Emerging markets outlook, October 2014

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  • 8/10/2019 Emerging markets outlook, October 2014


    Emerging markets outlook

    Emerging Markets FX

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

    Emerging markets outlook

    Is published four times a year and is forecastingcurrency developments for selected emerging marketcountries with a time horizon of 3 months.

    Weak growth, stronger dollar and geopolitical concerns

    Emerging markets analysis October 13, 2014

    The appreciation of the US dollar, concerns about higher interest

    rates in the US and signs of weaker growth in China in particular

    have placed pressure on emerging market currencies. Further

    stimulus from the ECB hasnt helped to ease these concerns.We expect the pressure on most emerging market currencies

    to continue this fall with the market again focused on weak

    underlying fundamentals, including slow growth, imbalances and

    geopolitical concerns.

    Economic development in Chinahas been broadly disappointing

    despite a major stimulus from the government. Housing pricesare falling throughout the country and industrial production

    has lost momentum. Low demand from China means that

    commodity prices will continue to trend downward. Moreover,

    the protests in Hong Kong have raised concerns about socialconict on the mainland. This, together with continued unrest

    in Russia and Ukraine and growing expectations of interestrate hikes in the US, has turned sentiment on several emergingmarket currencies bearish. This summer capital owed almost

    without hesitation to currencies with high short-term interest

    rates given the expectations of further stimulus from the ECB.

    Since September growth concerns have spread to the eurozones

    biggest countries. In the process, the focus and concern has

    shifted to weaker growth and the effects of a stronger dollar.

    Except for the nancial crisis in 2009, economic growth in Braziland South Africais the lowest in over 10 years.

    A stronger dollar is mainly hurting currencies with large fundingneeds in dollar. This includes Turkey, South Africa, Brazil andIndonesia. We expect the weak trend for emerging marketcurrencies to continue this fall despite that several currencies

    are signicantly oversold. The biggest risk for our negative

    outlook is if the pressure on emerging market currencies is met

    with substantial rate hikes, as happened in January. Another,

    though less likely, possibility is that China decides to stimulateits economy even more than before.

    We are still positive to Indias and Chinas currenciesversusthe euro, however. Partly this is because we expect a stronger

    dollar. We feel that the rupee is less vulnerable to higher USrates thanks to a rapid improvement in Indias external balance

    and better condence in policy makers. The dollar has the

    support of a steadily improving US economy and expectations

    of rate hikes starting next year. At the same time growth is

    surprising on the downside in the eurozones big countries, and

    the ECB is under major pressure to increase its stimulus. As a

    whole, relative growth and relative monetary policy both favor

    the dollar against the euro.

  • 8/10/2019 Emerging markets outlook, October 2014


    FX/FI research Swedbank Large Corporates & Institutions Page 2 of 8

    Emerging markets outlook

    Forecast EUR/RUB in 3 months 51.05 (today 51.02) Forecast EUR/PL N in 3 months 4.30 (today 4.19)

    Currency forecast vs. the euroCurrency forecast vs. the euro

    The Polish zloty has traded this year within a narrow range

    against the euro and appreciated against the euro. We expect

    the zloty to be slightly more vulnerable for the remainder

    of the year. The effects of the crisis in Russia and Ukraine,

    together with lower demand from the eurozone, are impeding

    growth. Our forecast is that the zloty will weaken slightly

    against the euro as the central bank cuts the benchmark rate.

    The Polish economy has lost steam. While GDP grew by 3.3%

    in the second quarter, economic data since then have been

    disappointing. The economy has been driven by domestic

    demand, mainly strong investment growth. Industrial

    production has lost momentum and rose by only 1.4% at an

    annual rate in August, compared with a growth rate of 7.5%

    in April. The anemic numbers in recent months are rooted in

    weaker exports owing to the recent slowdown in the eurozone,

    especially in Germany. Poland is highly dependent on Germany,

    where it sends 25% of its exports. The crisis in Russia and

    Ukraine has almost certainly affected activity as well. It seems

    that this weakness will continue through the rest of the year.

    The purchasing managers index has collapsed from 55.9 in

    February and stayed below the 50 mark for the last three

    months. The ination rate has been negative since July, which

    pressured the central bank to cut its benchmark rate by 50bpto 2.0% at its meeting in the beginning of October. We expect

    the central bank to cut at least another 25bp during this fall.

    On the positive side, low ination is strengthening household

    purchasing power, which, along with job growth, is partly

    offset ting the slowdown in manufacturing.


    Strong household purchasing power

    Low short-term rates


    High short term rates

    Weak growth and isolation

    We expect the ruble to continue to weaken against the dollar.

    Due to the high interest rate level in Russia, we anticipate a

    gradual decline. The risk is that it will be bigger and faster if

    Russia is slapped with further sanctions or if the central bank

    introduces capital controls to stop capital outows. We have a

    neutral view on the ruble against the euro as we see a stronger

    dollar ahead.

    The Russian ruble has continued to weaken to a new low

    against the dollar. The crisis between Russia and Ukraine

    has stabilized somewhat, with reports of troop pullbacks by

    both sides. On the other hand, the EU decided on additional

    sanctions against Russian ofcials in early September. Russia

    countered with a bill that allows it to seize foreign assets in

    Russian territory and by retaliating against several Western

    companies operating in the country. Russia is also demanding

    that the trade agreement between Ukraine and the EU be

    ripped up and renegotiated. We expect political tension to

    continue between Russia and the West for the foreseeable

    future and economic activity in Russia to remain weak. The

    credit channel from the West is practically closed, which means

    that already weak investment activity will slow even further.

    Households have been the driving force in the economy, but

    high ination is reducing their purchasing power. The centralbank unexpectedly raised its benchmark rate at the end of July

    by 50bp to 8%. Rates are now their highest since 2009, which

    is slowing credit growth and consumer spending, as reected

    in new car sales, which fell 26% at an annual rate in August.

  • 8/10/2019 Emerging markets outlook, October 2014


    FX/FI research Swedbank Large Corporates & Institutions Page 3 of 8

    Emerging markets outlook

    Forecast EUR/ TRY in 3 months 2.89 (today 2.89) Forecast EUR/Z AR in 3months 14.15 (today 14.07)

    Currency forecast vs. the euroCurrency forecast vs. the euro

    Though it is historically low in terms of its real effective

    exchange rate, we remain negative to the rand against the

    dollar due to South Africas persistent underlying problems

    with slow growth, a large current account decit and falling

    commodity prices. We have a neutral view of the rand against

    the euro.

    After a stable period this summer, the lira has weakened. It is

    still among the currencies that are highly sensitive to tighter

    global liquidity. The current account balance has improved, but

    nancing of the decit is short-term. We remain negative to

    the lira against the dollar and neutral against the euro.

    A long list of negative stories about the South African

    economy now includes mining strikes, which are cutting into

    metal exports at the same time that the electricity shortages

    are leading to higher oil imports. This has caused a record-

    high trade decit. As a result, the current account decit

    remains at about 6% of GDP. Growth is low, ination is high

    and structural problems in the labor market persist. GDP

    grew by only 1% in the second quarter, the lowest rate since

    the nancial crisis. In 2000-2008 the growth rate averaged

    about 4%. The purchasing managers index has stayed below

    the 50 mark, indicating continued weakness in manufacturing.

    After trending downward since 2011, the rand is weak in both

    nominal terms and measured by its real effective exchange

    rate. In spite of this, there isnt much in the economic data

    that suggests the rand is undervalued. Exports are falling and

    a weak commodity market has hurt terms of trade. Domestic

    demand is also low, as evidenced by weak retail sales andimports. The ination rate has stayed above the central banks

    upper tolerance level of 6% for most of 2014 and in August

    reached 6.4%. The central bank has raised its benchmark rate

    twice this year to 5.75%, and we expect further rate hikes.

    Turkish growth slowed in the second quarter. GDP rose by 2.0%

    on an annual basis, compared with an annual growth rate of

    4.7% in the rst quarter. The drop-off is due to lower domestic

    demand, including a 3.5% annual decline in investments.

    Growth is being sustained by a trade surplus driven by lower

    imports as well as strong exports. The trade balance has

    gradually improved during the year, helping to reduce the

    current account decit from about 9% of GDP to about 6.5%.

    While the decit has shrunk, the economy remains vulnerable

    to global risks, and the decit is still being funded with short-

    term debt. The ination rate remained stubbornly high at 9.5%

    in August, far exceeding the central banks tolerance level.

    That didnt stop it from cutting the repo rate in several steps

    this year to 8.25%. After the latest cut, real interest rates are

    negative. The central bank considers monetary conditions to

    be tight, but with real interest rates negative it continuesto undermine condence in its monetary policy. Domestic

    demand is weak and may be in need of stimulus, but to secure

    long-term funding for the current account decit the central

    bank will have to increase condence in its economic policies.

    South Africa

    Low exchange rate

    Weak external balance and low growth


    High short-term rates

    Vulnerable to escalating risk in the nancial markets

  • 8/10/2019 Emerging markets outlook, October 2014


    FX/FI research Swedbank Large Corporates & Institutions Page 4 of 8

    Emerging markets outlook

    Forecast EUR/MXN in 3 months 16.48 (today 17.05) Forecast EUR/BRL in 3 months 3.14 (today 3.07)

    Currency forecast vs. the euroCurrency forecast vs. the euro

    The Mexican peso has appreciated signicantly against the

    euro in 2014, which is partly because the euro has been weak

    against the dollar. We like the peso for fundamental reasons.

    While we see short-term downside risks against the backdrop

    of expectations of rate hikes in the US, we are positive to the

    peso against the euro through the end of the year.

    Mexicos slow economic development continued during the

    second quarter, with GDP growth of 1.6% on an annual

    basis. As a result, growth has trended below average (about

    2.5%) since early 2013. The slow growth is due to weakness

    in manufacturing outside automaking, weak activity in the

    construction sector and sluggish domestic demand. Domestic

    demand, especially consumer spending, has stood still due to

    weak consumer condence, which hasnt recovered from a

    big drop in 2013. Retail sales growth has uctuated around

    zero on an annual basis since the beginning of 2013. Auto

    production, on the other hand, has accelerated again after

    a period of stagnation in 2013. Industrial production saw

    negative growth numbers for much of 2013, but rose by 2%

    in July at an annual rate. The manufacturing PMI has risen and

    the latest reading of 52.7 is evidence of improved optimism in

    the industrial sector. The ination rate has uctuated aroundthe central banks upper tolerance level on 4%. On the other

    hand, we dont expect any rate hikes in this year. The economy

    is not strong enough and the central bank unexpectedly cut its

    benchmark rate in June to 3% when it was worried about the

    weak economic activity.

    The Brazilian economy is facing stagation and is in need of

    structural reforms. The election outcome will be important

    and the challenges are huge, but we dont expect any rapid

    changes in policy. Moreover, the global environment isnt

    helping, with falling commodity prices and a strong dollar. We

    are retaining a negative outlook on the real.

    The rst round of the presidential election produced asurprising result which suggest a very tight race. The outcome

    in the second round will be decisive to the investment climateand the nancial markets in Brazil going forward. Regardlessof whether President Dilma Rousseff or opposition leaderAcio Neves wins the election, political and structuralreforms are needed to restore investors condence. Brazilis underinvested and in need of long-term capital to nanceinfrastructure investments. The Brazilian economy is veryweak. GDP fell by 0.8% at an annual rate during the secondquarter and industrial production has trended lower throughmuch of 2014, falling in August by 5.4% at an annual rate.Household consumption rose during the second quarter by1.2% at an annual rate, the slowest growth rate since 2004.The balance of trade has stabilized, mostly thanks to weakimports, with exports continuing to languish. The currentaccount decit corresponds to about 3.5% of GDP, makingthe Brazilian economy vulnerable to lower dollar liquidity. Theination rate remains high despite the economic slowdownand several rate hikes. This year alone the central bank hasraised interest rates three times by a total of 100bp to 11%.This underscores the need for structural reforms to reducebottlenecks in the economy.


    High policy rate

    Weak growth and dual decits


    Growth-promoting reforms on the way

    Weak growth

  • 8/10/2019 Emerging markets outlook, October 2014


    FX/FI research Swedbank Large Corporates & Institutions Page 5 of 8

    Emerging markets outlook

    Forecast EUR/IDR in 3 months 15498 (today 15478) Forecast EUR/KRW in 3 months 1340.70 (today 1353.69)

    Currency forecast vs. the euroCurrency forecast vs. the euro

    The South Korean won lost some of its strength in September.

    The strong dollar and growth concerns in China overshadowed

    the large current account surplus. We expect the won to

    weaken against the dollar as the dollar strengthens and

    economic data from China are weak. We believe the won will

    strergthen to the euro.

    The Indonesian rupiah has several factors in its favor if the

    nancial markets risk appetite zzles, including well-stocked

    currency reserves, a low historic valuation and a high short-

    term interest rate. But because of falling commodity prices

    and lower expectations from the new government, we have a

    negative outlook on the rupiah against the dollar and a neutral

    view ag...


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