Emerging Markets Weekly Economic Briefing

1 Emerging Markets Emerging Markets Weekly Economic Briefing Forecasts eased down again as trade remains sluggish We have cut our forecast for China again following weak growth in Q1. We now expect the economy to grow little more than 7% this year, lower than the target rate of around 7.5%. Much of the weakness came from falling exports, which were 3.% lower in Q1 than the year before (in US$ terms). We also reduced our GDP growth for Brazil to 1.% this year (from 1.% previously). Brazil s trade was hit by poor exports in Q1 despite a near 1% fall in the exchange rate over the past year. As a result the current account is not expected to improve this year we are forecasting a deficit of close to 3.% of GDP. A similar lack of improvement is apparent in several other emerging economies with large current account deficits including South Africa and Turkey leaving them particularly vulnerable to further foreign capital withdrawals. China s growth slows in Q1 Chinese growth in Q1 was lower than expected by most forecasters, including us. At just 1.% quarter-on-quarter, this was the weakest expansion since Q, and is the equivalent of annualised growth of under %. Net trade detracted from growth as exports were particularly weak, but import growth also slowed. The contribution from investment shrank to 3.1%, from.1% in Q 13. China: Real GDP, investment & consumption GDP Investment Consumer spending 1 5 1 15 Source: Oxford Economics Forecast But, surprisingly, the contribution from consumption actually increased sharply from 3.9% to 5.7%. This was unexpected as retail sales were relatively weak; and it makes the path for consumption this year particularly hard to forecast. We think the government may have to provide some additional fiscal support over the course of the year to ensure that growth does not fall too far below its tolerance range of around 7.-7.3%. Trouble in Thailand Thailand s prime minister and nine of her ministers have been ordered to step down following a court ruling that she had illegally transferred her head of national security. This seems likely to prompt more protests ahead of a general election, now set for July, but which could be further disrupted. The economy is already suffering: industrial production in Q1 was over 7% lower than the year before and tourist arrivals were nearly 5% down. Investment indicators have fallen sharply and retail sales have also slipped. We forecast lower GDP growth of just.1% this year, all coming from net trade. Economist: Clare Howarth, Senior Asia-Pacific Economist Tel: + 15 937 e-mail: chowarth@oxfordeconomics.com 1

1 Emerging Markets Thailand: Manufacturing output =1 (seasonally adjusted) 1 1 1 1 1 1 India s general election nears end As India s six week election process draws to a close, we continue to forecast growth of.7% this year. Share price gains over the past few months suggest increasing optimism that the sluggish growth of recent years can be overcome. But there also seems to be a more realistic assessment in some quarters about the challenges the new government will face, as we have been warning for a while. Businesses are struggling to expand HSBC s composite PMI, which surveys manufacturing and services, indicated another fall in business activity in May and inflationary pressures are picking up again with core CPI inflation running at % in March. 1 1 15 9 3 Source: The Office of Industrial Economics India: Inflation CPI (industrial workers) Food components of WPI Total WPI -3 1 1 Source: India Ministry of Commerce & Industry Brazil s current account deficit widens We have cut our GDP forecast for Brazil to 1.% this year, from 1.%. Although most data releases related to domestic activity were consistent with our forecast, exports in Q1 were surprisingly weak, especially those to Europe and Argentina. Poor trade data will push up the current account deficit, which we now see rising to 3.% of GDP, the largest size since 1. Inflationary pressures are also rising, mainly due to a planned hike in electricity prices. Higher interest rates and the weaker exchange rate will eventually bring the deficit some relief, but next year rather than now. Latin America: Monthly GDP 3 month moving average 9 3-3 - -9 5 7 9 1 11 13 Fiscal expansion plan boost for Mexico Although our forecast is now below consensus for Brazil, we are more optimistic about the recovery in Mexico. The government has announced a substantial fiscal expansion programme to develop infrastructure, and exports, which have fallen over the quarter for the past two quarters, are forecast to improve as the recovery in the US gains traction. But with subdued production in Q1, and a fall in retail sales, the risks to our forecast must be to the downside. We expect GDP to rise by 3.% this year and 3.% in 15. South Africa s exports slide Brazil Mexico South Africa s trade balance fell sharply in Q1 as exports continued to slide. We now expect the current account deficit to widen even more, to 7.7% of GDP this year (from 7.1% in 13). Lower commodity prices are holding exports back, and strikes in platinum mines will also begin to affect sales. Industrial production in March was only 1% higher than a year ago, and consumption indicators are also modest. We forecast.% GDP growth this year, with little prospect of economic reforms to improve the outlook: the ANC looks set to win the general election when the final results are out tomorrow. Economist: Clare Howarth, Senior Asia-Pacific Economist Tel: + 15 937 e-mail: chowarth@oxfordeconomics.com

1 Emerging Markets South Africa: Current account balance % of GDP (seasonally adjusted) - - - - -1 199 199 1 1 Russia tightens monetary policy The Russian central bank unexpectedly raised interest rates by 5bps in late April, and the country s sovereign credit rating was downgraded by S&P. Despite some softer rhetoric by President Putin the past few days, the conflict in Ukraine shows little sign of ending soon. We now expect GDP growth of just.3% in 1, as business confidence remains low and the manufacturing PMI recorded a sixth month in negative territory. PPP exchange rates revised This month saw the first revision for six years to PPP exchange rates from the World Bank s International Comparison Program. As price levels of non-traded goods in rich countries tend to be higher than in poor countries, PPP exchange rates are used to convert expenditure to a common price level to compare GDP between countries. The results substantially increase measures of total output in a number of middle income countries, including the BRICs. The new estimates suggest that China s total GDP is far closer to US GDP than had previously been thought. Using the new PPP exchange rates would slightly increase the share of emerging markets in the world economy, but relatively strong growth in some economies (China, India) is partly offset by weak growth in others (Brazil, Russia). The overall outcome for world growth would be just.1 percentage point higher than our current 1 and 15 forecasts. and Turkey just sits tight Turkey s financial markets have stabilised and we expect the authorities to keep interest rates on hold for the rest of the year. But inflation is rising and activity has been dampened by the recent financial stress. We still think GDP will grow % this year, before beginning to pick up more decisively. Turkey: Capital flows & current account deficit US$ bn month total 7 5 Current account deficit 3 FDI inflows 1 Portfolio inflows -1 199 1 1 Economist: Clare Howarth, Senior Asia-Pacific Economist Tel: + 15 937 e-mail: chowarth@oxfordeconomics.com 3

1 Emerging Markets Latest data Recent Data Releases Previous month Latest Comment China - Exports (Apr) - Imports (Apr) - Trade Balance (m total) - HSBC Manufacturing PMI - HSBC Services PMI - Consumer Prices (Apr) -.% y/y -11.% y/y $33.bn (Mar). (Mar) 51.9 (Mar).% y/y.9% y/y.% y/y $3.1bn (Apr).1 (Apr) 51. (Apr) 1.% y/y Exports rose in April, driven by stronger demand from the US and the EU. This is consistent with our view that GDP growth is likely to be marginally stronger in Q than Q1. But the HSBC PMIs in April stayed quite sluggish. Sharply lower prices for vegetables and pork reduced headline inflation in April. Brazil - Ind. Output (Mar, s.adj) - HSBC Services PMI (Apr).% m/m 1.% y/y 51. -.5% m/m -1.3% y/y 5. Output fell by.% q/q in Q1, the third straight contraction. Moreover, the services PMI was barely in expansion territory in April. Russia - CPI (Apr) - HSBC Manufacturing PMI.9 % y/y.3 (Mar) 7.3% y/y.5 (Apr) The manufacturing PMI was steady in April but continued to indicate a contraction in the sector. Inflation rose to 11-month high in April. India - HSBC Services PMI 7.5 (Mar).5 (Apr) April services PMI not as bad as in March but still weak. Mexico CPI (Apr) 3.% y/y 3.5% y/y Inflation eased to a six-month low in April, helped by lower agricultural prices. Turkey CPI (Apr) Core CPI (Apr).% y/y 9.3% y/y 9.% y/y 9.7% y/y Sharp rise in core inflation over last year (just 5.% in April 13), in part reflecting fall in TRY. Taiwan - Exports (US$, Apr) - Trade balance (m total) - CPI (Apr).% y/y $37.bn (Mar) 1.% y/y.% y/y $37.bn (Apr) 1.% y/y Modest upward trend in exports is expected to continue as export orders edge higher. Sales to mainland have bounced in last two months. S. Africa Man. output (seas adj) (Mar) -.% m/m 1.5% y/y -1.9% m/m 1.% y/y Manufacturing output fell 1.% q/q in Q1, hit by poor external demand, mining strikes and subdued domestic activity. Czech Ind. output (Mar, seas. adj.) Exports (Mar, CZK terms) 1.7% m/m.% y/y -.% m/m.3% m/m 7.% y/y.% m/m Industrial output rose by more than 1% q/q for the third successive quarter, encouraged by stronger export demand. (seas adj) 1.9% y/y 1.1% y/y Chile IMACEC activity index (Mar, seas. adj.) Exports (US$, Apr). % m/m.5% y/y 17.% y/y -. % m/m 1.% y/y -1.% y/y Economic activity remains quite subdued, up only.% q/q in Q1, and export values fell in April, hit by the lower copper price. Indonesia GDP (Q1) Consumer spending (Q1) Investment (Q1) Export volumes (Q1) Import volumes (Q1) 5.7 % y/y 5.3 % y/y. % y/y 7.% y/y -.% y/y 5. % y/y 5. % y/y 5.1% y/y -.% y/y -.7% y/y Export volumes dropped unexpectedly in Q1, pulling down headline growth. But consumer spending remained strong. Indonesia banned exports of unprocessed minerals in January but these products made up just 3.3% of exports last year. Slower regional growth, affected by China slowdown, was also a factor. Economist: Clare Howarth, Senior Asia-Pacific Economist Tel: + 15 937 e-mail: chowarth@oxfordeconomics.com

1 Emerging Markets Events Monetary policy meetings in past week Key rate (now) Outcome Comment May 7 th Poland.5% (Seven day reference rate) Unchanged The National Bank of Poland left the interest rate unchanged in line with expectations, highlighting that it will remain cautious with regard to policy while there is so much uncertainty surrounding Ukraine, Poland s neighbour. Economic activity has been recovering steadily and we expect the bank to start raising rates to more historically normal levels in Q 1, but this is subject to clear downside risk. May th - Indonesia 7.5% (Policy rate) Unchanged The central bank left the interest rate unchanged as expected, encouraged by greater stability in financial markets, strong growth in domestic activity in Q1 and inflation edging lower. The target range for inflation this year is 3.5-5.5% and the central bank believes that the rate will fall into this range in H 1. May th - Malaysia 3.% (Overnight policy rate) Unchanged The Bank of Malaysia kept the interest rate on hold in line with expectations but suggested it is ready to raise rates soon to avoid a build-up of economic and financial imbalances. We expect the bank to start raising rates in Q3 1. May th Philippines 5.5% (Overnight repo rate) Unchanged The policy rate was left on hold but the reserve requirement ratio was increased for a second successive meeting to try and curb liquidity and contain price pressures. Real interest rates are negative and we expect the bank to increase its main interest rate within the next few months. For further information contact Sarah Fowler (sfowler@oxfordeconomics.com) Economist: Clare Howarth, Senior Asia-Pacific Economist Tel: + 15 937 e-mail: chowarth@oxfordeconomics.com 5

1 Emerging Markets Asia China: Trade US$bn (seasonally adjusted) 1 1 15 9 3 Exports Imports China: Imports from Korea US$bn (seasonally adjusted) 1 1 1 1 1 3 5 7 9 11 13 1 1 Source: Oxford Economics / China Customs China: Imports from Taiwan US$ bn (seasonally adjusted) 1 15 US$ bn Chinese imports from Taiwan (LH scale) 1 Taiwan: Exports by destination US$bn (seasonally adjusted) 1 China & HK 9 Rest of emerging Asia 3 Taiwanese exports to China (RH scale) US Europe 5 7 9 1 11 13 1 / Oxford Economics 1 1 Source: Taiwan Ministry of Finance / Oxford Economics China: Inflation 1 CPI - Non-food CPI - - Manufactured goods PPI - 1 1 Source: China Bureau of Statistics Emerging Asia: Short-term interest rates % 7 China 5 Korea 3 Malaysia Taiwan 1 Thailand 1 3 5 7 9 11 13 Economist: Clare Howarth, Senior Asia-Pacific Economist Tel: + 15 937 e-mail: chowarth@oxfordeconomics.com

1 Emerging Markets Asia Indonesia: Real GDP 5 15 Investment 1 5 GDP Indonesia: FDI inflows US$ bn ( quarter running total) 5 15 1-5 -1-15 Consumer spending Exports - 1 3 5 7 9 11 13 Source: Biro Pusat Statistik 5-5 -1 1 3 5 7 9 11 13 Source: Bank Indonesia Emergers: Exchange rates v US$ Index (Dec 3, 1 = 1) 115 11 China 15 1 Korea 95 9 Indonesia 5 appreciation India 75 7 5 Jan 11 Jul 11 Jan Jul Jan 13 Jul 13 Jan 1 Emergers: Exchange rates v US$ Index (Dec 3, 1 = 1) 11 1 appreciation Malaysia 1 Singapore Philippines 1 1 9 9 9 Thailand 9 9 Jan 11 Jul 11 Jan Jul Jan 13 Jul 13 Jan 1 India: Interest rates and wholesale prices 1 1 Mumbai 3-month offered rate Repo rate Wholesale prices (WPI) inflation - 5 7 9 1 11 13 1 Source: Oxford Economics India: Manufacturing & electricity output (3 month average) 5 Manufacturing 15 1 5 Electricity -5-1 7 9 1 11 13 1 Source: Oxford Economics Economist: Clare Howarth, Senior Asia-Pacific Economist Tel: + 15 937 e-mail: chowarth@oxfordeconomics.com 7

1 Emerging Markets Latin America Brazil: Industrial output & retail sales volumes 7=1 (seasonally adjusted) 17 1 Retail sales 15 1 13 11 1 9 Industrial output 7 1 1 Source: IBGE Chile: Monthly indicator of economic activity =1 (IMACEC, seasonally adjusted) 13 11 1 9 7 3 5 7 9 11 13 Latin America: Goods' imports (US$) 1 Argentina Brazil Chile Mexico - - - 3 month moving average - 1997 1999 1 3 5 7 9 11 13 Latin America: Consumer prices 1 Brazil Colombia Mexico - Chile - 5 7 9 1 11 13 1 Latin America: Foreign exchange reserves US$ bn 35 3 Brazil 5 Mexico 15 1 Argentina 5 Venezuela 1997 1999 1 3 5 7 9 11 13 Emergers: Exchange rates v US$ Index (Dec 3,1 = 1) 11 Mexico Chile 1 9 Brazil 7 Argentina 5 depreciation Jan 11 Jul 11 Jan Jul Jan 13 Jul 13 Jan 1 Economist: Clare Howarth, Senior Asia-Pacific Economist Tel: + 15 937 e-mail: chowarth@oxfordeconomics.com

1 Emerging Markets Emerging Europe Central & Eastern Europe: Retail sales Poland 15 Russia 1 5 Czech -5 Hungary -1 3 month moving average -15 1999 1 3 5 7 9 11 13 Central & Eastern Europe: Retail sales 3 Bulgaria Romania 1 Lithuania -1 Estonia - 3 month moving average Latvia -3 3 5 7 9 11 13 Central Europe: Merchandise exports in EUR 1=1 (seasonally adjusted) 15 1 13 11 Slovak 1 Hungary 9 7 Czech 5 3 5 7 9 11 13 Central & Eastern Europe: Consumer prices 1 1 Russia 1 Hungary Poland Czech - 3 5 7 9 11 13 Emergers: Exchange rates v Euro Index (Dec 3, 1 = 1) 19 Hungary 1 Czech 13 1 97 Poland 9 91 depreciation 5 Jan 11 Jul 11 Jan Jul Jan 13 Jul 13 Jan 1 Russia & Ukraine: Exchange rate v US$ Index (Dec 3, 1 = 1) Hryvnia per US$ 11 1 9 Ruble per US$ 7 depreciation Jan 11 Jul 11 Jan Jul Jan 13 Jul 13 Jan 1 Economist: Clare Howarth, Senior Asia-Pacific Economist Tel: + 15 937 e-mail: chowarth@oxfordeconomics.com 9

1 Emerging Markets Rest of World Turkey: Industrial output 1=1 (seasonally adjusted) 5 115 11 15 1 95 9 5 5 7 9 1 11 13 1 South Africa: Manufacturing output 5=1 (seasonally adjusted) 5 115 11 15 1 95 9 5 7 9 1 11 13 1 Turkey: Interest rates and inflation % Average bank lending rate 1 1 Turkey: Bank lending % 13-week annualised change 5 15 1-week interbank rate 3 9 1 3 "Core" inflation -1 7 9 1 11 13 1 / Oxford Economics - 7 9 1 11 13 1 Emergers: Exchange rates (v US$ or euro) Index (unweighted average of 19 countries) 1 1 9 9 9 9 9 depreciation Jan 11 Jul 11 Jan Jul Jan 13 Jul 13 Jan 1 Change in fx reserves of Brazil and India US$ bn (monthly change) 3 1-1 - -3 - -5 1 3 5 7 9 11 13 Economist: Clare Howarth, Senior Asia-Pacific Economist Tel: + 15 937 e-mail: chowarth@oxfordeconomics.com 1

1 Emerging Markets Industrial Production Percentage changes on a year earlier unless otherwise stated China Brazil Korea India Mexico Russia Turkey Taiwan Poland 13 Mar.9.1 -. 3.5.3 -.1.3 -. -.5 Apr 9.3.3 -.7 1.5-1. 1.1. -1..7 May 9. 3.3-1. -.5-1.3 -.5. -1.1.3 Jun.9 5.7 -.3-1. -1.5 1.7. 1.3.7 Jul 9.7 1.3 -.. -.9..1.5 3. Aug 1..5 3.3. -.1 -. 1. -.1.3 Sep 1.. -..7-1.5 1.3. -. 3.9 Oct 1.3.7 1. -1..3 1..1.5.5 Nov 1.. -. -1.3-1...7. 7. Dec 9.7 -. 1.1 -. -...9..7 1 Jan. -1. 1.1..9 -.. 1..3 Feb. 1..1-1.9.5.1.1. 5. Mar. -1.3. - - 1. 3..9 5.7 Consumer prices Percentage changes on a year earlier unless otherwise stated China Brazil Korea India Mexico Russia Turkey Taiwa n Poland 13 Apr..5 1.3 9.. 7..1 1.. Ma y.1.5 1.1 9.3. 7..5.7.5 Jun.7.7 1. 9.9.1.9.3.. Jul.7.3 1. 9. 3.5.5.9.1 1.1 Aug..1 1.5 9.5 3.5.5. -. 1.1 Sep 3.1 5.9 1. 9. 3..1 7.9. 1. Oct 3. 5..9 1. 3..3 7.7.. Nov 3. 5. 1. 11. 3..5 7.3.7. Dec.5 5.9 1.1 9.9..5 7..3.7 1 Jan.5 5. 1.1..5.1 7...5 Feb. 5.7 1.... 7.9..7 Mar.. 1.3.3 3..9. 1..7 Apr 1. - 1.5-3.5 7.3 9. 1. - Economist: Clare Howarth, Senior Asia-Pacific Economist Tel: + 15 937 e-mail: chowarth@oxfordeconomics.com 11

1 Emerging Markets Exports (US dollars) Percentage changes on a year earlier unless otherwise stated China Brazil Korea India Mexico Russia Turkey Taiwan Poland 13 Apr 1. 5..1 1. -. -1. -3. -1.9 9.7 May 1. -. 3.1 -. 1.9-9.9.5.7 1. Jun -3.1 9. -1. -..5.5-3.3.7 11. Jul 5.1 -.9. 11.3 3.7. -1.7 1. 1. Aug 7. -.3 7. 1. 5. 3. -9. 3. 1. Sep -.3 5. -1.7.... -7. 13. Oct 5..9 7. 13.7. -. -5.3.7 9. Nov.7 1.9..9. 3..1 3. 7. Dec.1 5..9.7 1...9 1. 15.1 1 Jan 1.. -..7. 1. 7.7-5. 13. Feb -1.1.5 1. -5.5.3 -.7 5.7 7.9 5.5 Mar -. -. 5.1-3. 1.3-13.1. - Apr.9 -. 9. - - - -. - Imports (US dollars) Percentage changes on a year earlier unless otherwise stated China Brazil Korea India Mexico Russia Turkey Taiwan Poland 13 Apr 1.7 15.7 -.7.3.9 13. 13.3 -.3. May -.3. -.7..3-5..9 -.1 -. Jun -.7 1.5-3. -...5 7.. 3.3 Jul 1.9 5. 3. -.1..9 5. -7.7 9.7 Aug 7.1 5. 1. -1. 3. -.1 1. -1.3 7. Sep 7..1-3.5-1..7 5. -. -.7. Oct 7. 1. 5.1-1. -.1-5.. -.9 1.1 Nov 5.3-7.5 -. -1. -.3-3.. -.5 5.9 Dec.5 3.9 3. -15.3-1.1 1.7. 1..5 1 Jan 1.. -1.1-19.1 3. -5.. -15. 9. Feb 1. 7.3 3.9-17.9 1. -9. -5..9 7.7 Mar -11. -. 3. -.1 1. - -3.1 7.5 - Apr. -11.1 5. - - - - 5. - Economist: Clare Howarth, Senior Asia-Pacific Economist Tel: + 15 937 e-mail: chowarth@oxfordeconomics.com