Feb-10
Feb-12
Feb-14
104
In fact, prospects for Kurdistans autonomous oil exports remain caught in the political
crossfire between Baghdad and Erbil (KRG). In January 2012, Erbil halted its exports via the
Baghdad-controlled Kirkuk-Ceyhan pipeline because of disputes over payments to
contractors and revenues from past oil sales. As a result, Baghdad has been receiving less
than half of the 175 kb/d due from the KRG. Since then, Erbil has trucked close to 65 kb/d
to Turkey for export through the Mediterranean port of Mersin. According to MEES, crude
exports are also being channelled through Iran at a rate of 30-40 kb/d. Remaining volumes
have been refined at the KRGs 100 kb/d Kar refinery and other topping plants.
The limits on export outlets have also constrained the expansion of production from
Kurdistan. Genels recently completed Khurmala-Fishkabur pipeline linking with a branch
of the Kirkuk Ceyhan network offers an opportunity for incremental exports. The 40-inch
pipeline (with a capacity of 300 kb/d, though there have been KRG claims of 400 kb/d) is
being tested now but has commissioning problems. As storage at Ceyhan and production
capacity in the KRG mount, the KRGs offer may help re-start the stalled negotiations. The
sides remain at odds, however, on revenue sharing and the marketing of KRG oil, which
could undermine budget targets. That said, the KRGs offer indicates that an agreement
over the budget in the next few days will, in our view, depend on whether PM Maliki is able
to extract a political dividend from the Kurds through a potential electoral deal that is much
needed ahead of the 30 April elections.
FIGURE 5
Drawdown of DFI balances was significant during 2013
USD bn
USD bn
25
20
15
10
5
0
Nov-08
FIGURE 6
Iraq FX reserves stood at USD67bn at end August 2013
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
25 March 2014
70
65
60
55
50
45
40
35
30
25
20
Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13
FX reserves (excl gold, USD bn)
Source: IMF, Haver Analytics, Barclays Research
105
While exports have the potential to stay near record levels, downside production risks
remain acute. Disruptions to the Kirkuk-Ceyhan line continue, and the security situation in
Anbar province has the potential to spread. Without adequate storage capacity, production
growth will be delayed, making the 4.1 mb/d production target announced by the
government overly optimistic, in our view. As such, and cognizant of the recent
improvements, we raise our average yearly production 2014 forecasts to 3.5 mbpd only
from 3.3 mbpd, and 2014 real GDP forecasts from 5.8 to 7.6% y/y respectively, while
recognizing upside risks to this forecast (Figure 7).
The above notwithstanding, we think the rise in production is unlikely to translate into any
major improvement Iraqs fiscal outlook. While we maintain our projected average oil price
per barrel for 2014 at USD 104.5, this is barely above our estimated fiscal oil breakeven price
for Iraq. Moreover, available data highlight an erosion of balances of the Development Fund
of Iraq (DFI) from USD18.05bn at end-2012 to USD10.8bn, their lowest level since February
2010 (Figure 5), a reflection of a deteriorating fiscal performance in 2013, owing to higher
military spending and most likely expansion in spending for electoral purposes. We think
that our estimate of a 0.8% of GDP surplus was not achieved in 2013, although budget
execution data have yet to be published. Given the current political landscape and PM
Malikis attempt to secure a third term, such patterns of fiscal underperformance are likely
to persist in 2014 if the budget is passed as proposed. We therefore reduce our fiscal
balance forecasts to almost zero, from 0.5% of GDP previously and would not be surprised
by further drawdowns on DFI balances.
FIGURE 7
Iraq macroeconomic forecasts
2010
2011
2012
2013E
2014F
2015F
5.857
8.582
8.4
4.9
7.6
7.8
135.5
180.6
212.5
225.4
246.2
267.5
2.4
2.7
3.0
3.1
3.5
3.8
3.0
12.5
7.0
2.1
3.6
4.2
60.9
61.0
60.2
57.8
28.4
29.0
44.9
33.8
28.3
25.6
11.5
10.8
50.4
60.7
68.7
70.3
73.8
75.7
Activity
External sector
Public sector
Overall fiscal balance (% GDP)
-4.3
4.9
4.0
0.5
0.1
-0.2
52.2
40.2
34.1
28.7
14.5
12.3
2.4
5.6
6.1
1.9
4.5
4.8
1170
1170
1166
1166
1166
1166
Prices
CPI (% y/y, period average)
Exchange rate (USD/Dinar, end of .period)
Note: *Assumes a debt reduction in 2014 by non-Paris Club official creditors, comparable to the Paris Club agreement.
Source: Central Bank of Iraq, IMF, Haver Analytics, Barclays Research
25 March 2014
106
EEMEA: KENYA
Kenyas economy continues to strengthen despite numerous challenges, including stilllarge twin deficits. Inflation has been brought under control and monetary policy is
likely to remain unchanged in H1. The infrastructure bond continues to offer
opportunities, while the Eurobond issuance is planned for the current fiscal year.
Key recommendations
Rates and FX: Although opportunities remain limited in the local market, we believe that
Dumisani Ngwenya
+27 11 895 5346
the tax-exempt Kenya infrastructure bond continues to offer value. Yields in the
infrastructure bond are currently at 11.9% and have moved only marginally lower since
Q4 13 as the relatively stable inflation environment has led to an unchanged monetary
policy stance. We expect monetary policy to remain unchanged in H1 amid a positive
inflation outlook, which, in turn, results from a stable FX outlook. Despite twin deficits,
KES has not suffered the selling witnessed in some other parts of the region, in part
because the CBK has been effective in its FX management, but also because Kenya had
few of the portfolio inflows in recent years that have become more difficult to maintain
in a less EM friendly global environment. We expect that the KES can remain well
anchored in the months ahead, particularly should the country launch its maiden
Eurobond as planned in the current fiscal year. Over the longer term we do project
modest shilling weakness, and forecast an end-year rate of 90/USD.
dumisani.ngwenya@barclays.com
Economic growth is estimated to have been 4.6% in 2013, which is flat from the 2012
outcome. Although final quarter data for 2013 is still outstanding, growth appears to have
been underpinned by strong performances in the electricity, trade, construction and
financial services sectors, while agriculture also recorded solid growth despite weatherrelated and productivity challenges. Within agriculture, the 2013 experience was mixed with
tea, vegetable and sugar cane production having recorded strong performances during the
year while coffee production declined. The hotels and restaurant sector declined sharply
(c.10% y/y in the first three quarters of 2013) as security concerns had a negative effect.
Following the fire at Jomo Kenyatta International Airport in August 2013, the Westgate Mall
attack in September may have further weighed on the sector in Q4 13.
FIGURE 1
Policy rate likely to remain unchanged in 2014
FIGURE 2
FX reserves continue to increase, which bodes well for FX
6.5
22
6.0
17
5.5
12
5.0
4.5
4.0
2
3.5
3.0
-3
2010
2011
Policy rate (%)
25 March 2014
2012
2013
CPI (% y/y)
2014
182-Tbill yield (%)
Jun-12
Dec-12
Usable FX reserves (USDbn)
Jun-13
Dec-13
Months of imports
Statutory level
Source: CBK, Barclays Research
107
The outlook for 2014 is more upbeat: during our visit to Kenya in February, the CBK
indicated that it expects growth of c.5% in 2014, somewhat below our estimate of 5.5%. We
look forward to improved weather conditions and anticipated improved demand from key
export markets to provide support to the agriculture sector. Along with the anticipated
improved external sector performance, the ongoing focus on expanding infrastructure and
the accommodative monetary policy environment will lend further support to growth.
Downside risks include the security environment and the countrys narrow export base
(predominantly agricultural), while volatile weather conditions and global growth (if it
disappoints) remain key threats.
The stable currency has underpinned the favourable inflation environment after peaking
at 8.3% y/y in September, lower food inflation has helped the overall moderation in inflation
to 6.9% in February 2014. The MPC remains unperturbed by credit growth of around 20%
y/y (January 2014), which it sees as still non-inflationary, while it also views fiscal policy as
consistent with the monetary policy objectives. Our projections indicate a stable inflation
trajectory near 7% over the medium term, which is still within the medium-term target of
5% and +-2.5pp around this level. As such, we do not expect any policy rate adjustment in
the remainder of H1. Upside risks to inflation (and thereby monetary policy rate) include a
sharp rise in fiscal spending and volatile weather conditions, which may affect food supply.
Despite hopes of improved demand for exports in 2014, the external sector remains
vulnerable. While there has been a decline in the current account deficit to an estimated
8.1% of GDP in 2013 from 10.5% in 2012, some key sectors remain exposed. These include
agriculture and manufacturing, with coffee exports sharply lower. Export data for the twelve
months to October 2013 show a 4% y/y decline, while imports rose 1% amid still-strong
imports of manufactured goods and capital goods. We expect the current account deficit to
rise to 10.5% of GDP in 2014 in the wake of continued strong capital goods imports.
On the fiscal side, uncertainties particularly in terms of its eventual cost about the rollout of the devolved system of government remain. Effective implementation of devolution
was a key precondition to its success, though a lack of clarity on respective roles of the
national and country governments, lack of supportive legal framework, power struggles
among governors and the national assembly, overspending and lack of skills at the country
FIGURE 3
Devolution putting upside pressure on fiscal deficit
0
-1
-2
-3
FIGURE 4
CA deficit to remain wide amid large imports
60
50
-2
40
-4
-5
30
-4
-6
-8
-6
20
-7
-8
-9
-10
FY2007
FY2009
FY2011
FY2013
25 March 2014
FY2015
-10
10
-12
-14
2006
2008
2010
2012
2014F
108
Ultimately, we believe that the system of devolved government is likely to be costly should
systems to ensure accountability fail. This could, in view of the IMF, derail fiscal discipline and
erode the recent success toward gradual consolidation leaving lower buffers to deal with
adverse shocks. Major spending pressures emanating from devolution have caused
authorities to adjust the deficit for FY2013-14 upwards to 8.7% of GDP from the initial 7.9%.
Still, we believe upside risk remains to the FY2013-4 deficit target. The government is
considering the Eurobond, domestic borrowing and multilateral support to finance the deficit.
Positively, we believe that Kenyan authorities may seek another Extended Credit Facility
(ECF) program from the IMF to replace the one that had come to an end in December 2013.
The previous ECF was intended to provide balance of payments assistance and budgetary
support.
In terms of longer-term risks, we believe that the ICC case against Kenyas President and
Deputy President is unlikely to have any effect on local markets in the medium term. The
trial against President Kenyatta has been postponed indefinitely from the 5 February 2014
date, while that of Deputy President Ruto will continue. There has been increased pressure
from the African Union for the cases to be withdrawn, while the withdrawal of witnesses
has also been hampering the cases. As such, we see any risk pertaining to these cases as
limited over the medium term.
FIGURE 5
Kenya macroeconomic forecasts
2010
2011
2012
2013F
2014F
2015F
5.8
4.4
4.6
4.6
5.5
6.1
32.2
34.1
40.9
44.0
47.9
52.7
-7.8
-9.8
-10.5
-8.1
-10.5
-11.8
4.0
4.2
5.7
6.1
7.0
3.9
3.7
4.3
4.1
4.2
-7.2
-5.0
-5.6
-6.8
-8.7
-6.0
48.1
54.2
49.6
51.7
53.7
53.3
Activity
External Sector
Months of imports
Public sector
Fiscal balance (% GDP)1
1
4.5
18.9
3.2
7.2
7.5
7.2
USD/KES, eop
80.75
85.07
86.00
86.31
90.00
93.50
Q3 13
Q4 13
Q1 14
Q2 14F
Q3 14F
Q4 14F
8.3
7.2
6.8
6.9
5.8
7.5
USD/KES (eop)
86.40
86.31
86.60
87.20
88.50
90.00
8.50
8.50
8.50
8.50
8.50
8.50
Note1: Fiscal year ending. Source: IMF, CBK, IHS-Global Insight, Barclays Research
25 March 2014
109
EEMEA: LEBANON
Lebanons new government faces daunting socio-economic and security problems. Any
efforts to revive growth or reverse the deterioration in public finances are likely to be
constrained. We think the uncertain outlook at the institutional level due to electoral
milestones will leave this and future governments with limited opportunity to improve
economic conditions during 2014.
Key recommendations
Credit: Lift to neutral. Although the political and economic backdrop does not seem
Andreas Kolbe
+44 (0)20 3134 3134
andreas.kolbe@barclays.com
conducive for increasing allocations to Lebanon credit, we think that relative valuations
in the non-GCC MENA region should attract demand. Morocco and Egypt have
outperformed in particular and for investors seeking to take some profits, we think
Lebanon may be an adequate, higher-yielding alternative, with spreads anchored by
local ownership and the resulting low correlation to global drivers of EM credit
(Figure 1).
A few days before the looming constitutional deadline, Lebanons deeply divided political
factions agreed to form a new government; on 20 March, Parliament voted by
overwhelming majority to grant a vote of confidence. Unlike similar political crises in 2007
and 2009, in which some form of compromise was reached, the agreement took place
without addressing the fundamental differences between the two opposing camps March
8 and March 14. Namely, Hezbollah is still fighting with the Assad regime forces against the
rebels. At the same time, several elements of the March 14 coalition maintain their strong
ties with regional powers that have been supporting various Syrian rebel factions. The deal
over the new government was achieved only after the Saudis and the Iranians put
significant pressure on their respective allies, amid a severe escalation in security threats.
Indeed, the security situation remains very fragile and could deteriorate further. The recent
battle of Yabroud in Syria (near the Lebanese border), in which Hezbollah played a key role
in securing victory over the Syrian rebels, looks set to renew the violence while raising
FIGURE 1
Based on valuations versus regional peers, Lebanon screens
as increasingly attractive
950
54
Z-sprd, bp
850
52
750
50
650
48
550
450
46
350
44
250
150
Feb-13
FIGURE 2
Economic activity weakens further
42
May-13
Aug-13
Feb-14
Lebanon 21s
Morocco 22s
Bahrain 20s
Egypt 20s
25 March 2014
Nov-13
40
Jan-13 Mar-13 May-13
Jul-13
Egypt
110
A coalition government can also prevent a possible scenario of an institutional void at the
executive branch level. Over the next few weeks the Lebanese are faced with a choice between
forging a consensus over who will be put forward to be the next president, or letting deep
divisions and geopolitical power plays lead the country into vacuum at the presidential level,
similar to 2007. According to the constitution, the Parliament will become a voting assembly
as of 25 March, and must elect a president no later than 25 May 2014. Should this not happen,
the current government would assume all powers of the executive branch according to Art 62.
Alternatively, a newly elected president will nominate a new prime minister and form a new
government by June. In either scenario, however, yet another new government should be
formed after Parliamentary elections in November. This uncertain outlook at the institutional
level due to electoral milestones will leave this and future governments limited opportunity to
improve economic conditions during 2014, in our view.
The uncertain political outlook and deteriorating situation in Syria continue to weigh on
Lebanons economic activity, as reflected in the January and February PMI prints (43.2 and
45.8, respectively). Tourism sector indicators point to a significant slowdown, with hotel
occupancy rates during January 2014 falling to 36% compared with 50% in January 2013. A
recent study conducted by Beiruts Traders Association showed Lebanons retail trade has
fallen a cumulative 35% over the past two years, a clear consequence of the political
instability the country has been facing.
Notable also is the stagnation in imports, which confirms the severe weakening in domestic
demand, as well as the sharp fall in export growth since April 2013, resulting in a contraction
in exports by 12.2% y/y, the first time since 1997 (Figure 3). This contraction is largely
FIGURE 3
Exports fell by 12.2% y/y for the first time since 1997 while
imports kept stagnant reflecting weak domestic demand
% y/y
FIGURE 4
BoP deficit shrank in 2013, on improvements in non-goods
related current and financial flows
40
USD bn
25
30
15
20
10
20
10
-5
-10
-10
-15
-20
-20
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Exports (% y/y)
Source: Haver Analytics, Barclays Research
25 March 2014
Imports (% y/y)
Source:
111
The composition of the current government and the likelihood of stalled reforms in light of
expected changes in administrations do not augur well for a reversal in deteriorating public
finances. As we highlighted previously (Lebanon Quarterly Outlook: Further institutional
void is looming), public debt dynamics continued to worsen in 2013 with total public debt
increasing by 8.3% y/y compared with 5.9% y/y in 2012, and the debt to GDP ratio
reaching 145.9% compared with 139.5% a year earlier. Total 2013 revenues remained
almost flat, while expenditures rose by 2.5% y/y. As such, the overall fiscal deficit widened
8.0% y/y, reaching 9.3% of GDP, up from 9.0% last year. The widening primary fiscal deficit
is significant in that it more than doubled, registering 0.4% of GDP in 2013 and further
pressured debt dynamics.
In the absence of fiscal reforms, we expect the deficit to continue to widen during 2014 as
the burden of Syrian refugees increases and stagnation of economic activity undermines
revenue generation. Financing the deficit is likely to remain highly reliant on ample domestic
liquidity in the local banking system. In addition to an estimated USD4.8bn deficit we
forecast for 2014, banks will also roll over another USD3.4bn of maturing Eurobonds
(USD1.9bn of principal and USD1.4bn of coupon). After all, they continue to benefit from a
sustained flow of private sector deposits, which grew at an annual average of 6.75% in 2013
compared with 6.84% y/y. That, along with the recent slowdown of credit for the private
sector (9.7% y/y in 2013 versus 10.6% y/y in 2012) should keep the loans to deposit ratio
of the banking system below 40%.
FIGURE 5
Fiscal deficit grew wider reaching 9.7% of GDP in 2013
% GDP
% GDP
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
-16
2003
95
90
85
80
75
70
65
60
55
2005
2007
FIGURE 6
Gross public debt rose sharply to 145.9% of GDP at end
2013, as both local and FX denominated debt edged up
25 March 2014
2009
2011
2013
50
2003
2005
2007
2009
FX denominated
Source:
2011
2013
LC denominated
112
2012
2013E
2014F
2015F
1.5
1.5
1.5
1.5
2.5
Activity
Real GDP (% y/y)
CPI (% average)
5.0
6.6
5.6
4.5
4.1
39.0
41.3
43.5
45.5
47.8
1,507.5
1,507.5
1,507.5
1,507.5
1,508.5
FX, eop
External sector
Current account (USD bn)
Current account (% GDP)
Net FDI (USD bn)
Gross external debt (% of GDP)1
Gross international reserves (USD bn)2
-4.8
-6.7
-6.9
-7.0
-7.1
-12.4
-16.2
-15.8
-15.5
-14.9
3.4
1.1
0.5
0.4
0.5
173.8
174.8
175.9
174.7
174.9
33.7
37.2
36.7
35.3
34.1
Public sector3
Public sector balance (% GDP)
Primary balance (including grants) (% GDP)
Gross public debt (% GDP)
-6.1
-9.0
-9.3
-10.5
-10.9
4.3
-0.2
-0.4
-1.0
-2.0
137.5
139.5
145.9
153.9
157.0
Note: 1 Includes all banking deposits held by non-residents, including estimated deposits of Lebanese nationals living abroad but classified as residents. 2 Total gross
reserves excluding gold. The national valuation of the latter amounts to about USD11.1bn as at end-2013. 3 Public finance data presentation was modified to account
for a consolidated presentation of fiscal data, which includes capital expenditures executed by the Council for Reconstruction and Development.
Source: Haver Analytics, IMF, Ministry of Finance, Banque du Liban, Barclays Research
25 March 2014
113
EEMEA: MOROCCO
Economics
Alia Moubayed
+44 (0)20 3134 1120
alia.moubayed@barclays.com
Credit Strategy
Key recommendations
Credit: While we are not turning fundamentally bearish on Morocco, we think that the
Andreas Kolbe
+44 (0)20 3134 3134
recent outperformance in a broader EEMEA credit context and the possibility of nearterm supply justify reducing positions in Morocco credit. Within the non-GCC MENA
region, we think Lebanon could provide a temporary carry-enhancing alternative, until
new opportunities in the primary market emerge.
andreas.kolbe@barclays.com
Moroccos GDP growth accelerated in Q4 13 to 4.8% y/y, closing the year at 4.4% y/y average
annual growth, below our forecast of 4.8% y/y, but significantly higher than the 2.7% y/y in
2012. This came as a result of a sharp expansion in agricultural output (20.1% y/y), coincident
with a slowdown in non-agricultural output (2.1% y/y/ vs. 4.4% in 2012) (Figure 1).
Since the beginning of this year, indicators have demonstrated continued strengthening
of non-agricultural output supported by improvements in external demand (notably
from the EU). Non-phosphate related exports registered 7.6% y/y growth, led by newly
developing manufacturing sectors (e.g. automobile, aeronautics), with high valueadded content that should gradually benefit from the pick-up in the global recovery,
particularly the EU. Domestic demand is also benefiting from low inflation, an
improvement in agricultural income due to a good harvest, steady increases in public
sector wages and a quasi-stabilization of unemployment levels. The latter rose only
slightly, to 9.2%, in 2013, up from 9% in 2012, driven primarily by youth
unemployment, which increased to 19.3% from 18.6% in 2012 (Figure 2) and remains a
key challenge for the country. In addition, FDI, public investment and banking credit to
capital goods/projects remain supportive of domestic demand. Therefore, we maintain
Rebound in manufacturing
exports and signs of strong
domestic demand bode well
for non-agricultural growth
FIGURE 1
Growth in 2013 driven by the non-agricultural sector
35
% y/y
% y/y
FIGURE 2
The unemployment rate stabilized in 2013, but increased
among the youth and in urban areas
6
25
15
-5
-15
-25
0
2007
2009
2011
25 March 2014
2013
2015f
25
20
19.3
15
10
16.4 16.3
13.4
14
9.0 9.2
4.0 3.8
4.0 4.5
Rural
0
Total
Youth
(15-24)
Urban
2012
2013
114
That said, in an attempt to encourage capital flows into Morocco, the countrys foreignexchange regulator (Office des Changes-OC) declared that individuals and non-exporting
companies can now open foreign-exchange bank accounts. The relaxation of foreign
FIGURE 3
Moroccos CA deficit narrowed significantly in 2013
FIGURE 4
High value added manufacturing exports contributed the
most to export growth
CAB (% GDP)
% GDP
6
4
Phosphate
Aeronautical
-2
-4
Pharmaceutical Ind.
-6
-8
-10
2014f
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
-12
-3.4
-0.5
-0.1
0.1
Agriculture-Agrofood
0.5
Electronics
0.5
Cars/Vehicles
6.7
-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8
25 March 2014
115
Against the backdrop of the relatively large CAD, the key question in the coming few months is
whether Morocco and the IMF can agree to renew the USD6.2bn Precautionary Liquidity Line
(PLL) due to expire in August 2014. The PLL served Morocco well in terms of anchoring
expectations for reforms and providing insurance against external shocks during periods of
weak growth and volatile commodities markets. In its recently published third review under the
PLL, and despite highlighting some areas of underperformance in terms of weaker-thanexpected fiscal and external positions, the IMF appeared broadly satisfied with the
governments reform program, and stated that Morocco continued to meet the PLL criteria. In
principle, Morocco can draw upon the facility any time and use it to support its external
financing needs, something it has not done so far. Instead it sees the PLL as precautionary, and
has used it as a credit enhancer, preferring to access capital markets to finance itself over the
past 18 months. Whether or not the PLL is extended, this strategy is unlikely to change and we
think the government will opt to go to the markets and issue up to USD1bn, leveraging the
PLLs support prior to August.
Moroccos fiscal deficit registered 5.4% of GDP during 2013, in line with our expectations,
narrowing from 7.6% of GDP in 2012. The reduction in the deficit came mainly as a result of
an almost 2 percentage point of GDP reduction in subsidies, after the latter expanded at a
double digit growth rate over the past two years (Figure 6). This was possible through
adjusting the prices and quantities of subsidized products, and indexing prices of three
subsidized energy products to world prices. We expect subsidy reduction to continue in
2014 (the budget targets another 1pp of GDP), and the authorities have already taken
measures to remove subsidies on gasoline and industrial fuel not used for electricity
generation and to reduce the per-unit subsidy on diesel in January.
Having said that, we maintain our view that the deficit target of 4.9% will be difficult to
achieve, given the growth slowdown and the limited progress on much-needed wage and
pension reforms. After all, Morocco has one of the highest levels of wage to GDP ratios
(11%) compared to regional peers. Moreover, the main public pension fund (the Caisse
FIGURE 5
FX reserves are rising in line with the PLL targets
FIGURE 6
The fiscal deficit closed at 5.4% of GP, in line with our forecasts
% GDP
6
USD bn
24
23
22
21
20
19
18
17
16
15
14
4
2
0
-2
-4
Feb-09
May-09
Aug-09
Nov-09
Feb-10
May-10
Aug-10
Nov-10
Feb-11
May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
-6
25 March 2014
-8
2005 2006 2007 2008 2009 2010 2011 2012 2013
Overall balance (% GDP)
116
2011
2012
2013
2014F
2015F
3.7
2.7
4.4
3.8
4.1
90.7
99.2
96.0
106.0
111.5
118.6
-3.7
-8.1
-9.6
-7.9
-7.2
-6.5
-4.1
-8.1
-10.0
-7.5
-6.5
-5.5
18
22.8
22
20.4
19.8
20.1
1.6
2.4
2.3
3.0
3.3
3.6
Activity
External sector
26.9
31.5
33.3
39.5
44.0
47.5
29.7
31.7
34.7
37.3
39.5
40.0
22.6
19.5
16.4
18.4
19.2
20.5
-4.7
-6.7
-7.6
-5.4
-5.3
-4.8
Public sector
Public sector balance (% GDP)
Primary balance (% of GDP)
-2.4
-3.7
-4.8
-3.2
-2.9
-2.4
51.3
54.4
60.2
62
63.1
63.9
0.9
1.3
1.9
2.5
2.6
8.40
8.07
8.60
8.38
8.50
8.52
Prices
CPI (% Dec/Dec)
FX (eop)
* General Government Source: Haver Analytics, Barclays Research
25 March 2014
117
EEMEA: MOZAMBIQUE
Mozambiques fiscal deficit is set to widen markedly in 2014, although unspent capital
gains tax revenues from 2013 should partly offset the planned rise in expenditures.
Future fiscal consolidation will be essential for maintaining a stable debt path.
Nevertheless, economic prospects remain bright, with real GDP estimated at more than
7% for this year and beyond.
Key recommendations
Credit: Better value in Zambia. Questions have intensified regarding Mozambiques
barclays.com
Credit Strategy
Andreas Kolbe
+44 (0)20 3134 3134
andreas.kolbe@barclays.com
Our recent trip to Mozambique affirmed our view of a likely marked deterioration in
Mozambiques fiscal balances this year. Although the budget deficit was contained at about
4% of GDP in 2013, it is expected to be more than double this year, in light of an expanded
wage bill and capital expenditure. Unspent 2013 capital gains tax revenues are expected to
offset the increased spending, but the trajectory in the deficit is unsustainable, given that
these revenue flows are one-off. The IMFs release (14 March), following its second review
of the Policy Support Instrument visit, indicated that the fiscal deficit could reach 9.5% of
GDP in 2014, taking into account an expected further 2.9% of GDP in a one-off windfall
revenue. The Fund urged authorities to begin a gradual fiscal adjustment in 2015, including
FIGURE 1
Divergence in recent rating agency action in 2013-2014
BB/Ba2
FIGURE 2
Fiscal deficit to widen sharply in 2014
0
-1
-2
Fitch
upgrade
July2013
BB-/Ba3
-3
-4
-5
B+/B1
-6
S&P revises
outlook neg
-7
B/B2
-8
S&P
downgrade
B-/B3
2010
2011
Moody's (B1)
Source: Bloomberg, Barclays Research
25 March 2014
2012
S&P (B)
2013
2014
Fitch (B+)
-9
-10
2007 2008 2009 2010 2011 2012 2013 2014F 2015F
Fiscal balance (% GDP)
Source: IMF, Barclays Research
118
Amid fiscal expansion, economic growth is likely to remain firm in 2014. We project real GDP
growth to reach an eight-year high of 8.1% y/y, up from an estimated 7.1% in 2013. Although
susceptible to adverse weather patterns, agriculture (23% of GDP) is expected to remain a key
pillar of growth. Flooding has been less severe this year, after the worst floods in more than 12
years were seen in early 2013. In the mining sector, logistical constraints continue to hinder
growth in coal output and exports. Production at Vales Moatize mine was roughly flat at
3.8mn tonnes in 2013, although a ramp-up in output is expected over the medium term as
transport and port bottlenecks are alleviated. Port capacity at Beira (via the Sena railway) and
Nacala (Nacala rail way) is set to be upgraded, with operation of a 18mn tonne per annum
(Mtpa) capacity Nacala railway and port expected to begin in 2015. Current capacity of the
Sena railway of 6.5 mtpa is planned to be trebled in the next two years.
The upgrading of transport infrastructure would boost coal output and exports considerably
as capacity at the Moatize mine stands at 11mn tonnes (the mines Phase 2 development is
expected to double production to 22mn tonnes by 2017). Production at the Moatize mine is
in addition to Rio Tintos Benga mine while further exploration is ongoing. With progress in
improving rail and port infrastructure, coal is likely to surpass aluminum as Mozambiques
largest export in the next 2-3 years. Stoppages of shipments, associated with flooding
and/or security concerns, as observed in 2013, are the main risk to this outlook. Meanwhile,
development of the natural gas sector is ongoing with Mozambique expected to be among
the worlds largest exporters of LNG by the turn of the decade. Against this backdrop, the
overall growth of the mining sector is likely to remain firm in the medium term, after
averaging above 25% y/y in 2013.
Monetary policy is also likely to remain growth-supportive, with inflation (2.3% y/y in
February) expected to remain contained. Headline inflation continued to ease through H2
13 into this year, underpinned by decline in food prices and relative stability of the MZN.
FIGURE 3
Inflation close to historical lows
FIGURE 4
FDI to remain firm
18
50
16
40
30
14
20
12
10
10
-10
-20
-30
-40
0
Jan-08
-50
Jan-09
Jan-10
SLF rate, %
Source: INE, Barclays Research
25 March 2014
Jan-11
Jan-12
SDF rate, %
Jan-13
Jan-14
CPI (% y/y)
FDI (% GDP)
119
In the external accounts, we expect the current account deficit to remain elevated (43% of
GDP) because of strong FDI-related imports (currently mostly consisting of service imports).
With coal gaining visibility in the export basket and aluminum accounting for the largest
share of exports (c. 31%), export revenues are vulnerable to a sharp drop in global
commodity prices. FDI was about USD6bn in 2013 (c. 43% of GDP) and is expected to
remain near this level in the medium term. Given that the large current account deficit is
linked to imports that are FDI-financed, it poses limited risk of a disorderly depreciation in
the MZN in the months ahead.
On the political front, the resumption of talks between the ruling Frelimo Party and the
Renamo Party from late January 2014 signals a positive development. Tensions between the
two parties escalated in 2013, with Renamo stating in October that it is pulling out of the
peace accord that ended the 16-year civil war in 1992. Amid heightened tensions last year,
Renamo did not participate in the November 2013 local government election, thereby losing
all its municipal representation. The latest talks have led to agreement on changes on the
composition of the National Electoral Commission (CNE), which was a key deadlock issue
between the parties. Frelimo and Renamo have also recently expressed a common will for
peace (Reuters, 4 March).
Although the Frelimo Party won all but four of the 53 municipal assemblies, the elections
significantly changed the political landscape, with the MDM gaining popularity, particularly
in the main cities. The MDM will be a major challenger to Renamos current position as the
party with the second most seats in the Frelimo-dominated parliament. Ahead of the
October elections, Frelimos Central Committee in early March voted for Defence Minister
Nyusi to be the partys presidential candidate in the upcoming elections, with President
Guebuza currently serving his final term. Though there appears to be recent improvement in
the political climate, we believe political noise is likely to persist ahead of the elections.
Security challenges remain, particularly in the Sofala region where there has been
intermittent fighting of Renamo-aligned militants with the army.
FIGURE 5
Mozambique macroeconomic forecasts
2010
2011
2012
2013
2014F
2015F
7.1
7.3
7.2
7.1
8.1
8.2
9.3
12.5
14.4
15.1
16.5
18.5
-11.7
-23.9
-44.7
-43.0
-43.8
-42.2
2.1
2.4
2.8
3.1
3.6
4.2
3.0
3.9
3.1
3.3
-4.3
-5.3
-4.1
-4.6
-9.5
-8.3
49.3
45.8
39.6
41.9
44.3
46.9
CPI1 (% Dec/Dec)
16.6
5.5
2.2
2.9
4.8
6.4
USD/MZN (eop)
32.58
27.31
29.75
30.08
32.00
32.80
Q1 13
Q4 13
Q1 14F
Q2 14F
Q3 14F
Q4 14F
4.3
2.9
2.6
2.6
4.2
4.8
USD/MZN (eop)
30.10
30.08
31.95
31.72
31.90
32.00
9.50
8.25
8.25
8.25
8.25
8.25
Note 1 Maputo CPI (used for policy purposes), 2) Standing lending facility rate (SLF) Source: IMF, BoM, INE, Barclays Research
25 March 2014
120
EEMEA: NIGERIA
Undermined by uncertainties
Nigerias economy continues to expand at a solid pace despite a deteriorating security
situation, increased political disputes, mounting governance concerns and management
changes at the central bank. Although inflation has been stable, deteriorating investor
sentiment resulting in a weaker naira suggests imminent monetary policy tightening.
Yields on the 1y T-bill have risen further in recent months.
Key recommendations
Credit: As a credit benefitting from higher energy prices and largely uncorrelated to the
recent geopolitical developments concerning Russia/Ukraine, Nigeria spreads have seen
some support. However, Nigeria has underperformed most regional peers such as Angola or
Gabon, which we think is justified given the political and economic uncertainties and
pressures Nigeria faces ahead of the 2015 presidential elections and the likely eurobond
supply from Nigeria this year. We continue to think that better investment opportunities
may again arise in Nigeria local markets (see below) or elsewhere in the SSA credit space.
dumisani.ngwenya@
barclays.com
Credit Strategy
Andreas Kolbe
+44 (0)20 3134 3134
andreas.kolbe@barclays.com
Rates and FX: Nigerian yields remain among the highest in the region with the yield on the
1-year T-bill trading above 15%. The rise comes amid a deteriorating macro backdrop, as
increased political noise and the suspension of Central Bank of Nigeria (CBN) Governor
Sanusi caused considerable uncertainty with regard to policy direction. Moreover, the neardepletion of fiscal buffers and the expectation of higher fiscal spending ahead of the 2015
elections cloud the outlook further. The mounting uncertainties have resulted in
deteriorating investor sentiment, which is reflected in increased demand for FX, putting the
naira under considerable pressure. Attempts by the CBN to intervene on a daily basis may
have narrowed the daily trading range to USD164-166, but it has also resulted in FX
reserves falling to below USD40bn (from USD49bn in early 2013), raising questions of how
much longer the Bank will be able to support the naira. With an increasing risk of larger
capital outflows, we believe that the naira may soon be devalued. At the same time, amid
additional policy tightening to drain liquidity, we believe yields may rise further and we
therefore recommend waiting for better entry levels in local rates until conditions stabilise.
FIGURE 1
Nigerian yields higher across the curve (%)
FIGURE 2
Official USDNGN rate versus interbank (spot) rate
16
170
15
160
Devaluations of naira
Another devaluation
coming?
150
14
140
13
130
12
120
11
110
10
100
Jan-08
3m
6m
1y
Mar-13
3y
5y
Sep-13
25 March 2014
7y
10y
Mar-14
20y
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Spot USDNGN
121
Nigerias challenges have not abated since the publication of our previous Emerging
Markets Quarterly. Security challenges persist; political disputes are ongoing; allegations of
mismanagement and waste within the government continue; and monetary policy concerns
have intensified following the suspension of CBN Governor Sanusi. Policy reforms have also
been neglected as the executive appears too distracted by other events in the economy.
The security situation in the north of the country appears to have worsened. President
Jonathan has, however, replaced the Ministers of Defence and Police in search of new
strategies to defend against Boko Haram. We fear that ethno-religious tensions may stretch
security forces further, particularly when campaigning starts for the February 2015
elections. President Jonathans likely participation in this election is expected to add to
tensions. At the end of February, Nigerias Independent Electoral Committee warned
politicians not to start their election campaigns early to avoid overheating the political
environment (campaigns are officially set to start 16 November 2014, ahead of the 14
February 2015 elections).
Although the political environment has heated up, with more ruling PDP members crossing
over to the opposition APC in January, the spotlight in recent weeks has been the
suspension of (former) CBN Governor Sanusi at the end of February for alleged financial
recklessness and misconduct. Sanusi, who indicated he will not return even if his
suspension is lifted, was replaced by Deputy Governor Dr. Sarah Alade. Meanwhile,
President Jonathan nominated the Managing Director of Zenith Bank, Mr Godwin Emifiele,
as successor to Sanusi. Mr Emifiele, once confirmed, will take up his position in June. The
increased policy uncertainty continues to be felt in the currency market as demand for FX
has risen despite attempts by both Dr Alade and Finance Minister Okonjo-Iweala to calm
markets. Pressure on the currency has been exacerbated by Sanusis suspension.
The former governors removal is just one of many events that appeared to have dented
investor confidence in Nigeria as this coincided with Fed tapering and the flight of capital
out of riskier EM markets. Pressures persist despite the CBN intervening daily in recent
weeks to maintain a stable currency, and we believe that a devaluation of the naira parity is
likely. FX supply totalled USD7.7bn in the first two months of 2014, compared with
USD2.7bn in the corresponding period in 2013.
FIGURE 3
Fiscal risks are to the upside given upcoming election
FIGURE 4
FX reserves continue to fall
50
45
-1
40
-1
35
30
-2
25
-2
-3
-3
20
Pre-election
years (elections
held early in
following year)
15
10
5
-4
2005
2007
2009
2011
2013
2015F
0
Jan-11
25 March 2014
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
FX reserves (USDbn)
Jul-11
Source: CBN
122
Finance Minister Okonjo-Iweala released her 2014 Budget proposal in January, which is
based on oil production of 2.39mbpd (down from 2.5mbpd assumed for 2013), a
benchmark oil price of USD77.50/bl, projected average GDP growth of 6.75%, and an
average exchange rate of N160/USD. The fiscal deficit is expected to increase marginally, to
1.9% of GDP from the estimated deficit of 1.85% in 2013, showing the federal
governments continued commitment to fiscal prudence.
However, despite the apparent fiscal prudence, the biggest threat remains the low fiscal
buffers, in our view. The excess crude account balance stood at USD2.5bn in January,
compared with USD11.5bn at the end of 2012. Government revenue (and the economy
overall) remains vulnerable to lower oil prices and production disruptions as close to 80% of
revenues originate from the oil sector. Furthermore, we believe the 2015 elections add
considerable upside risk to the 2014 deficit target, which would be finalised should a
supplementary budget be passed. Before his suspension, former Governor Sanusi supported
the maintenance of tight monetary policy in anticipation of an increase in fiscal spending that
may affect inflation negatively. Our estimates point to a fiscal deficit of c.3% of GDP in 2014.
In our opinion, three things will drive monetary policy. Current inflation (7.7% y/y in
February versus a policy rate of 12%) might alone argue for easing monetary policy, but the
threat of a fiscal overshoot (and its related impact on inflation) and the sustained pressure
on the naira suggest otherwise. Rather, we expect policy rates to remain on hold in the
coming months, with the acting governor using open market operations, FX regulations and
other measures to drain excess liquidity, and for the policy rate decision to be left until after
the new governor arrives in June 2014.
Even as monetary policy is expected to remain tight, we believe considerable risk remains
that the inflation target of 6-9% is missed. Should the currency be devalued as we expect, it
would put further upside pressure on the inflation outlook, with our estimates (excluding
the effect of a devaluation) pointing to year-end inflation of 10.4% y/y, driven largely by
food and utilities inflation.
FIGURE 5
GDP expected to remain strong in 2014, albeit marginally
lower
8
7
FIGURE 6
Monetary policy rate expected to remain unchanged, though
we expect other instruments to be used to drain liquidity
16
Average
14
12
5
4
10
1
0
2005
2007
2009
2011
25 March 2014
2013
2015F
4
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Monetary policy rate (%)
CPI (% y/y)
123
FIGURE 7
Nigeria macroeconomic forecasts1
2010
2011
2012
2013F
2014F
2015F
8.0
7.4
6.6
6.9
6.8
7.0
226
243
255
277
309
348
5.9
3.6
8.0
8.2
4.6
5.3
32.3
32.6
43.8
42.9
37.8
45.5
Months of imports
8.9
6.6
10.7
10.0
7.4
7.9
-3.3
-1.9
-2.3
-2.0
-3.1
-2.3
17.8
18.4
19.0
19.7
21.2
21.2
CPI (% Dec/Dec)
11.8
10.3
12.0
8.0
10.4
9.2
USD/NGN (eop)
150
154
159
160
172
176
Q3 13
Q4 13
Q1 14
Q2 14F
Q3 14F
Q4 14F
8.0
8.0
8.4
8.8
9.9
10.4
162
160
165
168
170
172
12.00
12.00
12.00
12.00
12.00
12.00
25 March 2014
124
EEMEA: POLAND
Smooth sailing
Growth is accelerating, with considerable upside potential. With inflation far below the
target, we expect hikes to be delayed until Q1 15. The current account continues its
uninterrupted improvement as trade flips into surplus; however, external financing has
dried up. With growth recovering, it should be easier to reduce fiscal deficits.
Economics
Daniel Hewitt
+44 (0)20 3134 3522
daniel.hewitt@barclays.com
Key recommendations
FX: We close our bullish PLN trades (against both EUR and HUF). The risk-reward for
longs does not seem particularly attractive right now as the positive factors that we had
expected to drive appreciation have not worked. While manufacturing production,
exports and overall GDP growth have done as expected, they have not helped to
strengthen the PLN. Monetary tightening is our trigger for an appreciation but seems
more likely to be a theme for late 2014.
Rates: The 2-3 year nominal yield curve does not offer, in our view, sufficient risk premia
for an eventual turn in the monetary policy cycle. We look for an upward adjustment in
yields here, which is likely to percolate along the entire yield curve. 2y swaps are closer
to fair territory at about 3.5% and 10y at 4.5% (compared with 3.0% and 4.10%
currently, respectively). We recommend cash-based investors switch into the
benchmark bonds including and shorter than the Apr 16s. For levered investors, we
recommend paying 1y1y IRS, which is currently only 70bp above the policy rate (the low
of the trading range since monetary policy went on hold in July 2013).
Growth is on a steady upward trajectory since Q2 13, and we expect it to accelerate steadily
(Figure 2). Overall, we expect growth to double to 3.1% in 2014 and accelerate in 2015 to
3.5%, a slight improvement from our previous forecasts. Net exports have led the growth
recovery. While exports have expanded (led by cars and other manufactured goods) helped
by the EU recovery, most of the gains have resulted from low imports caused by a 12% y/y
decline in imports of fuels and other crude materials.
FIGURE 1
Bond and swaps likely to adjust higher, led by 2y
%
2.0
8
7
6
5
4
3
2
1
0
-1
-2
FIGURE 2
Growth upswing in full bloom
130-230bp
60-150bp
(% q/q, SA)
1.5
1.0
2
1
0.0
0
-1
25 March 2014
1y1y - policy
Mar-14
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
-0.5
Policy
4
3
0.5
PLN 1y1y
-2
-1.0
Dec-09
Dec-10
Dec-11
Dec-12
-3
Dec-13
GDP
Consumption
Investment (RHS)
125
The second leg of the economic recovery is well underway with consumption starting to rise
(Figure 3). We envisage further upside potential for consumption as household real incomes
are rising, causing gains in retail sales. In particular, car sales have shot up in the past few
months. Consumer confidence has improved consistently since Q1 13.
Investments offer
upside potential
CPI inflation was 0.7% y/y in February and has remained below the 1.5-3.5% target for over
a year. We think inflation has hit bottom and will accelerate gradually from Q3 14 onward
and rise to 1.3% at end-2014 and 2.3% at end-2015. The decline in inflation represented a
convergence of different disinflationary factors that we think will begin to dissipate. Food
inflation halved due to global food price declines (Poland had an average harvest in 2013,
unlike record harvests in Romania and Hungary). Lower global energy prices contributed to
declines in energy and transport costs. Service inflation declined because of milder wage
increases due to the 2013 economic slowdown. In addition, education costs declined
because of cuts in kindergarten fees, while competition and technology advances brought
communications costs lower.
The National Bank of Poland (NBP) is in a strong position because it refrained from lowering
its policy rate excessively, stopping at 2.5%. While this is a record low for Poland, inflation
also hit record lows recently, so real rates remains quite high. With the economy on a
recovery path, there is little reason for the NBP to consider further cuts, even if the ECB were
to cut. The NBP has kept M2 and M3 money supply under control, both rising only 6% y/y
and decelerating, contributing to the low inflation environment; thus, there is no liquidity
overhang in Poland (unlike Hungary and Russia). Part of this is apparently due to Polands
concern to keep the PLN stable, particularly when the government took over open pension
fund (OFZ) assets. Government transfers of FX deposits from the NBP to the Development
Bank (BGK), which are then sold into the market along with EU transfers, has led to a slight
decline in NBP reserves and lower money supply.
FIGURE 3
With real incomes rising, consumption is gaining
FIGURE 4
EU transfers declined following high levels in 2012
15
14
20
100
80
15
60
13
10
3
12
11
1
0
Feb-10
10
Feb-11
Feb-12
25 March 2014
Feb-13
CPI (% y/y)
Feb-14
40
0
Dec-06
20
May-08
Oct-09
Mar-11
Aug-12
0
Jan-14
126
We expect the NBP to keep its policy rate on hold at 2.5% throughout 2014 and only raise
rates in Q1 15. This is in line with NBP forward guidance to keep rates unchanged until at
least the end of September and considered possibly extending this until end-2014.
Furthermore, Governor Belka emphasized that this is a promise the NBP takes very seriously.
We forecast inflation pushing through into the lower end of the 1.5-2.0% target in Q1 15,
which means the real rate will drop below 1.0%, probably a tipping point for the NBP.
Furthermore, we expect inflation to surpass 2% by end-2015. We think gradual rate hikes of
25bp per quarter will be in place until end-2015 when it reaches 3.5%. Ideally, inflation will
settle at about 2.5%, the middle of the target. From there, monetary policy would become
data-dependent.
Perhaps the most positive macro development over past two years has been the shrinking
of the current account deficit by two-thirds to just -1.3% of GDP in 2013. The trade account
has gone from a deficit to a slight surplus. Much of the improvement is from declines in fuel
imports as export growth has been modest. However, given the weak global environment,
Poland has been able to increase its share of export markets. We think the improvements
have come to an end because the economic recovery will push imports higher. In our view,
the current account deficit will settle at about 1% of GDP. External financing has almost
completely dried up. Net FDI shrivelled to zero in 2013 and has been negative this year.
Portfolio inflows have turned slightly negative as foreign investors decrease their holdings of
government bonds. The main source of external financing is EU transfers (capital account)
and IFI loans.
Fiscal adjustment discussions have been dominated by the government taking over half of
OFE pension assets. In fact, the government has carried out significant other fiscal
adjustments, bringing its deficit down by 3.5pp of GDP between 2010 to 2013 by freezing
wages and cutting other expenditures. The takeover of OFE assets and reduced OFE
payments have given fiscal accounts an important boost. Government payments to OFE
peaked at about 1.6% of GDP in 2010 and will shrink to about 0.5% of GDP in 2014 and less
in 2015. Another 0.5pp is saved in decreased interest payments on outstanding bonds. On
the other hand, with the adoption of ESA2010 rules, ongoing transfers from the OFE to the
budget will no longer count as revenue. After reaching about 4.4% of GDP in 2013, we
expect the deficit to improve to about 3.8% of GDP in 2014 (under ESA2010, OFE transfers
FIGURE 5
Inflation remains well below the target
FIGURE 6
Current account improves as trade surplus develops
12
40
10
30
Inflation target
(LHS)
-1
-2
-2
Feb-09
Feb-10
CPI (% y/y)
Feb-11
Feb-12
25 March 2014
Feb-13
-4
Feb-14
EUR bn.
12m rolling
20
10
0
-10
-20
-30
07
08
09
10
11
12
13
14
C/A balance
Trade Balance
127
FIGURE 7
Poland macroeconomic forecasts
2010
2011
2012
2013
2014F
2015F
3.9
4.6
2.1
1.6
3.1
3.5
4.6
4.2
1.1
0.7
1.8
3.0
3.1
2.7
1.0
1.0
2.7
4.1
10.5
9.8
-5.0
-4.2
-1.8
1.6
Activity
Real GDP (% y/y)
Domestic demand contribution (pp)
-0.7
0.4
0.9
0.9
1.3
0.4
Exports (% y/y)
12.2
8.4
3.3
5.0
7.4
8.2
Imports (% y/y)
13.8
5.8
-1.8
1.9
4.5
7.9
469
516
489
516
539
570
-24.3
-26.0
-18.7
-7.2
-6.6
-6.7
-5.2
-5.1
-3.5
-1.3
-1.2
-1.1
-11.7
-14.3
-6.9
2.8
3.8
4.0
0.9
7.0
12.3
5.2
0.3
0.7
32.6
16.7
23.1
7.4
7.6
7.6
317
323
366
380
386
392
94
98
109
106
106
106
-7.9
-5.0
-3.9
-4.4
-3.8
-3.0
-5.4
-2.6
-1.3
-1.7
-1.7
-1.0
54.9
56.2
55.6
57.6
50.7
49.8
3.1
4.6
2.4
0.7
1.3
2.3
EUR/PLN,
4.00
4.48
4.09
4.18
4.10
4.10
1y ago
Last
Q1 14F
Q2 14F
Q3 14F
Q4 14F
0.8
2.7
2.8
3.0
3.1
3.1
1.0
0.7
0.9
0.9
0.6
1.3
4.10
eop
4.16
4.15
4.14
4.12
4.11
3.25
2.50
2.50
2.50
2.50
2.50
2.67
2.71
2.73
2.73
25 March 2014
128
EEMEA: ROMANIA
Following the ruling coalition split, Prime Minister Ponta formed a new majority government,
gathering support from smaller parties. The new government reiterated its commitment to
the IMF programme. However, the coalition split increases political uncertainty ahead of the
presidential elections in November. Meanwhile, economic growth surprised on the upside,
while the current account deficit seems to have stabilized.
Key recommendations
Credit: Take some profits, some value still in EUR paper. Romania credit has continued
to perform well over the past quarter (albeit underperforming higher-yielding CEE
peers). Romanias macroeconomic performance justifies this, in our view. However, with
further issuance likely and the election period approaching, we do not think Romania
has significant room for further outperformance at current spread levels. Some value
remains in EUR-denominated bonds which, contrary to patterns across most other CEE
credits, continue to trade outside USD bonds in spread terms.
koon.chow@barclays.com
Credit Strategy
Andreas Kolbe
+44 (0)20 3134 3134
andreas.kolbe@barclays.com
In February, the ruling coalition split as the two main parties, PSD led by PM Ponta and PNL
led by Crin Antonescu, could not agree on a government reshuffle proposed by the PNL.
Notably, the split was not caused by the differences in parties ideologies (PSD is centre-left
and PNL is centre-right), but by the failure to agree on particular ministerial candidates, as
PNL tried to increase its influence within the government. Following the split, PM Ponta
managed to put together a new majority (supported by about 60% of MPs), having
gathered support from the minorities parties and non-affiliated MPs. The new government
already confirmed that it will remain committed to the IMF programme. However, the
coalition split will add to political uncertainty ahead of the presidential elections in
FIGURE 1
ROMGB safe haven
%
10
9
8
7
6
5
4
3
2
1
0
Jul-12
FIGURE 2
Growth accelerated partly due to household consumption
ROMGB: similar yielding as
peers but with lower FX vol.
2%
% q/q, SA
1%
0%
Jan-13
ROMGB 5y
Romanian FX vol.
25 March 2014
Jul-13
Jan-14
CE 5y avg.
CE avg. FX vol.
-1%
Dec-10
Dec-11
Real GDP
Dec-12
Dec-13
Household consumption
129
Growth surprised significantly on the upside in Q4 13, accelerating to 5.2% y/y (1.5% SA q/q).
This brought annual GDP growth to 3.5% in 2013, one of the highest growth rates in Europe.
Growth in Q4 and in 2013 as a whole was driven almost exclusively by agriculture and
industry that contributed 1.7pp each to the annual figure. Exports at 13% y/y continued to
shine in Q4, being led by food and cars, but with broad-based improvement in almost all
categories. Q4 was also marked by a notable improvement in household consumption, which
accelerated to 3.2% y/y (Figure 2). The negative surprise came from fixed investment, which
contracted by 11% y/y in Q4 and 5.6% y/y in 2013 as a whole. This year, we expect a further
recovery in private consumption to make a significant contribution to growth. Exports should
also improve further, helped by continued recovery in the euro area. However, the effect of
agriculture (assuming an average harvest) on growth will likely be negative this year after a
very high base in 2013. Thus, we expect headline growth to fall to 2.7% in 2014. Excluding
agriculture, we expect growth to accelerate further this year.
Inflation declined further in the winter months, reaching 1% y/y in February. Food deflation
continued at -2% y/y due to an excellent harvest and a VAT rate cut on bread products. Energy
inflation dived in recent months as large energy price hikes were not repeated this year, while
services inflation started to pick up. Inflation may be close to bottoming out, but favourable base
effect will likely keep it near historical lows in the coming months. By the end of the summer, the
base effects will fall out and the new agricultural season will likely lead to higher food inflation
(given a very good harvest in 2013). Together with improving domestic demand, this should
result in higher inflation, which we expect to reach 3.8% by the end of 2014. Meanwhile, the rate
cutting cycle is likely over, with the policy rate at 3.5% being described as well-positioned now
by the governor. The central bank also expressed its satisfaction that monetary policy loosening
finally transmitted into lower lending rates. Private sector lending growth slightly improved in
recent months, but remains marginally positive for RON-denominated loans and negative for FXdenominated ones. The NBR indicated that a reduction in the reserve requirements was needed
to stimulate bank lending and "will proceed at a moderate pace to gradually bring them in line
with European levels." Essentially, this would be another form of monetary loosening, so we
FIGURE 3
Inflation at historical lows, but the cutting cycle is likely over
21
12%
10%
8%
6%
4%
Inflation
target
2%
0%
-2%
Feb-10
Feb-11
Feb-12
Food CPI (% y/y)
Feb-13
25 March 2014
15
12
-3
-1
-6
-2
Feb-14
18
-9
Jan-08
CPI (% y/y)
Source:
FIGURE 4
Current account deficit has stabilized
Source:
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
-3
Jan-14
FDI+capital transfers
Other investments
130
The current account deficit declined to 1.1% of GDP in 2013 (from 4.4% in 2012), driven by
strong exports. In Q4, the deficit was mainly caused by lower direct investment income, which
was offset by higher EU transfers. Overall, the trade and current account trends seem to have
stabilized in recent months, and we see little room for further improvement. Goods exports
continue to expand at robust rates, but imports have also started to pick up in recent months.
We expect this trend to strengthen as consumer demand has started recovering. This will
likely lead to a small widening of the current account deficit in 2014-15. Meanwhile, the
financial account remains in deficit as the government and the central bank continue to
make their regular repayments to the IMF (c.EUR1.4bn per quarter). On a positive note, net
FDI picked up significantly in recent months. NBR reserves declined somewhat recently, but
overall remained at adequate levels (about seven months of imports).
The pre-cautionary IMF programme was resumed in February as President Basescu finally
agreed to sign the IMF's letter of intent, paving the way for the completion of the IMF
review. We point out that the programme had been suspended due to the dispute between
the government and the president over a fuel tax in the 2014 budget. The fuel tax will now
be introduced in April, with a three-month delay compared to the government's initial plan.
This delay is expected to be compensated for by additional expenditure cuts, to bring the
budget deficit to 2.2% of GDP in 2014. The budget deficit target for 2013 of 2.5% of GDP
was met. The IMF positively assessed the current progress of the precautionary programme,
mentioning that four out of five performance criteria had been met (only the reduction of
SOE arrears target was missed) and the privatisation programme was on schedule. Recently
though, the government decided to postpone the privatisation of the utility company
Oltenia, which was initially planned for H1. While the IMF programme is precautionary and
does not expect the withdrawal of funds, investors will likely find more comfort from the
programme's resumption, which will increase their confidence in the government's fiscal
credibility and reform path, especially given the current volatility in the markets.
FIGURE 5
Romania macroeconomic forecasts
2010
2011
2012
2013
2014F
2015F
Activity
Real GDP (% y/y)
-1.0
2.2
0.4
3.5
2.7
2.9
166
183
170
190
201
212
External Sector
Current Account (USD bn)
-7.3
-8.2
-7.5
-2.0
-3.4
-5.1
-4.4
-9.5
2.9
123.8
43.3
-4.5
-9.8
2.5
128.1
42.9
-4.4
-8.0
2.9
130.5
41.2
-1.1
-4.4
3.4
128.4
44.9
-1.7
-5.5
3.0
126.1
42.0
-2.4
-7.0
3.5
123.3
42.5
Public Sector
Public Sector Balance (% GDP, ESA95)
Primary Balance (% GDP)
-6.8
-5.3
-5.6
-3.9
-3.0
-1.2
-2.5
-0.7
-2.4
-0.6
-2.0
-0.2
30.5
34.7
37.9
38.5
38.5
38.0
CA (% GDP)
Trade Balance (USD bn)
Net FDI (USD bn)
Gross External Debt (USD bn)
International Reserves (USD bn)
Prices
CPI (% Dec/Dec)
8.0
3.1
5.0
1.6
3.8
3.9
EUR/RON, eop
Policy rate (%, eop)
4.28
6.25
4.32
6.00
4.43
5.25
4.43
4.00
4.40
3.50
4.40
4.25
Source: National Institute of Statistics and Economic Research, National Bank of Romania, Ministry of Public Finance, Haver Analytics, Barclays Research
25 March 2014
131
EEMEA: RUSSIA
Vulnerable giant
Russias economy has entered a negative spiral. We expect growth to decelerate further
this year due to continued weakness in investment and slowing consumption. This
process was already underway before the tensions with Ukraine, but is intensified by the
recent deterioration of relations with the West. Inflation remains above the target,
pushed up by continued RUB depreciation. The Bank of Russia hiked rates and will likely
need to implement further monetary tightening. RUB weakness should help reverse the
current account deterioration, but this may be offset by larger capital outflows.
Economics
Daniel Hewitt
+44 (0)20 3134 3522
daniel.hewitt@barclays.com
Eldar Vakhitov
+44 (0)20 7773 2192
eldar.vakhitov@barclays.com
Key recommendations
FX: We recommend being short the RUB against the EUR-USD basket as the scale of
portfolio outflows, associated with the high level of political tensions, could easily drive
depreciation beyond the 0.8% per month priced in by the market. We see most of the
pressure in the upcoming quarter and the Bank of Russia (CBR) could realistically be
called to intervene with USD20-25bn per month. Given the CBRs FX intervention
mechanism accommodates a 5 kopeck depreciation for every USD1.5bn of intervention,
this would translate to a 1.6-2.0% monthly depreciation of the RUB versus the basket.
Koon Chow
+44 (0)20 7773 7572
koon.chow@barclays.com
Durukal Gun
+44 (0)20 3134 6279
durukal.gun@barclays.com
Credit Strategy
Andreas Kolbe
+44 (0)20 3134 3134
andreas.kolbe@barclays.com
Credit: The risk of prolonged Russian-Western tensions and the threat of further
sanctions against individuals and businesses remain clear negatives for Russian credit,
in our view, across the sovereign, corporates and banks. The adverse economic
developments could also put downward pressures on Russias ratings in the medium
term. Even though Russian spreads have underperformed meaningfully already as
FIGURE 1
Not hard to depreciate faster than the forwards
FIGURE 2
Consumption is likely to continue decelerating
15
Basket/RUB
25 March 2014
Jan-15
Apr-14
Jul-13
Oct-12
Jan-12
Apr-11
Jul-10
Oct-09
Jan-09
50
48
46
44
42
40
38
36
34
32
30
% y/y
% y/y
45
10
30
15
-5
Feb-10
Feb-11
Retail sales
Feb-12
Real wages
Feb-13
-15
Feb-14
132
With growth having decelerated in 2012-13, we forecast a further easing to 0.7% in 2014
from 1.3% in 2013. Private consumption was the main engine behind economic growth in
the past few years, fuelled by double-digit real wage growth and record credit expansion.
However, these high levels are no longer sustainable. With profits falling, we expect slower
increases in private sector wages, along with lower public wage hikes, to weigh on private
consumption (Figure 2). In addition, household credit will likely decelerate further given the
tightening of monetary policy, tighter credit standards, the continuing clean-up of the
banking system and lower credit demand.
The decline in investment spending since mid-2012 has been another reason for slowing
growth. The decline is attributable to lower enterprise profitability (Figure 3) and an overall
weak business climate. Similarly to consumption, private investment will likely suffer further
from tighter monetary policy and the strengthening of bank prudential regulations. In
addition, sizeable investment projects mostly completed in 2012 (Nord Stream, Sochi 2014
Olympics) have not yet been replaced by new projects. The prospects for a near-term
turnaround in investment appear bleak. We expect investment spending to be lower in
selected sectors (eg, steel, rail) and stagnant elsewhere: lower revenue in certain sectors is a
major factor behind the decreases. In addition, the governments decision to freeze utility
tariffs paid by enterprises and lower the rate of tariff increases paid by households could
also have a negative effect. Overall, though, we expect the decline in public investment to be
smaller this year, due to an already low base from 2013.
High dependence on
energy makes Russias
economy vulnerable
Russias growth is vulnerable due to its high dependency on energy exports and lack of
diversification. The high level of growth during 1999-2012 (about 5% per annum,
notwithstanding the 2008-09 recession) was made possible by large increases in global
energy prices (up 4.2% per annum on average), to a lesser extent increases in Russias
energy production (particularly oil), and use of spare capacity (employment increased 20%
as unemployment halved). Even though massive outflows of capital occurred, Russias
current account surpluses were sufficient to handle these without harming growth.
However, this era appears to be over, as global energy prices are expected to remain
FIGURE 3
Declining profitability leads to falling investment spending
% y/y
30
20
RUBbn
5000
14
4000
12
3000
2000
10
1000
0
-1000
-10
-2000
-3000
-20
-4000
-30
-5000
2006 2007 2008 2009 2010 2011 2012 2013 2014
Investment
25 March 2014
FIGURE 4
Monetary policy tightening was necessary
10
8
6
End-2014
inflation target
4
2
Mar-09
Mar-10
CPI (% y/y)
Mar-11
Mar-12
Mar-13
Mar-14
133
Russia still enjoys a strong fiscal position. Government debt hovers at just 11% of GDP and
the budget deficit at 0.5% of GDP in 2013 was lower than the 0.8% planned. The 2014
budget foresees a deficit of 0.5% GDP (RUB389bn), though the Ministry of Finance (MinFin)
already indicated that the actual turnout could well avoid a deficit altogether. The budget is
based on an average oil price of USD101/bbl and USD/RUB at 33. If the average oil price
stays at the current ~USD107/bbl and the USD/RUB averages 37 (ie, c.12% depreciation),
this would bring the budget about RUB400bn and RUB700bn, respectively, in additional
revenue. The exchange rate matters, as oil tax receipts are tied to the oil price in USD and
represent about 50% of the total budget revenues. These additional funds provide the
necessary fiscal space for counter-cyclical policies to stimulate growth. In line with the
budget, gross internal debt issuance is planned at RUB809bn this year. However, the MinFin
has already indicated that it is likely to reduce this amount (and might also cancel external
issuance initially planned at USD7bn for this year), given current market volatility and extra
revenues from higher oil prices and depreciation.
Thus, one key question is to what extent the Russian government will use its fiscal space to
actively support growth. After having stressed fiscal conservatism until now, the government
may not want to be seen as being in emergency mode. Thus, any counteracting measures
such as increases in government wages or expansion in public investments will likely be backloaded to the second half of the year, with a relatively limited effect on 2014 growth.
Furthermore, other than productive infrastructure investments, measures to just boost wages
and pensions further would raise concerns about future fiscal dynamics, as well as the
competitiveness of the economy outside of the resource extraction sectors.
In addition to the economic challenges already underway before the conflict with Ukraine,
the ongoing tensions with the West could cause a lasting deterioration in investor sentiment
FIGURE 5
Liquidity overhang leads to pressures on the RUB
FIGURE 6
as the C/A surplus declined and capital outflows increased
30%
200
60
20%
160
-160
30
10%
120
-120
0%
80
-80
-10%
40
-40
90
USDbn
-30
-60
Mar-10
Mar-11
Mar-12
25 March 2014
Mar-13
-20%
Mar-14
0
Dec-08
-200
Dec-09
C/A balance
Dec-10
Dec-11
Dec-12
0
Dec-13
134
The current account underwent a sharp deterioration since the beginning of 2012 that has
brought the surplus down from USD97bn in 2011 to only USD33bn in 2013. The trade
surplus decline accounts for about half of the deterioration, while services and income
accounts split the other half. From our point of view, this was an indication that monetary
policy was too loose with the RUB over-valued. We think the RUB depreciation is just what is
needed to correct the current account drainage. In our estimates, a 10% RUB depreciation
increases the current account surplus by about 0.7% of GDP. We expect a virtual reversal of
the negative external trends in 2014 and quick increases in the trade surplus as imports
become more expensive and exports become cheaper (they should also remain supported
by stable and high oil prices). Imports of services (mostly tourism) are also likely to fall.
Potential economic sanctions could harm the current account, but given the high share of
oil and gas (about 65%) in total exports and Europes difficulty in reducing dependence on
them in the short term, we do not foresee a significant effect of the sanctions at this stage.
More importantly, however, additional sanctions could increase the already high capital
flight. Net private capital outflows were about USD15bn per quarter in 2013, according to
official CBR data. We are forecasting on the basis of recent flow trends and the experience
25 March 2014
135
2011
2012
2013
2014F
2015F
4.3
4.3
3.4
1.3
0.7
1.4
6.2
8.4
5.2
0.8
0.4
1.4
Activity
Real GDP (% y/y)
Domestic demand contribution (pp)
Private consumption (% y/y)
5.4
6.3
6.8
5.4
2.7
2.0
26.6
26.4
7.4
-9.0
-2.1
1.4
-1.9
-4.1
-1.8
0.6
0.3
0.0
7.1
0.3
1.3
4.3
1.7
1.8
25.2
21.1
9.6
3.1
0.9
2.3
1525
1899
2012
2102
1907
1920
67.5
97.3
72.0
33.0
53.6
77.5
External sector
Current account (USD bn)
CA (% GDP)
Trade balance (goods and serv., USD bn)
Net FDI (USD bn)
4.4
5.1
3.6
1.5
2.8
4.0
120.9
163.4
145.8
119.6
149.9
184.3
-9.4
-11.8
1.8
-7.8
-15.0
-10.0
-12.0
-64.5
-23.0
-32.6
-60.0
-30.0
488.9
538.9
636.4
732.0
768.6
807.0
479.4
498.6
537.6
509.6
460.0
479.0
-3.9
0.7
-0.1
-0.5
0.1
-0.5
-3.7
0.9
0.3
-0.2
0.4
-0.2
8.4
8.6
10.8
11.2
10.8
10.8
Public sector
Public sector balance (% GDP)
Primary balance (% GDP)
Gross public debt (% GDP)
Prices
CPI (% Dec/Dec)
8.8
6.1
6.6
6.5
6.7
5.1
USD/RUB (eop)
30.5
32.2
30.4
32.9
39.5
41.0
80
111
112
109
106
108
1y ago
Last
Q1 14F
Q2 14F
Q3 14F
Q4 14F
1.6
1.3
1.1
0.9
0.7
0.1
7.0
6.2
6.5
6.8
7.1
6.7
USD/RUB (eop)
31.1
36.1
36.5
38.0
39.0
39.5
5.50
7.00
7.00
8.00
8.00
8.00
8.30
8.20
7.30
7.20
25 March 2014
136
South Africa is experiencing tepid growth as a result of weak domestic demand and a variety
of supply-side issues. The likely inflationary consequences of the rands depreciation
motivated the SARB to hike 50bp in January and we think another 100bp of tightening could
be forthcoming this year. The big current account deficit looks likely to narrow but at a
sluggish pace. A continued deterioration in fiscal metrics could elicit a rating downgrade
later this year, unless the 7 May election generates positive policy surprises.
Key recommendations
FX: We do not expect the ZAR to sustain its recent recovery over the coming quarter.
We think it will still reach R12.00/USD later this year. A structural current account
deficit, heightened socio-political tensions, fractious labour markets, the lingering
possibility of another credit rating downgrade and the prospect of broad-based USD
strength form the basis of our bearish ZAR view. Consequently, we continue to
recommend that participants fade ZAR rallies; we still have the ZAR and the TRY as our
preferred EM shorts in relation to the USD over the coming months.
Rates: The curve is likely to bear flatten again, with a weaker ZAR and higher US
Treasury yields lifting short end rates faster than back end ones. We still regard the belly
of the curve as the most vulnerable during bouts of global risk aversion, because that is
the area of the curve where foreign ownership is greatest. We would also expect bonds
to outperform swaps in a risk-off environment. Swaps are vulnerable to fresh corporate
fixing activity as a result of higher policy rates and renewable energy hedging activity.
Although the risk to inflation remains to the upside, we think that linkers are already
trading at a significant premium to nominals.
Credit: Stay underweight, buy 5y CDS protection. South Africa credit has indirectly
benefitted from the Russia-Ukraine crisis, as investors have re-allocated from Russia and
higher gold prices have supported sentiment. This, coupled with defensive positioning,
has helped South Africa credit to outperform. We do not think, however, that the
outperformance is justified fundamentally and, hence, believe that current valuations
offer an attractive entry level to reset shorts.
25 March 2014
The domestic demand environment is very subdued with private household consumption
forecast at just 2.2% this year. Rising inflation and rate hikes should eat into consumers real
disposable income and spending. Furthermore, lending to households has slowed sharply.
One big question mark for the household consumption outlook is the employment
situation. Two separate quarterly surveys paint rather divergent pictures. A householdbased survey suggests South Africa is experiencing reasonable job growth with
employment back at pre-crisis levels while an enterprise-based survey points to very
anaemic employment trends. We think employment creation is likely to be quite
pedestrian. Nonetheless, the last retail sales number for January was unexpectedly robust
after two prior strong prints, so there could be some upside risk to our consumption
forecast if this is sustained. Fiscal restraint should limit the growth of government
consumption (2.1%), while weak business confidence continues to curb private investment
spend (3.5%).
137
FIGURE 2
Power rationing in early March could be repeated
%
Sep-11
Mar-12
QES
Sep-12
QLFS
25 March 2014
Mar-13
Sep-13
138
FIGURE 4
Public indebtedness is on an upward trend
Rbn
20
% y/y 3mma
40
30
15
20
10
10
% of GDP
2013/14 Budget
51
46
2014/15 Budget
41
0
-10
-5
-20
-10
-30
-15
-40
-20
2011
2012
2013
Exports (lhs)
25 March 2014
2014
Imports (lhs)
36
31
26
21
03/04
05/06
07/08
09/10
11/12
13/14
15/16
139
25 March 2014
140
2011
2012
2013
2014F
2015F
3.1
3.6
2.5
1.9
2.2
2.8
Activity
4.0
4.8
4.2
2.4
2.4
3.3
4.4
4.9
3.5
2.6
2.2
2.7
-2.1
4.2
4.4
4.7
3.6
3.8
-0.9
-1.2
-1.7
-0.5
-0.3
-0.5
9.0
6.8
0.4
4.2
7.7
6.5
Imports (% y/y)
11.0
10.0
6.0
4.7
6.8
6.4
360.8
405.3
381.5
350.8
318.8
350.7
GDP (US$bn)
External sector
Current account (US$bn)
-7.2
-9.41
-20.0
-20.3
-18.5
-18.6
CA (% GDP)
-2.0
-2.3
-5.2
-5.8
-5.8
-5.3
-6.8
-6.5
-4.8
-7.6
-6.9
-6.6
3.7
4.5
1.6
2.6
3.5
3.8
-1.9
5.7
13.1
5.6
8.2
-3.9
27.4
31.4
38.3
39.7
54.9
52.5
53.9
53.8
56.1
CPI (% Dec/Dec)
3.5
6.1
5.7
5.4
7.0
5.5
CPI (% average)
4.3
5.0
5.7
5.8
6.4
6.0
6.63
8.09
8.48
10.49
11.87
11.07
7.32
7.26
8.21
9.65
11.52
11.43
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
-5.4
-4.3
-3.7
-4.3
-4.0
-4.0
-2.1
-1.5
-1.0
-1.3
-0.9
-0.8
32.7
36
39.8
42.7
45.8
46.9
Prices
Public sector
Budget balance (% GDP)
Primary balance (% GDP)
Total govt debt (% GDP)
1y ago
Last
Q114F
Q214F
Q314F
Q414F
2.3
3.8
2.1
2.1
2.3
2.4
5.3
4.9
5.9
6.9
6.7
7.1
9.23
10.52
11.00
11.70
12.00
11.83
5.0
5.5
6.0
6.0
6.5
6.5
25 March 2014
141
EEMEA: TURKEY
Economics
Durukal Gun
+44 (0)20 3134 6279
durukal.gun@barclays.com
Christian Keller
+44 (0)20 7773 2031
Key recommendations
FX: The TRY does still not look cheap, based on our valuation models, and political risks are
christian.keller@barclays.com
elevated. The now higher carry and adjusting current account are not sufficient to offset
this, in our view. Prolonged domestic tension could further deter investment prospects and
the growth outlook. Hence, we remain tactically bearish on the TRY ahead of the elections.
Rates: We neutralize our bearish view on local rates, as monetary policy has significantly
adjusted and the economy is slowing (in the previous quarterly, we recommended paying
2y and a 2s10s cross-CCS flattener). We recommend being long Apr20 linkers FX hedged.
This has good risk-reward, ie, small positive carry and the opportunity for a good payout if
annual CPI surges above 9% in the next 3-6 months. Apr20s offer 3.7% real yield,
implying a 6.8% breakeven (vs. nominal 20s and 21s bonds). The rate hike risk to the
bond trade is modest, given that real yields did not react to the aggressive hike in January.
Durukal Gun
+44 (0)20 3134 6279
durukal.gun@barclays.com
Credit Strategy
Andreas Kolbe
Credit: We retain a neutral stance on Turkey credit, which has not adjusted as
aggressively as local markets, and political uncertainties and slower growth may weigh
on investor sentiment. However, credit spreads are anchored by Turkeys strong fiscal
position and declining public debt ratios and, given the recent developments in Russia,
could benefit from portfolio re-allocation flows within EEMEA. On balance, we retain a
neutral stance, favouring the 5-10y sector of the sovereign cash curve from a relative
value perspective.
andreas.kolbe@barclays.com
FIGURE 1
TRY still slightly overvalued
ZAR
INR
Jan-13
25 March 2014
IDR
BRL
Mar-14
TRY
Nominal bonds
Linker bonds
Apr-23
-40
Apr-22
Apr-14
-30
Apr-21
-20
Apr-20
-10
Apr-19
Apr-18
10
Apr-17
20
Apr-16
%
12
11
10
9
8
7
6
5
4
3
2
Apr-15
30
FIGURE 2
Value in linkers, with inflation risks priced as short-lived
Breakevens
142
The slowdown in growth should support the external adjustment. The January current account
balance suggests that this adjustment has already begun, and we expect it to become more
visible into Q2 14. Monetary tightening and additional macro-prudential measures (effective
since February) have led to a moderation in consumer credit (current run rate of ~7, vs. the
2007-13 average of 26%), which would slow imports further in the next couple of months.
Conversely, export growth should be lifted by stronger external demand, particularly from the
euro area, and by the lagged effect of currency weakness. Thus, we forecast the current account
deficit to shrink to about USD43bn in 2014 (5.7% of GDP), from USD65bn in 2013 (c. 7.8% of
GDP). Some particular effects, such as the declining gold trade (reverting to its historical norms
of USD3-4bn per annum from USD12bn last year) would also be supportive of the adjustment.
On the flip side, a potential rise in oil prices in the event of further escalation of geopolitical risks
may create some headwinds for the current account adjustment. As a rule of thumb, a USD
10/bbl change in the average oil price leads to a USD4-5bn change (negative or positive) in the
annual current account balance. Despite shrinking current account deficit, Turkeys external
funding needs remain high at about USD206bn, or 25% of GDP, which includes USD163bn
external debt due in the next 12 months in addition to the current account deficit.
January was a tough period for the central bank (CBT). Negative sentiment towards EM in
general and negative headlines about domestic tensions in Turkey left the TRY under
immense pressure. Initially, the CBT refrained from using interest deference by introducing a
new virtual rate, which was followed by a direct intervention in the FX market (the first
since 2012). However, this could not prevent the TRY from depreciating sharply, and the
CBT was eventually forced to hike all of its policy rates significantly (1w repo and O/N
lending rates by 550bp and 425bp, respectively) at an emergency MPC meeting in late
FIGURE 3
Consumer credit significantly slowed
FIGURE 4
which helps current account adjustment as well
USD bn
2014
Source: BRSA, Barclays Research
25 March 2014
2013
2007-2013 (average)
Jul-13
Jan-14
Jul-12
Jan-13
Jan-12
Jul-11
Jul-10
Jan-11
Jul-09
Jan-10
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Jul-08
10
Jan-09
15
Jan-08
20
Jul-07
25
Jul-06
30
Jan-07
35
Jan-06
1
0
-1
-2
-3
-4
-5
-6
-7
-8
40
143
The inflation outlook remains challenging. Exchange rate pass through is driving core
inflation higher, and food price volatility continues to pose additional upside risk, in our
view. Although the headline inflation rate remained roughly flat in February, core inflation
surged to 8.4% y/y; rent and restaurant inflation continued their upward trend. TRY
weakness has yet to show its full impact on inflation in coming months, and the relatively
dry winter so far (i.e. historically low water reservoir levels) has increased the risk for higher
food prices, in our view. Considering also the risks of potential adjustments to energy prices
post elections (~10% hike would add around 0.5pp to headline inflation), we think inflation
could surpass 9% y/y in Q2 14 before moderating towards 8% y/y by year-end.
The CBT has recently emphasised the need to control inflation, signalling that the tight
monetary policy stance will be maintained until medium-term inflation expectations are in
line with the target. The latest CBT expectation survey shows inflation expectations
continued to deteriorate (2014 inflation expected at 8% y/y, 12m ahead inflation at 7.3%
y/y), which is clearly above CBTs revised year-end forecast of 6.6% and 5%. However, the
CBT is likely to try to avoid additional rate hikes, in our view, and may tolerate temporary
spikes in inflation. Instead, additional hikes would be triggered only by renewed episodes of
strong sustained TRY pressure. Our baseline is for the one-week repo rate to be unchanged
at 10%. In case of temporary pressure on TRY, eg, in the wake of election results, the CBT
could adjust the composition of the liquidity provision to push the effective CBT funding rate
higher (ie, towards the O/N lending rate, which is 12%), and let the overnight market rate
rise all the way to the late liquidity window of 15% by tightening liquidity. Only if that were
to fail would further hikes in the repo rate be considered, in our view.
FIGURE 5
TRY stabilized after significant hike in January
FIGURE 6
Politics works against TRY via FX deposit channel
45
1.35
40
1.55
35
1.75
30
1.95
25
2.15
20
2.35
1.90
45%
1.70
1.50
100
1.30
1.10
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
200
25 March 2014
USDTRY
Feb-13
Aug-13
27%
2.10
Feb-12
Aug-12
24%
Feb-14
2.30
Feb-11
Aug-11
16%
500
300
50
Feb-10
Aug-10
600
18%
Feb-09
Aug-09
USD bn
Feb-08
Aug-08
700
400
2.50
USDTRY
Inverted
1.15
USDTRY
Feb-07
Aug-07
bp
Feb-06
Aug-06
USDTRY
144
The prolonged political uncertainty not only poses a downside risk to growth, but also works
against the currency through the FX deposit channel. As we discussed in Turkey: Local FX
deposits in Turkish banks, since mid-2013, households have stopped being contrarian
investors in the TRY and instead have bought FX (mainly USD) during periods of TRY
depreciation. The CBTs initial unwillingness to defend the TRY more forcefully and heightened
domestic political tensions likely played a role. The recording of local FX swap transactions of
residents also partially explains the upward trend in FX deposits. However, ultimately, this
phenomenon also reflects the continued demand for TRY hedging from investors.
FIGURE 7
Turkey macroeconomic forecasts
2010
2011
2012
2013F
2014F
2015F
9.2
8.8
2.2
3.9
2.2
3.5
13.5
9.9
-1.8
5.8
0.9
2.7
6.7
7.7
-0.6
4.6
1.6
2.5
30.5
18.0
-2.7
4.3
0.8
2.8
-4.4
-1.1
4.1
-1.9
1.3
0.8
Exports (% y/y)
3.4
7.9
16.7
0.9
4.2
5.0
Imports (% y/y)
20.7
10.7
-0.3
7.5
-0.8
1.9
732
775
788
822
761
830
Activity
Real GDP (% y/y) 1/
Domestic Demand Contribution (pp)
Private Consumption (% y/y)
Gross
-45
-75
-49
-65
-43
-50
CA (% GDP)
-6.2
-9.7
-6.2
-7.9
-5.7
-6.0
-56
-89
-65
-80
-53
-62
7.6
13.8
9.2
9.8
8.0
9.0
292
304
339
376
365
380
81
79
100
111
115
120
-3.6
-1.4
-2.1
-1.2
-2.2
-2.1
0.7
1.8
0.8
0.9
0.8
0.9
42.3
39.1
36.2
35.3
34.9
34.2
CPI (% Dec/Dec)
6.4
10.5
6.2
7.4
8.3
6.7
USD/TRY,
1.54
1.92
1.78
2.15
2.35
2.40
1y ago
Last
14 Q1
14 Q2
14 Q3
14 Q4
Public Sector
Prices
eop
1.4 (4Q12)
3.6*
2.5
2.1
1.8
2.4
6.2
7.9
8.0
8.1
8.0
8.3
1.78
2.24
2.25
2.30
2.35
2.35
5.50
10.00
10.00
10.00
10.00
10.00
11.74
11.51
11.30
11.13
11.15
25 March 2014
145
EEMEA: UKRAINE
External and fiscal balances remain under pressure as the economy dived into recession,
exacerbated by the ongoing conflict with Russia, which annexed the Crimea. To save the
country from default, the new government urgently needs to secure an agreement with
the IMF. However, we do not think public debt is on an unsustainable path and assign
the highest likelihood to a no default scenario, at least in the near term.
Key recommendations
Credit: Stick to short-dated bonds. Short Ukraine 17Ns versus long PDVSA 17Ns. We
think that the likelihood is relatively high that a default in the short term will be avoided.
While such a scenario should be supportive for Ukraine credit in the near term, the
longer-term economic challenges and political risks make us reluctant to turn more
positive on longer-dated bonds. On a relative value basis, among global EM highyielding sovereigns, we prefer Venezuela over Ukraine and suggest expressing this view
by going short the (high cash price) Ukraine 17Ns, versus long PDVSA 17Ns.
Following mass and violent protests, President Yanukovich was ousted in February. The
opposition formed a new government led by Arseniy Yatsenyuk, leader of the Fatherland
Party in parliament and close ally of Yulia Tymoshenko. The new Cabinet is a diverse one and
includes representatives of the protest movement. The appointment of ministers in charge of
the economic block looks encouraging: the Minister of Finance has held various posts in the
previous governments, and the Minister of Economy is a liberal technocrat with strong
management experience. Three main opposition parties (Fatherland Party, UDAR Party and
the nationalist Svoboda Party), together with smaller groups and independent deputies,
formed a European choice coalition in parliament comprising 250 deputies (out of 450 in
total). Importantly, the nomination of the government and the PM Yatsenyuk himself
received significantly larger support, of 331 and 371 parliamentary deputies, respectively.
The UDAR Party refused to be included in the government, yet supported it.
FIGURE 1
Petr Poroshenko is leading in the latest poll
25
20
FIGURE 2
Violent protests, conflict with Russia and fiscal tightening
will return the economy to recession this year
20
% y/y
15
15
10
10
-5
-10
Feb-10
GDP
Source: SOCIS
25 March 2014
% y/y, 3mma
Feb-11
IP
Feb-12
Feb-13
Retail trade
50
45
40
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
Feb-14
Exports (USD), RHS
146
Early presidential elections have been brought forward to 25 May (from March 2015). The
political turmoil has significantly changed the presidential elections landscape (for more
detail, please see Global EM Political Outlook: Ukraine, 6 March 2014). The only recent
available poll by SOCIS suggests a significant increase in the rating of Petr Poroshenko, an
experienced politician and billionaire businessman who claimed to be one of the sponsors of
the mass protests. The two other main candidates are Vitali Klitschko (leader of the UDAR
Party) and former PM Yulia Tymoshenko (leader of the Fatherland Party). We expect a closerun contest between these three candidates (Figure 1). Ousted President Yanukovich is now
facing criminal charges and will not be able to run: with the Party of Regions popularity
having slumped during the protests, we do not expect its candidate to be a frontrunner.
In February, the parliament approved a return to the 2004 constitution, which was one of the
main issues in the disputes with Yanukovich. The new constitution limits the powers of the
president and enlarges those of the government and parliament. Given this return and the
fact that all main presidential candidates are viewed as pro-Western, we do not expect the
presidential elections to cause a major shift in policy direction. However, political noise may
naturally increase closer to the election date, also given the ideological differences between
the opposition parties (eg, Fatherland and UDAR are centre-right parties, Svoboda is radicalright, and Solidarnost is centre-left).
The economy finished last year on a positive note, with GDP growth surprisingly accelerating,
after three quarters of contraction, to 3.3% y/y in Q4 (Figure 2). As in previous quarters,
growth was driven by private consumption but this time it got some support from slower
rates of contraction in investment and exports, as well as favourable base effect. The growth
spike in Q4 allowed real GDP to stay flat for 2013 as a whole. However, this positive trend is
bound to be short-lived. Prolonged civil clashes throughout the country at the beginning of
2014 have led to the wide-spread economic paralysis and severely worsened the growth
outlook. While it is difficult to estimate the exact impact, the economic effect of the Orange
revolution in 2004 can provide some guidance. Less prolonged and violent protests
(compared to the recent ones) at end-2004 contributed to sharp growth deceleration from
12% in 2004 to 3% in 2005 (which was amplified, though, by lower steel price growth). All
growth components are likely to deteriorate significantly this year. Consumption will take a
major hit as the new government plans to enact severe fiscal consolidation measures,
including massive across-the-board expenditure cuts and a large hike in gas tariffs. The
latter, together with sharp UAH devaluation (Figure 3), will likely push inflation close to
double digits after a prolonged deflation period. Ongoing conflict with Russia and its military
FIGURE 3
UAH devaluation is comparable to that during 2008-09 crisis
11
FIGURE 4
Twin deficits will undergo a sizeable adjustment this year
12%
USD/UAH
10%
10
8%
6%
4%
2%
0%
-2%
-6%
-4%
-8%
5
4
Mar-08
4Q rolling, % GDP
-10%
Dec-04
Mar-09
Mar-10
Mar-11
25 March 2014
Mar-12
Mar-13
Mar-14
Dec-06
Dec-08
C/A balance
Dec-10
Dec-12
Dec-14
Budget balance
147
Significant external imbalances raise concerns about financing. The current account deficit
widened to USD16bn (8.8% of GDP) in 2013. Gas imports are about 15% of the total imports
(c.8% of GDP), and Russias decision to withdraw the gas price discount starting from Q2 is a
significant negative. The discount lasted only one quarter, and the savings were relatively
modest at c.USD0.5bn. According to Ukrainian government officials, the gas price is expected
to increase to about USD380/bcm in April (from USD269/bcm in Q1). In the extreme
scenario of a significant escalation of the conflict, Russia could increase the price even further
to USD450-500bcm, which would have a detrimental effect on the current account and the
wider economy. On the positive side, in February the central bank abandoned its exchange
rate peg as the first step towards meeting the IMF requirements. The UAH has experienced
sharp swings since then, but we expect the average devaluation to be about 25-30% this
year. This should help to reduce non-gas imports (by about 15-20%), which will also take a
hit from significantly lower consumption. Exports trends are harder to gauge due to several
counteracting effects. Positive effects should come from UAH devaluation and the EUs
decision to remove excises for Ukrainian exports (25% of which go to the EU). Recovering
global prices for food (about 20% of total exports) should also help. However, these effects
will likely be more than offset by falling steel prices (25% of total exports), the deep recession
implying lower production, and significantly lower exports to Russia given the ongoing
tensions. Overall, we expect the C/A deficit to fall significantly, driven by import contraction,
to about USD8bn (about 5% of GDP) in 2014 and to adjust further in 2015 (Figure 4).
We estimate total external financing needs of about USD60bn until the year-end (Figure 7).
Those of the government (including Naftogaz) constitute c.USD8.5bn. FX reserves declined
to USD15.5bn at end-February. Conflict with Russia will likely damage investor sentiment,
leading to a significant reduction in FDI and portfolio flows this year. Corporate debt rollover
ratios have been high historically (as most of it reflects the returning capital flight), and
FIGURE 5
The NBU has partially monetized the deficit
40
USD bn
FIGURE 6
Public debt is sustainable even under adverse scenarios
80
35
70
30
25
60
20
50
15
40
10
30
5
0
Jan-09
Optimistic
Baseline
Adverse
20
Jan-10
Jan-11
Jan-12
NBU
Source: NBU, Haver Analytics, Barclays Research
25 March 2014
Jan-13
Banks
Jan-14
10
2006
2008
2010
2012
2014
2016
2018
148
Similarly to the rest of the economy, the Ukrainian banks are facing tough times as the
banking system is plagued by legacy NPLs, which are close to 40% of total loans. Additionally
UAH depreciation is likely to further put pressure on asset quality (capital adequacy ratio
declined to 15.8% in March). The banks are facing liquidity pressures as deposit flight has
exceeded 8% since the beginning of the year, and was above 5% in February alone (with
roughly the same pace in UAH and FX deposits). The NBU provided extensive liquidity to
banks and responded with different restrictions to preserve financial stability, including limits
on FX deposit withdrawals and purchases. Nevertheless, some banks could need
recapitalisation in the coming years: according to IIF estimates, state-owned banks recap
needs could reach up to USD2bn (1% of GDP). In an adverse scenario, banking system recap
needs could reach USD5bn, in case private bank owners do not participate in the recap.
The fiscal situation is also challenging. The central government budget deficit reached 4.4%
of GDP in 2013 (excluding a Naftogaz deficit of about 1% of GDP). With fiscal reserves
depleted, the NBU has had to partially monetise the deficit (Figure 5), which has likely
contributed to UAH depreciation pressures. In cooperation with the IMF, the government is
currently working on a fiscal consolidation programme to cut the deficit to 2.5-2.8% of GDP
in 2014. Revenues will dive this year due to the recession: in January/February they already
declined by 4% y/y, while the government estimates the decline for 2014 as a whole could
reach 15%. In order to cut the deficit, this would imply sharp across-the-board expenditure
cuts, as well as an increase in household gas tariffs (the current plan foresees a 40% increase
in April and further increases later in the year), which has been resisted by the Yanukovich
government since 2011. The effective gas subsidies have also been widely associated with
related corruption, which the new government seems determined to tackle. Given the
unstable political backdrop and already poor economic situation, we expect the fiscal
consolidation to be tilted towards cuts in spending on investment and government goods &
services, rather than harsh social benefits cuts. In this regard, the secession of Crimea should
be marginally positive for Ukraines finances, as this region is a net recipient of the
governments funding. In contrast, any escalation of the unrest in Eastern Ukraine would be a
significant negative, given these heavily industrialised regions have GDP per capita above the
country average and are significant net contributors to the budget.
Overall, the Ukrainian government has little room for manoeuvre as the IMF deal is vital to
save the country from default, so we expect the government to accept the IMF requirements
and ensure their implementation, at least in the near term. The negotiations with the IMF are
expected to finish next week, with the swift approval of the programme by an IMF board to
follow and the first tranche of financial assistance expected to be disbursed by end-March or
early April. According to the government, it will likely be a two to three-year IMF programme
with the total size of about USD15bn. The EU will also participate, with the amount of about
EUR1.6bn to be disbursed in three tranches this year (as part out of a multi-annual package
of up to EUR11bn in cooperation with EBRD and EIB). In addition, the US extended USD1bn
of credit guarantees to Ukraine. Russia indicated it could participate as well, though this is
becoming increasingly unlikely given the ongoing conflict between Russia and Ukraine.
All that said, we do not think Ukraine finds itself in an insolvent situation. The problem lies in
FX liquidity rather than debt sustainability, in our view. At end-2013, public debt reached
43% of GDP, about half of which is denominated in FX. Crimeas secession reduces nominal
25 March 2014
149
While an ultimate decision on any forced debt re-scheduling will likely have a political element
and is hence hard to completely anticipate, we believe that weighing the arguments for and
against a forced default results in a strong case for remaining current on all external debt.
From an economic perspective, the costs of a default are hard to estimate with certainty and
this uncertainty alone should outweigh the relatively limited financial costs of avoiding the
default to commercial creditors. Hence, we assign the highest likelihood to a no default
scenario, followed by some potential voluntary exchange initiatives of selected issues (possibly
Naftogaz). The more disruptive scenarios have a lower likelihood, in our view. A mandatory
debt re-profiling/maturity extension could be a consideration. Assuming that such a debt reprofiling would extend maturities to 10-15 years, with a 7.5% annual coupon (close to the
average coupon Ukraine is paying on its commercial external debt at present), and assuming
an exit yield around 11% (marginally above the current yield at the long-end of Ukraines USD
curve), cheapest-to-deliver (CTD) recovery values could be in the 70-80 region, we think.
Naturally, mandatory notional haircuts would lead to lower recovery values. Finally, we note
that the political situation remains fluid and any further escalation of the Russian-Ukrainian
conflict may make a purely economic assessment of the default risks obsolete. While this is
not our base case scenario, a disorderly default scenario, eg, driven by a civil strife/violent
conflict situation in Eastern Ukraine, cannot be fully ruled out at this stage. Please refer to
Ukraine sovereign credit: Default Unnecessary and rather unlikely, 20 March 2014, for a
more detailed discussion on possible near-term debt scenarios and a summary of Ukraines
sovereign and sovereign-guaranteed international bonds.
FIGURE 7
Ukraines external market maturity profile maturities
concentrated from September 2015 to 2017
FIGURE 8
Eurobond interest payments are relatively low and
manageable, in our view
USD mn
5.0
2,500
4.0
2,000
USD bn
IMF payments
3.0
1,500
2.0
1,000
1.0
500
25 March 2014
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
2023
UkrInf
Apr-14
Nafto
2022
2021
2020
2019
2018
2017
2016
Q4 15
Q3 15
Q2 15
0
Mar-14
Ukraine sov.
Q1 15
Q4 14
Q3 14
Q2 14
Q1 14
0.0
150
FIGURE 9
Estimated external financing needs and sources: Mar-Dec 2014
External financing needs (USD bn)
1. Government (including NBU)
Short term (original maturity <12 months)
Long and medium term falling due in Mar-Dec 2014
Rollover
8.5
12.2
144%
0.0
8.5
0.0
12.2
144%
IMF- Government
1.5
7.0
IMF- NBU
1.2
2.1
EU financing
Other
1.5
1.3
EBRD*
2.6
0.8
EIB*
1.7
1.0
US loan guarantees
10.8
9.3
2. Financial sector
3.7
80%
2.9
7.1
90%
36.5
2. Financial sector
Short term (original maturity <12 months)
Trade credits
25.3
6.4
39.0
110%
27.8
100%
11.3
19.1
11.3
55.7
60.5
6.7
1.9
5. FDI (net)
0.0
62.4
0.0
Use of reserves
15.5
62.4
15.5
Source: NBU, IMF, Bloomberg, Barclays Research. *Based on the proportional distribution of announced multiannual packages.
FIGURE 10
Ukraine macroeconomic forecasts
2010
2011
2012
2013
2014F
2015F
4.1
5.2
0.3
0.0
-4.0
0.5
136
163
177
182
142
145
Activity
External sector
Current account (USD bn)
-3.0
-10.2
-14.3
-16.1
-8.0
-3.5
CA (% GDP)
-2.2
-6.1
-8.5
-8.8
-5.4
-2.4
-8.4
-16.3
-19.5
-19.6
-10.2
-6.3
5.8
7.0
6.6
3.3
1.9
2.5
117.3
126.2
135.1
142.5
149.3
159.0
34.6
31.8
24.5
18.4
17.5
20.0
-5.9
-1.7
-3.6
-4.4
-3.0
-2.5
39.5
34.9
36.3
41.2
54.8
60.3
CPI (% Dec/Dec)
9.1
4.6
-0.2
0.3
12.0
7.0
8.0
8.0
8.1
8.2
10.5
11.0
Public sector
Prices
25 March 2014
151
EEMEA: ZAMBIA
Key recommendations
Credit: We think the ongoing weakness and underperformance of Zambia credit has
Dumisani Ngwenya
Rates and FX: Pressures on the ZMW heightened in recent weeks, as it depreciated to a
andreas.kolbe@barclays.com
record weak point above 6.40/USD. This was despite tighter monetary policy via a 50bp
hike in the policy rate at the end of February and a 6pp increase in the statutory reserve
ratio (effective 10 March). Following the recent sharp depreciation, the revocation of
Statutory Instruments No. 33 and No. 55 by the government on 21 March has boosted
the ZMW. Incorporating this development, we expect further tightening measures by the
authorities and a recovery in copper prices to lead the ZMW to trade in a narrower range
over the rest of the year. Nevertheless, we project the currency to end the year weaker at
about 6.20/USD. In rates, we believe upward pressure on yields will continue into Q2,
amid tight monetary policy. Despite yields above 15%, we remain cautious, given the
depreciation risk beyond our current forecasts.
The recent sharp fall in copper prices has brought to the fore a key vulnerability of the
Zambian economy. Weak activity data from China saw copper prices fall 12% from their
year-to-date high, reaching their lowest level since 2010. This price action reignited
concerns about domestic growth, specifically the possibility of a sustained decline. In our
view, this is unlikely to be the case. Our commodities team projects prices to recover in the
quarter ahead, while Chinas economic growth is expected to improve over the rest of 2014.
FIGURE 1
Zambia 2022s attractive after sustained underperformance
versus most SSA peers, in our view
1,000
Ghana 17s
Zambia 22s
Senegal 21s
Angola 19s
CIV 32s
MEMATU 20s
25 March 2014
2015F
Q214F
6000
Jan-14
6500
600
Jul-13
650
Oct-13
7000
Jan-13
7500
700
Apr-13
8000
750
Jul-12
800
Oct-12
250
Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14
8500
Jan-12
350
9000
850
Apr-12
450
9500
900
Jul-11
550
950
Oct-11
650
10000
Jan-11
Z-sprd
Apr-11
750
FIGURE 2
Copper production higher despite lower prices
152
Barring a downside risk scenario in which copper prices fail to recover and even decline
further, we believe Zambias economic growth is likely to be more than 6% this year.
Though weather-dependent, we expect agriculture to continue to provide sustenance for
growth in addition to increased copper production. Infrastructure development will also
provide impetus with several energy sector projects in the pipeline. Power constraints will
be eased with 500MW in additional capacity expected to be commissioned in the next 18
months, providing a significant boost to current capacity of about 2000MW. The ongoing
revision of GDP means that growth rates and economic estimates will change in upcoming
quarters, also affecting fiscal and external balance metrics.
Amid expected firm growth and rising inflation, we believe further monetary tightening is
possible in the next quarter. While base effects may support disinflation in H2, we continue
to see upside risks to the BoZs 6.5% end-2014 inflation target (Barclays end-2014 forecast:
7.7% y/y), amid recent FX depreciation and large public wage increases in 2013. Given tight
monetary policy, credit growth (12.7% y/y at end-2013, from 39.2% a year before) is likely
to remain relatively subdued.
Despite the favourable growth outlook, recent fiscal deterioration and the weaker external
position keeps Zambia at risk for a negative rating action in the next quarter (please see our
assessment in the previous Emerging Markets Quarterly). Announcements are expected from
Moodys (30 May; B1 stable) and S&P (B+ negative) in the upcoming months. After the onenotch downgrade last October, Fitch affirmed its B (stable) rating on Zambia on 21 March.
The significantly larger public wage bill suggests further fiscal slippage is possible (from 2013),
particularly should revenues disappoint, despite the two-year freeze in public wages and
subsidy reforms implemented in 2013 (which have freed some fiscal space).
FIGURE 3
Zambia macroeconomic forecasts
2010
2011F
2012
2013E
2014F
2015F
7.6
6.8
7.3
6.0
6.7
7.0
16.2
19.2
20.6
22.3
23.2
25.2
7.1
3.7
0.1
-1.5
-1.8
2.3
2.1
2.3
3.1
2.7
2.9
Months of imports
3.0
3.2
4.1
3.0
3.0
-3.0
-2.2
-3.3
-7.5
-7.0
-6.5
25.8
27.2
32.4
35.2
37.5
39.3
CPI (% Dec/Dec)
7.9
7.2
7.3
7.1
7.7
6.9
USD/ZMW (eop)
4.80
5.12
5.15
5.51
6.20
6.52
Q1 13
Q4 13
Q1 14F
Q2 14F
Q3 14F
Q4 14F
6.6
7.1
7.8
7.6
7.7
7.7
USD/ZMW (eop)
5.37
5.51
5.92
6.01
6.11
6.20
9.25
9.75
10.25
10.75
10.75
10.75
25 March 2014
153
LATAM: ARGENTINA
Key recommendations
Strategy: We remain constructive on Argentina credit, which we keep as an overweight
in our portfolio, given positive policy steps, potential catalysts in the financial agenda,
and valuations. We recommend the very short end of the curve, since it is inverted. In
particular, we favour the Boden15; while it trades tighter than the Bonar17, it is more
immune to supply risk and still trading at a sizable pickup relative to the long-end bonds.
For investors who cannot take on Argentina local law risk, the less liquid G17 is our pick.
We think that the ARS will be used as a nominal anchor and that the depreciation will be
gradual, but we sense risks are high for long peso positions in NDF.
The more significant update to our views is that we expect negotiations with holdouts to
materialize within the Kirchner administration; we had expected Argentina to negotiate after
litigation avenues were exhausted. We now think that the main question is when the
settlement is likely to happen and that the authorities will avoid default of exchange bonds.
The days of financial isolation are over. According to our forecasts (Figure 1), Argentina
needs to access markets rapidly if the authorities want to avoid a serious effect on the
economy and the associated political costs. Moreover, we think that the authorities might
prefer not to wait for the Supreme Court decision, even if the Solicitor General pushes
forward the expected litigation timeline. Entering 2015 without access to markets would
leave the economy, the president and investors too vulnerable to Brazil, uncertain terms of
trade shocks and the weather whims of La Nia. In this respect, on March 18, Cabinet Chief
Capitanich mentioned to the National Broadcasting Service advances in negotiations with
Paris Club and holdouts . This is the first time the authorities put out in the public domain
that a negotiated settlement with holdouts is within the feasible set of options. Capitanichs
pragmatism is a step forward and supports our constructive views on more recent policies.
Federal financing needs are manageable but a combination of fiscal adjustment and market
access is required. Federal financing can be split between hard currency (Figure 1) and peso
(Figure 2) needs. The former is related to hard currency debt service and GDP warrants, net
25 March 2014
154
of public sector holdings. Our calculations show that these stand at a manageable $6.6bn in
2014. This includes the Paris Club $2bn down-payment in 2014 and $1.5bn in cash per year
thereafter. It also includes net financing from multilaterals of $500mn and no GDP warrant
payment in December 2014. In 2015, even under the optimistic assumption that Argentina
settles with holdouts and issues a global bond for $5bn, the treasury would have to issue to
the central bank a note for $8.5bn 5. Therefore, it should not be a surprise if the authorities
move fast to engage with markets, else anxiety will build as forward-looking investors focus
on hard currency financing needs, particularly after taking into account interest due to debt
issued to settle with the International Centre for Settlement of Investment Disputes (ICSID),
Repsol and the Paris Club expected payment schedule. The time of paying debt with
reserves is almost over.
FIGURE 1
Hard currency financing needs 2014-20
USD bn
1. Hard currency bond debt service*
2. GDP warrants
3. In the hands of the public sector**
13.6
17.3
15.3
12.2
9.8
2.8
2.8
2.8
2.8
16.2
2.8
-0.9
-1.2
-10.4
-3.2
-4.2
-0.9
-6.9
4. Multilaterals amortizations
2.4
2.3
2.2
2.0
1.8
1.5
1.4
-2.9
-2.8
-4.2
-5.0
-5.3
-5.0
-4.9
6. Paris Club***
2.0
1.5
1.5
1.5
1.5
1.5
-5.0
-9.2
-13.4 -8.8
-9.7
-8.5
6.6
8.5
Note: Financial isolation is not a viable plan. *includes interests on rollover debt ** estimates *** assumes that after
the $2bn down-payment, installments are made in cash, not bonds. The provinces face low payments in 2014, and we
assume market access for them in or before 2015 of about $1.8bn. Source: Barclays Research
FIGURE 2
Peso financing needs 2014-20
USD bn
1. Primary deficit
6.4
7.2
4.8
2.8
0.6
-1.5
3.0
3.0
3.0
3.0
2. Provinces gap
3.0
3.0
3.0
11.8
8.8
-6.5
0.0
2.0
3.0
2.0
1.0
0.0
-3.8
-5.7
-4.4
-3.8
-3.1
-2.7
-2.8
0.0
0.0
0.0
0.0
0.0
0.0
0.0
2.8
1.6
0.7
0.3
0.3
0.5
0.8
23.2 14.6
6.9
2.6
3.6
5.6
9.0
Memo item
Note *includes interests on rollover debt ** in January 2014, a number of locals swapped ARS Bonar 2014. We expect
the authorities to start issuing peso-denominated paper to roll over peso paper due, and issue additional paper if
needed. *** Amount the treasury needs to give back (in 2016) to the central bank to maintain a decent level of net
worth. **** limited by the central bank charter. Source: Barclays Research
Moreover, we think that the authorities are too invested in tapping the markets. It would be
unreasonable to increase hard currency needs with ICSID, Repsol, and the Paris Club, paying
the political cost of reporting high inflation, without reaping the benefits of tapping markets
and reducing financing costs for YPF and provinces and lowering the pressure on currency
markets. We think that the chances that the process is reverted are extremely low.
Therefore, progress in the agenda will act as an important market catalyst.
The effect on reserves, however, would be less, given that part of 2015 debt services are held domestically, as
balance of payments data suggest.
25 March 2014
155
Reducing peso financing needs is more complicated than negotiating with holdouts because it
hits the pockets of voters, union leaders, and social movements; affects territorial political
support and aids the political opposition. The peso financing needs comprise the primary
fiscal deficit, the peso debt service, and the peso financing needs of the provincial and
municipal governments. These are financed through central bank profits and adelantos
transitorios, or money printing. The problem here, connected with the issues discussed above,
is that the reserves dynamics are the flip side of monetary conditions. Excess money supply
means too many pesos chasing too few dollars. It drains reserves and puts pressure on the
official and parallel market premium, as well as inflation. Therefore, the central bank faces a
constraint when financing the treasury, although it can technically print as many pesos as it
likes to pay for these6. The January reserves crisis is evidence that the central bank is close to
the point where printing too much hurts central bank reserves.
The central bank can always sterilize excess money printed to finance the treasurys peso
financing needs (by issuing Lebacs). This would be equivalent, in practice, to transfer peso debt
from the treasurys balance sheet to the central banks. But there is also a constraint to this
process, given the concomitant crowding out of private sector credit and, over time, the
increase in the quasi-fiscal deficit of the central bank. The central bank needs to pay interest for
Lebacs. The higher the Lebac interest rates, the shorter the time before the central bank starts
running quasi-fiscal deficits. Today, the central bank runs a surplus, but this could rapidly turn
into a deficit if Lebac rates remain at 30% for more than a year. This implies that sterilization at
high interest rates is not a process that can be ran for a sustained time and that, sooner rather
than later, the fiscal deficit must be tackled. This likely explains the hurry of the authorities to
move on with painful subsidy cuts, even with inflation at a cumulative 7.2% YTD in February.
This leads us to assume that the authorities will embark on a sizable fiscal adjustment that
takes the peso primary deficit to $10bn in 2014 (from $12bn in 2013) and to $6.4bn in
2015. We assume that the adjustment will happen in 2H (reducing the effect on 2014)
given the need to stabilize inflation in the next few quarters (tariff increases hit inflation)
and pass the union wage negotiation season that is mostly accomplished in the first half of
the year. Peso debt payments of close to $12bn are assumed to be easily rolled over (held
by local banks and public sector) and that the federal government issues peso domestic
debt to local banks and Anses for about $2.6bn. In addition, the aggregate provincial
financing needs are assumed to be $3bn. Assuming central bank profit transfers of $6.5bn
(same as in 2013) and adelantos transitorios of about $4bn, this would mean that money
printing to finance the treasury would amount to 2.8% of GDP and contribute a 23pp
increase in base money in 2014 if it is not sterilized by the central bank.
Is this amount of money printing low enough not to put pressure on exchange rate markets
and reserves? It is impossible to predict 7. But we do know that the central bank balance sheet
has room to stabilize exchange rate markets if needed. Assume, for instance, that the money
growth rate that stabilizes the exchange rate markets is 20% in 2014, a significantly lower
pace than nominal income. This would mean the central banks Lebac stock would increase
90% in 2014, or close to ARS100bn, given the 2.8pp of monetary financing mentioned above.
We think that such an increase is manageable (temporarily) for the central bank. For example,
from December 2014 to March 7, the stock of Lebacs has increased ARS43bn, or 40%. This
supports our view that the authorities have room to manoeuvre to contain the reserves bleed
if it becomes pressing again in the quarters to come.
The central bank charter does not allow printing any amount of pesos. In our forecasts, we respect these charter
constraints to finance the treasury.
7
This involves predicting demand for money in a changing and uncertain environment. Real money demand should
fall with lower activity and increasing depreciation/inflation expectations. However, should prices stabilize, it could
compensate for this effect from the effect on real income.
25 March 2014
156
Therefore, we see the authorities pursuing a heterodox stabilization plan that involves
(politically opportunistic) fiscal tightening of subsidies and non-essential capex spending
but most of the heavy lifting put on the central banks shoulders in 2014. To reduce the
effect of this on the economy, the authorities could pursue a combination of price-wage
controls and opening up external financing. Where does this logic leave us in terms of the
peso outlook? In our opinion, the January depreciation has proven that with full
employment and unanchored inflation expectations, seeking a real exchange rate
depreciation is fruitless: it brings nominal instability, labor unrest and a potential shortening
of contracts. Instead of obtaining the desired results, it leaves the real exchange rate at its
original level. Under this logic, we think that the authorities will use the peso as a nominal
anchor and a critical part of their income policies and pursue a gradual depreciation path
that will mean that the peso will depreciate below inflation. Pressures in the parallel
exchange market will depend, ultimately, on policy consistency.
The authorities have not stated an explicit objective in terms of inflation, but we think it is
close to 30% in 2014. The authorities are focused in combating inflation inertia. Their efforts
to reach agreements with friendly unions (~ 30%) and Secretary Costas work on price
controls (precios cuidados) and coordination between sectors are important policy elements
to reaching this goal. The new CPI will certainly help in such coordination efforts. Coordination
is needed because to protect their margins, firms are reluctant to contain prices if they have no
assurance that competitors, unions and inputs in the production chain, will do the same.
However, Secretary Costas efforts will fail to deliver permanent results unless there is success
on the fiscal side of the policy equation the Achilles heel of past failed stabilization plans. The
increase in economic slack will likely help the authorities in the next quarters, as well as the
nominal stability of the peso. Therefore, we think inflation will not spiral.
In past times, such a stabilization plan would include IMF financial support at the political
cost of the strings attached to financing, or "IMF conditionality". In the current state of
affairs, we think the authorities will not approach the Fund seeking for financing. Instead,
they are likely leaning toward negotiating with creditors including holdouts to get muchneeded hard currency to reduce the effect on growth and reserves during the transition to
2015 presidential elections. However, we think that the authorities could reluctantly
entertain an IMF Art 4 consultation should Paris Club creditor nations make it a nonnegotiable condition for a debt restructuring.
FIGURE 3
Argentina assets had a volatile performance in Q1
%
FIGURE 4
Argentina USD-denominated curve remains inverted
USD/ARS
8.5
100
98
8.0
96
7.5
94
7.0
90
6.5
88
86
Dec-13
Jan-14
EF106106 Corp
Source: Barclays Research
25 March 2014
Feb-14
Mar-14
Bonar 17
1250
1150
1050
92
84
Nov-13
(bp)
1350
Current
08-Jan-14
G17
G17
Boden15
Bonar 17
950
Discount
850
6.0
750
5.5
650
0.50
Discount
Par
Boden 15
Par
2.50
USD/ARS (RHS)
4.50
6.50
Modified Duration
8.50
10.50
157
FIGURE 5
Argentina macroeconomic forecasts
2007
2008
2009
2010
2011
2012
2013E
2014F
2015F
Activity
Real GDP (% y/y)
8.5
2.4
-4.1
7.9
5.0
-0.4
3.1
-1.5
4.4
9.7
4.1
-6.1
10.2
7.1
-0.3
4.1
-2.7
5.3
13.6
9.1
-10.2
21.2
16.6
-4.9
5.0
-4.3
10.4
-1.2
-1.7
1.9
-2.3
-2.2
0.0
-1.0
1.1
-0.9
3.4
9.1
1.2
-6.4
14.6
4.3
-6.6
1.3
1.0
Imports (% y/y)
20.5
14.1
-19.0
34.0
17.8
-5.2
7.1
-5.9
8.2
261
327
307
369
433
432
461
363
350
12.5
16.9
11.8
14.1
9.0
7.3
-2.8
6.1
-0.2
4.8
5.2
3.8
3.8
2.1
1.7
-0.6
1.7
-0.1
11.1
13.0
17.0
11.8
10.0
12.0
9.0
9.1
2.1
-16.7
-10.2
-9.9
-14.9
-10.4
-9.9
-9.2
-11.2
124.6
124.9
116.4
128.6
135.0
141.8
148.9
156.3
164.2
46.2
46.4
48.0
52.2
46.4
43.3
30.6
27.5
16.1
0.0
0.9
-2.6
-1.8
-2.8
-3.3
-4.8
-4.6
-3.2
2.1
2.6
-0.4
-0.3
-0.9
-1.5
-3.2
-3.1
-2.1
56.0
47.1
49.0
45.2
41.4
45.7
53.6
52.1
50.6
25.7
21.8
15.0
26.9
21.8
27.0
27.3
39.0
38.4
CPI (% average) *
18.6
27.0
14.1
23.6
23.7
24.0
26.9
37.4
38.2
3.15
3.45
3.80
3.98
4.30
4.92
6.32
9.67
13.12
3.12
3.16
3.73
3.91
4.13
4.55
5.48
8.52
11.56
Q2 12
Q3 12
Q4 12
Q1 13
Q2 13
Q3 13
Q4 13F
Q1 14F
Q2 14F
-2.8
-1.2
-0.5
0.2
6.4
3.4
2.2
-0.5
-2.5
23.1
24.5
26.1
28.0
26.2
26.4
27.0
33.2
37.7
4.53
4.70
4.92
5.08
5.33
5.74
6.32
7.87
8.48
12.0
13.8
15.2
14.9
15.8
17.7
19.4
24.2
24.7
25 March 2014
158
LATAM: BRAZIL
We believe the combination of better growth in early 2014 and a slightly more marketfriendly government has reduced some of the pessimism about the outlook of the Brazilian
economy. We remain sceptical that the government will deliver the 1.9% GDP fiscal primary
surplus target and are not surprised by the S&P rating downgrade of the sovereign. The
agency outlook moved back to stable, which should give a breather to overall mood and
allow the markets to enjoy the carry trade, at least until the World Cup in June.
Key recommendations
Credit: Despite the one-notch downgrade from S&P to BBB- (largely priced in), the outlook
has been moved to stable. Combined with positive signals on the fiscal front, better-thanexpected growth data and still-attractive valuations against peers, this led us to lift the
sovereign to tactically overweight in our portfolio. We believe the belly of the curve (new
BR 2025s) is the most attractive. For leveraged investors, we express our view by selling
Brazil and buying Colombia/Mexico 5y CDS.
FX: We still like the BRL on tactical grounds and recommend being short USDBRL (ref.
Sebastin Brown
2.37, target 2.29, stop 2.42). While we do expect a weaker BRL in the longer run, we
believe that the BCB will continue to use its large balance sheet to prevent a sell-off of
the currency, at least until the election. Recent inflationary pressures, together with the
need for slightly looser monetary policy in the face of more austere fiscal policy, only
increase the BCBs incentives to keep the BRL under control. The limited potential for a
sell-off, relatively low vol, and the currencys high FX-implied yield make short USDBRL
positions attractive in the 1-3m horizon.
Rates: Brazil local rates offer generous risk premia, despite the inflation challenges. We
think the current account adjustment can serve as a catalyst to stabilize exchange rate and
pull down the yield curve. Currently, the DI curve is pricing almost 300bp in hikes over the
next two years, which seems excessive. While the receiving trade has been extremely
volatile relative to other EM local rates, the risk-reward profile is extremely high. Given the
shape of the yield curve, we think the 3y point offers the most attractive carry/roll-down;
therefore, we recommend buying NTN-F 17s for real money and receiving DI Jan17 for
leveraged investors.
FIGURE 1
Brazil spreads are attractive relative to its peers
(bp)
FIGURE 2
Consumption and net exports are the main source of growth
in 2014
pp, contr.
10
120
100
6
80
60
40
20
May 13
-2
Aug 13
25 March 2014
Nov 13
Feb 14
-4
2007 2008 2009 2010 2011 2012 2013 2014F 2015F
C
Net Exp
Real GDP
159
It was at the end of 2011 when Q3 real GDP for that year started to surprise on the downside
in Brazil, the government embarked on what we called a fear of slowdown strategy (see the
Brazil chapter in The Emerging Market Quarterly: A Glass Half Full Take a Sip, 6 December
2011) and investors started to question Brazils bullish investment growth story. Heavy
government interventionism, in a frustrated attempt to re-stimulate growth and control
inflation, added fuel to the fire and led to a strong negative sentiment with Brazil. After the
resulting S&P downgrade, which was largely priced in, and move of the outlook back to
stable, the mood is starting to change again, and we believe positive growth surprises have
a lot to do with this.
Q4 13 real GDP growth surprised on the upside, which, along with better-than-expected
activity indicators in January 2014, dispelled concerns that the economy could be entering a
technical recession. Other factors helped to set a more positive stage: the government
announced a 1.9% of GDP primary fiscal surplus target for this year, which is the same level
as in 2013 and should interrupt the fiscal splurge that eroded 1.2 pp of GDP from the 3.1%
surplus level in 2011; is extending the monetary policy tightening; and is adopting a slightly
more market-friendly speech.
These factors, however, were not enough to prevent a downgrade, as S&P moved the longterm Brazil rating to BBB-. Weak growth prospects for the next couple of years, fiscal
deterioration and lack of economic policy credibility are the reasons, according to the
agency. We share the view that the government will not deliver the 1.9% primary fiscal
surplus this year, as we reiterate our 1.3% forecast. At the same time, with this event largely
priced in, we believe that the bearishness with Brazil could now take a breather, as the focus
moves to the World Cup in mid-year. Moreover, with the temperature rising in other parts of
the EM universe, Brazilian fundamentals, which are behind the investment-grade level, may
start to look a little brighter than those of others high yielders, which should give markets
some breathing space, at least in the coming months.
A critical point that helps support the improving sentiment in Brazil is the expected
contraction of the current account deficit. Even though we revised higher our 2014 year-end
current account deficit forecast to 3.3% from 3.0% of GDP, we remain more optimistic than
the consensus. According to the latest BCB Focus consensus survey, markets expect an
even milder improvement this year (current account deficit of 3.5% of GDP), with further
FIGURE 3
Current account deficit set to improve by Q2 14
FIGURE 4
Iron ore price decline is a risk to 2014 export growth
USD/ton
USD bn,
12mth sum
-55
170
Forecast
160
-60
150
-65
140
-70
130
-75
120
-80
110
-85
Jan-13
May-13
Sep-13
25 March 2014
Jan-14
May-14
Sep-14
100
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14
Source: Bloomberg, Barclays Research
160
The Argentine crisis is clearly bad news for Brazilian industrial exports. Argentina is Brazils thirdlargest trade partner; hence, the peso devaluation and slump in economic activity pose threats
to Brazilian industrial exports. For example, the transportation/industrial complex, which
represents 11% of total exports, depends strongly on Argentine demand, as more than onethird of exports of this sector goes to Argentina. Commodity prices, specifically iron ore,
represent another source of risk to export performance. Iron ore exports represent 13% of the
total, and the 25% y/y price decline already registered by mid-March (Figure 4) indicates that
further weakness in Chinese growth could have a larger effect on Brazilian export performance.
That said, we expect exports to inch up 1.9% this year, and the bulk of the trade balance
improvement (USD14.7bn forecast for this year, vs. USD2.6bn in 2013) should come from a
3.1% contraction in imports. The inflection point of the current account balance (12 months
rolling, Figure 3) appears already to have happened in March and should gain more traction
between Q2 and Q3 14. Despite the sluggish improvement, 85% of the current account gap
continues to be financed by net FDI, which is clearly good news for the BRL.
The trade-off between growth and inflation should continue to deteriorate over the medium
run as the government unwinds repressed regulated prices and eliminates tax exemptions.
In the short run, adverse weather conditions should add to the inflationary concerns.
Wholesale price indices are already capturing this trend. The February IGP-DI index
surprised on the upside, printing at 0.85% m/m, against the 0.65% consensus expectation,
led primarily by spikes in agricultural producer prices. Daily surveys also point to higher
inflation figures, with food inflation hovering above 1% throughout March. While there is
normally some lag between wholesale prices swings and consumer price movements, the
pass-through of non-industrialized food inflation is swifter and could pressure inflation
indices in the short run.
FIGURE 5
Net debt should increase this year, as we reiterate our
primary fiscal surplus forecast
FIGURE 6
Regulated price increases prevent IPCA softness, despite
floating prices slight relief
% GDP
% y/y
3.5
3.0
Forecast
2.5
2.0
1.5
1.0
Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14
Primary surplus
Source:
25 March 2014
40
9.0
39
8.0
38
7.0
37
6.0
36
5.0
35
4.0
34
3.0
33
2.0
32
1.0
31
Forecast
0.0
Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14
Regulates Prices
Source:
Floating Prices
IPCA
161
Some of the regulated price adjustment has already taken place this year, but there is still a
lot to be dealt with that could be left to 2015. In our 6% IPCA forecast for this year, pencilled
in are hikes in transportation prices, as bus fares were hiked in Rio de Janeiro in February
and at least two more cities are considering raising them after the elections; a 5% increase
in gasoline prices; and a 7.5% gain in electricity prices. This means that regulated prices will
rise nearly 4.5% this year, from a very depressed 1.5% in 2013. However, all of these hikes
depend on the electoral prospects: if floating prices move up more than we expect, the
government may leave regulated price adjustments for 2015. And if all of the BRL12bn in
new subsidies to the energy sector, announced on 14 March, is finally transferred into
higher consumer utility prices, our 5.6% 2015 IPCA forecast would rise at least an additional
60bp. Hence, despite the depressed domestic demand, inflation is likely to remain close to
the upper, rather than mid-, point of the inflation target.
FIGURE 7
Brazil macroeconomic forecasts
2010
2011
2012
2013
2014F
2015F
7.5
2.7
1.0
2.3
1.9
2.4
10.2
3.6
1.0
3.2
0.5
2.2
6.9
4.1
3.2
2.3
2.0
2.1
21.3
4.7
-4.0
6.3
0.9
2.5
-2.7
-0.8
0.0
-0.9
1.4
0.2
Exports (% y/y)
11.5
4.5
0.5
2.5
7.6
3.8
Imports (% y/y)
35.8
9.7
0.2
8.4
-3.2
1.7
2144
2477
2237
2217
2167
2248
-47.3
-52.5
-54.2
-81.4
-70.8
-56.8
CA (% GDP)
-2.2
-2.1
-2.4
-3.7
-3.3
-2.5
20.1
29.8
19.4
2.6
14.7
27.2
36.9
67.7
68.1
67.5
60.0
52.0
Activity
External sector
61.9
43.1
3.8
6.6
9.0
13.0
256.8
298.2
312.9
312.0
304.3
308.2
288.6
352.0
373.1
358.8
359.0
369.2
-2.5
-2.6
-2.5
-3.3
-3.9
-3.5
Public sector
Public sector balance (% GDP)
Primary balance (% GDP)
2.7
3.1
2.4
1.9
1.3
1.7
53.4
54.2
58.8
57.2
58.1
58.6
39.1
36.4
35.3
33.8
35.3
36.1
CPI (% Dec/Dec)
5.9
6.5
5.8
5.9
6.0
5.6
CPI (% average)
5.0
6.6
5.4
6.2
5.9
5.9
1.66
1.87
2.05
2.36
2.45
2.60
1.76
1.67
1.96
2.18
2.41
2.52
1y ago
Last
Q1 14F
Q2 14F
Q3 14F
Q4 14F
1.8
2.2
2.3
1.1
2.2
2.1
5.8
5.8
5.7
5.7
6.1
6.0
2.05
2.33
2.35
2.40
2.45
2.45
7.25
9.50
11.00
11.00
11.00
11.00
--
--
--
10.99
11.37
11.89
Prices
25 March 2014
162
Leaving behind the electoral uncertainty, Central American authorities still face
challenging political hurdles to implementing fiscal consolidation. Risks of radicalization
in El Salvador seem contained, opportunities to build consensus in Costa Rica appear to
have opened, and in Panama, delays in the canal works and the deferral of public works
payments will require a more restrictive fiscal policy.
Key recommendations
Credit: During the election process, El Salvador spreads have repriced wider relative to
the Dominican Republic. While we think the uncertainty is higher, the risk of
radicalization is limited, in our view. Therefore, we recommend that investors tactically
switch out of the DOMREP 2021s into the ELSALV 2023s. At a portfolio level, we express
our view by leaving our stance on El Salvador at neutral and on the Dominican Republic
at underweight.
Elections have been center stage in most Central American countries (CAC) over the past
months; however, electoral uncertainty has steadily declined, and the main question
remains how the new authorities will tackle challenging fiscal conditions, particularly in the
context of tighter global monetary conditions, which could make it more difficult to finance
CAC deficits. In order to limit further deterioration in fundamentals, the new governments
will have to move rapidly from the ballot box to building consensus and implementing
measures that bring fiscal consolidation.
El Salvador elected Salvador Sanchez Ceren as its new president. His very narrow winning
margin is likely to maintain a high level of polarization and could increase political noise.
However, we believe economic and political constraints should limit the risk of radicalization
of the new administration, which has been the markets main concern. Costa Rica will hold
a run-off election on April 6, but the ruling partys candidate, Johnny Araya, withdrew his
candidacy, clearing the path for Luis Guillermo Solis to become president. In our view, this
increases the chances of building a consensus to pass needed fiscal reforms, although we
expect some deterioration in the public accounts in the short term. Panama will hold
general elections on May 4. Although the various opinion polls show different margins, the
government candidate, Jos Domingo Arias, remains ahead. Still, his lead may not imply
FIGURE 1
El Salvador spreads underperformed during the election
process, creating a tactical opportunity, in our view
FIGURE 2
Close win likely to maintain high polarization (%)
Spread (bp)
550
500
450
400
350
300
250
Feb 12
Aug 12
Feb 13
El Salv 23
Source: Barclays Research
25 March 2014
Aug 13
Feb 14
DomRep 21
Source: TSE
163
Surprisingly, the run-off in El Salvador was very tight, with both candidates claiming victory.
Although polls showed a large advantage for Salvador Sanchez Cern, the candidate of the
leftist FMLN, the countrys electoral court (TSE) declared him the winner with just 50.1% of
the vote, compared with 49.9% for Norman Quijano of the center-right ARENA (Figure 2).
Mr. Quijano is contesting the result and has taken his case to the Supreme Court. This
shows a highly polarized society that will find it difficult to build a consensus to overcome
the challenges facing the country. However, we also believe that the room for radicalization,
which has been the markets biggest concern in the event of a Sanchez Cern victory, is
limited. As we wrote in Global EM political outlook: Central America and the Caribbean,
March 6, 2014, Mr. Sanchez Cern will most likely face constraints that limit the potential
for policy change.
The country faces a difficult economic situation. Despite improvements on the fiscal front,
the government still has substantial financing needs, given the high concentration of shortterm domestic debt, which amounts to approximately USD0.6bn. This will force the new
government to seek financing. It will have to consider looking for a new agreement with the
IMF and/or trying to place a long-term bond in the international market. After the inability
of El Salvador to extend the previous standby agreement with the IMF, we expect intense
negotiations if the government seeks a new one. The key point is a possible increase in the
VAT, which the government has resisted. An agreement might be possible by earmarking
the revenues from the tax increase for social expenditures in health and education.
Nonetheless, the negotiations will likely be protracted, which means the government is
likely place a bond in the market before year-end. This funding need requires the new
administration to maintain a moderate position.
A political constraint for the new government is legislative elections that will be held next year.
With the electorate divided in half, radicalization could shift swing voters to the opposition and
cause the government to lose control of the legislature. The FMLN seems to have a long-term
goal of retaining power; as such, we believe it is likely to pursue gradual reforms, rather than
radical shifts, to ensure its projects sustainability. Radicalization could lead to deterioration in
the countrys economic situation, which has been registering very low growth due to a lack of
investment, thus jeopardizing its position. Nonetheless, even if policies are not radicalized,
rising polarization could increase political noise, negatively affecting investment in a country
whose main problem has been its inability to grow at a faster rate.
Despite the contained political risks, we continue to see El Salvadors debt dynamics moving
in an unsustainable trend. There have been significant fiscal efforts to reduce the public
sector deficit; however, we estimate that it will remain at about 4.0% of GDP. Even if the
government is able to pass fiscal reforms, we expect the measures to result in slower
growth, or even a recession, making debt stabilization unlikely in the next two years. We
estimate the public sector debt/GDP ratio will exceed 65.0% of GDP by 2015, which leaves
the country in a vulnerable position, particularly considering the changes in the global
environment, which imply less liquidity and higher financing costs.
25 March 2014
Luis Guillermo Solis of the Citizen Action Party (PAC) was supposed to face Johnny Araya of
the ruling Partido de la Liberacin Nacional (PLN) on April 6. The momentum that Mr. Solis
showed in the final stretch of the first round and Mr. Arayas weak performance made Mr.
Solis the favorite in the run-off election. This was confirmed by a CIEP poll published in early
March that showed Mr. Solis with 64.4% support, compared with 20.9% for Mr. Araya, an
164
Mr. Arayas withdrawal could also mean that additional friction between the political parties
can be avoided, which would make it easier for the new administration to reach
agreements. Nonetheless, Februarys election left a more fragmented Legislative Assembly
(Figure 3). The leftist Frente Amplio (FA), which had just 1 of the 57 seats in the Assembly,
won 9 seats. Mr. Arayas PLN remains the main political force in the legislature, with 18
seats, but that is down from 24 in the previous legislature. Mr. Soliss PAC will have 13
seats, the libertarian movement 3 and the Social Christian Unity (PUSC) 9. The more
fragmented Legislative Assembly could cause further delays to the reform agenda. Mr.
Soliss initial move was to try to build an alliance with the FA and PUSC, rather than with the
PLN. However, Mr. Arayas withdrawal also introduces the possibility that PLN legislators
could support a legislative proposal that the government might present for the good of the
country. He said they will adopt a responsible opposition.
Mr. Solis has proposed postponing reform for two years in order to try to look for a more
efficient use of public resources and reduce tax evasion. Still, the impact of his proposal is
limited, considering that the government is legally required to increase expenditures for
education to 8.0% of GDP, and more that 60% of the government budget is committed to
salaries and interest payments. However, his advisers are conscious of the necessity of reform.
They say they just want to avoid ending up like previous administrations, trapped in
congressional negotiations and legal discussions. In that sense, the possibility of an alliance that
includes the PLN and reaches at least 38 of the 57 assembly seats opens the possibility of fasttracking the reform and preventing further deterioration of Costa Ricas fundamentals.
Despite the improved chances of building consensus, it seems difficult to avoid further
deterioration in the fiscal accounts, at least in 2014. It is important to take into account that in
Costa Rica there is no re-election for legislators. Therefore, all members of the legislative
assembly will be new, which implies that they will need time to reach an agreement. In that
sense, we estimate that the fiscal deficit will reach 6.0% of GDP in 2014, and in order to finance
it, we believe the government will need to issue another USD1.0bn of bonds after the elections.
We believe the first signals the administration sends will be critical. If it does not provide a clear
sign that it is tackling the fiscal imbalance in the short term, the credit is likely to be downgraded
by Moodys, the only rating agency that rates the sovereign investment grade.
FIGURE 3
El Salvador needs to extend debt maturity
FIGURE 4
Costa Ricas fragmented Legislative Assembly
1.2
60
1.0
50
0.8
40
0.6
6
1
30
11
0.4
5
3
6
9
9
9
13
20
0.2
24
10
External
Source: TSE, Barclays Research
25 March 2014
Letes
2040
2038
2036
2034
2032
2030
2028
2026
2024
2022
2020
2018
2016
2014
0.0
18
0
Current LA
PLN
PAC
New LA
FA
PUSC
ML
Others
165
This, along with a reduction in government revenues due to the delay in the expansion of the
Panama Canal, will require the next government to cut investment or issue more debt in the
near term, in our view. Passing fiscal reforms are necessary over the medium term in order to
able to continue to reduce the indebtedness level. Growth will not be enough to continue to
lower Panamas debt/GDP ratio. Considering the partial paralyzation of work on the canals
expansion, the conclusion of this project next year and possible future fiscal tightening, we
expect GDP growth to moderate towards 6.5% from an average of 9.0% over the past seven
years. We believe that further downward pressures on growth are contained, considering that
a large portion of demand is satisfied by imported goods and services, which reduces the
multiplier effect of public spending. Nonetheless, in absence of fiscal tightening, we could start
to see deterioration of the fundamentals of the credit, with the debt increasing from 40.0% of
GDP to more than 45.0% of GDP over the next two years.
FIGURE 5
Costa Ricas high financing needs (% GDP)
FIGURE 6
Tighter race, but Arias retains the lead in Panama (%)
12
40
10
36
38
34
32
30
28
26
24
22
0
2013E
2014F
Primary Deficit
2015F
Interest Payments
2016F
Amortization
20
01-Nov-13
01-Dec-13
Arias
01-Feb-14
01-Jan-14
Navarro
Varela
25 March 2014
166
LATAM: CHILE
Weak Q4 13 data lead us to see downside risks to our growth forecasts. Internal
demand, the foundation of Chiles past resilience, is now declining as investments dry
up. However, we see reasons to avoid an overly pessimistic outlook: the weaker CLP
should improve the trade balance and curb current account risks, which, together with
this years robust expansion of fiscal spending, are likely to push growth back into line
with its 4.5% potential by 2015.
Key recommendations
FX: We believe the USDCLP should converge to close to 555-560 towards the end of the
year. While the volatility of the cross is high and there are no clear triggers for a sustained
rally of the peso, we recommend building long CLP positions when the USDCLP goes
above 575 and taking profits whenever the cross dips below 550 as fiscal spending limits
the upside potential of the cross. Funding with PEN could be attractive, as the Nuevo Sol
should continue to exhibit low volatility.
The slowdown of the economy during 2013 became a matter of widespread consensus in
April last year when the growth rate of the IMACEC fell to a 21-month low, reaching only
3.1% y/y saar. The debates among analysts and investors quickly shifted from whether the
resiliency of internal demand could continue to isolate growth from a weakening global
context to the extent to which the growth would suffer and the BCChs likely policy answer.
But even in that context of unanimous bearishness, most analysts did not expect the
economy to perform as poorly as it did in Q4 13: GDP expanded only 2.7% y/y, driven by a
12.3% y/y contraction of investment. While falling inventories during Q2 and Q3 were the
main drag on investment, that is no longer the case. During Q4 13 investment was mainly
driven by a 28.5% y/y decline of purchases of machinery and (Figure 1).
GDP growth reached only 4.1% during 2013. And the 12.6pp, 8.7pp, and 6.7pp
contributions of internal demand to real growth in 2010, 2011, and 2012, respectively, are
useful data if one wants to gauge the real weakness of internals demand 3.4pp contribution
over 2013. The Chilean economys internal demand-based growth resiliency seems to be
quickly vanishing and will now depend on the dynamics of consumption alone: its
FIGURE 1
Weak Q4 13 data driven by sharp contraction of investments
pp
FIGURE 2
Consumer confidence correction likely to hurt retail sales
25%
20
130
125
20%
15
120
15%
10
115
110
10%
105
5%
100
95
0%
-5
90
-5%
-10
Mar-10
Dec-10
Sep-11
FAI
Net exports
Private consump.
Source: BCCh, Barclays Research
25 March 2014
Jun-12
Mar-13
Dec-13
Governm. consump.
Inventories
GDP growth (% y/y)
85
Q1
06
Q1
07
Q1
08
Q1
09
Q1
10
Q1
11
Q1
12
Q1
13
167
Consumption has continued expanding in part because of the resilience of the labor market. Yet
the sharp decline of investments will sooner or later translate into higher unemployment and.
Therefore, less disposable income and weaker consumer confidence should lead to softer
consumption (Figure 2). In fact, we expect consumption to grow by 4.1% during 2014, which is
well below the last years 5.6% expansion. High frequency data released this year has generally
surprised on the downside and is therefore in line with our relatively pessimistic outlook.
Tangible economic forces associated with a global decline of the investment cycle in
commodities play an important role in the relatively grim state of the Chilean economy. Yet
they are not the only elements holding economic expansion back, as political events seem to
be curtailing activity as well. In particular, the dismal prints of the IMACEC early this year
would have not been as negative if it had not been for the 22-day strike by Chilean port
workers last January, which directly limited copper exports during the month.
Michelle Bachelet has already been inaugurated as Chiles new president, but some of the
uncertainty that pushed up volatility in financial markets around last Decembers election
has not yet dissipated. In particular, the fears of a reform that will entail a higher effective
taxation of retained earnings could be holding investments back. While there are few details
yet available about the governments preferred changes to the tax code, the uncertainty and
pessimism associated with these changes are unlikely to fade unless the government
quickly announces a full-fledged tax reform proposal.
FIGURE 4
Inflationary pressures still subdued
Forecast
4.5
10
4.0
3.5
3.0
-5
2.5
-10
2.0
-15
1.5
-20
Q4
09
Q2
10
Q4
10
Q2
11
25 March 2014
Q4
11
Q2
12
Other
FDI
Q4
12
Q2
13
Q4
13
1.0
0.5
2011
2012
CPI (% y/y)
Core CPI (% y/y)
2013
2014
Inflation target
Inflation target bounds
168
exporters during Q4 13 and Q1 14 and the improvement of Chiles current account position
associated with it should serve as reminder of the benefits of a floating exchange rate
regime. We believe the weaker CLP is likely to play an important role in allowing growth to
bounce back from 4.0% to levels closer to 4.5% towards 2015. We estimate Chiles potential
GDP growth to be closer to 4.5% than to 4.0%.
The combination of lower appetite for EM financial assets and the BCChs expansionary
monetary policy has resulted in a strong sell-off of the CLP, well beyond what our fair value
models could account for on the basis of commodity prices and interest rate and inflation
differentials. On the other hand, Chilean yields have fallen, not only because of the interest
rate cuts but also because of the limited supply of government paper issued so far. The
combination of these elements has not resulted in a significant increase of financing costs
for the Chilean economy.
At the same time, the relative weakness of investments and improving prospects for Chilean
exports as the CLP depreciates will likely result in a quick narrowing of the current account
deficit towards levels closer to 2.0% of GDP by 2015, which should all but eliminate the
current account position from the list of main risks to Chiles economy. And while a
withdrawal of liquidity from EM assets is likely also to put pressure on Chilean financial
markets, the current account continues to be financed mainly by FDI (Figure 3); thus, the
scope for speculative flows to threaten financial stability is fairly limited, especially if the CLP
continues to sell off.
169
25 March 2014
170
FIGURE 5
Chile macroeconomic forecasts
2010
2011
2012
2013
2014F
2015F
5.8
5.8
5.4
4.1
4.2
4.7
13.5
9.9
7.1
3.5
3.2
5.2
10.8
8.9
6.0
5.6
4.1
4.4
12.2
14.4
12.2
0.4
4.4
6.3
-7.7
-4.1
-1.7
0.6
1.1
-0.5
Activity
Real GDP (% y/y)
2.3
5.5
1.1
4.3
5.7
4.6
Imports (% y/y)
25.9
15.6
5.0
2.2
2.4
5.3
217.7
251.5
266.5
277.2
272.8
289.1
3.6
-3.1
-9.1
-9.5
-8.2
-6.1
CA (% GDP)
1.6
-1.2
-3.4
-3.4
-3.0
-2.1
15.7
11.0
2.5
2.1
3.9
6.4
6.1
5.5
8.5
10.0
9.0
9.0
-4.0
17.5
-1.4
-0.5
-0.8
-2.9
84.1
98.6
116.7
130.7
146.4
164.0
27.9
42.0
41.6
40.2
40.2
40.2
-0.4
1.5
0.6
0.4
-0.9
-0.5
Public Sector
Central government balance (% GDP)
0.1
1.9
1.2
0.7
-0.6
-0.2
8.6
11.1
12.0
11.5
12.4
12.9
-7.0
-8.6
-9.2
-9.6
-8.7
-8.2
CPI (% Dec/Dec)
3.0
4.4
1.5
3.0
3.0
3.0
CPI (% average)
1.4
3.3
3.0
1.8
3.0
3.0
468
520
479
525
555
545
510
483
486
495
540
550
1y ago
Last
Q1 14F
Q2 14F
Q3 14F
Q4 14F
4.9
2.7
3.4
4.1
4.5
4.9
Prices
1.6
3.0
3.4
3.9
3.5
2.6
471
572
570
560
560
555
5.00
4.00
4.00
4.00
4.00
4.00
25 March 2014
171
LATAM: COLOMBIA
Economics
Alejandro Arreaza
+1 212 412 3021
alejandro.arreaza@barclays.com
Key recommendations
Credit: We recommend that investors go long Colombia 2044s, switching from the
Alejandro Grisanti
+1 212 412 5982
2023s. Supply at the long end earlier this year and, political developments more recently,
have likely driven the underperformance of Colombia credit relative to its Latin American
peers (Peru, in particular) and caused the spread curve to steepen. Given our relatively
benign view of US Treasury yields in the near term and our expectation of a smooth
political transition against a backdrop of continued strong economic fundamentals, we
think valuations at the long end of Colombias bond curve have become attractive. We
expect the spread curve to flatten. At portfolio level, we remain overweight.
alejandro.grisanti@barclays.com
Credit Strategy
Donato Guarino
+1 212 412 5564
donato.guarino@barclays.com
There have been few surprises in the run-up to the 25 May presidential elections in
Colombia. In the absence of a strong contender, President Santos remains the clear favorite.
The main question is whether he will be able to win in the first round or require a run-off.
The only unexpected event in the campaign so far has been the Conservative Party decision
not to support President Santoss re-election. Nonetheless, with a fragmented Conservative
Party and a candidate that still lacks support, this decision has not altered the picture.
Although it is strange to have an uneventful election in Latin America, we believe that the risks
of political noise in the run up to the election are very limited. According to the last poll by
Ipsos Napoleon Franco, a large portion of the electorate (47%) is still undecided. Nonetheless,
President Santos has maintained a clear lead over the other candidates. According to the poll,
Santos received 28% of support, more than three times that of the second candidate, Oscar
Ivan Zuluaga, with just 8%. Next was Enrique Penaloza (5%) of the Green party, the leftist
Clara Lopez (4%) and the conservative Marta Lucia Ramirez (3%). Moreover, in the event of a
second round, President Santos has a large advantage over the other contenders. Only one
FIGURE 1
Colombia: Long end has been underperforming similar lowbeta LatAm credits
30
10s30s (bp)
80
70
60
50
40
FIGURE 2
President Santos maintains lead in opinion polls (%)
Col 23-44
25
Mex 23-44
Mex 23-44
Per 25-50 Bra 25-41
20
15
Indo 22-42
30
10
Tur 25-40
20
SOAF 25-41
10
0
Nov-13
0
Ru 23-43
-10
-20
100
150
25 March 2014
200
10yr
250
300
Dec-13
Juan Manuel Santos
Enrique Penalosa
Marta Lucia Ramirez
350
Source:
Jan-14
Feb-14
Mar-14
Registraduria Nacional
172
In a first test of his re-election bid, Santos performed relatively well at the 9 March
parliamentary elections. These were marked by the emergence of a stronger opposition to
President Santoss government, which had until then enjoyed almost total control of the
legislature. This opposition will be led by former President Alvaro Uribe, whose Democratic
Center Party obtained 19 of the 100 seats in the Senate. Nonetheless, Santos and his allies
still control the majority of the seats. Santoss U Party got 21 seats, the liberals 17, the
conservatives 19 (15 of which have not expressed their support for the Conservative
presidential candidate, suggesting they are likely to support Santos), and Radical Change
nine seats. This tally means more than 50% of the seats are aligned with the Santos
administration. In addition, the Green party and the leftist Polo Democratico got five seats
each. Although these last two parties are not part of Santos coalition, they do support the
peace process that the government has been promoting. Therefore, even if Santos will need
to negotiate more and face stronger debates, he will likely have the support for the
legislative agenda that a potential peace agreement with the guerrillas might require.
FIGURE 3
Leading indicators show sustained growth recovery
FIGURE 4
Stagnant oil production caps growth
20
25%
15
20%
10
15%
10%
5%
-5
0%
-10
2008
2009
2010
GDP (LHS)
Source: Haver,
Barclays Research
25 March 2014
2011
IP
2012
2013
Retail Sales
-5%
Jan-10
75
70
65
60
55
50
45
40
35
30
Sep-10 May-11 Jan-12
173
Inflation, meanwhile, remains low (2.32% y/y), with no evidence of demand pressures.
However, prices have been accelerating as expected, with inflation converging toward the
center of the target. Nonetheless, the main increases have come from food and energy
prices, while core inflation excluding these components remains stable at 2.70%.This still
gives Banrep the space to remain on hold until mid-year. The bank has so far maintained a
cautious tone, and without a widening of the output gap we do not think demand pressures
in the short term could trigger an early start to interest rate normalization. We continue to
expect the tightening cycle to start in July, bringing the reference rate to 4.75% by year-end
and 5.0% next year. The main risk that we see for inflation in the short run is the passthrough of the recent depreciation of the COP, which has been bigger than we expected.
However, we see possible a stabilization of the exchange rate in the coming months.
The normalization of interest rates should add support to the COP, which seems to have
weakened excessively in recent months on global factors. Moreover, even if Banrep could keep
the option of intervening in the FX market, in practice it might reduce or even stop dollar
purchases. Historically the bank has been of the opinion that there is no significant deviation
of the real exchange rate and that the accumulation of reserves implies a high cost.
FIGURE 5
Growth stabilizing (%)
FIGURE 6
Less intervention and higher rates should reduce pressures
on the COP
800
700
600
-2
200
-4
100
-6
2
Q1-10
Q4-10
Q3-11
Investment Contrib
Q2-12
Q1-13
25 March 2014
Barclays Research
2,000
1,950
500
400
1,900
300
0
Jan-12
1,850
1,800
1,750
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
2,050
Barclays Research
174
2011
2012
2013
2014F
2015F
4.0
6.6
4.2
4.3
4.8
4.4
Activity
Real GDP (% y/y)
Domestic demand contribution (pp)
5.3
9.0
5.6
5.0
5.5
5.5
5.0
5.9
4.7
4.5
4.7
4.4
4.9
18.7
7.6
4.9
7.1
7.5
-2.1
-2.8
-1.4
-0.4
-0.9
-1.1
Exports (% y/y)
1.3
12.9
5.4
1.9
4.0
5.5
Imports (% y/y)
10.8
21.2
9.1
2.6
6.0
7.3
287
336
369
376
377
411
-8.8
-9.6
-11.9
-12.0
-13.7
-14.3
-3.1
-2.9
-3.2
-3.2
-3.6
-3.5
2.4
6.1
4.9
3.1
1.5
1.2
-0.1
5.1
15.9
13.0
12.0
12.5
12.0
8.0
1.2
5.2
3.2
2.8
64.7
75.9
80.5
86.5
95.2
104.7
28.5
32.3
37.5
43.6
45.1
46.1
-3.3
-1.8
0.4
-1.4
-1.2
-0.9
-3.9
-2.8
-2.3
-2.4
-2.2
-2.1
-1.1
-0.2
0.5
0.3
0.5
0.5
46.2
42.9
40.6
39.7
38.2
35.7
37.2
34.5
33.4
34.4
32.1
30.3
3.2
3.7
2.4
1.9
3.3
3.0
Public sector
2.3
3.4
3.1
2.0
2.8
3.2
1914
1930
1820
1929
2000
2000
1899
1848
1800
1869
2020
2000
1y ago
Q413
Q1 14
Q2 14
Q3 14
Q4 14
2.6
4.9
5.1
4.5
4.8
5.1
1.9
1.9
2.4
2.6
2.7
2.7
1822
1930
1990
2000
2000
2000
3.25
3.25
3.25
3.25
4.00
4.75
25 March 2014
175
LATAM: MEXICO
Economics
Marco Oviedo
+52 55 5241 3331
marco.oviedo@barclays.com
FX Strategy
Key recommendations
Donato Guarino
+1 212 412 5564
Rates: We reiterate our recommendation to be long Mbono42s despite the recent rally.
Valuations remain attractive: the Mexico bond/swap curve is one of the steepest in EM,
hinting that it has overreacted to US Treasury movements. In addition, limited pressure on
the inflation front and still-anaemic growth should be fertile ground for building
long/receiver positions. Our core rate market view is that the pressure on US Treasuries is
likely to be seen only in H2, which should reduce headwinds over the next quarter.
Leveraged investors should express this view via flattening the long end of the curves.
Finally, we would express our monetary policy outlook by entering either a 1y1y TIIE
receiver or a 2y TIIE receiver.
Credit: Mexico bonds/CDS spreads have outperformed other low-beta credit over the
past six months. Since the reform agenda has progressed, it appears that further possible
rating upgrades are already priced in at current levels (Moodys moved the credit to A3
this quarter). Technicals also suggest a more cautious bias since the supply outlook
remains challenging for the credit and recent weakness of other lG credits in EMEA has
accelerated demand for Mexican bonds. Overall, we prefer to remain neutral for now as
there is a lack of short-term catalysts to drive outperformance. We recommend buying
Mexico 5y CDS against Brazil. For real money, we think the belly of the Mexico curve is
particularly rich versus Brazil and recommend a long BR25 short MX23 switch.
FX: A dearth of clear triggers for an MXN rally over the next three months and an
economy that, although weak, still seems promising relative to other EM countries lead us
to recommend an MXN-neutral approach to the upcoming quarter. While the MXN has
performed relatively well compared with the rest of EM FX, our expectation of mild peso
donato.guarino@barclays.com
Rates and Credit Strategy
Sebastin Brown
+1 212 412 6721
sebastian.brown@barclays.com
FIGURE 1
EM sovereign spread versus rating: Mexico spreads already
priced-in a eventual upgrade to A- from Fitch and S&P
EM USD Sov Index OAS
300
Rus
Tur
250
Soaf
200
Ind
Bra
Rom
150
Mex
upgr
100
50
Col
Mex
Phil
5.5
6
4
BBB
2.6
25 March 2014
4.7 4.5
2.5
0.8
0.7
BBB-
-2.7
-4
Mar-12
3.9
3.7
-2
Pol
BBB+
Forecast
% q/q saar
8
6.6
0.2
Per
Pan
A-
FIGURE 2
The economy should pick up moderately with external
demand
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
176
Defining implementation
Recent developments in
telecoms signal the
governments strong
commitment to reform
implementation
FIGURE 3
and the output gap remaining negative
FIGURE 4
Inflation should remain within Banxicos target interval
% q/q saar
% of GDP
4
Forecast
10.0
5.0
0.0
-2
-5.0
-4
-6
-10.0
-8
Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13
-15.0
4.5
Ceiling
4.0
3.5
3.0
Target
2.5
Output gap
Source: INEGI, Barclays Research
25 March 2014
% y/y
5.0
GDP growth
2.0
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
177
In terms of external factors, our US economists forecast that US GDP will expand 2.7% y/y
in 2014, consistent with industrial production growing close to 3.8% y/y. High frequency
data suggest that US manufacturing growth was soft in January, but this slowdown is
probably temporary. In particular, Mexico manufacturing exports declined 1.8% m/m sa,
consistent with the 0.8% m/m sa contraction in the US manufacturing sector. Nevertheless,
US manufacturing improved during February and it will likely continue expanding in March
so we expect Mexican exports to expand 3.5% 3m/3m saar in Q1, pushing industrial
production in Mexico to 3.1% 3m/3m saar. If in fact US manufacturing accelerates to 5%
3m/3m saar in H2 14, exports would also accelerate to 5.3% 3m/3m saar in Q3 and Q4,
leading to the consolidation of growth.
Domestic demand has been persistently weak. Fixed investments declined 1.8% in 2013,
with the construction sector contracting 4.9% y/y in 2013, while machinery and equipment
investment increased 5.4% y/y. The construction outlook remains uncertain as it remains
depressed, even though public investment actually accelerated in H2 13 to 4% y/y in 2013.
Moreover, the short-term outlook for investment is not very promising. First, the new fiscal
framework does not allow the immediate deduction of investment, raising its cost for firms.
The higher tax burden will also reduce the availability of cash balances for investment.
Finally, the higher fiscal deficit might consume an important amount of domestic saving,
reducing funding resources for investment. Only a boost in optimism from the reform
implementation outlook will give investment an additional push this year, combined with an
effective public spending implementation.
Private consumption will be harmed by the higher tax burden, especially during Q1 14. This
has been evident in the consumer confidence index, which fell 16% in January, and in the
stagnation of the retailing sector. Nevertheless, we expect consumption to expand 3.5% y/y
as higher public spending should translate into stronger retail sales and employment,
supporting overall consumption dynamics. For 2015, we continue to believe GDP will be
3.8% y/y, as fiscal spending, particularly in the public sector, will have a full effect on the
economy. Furthermore, the construction sector should have recovered by then, while
investment should accelerate with positive developments in the reform implementation.
25 March 2014
In terms of inflation, since the economy is likely to continue growing below potential, core
inflation will likely remain subdued. We estimate that the output gap is currently 2% of GDP.
The tax effects on inflation were proven to be short-lived and lower than expected. The oneoff effect was observed in the first fortnight of January, and in the second half of the month,
inflation did not show signs of contamination or persistence. We believe that inflation will
return to below 4% in March and it will begin to decline for the rest of H1 14 with very
limited non-core pressures. If in fact the economy accelerates in H2 14, then so would
178
Banxico is also expecting annual inflation to begin to decline. This will be confirmed with the
March and April prints. Accordingly, our macroeconomic outlook suggests Banxico will
remain on hold for the rest of the year and possibly start rising rates until March 2015 as
core inflation accelerates. However, if economic activity starts to disappoint, central bank
communications will be more focused on growth with a more dovish tone. In fact, weakerthan-expected growth in 2014 would likely delay central bank intentions to increase rates in
2015. Moreover, we believe the board would feel uncomfortable implementing additional
rate cuts this year since it would imply short-term negative real rates, something that seems
to be a concern given high market volatility. Nevertheless, if the deterioration of economic
activity deepens, we cannot discard a reaction.
FIGURE 5
Mexico macroeconomic forecasts
2009
2010
2011
2012
2013F
2014F
2015F
Activity
Real GDP (% y/y)
-4.7
5.1
4.0
3.9
1.1
3.0
3.8
-6.5
5.3
4.9
4.7
2.4
3.1
3.5
-9.3
1.3
7.9
4.6
-1.8
0.9
5.1
2.0
0.0
0.0
0.2
0.2
0.2
-0.2
Exports (% y/y)
-11.8
20.5
8.2
5.9
2.0
5.0
5.6
Imports (% y/y)
-17.6
20.5
8.0
5.4
1.3
4.3
6.4
889
1,048
1,164
1,186
1,276
1,332
1,444
12,094
13,282
14,531
15,588
16,380
17,512
18,814
External Sector
Current Account (USD bn)
-8.1
-3.6
-12.3
-14.8
-22.3
-36.1
-31.6
CA (% GDP)
-0.9
-0.3
-1.1
-1.2
-1.8
-2.7
-2.2
-4.9
-2.9
-1.3
0.2
-0.7
-13.4
-6.1
7.5
8.0
10.4
-5.2
25.2
20.0
20.0
8.4
36.0
39.8
56.3
33.6
44.5
31.5
195.0
247.9
282.1
346.8
380.3
424.8
456.3
90.9
113.6
142.5
163.6
176.6
191.4
197.6
-2.3
-2.8
-2.4
-2.6
-2.3
-3.5
-3.1
-0.1
-0.9
-0.6
-0.6
-0.4
-1.5
-1.1
PSBR (% GDP)
-2.6
-3.4
-2.7
-3.2
-3.0
-4.1
-3.7
34.3
33.5
34.9
35.3
37.6
39.0
39.3
Public Sector
31.4
31.7
33.4
34.3
36.3
38.3
38.6
36.2
36.2
37.5
37.8
39.7
43.1
43.0
CPI (% Dec/Dec)
3.6
4.4
3.8
3.6
4.0
3.8
3.7
CPI (% average)
5.3
4.2
3.4
4.1
3.8
3.8
3.7
13.09
12.34
13.94
12.85
13.04
12.95
13.14
13.60
12.67
12.48
13.15
12.84
13.15
13.03
Prices
1y ago
Last
Q1 14F
Q2 14F
Q3 14F
Q414F
Q1 15F
0.6
0.7
1.0
3.1
3.3
4.3
4.5
4.3
4.2
3.9
3.5
3.8
3.8
3.5
12.33
13.25
13.25
13.20
13.10
12.95
12.97
4.00
3.50
3.50
3.50
3.50
3.50
3.75
25 March 2014
179
LATAM: PERU
Despite the persistence of relatively low growth, inflation has been surprising to the
upside. A possible decline in potential growth could lead to demand pressures, despite
moderate growth. Nonetheless, continued FX stability as a result of central bank
intervention should help to contain inflation in the short term.
Key recommendations
Credit: After Perus recent outperformance, we move it to neutral from overweight in
Alejandro Grisanti
+1 212 412 5982
alejandro.grisanti@barclays.com
Credit Strategy
Donato Guarino
+1 212 412 5564
donato.guarino@barclays.com
our credit portfolio. We think the risks are asymmetric at current levels: while the
slowdown in growth is largely priced in, a weaker external position and inflation
pressures could move the market down, and given the tight valuation, we prefer to take
profits. To express our defensive view, we recommend positioning on the belly of the
curve since it is flat relative to similar LatAm credits.
GDP growth closed 2013 in line with our expectations, with 5.0% growth, and got off to a
weaker start in 2014, printing a 4.2% expansion in January (in line with our forecast of 4.1%,
but below the consensus estimate of 4.9%). Although statistical factors, including more
working days in February and March, could support stronger growth in the months ahead,
we do not see a source for an acceleration of growth above 5.0% in the first half of the year.
This is because of an expected weak contribution from private investment and a negative
shock in terms of trade given the fall in metal prices, particularly for copper. In the second
half of the year, we continue to expect a better performance when new production from
mining projects enters the market, potentially boosting growth via exports.
FIGURE 1
Peru credit has been outperforming its peers; we think there
is limited room to compress
FIGURE 2
Inflation acceleration likely to prevent further monetary
stimulus (%)
(bp)
4.5
35
4.0
25
3.5
15
3.0
2.5
-5
-15
2.0
-25
1.5
-35
1.0
Jan-10
-45
Apr 12
Oct 12
Apr 13
Oct 13
Peru 37s-Colombia41s
Peru 50s - Colombia 41s
Source: Barclays Research
25 March 2014
Oct-10
Jul-11
Apr-12
Jan-13
Oct-13
Headline Inf
Target center
Target ceilling
Reference rate
Source: BCRP, Barclays Research
180
Despite weaker internal demand, inflation has not moderated, reaching 3.78% in February
vs a target range of 3.0% +/-1pp. Part of this increase has been driven by supply factors,
with recent increases in electricity and fuel prices. Nonetheless, inflation excluding food and
energy, the key indicator tracked by the BCRP, has escalated to the upper bound of the
inflation target (Figure 2). In the past three years, the BRCP has not tightened monetary
policy even when headline inflation has been above the upper bound of the target. Actually,
it has been loosening policy, reducing reserve requirements, and last November it surprised
the markets by cutting interest rates. However, although inflation excluding food and
energy has remained close to the center of the target since 2011, it could move above the
target range. We expect the BCRP to be more cautious.
Given the weaker demand, we expect inflation to moderate in the coming months, which
could give the BCRP space to remain on hold. Nonetheless, we see a risk that potential
growth in Peru has been declining in the past couple of years; therefore, as GDP growth
recovers in the second half of 2014 and the beginning of 2015, Peru might start to see some
demand pressure on prices (Figure 3) even if growth remains moderate (5.5-6.0%). In that
case, inflation will likely resist converging toward the center of the target range. This has
caused us to increase our CPI forecast for the end of 2014 to 2.6% from 2.3% and we think
the BCRP might need to start normalizing interest rates in early 2015.
The BCRP could still have another tool to contain inflation: the exchange rate. So far, the
BRCP has been able to maintain the PEN very stable for nearly nine months by selling dollars
in the FX market (Figure 4). Although we were expecting the BCRP to let the currency
depreciate in order to contain the deterioration of the current account, it has given no signal
of a change in its strategy. Peru has the largest FX reserves in Latin America, accounting for
approximately 30% of its GDP. Therefore, it has the capacity to continue to do so for some
time, keeping its currency relatively stable around USD/PEN1.82.
The stability of the currency could have several implications, including containing the
inflation of tradable goods. The strongest acceleration in prices in recent months has been
in tradable inflation, which has increased from 1.32% in May 2013 to 3.02% in February
2014. This partly reflects the pass-through of the 7.1% depreciation of the currency in mid2013. However, if the BCRP continues to keep the PEN stable, this pressure is likely to be
contained in the short term.
FIGURE 3
Possible demand pressures in the horizon (%)
FIGURE 4
FX intervention stabilizing the PEN
5.0
7.0
400
2.85
4.0
6.0
200
2.80
5.0
3.0
2.0
4.0
1.0
3.0
0.0
2.0
-1.0
1.0
-2.0
-3.0
0.0
I-08
I-09
I-10
I-11
I-12
Output Gap(LHS)
25 March 2014
I-13
I-14
I-15
2.75
2.70
-200
2.65
-400
2.60
-600
-800
2Jan13
2.55
2.50
1Apr13
25Jun13
23Sep13
19Dec13
Inflation
Barclays Research
181
FIGURE 5
Peru macroeconomic forecasts
2010
2011
2012
2013
2014F
2015F
Activity
Real GDP (% y/y)
8.8
6.9
6.3
5.0
5.1
5.7
6.2
5.8
5.8
5.2
5.2
5.5
22.1
11.4
13.5
3.9
0.8
6.8
Exports (% y/y)
1.3
8.8
5.9
1.0
8.1
10.4
Imports (% y/y)
24.0
9.8
10.4
5.1
3.0
10.2
155.2
176.3
197.2
211.1
217.7
236.6
-3.8
-3.3
-6.5
-10.2
-9.9
-9.7
CA (% GDP)
-2.4
-1.9
-3.3
-4.8
-4.6
-4.1
6.8
9.3
5.1
-0.4
0.6
0.8
8.2
8.1
12.3
10.0
8.0
8.9
40.5
48.0
58.8
60.3
61.8
60.8
44.1
48.8
64.0
66.8
65.5
63.7
-0.5
2.0
2.1
0.8
0.3
0.8
0.6
3.0
3.1
1.9
1.2
1.6
25.2
24.0
23.2
21.4
21.2
19.0
2.3
4.7
2.6
2.9
2.6
2.6
Public sector
2.80
2.73
2.60
2.80
2.85
2.82
1y ago
Last
Q1 14F
Q2 14F
Q314F
Q414F
4.7
5.1
4.6
4.9
5.3
5.7
2.59
2.86
3.33
2.97
2.19
2.61
2.59
2.80
2.81
2.81
2.83
2.85
4.25
4.00
4.00
4.00
4.00
4.00
25 March 2014
182
LATAM: URUGUAY
The inflation surge in January and February will likely shift the central banks attention
back to inflation, supporting the peso. Fiscal policy will likely be unhelpful in this regard
in an election year. Junes presidential primaries should have little market effect.
Key recommendations
Credit: Positive externality from geopolitical conflicts has increased flows to low-beta
LatAm credit. Uruguay has benefited from these flows, especially at the long end
(UY36s), which has outperformed. The bond curve is extremely flat relative to other low
beta credits in LatAm; therefore, we prefer the 10yr part of the curve (UY 25s).
In our view the objective of Uruguays central bank (BCU) is not merely low inflation. Based
on its past behavior, the BCU cares strongly about competitiveness, inflation and
employment, as well as keeping real wages in positive territory. As a result, the central
banks priorities change over time, complicating communication with markets.
We think recent inflation dynamics, coupled with a more comfortable real exchange rate
and less pressing capital inflows, will shift the central banks attention to inflation in the
months ahead. Uruguayan inflation surprised in January and February, climbing to 9.8% y/y
(1.7% m/m). Cumulative inflation in the first two months of the year was 4.1pp, versus 2.9pp
in the same period of 2013. A renewed focus on inflation should bring tighter monetary
policies and support the peso in the short run. We expect the peso to reach 23.5 by year-end.
Central bank efforts to contain inflation and real appreciation of the peso have historically
received little help from the fiscal side. The main problems for the fiscal authorities, we
think, are the budgets high indexation portion and the unwillingness to hit real wages and
pensions. We expect this tension between fiscal and monetary policy to increase in an
election year, putting more pressure on monetary policy to clamp down on inflation. Figure
2 depicts real interest rates and the real change in the primary balance. The chart shows
that the primary surplus has been contracting, indicating that fiscal efforts have not been
significant to fight inflation. In contrast, note that the recent central bank policies has had
the effect of increasing real deposit interests rates (and volatility). This would be in line with
our view that the recent high inflation prints and a more comfortable real exchange will
likely mean a tighter monetary policy in the quarters ahead. We think inflation will come
back to about 8% by the end of 2014.
From a longer-term perspective, low productivity growth remains the main economic
challenge. This relates to stubborn inflation and to the future path of adjustment of the
current account deficit. The authorities avoid cooling the economy to fight inflation because
they feel those growth rates are too low. This reluctance to cool down the economy in turn
dents competitiveness unless the economy is able to move to higher output per worker.
Long-term reforms in the labor market, taxation, and deeper reforms in education are likely
needed to address productivity growth issues and help to reduce inflation and maintain
growth at acceptable levels.
The productivity problem also sheds light on the future adjustment path of the current
account deficit. Unless productivity increases, the current account adjustment will mean
subpar growth, precisely what the authorities are refusing to accept in the fight against
25 March 2014
183
That said, the shorter-term growth outlook is not bright. External shocks stemming from
disappointing growth in Brazil and Argentina will take a toll on Uruguays growth. Moreover,
the depreciation of the official and unofficial Argentine peso, as well as measures taken in
Argentina to make spending abroad more expensive, will likely have a negative effect on the
tourism sector. On the positive side, the development of several FDI-funded investments
will contribute to investment growth. However, the main source of growth in 2014 will
remain consumer spending as real wage growth, and high employment should maintain
consumer demand at high levels. We expect growth at 3% in 2014 and 3.2% in 2015.
FIGURE 1
Uruguay long end has benefited from the positive externality
of geopolitical risk; the curve looks flat
(bp)
x 10000
80
FIGURE 2
Fiscal and monetary policy divergence
70
60
50
2.5
5.0
2.0
4.0
1.5
3.0
1.0
2.0
0.5
1.0
0.0
0.0
-0.5
-1.0
30
-1.0
-2.0
20
-1.5
-3.0
10
-2.0
-4.0
40
0
Mar 13
-2.5
Jun 13
Sep 13
PE 50 - PE 25
Source: Bloomberg, Barclays Research
25 March 2014
Dec 13
UY 36 - UY 25
Mar 14
-5.0
Feb 12
Aug 12
Feb 13
Aug 13
184
2008F
2009
2010
2011
2012
2013E
2014F
2015F
6.5
7.2
2.2
8.9
6.5
4.2
3.6
3.0
3.2
6.9
12.3
-2.4
11.3
9.2
8.6
5.1
4.6
4.8
Activity
7.1
9.1
-1.6
13.7
8.9
6.9
4.2
4.1
4.4
9.3
19.3
-5.7
13.3
5.5
19.4
6.4
4.7
4.7
-0.4
-5.1
4.7
-2.4
-2.6
-4.5
-1.4
-1.5
-1.6
Exports (% y/y)
4.8
8.5
4.2
7.8
6.3
1.6
1.1
3.0
3.0
Imports (% y/y)
5.9
24.4
-9.3
14.8
13.4
13.6
4.5
6.0
6.0
23.4
30.5
30.3
38.9
46.6
49.4
53.8
56.5
62.5
-0.2
-1.7
-0.4
-0.7
-1.4
-2.7
-2.7
-1.8
-2.1
CA (% GDP)
-0.9
-5.7
-1.3
-1.9
-2.9
-5.4
-5.0
-3.1
-3.3
-0.5
-1.7
-0.5
-0.5
-1.4
-2.4
-1.4
-1.8
-2.1
1.2
2.1
1.5
2.3
2.5
2.8
2.9
3.0
3.0
1.3
3.9
2.0
0.4
4.0
6.0
5.8
3.8
3.8
12.2
12.0
14.1
14.6
15.1
15.6
16.1
16.6
17.1
4.1
6.3
8.0
7.7
10.3
13.6
16.7
18.7
20.5
0.0
-1.6
-1.7
-1.1
-0.9
-2.8
-2.3
-2.1
-1.9
3.6
1.4
1.2
1.9
2.0
-0.2
0.3
0.5
0.6
58.1
44.9
56.8
44.0
40.0
40.7
40.2
40.9
39.4
41.2
27.1
36.9
32.4
30.3
31.6
31.8
32.9
32.2
CPI (% average)
8.1
7.9
7.1
6.7
8.1
8.1
8.6
9.4
8.5
21.5
24.4
19.5
19.9
20.0
19.2
21.5
23.5
23.9
22.0
23.3
20.3
20.0
19.3
20.3
20.4
23.2
23.9
Q4 12
Q1 13
Q2 13
Q3 13
Q4 13
Q1 14
Q2 14
Q3 14
Q4 14
5.0
4.0
5.6
2.1
3.0
2.4
3.2
3.2
3.2
Public Sector
Prices
8.5
8.7
8.1
8.9
8.6
9.5
9.7
9.4
9.2
19.18
18.85
20.55
21.85
21.50
22.91
23.39
23.40
23.50
25 March 2014
185
LATAM: VENEZUELA
In action in the decision-making process could have high economic costs: a contraction in
the economy of 1.8%, inflation of 59.5%, and a fiscal deficit of 7.2% of GDP. But there are
some signals of change, such as a more flexible exchange rate system and the possibility
of changing general subsidies for localized ones.
Key recommendations
We reiterate our overweight recommendation on Venezuela. The central bank has
finally published an exchange agreement that sets the (more flexible) rules for the new
FX market (SICAD II). There are still issues to be clarified, but the FX market changes
could reduce Venezuelas economic distortions and imbalances significantly, which
should be supportive for Venezuela/PDVSA debt. Since both bond curves are inverted, we
suggest being long the PDVSA17N and the VE16s.
25 March 2014
Even if the rules allow the BCV to intervene and set limits and conditions to direct the market,
authorities have stated explicitly that they will not use a ceiling or bands to constrain the
exchange rate. Intervention seems to be limited to selling dollars at any time at a price set to
direct the FX rate to a specific level. In that sense, the public entities, as suppliers of this
market, could set the offer and closing prices, but the highest bid would be allocated the
dollars. This would direct dollars to the sectors willing to pay more, thus reducing the marginal
pressure in the non-official market. Moreover, if new supply comes in at a weaker rate, the
government would have greater capacity to sterilize excess liquidity and encourage
convergence between the official and non-official exchange rates. Authorities have said that
their goal is to stabilize the new FX rate at VEB/USD 50.0-60.0. In our opinion, a stronger rate,
even below 40, could be reached in the short to medium term. We also expect that in the
longer term, the government will migrate priority goods (foods, medicine, housing, and
education) from Cadivi/Sincoex to Sicad I and unify all non-priority goods at the Sicad II. We
view this as a significant change that could improve fiscal accounts and the countrys external
position. But the new systems probability of success will depend on the end of fiscal
monetization and some moderation on the fiscal front. If the government is not able to
improve fiscal accounts and continues to monetize the deficit, it may not be able to avoid a
strong devaluation in this new market, which could lead to its closure.
186
In an economy such as Venezuelas, with significant gaps among the different exchange
rates, it is very important to calculate the weighted average exchange rate for the economy,
for the private sector, and for the amount of USD the public sector is expected to sell to the
private sector. The latter category is needed to measure the fiscal effect of the devaluation.
The various calculations are shown in Figure 1. Venezuela, including the private and public
sectors and the non-official market, transacted USD69.7bn at a weighted average exchange
rate of VEB/USD 8.2 in 2013. For 2014, we expect a similar amount of transactions, but
given the difference of dollars sold in each market, the dollar will increase its value by 95%,
to VEB/USD 16.0, which represents a 49% devaluation.
FIGURE 1
Weighted average exchange rate by sector
2013
2014
USD
VEB/USD
USD
VEB/USD
CADIVI/SINCOEX
28.9
6.3
12.0
6.3
SITME/SICAD I
2.4
11.3
SICAD II
7.4
14.0
11.6
42.0
Public imports
34.3
6.3
31.7
6.3
Non-official market
4.1
35.7
4.5
46.0
69.7
8.2
67.2
16.0
35.4
10.0
35.5
24.6
31.3
6.7
31.0
21.5
To calculate the average exchange rate for the private sector, we subtract from the previous
amount all public sector transactions, which represent almost half of the total transactions.
For the private sector, we expected a similar dollar supply in 2014 as received in 2013
(about USD35.5bn), but at a completely different exchange rate. In fact, the weighted
average exchange rate would increase 145%, from VEB/USD 10.0 in 2013 to VEB/USD 24.6
in 2014. This movement represents a devaluation of 59%.
If we separate the transactions that do not involve the public sector, which for simplicity we
call the non-official market, from the private sector transactions, we should be able to
calculate the fiscal gains. In 2013, authorities sold almost USD28.9bn at the cadivi rate, and
given all the changes and delays in SITME and SICAD, they sold just USD2.4bn at the SICAD I
rate. The weighted average exchange rate at which authorities sold dollars to the private
sector was just VEB/USD 6.7. Given the change in weights and the importance we assign to
Sicad II, we expect the new exchange rate to be VEB/USD 21.5, a devaluation of 69%,
representing a 222% increase in the price of the dollar. Given that we expect the public sector
to sell almost the same amount of dollars at a very important weaker rate, the effect on the
public sector accounts should be VEB459.2bn, or 12.0pp of GDP. Unfortunately, given the
fiscal voracity that authorities have shown, we expect a reduction of the fiscal deficit of 9pp of
GDP, ending at 7.2pp of GDP without taking into consideration additional measures.
25 March 2014
We believe the government is in the middle of trying to transform general subsidies into
focalized ones. President Maduro recently announced a debit card, the Secure Supply Card.
Use of the card will be optional and it will have different benefits, with the government
denying that it is intended to limit food purchases. We believe that through this card, the
government will distribute the subsidies to the poorest sector of the population so that it
can adjust the prices of priority goods, such as food and medicine, and increase the
187
25 March 2014
188
2011
2012
2013F
2014F
2015F
-1.5
4.2
5.6
1.1
-1.8
2.5
0.1
0.6
1.4
0.4
0.5
4.9
-1.8
4.5
5.8
1.4
-2.3
2.1
Consumption (% y/y)
-1.9
4.4
6.9
3.6
-1.3
3.1
-4.1
4.4
23.3
-5.6
-5.4
3.1
Exports (% y/y)
-14.0
4.7
1.6
-5.0
-1.2
4.6
Imports (% y/y)
-5.5
15.4
24.4
-7.3
-6.6
5.6
223.3
265.9
318.1
239.5
209.7
268.1
78.0
112.0
113.0
108.7
106.0
108.0
12.1
24.4
11.0
10.0
15.0
18.6
Activity
Real GDP (% y/y)
CA (% GDP)
5.4
9.2
3.5
4.2
7.1
6.9
27.1
46.0
38.0
35.0
38.8
40.5
73.9
97.2
100.4
102.5
107.9
110.8
30.3
29.9
29.9
21.5
20.5
21.2
-12.2
-11.6
-19.6
-16.2
-7.2
-8.9
-10.3
-11.6
-16.6
-13.5
-6.2
-8.4
-8.5
-9.4
-13.7
-10.4
-3.6
-6.1
43.1
48.2
50.8
63.8
70.0
56.9
Public Sector
7.0
8.4
11.6
21.6
32.2
22.5
16.5
16.6
14.5
21.0
25.7
25.6
CPI (% Dec/Dec)
27.2
28.5
20.1
56.2
59.5
40.8
4.30
4.30
4.30
6.30
6.30
6.30
4.49
5.11
5.16
9.75
18.23
20.54
1y ago
Last
13Q4F
14Q1F
14Q2F
14Q3F
Prices
5.5
1.1
0.1
-0.3
-3.5
-2.5
4.30
6.30
6.30
6.30
6.30
6.30
* Includes central government, PDVSA and Chinese Fund estimated using the average weighted exchange rate. ** Includes Chinese Fund repayments
Source: MF, BCV, INE, Haver, Barclays Research
25 March 2014
189
PR China
GDP at
PPP
(20032013)
2013
population
(USD bn)
(mn)
9,264
1,361
6,808
9,828
15.4
274
38,056
52,687
0.4
Taiwan
2013
GDP
Real GDP
2013
GDP
2013
GDP
2013
Share
of world
growth
2013
2014
Inflation Inflation
Target
Inflation Target
Sovereign credit
rating
(20032013)
(%)
(%)
10.2
2.9
3.5
3.5
Aa3
AA-
A+
4.4
2.1
Aa1
AAA
AA+
A+
2013
2013
Gross Gross
2013 External Public
Reserves Debt
Debt
(USD
bn)
2013
Saving
Rate
2013
Openness
((X+M)/GDP)
(%
GDP)
(%
GDP)
(%
GDP)
3,821
35
51
45
311
414
29
467
488
23
20,855
39,580
1.1
3.9
1.2
Aa3
AA-u
402
29
36
30
118
1,863
1,202
1,550
3,991
5.7
7.7
6.6
Baa3
BBB- BBB-
294
23
64
31
55
Indonesia
864
250
3,455
5,182
1.5
5.7
7.1
Baa3
BB+
BBB-
99
31
27
31
42
Malaysia
312
29
10,638
17,526
0.6
5.1
2.4
A3
A-
A-
135
37
55
31
157
Philippines
271
100
2,719
4,660
0.5
5.4
4.5
3-5%
3-5%
Baa3
BBB- BBB-
83
22
53
21
43
Singapore
295
54,630
62,428
0.4
6.1
2.5
Aaa
AAA AAA
273
414
105
45
272
1,202
50
24,040
33,156
1.9
3.6
2.9
2.5-3.5% 2.5-3.5%
Aa3
AA-
346
35
37
31
90
384
65
5,953
9,888
0.8
4.2
3.0
0.5-3.0% 0.5-3.0%
Baa1
BBB+ BBB+
167
36
46
30
144
15,217
3,092
4,921
12,570
28.4
8.3
3.8
India
South Korea
Thailand
Emerging Asia
3.5-5.5% 3.5-5.5%
A+
5,932
Hungary
130
10
13,131
19,836
0.2
0.3
4.9
Poland
516
39
13,403
21,118
0.9
4.0
2.7
3% (2-4%)
Ba1
BB
BB+
47
109
79
20
156
1.5-3.5% 1.5-3.5%
3%
A2
A-
A-
106
74
50
16
Ukraine
182
45
4,044
7,422
0.4
3.3
9.9
77
Caa2
CCC
CCC
18
77
41
13
Russia
2,134
143
14,923
18,083
3.0
4.4
9.9
5-6%
86
5%
Baa1
BBB
BBB
506
34
10
29
43
Turkey
822
77
10,675
15,264
1.3
4.9
9.9
Israel
292
35,828
34,876
0.3
4.1
2.0
5.0%
5.0%
Baa3
BB+
BBB-
111
46
35
13
49
1-3%
1-3%
A1
A+
82
34
68
18
52
Egypt
288
85
3,388
6,487
0.6
4.4
9.6
Caa1
B-
B-
17
17
88
12
29
South Africa
351
53
6,625
11,525
0.7
3.4
5.6
3-6%
3-6%
Baa1
BBB
BBB
50
38
43
14
65
4,715
460
10260
16587
7.5
4.2
8.1
432
41
10,554
18,582
0.9
5.4
16.7
Caa1
43
32
43
23
34
Brazil
2,217
198
11,197
12,118
2.8
3.5
5.5
4.5%
4.5%
Baa2
BBB-
BBB
359
14
57
14
22
Chile
277
18
15,787
19,105
0.4
4.7
3.4
3%
3%
Aa3
AA-
A+
40
47
12
24
55
Emerging EMEA
Argentina
Colombia
937
CCC+u CC
377
46
8,192
11,088
0.6
4.8
4.1
3%
3%
Baa3
BBB
BBB-
44
23
40
20
31
1,186
115
10,322
15,608
2.1
2.5
4.3
3%
3%
A3
BBB
BBB+
177
30
39
20
67
Peru
211
31
6,747
11,149
0.4
6.6
2.9
2%
2%
Baa2
BBB+ BBB+
67
31
21
24
40
Uruguay
50
14,141
16,588
0.1
5.2
8.5
4-6%
3-7%
Baa3
BBB- BBB-
13
32
56
18
54
Venezuela
239
30
7,990
13,586
0.5
5.7
25.6
Caa1
22
43
64
20
59
4,990
482
10,348
14,028
7.7
3.9
7.3
764
24,922
4,034
6,178
13,519
43.6
6.8
5.2
7,634
Mexico
Latin America
Emerging Markets
B-
B+
25 March 2014
190
Real GDP
Consumer prices
Consumer prices
% annual change
% annual change
Global
100.0
3.5
2.8
2.9
4.0
4.1
2.9
3.4
3.8
2.6
3.1
3.1
3.2
2.6
3.0
3.1
Advanced
Emerging
BRIC
51.4
48.6
30.9
1.9
5.2
6.0
2.2
3.5
3.9
1.6
4.4
4.7
2.2
5.8
7.0
2.2
6.1
7.0
1.2
4.8
5.8
2.1
4.7
5.6
2.1
5.4
6.1
1.2
5.1
3.7
1.7
5.5
3.9
1.6
5.5
4.1
1.8
5.6
4.4
1.3
4.9
4.2
1.6
5.4
4.0
1.8
5.3
4.4
Americas
United States
Canada
33.0
22.2
2.0
2.2
2.4
2.0
2.2
2.5
2.0
2.5
2.5
2.0
2.7
2.5
2.5
2.8
2.5
2.5
2.0
1.9
1.7
2.5
2.7
2.2
2.8
2.6
2.5
3.5
1.4
1.2
3.8
1.6
1.6
3.9
1.7
1.6
4.1
2.0
1.7
3.1
1.5
0.9
3.8
1.7
1.5
3.9
2.1
1.9
Latin America
Argentina
8.8
1.0
1.8
-0.8
1.2
-4.4
2.4
-4.1
3.5
1.1
3.6
4.0
2.3
3.1
2.1
-1.5
3.5
4.4
11.2
33.2
11.7
37.7
12.0
39.0
11.7
39.0
9.2
26.9
11.6
37.4
10.3
38.2
Brazil
Chile
Colombia
3.2
0.4
0.7
2.8
-0.3
6.2
1.2
8.2
4.0
2.4
2.0
4.4
2.4
8.2
4.0
2.4
1.2
4.3
2.3
4.1
4.2
1.9
4.2
4.8
2.4
4.7
4.4
5.7
3.3
3.0
5.6
4.0
3.0
6.1
3.7
2.8
6.2
3.2
3.0
6.2
1.8
2.1
5.9
3.6
3.0
5.9
3.0
3.0
Mexico
Peru
Venezuela
2.5
0.5
0.5
0.7
6.4
-2.6
2.5
3.9
-5.3
5.5
4.4
-3.6
4.7
6.1
1.7
4.5
8.1
2.7
1.1
5.0
1.1
3.0
5.1
-1.8
3.8
5.7
3.0
4.2
3.4
59.3
3.5
3.1
63.0
3.8
2.3
62.7
3.8
2.5
58.0
3.8
2.8
40.6
3.8
2.5
60.7
3.7
2.5
43.0
40.1
6.2
5.5
0.7
4.3
3.1
4.1
-3.0
6.3
1.6
6.6
1.9
5.3
1.5
5.2
1.0
5.7
1.2
2.5
1.3
3.2
3.3
3.2
3.3
3.3
3.3
2.4
0.4
3.1
2.8
3.3
2.3
1.3
32.6
17.6
3.2
6.4
7.0
2.5
4.6
4.9
2.1
5.5
7.4
2.5
7.3
8.5
3.1
7.6
8.7
2.4
6.1
7.7
2.6
6.1
7.2
3.5
6.6
7.4
3.2
2.9
2.3
3.5
3.2
2.5
2.7
3.2
2.8
2.5
3.4
3.3
2.4
3.1
2.6
3.0
3.2
2.7
2.8
3.7
3.5
Hong Kong
India
0.5
6.6
4.4
6.0
3.3
5.3
2.9
1.2
4.0
8.2
4.2
7.8
2.9
4.6
3.4
5.3
3.8
6.4
4.4
5.2
4.2
6.0
3.7
5.4
3.7
5.0
4.3
6.3
4.0
5.4
4.1
5.6
Indonesia
South Korea
Malaysia
1.7
2.2
0.7
6.8
3.7
8.6
4.1
3.6
4.0
4.7
4.9
4.0
5.4
4.1
4.0
7.9
3.2
5.5
5.8
2.8
4.7
5.3
4.1
5.4
5.6
4.2
5.3
7.7
1.1
3.2
6.9
1.7
3.3
5.0
2.4
3.3
5.3
2.9
3.0
6.4
1.3
2.1
6.2
2.0
3.2
5.3
2.3
3.5
Philippines
Singapore
Taiwan
0.6
0.4
1.2
5.0
6.1
7.3
8.6
-0.4
2.8
8.9
4.9
5.3
4.0
1.6
3.6
6.1
7.0
3.2
7.2
4.0
2.1
6.5
3.5
4.0
6.5
3.4
4.5
4.1
0.9
0.7
4.6
2.8
1.0
4.5
2.4
0.9
3.8
2.0
1.0
2.9
2.4
0.8
4.3
2.0
0.9
3.5
2.4
1.8
Thailand
Europe and Africa
0.9
26.9
3.9
2.1
0.0
1.5
3.5
1.7
5.0
1.9
6.0
1.9
2.9
0.6
3.0
1.6
4.0
1.9
2.0
1.8
2.6
2.1
2.7
2.0
2.5
2.1
2.2
2.3
2.4
2.0
2.5
2.1
Euro area
Belgium
France
14.9
0.6
3.0
1.1
2.0
1.2
1.4
1.2
0.7
1.7
1.3
1.6
1.8
1.6
1.5
1.7
1.7
1.2
-0.4
0.2
0.3
1.3
1.4
1.1
1.5
1.6
1.5
0.7
1.0
0.9
1.0
1.0
1.3
0.9
1.1
1.2
1.0
1.2
1.3
1.4
1.2
1.0
0.9
1.1
1.2
1.1
1.6
1.3
Germany
Greece
Ireland
4.3
0.4
0.3
1.5
-7.9
-9.0
2.1
3.8
4.3
2.3
4.1
4.3
2.3
3.3
3.5
2.0
2.2
3.3
0.5
-3.7
-0.6
2.0
0.7
1.7
1.6
2.1
2.6
1.0
-1.1
0.2
1.2
-1.1
0.2
1.2
-0.9
0.5
1.4
-0.9
0.8
1.6
-0.9
0.5
1.2
-1.0
0.4
1.9
-1.0
1.5
Italy
Netherlands
2.4
0.9
0.5
2.8
1.0
0.5
1.2
0.4
1.6
0.8
1.6
1.0
-1.9
-0.8
0.8
1.1
1.0
1.2
0.5
0.5
0.6
0.6
0.5
0.4
0.6
0.5
1.3
2.6
0.5
0.5
0.7
0.2
Portugal
Spain
United Kingdom
0.3
1.9
3.2
2.5
0.7
2.9
0.5
1.8
2.5
0.2
1.4
2.4
0.6
1.6
2.5
0.6
1.8
2.3
-1.4
-1.2
1.8
1.1
1.2
2.7
1.3
1.7
2.5
-0.1
0.1
1.7
0.1
0.4
1.8
-0.1
0.0
1.6
-0.2
0.1
1.6
0.4
1.5
2.6
-0.1
0.2
1.7
-0.4
0.0
1.9
Switzerland
Sweden
Norway (mainland)
0.5
0.5
0.4
0.6
6.9
2.4
1.8
1.0
2.6
1.8
2.6
2.4
1.8
2.3
2.4
1.8
2.4
2.4
2.0
1.5
2.1
1.7
2.8
2.3
1.7
2.5
2.6
-0.1
-0.1
2.2
0.0
0.4
2.3
0.2
0.5
2.4
0.4
1.1
2.5
-0.2
-0.1
2.1
0.1
0.5
2.4
0.5
1.9
2.5
Denmark
EM Europe & Africa
0.3
7.2
-2.0
3.6
2.0
1.0
2.0
1.5
2.0
1.9
2.0
2.2
0.4
2.1
1.3
1.6
2.2
2.4
0.9
5.5
1.1
6.0
1.3
6.0
1.4
6.0
0.7
5.7
1.2
5.9
1.6
5.3
Poland
Russia
Turkey
1.1
3.4
1.5
2.4
3.4
4.7
3.4
-1.3
3.8
3.3
-0.1
3.3
3.4
0.8
2.9
3.4
1.0
3.5
1.6
1.3
3.9
3.1
0.7
2.2
3.5
1.4
3.5
0.9
6.2
7.9
1.1
6.7
8.6
0.8
7.0
7.8
1.1
6.8
8.1
1.0
6.8
7.5
1.1
6.7
8.1
2.0
5.7
6.9
Israel
South Africa
0.4
0.8
2.7
3.8
3.0
1.7
3.0
1.5
3.0
2.0
3.1
3.0
3.2
1.9
2.9
2.2
3.3
2.8
1.3
5.9
1.4
6.5
1.3
6.7
1.6
7.0
1.6
5.8
1.4
6.5
2.1
6.0
Asia/Pacific
Japan
Australia
Emerging Asia
China
Note Weights used for real GDP are based on IMF PPP-based GDP, and weights used for consumer prices are based on IMF nominal GDP (5yr centered moving
average). (*) IMF PPP-based GDP weights for 2013. Source: Barclays Research
25 March 2014
191
2010
2011
2012
2013F
2014F
2015F
2010
2011
2012
2013F
2014F
0.2
-0.1
-0.1
0.0
0.3
0.3
-6.7
-5.4
-5.0
-4.1
-3.4
2015F
-3.0
-0.6
-0.7
-0.6
-0.3
0.0
-0.1
-8.4
-7.1
-6.4
-5.0
-3.9
-3.3
Emerging
1.9
1.0
0.7
0.5
0.8
0.9
-3.0
-2.2
-2.4
-2.5
-2.6
-2.5
BRIC
2.0
0.9
0.8
0.5
0.8
1.1
-3.0
-2.1
-2.3
-2.5
-2.7
-2.7
Americas
United States
Canada
Latin America
-2.5
-2.4
-2.5
-2.4
-2.1
-2.0
-9.6
-8.4
-7.4
-5.3
-4.2
-3.7
-3.0
-2.9
-2.7
-2.2
-2.0
-2.0
-12.2
-10.7
-9.3
-6.2
-4.6
-4.0
-3.5
-2.8
-3.4
-3.3
-2.9
-2.7
-3.4
-2.7
-2.5
-2.4
-2.2
-2.0
-0.6
-0.7
-1.5
-2.4
-2.0
-1.7
-2.9
-2.8
-3.0
-3.4
-3.6
-3.2
Argentina
3.8
2.1
1.7
-0.6
1.7
-0.1
-1.8
-2.8
-3.3
-4.8
-4.6
-3.2
Brazil
-2.2
-2.1
-2.4
-3.7
-3.3
-2.5
-2.5
-2.6
-2.5
-3.3
-3.9
-3.5
Chile
1.6
-1.2
-3.4
-3.4
-3.0
-2.1
-0.4
1.5
0.6
0.4
-0.9
-0.5
Colombia
-3.1
-2.9
-3.2
-3.2
-3.6
-3.5
-3.3
-1.8
0.4
-1.4
-0.6
-0.6
-3.1
Mexico
-0.3
-1.1
-1.2
-1.8
-2.7
-2.2
-2.8
-2.4
-2.6
-2.3
-3.5
Peru
-2.4
-1.9
-3.3
-4.8
-4.5
-4.1
-0.5
2.0
2.1
0.8
0.3
0.5
Venezuela
5.4
9.2
3.4
3.9
6.8
7.0
-10.3
-11.6
-16.6
-13.5
-8.0
-9.8
Asia/Pacific
3.1
1.7
1.2
1.4
1.3
1.2
-4.4
-4.2
-4.5
-4.3
-3.8
-3.4
Japan
3.7
2.0
1.0
0.7
0.1
0.3
-8.3
-8.9
-9.9
-10.0
-8.0
-6.9
Australia
-3.5
-2.8
-4.1
-2.9
-3.2
-3.6
-4.2
-3.4
-2.9
-1.2
-2.7
-1.8
Emerging Asia
3.5
2.1
1.8
2.1
2.1
1.9
-2.5
-2.2
-2.4
-2.5
-2.5
-2.4
-2.1
China
4.0
1.9
2.3
2.0
1.9
2.0
-1.7
-1.1
-1.7
-1.9
-2.2
Hong Kong
7.0
5.6
1.6
2.1
3.3
4.1
4.1
3.8
3.2
0.6
1.0
1.0
India
-3.2
-3.4
-5.0
-2.6
-2.3
-2.8
-8.1
-8.1
-7.4
-7.2
-7.0
-7.0
Indonesia
0.7
0.2
-2.8
-3.3
-2.5
-1.9
-0.7
-1.1
-1.8
-2.3
-2.1
-2.0
South Korea
2.9
2.3
4.3
5.9
4.9
4.4
-1.6
-1.6
-2.1
-2.0
-1.0
-0.5
Malaysia
10.9
11.6
6.1
3.8
3.7
3.0
-5.6
-4.8
-4.5
-3.9
-3.5
-3.0
Philippines
4.3
3.1
2.8
3.9
3.2
2.7
-3.5
-2.0
-2.3
-1.4
-2.1
-2.0
Singapore
25.3
23.2
17.4
18.4
16.5
14.5
0.3
1.2
1.1
1.1
-0.3
0.4
Taiwan
9.3
9.0
10.7
10.4
10.0
9.0
-3.3
-2.2
-2.5
-2.0
-1.0
-1.0
-1.5
Thailand
3.1
1.2
-0.4
-0.7
0.6
0.5
-0.8
-2.7
-2.8
-2.5
-2.2
0.7
0.6
1.2
1.2
1.9
1.9
-5.6
-3.4
-2.9
-2.5
-2.2
-1.9
Euro area
0.0
0.1
1.4
1.7
2.5
2.4
-6.2
-4.2
-3.7
-3.1
-2.5
-2.1
Belgium
1.9
-1.1
-2.0
-2.7
-0.5
-0.9
-3.7
-3.7
-4.0
-2.7
-2.4
-1.5
France
-1.4
-1.7
-2.2
-2.1
-2.2
-2.2
-7.1
-5.3
-4.8
-4.0
-3.7
-3.2
Germany
6.1
6.2
7.1
7.4
7.4
6.9
-4.2
-0.8
0.1
0.0
-0.2
-0.2
Greece
-9.8
-9.5
-2.3
1.3
3.7
4.3
-10.7
-9.5
-9.0
-12.9
-1.8
-0.8
Ireland
1.1
1.2
4.4
5.8
3.2
3.1
-30.6
-13.1
-8.2
-7.3
-4.8
-3.0
Italy
-3.6
-3.1
-0.5
0.1
1.5
1.9
-4.5
-3.8
-3.0
-3.0
-2.7
-2.4
Netherlands
Portugal
7.4
9.5
9.4
10.2
9.6
8.3
-5.1
-4.3
-4.1
-3.1
-2.8
-2.5
-10.6
-7.0
-2.0
0.3
0.9
1.6
-9.8
-4.3
-6.4
-4.5
-4.2
-4.1
Spain
-4.5
-3.8
-1.1
-0.2
1.5
2.0
-9.6
-9.6
-10.6
-7.0
-5.8
-4.9
United Kingdom
-2.7
-1.5
-3.7
-3.7
-3.5
-3.5
-10.2
-7.8
-6.1
-5.7
-5.2
-4.2
Switzerland
14.7
9.0
11.2
10.5
10.1
9.8
0.8
0.8
0.7
0.7
1.0
1.2
Sweden
6.9
7.3
6.5
6.2
6.0
5.8
0.0
0.2
-0.5
-1.1
-1.6
-1.0
12.0
Norway
12.4
12.8
14.3
12.8
12.5
12.5
12.2
13.3
14.7
12.0
12.0
Denmark
5.9
5.6
6.0
7.0
6.8
6.6
-2.5
-1.8
-3.9
-0.5
-1.4
-2.9
0.1
-0.3
-0.4
-1.3
-0.2
0.4
-4.6
-1.2
-1.6
-1.6
-1.7
-1.9
Poland
-5.2
-5.1
-3.5
-1.3
-1.2
-1.1
-7.9
-5.0
-3.9
-4.4
-3.7
-3.0
Russia
4.4
5.1
3.6
1.5
2.7
3.9
-3.9
0.7
-0.1
-0.5
0.1
-0.5
Turkey
-6.2
-9.7
-6.2
-7.8
-5.7
-6.0
-3.6
-1.4
-2.0
-1.2
-2.2
-2.1
Israel
3.1
1.3
0.3
2.5
2.9
3.0
-3.5
-3.1
-3.9
-3.1
-3.0
-2.7
South Africa *
-2.0
-2.3
-5.2
-5.8
-5.8
-5.3
-6.5
-4.3
-3.7
-4.3
-4.0
-4.0
Note: Weights used are based on IMF nominal GDP (5yr centered moving average). (*) South Africa Government balance (% GDP) is a consolidated budget figure
representing financial years (i.e., FY 09/10 = 2010). Source: Barclays Research
25 March 2014
192
Forecasts
Current
Date
Level
Last move
Next move
expected
0-0.25
Easing: 17 Sep 07
5.25
Dec 08 (-75-100)
Jun 15
0.10
Easing: 30 Oct 08
0.50
Oct 10 (0-10)
H2 2018 (+20)
0.25
Easing: 3 Nov 11
1.50
Nov 13 (-25)
0.25
0.25
0.25
0.25
0.00
Easing: 3 Nov 11
0.75
Jul 13 (-25)
0.00
0.00
0.00
0.00
0.50
Easing: 6 Dec 07
5.75
Mar 09 (-50)
Q2 15 (+25)
0.50
0.50
0.50
0.50
2.50
Easing: 1 Nov 11
4.75
Aug 13 (-25)
Q1 15 (+25)
2.50
2.50
2.50
2.50
2.75
Tightening: 13 Mar 14
2.50
Mar 14 (+25)
Q2 2014 (+25)
2.75
3.00
3.25
3.50
0-0.25
Easing: 8 Oct 08
2.75
Aug 11 (-25)
Beyond Q4 14
0.25
0.25
0.25
0.25
Norges Bank
1.50
Easing: 14 Dec 11
2.25
Mar 12 (-25)
Beyond Q4 14
1.50
1.50
1.50
1.50
Riksbank
1.00
Easing: 20 Dec 11
2.00
Dec 13 (-25)
Q4 14 (+25)
0.75
0.75
0.75
1.00
Bank of Canada
1.00
Tightening: 1 Jun 10
0.25
Sep 10 (+25)
Q1 15 (+25)
1.00
1.00
1.00
1.00
6.00
Easing: 7 Jun 12
6.56
Jul 12 (-31)
Beyond Q4 14
6.00
6.00
6.00
6.00
0.50
Easing: 19 Sep 07
6.75
Dec 08 (-100)
Beyond Q4 14
0.50
0.50
0.50
0.50
8.00
Tightening: 20 Sep 13
7.25
Jan 14 (+25)
Q3 14 (-25)
8.00
8.00
7.75
7.50
7.50
Tightening: 13 Jun 13
5.75
Nov 13 (+25)
Q1 15 (-25)
7.50
7.50
7.50
7.50
2.50
Easing: 12 Jul 12
3.25
May 13 (-25)
Q3 14 (+25)
2.50
2.50
2.75
2.75
3.00
Tightening: 4 Mar 10
2.00
May 11 (+25)
May 14 (+25)
3.00
3.25
3.50
3.50
3.50
Easing: 19 Jan 12
4.50
Oct 12 (-25)
Q2 14 (+25)
3.50
3.75
4.00
4.00
1.875
Tightening: 24 Jun 10
1.380
Jun 11 (+12.5)
Q3 14 (+12.5)
1.875
1.875
2.000
2.125
2.00
Easing: 30 Nov 11
3.50
Mar 14 (-25)
Q1 15 (+25)
2.00
2.00
2.00
2.00
Q1 14 Q2 14 Q3 14 Q4 14
Advanced
Fed funds rate
Emerging Asia
0.05
Easing: 8 Aug 08
3.70
Nov 12 (-20)
Beyond Q4 14
0.05
0.05
0.05
0.05
2.70
Easing: 28 Aug 12
7.00
Feb 14 (-15)
Mar 14 (-10)
2.60
2.50
2.50
2.50
2.50
Easing: 7 Nov 12
4.75
Jul 13 (-25)
Q1 15 (+25)
2.50
2.50
2.50
2.50
3.50
Easing: 4 Feb 08
10.25
Feb 14 (-25)
Beyond Q4 14
3.50
3.50
3.50
3.50
7.00
Tightening: 13 Sep 12
5.25
Mar 14 (+150)
Q2 14 (+100)
7.00
8.00
8.00
8.00
5.50
Tightening: 29 Jan 14
5.00
Jan 14 (+50)
Mar 14 (+50)
6.00
6.00
6.50
6.50
10.00
Tightening: 28 Jan 14
4.50
Jan 14 (+550)
Beyond Q4 14
10.00
10.00
10.00
10.00
12.00
Tightening: 24 Jul 13
6.50
Jan 14 (+425)
Beyond Q4 14
12.00
12.00
12.00
12.00
8.25
Easing: 1 Aug 13
9.75
Dec 13 (-50)
Beyond Q4 14
8.25
8.25
8.25
8.25
0.75
Easing: 26 Sep 11
3.25
Feb 14 (-25)
Beyond Q4 14
0.75
0.75
0.75
0.75
10.75
Tightening: 17 Apr 13
7.25
Feb 14 (+25)
Apr 14 (+25)
10.75
11.00
11.00
11.00
4.00
Easing: 12 January 12
5.25
Mar 14 (-25)
Beyond Q4 14
4.00
4.00
4.00
4.00
3.25
Easing: 27 Jul 12
5.25
Mar 13 (-50)
Jul 14 (+25)
3.25
3.25
4.00
4.75
3.50
Easing: 16 Jan 09
8.25
Oct 13 (-25)
Q1 15 (+25)
3.50
3.50
3.50
3.50
4.00
Easing: 7 Nov 13
4..25
Nov 13 (-25)
Beyond Q4 14
4.00
4.00
4.00
4.00
Latin America
Brazil: SELIC rate
Note: *The Central Bank of Turkey has indicated that liquidity will be provided primarily from the 1-week repo rate instead of O/N lending rate in the forthcoming
period. Source: Barclays Research
25 March 2014
193
Spot
1m
3m
6m
1y
1m
3m
6m
1y
EUR/USD
1.38
1.38
1.35
1.30
1.27
0.2%
-2.0%
-5.6%
-7.8%
USD/JPY
102
103
105
105
105
0.6%
2.6%
2.6%
2.8%
GBP/USD
1.65
1.64
1.63
1.65
1.65
-0.5%
-1.4%
-0.2%
0.2%
USD/CHF
0.89
0.89
0.92
0.96
1.00
0.7%
3.8%
8.8%
13.4%
USD/CAD
1.13
1.12
1.13
1.14
1.16
-0.7%
0.1%
0.7%
2.1%
AUD/USD
0.90
0.89
0.88
0.87
0.85
-1.1%
-1.8%
-2.3%
-3.3%
NZD/USD
0.85
0.85
0.85
0.83
0.82
-0.1%
0.4%
-1.1%
-0.5%
USD/CNY
6.23
6.20
6.15
6.08
6.05
0.5%
-0.7%
-2.1%
-3.1%
USD/HKD
7.76
7.77
7.77
7.77
7.77
0.1%
0.1%
0.1%
0.1%
USD/INR
61.33
59.00
61.00
61.00
61.00
-4.6%
-2.5%
-4.3%
-7.5%
USDIDR
11,446
11,400
11,400
11,300
11,200
-1.2%
-2.3%
-4.9%
-8.8%
USD/KRW
1,076
1,070
1,060
1,050
1,050
-1.2%
-2.5%
-3.8%
-4.4%
USD/LKR
131
133
133
134
134
1.6%
1.1%
0.2%
-0.9%
USD/MYR
3.30
3.26
3.24
3.20
3.20
-2.0%
-3.0%
-4.7%
-5.6%
USD/PHP
45
44.50
44.00
44.00
44.00
-1.9%
-3.2%
-3.4%
-3.8%
G7 countries
Emerging Asia
USD/SGD
1.28
1.27
1.28
1.27
1.27
-0.5%
-0.1%
-0.5%
-0.5%
USD/THB
32.42
32.50
33.00
32.50
32.00
0.0%
1.3%
-0.9%
-3.3%
USD/TWD
30.54
30.50
30.00
30.00
30.00
-0.6%
-2.1%
-1.9%
-1.6%
USD/VND
21,098
21,200
21,250
21,300
21,500
-0.7%
-1.5%
-2.2%
-4.1%
USD/ARS
7.95
8.14
8.59
9.30
10.88
1.1%
1.7%
-0.5%
-4.1%
USD/BRL
2.35
2.35
2.40
2.45
2.50
-0.9%
-0.4%
-0.8%
-3.3%
USD/CLP
571
570
565
560
560
-0.4%
-1.9%
-3.5%
-4.9%
USD/MXN
13.29
13.22
13.20
13.15
12.95
-0.8%
-1.4%
-2.5%
-5.3%
USD/COP
2,010
2,030
2,020
2,015
2,000
1.1%
0.1%
-0.9%
-3.5%
USD/PEN
2.81
2.81
2.82
2.83
2.85
-0.6%
-1.1%
-2.0%
-3.3%
EUR/CZK
27.49
27.50
27.50
27.50
27.50
0.1%
0.1%
0.2%
0.4%
EUR/HUF
312
310
315
315
315
-0.9%
0.4%
-0.1%
-1.2%
EUR/PLN
4.21
4.15
4.15
4.10
4.10
-1.5%
-1.9%
-3.6%
-4.7%
EUR/RON
4.49
4.45
4.45
4.40
4.40
-1.1%
-1.5%
-3.3%
-4.6%
USD/RUB
36.06
36.50
38.00
39.00
40.00
0.5%
3.1%
3.6%
2.1%
BSK/RUB
42.19
42.74
43.99
44.27
44.86
0.6%
2.0%
0.5%
-2.1%
USD/TRY
2.24
2.25
2.30
2.35
2.35
-0.5%
-0.3%
-0.9%
-6.2%
USD/ILS
3.48
3.45
3.45
3.40
3.40
-1.0%
-1.0%
-2.5%
-2.5%
USD/EGP
6.96
6.88
6.96
6.97
6.88
-1.6%
-1.7%
-4.2%
-11.6%
Latin America
EEMEA
Sub-Saharan Africa
USD/GHS
2.69
2.65
2.75
2.80
2.90
2.7%
6.6%
8.5%
12.4%
USD/KES
86.45
87.00
87.20
88.50
90.00
0.1%
-0.5%
-0.6%
-3.4%
USD/NGN
165
159
168
170
172
-4.6%
-1.6%
-4.1%
-9.3%
USD/UGX
2,545
2,550
2,600
2,630
2,700
-0.6%
-0.1%
-1.6%
-3.2%
USD/ZAR
10.95
11.00
11.50
12.00
11.80
0.0%
3.5%
6.3%
0.9%
USD/ZMW
6.33
6.23
6.18
6.22
6.50
-3.6%
-6.6%
-9.2%
-11.2%
25 March 2014
194
Asia Pacific
David Fernandez
Head of FICC Research, Asia Pacific
+65 6308 3518
david.fernandez@barclays.com
Economics
Rahul Bajoria
Economist - India, Malaysia, Thailand
+65 6308 3511
rahul.bajoria@barclays.com
Jian Chang
Chief China Economist
+852 2903 2654
jian.chang@barclays.com
Kieran Davies
Economist - Australia, New Zealand
+61 2 933 46164
kieran.davies@barclays.com
Bill Diviney
Regional Economist
+65 6308 3607
bill.diviney@barclays.com
Wai Ho Leong
Senior Economist - Korea, Singapore,
Taiwan
+65 6308 3292
waiho.leong@barclays.com
Jerry Peng
Economist - China, Hong Kong
+852 2903 3291
jerry.peng@barclays.com
Siddhartha Sanyal
Chief Economist - India
+91 22 6719 6177
siddhartha.sanyal@barclays.com
Prakriti Sofat
Senior Economist - Indonesia,
Philippines, Sri Lanka, Vietnam
+65 6308 3201
prakriti.sofat@barclays.com
Serena Zhou
Economist - China, Hong Kong
+852 2903 2653
serena.zhou@barclays.com
Hamish Pepper
Strategist - FX
+65 6308 2220
hamish.pepper@barclays.com
Christina Chiow
Chinese Real Estate; High Grade
Industrials
+65 6308 3214
christina.chiow@barclays.com
Lyris Koh
Financial Institutions
+65 6308 3595
lyris.koh@barclays.com
Justin Ong
High Grade Industrials;
Oil & Gas and Utilities
+65 6308 2155
justin.ong@barclays.com
Avanti Save
Credit Strategy
+65 6308 3116
avanti.save@barclays.com
Eugene Tham
Associate
+65 6308 3180
eugene.x.tham@barclays.com
Abhilash Narayan
Associate
+65 6308 2192
abhilash.xb.narayan@barclays.com
Marcelo Salomon
Co-head LatAm Research
Brazil
+1 212 412 5717
marcelo.salomon@barclays.com
Marco Oviedo
Chief Economist - Mexico
+52 55 5241 3331
marco.oviedo@barclays.com
Sebastian Vargas
Chief Economist - Argentina, Uruguay
+1 212 412 6823
sebastian.vargas@barclays.com
Latin America
Economics
Alejandro Grisanti
Co-head LatAm Research
Venezuela
+1 212 412 5982
alejandro.grisanti@barclays.com
Alejandro Arreaza
Chief Economist - Colombia, Peru, CAC
+1 212 412 3021
alejandro.arreaza@barclays.com
Sebastian Brown
Strategist - FX; Economist - Chile
+1 212 412 6721
sebastian.brown@barclays.com
Bruno Rovai
Strategist - LatAm; Economist - Brazil
+55 11 3757 7772
bruno.rovai@barclays.com
Anibal Valdes
Financials
+1 212 412 3419
anibal.valdes@barclays.com
Aziz Sunderji
Corporate Credit Strategy LatAm/ EEMENA
+1 212 412 2218
aziz.sunderji@barclays.com
Eriko Miyazaki-Ross
Latin America, Corporate Credit Research
& Strategy
+1 212 412 3428
eriko.miyazaki-ross@barclays.com
25 March 2014
195
Durukal Gun
Strategist FX
+ 44 (0)20 313 46279
durukal.gun@barclays.com
Economics
Daniel Hewitt
Senior Economist - Russia, Poland,
Hungary, Israel
+44 (0)20 3134 3522
daniel.hewitt@barclays.com
Alia Moubayed
Senior Economist - MENA
+44 (0)20 313 41120
alia.moubayed@barclays.com
Eldar Vakhitov
Economist - Russia, Ukraine, CEE
+44 (0)20 777 32192
eldar.vakhitov@barclays.com
Svetla Atanasova
EEMEA Corporate Credit Research
Financials
+44 (0)20 313 44235
svetla.atanasova@barclays.com
Bayina Bashtaeva
EEMEA Corporate Credit Research
+44 20 7773 7428
bayina.bashtaeva@barclays.com
Stella Cridge
EEMEA Corporate Credit Research
CIS Corporates
+44 (0)20 313 49618
stella.cridge@barclays.com
Peter Worthington
Head of South Africa Research
+ 27 21 927 6611
peter.worthington@absacapital.com
Miyelani Maluleke
Economist South Africa
+27 11 895 5368
miyelani.maluleke@absacapital.com
Ridle Markus
Head of Sub Saharan Africa Economics
Research
+27 11 895 5374
ridle.markus@absacapital.com
Dumisani Ngwenya
Economist Sub Saharan Africa
+27 11 895 5346
dumisani.ngwenya@absacapital.com
25 March 2014
Judy Padayachee
Technical Strategy South Africa
+27 11 895 5350
judy.padayachee@absacapital.com
196
Analyst Certification
We, Koon Chow, Christian Keller, Andreas Kolbe, Bruno Rovai, Rahul Bajoria, David Fernandez, Wai Ho Leong, Daniel Hewitt, Eldar Vakhitov, Jeff Gable,
Ridle Markus, Peter Worthington, Alejandro Grisanti, Marcelo Salomon, Alia Moubayed, Rohit Arora, Jian Chang, Hamish Pepper, Jerry Peng, Siddhartha
Sanyal, Avanti Save, Prakriti Sofat, Bill Diviney, Dumisani Ngwenya, Bayina Bashtaeva, Durukal Gun, Michael Cohen, Helima L. Croft, Christopher Louney,
Mike Keenan, Donato Guarino, Sebastian Vargas, Sebastin Brown, Alejandro Arreaza and Marco Oviedo, hereby certify (1) that the views expressed in
this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no
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