Emerging Markets Briefer - Danske Bank

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Dec 20, 2017 - Emerging markets (EM) are set to close the year on a very positive note despite numerous .... child benef
Investment Research — General Market Conditions

20 December 2017

Emerging Markets Briefer Slowing down to single-digit growth Emerging markets (EM) are set to close the year on a very positive note despite numerous headwinds from local political uncertainties to geopolitical woes and continuing monetary tightening in developed economies. The reflation expectations have been left behind for now despite ongoing global economic growth. We expect the double-digit growth, which has been seen through many EM assets in 2017, to slow down into single-digit expansion due to the following factors outlined below. China’s economic growth is likely to slow down moderately, as the country’s monetary policy will be tightened further and home sales growth is set to decelerate. The slowdown in leading indicators has been visible already through lower credit, construction and manufacturing growth as well. As a result of the slowdown in leading indicators, sliding metal prices could weigh on metal and ore exporters in the EM such as Brazil, Chile, Indonesia, Malaysia and South Africa. However, we do not expect the slowdown to be excessively sharp as, for instance, low housing inventories in China are likely to cushion the slowdown, industrial upgrading is set to go on and money growth has stabilised. Ongoing monetary tightening in developed markets is set to limit excessive flows into EM as carry trades will be less attractive and global liquidity is likely to decrease. While the Fed’s tightening has not stopped EM growth extension in 2017, a more hawkish stance by central banks in developed markets is set to continue in 2018. EM assets will be still supported by more dovish market expectations versus the central banks’ dots. For example, we expect the Fed to hike twice in 2018 versus its own projections of three hikes. EM countries with high FX leverage in the economy such as Chile, Hungary, Peru and Turkey are likely to experience additional pressure. Geopolitical woes and domestic uncertainties should be taken into account, while considering EM countries individually. In 2018, several EM giants such as Brazil, Colombia, Mexico and Russia are facing presidential elections. While markets stay calm about the possible presidential election outcome in Russia, elections in other EM peers are likely to trigger volatility in local assets. On the other hand, geopolitical risks are set to remain elevated for Russia and Turkey in 2018. US President Donald Trump’s hawkish stance on several EM exporters has eased for the time being. Yet, we recommend to keep in mind a possible standoff with China. In terms of geopolitical risk in 2018 for Asian economies, we see uncertainty around the Korean peninsula. Central and East European economies (CEE) including the Baltic States should continue to grow, supported by the EU economic expansion. Yet, CEE’s economic growth is likely to peak in late 2018 as accelerating inflation is set to push central banks in the Czech Republic, Hungary and Poland more to the hawkish side. China’s monetary policy tightening and economic slowdown to weigh on EM

Global liquidity growth is set to decrease weighing on the EM

Contents Poland ............................................................................ 2 Hungary ....................................................................... 3 Czech Republic ....................................................... 4 The Baltics .................................................................... 5 Russia ........................................................................... 6 Turkey ........................................................................... 7 South Africa .............................................................. 8 Brazil .............................................................................. 9 China ...........................................................................10 India ..............................................................................11 Danske Bank hedging recommendations: EMEA .............................12 Danske Bank hedging recommendations: other emerging markets......................................................................13 FX forecasts............................................................14 Forecasts vs forwards.....................................16 Monetary policy calendar ..............................17

Chief Analyst, Head of Emerging Markets Research Jakob Ekholdt Christensen + 45 45 12 85 30 [email protected] Chief Analyst Allan von Mehren +45 45 12 80 55 [email protected] Senior Analyst Morten Helt +45 29 62 62 33 [email protected] Senior Analyst Vladimir Miklashevsky +358 10 546 7522 [email protected] Analyst Rokas Grajauskas +370 5 215 6231 [email protected] Assistant Analyst Nicolai Pertou Ringkøbing [email protected]

Source: Bloomberg data, Macrobond Financial, Danske Bank

Source: Bloomberg data, Danske Bank

Important disclosures and certifications are contained from page 18 of this report.

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Emerging Markets Briefer

Poland – strong economic performance continues Macro and political outlook 

Polish economic growth remains solid. Private consumption is being boosted by the child benefit cheque, record low unemployment (which fell to an all-time low of 6.6% in October) and higher real wage growth. Furthermore, increasing absorption of EU funds is adding to investment activity, which grew 20% y/y in October. Given the strong performance, we have raised our GDP forecasts for this year and next to 4.6% and 3.8%, respectively (from 4.0% and 3.5%, respectively). On the political front, the conflict with the EU has died down for now amid delays in forming a new German government and Brexit negotiations. The reshuffling of the Polish government on 8 December is unlikely to substantially alter the direction of economic policies until the next election, but it may improve relations with the EU.

The National Bank of Poland (NBP), particularly governor Glapiński, is in no hurry to raise monetary policy rates despite headline inflation increasing (reaching 2.5% in November). However, according to the minutes of the meeting on 8 November, several MPC members are beginning to feel uneasy about the monetary policy stance. However, the core inflation pressures have remained fairly constant in recent months. We expect the headline to fall back slightly in the coming months before rebounding in April given the increase in domestic inflation pressures. The financial market is pricing in a 25bp hike over the next year, which we think is too dovish, as we expect a rate hike in early Q3 2018.

S&P: BBB+ (stable) Currency regime: Free float (freely convertible) Inflation target:

Macro forecasts 2016

2017

2018

2019

2020

GDP (% y/y)

2.9

4.6

3.8

3.5

3.6

GDP deflator (% y/y)

0.4

1.8

1.9

1.8

1.8

CPI (% y/y)

-0.7

1.9

2.5

2.5

2.5

Private consumption (% y/y)

3.8

4.8

4.0

3.6

3.5

Fixed investments (% y/y)

-7.9

1.8

3.7

3.6

3.5

Unemployment (%)

8.2

7.1

6.5

6.2

6.2

Current account (% of GDP)

-0.5

-0.5

-0.9

-1.5

-1.7

Source: Macrobond Financial, Danske Bank

FX outlook 

Credit rating:

2.5% ±1pp

Monetary policy outlook 

PLN

After weakening in Q3, the zloty has rebounded amid abating tensions with the EU and strong underlying performance of the Polish economy. As we expect inflation to drop near term despite strong economic performance, we think EUR/PLN should remain fairly unchanged over the next three months. However, given the rebound in inflation in Q2 2018, the EUR/PLN should drop as the market would price in more rate hikes by the NBP. Our forecasts for EUR/PLN are 4.20 in 3M, falling to 4.16 in 6M and 4.14 in 12M. However, as noted in the risks section, the cross may see temporary spikes in the cross around confrontations with the EU, but strong economic fundamentals will likely pull it down again.

Interest rate forecast National Bank of Poland (NBP) Policy rate

1.50

Next meeting Next change End-2018

10/01/2018 +25bp Q3, 2018 2.00

Source: Danske Bank

Risk factors 

The balance of risk with our EUR/PLN forecast in the near term is to the downside given the strong economic performance of the Polish economy and possible upside inflation risks. Among the upside risks for the cross are renewed tensions with the EU over the rule of law case Also, a deterioration in global risk sentiment or higher global interest rates could trigger an upward move in EUR/PLN.

Economy operating close to full potential...

...and markets are pricing in one rate hike over the next year

FX forecasts

EUR/PLN 18-Dec +3M +6M +12M

Danske 4.21 4.20 4.16 4.14

Forward 4.22 4.24 4.28

USD/PLN 18-Dec +3M +6M +12M

Danske 3.56 3.62 3.47 3.31

Forward

Source: Danske Bank

Source: Macrobond Financial

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Source: Macrobond Financial

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3.55 3.55 3.54

Emerging Markets Briefer

Hungary – waiting for inflation to move Macro outlook 

Growth in Q3 continued the strong form shown in Q2, with GDP growing 3.9% y/y in Q3 (revised up from the 3.6% preliminary number). This is a confirmation of the strong signals coming out of Hungary and could eventually raise concerns over a potential overheating of the economy. In October, retail sales and industrial production grew at 6.3% y/y and 7.6% y/y, respectively, suggesting the strong momentum continuing in Q4. With strong growth numbers for all three quarters so far, we raise our GDP forecast for 2017 from 3.6% to 4.0%. We also revise up our forecast for 2018, as the strong momentum seems to be accelerating into 2018.

Credit rating: S&P: BBB- (positive) Currency regime: Free float (freely convertible) Inflation target:

Monetary policy outlook 

HUF

Inflation continues to struggle to reach the central bank’s (MNB) 3% target, with core inflation staying at 2.7% y/y and CPI inflation reaching 2.5% y/y in November. With headline inflation remaining below the central bank’s 3% target, we do not see any imminent changes in its dovish stance, but we believe that the strong economic growth will drive up inflation eventually, leading to a change in policy by the central bank at some point in 2018. The Hungarian central bank announced extraordinary measures at its November meeting and gave further details at the December meeting keeping the key rate unchanged: the MNB will focus on alternative measures, such as asset purchases in 2018, in order to keep record-low financing costs. We still expect a change in policy stance during 2018.

3% (medium term)

Macro forecasts 2016

2017

2018

2019

GDP (% y/y)

2.1

4.0

3.9

3.3

GDP deflator (% y/y)

0.8

3.3

3.3

3.2

CPI (% y/y)

-0.1

2.5

2.7

3.0

Private consumption (% y/y)

4.3

4.5

4.5

3.5

Fixed investments (% y/y)

-3.7

21.2

14.8

4.7

Unemployment (%)

4.4

4.4

4.2

4.1

Current account (% of GDP)

3.0

3.3

2.8

2.5

Source: Macrobond Financial, Danske Bank

FX outlook 

On the back of a still dovish MNB, EUR/HUF has moved above 314. Given the continued above-potential growth, we think that a tightening of monetary policy will be factored in eventually, lending support to the HUF at some point during 2018, as we do not see the ECB hiking before 2019.We target EUR/HUF at 311 in 1M, 310 in 3M, 308 in 6M and 305 in 12M.

Risk factors 

A clear upside risk to our EUR/HUF forecast is a deterioration in global risk sentiment as well as a more hawkish ECB. However, there are also downside risks for the cross from stronger-than-expected economic and inflation developments in Hungary.

Core inflation bending off just below 3%

Interest rate forecast Hungarian Central Bank (MNB) Policy rate

0.90

Next meeting Next change End-2018

30/01/2018 +15bp H2, 2018 1.05

Source: Danske Bank

FX forecasts

An undervalued HUF brings record current account surpluses

EUR/HUF 18-Dec +3M +6M +12M

Danske 313.6 310.0 308.0 305.0

Forward 313.4 313.5 313.9

USD/HUF

Source: Macrobond Financial

Source: Macrobond Financial

18-Dec +3M +6M +12M

Danske 265.47 267.24 256.67 244.00

Forward 264.03 262.52 259.52

Source: Danske Bank

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Emerging Markets Briefer

Czech Republic – CNB to stay patient Macro and political outlook 

GDP growth slowed in Q3, growing 0.5% q/q compared to 2.5% q/q in Q2. However, this reflects mainly the strong growth in Q2 and on an annual basis GDP was up 5% in Q3. The strength of the economy also continues to show in the labour market, with unemployment falling to a new record low of 3.5% in November. Despite the strong labour market, wage growth in Q3 disappointed by increasing 6.8%, below the 7.5% expected by the CNB. With strong growth throughout Q3 we forecast GDP growth for 2017 at 4.4% y/y. We revise up our forecast for 2018 from 3.2% to 3.3%.

Credit rating: S&P: AA- (stable) Currency regime: Managed float

Monetary policy outlook 

CZK

The Czech National Bank (CNB) raised the two-week repo rate by 25bp to 0.50% at its November meeting. The decision was highly anticipated by the market and the CZK eventually depreciated slightly on the day it was made, following some dovish comments at the press meeting. Inflation decreased to 2.6% y/y in November, while unemployment fell to a new record-low of 3.5%. The market still anticipates that the CNB will proceed with another rate hike, but with slightly disappointing wage growth numbers and inflation falling back it seems unlikely that it will do so in December. We expect the CNB to wait until 2018 and to hike the two-week repo rate by 25bp in February.

Inflation target: 2% ±1pp

Macro forecasts 2016

2017

2018

2019

GDP (% y/y)

2.5

4.4

3.3

3.1

GDP deflator (% y/y)

1.2

1.4

2.0

2.0

FX outlook

CPI (% y/y)

0.3

2.4

2.0

1.9

Private consumption (% y/y)

3.6

4.1

3.3

2.9



Fixed investments (% y/y)

-2.5

5.6

3.5

2.9

Unemployment (%)

5.5

4.2

3.7

3.6

Current account (% of GDP)

1.1

0.9

0.8

0.8

Since the last edition of the EM Briefer, EUR/CZK has broken below the important level of 26.00. This move lower has been driven by continuing strong fundamentals, and an increasingly hawkish CNB. In November, EUR/CZK went as far as below 25.40, but on the back of a more patient central bank and some weak numbers out of the Czech Republic, EUR/CZK has moved back towards 25.70. We project that the cross will hover around current levels in the short term and look for more gradual CZK strengthening over the medium term. This is based on robust Czech economic fundamentals and relative monetary policy divergence, as the CNB seems ready to continue its hiking cycle, while we do not expect an ECB hike before 2019. We keep our forecasts unchanged at 25.60 in 1M, 25.50 in 3M and 25.30 in 6M and 12M.

Given the sizable amount of long CZK positions accumulated in the market prior to the floor exit, EUR/CZK is still vulnerable to sudden moves. A possible trigger for capital outflows could be a large number of Czech government debt securities maturing.

CNB preparing for yet another rate hike, as inflation stays above target

Interest rate forecast Czech National Bank (CNB) Policy rate

0.50

Next meeting Next change End-2018

21/12/2017 +25bp Q1, 2018 1.00

Source: Danske Bank

Risk factors 

Source: Macrobond Financial, Danske Bank

CNB concerned about Czech economy overheating in light of strong growth

FX forecasts

EUR/CZK 18-Dec +3M +6M +12M

Danske 25.71 25.50 25.30 25.30

Forward 25.49 25.52 25.59

USD/CZK 18-Dec +3M +6M +12M Source: Macrobond Financial, Danske Bank

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Source: Macrobond Financial, Danske Bank

Danske 21.76 21.98 21.08 20.24

Forward

Source: Danske Bank

www.danskeresearch.com

21.48 21.38 21.16

Emerging Markets Briefer

The Baltics – higher economic growth persists 



Latvia led the Baltic states in terms of economic growth in Q3 17, as its GDP expanded by 5.8% y/y, while Estonia’s economy grew by 4.2% and Lithuania’s by 3.1%. Overall, we expect the Baltic states to grow significantly faster this year than in 2016, due primarily to a rebound in investment activity but also to stronger exports and robust domestic consumption. Driven by higher energy and food prices and rapid wage growth, reaching 7.2-7.5% y/y in all three countries in Q3, price growth in the Baltics is also significantly higher this year than in 2016. We estimate inflation this year will average 3.6% in Estonia, 3.0% in Latvia and 3.7% in Lithuania. In our view, inflation should be slightly lower in 2018, due to slower growth in food and energy prices.

Estonia 

Investment continues to be the key driver behind economic growth in Estonia. After four consecutive years of contraction, investment activity is rebounding this year and is being driven by higher EU funding, high capacity utilisation rates and increasing business sentiment. In Q3, investment increased by 13.2% y/y, while private consumption grew by 3.5% y/y.



Estonian exports contracted by 0.2% y/y in Q3, due primarily to a decrease in the export of goods in September, when two big export categories – electronics and oil products – experienced a decline.

Latvia 



Despite higher inflation, private consumption in Latvia expanded by 5.8% y/y in Q3 – the highest rate in four years. This was driven by an uptick in wage growth. Investment is also rebounding more strongly this year (up 20.0% y/y in Q3) after a sharp contraction in 2016. Following a strong beginning of the year, Latvia’s export performance has faded lately. Exports grew by 2.4% y/y in Q3.

Estonia Credit rating: S&P: AA- (stable) Currency: EUR since 1 January 2011 2016

2017

2018

2019

GDP (% y/y)

2.1

4.6

3.2

3.3

HICP inflation (% y/y)

0.8

3.6

2.8

3.0

Private consumption (% y/y)

4.1

2.4

2.9

3.2

Fixed investment (% y/y)

-2.8

15.0

6.3

6.9

Exports (% y/y)

3.6

2.7

2.9

3.3

Gross wage growth (% y/y)

7.3

6.9

7.4

7.8

Unemployment (%)

6.8

6.1

6.0

5.8

Source: Macrobond Financial, Danske Bank

Latvia Credit rating: S&P: A- (positive) Currency: EUR since 1 January 2014 2016

2017

2018

2019

GDP (% y/y)

2.1

4.4

3.4

3.3

HICP inflation (% y/y)

0.1

3.0

2.9

3.1

Private consumption (% y/y)

3.4

4.4

4.2

3.9

-11.7

17.9

6.8

7.2

Exports (% y/y)

2.8

3.8

3.5

3.3

Gross wage growth (% y/y)

5.0

7.5

8.1

8.7

Unemployment (%)

9.6

8.7

7.9

7.5

Fixed investment (% y/y)

Source: Macrobond Financial, Danske Bank

Lithuania 

Lithuania is the export leader in the EU this year, with exports expanding by 13.0% y/y in Q3, driven by a recovery in demand in both European markets and Russia.



Growth in private consumption slowed somewhat in Q3, to 2.4% y/y, due primarily to higher inflation. Fixed investment continues to expand at a healthy rate (+7.5% y/y in Q3), driven by much the same factors as in the other Baltic countries.

Inflation heads south in 2018

Lithuania Credit rating: S&P: A- (positive) Currency: EUR since 1 January 2015 2016

2017

2018

2019

GDP (% y/y)

2.3

3.7

3.5

3.4

HICP inflation (% y/y)

0.7

3.7

3.2

3.3

Private consumption (% y/y)

5.6

3.9

4.0

3.8

Fixed investment (% y/y)

-0.5

6.8

7.9

7.4

Exports (% y/y)

2.9

11.9

4.3

4.1

Gross wage growth (% y/y)

7.9

8.2

8.4

8.9

Unemployment (%)

7.9

7.2

6.9

6.6

Source: Macrobond Financial, Danske Bank

Source: Eurostat, Danske Bank

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Emerging Markets Briefer

Russia – eyeing possible sanctions Macro outlook 





Russia’s economy continues to grow. In Q2 17, the economy jumped 2.5% y/y versus 0.5% y/y a quarter earlier. According to the final data, Q3 17 has slowed down to 1.8% y/y. Agriculture and service sectors were the main contributors, while support is also coming from recovering retail sales. We keep our 2017 GDP growth estimate at 1.9% y/y and at 2.0% y/y for 2018. We expect the economy to grow 2.1% in 2019. The presidential election in March 2018 is likely to be a non-event for the markets. Yet, we do not exclude that some reforms could be started as the election is over and the new government is formed before H2 18. We expect that the pension age increase could start in 2019 already, while taxes should remain unchanged through 2018. Given the expectations of possible reforms in Russia, it could push up potential growth in the long term from current 2.0% y/y. Russia’s rigid fiscal discipline is set to continue through the next presidential term 2018-2024. We could see the budget deficit approaching 0.0% of GDP in early 2020s already. We expect the current account surplus to continue through the next years.

FX and monetary policy outlook 





On 15 December, the CBR cut its key rate by a surprising 50bp to 7.75%, while together with Bloomberg unanimous consensus we expected a 25bp cut. We expect the CBR to continue its moderate cuts, bringing the key rate to 6.75% by end-2018, keeping real rates highly elevated. Inflation fell further under CBR’s 4% y/y target, posting 2.5% y/y in November, which is an all post-Soviet time low. Yet, the CBR wants to anchor long-term CPI around 4% y/y, which better explains the central bank’s objective. We remain bullish on the RUB in the long term, as high rate differentials prevail and the domestic story supports the currency. Short- and medium-term prospects are murkier, however, as external factors such as the oil price and geopolitics put notable pressure on the RUB.

Credit rating: S&P: BB+ (positive) Currency regime: Free float Inflation target: 4%

Macro forecasts Real GDP (% y/y) Private consumption, real (% y/y) Fixed investments, real (% y/y) Brent oil price (USD, average, futures) Brent oil price (% y/y) Exports in USD (% y/y) Imports in USD (% y/y) MosPrime 3 months rate (% average) CPI (% Dec/Dec) Unemployment (%) Budget balance (% of GDP) Current account (% of GDP)

2015

2016

2017E

2018E

2019E

-2.8

-0.2

1.9

2.0

2.1

-9.8 -9.4 53.6 -46.1 -31.8 -37.0

-5.0 -1.4 45.1 -15.9 -18.0 -2.0

2.3 4.0 55.0 22.0 22.0 21.0

2.5 5.8 62.1 12.8 14.0 10.0

2.9 6.0 59.2 -4.6 18.0 2.0

13.3 12.9 5.6 -2.4 4.0

11.2 5.4 5.6 -3.5 3.2

9.2 2.5 5.2 -3.0 3.0

7.25 3.3 5.1 -2.7 3.2

6.7 3.3 5.1 -2.0 3.2

Source: CBR, Rosstat, Bloomberg, Macrobond Financial, Danske Bank estimates

Interest rate forecast Bank of Russia (CBR) Policy rate Next meeting Next change End-2018

7.75 09/02/2018 -25bp Q1, 2018 6.75

Source: CBR, Danske Bank

FX forecasts

Risk factors 

RUB

Possible introduction of the new anti-Russia sanctions by the US by the end of January 2018 is a serious short- to medium-term risk for the RUB, Russian stocks and government debt. Worsening sentiment could pause foreign direct investment flows and accelerate inflation. Upside risks come from an increasing oil price and improving relations with the West.

EUR/RUB 18-Dec +3M +6M +12M

Danske 69.19 67.05 67.44 66.88

Forward 70.31 71.59 74.09

USD/RUB Industrial production falls on revised calculation method

Private consumption recovers on real wage and lending growth

18-Dec +3M +6M +12M

Danske 58.57 57.80 56.20 53.50

Forward

Source: Danske Bank

Source: Macrobond Financial, Danske Bank

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Source: Macrobond Financial, Danske Bank

www.danskeresearch.com

59.24 59.96 61.25

Emerging Markets Briefer

Turkey – cosmic growth surprises Macro outlook 





Turkey’s economic growth surprised positively, with GDP expanding 11.1% y/y in Q3 17, the strongest growth since 2011. The best performers on an annual basis were construction and industrial sectors. Seasonally adjusted quarterly data indicate that quarterly growth came from private consumption and fixed investments. Exports also saw double-digit growth in Q3 17. Given the recent surprise in economic indicators’ growth we raise our 2017 GDP forecast to 6.8% y/y from 4.1% y/y previously. We expect 2018 GDP to grow to 3.5% y/y, as a high base effect will keep the expansion figures lower and the central bank is likely to remain more hawkish than we expected previously. We expect 2019 GDP growth to slow down to 3.0% y/y. The current account (CA) balance remains in negative territory, posting an USD3.8bn deficit in October. We expect the current account deficit to stay in negative territory throughout 2017-2019 at circa -5.0% of GDP. The current increase in the oil price would widen the deficit and a significant fiscal expansion is a major threat to CA widening.

FX and monetary policy outlook 



We see weaker prospects for the TRY in the long term, as rising commodity prices weigh on the current account deficit and a hawkish Fed would put pressure on FX exposure of Turkish corporations. We remain cautious in the short- to medium-term as geopolitical woes are likely to add volatility to the pair.

S&P: BB (negative) Currency regime: Free float Inflation target: 5.0% year-end 2017-20

Macro forecasts Real GDP (% y/y) Private consumption, real (% y/y) Fixed investments, real (% y/y) CPI (% Dec/Dec) Unemployment (%) Current account (% of GDP)

2015 6.1 5.6 9.1 7.7 10.3 -3.8

2016 2017E 2.9 6.8 2.3 6.2 3.2 4.8 7.8 12.0 10.7 10.6 -3.8 -5.2

2018E 2019E 3.5 3.0 3.1 2.7 4.0 3.2 8.2 7.8 10.0 10.4 -4.8 -4.5

Interest rate forecasts C.B. of the Republic of Turkey (TCMB) Policy rate

8.00

Next meeting Next change End-2018

18/01/2018 Unchanged 2018 8.00

Source: Danske Bank

FX forecasts

Downside risks to our TRY forecasts are again geopolitical, if the confrontation with the US escalates. The TCMB’s easing on political pressure and improving macro are also downside risks to our TRY forecasts. Fed’s monetary tightening is the general EM downside risk for the TRY.

Turkey’s GDP growth surprises with extraordinary prints in Q1-Q3 17

Credit rating:

Source: Bloomberg, Danske Bank

On 14 December Turkey’s central bank (the TCMB) left its benchmark repo rate unchanged at 8.00% as we and Bloomberg consensus expected. Yet, the TCMB raised its late liquidity rate by 50bp to 12.75%, as inflation has accelerated to a multi-year high and the TRY’s volatility has surged recently. However, the hike was too small versus markets expectations, which caused a large sell-off in the TRY. The TCMB might start raising its benchmark repo rate in H1 18, if the current inflation pressure persists.

Risk factors 

TRY

EUR/TRY 18-Dec +3M +6M +12M

Danske 4.52 4.58 4.80 5.06

Forward 4.66 4.83 5.17

USD/TRY

Current account deficit to stay throughout 2017-18 18-Dec +3M +6M +12M

Danske 3.83 3.95 4.00 4.05

Forward 3.93 4.04 4.28

Source: Macrobond Financial, Danske Bank

Source: Macrobond Financial

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20 December 2017

Source: Macrobond Financial

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Emerging Markets Briefer

South Africa – the dawn of a new era Macro outlook 





The appointment of Cyril Ramaphosa as the new ANC leader has fuelled hopes among investors of a new dawn for the South African economy. The new ANC leader has run a pro-business and anti-corruption campaign, trying to distinguish himself from the Zuma administration. However, it is not yet clear how forcefully he will be able to implement his policy agenda, nor how easily Jacob Zuma will relinquish power, especially as the two men are not on closest terms. Hence we may be in for policy uncertainty near term, but leadership change is positive for the South African economy. Meanwhile, the South African (SA) economy is still experiencing a modest recovery; in Q3, the economy grew 0.8% y/y in line with consensus. The rebound is driven mainly by agriculture, which is recovering from a severe drought, and also by mining. However, manufacturing and services sector activity remains subdued. The rebound in the economy comes amid improving confidence among corporates and households. However, retail sales growth slowed to 3.2% in October from an average of over 5% in Q2, pointing to weaker consumption growth in Q4. Although the PMI has increased, the indicator remains below the 50 benchmark. Leading indicators, however, do paint a somewhat brighter picture. The ANC leadership change will lead to stronger growth prospects for the South African economy, we will have to see concrete policy changes to assess the growth impact. We revise upward our forecast (also in light of the Q3 and solid leading indicators) moderately, projecting real GDP to grow by 0.9% (previously 0.7%) in 2017 and 1.9% (previously 1.5%) and 2.2% in 2018 and 2019, respectively, both slightly above Bloomberg consensus.

Monetary policy outlook 

S&P: BB (stable) Currency regime: Free float (freely convertible) Inflation target: 3-6%

Macro forecasts 2016

2017

2018

2019

2020

GDP (% y/y)

0.3

0.9

1.9

2.2

2.7

GDP deflator (% y/y)

7.0

5.7

6.6

6.7

6.7

CPI (% y/y)

4.5

5.4

6.4

7.1

7.0

Private consumption (% y/y)

0.8

1.6

2.7

2.0

2.3

Fixed investments (% y/y)

-3.9

-0.2

1.2

1.9

2.3

Unemployment (%)

26.5

28.3

29.0

29.3

29.5

Current account (% of GDP)

-4.9

2.5

-3.1

-3.3

-3.3

Source: Bloomberg, Danske Bank

Interest rate forecast Policy rate

6.75

Next meeting Next change End-2018

18/01/2018 -25bp Q1, 2018 6.25

Source: Danske Bank

FX forecasts

The sharp downward move in the USD/ZAR on the election of Cyril Ramaphosa as new ANC leader is a little overdone in our view. We basically see a challenging transition from Jacob Zuma to Cyril Ramaphosa, which will involve some policy uncertainty nearterm. At the current level, the Rand is not as undervalued as before, which will limit the improvement in the external balance. Hence we think the USD/ZAR may rebound a bit near-term to around 12.75 in 3M before falling further as the new leader are able to instil his policy agenda, implying the USD/ZAR will fall to 12.50 in 6M and 12.25 in 12M.

Inflation has fallen to the middle of SARB’s target range…

Credit rating:

South African Reserve Bank (SARB)

The South African Reserve Bank (SARB) kept its benchmark repo rate unchanged at 6.75% at the 23 November meeting, against our expectations. Inflation has been below 5% since July, i.e. safely within the central bank’s 3-6% inflation band. With the election of Cyril Ramaphosa and the stronger ZAR, we think the SARB will be able to lower its repo rate by 25bp at the March meeting.

FX outlook 

ZAR

… with the recent ZAR stability, which is still in undervalued territory

EUR/ZAR 18-Dec +3M +6M +12M

Danske 14.87 14.79 15.00 15.31

Forward 15.31 15.62 16.25

USD/ZAR 18-Dec +3M +6M +12M

Danske 12.59 12.75 12.50 12.25

Forward 12.90 13.08 13.44

Source: Macrobond Financial, Danske Bank

Source: Macrobond Financial

8|

20 December 2017

Source: Macrobond Financial

www.danskeresearch.com

Emerging Markets Briefer

Brazil – accelerating growth Macro outlook 





In Q2 17 Brazil’s economy saw its first positive growth print in three and a half years (+0.4% y/y), expanding further in Q3 17 (+1.4% y/y). The economy got support from growth in agriculture and improved private consumption. We raise our 2017 GDP growth forecast to +0.8% y/y from +0.3% y/y previously. Given acceleration in global economic growth and recovery in Brazil’s private consumption on record-low inflation, we expect 2018 GDP to expand 2.4% y/y (previously 2.0% y/y) and 2019 GDP growth to be at 2.5% y/y (previously 2.1% y/y), as upside risks to our forecasts remain on possible improvement in domestic politics and monetary easing effect. The major sentiment driver remains political turbulence, linked to the allegations against the President, Michel Temer, weighing on the likelihood of passing the social security reforms as well as on economic confidence. Yet, the country’s government is willing to proceed with the pension reform in 2018, despite the recent vote delay. The presidential election in 2018 will add to domestic uncertainty, as former President Luiz Inacio Lula da Silva could join the race.

Monetary policy outlook 

Brazil’s central bank (the BCB) has been aggressively cutting rates as firm disinflation continued through 2017. We expect monetary easing to slow down in H1 18. At the same time the continuing political turbulence could jeopardize short- and long-term fiscal adjustments, which could push up the so-called neutral real interest rate. This is pushing the BCB to stop monetary easing in H2 18.

FX outlook 



Credit rating: S&P: BB (negative) Currency regime: Free float (non-convertible) Inflation target: 4.5% ±1.5pp in 2018 4.25% ±1.5pp in 2019 4.0% ±1.5pp in 2020

Macro forecasts GDP 0.8 2.4 2.5

2017 2018 2019

Inflation (average) 3.4 3.9 4.0

Source Danske Bank

Interest rate forecasts Central Bank of Brazil (BCB)

Political turbulence has been driving the BRL over the past months. Currently, the BRL has been under pressure amid the renewed political uncertainty. While the attractive carry is still present, its appeal should diminish on further monetary easing and political turbulence. Medium- and long-term prospects for the BRL look brisker on an improving CA balance, economic recovery and attractive carry, which is set to remain. Our BRL forecast remains more bullish than market expectations. The most important negative risks are domestic and the presidential election would add to BRL volatility and decreasing demand from China on iron ore exports, while positive risks include a stronger recovery of the Brazilian economy and fast approvals of reforms by the government.

A prudent BCB has regained control over inflation…

BRL

...while improving external balances should support BRL

Policy rate Next meeting Next change End-2018

7.00 07/02/2018 -25bp Q1, 2018 6.75

Source: Danske Bank

FX forecasts

EUR/BRL 18-Dec +3M +6M +12M

Danske 3.88 3.71 3.84 3.94

Forward 3.94 4.01 4.14

USD/BRL 18-Dec +3M +6M +12M

Danske 3.29 3.20 3.20 3.15

Forward 3.32 3.36 3.42

Source: Macrobond Financial, Danske Bank

Source: Macrobond Financial

9|

20 December 2017

Source: Macrobond Financial

www.danskeresearch.com

Emerging Markets Briefer

China – slowing down Macro outlook 







The Chinese economy strengthened in 2016-17, pulled by a very strong housing market, robust infrastructure spending and higher export growth pulled by higher activity in the US and Europe. We also believe steel production was ramped up over the summer ahead of the anti-pollution curbs on production that are now setting in over the winter. Growth in 2017 is set to end up at 6.8% following 6.7% in 2016. We project a moderate slowdown. First, China has taken several steps to cool the housing market and home sales are now falling. Second, we expect a downshift in external demand, pushing export growth a notch lower. Finally, we expect anti-pollution curbs to take a toll on construction and heavy industry from November to February. A renewed reform push since October’s Party Congress is likely to mean some shortterm pain but for longer term gain. Over the past year, President Xi Jinping has strengthened his focus on supply-side reform and measures to reduce financial risks. The measures are likely to continue, and in some areas intensify, over the next year. Moving from quantitative growth targets to a focus on sustainability is set to dampen growth in infrastructure investments and force through deleveraging and capacity cuts in the ‘old industries’ dominated by state owned enterprise. With a change in China’s priorities to more sustainability, growth is likely to head lower in coming years. We look for 6.3% in 2018, falling to around 6% in 2020. In our view, the decline will be felt mainly in infrastructure and construction and by subsuppliers to these sectors. We expect consumption growth to stay robust, though.

CNY Credit rating: S&P: A+ (stable) Currency regime: Managed exchange rate versus basket of currencies Inflation target: 3.0% for 2017

Macro forecasts GDP

Inflation

Danske

Consensus

Danske

Consensus

6.7 6.8 6.3

6.7 6.8 6.4

2.0 2.0 2.3

2 1.6 2.3

2016 2017 2018

Source: Bloomberg, Danske Bank

Monetary policy outlook 

The People’s Bank of China (PBoC) tightened monetary policy in H1 but not via the usual policy rates channel. Focus has instead been on tightening credit in the shadow banking system and pushing up money-market rates through tighter liquidity. The crackdown on shadow banking has continued following the Party Congress in October, showing that China is increasingly determined to take steps to address financial risks.

The CNY has been very stable against the USD over the past quarter at c.6.60-6.65 and we expect USD/CNY to rise only gradually to 6.75 in 12M. The Chinese slowdown and US Fed hikes should put upside pressure on USD/CNY. However, in our view, an overall weakening of the trade-weighted USD will dampen the move higher. We do not expect the US tax cuts to lead to a renewed round of outflows from China – a concern that has surfaced recently.

USD/CNY has stabilised

People's Bank of China (PBOC) Policy rate Next meeting Next change End-2018

4.35 No regular meetings -25bp Q4, 2018 4.10

Source: Danske Bank

FX outlook 

Interest rate forecast

Financial tightening to slow activity

FX forecasts

EUR/CNY 18-Dec +3M +6M +12M

Danske 7.82 7.71 8.04 8.44

Forward 7.91 8.00 8.19

USD/CNY 18-Dec +3M +6M +12M

Danske 6.62 6.65 6.70 6.75

Forward 6.66 6.70 6.77

Source: Macrobond Financial, Danske Bank Source: Macrobond Financial

10 |

20 December 2017

Source: Macrobond Financial

www.danskeresearch.com

Emerging Markets Briefer

India – decent growth ahead Macro outlook 





Growth. India’s GDP growth increased to 6.3% in Q3 from 5.7% in Q2 17. The ban on old 500 and 1,000 rupee notes in November 2016 weighed on economic growth in H1 as it resulted in a big drop in the money supply growth. Especially investment growth took a hit. However, the effect is now fading. India’s economy has benefited from the strong global economy this year, which has underpinned exports. Import growth recovered sharply in early 2017 but has come down a bit lately. We expect growth to rise to 7% in 2018. Positive effects from the goods and service tax (GST) reform have been praised by the IMF as has some liberalisation in the Foreign Direct Investment framework. Macroeconomic stability and balances. India has generally achieved macroeconomic stability with inflation under control and a robust external balance around 1% of GDP down from 5% of GDP five years ago. The fiscal deficit is still too high, though, at around 6% of GDP. Nevertheless, Moody’s upgraded India’s sovereign debt rating in November for the first time since 2004 on optimism that Modi’s reforms would reduce the risk of a sharp increase in debt. The rating was raised to Baa2 from Baa3. A weak spot in India is the banking sector with a high rate of non-performing loans and inadequate provisions.

Monetary policy outlook 

The Reserve Bank of India (RBI) cut rates in August as widely expected after inflation had been undershooting the target of 4% +/-2% (see chart). However, inflation has recently moved higher again and reduced the likelihood of further rate cuts. Instead, rate hikes in 2018 have come on the agenda and we now look for a hike in Q2 18 on the back of solid growth and inflation a bit above target.

The INR has moved broadly sideways since April, although it has strengthened a bit lately to 64 against the USD. We look for a gradual strengthening to 61 in 12M as a robust global economy is favourable for FX carry. With India offering overall macro stability, decent growth and fairly high rates it should support a gradual strengthening of the INR.

Inflation below target paved the way for a rate cut in August

Credit rating: S&P: BBB- (stable) Currency regime: Free float Inflation target: 4% ±2pp

Macro forecasts GDP

Inflation

Danske Bank

Consen sus

Danske Bank

Consens us

2016

8.0

8.0

5.0

5.0

2017

6.3

7.0

3.5

3.6

2018

7.0

7.5

4.0

4.4

Source: Bloomberg, Danske Bank

FX outlook 

INR

Import growth indicates recovery in 2016 but some slowing in H1

Interest rate forecast Reserve Bank of India (RBI) Policy rate Next meeting Next change End-2018

6.00 07/02/2018 +25bp Q2, 2018 6.50

Source: Danske Bank

FX forecasts

EUR/INR 18-Dec +3M +6M +12M

Danske 75.85 74.24 75.60 76.25

Forward 76.41 77.66 80.21

USD/INR

Source: Macrobond Financial, Danske Bank

Source: Macrobond Financial, Danske Bank

18-Dec +3M +6M +12M

Danske 64.20 64.00 63.00 61.00

Forward 64.38 65.04 66.31

Source: Macrobond Financial, Danske Bank

11 |

20 December 2017

www.danskeresearch.com

Emerging Markets Briefer

Danske Bank hedging recommendations: EMEA Instrument

Currency

Income

Forecast

Expenses

We recommend hedging PLN income via We recommend hedging PLN expenses knock-in forwards. via FX forwards. In the short term (0-3M), clients could alternatively consider hedging PLN expenses via risk reversals.

4.50 4.40

4.30 4.20

PLN

4.10

Price indicators

EUR/PLN Forward

4.00 Dec/15

Implied volatility

Aug/16

Risk reversal (PLN seller) Forward rate (PLN seller)

cheap

neutral

expensive

Income

May/17

Jan/18

Sep/18

1M

3M

6M

12M

DB forecast

4.22

4.20

4.16

4.14

Forward

4.21

4.22

4.25

4.30

Cons. forecast

4.24

4.22

4.16

4.19

Instrument

Currency

DB forecast Cons. forecast

Forecast

Expenses

We recommend hedging RUB-income via We recommend hedging RUB expenses knock-in forwards. via FX forwards. 90.0 80.0 70.0

RUB

60.0

Price indicators

EUR/RUB Forward

50.0 Dec/15

Implied volatility

Aug/16

cheap

neutral

expensive

Income

Jan/18

Sep/18

3M

6M

12M

DB forecast

68.44

67.05

67.44

66.88

Forward

69.68

70.47

71.77

74.29

Cons. forecast

68.72

68.73

68.96

71.75

Instrument

Currency

May/17

1M

Risk reversal (RUB seller) Forward rate (RUB seller)

DB forecast Cons. forecast

Forecast

Expenses

We recommend hedging HUF income via We recommend hedging HUF expenses knock-in forwards. via FX forwards.

320 315 310

HUF

305

Price indicators

EUR/HUF Forward

300 Dec/15

Implied volatility

Aug/16

Risk reversal (HUF seller) Forward rate (HUF seller)

cheap

neutral

expensive

Income

May/17

Jan/18

Sep/18

1M

3M

6M

12M

DB forecast

311.00

310.00

308.00

305.00

Forward

313.20

313.45

313.82

314.41

Cons. forecast

311.77

309.86

302.97

305.68

Instrument

Currency

DB forecast Cons. forecast

Forecast

Expenses

We recommend hedging CZK income via We recommend hedging CZK expenses knock-in forwards. via FX forwards.

27.0 26.5 26.0 25.5

CZK

25.0

Price indicators

24.5

Implied volatility

24.0 Dec/15

Risk reversal (CZK seller)

neutral

Aug/16

DB forecast Cons. forecast

May/17

Jan/18

3M

6M

12M

25.60

25.50

25.30

25.30

Forward

25.58

25.58

25.64

25.77

Cons. forecast

25.43

25.23

24.85

24.71

expensive DB forecast

Source: Danske Bank

12 |

20 December 2017

Sep/18

1M

Forward rate (CZK seller)

cheap

EUR/CZK Forward

www.danskeresearch.com

Emerging Markets Briefer

Danske Bank hedging recommendations: other emerging markets Instrument

Currency

Income

Forecast

Expenses

We recommend hedging CNH income via FX forwards.

We recommend hedging CNH payables via a risk-reversal strategy.

8.50 8.00 7.50

CNH

7.00

Price indicators

EUR/CNH Forward

6.50 Dec/15

Implied volatility

Aug/16

Risk reversal (CNH seller)

DB forecast

Forward rate (CNH seller)

cheap

neutral

expensive Forward Cons. forecast

Income

Jan/18

Sep/18

3M

6M

12M

7.71

7.71

8.04

8.44

7.84

7.90

7.99

8.18

7.78

7.78

7.84

8.05

Forecast

Expenses

Hedge ZAR income with knock-in forwards.

May/17

1M

Instrument

Currency

DB forecast Cons. forecast

We recommend hedging ZAR expenses via FX forwards. 18.0

16.0

14.0

ZAR Price indicators

EUR/ZAR Forward

12.0 Dec/15

Implied volatility

Aug/16

Risk reversal (ZAR seller)

DB forecast

Forward rate (ZAR seller)

cheap

neutral

expensive Forward

Cons. forecast

Income

Jan/18

Sep/18

3M

6M

12M

14.87

14.79

15.00

15.31

15.26

15.45

15.76

16.41

16.61

16.58

16.89

17.66

Forecast

Expenses

Hedge TRY income with FX forwards.

May/17

1M

Instrument

Currency

DB forecast Cons. forecast

We recommend hedging TRY expenses with knock-in forwards.

5.50 5.00 4.50 4.00 3.50

TRY

3.00

Price indicators

EUR/TRY Forward

2.50 Dec/15

Implied volatility

Aug/16

Risk reversal (TRY seller) Forward rate (TRY seller)

cheap

neutral

expensive

DB forecast Cons. forecast

May/17

Jan/18

3M

6M

12M

DB forecast

4.52

4.58

4.80

5.06

Forward

4.58

4.68

4.84

5.19

Cons. forecast

4.55

4.58

4.65

4.87

Source: Danske Bank

13 |

20 December 2017

Sep/18

1M

www.danskeresearch.com

Emerging Markets Briefer

FX forecasts Core – major

Danske EUR

USD

JPY

18-Dec +3M +6M +12M 18-Dec +3M +6M +12M 18-Dec +3M +6M +12M

1.18 1.16 1.20 1.25 132.7 131.1 136.8 142.5

EUR Forward

Danske 1.18 1.16 1.20 1.25

USD Forward 1.19 1.19 1.21

1.19 1.19 1.21 132.7 132.8 132.9

112.3 113.0 114.0 114.0

111.9 111.3 109.9

Danske 744.3 744.3 744.3 744.5 630.0 641.6 620.2 595.6 5.61 5.68 5.44 5.22

DKK Forward 743.8 743.4 742.8 626.7 622.6 614.1 5.60 5.60 5.59

Danske 995.1 1010.0 990.0 980.0 842.3 870.7 825.0 784.0 7.50 7.71 7.24 6.88

SEK Forward 992.3 992.3 992.3 836.1 831.0 820.3 7.48 7.47 7.47

Danske 985.1 940.0 920.0 910.0 833.9 810.3 766.7 728.0 7.42 7.17 6.73 6.39

NOK Forward 987.2 990.2 996.5 831.8 829.3 823.8 7.44 7.46 7.50

Source: Macrobond Financial, Danske Bank

Wider CEE

PLN

HUF

CZK

18-Dec +3M +6M +12M 18-Dec +3M +6M +12M 18-Dec +3M +6M +12M

Danske 4.21 4.20 4.16 4.14 313.6 310.0 308.0 305.0 25.71 25.50 25.30 25.30

EUR Forward 4.22 4.24 4.28 313.4 313.5 313.9 25.49 25.52 25.59

Danske 3.56 3.62 3.47 3.31 265.5 267.2 256.7 244.0 21.76 21.98 21.08 20.24

USD Forward 3.55 3.55 3.54 264.0 262.5 259.5 21.48 21.38 21.16

Danske 177.0 177.2 178.9 179.8 2.37 2.40 2.42 2.44 28.95 29.19 29.42 29.43

DKK Forward 176.4 175.4 173.6 2.37 2.37 2.37 29.18 29.13 29.03

Danske 236.6 240.5 238.0 236.7 3.17 3.26 3.21 3.21 38.71 39.61 39.13 38.74

SEK Forward 235.4 234.2 231.9 3.17 3.17 3.16 38.93 38.88 38.77

Danske 234.2 223.8 221.2 219.8 3.14 3.03 2.99 2.98 38.32 36.86 36.36 35.97

NOK Forward 234.2 233.7 232.9 3.15 3.16 3.17 38.73 38.79 38.94

Source: Macrobond Financial, Danske Bank

CIS

RUB

18-Dec +3M +6M +12M

Danske 69.19 67.05 67.44 66.88

EUR Forward 70.31 71.59 74.09

Danske 58.57 57.80 56.20 53.50

USD Forward 59.24 59.96 61.25

Danske 10.76 11.10 11.04 11.13

DKK Forward 10.58 10.38 10.03

Danske 14.38 15.06 14.68 14.65

SEK Forward 14.11 13.86 13.39

Danske 14.24 14.02 13.64 13.61

NOK Forward 14.04 13.83 13.45

Source: Macrobond Financial, Danske Bank

MEA

TRY

ZAR

18-Dec +3M +6M +12M 18-Dec +3M +6M +12M

Danske 4.52 4.58 4.80 5.06 14.87 14.79 15.00 15.31

EUR Forward 4.66 4.83 5.17 15.31 15.62 16.25

Danske 3.83 3.95 4.00 4.05 12.59 12.75 12.50 12.25

USD Forward 3.93 4.04 4.28 12.90 13.08 13.44

Danske 164.7 162.4 155.1 147.1 50.0 50.3 49.6 48.6

DKK Forward 159.5 154.0 143.6 48.6 47.6 45.7

Danske 220.2 220.4 206.3 193.6 66.9 68.3 66.0 64.0

SEK Forward 212.8 205.6 191.8 64.8 63.5 61.1

Danske 218.0 205.2 191.7 179.8 66.2 63.6 61.3 59.4

NOK Forward

Source: Macrobond Financial, Danske Bank

14 |

20 December 2017

www.danskeresearch.com

211.7 205.1 192.6 64.5 63.4 61.3

Emerging Markets Briefer

Latin America

BRL

18-Dec +3M +6M +12M

Danske 3.88 3.71 3.84 3.94

EUR Forward 3.94 4.01 4.14

Danske 3.29 3.20 3.20 3.15

USD Forward 3.32 3.36 3.42

Danske 191.8 200.5 193.8 189.1

DKK Forward 188.7 185.6 179.5

Danske 256.4 272.1 257.8 248.9

SEK Forward 251.7 247.7 239.7

Danske 253.8 253.2 239.6 231.1

NOK Forward 250.4 247.2 240.7

Source: Macrobond Financial, Danske Bank

Emerging markets Asia

CNY

INR

18-Dec +3M +6M +12M 18-Dec +3M +6M +12M

Danske 7.82 7.71 8.04 8.44 75.85 74.24 75.60 76.25

EUR Forward 7.91 8.00 8.19 76.41 77.66 80.21

Danske 6.62 6.65 6.70 6.75 64.20 64.00 63.00 61.00

USD Forward 6.66 6.70 6.77 64.38 65.04 66.31

Danske 95.2 96.5 92.6 88.2 9.81 10.02 9.84 9.76

DKK Forward 94.1 92.9 90.7 9.73 9.57 9.26

Danske 127.3 130.9 123.1 116.1 13.12 13.60 13.10 12.85

SEK Forward 125.5 124.0 121.1 12.99 12.78 12.37

Danske 126.1 121.9 114.4 107.9 12.99 12.66 12.17 11.93

NOK Forward

Source: Macrobond Financial, Danske Bank

15 |

20 December 2017

www.danskeresearch.com

124.9 123.7 121.6 12.92 12.75 12.42

Emerging Markets Briefer

Forecasts vs forwards 3M – base currency EUR

3M – base currency USD 6.0 4.0 2.0 0.0 % -2.0 -4.0 -6.0 -8.0 -10.0

8.0 6.0 4.0 2.0 %0.0 -2.0 -4.0 -6.0 -8.0

HUF

PLN

CZK

HUF

CZK

TRY

CNY

HUF

TRY

CZK

CNY

7.0 6.0 5.0 4.0 % 3.0 2.0 1.0 0.0

7.0 6.0 5.0 4.0 % 3.0 2.0 1.0 0.0 -1.0

INR

ZAR

BRL

RUB

CNY

TRY

CZK

HUF

PLN

INR

ZAR

BRL

RUB

BRL

INR

ZAR

RUB

CNY

CZK

20 December 2017

TRY

Source: Macrobond Financial, Danske Bank

HUF

14.0 12.0 10.0 8.0 % 6.0 4.0 2.0 0.0

PLN

12.0 10.0 8.0 6.0 % 4.0 2.0 0.0 -2.0 -4.0

BRL

12M – base currency USD

INR

12M – base currency EUR

ZAR

Source: Macrobond Financial, Danske Bank

RUB

Source: Macrobond Financial, Danske Bank

16 |

TRY

6M – base currency USD

PLN

6M – base currency EUR

PLN

Source: Macrobond Financial, Danske Bank

CNY

INR

ZAR

RUB

BRL

CZK

PLN

HUF

TRY

CNY

INR

ZAR

RUB

BRL

Source: Macrobond Financial, Danske Bank

Source: Macrobond Financial, Danske Bank

www.danskeresearch.com

Emerging Markets Briefer

Monetary policy calendar Calendar Policy Rate (%)

Latest Change

Next Change

Next Meeting

Year-end 2018 (%)

19 December 2017 Wider CEE PLN HUF CZK TRY CIS RUB MEA ZAR LATAM BRL EM Asia CNY INR

1.50 0.90 0.50 8.00

- 50 bp - 15 bp +25 bp +50 bp

Mar, 2015 May, 2016 Nov, 2017 Nov, 2016

+25bp +15bp +25bp -

Q3, 2018 H2, 2018 Q1, 2018 Unchanged 2018

10/01/2018 30/01/2018 21/12/2017 18/01/2018

2.00 1.05 1.00 8.00

7.75

-50 bp

Dec, 2017

-25bp

Q1, 2018

09/02/2018

6.75

6.75

- 25 bp

Jul, 2017

-25bp

Q1, 2018

18/01/2018

6.25

7.00

-50 bp

Dec, 2017

-25bp

Q1, 2018

07/02/2018

6.75

4.35 6.00

- 25 bp - 25 bp

Nov, 2015 Aug, 2017

-25bp +25bp

Q4, 2018 Q2, 2018

No regular meetings 07/02/2018

4.10 6.50

Source: Danske Bank

17 |

20 December 2017

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Emerging Markets Briefer

Disclosure This research report has been prepared by Danske Bank A/S (‘Danske Bank’). The authors of this research report are Jakob Christensen (Chief Analyst), Allan von Mehren (Chief Analyst), Morten Thrane Helt (Senior Analyst), Vladimir Miklashevsky (Senior Analyst), Rokas Grajauskas (Analyst) and Nicolai Pertou Ringkøbing (Assistant Analyst). Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst’s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request. Danske Bank’s research reports are prepared in accordance with the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high-quality research based on research objectivity and independence. These procedures are documented in Danske Bank’s research policies. Employees within Danske Bank’s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank’s Research Departments are organised independently from, and do not report to, other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors on request. Risk warning Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis of relevant assumptions, are stated throughout the text. Expected updates None. Date of first publication See the front page of this research report for the date of first publication.

General disclaimer This research report has been prepared by Danske Bank (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) (‘Relevant Financial Instruments’). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided herein. This research report is not intended for, and may not be redistributed to, retail customers in the United Kingdom or the United States. This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank’s prior written consent.

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Emerging Markets Briefer

Disclaimer related to distribution in the United States This research report was created by Danske Bank A/S and is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank A/A, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to ‘U.S. institutional investors’ as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to ‘U.S. institutional investors’. Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA but satisfy the applicable requirements of a non-U.S. jurisdiction. Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in non-U.S. financial instruments may entail certain risks. Financial instruments of non-U.S. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission.

Report completed: 19 December 2017, 23:03 CET Report first disseminated: 20 December 2017, 07:00 CET

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