Emerging Markets Briefer PBoC to the rescue!

Transcription

1 Investment Research General Market Conditions 24 November 2014 PBoC to the rescue! Last week the People s Bank of China (PBoC) cut its leading interest rates. The one-year benchmark deposit rate was cut by 25bp to 2.75% and the one-year benchmark lending rate was cut by 40bp to 5.6%. As the lending rates have largely been liberalised, the oneyear deposit rate is now the more important of the two benchmark interest rates. While it was clear that there was a slight easing bias in monetary policy in China, the interest rate cut was nonetheless a bit of a surprise. It suggests that China now has a more substantial easing bias in monetary policy and that the government s attempt to contain credit growth will be loosened somewhat in coming months. Hence, supporting growth now appears to be a higher priority. The implication of the interest rate cut is that Chinese growth has probably bottomed out and should start to improve in Q1 when investment demand and particularly the property market will start to rebound. The interest rate cut is particularly important for the property market where the 40bp cut in the benchmark lending rate is still important for mortgage interest rates. The growth outlook is definitely more positive for H1 15. However, we do not expect to see a sharp rebound in growth next year as the government will still be focused on managing financial risk and securing sustainable credit growth. Hence, the PBoC will continue to ease only cautiously and we do not expect it to cut rates further. In addition, China remains in a structural slowdown, which will continue to weigh on growth further ahead. The interest rate cut is extremely positive for risk sentiment and risky assets in general in financial markets and it is particularly positive for emerging markets and commodities. Hence, it should help commodity and Emerging Market currencies like the Brazilian real, Mexican peso, the South African rand and of course the Russian rouble. Contents Poland... 2 Czech Republic... 3 Hungary... 4 Romania... 5 Baltics... 6 Russia... 7 Ukraine... 8 Kazakhstan... 9 Turkey South Africa Brazil Mexico China Indonesia India Forecasts vs forwards Monetary policy calendar has been an extremely challenging year and at the centre of the troubles have been falling commodity prices and worries about Chinese growth. If the rate cut from the PBoC indeed signals a more dovish Chinese monetary policy stance going forward, that should give some support for Emerging in We certainly hope so! Chief Analyst Lars Christensen larch@danskebank.dk Important disclosures and certifications are contained from page 23 of this report.

2 Poland The outlook for the Polish economy has deteriorated recently. The economy is falling deeper and deeper into deflation and it has become even clearer that growth remains well under potential growth and that inflation is likely to remain well below the Polish central bank s official 2.5% inflation target in coming years unless bold monetary easing is undertaken. Weaker domestic demand and lower external demand due to the Ukrainian crisis and general weakness in the European economy are weighing on Polish growth. Monetary policy outlook Despite deflation in the Polish economy having deepened, the Polish central bank (NBP) has been very reluctant to cut interest rates, including at the latest monetary policy council meeting. Even though we continue to think the NBP will cut rates further in 2015, it is unlikely to move faster than currently expected by the markets. FX outlook While the deflationary situation in Poland warrants significant monetary easing, the NBP is not likely to act in the near term, in our view. This effectively means the NBP is keeping monetary policy too tight, which is giving some support to the zloty. With EUR/PLN close to fair value, we do not expect any major movement in the zloty in the next 12 months. Polish economy is in deflation Further slowdown in Q3 14 PLN S&P: A- (stable) Free float (freely convertible) Inflation target: 2.5% +/-1pp Macro forecasts GDP (% y/y) GDP deflator (% y/y) CPI (% y/y) Private consumption (% y/y) Fixed investments (% y/y) Unemployment (%) Current account (% of GDP) Interest rate forecast National Bank of Poland (NBP) Policy rate 2.00 Next meeting 03 December 2014 Next change - Unchanged, 2014 End Source: Danske Bank Source: Macrobond Financial Source: Macrobond Financial EUR/PLN 21-Nov M M M USD/PLN 21-Nov M M M Source: Danske Bank 2 24 November

3 Czech Republic Czech preliminary Q3 GDP showed 2.3% y/y growth, which was weaker than expected and lower versus 2.5% y/y in Q2 14. The economic recovery is clearly losing momentum. We maintain our GDP forecast at 2.6% y/y for 2014 and 2.7% y/y for Risks to our forecast are on the downside. The Czech central bank (CNB) has revised its GDP forecast down for this year and next. It now expects GDP growth of 2.5% this year and also in The ongoing slowdown in the eurozone and the global economy poses downside risks to further Czech recovery. Inflation in October remained unchanged at 0.7% y/y compared to September. It was somewhat lower compared to the Czech central bank s forecast of 0.8% y/y. Looking ahead, we expect headline inflation to stay below 1% for the remainder of this year, but after that it should accelerate above 1%. That said, we do not see inflation approaching the 2% inflation target next year; inflation should rather hover around 1% for most of next year. Both retail sales and industrial production continue to show decent growth. Retail sales in September accelerated to 6.2% y/y, up from 2.7% y/y in August. Industrial production accelerated to 8.3% y/y in September, up from a -5.2% y/y fall in August. Monetary policy outlook The CNB left its key policy rate at a technical zero of 0.05% and also kept the Czech koruna cap near 27/EUR in November. Although it said that the economy had begun to generate some inflationary pressures and that economic growth had been restarted, it revised its GDP growth forecast down for next year and also postponed the koruna cap exit into Q1 16 from Q3 15. Furthermore, the CNB said that having the CZK weaker than the cap helps to boost inflation and fuel growth. The CNB clearly signalled that it prefers CZK to be closer to 28.0/EUR than to the cap of 27/EUR. FX outlook The Czech koruna is hovering weaker than the CNB s koruna 27/EUR cap at around Despite the fairly balanced CNB inflation outlook, it acknowledges that a weaker CZK than the cap is helping to bring inflation to the target more quickly and also to fuel economic growth. The CNB is giving a clear signal that it prefers the EUR/CZK closer to However, the CNB also says that it is not discussing lifting the EUR/CZK floor. Hence, while we do not expect the CNB to raise the EUR/CZK floor, we expect it to talk the CZK weaker. Hence, we maintain our negative forecast on all forecast horizons versus the spot and market pricing. We maintain our EUR/CZK forecast at 28.0, 28.0 and 28.0 in three, six and 12 months. CZK S&P: AA- (stable) Free float (freely convertible) Inflation target: 2% +/-1pp Macro forecasts Interest rate forecast Source: Danske Bank Source: Danske Bank GDP (% y/y) GDP deflator (% y/y) CPI (% y/y) Private consumption (% y/y) Fixed investments (% y/y) Unemployment (%) Current account (% of GDP) Policy rate Czech National Bank (CNB) 0.05 Next meeting 07 Dec 2014 Next change - Unchanged 2014 End EUR/CZK 21-Nov M M M USD/CZK 21-Nov M M M November

4 Hungary Growth has been picking up in Hungary and after years of stagnation it is becoming one of the fastest growth economies in central and eastern Europe. However, structural problems and weak domestic demand continue to weigh on economic activity. We now expect real GDP growth to be 3.5% y/y in 2014 up from 1.2% y/y in We expect growth to remain at 3.5% y/y in Monetary policy outlook The Hungarian central bank (MNB) has been cutting interest rates in baby-steps. This has been justified, as there is actually now deflation in Hungary (despite higher growth) and there is certainly a risk of further deflation in coming months. However, we also stress that the fall in inflation reflects supply-side factors to a greater extent than in, for example, Poland and the Czech Republic and we therefore expect inflation to pick up somewhat over the coming year, which should push the MNB in a slightly more hawkish direction. FX outlook We continue to believe that Hungary s fairly strong external position is likely to be supportive for the HUF in the medium term, as will the increasingly stronger recovery in growth. As a consequence, we believe we could see the forint continuing to strengthen (moderately) on a three- to six-month horizon. HUF S&P: BB (stable) Free float (freely convertible) Inflation target: 3% (medium term) Macro forecasts GDP (% y/y) GDP deflator (% y/y) CPI (% y/y) Private consumption (% y/y) Fixed investments (% y/y) Unemployment (%) Current account (% of GDP) Deflation Growth remains decent Interest rate forecast Policy rate Hungarian Central Bank (MNB) 2.10 Next meeting 25 Nov 2014 Next change - Unchanged 2014 End Source: Danske Bank Source: Macrobond Financial Source: Macrobond Financial EUR/HUF 21-Nov M M M USD/HUF 21-Nov M M M Source: Danske Bank 4 24 November

5 Romania Preliminary Q3 GDP surprised on the upside with GDP growth of 3.2% y/y, up from the upwardly revised 1.4% y/y in Q2. We expect the Romanian economy to expand by 2.7% this year and by 3.2% y/y in Inflation had been on a downward path since the start of However, in September, it increased to 1.5% y/y and was 1.4% y/y in October, up compared to low levels due to the faded effect of last year s VAT rate cut. We expect inflation to fall further in the coming months. Economic indicators continue to be decent. Retail sales in September came out at 5.8% y/y. Industrial production in September expanded by 4.9% y/y. The current account deficit has narrowed considerably over the past two years. Looking ahead, we expect the current account deficit to remain sustainable. We expect a deficit of 1.5% of GDP in 2014 and 1.7% of GDP in Monetary policy outlook The Romania central bank (NBR) decided to cut the key policy rate by another 25bp in early November bringing it to 2.75%. Governor Isarescu left the door open for further easing, saying that the NBR still has room for manoeuvre. Looking ahead, the NBR is likely to ease monetary policy further. However, the NBR might cut minimum reserve requirements instead of the key policy rate in the coming months. FX outlook Due to Romania s improved external imbalances, the RON has become more resilient to external shocks. However, this did not protect the currency completely when the geopolitical risks in Ukraine intensified and all CEE currencies came under immediate pressure. However, as the geopolitical risks have receded recently, the RON has recovered. We think that the RON is almost at its fair value. We are somewhat more positive on the leu than market pricing. RON S&P: BBB- (stable) Free float (freely convertible) Inflation target: 2014: 2.5% +/-1pp Macro forecasts Interest rate forecast Source: Danske Bank GDP (% y/y) GDP deflator (% y/y) CPI (% y/y) Private consumption (% y/y) Fixed investments (% y/y) Unemployment (%) Current account (% of GDP) National Bank of Romania (NBR) Policy rate Next meeting Jan 2015 Next change - Unchnaged 2014 End EUR/RON 21-Nov M M M USD/RON 21-Nov M M M Source: Reuters EcoWin, Danske Bank 5 24 November

6 Baltics Geopolitical tension with Russia remains the greatest downside risk to the Baltic economies, as it affects not only export growth but also business and consumer sentiment. Nevertheless, sound growth prospects are expected for all three economies over the medium-term horizon. Estonia S&P: AA- (stable) Inflation remains between 0-1% in all three Baltic states, well below the ECB s target of 2%. However, if energy is excluded from the consumption basket, average 2014 inflation stands at 1.4% for Estonia, 1.2% for Latvia and 0.9% for Lithuania. Estonian macro outlook Just as in 2013, Estonian GDP growth is the slowest among the Baltic states in Having expanded by 0.8% in 2013, Estonian GDP grew by 1.4% y/y in H1 14. Flash estimates for Q3 released in November indicate growth of 2.3% y/y. While domestic demand is forecast to expand by 2.5% in 2014, net exports continue to be a drag on the Estonian economy. Weak growth in Finland and Russia is the biggest concern as exports to these markets contracted by 10% y/y and 9% y/y, respectively, in January-September On the other hand, the Russian embargo on European food products is going to have a minimal effect on the Estonian economy, as food items on the embargo list comprise just over 0.5% of Estonian total exports. Latvian macro outlook Having posted 4.1% growth in 2013, the Latvian economy is experiencing a slowdown in growth this year. Growth in H1 14 was 2.5% y/y, while the flash estimate for Q3 indicated growth of 2.2% y/y. While the Russian embargo on European food imports is not going to have a major direct impact on the Latvian economy (sanctioned food items account for 0.5% of Latvia s total exports), the geopolitical tension is having a strong effect on both consumer and business confidence in Latvia. As a result, both private consumption and fixed investment have so far expanded much more slowly than expected (3.6% and 0.5%, respectively) in We have revised our growth forecast for Latvia and expect growth to be 2.7% in 2014, 2.9% in 2015 and 3.1% in Lithuanian macro outlook At 3.1% y/y, Lithuania had the highest GDP growth rate among the Baltic states in H1 14. Its GDP growth slowed in Q3, reaching 2.6% y/y, and is set to converge towards our forecast of 2.9% for Russian food sanctions will hurt Lithuania more than any other EU country as food items under embargo account for two-thirds of all Lithuanian food exports to Russia and 3.8% of total exports. The trade deficit with Russia was dampened by record grain exports in September but will start weighing on growth in Q4 14 and into Currency: EUR since 1 January 2011 Latvia S&P: A- (stable) Currency: EUR since 1 January 2014 Lithuania S&P: A- (stable) Currency board, ERM2 member (freely convertible) EUR as of 1 January GDP (% y/y) 0,8 2,1 2,5 2,7 GDP deflator (% y/y) 4,3 2,1 1,3 1,4 CPI (% y/y) 3,2 0,5 1,9 2,1 Private consumption (% y/y) 4,8 3,6 2,5 2,6 Fixed investments (% y/y) 1,4 1,0 2,9 3,9 Unemployment (%) 8,6 7,5 7,6 7,6 Current account (% of GDP) -1,8-2,1-2,0-2, GDP (% y/y) 4,1 2,7 2,9 3,1 GDP deflator (% y/y) 1,4 1,3 1,4 1,5 CPI (% y/y) 0,0 0,6 1,6 2,3 Private consumption (% y/y) 6,2 3,9 3,4 3,6 Fixed investments (% y/y) -5,2 0,5 1,2 2,3 Unemployment (%) 11,9 11,1 11,1 11,0 Current account (% of GDP) -0,8-1,0-1,5-2,0 The big news in October was the arrival of the floating LNG terminal to the port of Klaipėda. With the capacity of 4 billion m 3 the terminal, named Independence, will cover 90% of the gas needs of the Baltic region (until now 100% dependent on gas imports from Russia) GDP (% y/y) 3,3 2,9 2,7 3,1 GDP deflator (% y/y) 2,2 1,1 1,3 1,3 CPI (% y/y) 1,2 0,1 1,3 2,0 Private consumption (% y/y) 4,8 3,5 2,8 3,0 Fixed investments (% y/y) 12,8 5,6 3,1 3,0 Unemployment (%) 11,8 11,3 11,2 11,1 Current account (% of GDP) 1,3 0,1-0,5-0, November

7 Russia Economic growth in Russia surprised on the positive side, expanding 0.7% y/y in Q3 14 according to the preliminary number, more than consensus (0.3%) versus 0.8% y/y in Q2 14. Yet, we believe the stronger-than-expected growth was due mostly to expansion in agricultural production and support from local food production, as the food import ban has halted the foreign supply. However, as local production is likely to reach capacity limits on surging demand for domestic products, we do not expect any sustainable growth in the near term on declining fixed investments. Fixed investment growth is disappointing: it increased just 0.5% y/y in June, having fallen in the other months of 2014, posting -2.8% y/y in September Construction fell 4.4% y/y in September, staying negative for 9M 14 despite strong residential construction data: 24.6% y/y growth in January to September Unemployment remains low, reaching a post-soviet low of 4.8% in August and posting 4.9% in September. Yet, private consumption expansion is slowing down at an alarming rate on high interest rates and a weakening rouble: retail sales expanded 1.7% y/y in September, while real wages fell for the first time since FX and monetary policy outlook The Russian central bank (Bank Rossii) has been the major newsmaker in the Russian economy in recent weeks. On 31 October, it hiked its key rate by an unexpected 150bp (consensus 50bp, our estimate 100bp) to save the sinking rouble and curb accelerating inflation. It also threatened to keep an eye on rouble liquidity and squeeze it if needed to support the currency. On 10 November, it abolished the rouble s trading band moving to free float. Despite the move to free float, Bank Rossii retains the right to intervene at any time in case of financial stability threats. The central bank has been generously offering FX through FX repo auctions up to one year. Yet, surprisingly the demand for USD has been more than weak. We believe this facility is considered by locals to be a source of last resort as there is no extra collateral and the conditions are not the best. We see FX needs for 2014 being covered well enough by local banks and corporations. However, we believe 2015 will be very challenging. The oil price risk is now weighing on the rouble more than pure geopolitics. We expect the free float regime to keep volatility elevated as the rouble is trying to find a new equilibrium. We do not see any support from fundamentals in the long run. Risk factors We continue to believe that a further decline in the oil price remains the major risk, as Brent has fallen 32% since the June 2014 high, heading towards USD75/bl. Geopolitical risks remain, as the situation in eastern Ukraine is far from a peaceful solution and additional sanctions are likely to come from both parties. RUB S&P: BBB- (negative) Free float since 10 November 2014 Inflation target: 5% in 2014, 4.5% in 2015 (December-on-December basis, ±1.5pp) Macro forecasts Interest rate forecast Source: Danske Bank GDP (% y/y) CPI (% y/y) Private consumption (% y/y) Fixed investments (% y/y) Unemployment (%) Current account (% of GDP) Bank of Russia (CBR) Policy rate Next meeting Dec 2014 Next change - Unchanged, 2014 End EUR/RUB 21-Nov M M M USD/RUB 21-Nov M M M November

8 Ukraine Preliminary GDP growth data shows that recession is deepening further: the economy contracted 5.1% y/y in Q3 13 versus a 4.6% y/y fall a quarter earlier. Industrial output continues to dive, falling 16.6% y/y in September 2014 due to fighting in the Donetsk and Lugansk regions. Thus, we see downside risks to our 2014 GDP forecast. We expect GDP to be -8% y/y in 2014 and -4% y/y in The slump in private consumption is worsening on the falling hryvna, bringing inflation up to 19.8% y/y in October 2014 from 17.5% y/y in September. Looking back 12 months to October 2013, there was deflation in Ukraine. Parliamentary elections were hold on 26 October. To see any economic reforms, approve the 2015 budget or agree with the IMF, a new coalition must be created. President Petro Poroshenko and Prime Minister Arseny Yatsenyuk are trying to form a coalition with three other parties but they have not met the promised schedule. Despite the agreement on a preliminary gas supply reached on 29 October, the gas is not flowing to Ukraine, yet. Russia is waiting for the prepayment from the Ukrainian side. FX and monetary policy outlook As we expected, the hryvna was left to fall 23% against the US dollar once the parliamentary elections on 26 October were over. Since November 2013, the UAH has lost 95.4% against the USD. On 12 November, it hit an all-time low against the USD at Thus, our year-end forecast of has been realised. We expect the USDUAH to rise to over the next three months and over the next six months. On 13 November, the national bank of Ukraine (NBU) raised its policy rate by 150bp to 14% to support the hryvna and mitigate accelerating inflation. We do not see this increase having a significant impact on Ukraine s economy as local banks credit activity has been recently extremely low. Risk factors An escalation of the geopolitical situation and difficulties with debt servicing are the major economic risks in the current environment. UAH S&P: CCC (negative) Managed peg versus USD EUR/UAH 21-Nov M M M USD/UAH 21-Nov M M M Private consumption has dived in 2014 Industrial and agricultural production 8 24 November

9 Kazakhstan Kazakh economic growth continued to expand steadily to 4.1% y/y in January to September 2014 versus 3.9% y/y in January to June 2014 as preliminary data shows. However, the falling oil price and increased pressure on the pegged KZT are bringing additional challenges to solid economic growth in Thus, the newest monthly data provides evidence of this. Industrial production fell further in October delivering a 1.6% y/y contraction after a 0.7% y/y fall in September. Mining and quarrying continue to shrink and the Kashagan oil project is not delivering the expected production. Fixed investments continue to expand on the back of the government s fiscal policy. In January to October 2014, investments grew 5.1% y/y. Through expansionary fiscal policy, the government has started infrastructural projects. Consumer prices continue to rise on devaluation expectations and accelerated food exports to Russia. In October, the CPI rose 0.2pp to 7.6% y/y. We expect it to rise to 8% y/y in Rising inflation could slow retail sales growth early in Low unemployment prevails, staying at 5.0% since June 2014 and supporting the 2014 private consumption outlook. Yet, scarce labour resources impede economic expansion. FX and monetary policy outlook In October to November 2014, the quickly weakening Russian rouble has put significant pressure on the KZT. The RUB/KZT pair hit the critical level of 4.40 on 22 October. According to the NBK, the comfortable level for KZT is before USD/RUB hits 44. Yet, USD/RUB reached a high of on 7 November and RUB/KZT slumped to 3.73 on the same day. Despite the recent rebound, we do not exclude a 30% devaluation against the USD in Q1 15 as a lower oil price and freely floating rouble pose additional risks. KZT S&P: BBB+ (negative) Corridor versus USD EUR/KZT 21-Nov M M M USD/KZT 21-Nov M M M We believe that the NBK is postponing any devaluation decision until 2015, as the central bank has enough FX reserves to support the currency. Risk factors Kazakhstan remains dependent on its resource sector and oil exports, which account for 75% of the country s total exports. Accelerating inflation and a falling oil price put pressure on the budget and the whole economy. GDP and inflation Industrial production growth 9 24 November

10 Turkey The Turkish economy has been showing quite clear signs of slowing over the past couple of years and recently there have been further signs of growth deceleration. We now expect 2.7% y/y real GDP growth in 2014 and 2.8% y/y in Lower oil prices are likely to reduce the large Turkish current account deficit significantly in the coming quarters. Monetary policy outlook Recently, Turkish inflation has increased further and there is now a clear risk of double-digit inflation in coming months. That said, with growth remaining weak, the underlying inflation pressures are likely to ease off in the coming months. Furthermore, we would stress that the recent increase in inflation is to a large extent driven by supply-side factors (primarily food prices), which could be an argument against any monetary tightening. Therefore, we expect the Turkish central bank to stay on hold for the remainder of the year but we could see rates coming down in 2015 as inflation eases off. FX outlook Continued fairly high inflation and a large current account deficit are likely to continue to weigh on the lira over the longer term. This said, the recent sharp fall in oil prices means we are likely to see a significant improvement in the current account situation in coming quarters. This should lend some support to the lira and will limit the risk of a major sell-off in the currency. Overall, we think the lira could perform better than what is implied by futures. TRY S&P: BB+ (negative) Free-float (freely convertible) Inflation target: 5.0% year-end 2014 Macro forecasts GDP (% y/y) GDP deflator (% y/y) CPI (% y/y) Private consumption (% y/y) Fixed investments (% y/y) Unemployment (%) Current account (% of GDP) n/a Source: Danske Bank Interest rate forecasts Growth likely to slow down further Current account deficit narrows C.B. of the Republic of Turkey (TCMB) Policy rate 8.25 Next meeting 24 Dec 2014 Next change - Unchanged 2014 End Source: Danske Bank Source: Macrobond Financial Source: Macrobond Financial EUR/TRY 21-Nov M M M USD/TRY 21-Nov M M M November

11 South Africa The South African economy remains very weak. The prolonged strike had a very negative impact on economic activity while private consumption keeps weakening. Q2 GDP numbers were weak with GDP of 1.0% y/y, down from 1.6% y/y in Q1. We forecast GDP growth of 1.6% y/y in 2014 and 2.1% y/y in The South African central bank (SARB) has revised its GDP forecast down further for this year to 1.5% (down from 1.7%) and 2.8% in 2015 (2.8%). Inflation in September stayed just about within the inflation target range of 3%-6%, precisely at 5.9% y/y, down from 6.4% y/y in August. Looking ahead, inflation will moderate further due to the sharp fall in oil prices. The exchange rate poses the main inflation risks. The current account deficit in Q2 14 widened considerably, to 6.2% of GDP, from 4.5% of GDP in Q1 14. The large current account deficit is unsustainable and makes the South African economy vulnerable to external shocks. However, the continued sharp fall in oil prices should help to improve the current account situation. Q3 14 unemployment figures confirmed that the situation on the labour market is not improving. Unemployment stayed firmly above 25%, precisely at 25.4%. The economy remains very weak, hence job creation is poor. We see do not see the situation on the labour market improving anytime soon given the outlook for weak economic activity going forward. Monetary policy outlook The SARB continues to face contradictory policy choices. On the one hand, growth is very weak and clearly requires accommodative monetary policy, while inflation is stubbornly high and hovers at the upper end of the inflation target of 3-6%. However, growth worries currently seem to outweigh worries about somewhat higher inflation (mainly due to the exchange rate). Due to the weak economy, the SARB decided to stay on hold at its MPC meeting in November. The statement from the SARB was fairly neutral and balanced. We expect the SARB to stay on hold for some time to come. However, we still expect that the next move will be up. FX outlook Given South Africa s external imbalances, the rand remains highly exposed to swings in risk sentiment. However, the fresh monetary easing delivered by the People s Bank of China (PBoC) should support commodity prices and hence support commodity-exporting countries such as South Africa. Furthermore, given that China is South Africa s main trading partner, it should support the South African economy. We have therefore revised our rand forecast in a more positive direction. We are positive on the ZAR, especially on the short- to medium-term horizon, while we remain negative on the longer-term horizon, given South Africa s external imbalances. ZAR S&P: BBB (stable) Free float (freely convertible) Inflation target: 3%-6% Macro forecasts Source: Danske Bank Interest rate forecast Policy rate Source: Danske Bank GDP (% y/y) GDP deflator (% y/y) CPI (% y/y) Private consumption (% y/y) Fixed investments (% y/y) Unemployment (%) Current account (% of GDP) South African Reserve Bank (SARB) 5.75 Next meeting 29 Jan 2015 Next change - Unchanged, 2014 End EUR/ZAR 21-Nov M M M USD/ZAR 21-Nov M M M November

12 Brazil The Brazilian economy is performing badly. Q2 GDP showed a contraction of 0.9% y/y from still positive growth of 1.9% y/y in Q1. Contradictory policies resulting in large macroeconomic imbalances with high inflation have reduced Brazil s growth potential. We have revised our GDP forecasts and now expect GDP growth of 0.4% y/y in 2014, 1.4% y/y in 2015 and 2.0% y/y in Manufacturing PMI in October remained under the critical 50, precisely This indicates continued weakness in manufacturing going forward. Industrial production remains in the red. In September, industrial production posted a contraction of 2.1% y/y. Retail sales are also weak. In September retail sales posted only low growth of 0.5% y/y. From the data it is clear that both the supply side and demand sides of the economy remain weak. IPCA inflation remains elevated. In October inflation came out at 6.59% y/y, which means that inflation remains above the official inflation target of 4.5% +/-2 percentage points. In the second round of presidential elections at the end of October, the incumbent president Rousseff was re-elected for a second term as Brazil s president. perceived her re-election as negative, as the likelihood of implementing more probusiness policies and less interventionist policies decreased a lot. Monetary policy outlook In a fairly surprising move, the Brazilian central bank (BCB) raised rates by 25bp at its monetary policy committee (Copom) meeting in late October. This brought the Selic rate to 11.25%. The rate hike came out on the back of a further increase in inflation and a risk of further acceleration. It is expected that the BCB will tighten monetary policy further to tame inflationary pressures. It is likely that the BCB will deliver yet another 25bp rate hike at the next Copom meeting in early December. FX outlook and risk factors The Brazilian real remains highly volatile, and that is due to shifts in global risk sentiment but also to uncertainty regarding the domestic politics. However, the fresh monetary policy easing delivered by the People s Bank of China (PBoC) is clearly positive for commodity-exporting countries such as Brazil. In this respect the move by the PBoC clearly helps commodity-exporting emerging markets currencies such as the real. We have therefore revised our BRL forecast in a more positive direction We now forecast USD/BRL 2.55, 2.57 and 2.60 in 3, 6 and 12 months. The re-election of Mrs Rousseff and uncertainty over new measures and fiscal irresponsibility are clearly risks for the real. BRL S&P: BBB- (stable) Free float (non-convertible) Inflation target: 4.5% +/- 2% points Macro forecasts Source: Danske Bank Interest rate forecasts Source: Danske Bank GDP (% y/y) GDP deflator (% y/y) CPI (% y/y) Private consumption (% y/y) Fixed investments (% y/y) Unemployment (%) Current account (% of GDP) n/a Central Bank of Brazil (BCB) Policy rate Next meeting Dec 2014 Next change +25bp December, 2014 End EUR/BRL 21-Nov M M M USD/BRL 21-Nov M M M November

13 Mexico Q3 14 GDP expanded by 2.2% y/y, up from 1.6% y/y in Q2 14. Although growth improved compared to Q2, it nonetheless came out slightly weaker than expected. Economic expansion was driven by external demand, though domestic demand seemed to have improved. While the outlook for the Mexican economy remains bright, as it should be supported by the continued recovery in the US economy, there is a very clear lag from the positive spill-over from the US recovery. Furthermore, low oil prices clearly pose downside risks. We expect the economy to expand by 2.7% y/y in 2014, 3.8% y/y in 2015 and 3.8% y/y in Risks to our forecast are on the downside. Manufacturing PMI continues to improve. In October it accelerated further, to 53.3, up from September s Both industrial production and retail sales remain modest, but indicate moderate recovery. Unemployment remains fairly contained and is hovering just below 5.0%. Monetary policy outlook Inflation remains elevated and above the official inflation target of 3.0% +/-1pp. Inflation in October increased further, to 4.30% y/y, up from 4.22% y/y in September. Inflation should moderate in the last few months of this year. We expect inflation to average 3.8% y/y in 2014 and 3.9% y/y in The Mexican central bank, Banco de Mexico, left interest rates unchanged at its monetary policy setting meeting at the end of October. The decision was unanimous. The Mexican central bank acknowledges that there is continued slack in the economy while inflation is expected to fall going forward. We expect Banco de Mexico to stay on hold for the remainder of the year. FX outlook The MXN is being hit by low oil prices and swings in risk sentiment, but also by ongoing demonstrations against the government. Sentiment is clearly negative towards the MXN at this moment. Our EMEA FX Scorecard continues to send negative signals on all forecast horizons, mainly due to the negative score from commodities, a weaker macro score and global conditions. We maintain a fairly negative forecast for the MXN. We forecast USD/MXN 13.80, in 3, 6 and 12 months. Growth improves slightly Source: Macrobond Financial Inflation rises further above the target Source: Macrobond Financial MXN S&P: BBB (positive) Free float (freely convertible) Inflation target: 3.0% +/- 1% point Macro forecasts Source: Danske Bank Interest rate forecast Source: Danske Bank GDP (% y/y) GDP deflator (% y/y) CPI (% y/y) Private consumption (% y/y) Fixed investments (% y/y) Unemployment (%) Current account (% of GDP) n/a Bank of Mexico (Banxico) Policy rate Next meeting Dec 2014 Next change - Unchanged 2014 End EUR/MXN 21-Nov M M M USD/MXN 21-Nov M M M November

14 China Chinese growth has so far slowed moderately this year mainly on the back of slower credit growth and domestic investment demand. We expect a moderate recovery in growth in the coming quarters after the People s Bank of China (PBoC) cut its leading interest rates in November. However, the structural slowdown in growth and the managed deleveraging with government focus on containing credit growth is expected to continue to weigh on growth. Hence, we expect another short-lived mini recovery with a peak in the manufacturing PMIs below 53 in early Q2 15. The impact of the PBoC s easing on growth in 2015 is expected to be modest, as it will largely frontload growth into H1 15. Inflation stayed subdued at just 1.6% y/y in October and inflation is expected to continue to decline slightly in the coming months driven by lower energy and commodity prices. Inflation is currently substantially below the government s upper 3.5% limit but the government has never communicated a lower bound for inflation. Monetary policy outlook The PBoC cut its leading lending rate by 40bp to 5.6% and its leading deposit rate by 25bp to 2.75%. The interest rate cut suggests that the PBoC now has a stronger easing bias and a higher priority to stabilise growth. We expect it to cut the reserve requirement for banks by 50bp in December and January, but we do not expect it to cut its leading interest rates again. So far, the PBoC has refrained from adding substantial liquidity to the interbank market, which suggests that it is still easing very cautiously. FX outlook In April, China widened the daily trading band to +/-2% from +/-1% and the PBoC has since also reduced its intervention in the FX market. The wider trading band should be regarded as another small step towards a floating exchange rate. Hence, we should get used to more two-way volatility in the USD/CNY exchange rate in the future. We expect CNY to weaken slightly in the short run:1) a stronger easing bias in monetary policy usually means that the appreciation pace slows, 2) flows will be less supportive for continued appreciation because the trade balance surplus is usually small in Q1. The underlying trade balance surplus is increasing on the back of a marked decline in import prices and fundamentals still suggest that CNY remains on a moderate appreciation path. CNY expected to depreciate in the short run Trade balance surplus has surged in recent months CNY S&P: AA- (stable) Crawling USD peg Inflation target: 3.5% for 2014 Interest rate forecast People's Bank of China (PBOC) Policy rate Next meeting 5.75 Not announced Next change - Unchanged 2015 End Source: Danske Bank EUR/CNY 21-Nov M M M USD/CNY 21-Nov M M M Source: Macrobond Financial November

15 Indonesia The Indonesian economy has been balancing close to overheating in recent years and the current account has deteriorated markedly since Growth has been also been slowing on the back of monetary tightening and weaker export growth and has reached just 5.0% y/y in Q3 14. A substantial cut in fuel subsidies in November could weigh further on growth in the short run but a large part of the budget savings is to be recycled into infrastructure spending. Therefore, its impact on growth is expected to be modest. The current account deficit has improved to less than 3% of GDP and it should benefit further from lower crude oil prices and the recent cut in fuel subsidies. The sharp cut in fuel subsidies in November is expected to push inflation higher to close to 7% y/y from 4.5% y/y in September. Monetary policy outlook The Bank of Indonesia (BI) hiked its leading interest rate by 0.25% to 7.75% after the announcement of the hike in the fuel subsidy. The interest rate hike should be regarded as a pre-emptive move to contain inflation expectations in the wake of the cut in fuel subsidies. BI also hiked aggressively when fuel subsidies were cut in Hence, additional hikes cannot be ruled out if inflation increases more than expected in the coming months. In light of the high interest rate and the decline in crude oil prices, this looks less likely this time. However, with the Fed expected to start raising interest rates in mid-2015, the window for cutting interest rates in Indonesia will be very limited. FX outlook The reform-minded Joko Widodo won the presidential election in July, but his ability to push through substantial reforms has been questioned by the government s weak position in the parliament and Widodo s weak position within his own party, PDI-P. In that light, the substantial cut in fuel subsidies is an extremely positive signal. Indonesia s public finances are healthy and if the current account also improves it could open for an upgrade of Indonesia s credit rating. However, there remains the risk that Indonesia will continue a slide towards a protectionist policy, with a negative impact on foreign direct investment and competitiveness. IDR no longer looks overvalued; however, due to foreign investors large share of government bonds, Indonesia is sensitive to interest rate hikes in the US, albeit the IDR is no longer among the very vulnerable currencies. We still see a depreciation of the IDR on a 12-month horizon, driven mainly by gradual normalisation of monetary policy in the US. IDR S&P: BB+ (stable) Free float Inflation target: % for 2014 Interest rate forecast Policy rate Next meeting 11 Dec 2014 Next change - Unchanged 2015 End Source: Danske Bank Bank Indonesia (BI) 7.75 EUR/IDR 21-Nov M M M USD/IDR 21-Nov M M M CA deficit has improved slightly BI hike to anchor inflation expectations Source: Macrobond Financial Source: Macrobond Financial November

16 India GDP growth has slowed markedly to less than 5% after double-digit growth just before the global financial crisis started in The slowdown has been driven by both monetary tightening and a slowdown in India s potential growth as the pace of economic reforms has slowed. The BJP and its leaders Narandra Modi won an outright majority in the Lower House in connection with the election in May. Hence, it is in a strong position to accelerate economic reforms. With markedly improved external balances India, in our view, is well positioned for a cyclical recovery in the coming years. India s current account has also improved markedly to about 1% of GDP in Q2 14 from more than 5% of GDP in H2 13 and will benefit substantially from the decline in crude oil prices. Monetary policy outlook The new Reserve Bank of India s (RBI) governor Raguram Rajan has attempted to signal an increasingly independent monetary policy and, among other things, RBI is planning to move gradually towards a pure inflation target using traditional CPI instead of wholesale prices currently. The longer-term target for CPI inflation is 4% +/-2%. Inflation in October declined markedly to just 5.5% y/y and is now within RBI s target range. This suggests that at its meeting in December, RBI will move to a more neutral stance and could cut interest rates in 2015, even though Fed tightening next year will make it difficult. FX outlook We believe that INR will be one of the best performing Asian currencies next year albeit it will weaken a bit against USD. The main reasons are (1) a marked improvement in the current account that will continue in the wake of the recent drop in crude oil prices, (2) possible acceleration in economic reforms under a strong new BJP-led government, (3) credible/hawkish central bank, and (4) gradual cyclical recovery in India. In 2015, gradual monetary tightening in the US should gradually start to weigh on INR. However, because the Indian money and bond market is relatively closed, India should also be less sensitive to higher interest rates in the US than other emerging markets. Hence, a major depreciation is unlikely. External balances have improved markedly Inflation declining fast aided by lower crude oil prices INR S&P: BBB- (negative) Free float Inflation target: 5% medium term Interest rate forecast Reserve Bank of India (RBI) Policy rate Next meeting Dec 2014 Next change - 25 bp Q End Source: Danske Bank EUR/INR 21-Nov M M M USD/INR 21-Nov M M M November

17 Core major EUR USD JPY EUR USD DKK SEK NOK 21-Nov M M M Nov M M M Nov M M M Wider CEE PLN HUF CZK RON EUR USD DKK SEK NOK 21-Nov M M M Nov M M M Nov M M M Nov M M M Baltics LTL EUR USD DKK SEK NOK 21-Nov M M M November

18 CIS RUB UAH KZT EUR USD DKK SEK NOK 21-Nov M M M Nov M N/A 43.9 N/A 40.5 N/A +6M N/A 37.5 N/A 34.4 N/A +12M N/A 36.2 N/A 32.5 N/A 21-Nov M M M MEA TRY ZAR ILS EGP EUR USD DKK SEK NOK 21-Nov M M M Nov M M M Nov M M M Nov M M M Latin America BRL MXN ARS EUR USD DKK SEK NOK 21-Nov M M M Nov M M M Nov M M M November

19 Emerging markets Asia CNY KRW THB SGD HKD MYR PHP IDR INR TWD EUR USD DKK SEK NOK 21-Nov M M M Nov M M M Nov M M M Nov M M M Nov M M M Nov M M M Nov M N/A N/A N/A N/A N/A +6M N/A N/A N/A N/A N/A +12M N/A N/A N/A N/A N/A 21-Nov M M M Nov M M M Nov M M M November