Emerging markets outlook, October 2013

Emerging markets outlook
Emerging markets analysis — 7 October 2013

No bargain but better value

Concerns about decreased liquidity in the US dollar and the shift
down in growth in China initiated strong sales of dollar-based
growth currencies. At the same time, fundamental imbalances
were exposed in countries that had previously received major
capital inflows relatively uncritically. The structural problems
are considerable, particularly for those countries that have
large deficits in their current accounts. On the other hand,
some currencies have fallen to such low levels that considerable
misfortune is discounted in current rates. In addition, interest
rates have been raised in several countries with the purpose of
defending exchange rates and holding back higher inflationary
pressure.
The US central bank, the Fed, unexpectedly refrained from
starting to scale back bond purchases at its monetary policy
meeting in September. This has decreased market concerns of
a rapid cutback of stimuli by the Fed, while economic statistics
from China indicate a stabilisation of the economy. In the current
situation, the likelihood that the cutback will not commence
until 2014 is high, since the US labour market has not developed
sufficiently strongly to convince the decision makers at the Fed.
Within the euro zone, the economic indicators suggest a gradual
improvement and the situation is considerably calmer than it
was a year ago. This means that we see fewer risks for the zloty,
despite growth in Poland currently being low.

On the whole, it is our assessment that the two factors from
the US and China that began the decline in emerging markets
currencies in June will not be repeated during this half of the
year. We are positive towards currencies with active central
banks and sizeable reserves. The Indian rupee and the Brazilian
real belong to this group. The problems and challenges for these
economies are considerable, although it is likely that much of
this is discounted in current exchange rates. For India, the real
effective exchange rate has fallen to the lowest level in 17 years.
We are negative on the Turkish lira, where the central bank is
battling a headwind and the current account is again weakening.
The US dollar has weakened against the euro since the summer.
The main reason behind this has been Fed’s decision to not start
scaling down its bond purchases during its September meeting.
However, we believe the dollar to strengthen on the back of
higher relative growth and forecast EUR/USD at 1.30 by the
end of the year.
The news in this edition is that we are now monitoring and
forecasting currency development in South Korea and
Indonesia. For reasons of space, Hungary and the Czech
Republic have been removed from this publication, although we
continue to analyse these countries and are happy to provide
currency forecasts on request.


Emerging Markets FX

Is published four times a year and is forecasting
currency developments for selected emerging market
countries with a time horizon of 3 months.

Provides advice, analysis and foreign exchange products to
clients within emerging markets.
For further information, call +46 8 700 90 20
Analyst: Hans Gustafson +46 8 700 91 47


Russia

Poland

Growth disappointments continue

Increased optimism in industry

High inflation is an obstacle to rapid stimulation

Weak growth and low policy rate

Currency forecast vs. the euro


Growth in Russia continues to surprise on the downside.
During the second quarter, the Russian economy grew by
only 1.2 percent at annual rates. Confidence in industry has
weakened in line with the decline and PMI has been below the
50 mark since July this year, with industrial production activity
being at the same level as in 2011. Although exports did gather
pace in July, they remain weak, with an increase of 5.5 percent
at annual rates in July. For a long time, Russia has been able to
boast a large current account surplus. This is now weakening
at a fast pace as the balance of trade declines. Conditions
for household consumption remain relatively favourable.
Unemployment is at a historically low level and wages are
rising at a good pace. Retail sales rose by 4 percent in August
compared with the same month in 2012. Inflation has abated
somewhat but, at 6.5 percent, is too high for the central bank
to be able to cut its policy rates. In addition, credit growth in
the household sector is too high with average growth at 36
percent in June. The principal problem for Russia is the weak
level of investments, which stems from a weak credit offering
and an excessive cost of debt in relation to global competitors.

The Polish economy has bottomed out with GDP growth of
0.8 percent in the second quarter, compared with 0.5 percent
in the first quarter. Following its lowest point in April, PMI
has risen at a steady pace and was 53.1 in September. This
indicates continued good momentum in the manufacturing
sector ahead, and since June, the trend has been favourable
compared with the situation 12 months ago. The trend in real
wages has turned from being negative in 2012 to an increase
of 3.1 percent at annual rates in June and consumer confidence
has risen to the highest level in two years. This is also reflected
in the fact that the negative trend in retail sales has turned. On
the other hand, domestic demand on the whole remains low,
which is keeping inflationary pressure down. Consumer prices
rose by only 1.1 percent in August and inflation expectations
amounted to 1.0 percent in September. This means that the
central bank will keep the policy rate at a low level as long
as inflation remains below the tolerance interval of 1.5 to
3.5 percent. In addition, credit growth is very weak, both for
companies and households. The central bank lowered its policy
rate by 25 points to 2.5 percent at its meeting in July but, at
the same time, issued a strong signal that this was the final
cut in this cycle.

Forecast EUR/RUB in 3 months 44.46 (today 43.83)

Forecast EUR/PLN in 3 months 4.20 (today 4.21)

The Russian economy has continued to surprise with lower
growth than expected. The earlier sizeable current account
surplus is declining at a rapid pace. Inflationary pressure has
abated but remains too high for the central bank to be able
to cut its policy rates. A weaker rouble is one of the few
opportunities for stimulation by the Russian authorities at the
moment.

Economic activity in Poland remains low and the low interest
level will persist. On the other hand, optimism is beginning
to rise in the industry, supported by improved demand from
Germany and less concerns within the euro zone. We therefore
expect the zloty to trade within a bandwidth of 4.10 to 4.30
against the euro during the final quarter of the year.

Russia Spot Rate EUR/RUB

Poland Spot Rate EUR/PLN
44

4,5

4,5

43

43

4,4

4,4

42

42

41

41

4,3

4,3

40

40

4,2

4,2

39

39

4,1

4,1

38
nov
feb
11

maj

aug
12

nov

feb

maj
13

aug

38

Source: Reuters EcoWin

FX/FI research — Swedbank Large Corporates & Institutions

4,0

nov feb
11

maj

aug
12

nov

feb

maj aug
13

EUR/PLN

4,6

EUR/PLN

4,6

EUR/RUB

45

44

EUR/RUB

45

4,0


Page 2 of 8


Turkey

South Africa

Low confidence in monetary policy

Low valuation

Weakened external balance

Weak current account

The Turkish lira noted a new lowest against the US dollar in
August. The lira has been pressured by numerous factors since
May this year. The regime’s authoritarian reaction against the
demonstrators in Taksim Square broke an extended period
of social calm. Exports have plummeted this year, increasing
the current account deficit and concerns over its financing.
Confidence in monetary policy is in tatters with both inflation
and credit growth having rocketed way beyond targets. This
is the effect of the central bank’s stubborn focus on stabilising
capital flows compared to fighting inflation. However, GDP
surprised strongly with growth of 4.4 percent in the second
quarter, largely driven by inventory build-up. The weak lira has
blown air under the wings of export industry, as can be seen in
PMI, which rose strongly to 54.0 in September, driven by new
orders. The downside of the weak lira and high inflationary
pressure is weakened household purchasing power, which has
reduced consumer confidence. The central bank is battling a
headwind and has raised its upper policy rate to 7.75 percent
in two stages since the summer. Turkey remains largely
dependent on short-term portfolio flows to finance the
current account deficit. Foreign direct investment amounts to
only about USD 10 billion, compared with financing needs for
the current account of about USD 55 billion at on-going annual
rates.

The South African rand has had the weakest development of
all of the growth countries we monitor this year. South Africa
continues to be plagued by a growing current account deficit,
unease in the mining sector and a weak labour market. The
current accounty deficit weakened more than expected in the
second quarter, declining to 6.5 percent of GDP. The latest
statistics do not suggest any improvement, with the balance
of trade showing a deficit for every month since January
2012. GDP rose by 2.0 percent in second quarter, compared
with 1.9 percent in the first quarter. Manufacturing industry
is maintaining a good pace, while progress remains difficult
for the mining sector, which is treading water at the same
level of activity as in 2010. PMI fell back below the 50 mark
in September after having temporarily picked up in August,
suggesting that growth will remain sluggish in the near
future. The situation in the labour market has worsened and
this is reflected in consumer confidence falling to the lowest
level in more than ten years. The central bank policy rate has
been unchanged since the cut to a record-low 5 percent in
July 2012. In itself, economic activity motivates stimulatory
monetary policy, but the rate of inflation was 6.4 percent in
August; above the central bank’s tolerance level of 6 percent.
As long as the rand does not strengthen, an imminent increase
in interest rates is unlikely.

Forecast EUR/TRY in 3 months 2.73 (today 2.72)

Forecast EUR/ZAR in 3months 13.52 (today 13.64)

The Turkish lira belongs to the group of currencies with major
current account deficits that were hit hard by concerns over
reduced liquidity in the US dollar. In our assessment, the lira
remains sensitive since the current account deficit has again
weakened and confidence in economic policy is low.

The South African rand has developed worst this year of the
currencies we monitor. Following a decline since the end of
2010, the rand now has a low valuation measured in terms of
real effective exchange rates. On the other hand, we do not
expect a turnaround as long as the current account deficit
shows no sign of improvement. In addition, the difference in
interest rates is not sufficiently great compared with other
growth countries experiencing similar problems.
South Africa, Spot Rate, EUR/ZAR

Turkey, Spot Rate, EUR/TRY
2,8

14,0

14,0

2,7

2,7

13,5

13,5

2,6

2,6

2,5

2,5

2,3

2,3

2,2

2,2

2,1
nov
feb
11

2,1

maj

aug
12

nov

feb

maj
13

aug



12,5

12,0

12,0

11,5

11,5

11,0

11,0

10,5

10,5

10,0

10,0

9,5
nov feb
11

maj

aug
12

nov

feb

maj
aug
13

EUR/ZAR

2,4

13,0

12,5
EUR/ZAR

2,4

13,0
EUR/TRY

EUR/TRY

2,8

9,5


Page 3 of 8


Mexico

Brazil
Improved valuation, active central bank and higher

Growth reforms on the way

interest rates

The economy has lost momentum

Weak growth and weak balance of payments


GDP grew by 3.3 percent in the second quarter compared
with 1.9 percent in the first quarter. Industrial production
has lost speed since June and fell by 1.2 percent at annual
rates in August. PMI has risen from its lowest point in June
to 49.9 in September, thus indicating a relatively cautious
recovery. Exports are developing sluggishly, while imports are
maintaining a good level. The surplus in the balance of trade
is now gradually decreasing and the current account deficit is
rapidly weakening, amounting to approximately 3.7 percent of
GDP in August. The situation in the labour market is weak with
an increase in employment of merely 1.2 percent in August
compared with an average of 2.9 percent over the past ten
years. The rate of inflation has abated somewhat but, at 6.1
percent, is close to the central bank’s upper tolerance level and
inflation expectations are the highest since 2004. The central
bank has raised its policy rate by 175 points in four stages over
the year to 9 percent. Given the high rate of inflation, which
is expected to be further exacerbated by higher import prices
due to the weak real, we expect further rate hikes this year.
Higher interest rates will hold down household consumption
and the ten-year bond rate has risen from 9 percent early in
the year to nearly 12 percent in September.

Forecast EUR/MXN in 3 months 17.16 (today 17.90)

Forecast EUR/BRL in 3 months 2.80 (today 3.00)

The Mexican peso has weakened in line with other growth
currencies since June, albeit not to the same extent. We are
positive towards the peso in the medium term thanks to the
reform efforts and the proximity to the US. The risk of further
rate cuts and uncertainty regarding the US labour market
cause us to be neutral on the peso for the remainder of the
year against the US dollar and positive against the euro.

With the real having trended downwards since June 2010, the
real effective exchange rate is now down at the levels that
prevailed during the financial crisis. It is our assessment that
this low level, combined with an active central bank and high
policy rates, will stabilise the real and provide a certain degree
of reinforcement over the next few months. The greatest risk
is renewed concerns over a normalisation of US monetary
policy.
Brazil, Spot Rate, EUR/BRL

Mexico, Spot Rate, EUR/MXN

18,0

18,0

17,5

17,5

17,0

17,0

16,5

16,5

16,0

16,0

15,5
nov feb
11

maj

aug
12

nov

feb

maj
aug
13

15,5



EUR/BRL

18,5

EUR/MXN

19,0

18,5

EUR/MXN

19,0

3,3
3,2
3,1
3,0
2,9
2,8
2,7

3,3
3,2
3,1
3,0
2,9
2,8
2,7

2,6
2,5
2,4
2,3
2,2
nov
feb
11

2,6
2,5
2,4
2,3
2,2

maj

aug
12

nov

feb

maj
13

aug

EUR/BRL

Growth in Mexico has slackened considerably this year.
GDP rose by 1.5 percent in the second quarter, which can be
compared with an average growth rate of 2.6 percent over
the past ten years. Industrial production has been weak since
the end of 2012 and fell by 0.5 percent at annual rates over
the month of July. On the other hand, PMI has strengthened
from just beneath the 50 mark from the bottom level of 46.5 in
June and exports have recovered from the decline early in the
year. Retail sales are weak and consumer confidence shows
no sign of improvement. Inflation has fluctuated around 4
percent over the past 12 months, while the rate of increase in
core inflation has gradually fallen to the lowest level since the
1970s. The weak economic trend caused the central bank to
unexpectedly lower its policy rate by 25 points to 3.75 percent
in early September. The central bank previously foresaw a
faster recovery in the latter half of the year. Consequently, we
do not rule out a further interest rate cut before the end of
the year. This means decreased interest support for the peso,
particularly in relation to the Brazilian real, where we expect
further rate hikes. Structurally, we are positive towards the
peso thanks to the reforms that the government is proposing
regarding the deregulation of the energy sector, which opens
up for direct foreign investment.


Page 4 of 8


Indonesia

South Korea

Negative trend in the current account

Large reserves and strong external balance

Low confidence in monetary policy

Weak momentum in the economy



The economic trend has brought several negative surprises in
recent months. GDP grew by 5.8 percent at annual rates in the
second quarter, which was the lowest level of growth since
the third quarter of 2010. Exports have been weak since early
2012 and fell by 6.3 percent during August alone. The balance
of trade has gradually worsened since the end of 2011. The
current account deficit amounted to 4.4 percent of GDP in the
second quarter, which was surprisingly high and the highest
in recent memory. Inflation has accelerated following the
government’s decision to cut back subsidies on vehicle fuel.
In September, the rate of inflation was 8.4 percent, compared
with levels below 5 percent in 2012. The central bank has
attempted to stabilise the currency by raising the policy rate in
several stages over the summer by a total of 150 points to 7.25
percent. It has also signed a swap agreement with the Japanese
central bank. These measures have not been sufficient to stop
the outflow of currency, which has caused currency reserves
to decline by approximately USD 15 billion to USD 86 billion.
Pressure on the central government budget is now increasing
since the cost of importing subsidised vehicle fuel has risen
considerably due to the weakening of the currency, while tax
revenues have decreased in line with the weaker economy.

GDP rose by 2.3 percent in the second quarter, meaning that
the economy has stabilised. Industrial production recovered in
August with an annual rate of 3.7 percent and new orders for
machinery have risen sharply. We expect the recovery to be
relatively calm however. Although PMI rose in September, it
remains below the 50 mark. A stabilisation of growth in China
is of considerable importance for South Korea, since exports
to China amount to more than 26 percent of total exports.
Retail trade has been weak since 2012 with an annual rate
fluctuating around zero. The government has announced a
stimulation package with 2.5 percent higher expenditure,
including welfare expenditure, labour market ventures and
healthcare, which is expected to strengthen consumer
confidence. Inflationary pressure is very low. Consumer prices
rose by only 0.8 percent in September, which is the lowest
rate of increase since the Asian crisis of 1999. This means
that inflation is below the central bank’s tolerance level of
between 2 and 4 percent by a broad margin. The central bank’s
view is that resources will be unoccupied for a long time to
come. Consequently, we expect no changes in monetary policy
before the summer of 2014. The key rate was most recently
cut in May by 25 points to 2.5 percent.

Forecast EUR/IDR in 3 months 15228 (today 15246)

Forecast EUR/KRW in 3 months 1417.00 (today 1454.03)

With a decline of 16 percent against the euro, the rupiah is
the currency that has been hardest hit of those we monitor
since the unease began in the summer. In addition, the interest
level for ten-year government securities doubled over the
summer. In our view, the risks for the rupiah against the US
dollar remain considerable. We are neutral towards the rupiah
measured in euros.

With a sizeable currency reserve and a current account surplus
of more than 5 percent of GDP, the South Korean won has had
a relatively strong development compared with other growth
currencies in the region. We expect a consolidation of the won
over the remainder of 2013 against the US dollar and some
strength against the euro.

Indonesia Spot Rate EUR/IDR

South Korea Spot Rate EUR/KRW
1550

1525

1525

14500

1500

1500

14000

1475

1475

1450

1450

1425

1425

1400

1400

15000

15000

14500
14000
13500

13500

13000

13000

12500

12500

12000

12000

11500

11500

11000
nov feb
11

maj

aug
12

nov

feb

maj aug
13

11000



EUR/KRW

15500

EUR/IDR

15500

EUR/IDR

16000

1375
nov feb
11

maj

aug
12

nov

feb

maj aug
13

EUR/KRW

1550

16000

1375


Page 5 of 8


India

China

Low valuation and active central bank

Economy shows signs of stabilising

Weak growth and strong need for reforms

Politicians are guiding down growth



Confidence in economic policy weakened considerably during
the summer with concerns over the quality of the credit stocks
in the Indian bank system. This, combined with expectations
that the Fed would start scaling back its bond purchases,
resulted in a strong decline for the rupee and a considerable
slump in the stock market. The economic slowdown has
continued with GDP growth at only 4.4 percent in the second
quarter. Industrial production has been weak since 2011.
PMI rose from 48.5 to 49.6 in September and thus remains
at a historically very low level. Inflation is high with a rate
of increase of 9.5 percent in consumer prices in August. The
current account deficit is of a record size, although the
worsening has ceased during the year, mostly because
imports have collapsed. The deficit in the current account
has thus decreased as a proportion of GDP. In September,
Raghuram Rajan became the new governor of the central
bank, having previously worked as chief economist at the
IMF. He immediately initiated a number of measures aimed at
stemming the outflow of capital and unexpectedly raised the
policy rate by 25 points at the end of September. Since then,
the Rupee has strengthened. For a more lasting strengthening
of the currency, it is now necessary that politicians implement
reforms that increase future confidence in the economy.

Recent statistics show that growth in China has shifted
down a gear, while at the same time stabilising. GDP rose by
7.6 percent in the second quarter compared with 7.7 percent
in the first quarter. The rate of investment has fallen and,
since 2012, it is rising by about 20 percent at annual rates,
compared with 25 percent over the period 2010-2011. The
rate of wage increases has declined from levels above 25
percent in early 2012 to approximately 17 percent, which has
had an impact in the form of lower retail sales. The political
focus is on restraining economic activity to a more sustainable
long-term trend. The risk of a hard landing is considerable
unless the credit expansion of recent years is halted and the
bubble tendencies are addressed. Total credit growth has
calmed since the authorities permitted a substantial increase
in interbank interest rates at the end of June. House prices,
on the other hand, have continued to rise, with the annual
rate amounting to 8.3 percent in August. PMI is now above
the 50 mark for both large and small companies. The central
bank injected substantial liquidity at the end of September
to prevent turbulence in the interbank market equivalent to
that which occurred at the end of June. The governing party

Forecast EUR/INR in 3 months 76.70 (today 84.11)

Forecast EUR/CNY in 3 months 7.88 (today 8.32)

The Indian currency is now down at the lowest level in more
than 16 years in terms of the real effective exchange rate.
In the short term, we are positive on the rupee thanks to
increased confidence in the central bank, high interbank rates
and a currency reserve covering three years of current account
deficits.

The renminbi has been stable against the US dollar in recent
months, which is in line with the political focus on stabilising
the economy. On the other hand, the Chinese currency has
strengthened by some 6.5 percent this year against a tradeweighted basket of currencies. We expect a continued stable
trend against the USD and given our EUR//SD forecast implies
a stronger renminbi against the euro.

India, Spot Rate, EUR/INR

China, Spot Rate, EUR/CNY

80

80

75

75

70

70

65

65

60
nov
feb
11

maj

aug
12

nov

feb

maj
13

aug

8,6
8,5

60



8,8
8,7
8,6
8,5

8,4
8,3
8,2

8,4
8,3
8,2

8,1
8,0

8,1
8,0

7,9
7,8
7,7
nov
feb
11

7,9
7,8
7,7

maj

aug
12

nov

feb

maj
13

aug

EUR/CNY

85
EUR/CNY

90

85

8,8
8,7

EUR/INR

95

90

EUR/INR

95


Page 6 of 8


Contact information
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https://research.swedbank.se

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exchange

Research

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Acting head

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e-mail: martin.soderlund@swedbank.s

e-mail: jan.peter.larsson@swedbank.se

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Magnus AlvessonTel: +46 8 5859 3341

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VP

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e-mail: hans.boman@swedbank.se

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Research
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e-mail: anders.eklof@swedbank.se

Research Macro

Emerging markets

VP

e-mail: hans.gustafson@swedbank.se

Anna Felländer Tel: +46 8 700 99 64
e-mail: anna.fellander@swedbank.se

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Fixed Income

e-mail: zandra.trulsson@swedbank.se
FX and Fixed Income Stockholm
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e-post: lena.jonnerberg@swedbank.se
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This research report has been compiled by Swedbank Large Corporations & Institutions, a division of Swedbank AB (publ). The document is not advisory and is
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Page 7 of 8


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The analyst(s) responsible for the content of this report hereby confirm that notwithstanding the existence of any such potential conflicts of
interest referred to herein, the views expressed in this report accurately reflect their personal views about the market covered. The analyst(s)
further confirm not to have been, nor are or will be, receiving direct or indirect compensation in exchange for expressing any of the views or the
specific recommendation contained in the report.
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This report by Swedbank Large Corporates & Institutions FX Fixed Income Research, is issued by the Swedbank Large Corporates & Institutions
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Emerging markets outlook, October 2013

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