J. P Morgan - Emerging Markets Outlook and Strategy for 2013 by riteshbhansali

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									                                                                         Emerging Markets Research
                                                                         November 21, 2012

Emerging Markets Outlook and Strategy for 2013

                                                                         Spreads and yields
                                                                                                         Year          Forecast
                                                                                             Current     Ago          End-Dec 13
                                                                         EMBIG                 302        415          225-250
                                                                         GBI-EM GD             5.59      6.52            5.90
                                                                         CEMBI Broad           361        450          275-300
                                                                         Fed funds            0.125      0.125          0.125
                                                                         10-year bond          1.61      2.01            2.00
                                                                         Source: J.P. Morgan

                                                                         EMBI Global, GBI-EM, JPMHY, S&P 500
                                                                         Return index, Oct 31, 2011 = 100
                                                                                     US HY
                                                                          115                            EMBIG

                                                                          110                                        S&P 500
                                                                           95                                GBI-EM Global Div.
                                                                                                              (USD unhedged)
                                                                            Oct-11      Jan-12      Apr-12      Jul-12    Oct-12
                                                                         Source: J.P. Morgan

                                                                         Joyce Chang
                                                                         (1-212) 834-4203
                                                                         J.P. Morgan Securities LLC

See the last page for analyst certification and important disclosures.
Joyce Chang                      Emerging Markets Research
(1-212) 834-4203                 Emerging Markets Outlook and Strategy for 2013
                                 November 21, 2012

Table of Contents
2013 Executive Summary                                  3       NEXGEM markets to deliver 9-10% total returns
Market Overview                                         5       in 2013

2012 Performance in review                              6       EM technicals to remain supportive
EMBIG total returns reach 16% in 2012
                                                                Convergence of DM and EM ratings to continue
Inflows into EM fixed income on track to reach a
record US$85 billion                                            Top trade recommendations for 2013              31

EM corporate bond debt stock surpasses US$1                     GBI EM Model Portfolio top trades for 2013
trillion milestone
                                                                EM Asia: FX themes to dominate but be long
NEXGEM market value rises by nearly 40%                         Indonesia and India rates as well

GBI-EM returns rebound from 2Q sell-off to end                  Latin America: Supportive FX backdrop; OW
the year up 13%                                                 duration in Brazil

Regional highlights                                             EMEA EM: Divergence between CEE and
                                                                Russia, Turkey
2013 Global macro outlook                             11
                                                                EMBIG Model Portfolio top trades for 2013
Resolution of US fiscal cliff overtakes
Eurozone crisis as key external risk                            EM corporates top trades for 2013

EM growth to increase to 4.9% in 2013,                          NEXGEM views for 2013
widening the margin versus DM growth
                                                                Latin America Outlook for 2013                  40
Modest gains for commodity prices expected
                                                                EMEA EM Outlook for 2013                        57
EM Asia outlook: Rotating into better growth
in 2013                                                         EM Asia Outlook for 2013                        85

Latin America outlook: Growth near potential                    Global Economic Outlook                         94
and inflation within target
                                                                Exchange rate forecasts for 2013                95
EMEA EM Outlook: Slower growth, with fiscal
balances contained                                              Credit Ratings                                  96
Geopolitical and country specific risks remain                  Index of Prior Features                         97
high in 2013

2013 Performance outlook                              22

EM local markets likely to outperform EM
credit in 2013

EMBIG and CEMBI to return 7-8.5%

J.P. Morgan Securities LLC                                       Emerging Markets Research
Joyce Chang AC                                                   Emerging Markets Outlook and Strategy for 2013
(1-212) 834-4203
joyce.chang@jpmorgan.com                                         November 21, 2012

                                                                 are less attractive and down to the lowest yields (5.59%)
2013 Executive Summary                                           since 2003 and EM central banks are expected to ease by
2012 will be remembered as the year that EM fixed                only 8bp in aggregate through 3Q13. Duration returns totaled
income cemented its position as a mainstream                     approximately 6.5% during 2012, and we expect duration to
investment-grade asset class. EM sovereigns are now seen         be close to flat next year. The backdrop for EM FX is more
as a flight-to-quality trade due to their strong balance sheet   constructive as growth expectations for EM increase and we
and net external creditor position. EM corporates have come      expect EM FX spot to contribute 5% to 5.5% to GBI-EM
of age, with US$1 trillion of bonds outstanding, approaching     returns next year, compared to only 1% this year. The GBI-
a scale that now rivals US high yield markets. EM fixed          EM underperformed substantially during 1H12 due to
income is ending 2012 as the top performing asset class          volatile EUR/USD moves and a 6% EM FX correction
across both EM and DM fixed income and riskier equity            during 2Q12. In 2013, we expect EUR/USD to strengthen to
markets, providing equity-like total returns ranging from        1.34 by end-2013.
13% to 16% for the three investment-grade rated J.P.
Morgan benchmark indices (GBI-EM GD, CEMBI and                   In addition, we recommend EM high yield sovereign
EMBIG). High yield EM corporate and sovereign bonds              bonds, where we expect 10-11% total returns in 2013.
have delivered returns exceeding 20%. EM corporate debt          NEXGEM markets will likely continue to grow in 2013,
issuance is on track to hit a record US$310 billion.             having experienced nearly a 40% increase in market value
                                                                 over the past year, when five new debut issuer countries
Sponsorship of the asset class deepened and became more          entered the index. We expect as many as 9 NEXGEM issuers
diversified, with inflows into EM fixed income setting a         will come to market in 2013.
new record, with US$85 billion expected this year. This is
more than double this year’s inflows into EM equities            Similar to 2012, global markets will take their cue from
(US$32.1 billion) and US high yield (US$32.8 billion).           G-4 monetary policy. Macro risks around the Euro area and
Inflows into EM debt are becoming counter-cyclical as EM         US fiscal cliff are likely to limit the upside to global growth,
countries continue to benefit from ratings upgrades, and the     but supportive G-4 monetary policy will limit the downside.
proportion of higher-rated issuance has increased. The           J.P. Morgan forecasts that mortgage purchases by the US
investment grade share of the EMBIG and CEMBI has                Federal Reserve will continue into 1H14 and that US$480
grown to 62% and 75% of the outstanding markets,                 billion of mortgage securities will be purchased in 2013,
respectively. More than 83% of the EM local currency index       contributing to the shortage of USD bonds available in the
is now investment-grade rated.                                   market. EMBIG (4.70%), CEMBI (4.88%) and GBI-EM
                                                                 (5.59%) yields remain well above those of US High Grade
We remain overweight the EMBIG and CEMBI going                   (3.44%), and European High Grade (2.50%), but below US
into 2013, but expect EM local markets to outperform             High Yield (7.33%). The Euro area is expected to exit
EM credit next year. We forecast significantly lower 2013        recession in 2Q13 as a result of improvement in credit
expected total returns for investment-grade EM sovereign         conditions driven by the success of the OMT program in
and corporate credit at 7-8.5%. This is still substantially      reducing financial sector stress, although this has yet to
higher than the expected returns for other investment grade      translate into lower borrowing rates for households and
bonds, as we expect only 5.4% and 1.5% returns from US           businesses or a reduction in bank lending standards.
high grade and Euro high grade bonds next year,                  European bank deleveraging did not adversely impact most
respectively. We would view broader market volatility            EM countries as was widely expected a year ago given that
around the US fiscal cliff and Eurozone crises as                EM corporates have been able to access USD markets as
opportunities to add exposure. Our base case forecasts for the   well as their own local markets. European bank deleveraging
EMBIG and CEMBI anticipates a modest rise of 40bp for            also appears to be occurring as a result of equity infusion
US Treasury yields next year and 50-85bp of spread               rather than a reduction in overall credit availability—a much
tightening. By comparison, EMBIG and CEMBI spreads               more benign scenario than expected a year ago.
tightened by124bp and 106bp, respectively, over the course
of 2012 and Treasury total returns of 3% further boosted         EM technicals will remain supportive in 2013 even if
performance.                                                     inflows into EM fixed income slow to US$70 billion from
                                                                 our 2012 forecast of US$85 billion. Year-to-date inflows
Going into 2013, we increase our recommendations for             into EM fixed income of US$77 billion represent 14% of
EM local currency, expecting 10% returns for the GBI-            assets under management tracked against the J.P. Morgan
EM GD in 2013. We expect spot FX to replace duration as          family of EM indices. For 2013, we anticipate that EM local
the key driver for GBI-EM performance, as EM rates overall       currency will likely attract a greater share of inflows due to
                                                                 higher expected returns. Sovereign net borrowing needs

J.P. Morgan Securities LLC                                           Emerging Markets Research
Joyce Chang AC                                                       Emerging Markets Outlook and Strategy for 2013
(1-212) 834-4203
joyce.chang@jpmorgan.com                                             November 21, 2012

remain negligible with US$77.2 billion of projected 2013             positions in EMEA EM. One big 2012 surprise had been
gross issuance compared to US$68.2 billion of expected EM            the outperformance of EMEA EM assets across the EMBIG,
sovereign cashflows. EM corporate issuance is likely to slow         CEMBI and GBI-EM. In the EM sovereign markets, we stay
from the record US$310 billion achieved this year; we                underweight Central and Eastern Europe, which has the
forecast US$281 billion of issuance. EM corporate financing          weakest growth forecasts and higher debt burdens. Keep
needs remain manageable. We forecast net EM corporate                underweight positions in Ukraine, Romania, Lithuania and
issuance at US$227 billion (gross supply net of maturities)          South Africa. Higher-yielding commodity plays and
and net financing needs (net issuance minus coupons) at              NEXGEM credits remain attractive and we recommend
US$153 billion.                                                      holding Venezuela, Angola and Gabon external debt and
                                                                     staying long Nigeria rates. We are also overweight Turkey
2013 global growth prospects remain subdued with 2.4%                and Indonesia where we see external imbalance
global GDP growth expected, as fiscal tightening persists            improvements, likely continued rating upgrades and spreads
in the US and Europe. Risks are highest in 1Q13 as the US            still at the wider end of the low spread segment of the
fiscal cliff and debt ceiling face resolution. We expect a deal to   EMBIG.
be reached that averts most of the impact of the 4% of GDP
fiscal cliff, but US growth will decline to 1.7% next year from      In EM local markets, we keep a constructive bias for FX
2.2% this year. With the US fiscal drag rising to 1.1% of GDP,       in EM Asia and Latin America and recommend a
our US economists see the period of US relative                      combination of long and short duration positions across
outperformance ending. While the ECB OMT program will                regions. Near or above potential GDP growth will be
help to moderate the fiscal drag, Euro area growth is forecast       supportive of Latin American currencies next year, but
at only 0.0% next year. For developed markets as a whole, J.P.       intervention could prevent significant appreciation—
Morgan is projecting only 0.9% growth.                               especially in Brazil, where there is a debate of whether the
                                                                     authorities may want to shift the FX fluctuation band weaker.
The macro backdrop for EM is rotating into modestly                  Hold MXN in the GBI-EM Model Portfolio and via options.
better growth in 2013: we expect EM growth to reach                  Stay long duration in Brazil but underweight in Mexico,
4.9% next year from 4.6% this year. In EM Asia, China and            which seems to be the richest bond market in Latin America.
India are both forecast to see growth improve after a                Similar to the external debt story, we expect local markets in
disappointing 2012. China has changed political leadership but       Central and Eastern Europe to underperform. We
not policy, with the new leadership continuing the current pace      recommend long Russia and Turkey positions versus Poland
of policy easing. The likelihood of a large stimulus is low.         and South Africa for both FX and rates markets. We see
Latin America is expected to reaccelerate back to potential in       better opportunities in EM Asia FX through long IDR and
2013, reaching 3.8% GDP growth. EMEA EM is the one EM                KRW and overweight Southeast Asia FX versus G-10 FX as
region that is likely to experience lower growth as                  EM Asian central banks have been more permissive on FX
policymakers work to contain fiscal balances, with GDP               policy than expected. EM Asian rates will struggle to rally
growth declining to 2.9% from 3.2% this year.                        further and only higher-yielding Indian and Indonesian rates
                                                                     offer immediate value.
After declining in aggregate during 2012, commodity
prices are expected to post modest gains during 2013. J.P.           The Middle East and Russia stand out for offering the best
Morgan forecasts WTI crude at $106/bbl and Brent crude at            value in the EM corporate universe. Highly rated single-
$113/bbl next year. The vast majority of EM oil-exporters            and double-A rated GCC credits still offer spreads as high as
are assuming a much lower price for oil in their 2013                250bp. Investment grade Russian oil and gas names continue
budgets. Only Russia (Brent at $99/bbl) and Colombia                 to trade as wide as 300bp. We are generally neutral on Latin
($101/bbl) are assuming oil prices as high as the range that         American corporate but stay overweight PDVSA and Cemex
we are forecasting for next year. However, we caution that           long-end bonds. Our Asia corporate recommendations are
rising tensions between Iran and Israel could spill over into        concentrated in good quality names for carry. We favor
oil markets, causing a repeat of the price volatility that           owning names that are well positioned to benefit from stable
occurred in 1H12, when oil traded in a $33 range from $77            economic outlooks in countries such as Malaysia (CIMB),
to $110 per barrel. We forecast a modest rebound in base             Thailand (SCB), and Korea (KDB). We prefer landlords in
metals as China implements its infrastructure investment             Hong Kong (Sun Hung Kai, Hang Lung) and consumption
plans that were announced in September.                              story plays in China (Tingyi, Tencent). We see selective
                                                                     opportunities to reach down the capital structure for yields in
Our sovereign asset selection in 2013 favors Latin                   hybrids such as Hutch 6% perps and CKI 7% perps.
America, commodity exporters and higher-yielding
NEXGEM credits, while we recommend underweight

J.P. Morgan Securities LLC                                  Emerging Markets Research
Joyce Chang AC                                              Emerging Markets Outlook and Strategy for 2013
(1-212) 834-4203
joyce.chang@jpmorgan.com                                    November 21, 2012

                                                             2013 net EM sovereign borrowing needs remain
Market Overview                                               negligible at US$77.2 billion compared to US$68.2
EM local markets to outperform EM                             billion of expected EM sovereign cashflows
credit in 2013                                               Latin America, commodity exporters and higher-
                                                              yielding NEXGEM credits to outperform in 2013
 EM fixed income is ending 2012 as the top performer
  (+13% to 16% returns) across EM and DM fixed               Outperformance of EMEA EM assets in 2012 is
  income and riskier equity markets                           unlikely to hold next year; move to underweight
                                                              positions across all EM fixed income asset classes
 We remain overweight the EMBIG and CEMBI but
  expect 2013 total returns to decline to 7-8.5%             Maintain overweight Venezuela, Turkey, Indonesia,
                                                              Angola, Gabon and Georgia sovereign debt
 EM debt still attractive on a relative value basis; US
  and European high grade strategists expect total           Stay underweight Ukraine, Romania, Lithuania and
  returns of 5.4% and 1.5%, with high yield assets            South Africa, and Zambia sovereign debt
  returning 7.0-8.0% to 6.0%, respectively
                                                             EM FX spot to contribute as much as 5-5.5% to GBI-
 We recommend increased EM local currency                    EM returns in our base case (EUR/USD at 1.34),
  holdings and expect EM local markets (GBI-EM) to            replacing duration as key driver for GBI-EM
  solidly outperform EM credit, with +10% total               performance as EM yields (5.59%) have dropped to
  returns possible                                            their lowest level since 2003
 NEXGEM markets have gained traction, returning
  20% this year, with 5 new entrants and a nearly 40%        EM central banks are expected to ease by only 8bp in
  increase in market value over the past year                 aggregate through 3Q13, with Latin America hiking
                                                              rates by end-2013; duration returns will be flat next
 DM growth prospects remain subdued with                     year
  significant fiscal drags in the US and Europe; G-4
  monetary policy to limit the downside                      Near or above potential growth in Latin America is
                                                              supportive of FX: hold MXN in the GBI-EM Model
 EM fixed income will benefit from the shortage of           Portfolio and via options
  USD bonds available in the market as Fed asset
  purchases continue through 1H14                            Maintain long-held overweight duration position in
                                                              Brazil; underweight Mexico duration
 Ratings upgrade momentum will likely slow for EM
  sovereigns, but we still expect upgrades (18) to exceed    Overweight IDR, THB and KRW and go long
  downgrades (13) in the coming year                          Southeast Asia FX versus G-10 FX; overweight Sri
                                                              Lanka 2-year benchmark bonds
 With the exception of EMEA EM, the larger EM
  economies (China, India, Brazil) are rotating into         EM Asian rates are unattractive; stay only in high
  modestly better growth in 2013, with EM growth              yielders such as India and Indonesia
  overall likely to rise to 4.9% next year                   Local markets in Central and Eastern Europe likely
 Commodity prices are expected to post modest gains          to underperform; stay long Russia and Turkey versus
  in 2013                                                     short Poland and South Africa for both FX and rates
 EM technicals remain supportive, with robust inflows
  and issuance trends of 2012 likely to hold                 GCC credits and Russian oil and gas names offer the
                                                              best value in the investment grade EM corporate
 We forecast inflows into EM fixed income at US$70           universe given strong government sponsorship
  billion next year, down from a projected US$85
  billion this year, with local currency debt likely to      We are generally neutral on Latin American
  attract a greater share of flows                            corporate, but overweight PDVSA and Cemex long-
                                                              end bonds
 EM corporate bond issuance is likely to moderate to
  US$281 billion from a projected record of US$310           Asia corporate recommendations are concentrated in
  billion this year                                           good quality names for carry, with selective
                                                              opportunities to reach down the capital structure for
                                                              yields in hybrids such as Hutch 6% perps and CKI
                                                              7% perps

J.P. Morgan Securities LLC           J.P. Morgan Securities plc                        Emerging Markets Research
Joyce Chang AC                       Jonny Goulden AC                                  Emerging Markets Outlook and Strategy for 2013
(1-212) 834-4203                     (44-20) 7134-4470
joyce.chang@jpmorgan.com             jonathan.m.goulden@jpmorgan.com                   November 21, 2012
J.P. Morgan Securities LLC
Trang Nguyen AC
(1-212) 834-2475

                                                                                       local currency holdings and expect EM local markets (GBI-
2012 Performance in review                                                             EM) to solidly outperform EM credit, with 10% total
                                                                                       returns possible.
2012 will be remembered as the year that EM fixed
income cemented its position as a mainstream                                           Tighter spreads and lower all-in yields will result in
investment-grade asset class. EM sovereigns are now seen                               lower returns for EM fixed income in 2013, but we
as a flight-to-quality trade due to their strong balance sheets                        remain comfortable that the structural shifts in the EM
and net creditor status. EM corporates have come of age,                               fixed income asset class have gained traction. We review
reaching a scale that now rivals US high yield markets,                                the inflow, issuance, ratings and performance trends of 2012
with increased sponsorship from a diversified investor base.                           that contributed to the highest returns for EM fixed income
EM fixed income is ending 2012 as the top performing                                   achieved since 2009.
asset class across both EM and DM fixed income and
riskier equity markets, providing equity-like total returns                            EMBIG total returns reach 16% in 2012
ranging from 13% to 16% for the three investment-grade
rated J.P. Morgan benchmark indices (GBI-EM GD USD,                                    EM sovereigns registered the strongest performance
CEMBI and EMBIG). High yield EM corporate and                                          across EM fixed income and equity asset classes, benefiting
sovereign bonds have delivered returns exceeding 20%.                                  from low supply, attractive fundamentals, and longer
                                                                                       duration. EMBIG returns of 16.2% and CEMBI returns of
Chart 1: EM fixed income returns outperformed other asset classes
Total returns year-to date through Nov 19 (%)
                                                                                       13.3%, compare to 13.0% for the GBI-EM and only 6.0% for
                                                                                       EM FX (using our ELMI+ index). Returns have also been
           NEXGEM                                                        20.1          relatively stable, with May being the only negative return
              EMBIG                                            16.1                    month for the EMBIG and CEMBI. In contrast to 2011, US
        CEMBI Broad                                     13.3                           Treasury performance accounted for only a small portion of
    GBI-EM Global div                                  13.0                            the total returns for EMBIG and CEMBI. Credit returns from
        US High Yield                                 12.3                             hard currency debt are the bigger contributor to total returns,
                Gold                              10.7                                 accounting for 13.7% of EMBIG returns (out of 16.2% total
            S&P 500                              10.3                                  return). CEMBI spreads have delivered credit returns of 11.7%
      US High Grade                             9.7                                    (out of a 13.7% total return). Our EMBIG Model Portfolio
          EM equities                    6.7                                           outperformed the benchmark by 93bp over the past year,
              ELMI+                    5.9                                             with 33bp coming from our market positioning and 60bp
        UST (GBI US)           2.7                                                     from credit selection.
         Commodities          2.2
                        0.0     5.0        10.0        15.0       20.0          25.0   Inflows into EM fixed income on track to
Source: J.P. Morgan
                                                                                       reach a record US$85 billion
2012 will be a tough act to follow but EM local markets
should solidly outperform EM credit in 2013. EMBIG                                     The strong performance of EM fixed income assets in
and CEMBI spreads are now 124bp and 106bp tighter than                                 2012 has been supported by sustained inflows, which will
a year ago, respectively, while EMBIG yields fell to an all-                           likely set a new record in 2012, surpassing the previous
time low with levels now at 4.70%. US Treasuries have                                  record of US$80 billion set in 2010. The technical backdrop
also declined by 40bp versus the J.P. Morgan forecast that                             for fixed income products in 2012 has been positively fueled
yields would rise 50-75bp over the year. Treasury total                                by a lack of supply in USD-denominated spread products
returns of 3% on the year were a small boost to hard                                   amplified by G4 central bank QE. Net supply across US
currency EM returns. These conditions are unlikely to be                               spread products—US high grade, US high yield, EM
replicated in 2013. Further contraction in US Treasury yields                          sovereigns, EM corporates, MBS, CMS, ABS, CLO—are
is unlikely, and interest rates will be an important                                   estimated at US$504 billion for full-year 2012, compared to
determinant of the performance of credit spread products.                              US$782 billion in coupons, resulting in US$278 billion in
                                                                                       excess cash. This lack of supply dynamic deepened by a
We remain overweight the EMBIG and CEMBI but                                           further US$140 billion in 4Q12 following the Fed’s QE3
expect 2013 total returns to decline to 7-8.5%. However,                               mortgage purchases. Consequently, the supply-demand
EM debt remains attractive on a relative value basis; US                               imbalance has resulted in a surge of inflows to fixed income
and European high grade strategists expect total returns                               assets, including EM.
only in the 1.5% to 5.4% range, with high yield assets
returning 6.0% to 8.0%. We recommend increased EM

 J.P. Morgan Securities LLC            J.P. Morgan Securities (Asia Pac.) Ltd
J.P. Morgan Securities LLC                                                          Emerging Markets Research
 Trang Nguyen AC                       Yang-Myung Hong AC
Joyce Chang AC                                                                      Emerging Markets Outlook and Strategy for 2013
 (1-212) 834-2475                      (852) 2800-8028
(1-212) 834-4203
 trang.m.nguyen@jpmorgan.com           ym.hong@jpmorgan.com                         November 21, 2012
J.P. Morgan Securities LLC             J.P. Morgan Securities LLC
Alisa Meyers AC                        Jarrad Linzie AC
(1-212) 834-9151                       (1-212) 834-7041
alisa.meyers@jpmorgan.com              jarrad.k.linzie@jpmorgan.com

At US$77.2 billion YTD, EM inflows are already 78%                                  billion) in terms of market capitalization. Interestingly, the
higher than 2011’s total inflows (chart 2). Similarly, US                           weight of quasi-sovereign issues within these two indices
high grade funds have enjoyed 60% more inflows than 2011,                           has been showing an opposite trend. While it has been
while US high yield funds have experienced inflows                                  steadily increasing in the EMBIG, the weight in the
measuring 120% of total 2011 inflows. The announcement of                           CEMBI has been declining after hitting a peak in 2009;
QE3 coincided with a notable pick-up in inflows to EM:                              quasi-sovereigns are now below 30% of the index, which is
demand for local currency assets and Japanese retail flows                          the result of strong growth in issuances from ‘pure’
returned. Japanese flows to EM, which had flatlined for two                         corporates without sovereign affiliations. From a broader
years, have recorded US$3 billion of inflows over the period.                       perspective, quasi-sovereigns account for 41% of EM
Meanwhile, local currency funds—which had fallen out of                             corporate issuances this year compared to 44% last year
favor since the September/October 2011 sell-off—have now                            (including 100%-owned entities that are not in the
exhibited a steady rise on both an absolute basis and as a                          CEMBI). We expect fundamentals to remain steady and
share of total inflows. However, year-to-date EM local                              default rates to fall to 1.7% from 3.0% in 2012 and long-
currency inflows have only tallied US$19 billion or 25% of                          term average of 3.7%. The high yield component of the
total inflows, compared to the high of US$48 billion or 60%                         CEMBI is now rated BB-/Ba3, one notch higher than the
of total inflows in 2010.                                                           current US high yield credit rating.

Chart 2: EM fixed income flows will likely end the year at a new                    Chart 3: Record US$310 billion issuance in 2012, with growing
record US$85 billion                                                                contribution from higher rated issuers
Inflows to EM Fixed Income funds (US$ billion)                                      EM corporate international bond issuance (US$ billion)
  90              2008                    2009               2010                    350                                                                   90%
                                                                         80.0                              High yield                   Investment grade
 80                   2011               2012                                                                                                              80%
                                                                                     300                   % of IG (RHS)
 70                                                                   77.2                                                                                 70%
 60                                                                                                                                                        60%
 50                                                                      46.8        200                                                                   50%
 40                                                                      43.3        150                                                                   40%
 30                                                                                                                                                        30%
 20                                                                                                                                                        20%
                                                                                      50                                                                   10%
  0                                                                                     -                                                                  0%
       Jan Feb Mar Apr May Jun             Jul Aug Sep Oct Nov Dec
Source: J.P. Morgan
                                                                                    Note: 2012YTD through November 9, 2012
                                                                                    Source: Bond Radar and J.P. Morgan

EM corporate bond debt stock surpasses
US$1 trillion milestone                                                             The steady growth in funds benchmarked to the CEMBI
                                                                                    family of indices also supports the asset class by
EM corporates reached an important milestone this                                   providing a more stable investor base. At US$44 billion,
year, with supply set to exceed US$300 billion and the                              benchmarked funds are up 49% year-to-date and have more
debt stock exceeding US$1 trillion. This is close to the                            than doubled over the past two years. While still dwarfed by
size of the US HY bond market. Such growth has also been                            the US$284 billion of funds benchmarked to the EMBIG, the
accompanied by a larger portion of higher rated issuances,                          dedicated investor base has been growing strongly as more
as investment grade accounted for 74% of total issuance so                          dedicated funds and ETFs have been launched over the past
far in 2012 versus the 60-70% range over the past 10 years                          years. Local investors are also becoming a growing source of
(excluding 2009). Asia saw the biggest increase in volumes                          support, retail and private bank demand may be more
among the EM regions, making up 40% of the total and                                variable. Chart 4 on the following page highlights the growth
contributing to the higher weight of IG given the region is                         in assets under management tracked against the J.P. Morgan
primarily IG (76%). Record issuance has put the CEMBI                               family of EM indices.
Broad (US$560 billion) on par with the EMBIG (US$564

J.P. Morgan Securities LLC               J.P. Morgan Securities LLC
 J.P. Morgan Securities LLC              Holly Huffman AC               Emerging Markets Research
Andrew Szmulewicz AC                                                    Emerging Markets Outlook and Strategy for 2013
 Joyce Chang AC                          (1-212) 834-4953
(1-212) 834-4029
 (1-212) 834-4203                        holly.s.huffman@jpmorgan.com
andrew.j.szmulewicz@jpmorgan.com                                        November 21, 2012

Chart 4: Total assets under management benchmarked to                   Chart 5: NEXGEM issuance projected to increase to US$9.3 billion in
J.P. Morgan EM indices have reached US$542 billion                      2013
US$ billion                                                             US$ million
600       Local Currency Money Market   Corporate External Debt                      Angola
          External Debt                 Local Market Debt                            Belarus
500                                                                                    Belize
400                                                                            Cote D'Ivoire
                                                                                      Congo                                      2013 Issuance Forecast
                                                                         Dominican Republic
                                                                                    Ecuador                                      2012 Issuance YTD
100                                                                             El Salvador*
    0                                                                                 Gabon
          December 2010          December 2011          December 2012                 Ghana
Source: J.P. Morgan                                                              Guatemala
NEXGEM market value rises by nearly                                                    Kenya
NEXGEM continues to be on pace to outperform nearly                                 Senegal
all other fixed income asset classes for 2012. YTD                                 Sri Lanka
returns for NEXGEM have totaled 20.1%, outperforming                               Tanzania
all EM product types including EMBIG (16.1%), CEMBI                                 Vietnam
(13.3%) and GBI-EM (13.0%). NEXGEM has also                                          Zambia
outperformed other asset classes this year including
                                                                                                 0           500          1000    1500      2000      2500
European high yield (17.9%), Global high yield (13.0%),                 *Issuance likely to occur before year end 2012.
Global high grade (9.7%), and US equities                               Source: J.P. Morgan
(10.3%). Through mid-October, NEXGEM had performed
comparably with a similarly-rated sleeve of the EMBIG.                  GBI-EM returns rebound from 2Q sell-off
However, as a result of recent weakness in Argentina,
NEXGEM has now managed to outperform this category as
                                                                        to end the year up 13%
                                                                        EM local markets, using the GBI-EM GD as a proxy,
                                                                        have returned 13% this year despite a 6% EM FX
With the inclusion of four new members, additional                      correction during 2Q12 which left overall returns close
issuance from Sri Lanka, and strong performance, the                    to flat as of end-May. Though EM FX remained volatile
investible NEXGEM external market has grown by                          and only added 1% in spot terms for the GBI in 2012,
36.4% YTD. Angola, Guatemala, Mongolia, and Zambia                      carry and duration provided steady returns through the
have all become NEXGEM members this year through                        year (13% total; chart 6). This was a significant
inclusion of their debut benchmark issuance. Furthermore,               outperformance relative to flat performance for the GBI-
Bolivia’s potential inclusion looms on the horizon as the               EM GD in 2011, when FX spot declines negated carry and
eligible 22’s are set to mark this country’s inclusion. Such            duration returns. 2012 returns have been more modest
inclusion will bring the number of NEXGEM countries to                  than in 2010 (16%) and 2009 (22%) when EM FX gains
23 from 18 at 2011 year end. As of the time of this                     boosted strong local performance. The majority of the EM
publication, NEXGEM’s market value had increased 36.4%                  FX moves in 2012 were again driven by EUR/USD: EM
to US$33.3 billion, representing 5.9% of the EMBI Global,               currencies traded within a +/- 3% range against the
up from 5.3% at the end of 2011.                                        historic relationship versus the EUR after the sell-off in
                                                                        the beginning of the year. GBI-EM GD yields have

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HollyMorgan Securities LLC                Jonny Goulden AC                         Emerging Markets Research
Joyce Chang AC
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declined by 100bp to 5.60%, the lowest level since 2003,                           Chart 7: Wide variation in performance across GBI countries
the period for which we have data. Spreads to the US GBI                           Year-to-date returns for GBI-EM GD through Nov 19, ranked by USD total return
tightened by 75bp, the lowest level since mid-2011 and                                 Hungary
near the average of the mid-2009 to mid-2011 average.                                    Nigeria
Since mid-2012, the spread of GBI-EM yields to US                                        Turkey
Treasuries has tightened more than the historic                                            Peru
relationship with Treasuries would suggest (tightening is                                  Chile
seen more in Treasury sell-offs rather than rallies).                                    Mexico
Compared to 2011 when local yields increased in the                                   Colombia
September sell-off, yields in 2012 were steady to lower                                  Poland
overall throughout 2012.                                                                 Russia
                                                                                       Malaysia                                                    Local
                                                                                       Thailand                                                    FX
Chart 6: FX remained volatile in 2012 while the GBI-EM in local
currency terms posted steady returns throughout the year                                                                                           USD
Year-to-date returns for GBI-EM GD local index (carry and duration) and FX spot           Brazil
 14                                                                                 South Africa
                GBI-EM local YTD returns            GBI-EM FX spot return
 12                                                                                             -20%     -10%       0%        10%       20%       30%       40%
 10                                                                                Source: J.P. Morgan

  6                                                                                Regional highlights
  2                                                                                EMEA EM markets outperform despite Euro
  0                                                                                area recession and European bank
  Jan-12         Mar-12       May-12         Jul-12        Sep-12         Nov-12
                                                                                   EMEA EM market performance across EM fixed income
Source: J.P. Morgan                                                                asset classes has surpassed other regions despite
                                                                                   substantial European bank de-leveraging in Bulgaria,
                                                                                   Hungary, Kazakhstan and Ukraine, and weaker growth
There has been wide variation in country-level                                     in the EMEA EM region relative to other regions. Across
performance among EM local markets in 2012 (chart 7).                              EM markets, EMEA EM entered the year as an
Outperformers included Hungary and Nigeria, which each                             underperformer, but as European tail-risks receded EM
returned over 25% in USD terms, while Brazil, Indonesia,                           sovereign and corporates in the region outperformed.
and South Africa underperformed, returning around 5%.                              EMBIG Europe and CEMBI Europe tightened 196bp and
Note that for the three underperformers, EM FX losses were                         265bp corresponding to total returns of 19.9% and 16.8%,
the key driver as carry and duration returns were solid over                       respectively, compared to 124bp of tightening in the
10% for each. At the regional level, EMEA EM has                                   EMBIG and 106bp of tightening in the CEMBI (16.1%
outperformed, up nearly 17% on the year, while Latin                               and 13.3% total returns, respectively). In currency markets,
America has returned 14% and EM Asia has lagged at 6.3%.                           EMEA EM FX saw HUF return 14.1% and TRY 13.3%,
The YTD outperformance of EMEA EM occurred beginning                               compared to 6.1% for EM FX overall, and EMEA EM local
in June, when the European sovereign debt crisis began to                          bond yields fell 144bp, versus a 92bp decline for the GBI-
fade as the key driver of markets and before the Fed’s QE3                         EM overall. Growth was not the driver of EMEA EM
announcement in mid-September, at which point EM Asian                             outperformance, as regional real GDP only expanded
local markets became the steady performer. Our GBI-EM                              2.6%oya, versus 6.1% for Asia and 2.9% for Latin
Model Portfolio has outperformed the index by 76bp in                              America. Looking into 2013, we see renewed
2012; 53bp due to FX gains and 23bp due to local gains. By                         underperformance for EMEA EM sovereigns and FX early
region, we outperformed the Asia index by 49bp, the EMEA                           in the year as risk premia have been reduced and focus will
index by 59bp, and the Latin America index by 138bp.

 J.P. Morgan Securities LLC                                       JPMorgan Chase Bank N.A.
 Luis Morgan AC
 J.P. Oganes Securities LLC                                       David Fernandez AC                                                             Emerging Markets Research
 Joyce Chang AC
 (1-212) 834-4326                                                 (65) 6882-2461                                                                 Emerging Markets Outlook and Strategy for 2013
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 joyce.chang@jpmorgan.com                                                                                                                        November 21, 2012
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now likely turn back to the weaker growth outlook                                                                                                YTD, equivalent to a return of 15.2%. However, Peru
compared to other EM regions, as Euro area growth                                                                                                Soberanos outperformed in the region, returning 17.5%
remains disappointing.                                                                                                                           YTD in local terms and over 21% in USD terms. Foreign
                                                                                                                                                 inflows into Peruvian bonds have reached US$1.6 billion
Chart 8: EMEA EM outperformed across EM asset classes in 2012                                                                                    so far this year, bringing the share of foreign ownership
Total returns (%) year-to-date through Nov 19                                                                                                    from 48% in December 2011 to 58% in September 2012.
                                                                                                    19.9%                                        Returns in Mexico and Colombia were more balanced
 20.0%                                                                                                                   16.8%
          13.5%                      13.8% 13.7% 13.9%                                                                       14.0%               between duration and FX. Mexico’s duration performance
 15.0%             11.6%                                                                                                                         was in line with US Treasuries, returning nearly 12%,
 10.0%                                                                               6.4%                                                        while FX added another 5.5%. In Colombia, duration
  5.0%                                                                                                       2.4%                                returned 12%, and FX added 6.6%. While Soberano bonds
  0.0%                                                                                                                                           were the best performers in the region, Peru has a weight of
 -5.0%                                                                  -0.1%                                                                    only 5% in the Latin American GBI sub-index, while
                                                                                                                                                 Brazilian local bonds represent a third.




                             GBI-EM FX

                                                                         GBI-EM FX

                                                                                                             GBI-EM FX
                                         GBI-EM Rates

                                                                                     GBI-EM Rates

                                                                                                                                  GBI-EM Rates
                                                                                                                                                 EM Asia steady growth and performance

                   Latin America                                EM Asia                                          EMEA                            From a growth perspective, 2012 was a disappointment
Source: J.P. Morgan                                                                                                                              for EM Asia with China and India prominently missing
                                                                                                                                                 expectations. The region is on track to produce 6.1% GDP
Latin America performs strongly in terms of                                                                                                      growth in 2012, below our forecast of 6.4% published in
growth and market returns                                                                                                                        the year-ahead 12 months ago, with significant downgrades
                                                                                                                                                 over that time to expectations in the region’s heavyweight
Latin America’s growth fell below potential in 2012 to                                                                                           economies of China (7.6%, down from 8.3%) and India
2.9%, as expected, but Brazil explained much of the                                                                                              (5.6%, down from 7.7%). Growth in Southeast Asia has
slowdown in the regional average. Brazil accounts for                                                                                            held up relatively better, due in part to more effective
47% of the region’s nominal GDP and the full-year growth                                                                                         deployment of fiscal policy support during the year. This
rate of 1.4%oya expected for this year—which stands well                                                                                         growth differential also appears in the performance of the
below Brazil’s estimated potential pace of 4.0%—has                                                                                              current accounts, with, for example, China’s surplus
dragged down the regional average. Brazil’s                                                                                                      exceeding our earlier expectations and Indonesia turning in
underperformance is partly explained by the tightening                                                                                           a slight deficit. Inflation was expected to roll down across
measures adopted in 1H11, the currency appreciation and                                                                                          EM Asia in 2012 and it has, which gave central banks the
the slowdown in China. Most other countries in the region                                                                                        policy space to lower rates, even though they chose to do so
are expected to grow largely in line or even above potential                                                                                     only hesitantly throughout the year.
this year—including several that are quite exposed to China
like Chile (5.4%) and Peru (6%), where growth will far                                                                                           EM Asian local markets (+6.1% YTD) underperformed
exceed the projections made late last year. Another notable                                                                                      other regions and delivered less than half of returns of
case is that of Mexico (3.9%), where the economy is                                                                                              EM sovereign and corporate debt. After a slow first half
expected to grow above potential once again this year                                                                                            in 2012, Asian local market performance has improved
despite the lackluster performance of the US. The growth                                                                                         over the summer as QE3 inflows revived Asian currency
resilience of many Latin American economies this year is                                                                                         appreciation and bonds delivered gains on a regional shift
due to the strength of domestic demand, which has                                                                                                to rate cutting. Duration has driven returns, with GBI-EM
compensated for the external drag coming from slower                                                                                             Asia returns split out as 0.2% FX, 1.1% carry and 4.9%
global growth and lower commodity prices.                                                                                                        duration. We correctly identified that SGD would perform
                                                                                                                                                 well in 2012 on a hawkish MAS. KRW was a range-trader
Latin America’s local market returns matched those of                                                                                            for most of the first half but began a steady appreciation
the EMEA EM region, exceeding 13%, dominated by                                                                                                  trajectory since 3Q, a move which we eventually entered.
duration and carry during 2012. FX in the region had a                                                                                           In rates, our top calls in 2012 were for Korea and
stellar start to the year returning 8.7% over the first two                                                                                      Malaysian rates to outperform, which they did: KTB yields
months before declining through the end of 1H12 as central                                                                                       fell on the unexpected start of a BOK rate cut cycle and low
bank increased activism. The growth bias in Brazil was                                                                                           supply, while MGS yields declined on large foreign
behind the large swing in the region’s currency                                                                                                  purchases.
performance, while BCB easing was favorable for our long
duration call as GBI-EM Brazil yields have declined 223bp

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Joyce Chang AC                       Michael Marrese AC                       Emerging Markets Outlook and Strategy for 2013
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J.P. Morgan Securities LLC
Luis Oganes AC
(1-212) 834-4326
                                                                              The Euro area is projected to exit from recession in the
2013 Global macro outlook                                                     second quarter of next year, but full-year Euro area
                                                                              growth is still expected to be zero compared to a modest
Resolution of US fiscal cliff overtakes                                       decline of 0.4% this year. Germany is projected to grow
Eurozone crisis as key external risk                                          only 1.1%, but still favorable compared to contraction in
                                                                              Italy (-0.5%) and Spain (-1.6%). According to J.P. Morgan,
Just as markets positioned for the Eurozone crisis in                         the fiscal drag in the Euro area will moderate from 1.8% of
binary terms at the beginning of 2012, the same                               GDP this year to 1.1% of GDP in 2013 because a
phenomenon is occurring with the US fiscal cliff. Since                       substantial amount of tightening occurred already in core
Obama’s victory in the November 6 US elections, the                           countries and because official creditors have loosened
seemingly singular focus of markets is the fiscal cliff. Fears                austerity measures by extending the timeframe for
that the so-called “fiscal cliff” could lead to an abrupt shift               implementation of structural and fiscal reforms. We
in the first half of 2013 to massive austerity, which would                   mention two caveats for the Euro area. The success of ECB
plunge the US economy back into recession, have                               OMT in alleviating financial market stress appears to have
overtaken concerns about the Eurozone crisis. The fiscal                      had the negative side effect of delaying Euro area reforms
cliff amounts to about US$600 billion or nearly 4% of GDP                     related to governance and banking union. We also are
of tax hikes and spending cuts from the expiration of the                     concerned that there have been no clear endorsements for
Bush tax cuts payroll tax holiday and automatic spending                      Spain’s reform program or a firm timeline for Spain to
cuts, associated with the Budget Control Act of 2011 (table                   request assistance.
1). Even if the cliff is “resolved,” any resolution will still
involve a significant drag to the economy. J.P. Morgan’s                      European banks have more deleveraging to go and
forecast incorporates a drag of 1.1% in 2013, even if the                     more normalized levels of credit supply are unlikely to
worst of the US fiscal cliff is avoided. Brinksmanship                        materialize next year. Our European credit analysts
politics will also likely play out when the debt ceiling limit is             believe that balance sheet deleveraging will remain a
reached and becomes binding in February or March 2013.                        central theme for European banks next year with the sector
                                                                              targeting a total of EUR2.7 trillion in asset reductions or
Table 1: Fiscal cliff: J.P. Morgan forecast                                   the equivalent to 6.4% of the aggregate sector balance
                                              Assumed Share Drag as           sheet, of which EUR1.5 trillion is to be achieved by end-
Measure                           US$ billion Multiplier realized % of GDP    2014. However, deleveraging is occurring as a result of
Sunsetting of Bush tax cuts         309         0.75       0.10      0.1
                                                                              equity infusion rather than a reduction in overall credit
Expiration of payroll tax holiday   125         0.75       1.00      0.6
Emergency unemployment benefits      40         0.90       0.33      0.1      availability. The aggregate balance sheet size of the
Budget control act spending cuts     98         1.00       0.50      0.3      European banking sector remains relatively unchanged, but
Total                               572                              1.1      monthly growth rates in loans to households and non-
Source: J.P. Morgan                                                           financial corporations have dropped materially.1

Even with the gradual removal of fiscal policy support,                       Chart 9: Eurozone aggregate bank balance sheets: deleveraging dynamic
our economists believe that the US expansion is expected                      LHS-Assets in EUR trillion, RHS-Leverage ratio
to continue at a 2% over-year-ago pace in 2013, although                          40                                                             19.0
                                                                                                      Total Assets             Leverage Ratio
1H13 growth forecasts remain discouraging. Still, US                              35
growth will decline to 1.7% next year from 2.2% this year.                                                                                       18.0
The private sector will continue to expand in the coming
year, with housing taking a leading role. Low inflation, along                    25                                                             17.0
with high unemployment and lingering downside risks to                            20
growth, will keep the Fed firmly in accommodative mode                            15                                                             16.0
next year.                                                                        10
Table 2: J.P. Morgan US forecasts
                                     4Q12     1Q13    2Q13    3Q13    4Q13         0                                                             14.0
Real GDP (%q/q, saar)                 2.00     1.00    1.50    2.50    3.00
Consumption (%q/q, saar)              2.00     0.50    0.70    1.90    2.50
Core PCE prices (%oya)                1.90     1.80    1.50    1.50    1.50   Source: ECB and J.P. Morgan
Unemployment rate (level)              8.0      8.0     7.9     7.9     7.8
Nonfarm employment (ch., 000s)       125.0    150.0   170.0   180.0   200.0
Source: J.P. Morgan
                                                                               See European Credit Outlook & Strategy 2013: As Good as it
                                                                              Gets? Stephen Dulake et al., 14 November 2012.

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joyce.chang@jpmorgan.com       haibin.zhu@jpmorgan.com                    November 21, 2012
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EM growth to increase to 4.9% in 2013,                                    been disappointing, slowing to 2.7% in 2011, and to an
widening the margin versus DM growth                                      expected 1.4% this year. Last year’s deceleration was self-
                                                                          inflicted, but it was aggravated by negative global factors
We expect EM growth to increase to 4.9%oya in 2013                        (including China’s deceleration) and a downward credit
from 4.6% this year. EM Asia should remain the key                        cycle. While these factors also delayed the effects of the
driver (6.5%), and we expect China to grow by 8.0%.                       broad policy easing implemented since August 2011, we
EMEA EM is likely to be remain the laggard (2.9%), and                    are finally starting to see Brazil’s economy gaining traction
we expect Latin America to post the most notable                          and rebounding to around 4.5% in 2H12. A policy-driven
improvement (3.8% from 2.9%), led by the projected                        improvement in consumption is leading the initial recovery,
rebound in Brazil, which should grow by 4.1% in 2013. We                  but we are looking for the resumption of capex and
expect EM economies to contribute over 100% to nominal                    infrastructure investment to provide more sustainability to
global GDP growth next year, with China, Brazil and India                 the growth outlook in 2013. The recovery in investment
together accounting for 68% of this contribution. China,                  amid a murky global scenario is the main challenge ahead.
Brazil, and India are forecast to see growth improve after a              We forecast real GDP growth at 4.1% in 2013, but an
disappointing 2012.                                                       eventual postponement in the rebound in investments and a
                                                                          protracted credit recovery suggest some downside risks to
Table 3: EM growth to pick up to 4.9% in 2013, with the gap               this forecast.
widening to DM growth
Real GDP (%oya)                                                           EM inflation is expected to turn modestly higher, rising
                                                              Potential   from 4.4% this year to 4.9% in 2013. Inflationary
                             2011      2012      2013           GDP
Developed markets             1.3       1.1       0.9           1.7       pressures are greatest in Latin America, but we expect that
Emerging markets              6.2       4.6       4.9           5.4       inflation will be within target in most of the region by year
  Latin America               4.2       2.9       3.8            3.9      end.
  EMEA EM                     5.3       3.2       2.9           4.0
  EM Asia                     7.4       6.1       6.5           6.8
Source: J.P. Morgan                                                       Policy rates overall in EM should be relatively steady in
                                                                          2013. EM central banks are unlikely to make significant
Despite the once-a-decade political transition in China,                  adjustments to policy rates next year and are expected to
economic policy is likely to remain status quo. New                       ease by only 8bp in aggregate through 3Q13. This
leaders will continue the economic agenda as laid out in the              compares to 69bp of rate cuts during the course of the past
12th five-year (2011-15) plan. The working report in the                  year. On a weighted-average basis, we forecast rates to
18th party congress reiterated that the transition of the                 increase to 5.62% in 4Q13, largely due to some tightening
economic growth model remains the key economic task.                      in Brazil (chart 10). We expect moderate easing in EMEA
The main areas of economic reform in the coming years                     EM, with Hungary and Poland likely to ease 75bp and
include urbanization, innovations and industry upgrading,                 100bp, respectively, and in EM Asia.
reducing income inequality and growth imbalances, and
enhancing economic openness.                                              Chart 10: More than 5% policy rate differential between EM and DM
                                                                          Policy rate (%)
In the near term, the government will continue the                         14
current pace of policy easing to ensure the firming up of                                             Developed markets        Emerging markets
growth momentum, but the likelihood of a large
stimulus is low. With the impact of policy easing gradually                10
phasing in and the economic recovery gaining traction, at                   8
the same time that inflation and unemployment rates are
still within the comfort zone, it is not necessary to push up
the scale of policy easing significantly. The government                    4
will address the issue of balancing the pace and quality of
economic growth. We expect that the 2013 growth target
may be lowered to 7% in 2013 from 7.5% in 2012.                             0

Brazil’s growth will go back to potential in 2013,                        Source: JPMorgan
following two years of underperformance. After posting
a 7.5% GDP growth rate in 2010, Brazil’s performance has

J.P. Morgan Securities LLC                                            Emerging Markets Research
Luis Oganes AC
Joyce Chang AC                                                        Emerging Markets Outlook and Strategy for 2013
(1-212) 834-4203
joyce.chang@jpmorgan.com                                              November 21, 2012

Modest gains for commodity prices                                      our commodity analysts retain for now the crude price
expected                                                               outlook shown in table 4 based on these fundamental
                                                                       factors. In the case of metal prices, while most will close
                                                                       the year displaying percentage drops in the high single
After declining in most cases during 2012, commodity                   digits or in the teens, the signs of bottoming out in the
prices are expected to post gains—albeit modest—                       global economy that have begun to emerge—particularly in
during 2013. If our price forecasts for 4Q12 are on the                China—imply that immediate physical metals demand is
mark, average WTI and Brent crude prices would close this              starting to pick up and that the recent shift in price
year only marginally lower than in 2011. The 2013 outlook              momentum may prove durable. As such, the 2013 metals
looks for modest gains in average prices (WTI +6.9% and                price forecasts pencil in at least a partial reversal of this
Brent +2.7%), but near-term risks are clearly shifting to the          year’s average declines in most cases. By contrast, most of
upside given the recent developments in the Middle East                the major agricultural commodities have displayed price
that raise concerns about escalating tensions precipitating a          gains this year amid supply disruptions related to weather,
more serious military conflict. Nonetheless, these                     but the outlook for 2013 is more mixed: corn (+4.1%) and
geopolitical issues come at a time when crude supplies are             CME wheat (+3.8%) prices are expected to post further
generally stable or pushing rapidly higher in major                    increases; soybeans (-6%) will give back some of this
producing areas, especially North America. Consequently,               year’s gain; and sugar (-7.5%) will continue to decline.

Table 4: 2013 commodity price forecasts are modestly higher
                                           2012                                                                           2013
                             Average     Average y/y change        1Q13      2Q13         3Q13     4Q13     Average     Average y/y change
WTI Crude ($/bbl)                94.00                    -1.2%    95.00     90.00     111.00     106.00       100.50                     6.9%
Brent Crude ($/bbl)             110.00                    -0.8%   112.00    105.00     120.00     115.00       113.00                     2.7%
US Natural Gas ($/MMBtu)          2.75                   -31.7%     4.25      4.00       4.25       4.50         4.25                    54.6%
Precious Metals
Gold ($/t oz.)                    1670                     6.3%     1750      1775       1800       1775         1775                     6.3%
Silver ($/t oz.)                  30.5                   -13.6%    30.00     30.00      30.00      30.00        30.00                    -1.6%
Platinum ($/t oz.)                1528                   -11.2%     1575      1650       1725       1800         1688                    10.4%
Palladium ($/t oz.)                643                   -12.2%      700       750        800        825          769                    19.5%
Base Metals
Aluminum ($/mt)                   2040                   -15.0%    2100      2200       2250        2300         2213                     8.5%
Copper ($/mt)                     8054                    -8.6%    8500      8700       9000        9200         8850                     9.9%
Nickel ($/mt)                    17720                   -22.5%   18500     19000      19500       20000        19250                     8.6%
Zinc ($/mt)                       1961                   -10.6%    2050      2100       2150        2200         2125                     8.4%
Lead ($/mt)                       2024                   -15.6%    2100      2250       2300        2375         2256                    11.5%
Tin ($/mt)                       20880                   -19.7%   21500     22000      22500       23000        22250                     6.6%
Corn ($/bu)                       7.30                     7.4%     8.50      8.25       7.00       6.50         7.60                     4.1%
CME wheat ($/bu)                  7.80                    10.0%     9.25      8.75       7.50       7.00         8.10                     3.8%
Soybeans ($/bu)                  15.10                    14.6%    15.75     14.10      14.00      13.00        14.20                    -6.0%
Sugar ($/bu)                     21.20                   -21.8%    18.50     20.00      20.00      20.00        19.60                    -7.5%
Source: J.P. Morgan

J.P. Morgan Securities LLC                                                                           Emerging Markets Research
Luis Oganes AC
Joyce Chang AC                                                                                       Emerging Markets Outlook and Strategy for 2013
(1-212) 834-4326
joyce.chang@jpmorgan.com                                                                             November 21, 2012

Commodity prices will likely play a more supportive                                                   Table 5: Commodities account fore more than 50% of total exports
role for the terms of trade and fiscal accounts of EM                                                 for major Latin American and EMEA EM countries
                                                                                                      % of each country’s exports
commodity exporters in 2013. Commodities represent                                                                                                           Commodities exports by type:
more than 50% of total exports in 14 countries in Latin                                                                     Total commodities          Oil      Metals          Agriculture
America and EMEA EM (including the GCC bloc—see                                                       Latin America                56.4               19.1       16.6              20.6
table 5), which in turn account for nearly 45% of the                                                   Argentina                  76.0               7.8         8.9              59.3
EMBIG market capitalization. While the decline in                                                       Brazil                     58.5               10.6       20.4              27.5
                                                                                                        Chile                      65.6               0.0        59.1               6.5
commodity prices and export volumes observed this year                                                  Colombia                   70.6               51.4       14.6               4.4
hurt external and fiscal accounts of this set of countries, it                                          Ecuador                    78.4               53.7        0.5              23.0
was not extreme enough to push any of them into a crisis.                                               Peru                       89.5               10.0       62.8              16.7
As most commodity prices are expected to recover in 2013,                                               Uruguay                    61.0               0.0         3.0              58.0
                                                                                                        Venezuela                  97.6               95.1        2.3               0.1
these countries will enjoy the windfall. However, since the                                           EMEA EM                      53.1               29.9        8.3               2.8
price gains are projected to be modest, those EM countries                                              GCC                        64.1               53.6        1.7               0.2
that actually import commodities should not see an                                                      Kazakhstan                 73.6               54.9        8.9               0.9
excessive deterioration of their terms of trade. Among the                                              Nigeria                    99.4               87.3        0.3               1.4
                                                                                                        Russia                     74.4               45.7        7.4               1.3
oil exporters, budget drafts for 2013 generally assume oil                                              South Africa               54.6               1.3        26.4               3.7
prices lower than J.P. Morgan’s average price forecasts of                                              Ukraine                    52.4               3.8        24.8              12.4
$100.5/bbl for WTI and $113.0/bbl for Brent, although in                                              Source: Official sources and J.P. Morgan
several cases, such price assumptions stand below the
breakeven level required to balance their budgets (table 6).

Table 6: Impact of $1 change in oil prices on EM fiscal and export accounts
% of each country’s exports
                                                                                                 Impact of $1 change in
                                                                                                     gross exports                          2012 budget                           2013 budget
                        Oil exports1        Oil imports        Impact of $1 change in                                                oil price      breakeven              oil price      breakeven
                                                                                               % of GDP         US$ million
Country                  % of total         % of total        fiscal accounts (%GDP)                                               assumption        oil price3          assumption        oil price3
Latin America
Colombia                    51.4                4.0                      0.04                     0.10               340                92                 n.a.              101                n.a.
Ecuador                     53.7                19.0                     0.13                     0.22               130                80                 90                79                 90
Mexico2                     16.1                12.2                     0.02                     0.04               485                85                 n.a.              87                 n.a.
Venezuela                   95.1                15.0                     0.15                     0.38               750                50                 100               55                 95
Algeria                     98.1                0.0                      0.70                     0.84              1,130               37                117                37                 117
Angola                      94.0                0.2                      0.44                     0.67               517                77                67                 n.a.               n.a.
Gabon                       86.0                0.5                      0.19                     0.73                85                65                62                 n.a.               n.a.
Iraq                        97.7                0.0                      0.95                     0.92               228                85                115                85                 115
Kazakhstan                  54.9                0.0                      0.10                     0.30               630                90                80                 90                 75
Nigeria                     87.3                2.0                      0.29                     0.40               674                70                96                 75                 94
Qatar                       89.5                0.0                      0.49                     0.68               562                45                60                 45                 60
Russia                      66.3                0.0                      0.08                     0.18              3,500               109              109.5               97                 111
Saudi Arabia                94.0                0.0                      0.89                     0.68              3,800               60                66                 60                 66
EM Asia
Malaysia                    16.2                8.2                      -0.01                    0.17               379                n.a.               n.a.              n.a.               n.a.
1. Including oil derivatives and in some cases natural gas
2. The impact of $1 change in fiscal accounts represents an estimate of how much goes to the stabilization fund for every $1 above the oil price budget assumption. If the price is below the budget
assumption, the price is offset by the oil hedge.
3. The oil price that would balance the budget
 Source: J.P. Morgan

J.P. Morgan Securities LLC
JPMorgan Chase Bank N.A.                                                        Emerging Markets Research
David Chang AC
Joyce Fernandez AC                                                              Emerging Markets Outlook and Strategy for 2013
(1-212) 834-4203
(65) 6882-2461
joyce.chang@jpmorgan.com                                                        November 21, 2012

EM Asia outlook: Rotating into better                                           3.2% in 2012. China inflation should increase to 3.6% from
growth in 2013                                                                  2.4%, but remain below the official target of 4%. In India,
                                                                                we expect inflation will finally soften in 2013. For most
                                                                                countries in the region the turn to higher monthly inflation,
Economic activity in EM Asia has taken a turn for the
                                                                                in our base case of moderate GDP growth, will not be seen
better as we end 2012 and will lead to better headline
                                                                                as a threat. Against this backdrop, EM Asian central banks
GDP growth in 2013. We expect regional GDP growth to
                                                                                may still slowly drip out rate cuts in 2013. We expect the
pick up to 6.5% in 2013 from 6.1% in 2012. Importantly,
                                                                                Reserve Bank of India is expected to cut in January. For
China and India are both forecast to see growth improve
                                                                                most of Asia, fiscal policy also has the policy space to do
next year to 8.0% and 6.0%, respectively, after a very
                                                                                more, and we do expect budgets to be growth supportive,
disappointing 2012. For Asian policymakers, improved
                                                                                but not massively so. As noted above on page 12,
growth data will clearly be good news, but it is not clear
                                                                                significant policy stimulus form China is unlikely to come
they will be satisfied with the pace of recovery, especially
                                                                                to fruition.
coming after this year’s disappointments. After phases of
depreciation in 2012, we expect EM Asian balance of
payments to be stronger in 2013. Current accounts are                           Table 9: Emerging Asia: Pickup in inflation
forecast to hold steady at around US$380 billion, while                         CPI %Dec/Dec
capital inflows should remain robust. With inflation no                                                                                                        Inflation
                                                                                                                         2011           2012         2013       target
longer falling, policymakers should be more tolerant of                         Emerging Asia                              4.5          3.2          4.0
Asian FX appreciation.                                                            China                                    4.1          2.4          3.6          4.0
                                                                                  Hong Kong                                5.7          2.3          3.7           —
                                                                                  India**                                  7.7          8.0          7.3           —
Table 7: Emerging Asia: Slight pick up in growth but still below                  Indonesia                                3.8          4.3          4.6      4.5 (+/-1.0)
potential                                                                         Korea                                    4.2          1.8          3.5      3.0 (+/-1.0)
Real GDP %oya                                                                     Malaysia                                 3.0          1.2          2.6           —
                                                                   Potential      Singapore                                5.5          4.4          3.2           —
                                2011          2012      2013         GDP          Taiwan                                   2.0          1.2          1.8           —
Emerging Asia                    7.4           6.1       6.5          6.8         Thailand*                                3.5          3.2          1.2        0.5-3.0
  China                          9.3           7.6       8.0          8.0       *Inflation target for core; ** Refers to WPI
  Hong Kong                      5.0           1.2       3.2          4.5       Source: J.P. Morgan
  India                          6.5           5.6       6.0          6.5
  Indonesia                      6.5           5.7       4.5          5.0
  Korea                          3.6           2.3       3.2          4.0       Table 10: Emerging Asia: Drip support from monetary policy to
  Malaysia                       5.1           5.0       3.7          5.5       continue
  Singapore                      4.9           1.5       2.5          4.5        Policy rate %
  Taiwan                         4.0           1.2       3.4          4.5                                                                                2013
  Thailand                       0.1           5.7       4.5          4.5                                        Current         4Q12          1Q     2Q      3Q       4Q
Source: J.P. Morgan                                                             EM Asia                           5.53           5.50         5.46   5.46    5.46     5.46
                                                                                  China                           6.00           6.00         6.00   6.00    6.00     6.00
Table 8: Emerging Asia: Current account and fiscal balances to hold               Hong Kong                       0.50           0.50         0.50   0.50    0.50     0.50
                                                                                  India                           8.00           8.00         7.75   7.75    7.75     7.75
steady                                                                            Indonesia                       5.75           5.75         5.75   5.75    5.75     5.75
                                                                                  Korea                           3.00           2.75         2.75   2.75    2.75     2.75
                          Fiscal balance             Current account balance
                                                                                  Malaysia                        3.00           3.00         3.00   3.00    3.00     3.00
                      2011 2012 2013                 2011      2012     2013      Taiwan                          1.88           1.88         1.88   1.88    1.88     1.88
Emerging Asia         -1.7     -2.3    -2.1           2.4       2.3      2.2      Thailand                        2.75           2.75         2.75   2.75    2.75     2.75
  China               -1.1     -2.0    -2.0           2.8       3.1      2.9    Source: J.P. Morgan
  Hong Kong            3.5     -0.2     3.8           3.1       2.3      1.5
  India               -5.9     -5.6    -5.3          -4.2      -3.7      -3.5
  Indonesia           -1.7     -2.1    -1.8           0.2      -2.4      0.4
                                                                                The region has resisted imposing significant controls on
  Korea                0.5      1.0     1.5           2.2       3.2      2.3
  Malaysia            -5.4     -4.7    -4.0          11.0       3.9      3.1    capital inflows and we expect this restraint to continue
  Singapore            0.7      0.4     0.0          18.8      20.1     15.3    with the focus on measures to control local property
  Taiwan              -1.8     -2.0    -2.0           8.2       8.9      8.5    prices. More notably, in a scenario where DM surprises on
  Thailand            -3.0     -3.5    -3.5           4.0      -0.2      1.2
Source: J.P. Morgan
                                                                                the upside, Asian growth and inflation would both be higher.
                                                                                Policymakers have been stingy with support in 2012, partly
After falling continuously in 2012, inflation in EM Asia                        because they never fully dismissed inflation risks. If growth
is expected to turn higher, allowing for drip support                           and inflation see upside surprises, this could produce
from monetary policy to continue, if needed in 2013. We                         tightening in 2013.
forecast regional inflation to rise to 4.0% in 2013 from

JPMorgan Chase Bank N.A.
 J.P. Morgan Securities LLC                  J.P. Morgan Securities LLC                 Emerging Markets Research
David Fernandez AC
 Joyce Chang AC                              Luis Oganes AC                             Emerging Markets Outlook and Strategy for 2013
(65) 6882-2461
 (1-212) 834-4203                            (1-212) 834-4326
 joyce.chang@jpmorgan.com                    luis.oganes@jpmorgan.com                   November 21, 2012

Table 11: EM Asia: More restraint in introducing macro prudential controls in 2013
                               FX regime                                                Recent measures                                             Possible future measures
China          Strict Capital Account control. Bond        SAFE introduced a new regulation of bank’s NOP management regime in April           Existing QFII program limit and
               Investment possible through QFII and        16 2012, which allows to short USD and long CNY as an overnight position.           RQFII limits would be increased
               Direct investment quota, but highly                                                                                             further
               regulated by authorities.
India          Strict Limits on size of foreign bond       FII limits increased to US$20 billion for government bonds and US$45 billion        FII limits on G-Secs could be
               investment. Limit of US$20 billion on       for corporates. In December 2011 hedging of FX exposure of residents and            increased; withholding tax on all
               government bonds and US$45 billion on       foreigners was restricted, but there has been partial relaxation since then and     corporate bonds and government
               corporates                                  cancellation and rebooking up to 25% is permitted. In October 2012,                 could be reduced.
                                                           withholding tax on External commercial borrowing and Infrastructure corporate
                                                           bonds was reduced to 5% from 20%.
Indonesia      Interest and income tax at 20%, but         New acquisition of a domestic commercial bank by a financial institution is         We expect liquidity to improve in the
               majority of investors use tax treaties to   limited to 40% ownership stake, a non-financial institution to 30%, and families    FX market, especially for investors
               reduce these taxes between 0-10%.           or individuals to 20%. Local banks have provided only limited liquidity this year   who are planning to take dollars out
               Domestic banks are required to report       on allowing foreign investors to take their USD out of the country.                 of the country.
               currency transactions and positions.
Korea          Free floating and convertible.              Increased checking of banks forward FX accounts, verbal intervention warning        Potential tightening of banks' FX
                                                           of the need to “smooth FX volatility,” references to potential added                forward position limit and hiking
                                                           macroprudential measures                                                            bank levy.
Malaysia       No taxes                                    None                                                                                None
Singapore      Open capital account. No taxes.             Since 2009 has raised rate on Seller's Stamp Duty by roughly four-fold for all      Further restrictions on LTVs as well
                                                           second mortgages and extended period of applicability to four years from            as buying/selling duties, specifically
                                                           three (tax is 16% for property sold within one year of purchase, 12% for two        aimed at foreign buyers
                                                           years, 8% for three years, 4% for four years); introduced buyer’s stamp duty of
                                                           up to 3% on all property purchases plus an additional buyer’s stamp duty
                                                           (ABSD) on foreigners (10%) and citizens (3% on second mortgage); increased
                                                           amount of minimum cash payment for downpayment; banned mortgage
                                                           periods beyond 35 years and put limits on mortgages above 30 years; and
                                                           reduced loan-to-value ratio (LTV) to 60% for second mortgages
Sri Lanka      Strict Limits on size of foreign            Foreign investment in T-bonds and T-bills raised to 12.5% from 10% of total         Easing of capital controls.
               investment in T-bonds and T-bills at        outstanding earlier. LKR shifted to a de-facto free-floating regime after a one-
               12.5% of total outstanding.                 off 3% devaluation
Taiwan         Time deposits are not allowed for           None                                                                                None
               foreigners. FINI account required for
               foreign investment, frequent inspections
               of custodian banks
Thailand       Foreigners exempt from WH tax for           15% WHT was reintroduced two weeks ago to equalize with current tax                 Potential introduction of across the
               government bonds                            regime for domestic holders.                                                        board tax on all fixed income inflows
                                                                                                                                               with potential restrictions on
                                                                                                                                               minimum holding period.
Source: J.P. Morgan

Latin America outlook: Growth near                                                       agricultural crop that was affected by a draught earlier this
                                                                                         year. This baseline scenario assumes that the US avoids a
potential and inflation within target                                                    sharp deceleration or recession due to the fiscal cliff (which
                                                                                         would affect Mexico, in particular) and that China’s gradual
Latin America is expected to reaccelerate back to                                        recovery consolidates (preventing a further drop in prices
potential in 2013. The recovery under way in Brazil, which                               and volumes of commodity exports). Faster growth will help
is projected to grow 4.1%oya in 2013, will help to bring the                             to improve fiscal accounts (Latin America’s average fiscal
region’s average close to its estimated potential pace of 3.9%                           deficit is expected to shrink to 2.1% of regional GDP from a
despite some expected moderation in Chile (4.5%) and                                     2.5% gap this year), but current accounts will likely
Mexico (3.6%), and a significant drop in Venezuela growth                                deteriorate a bit (the current account deficit is projected to
(0%) as the economy absorbs the impact of the needed post-                               reach 1.7% of GDP in 2013 versus 1.4% this year). The good
election fiscal tightening and FX devaluation. Colombia                                  news is that countries with external gaps should be able to
(4.5%) and Peru (6.0%) should maintain their current                                     finance them easily with FDI inflows and/or long-term
cruising speeds amid strong FDI, while Argentina (3.6%)                                  external borrowing.
should recover with the help of Brazil and a better

 J.P. Morgan Securities LLC
J.P. Morgan Securities LLC                                                      Emerging Markets Research
 Joyce Chang AC
Luis Oganes AC                                                                  Emerging Markets Outlook and Strategy for 2013
 (1-212) 834-4203
(1-212) 834-4326
luis.oganes@jpmorgan.com                                                        November 21, 2012

Table 12: Latin America: Growth to pick up close to potential                   around these forecasts are for Brazil to stay on hold
Real GDP %oya                                                                   throughout 2013 if growth disappoints again and if
                                2011          2012      2013         GDP        inflation expectations remain well-anchored; for
Latin America                   4.2           2.9        3.8         3.9        Colombia to cut its repo rate once again if the 2Q13
  Argentina                     8.9           2.7        3.6         3.5        recovery proves short-lived; for Chile to hike if inflation
  Brazil                        2.7           1.4        4.1         4.0        finally accelerates amid strong domestic demand and tight
  Chile                         6.0           5.4        4.5         4.5
  Colombia                      5.9           4.3        4.5         5.0
                                                                                labor markets; and for Mexico to follow its recent
  Ecuador                       8.0           5.0        4.0         3.0        hawkish rhetoric with a hike if its currently high inflation
  Mexico                        3.9           3.9        3.6         3.3        fails to converge back to target. FX dynamics will also
  Peru                          6.9           6.0        6.0         6.0        play a role in driving monetary policy decisions. Brazil
  Uruguay                       5.7           3.5        4.0         4.0
  Venezuela                     4.2           5.0        0.0         3.0
                                                                                will likely remain the most interventionist in FX markets
Source: J.P. Morgan                                                             and may adopt macro-prudential measures to help
                                                                                maintain a low Selic rate amid potential inflation
                                                                                pressures, while trying to prevent BRL appreciation.
Table 13: Latin America: Growth pickup to improve fiscal accounts
                                                                                Mexico will likely remain on the other extreme and
but current account balances could deteriorate further
%GDP                                                                            display the most tolerance of FX volatility. The other
                          Fiscal balance             Current account balance    central banks in the region will be somewhere in between.
                      2011 2012 2013                 2011      2012     2013
Latin America         -2.2     -2.5    -2.1          -0.9      -1.4      -1.7
  Argentina           -1.6     -2.2    -2.5          -0.1      -0.1      -1.0   Table 14: Latin America: Average inflation ticks up but largely within
  Brazil              -2.6     -2.7    -2.3          -2.1      -2.4      -2.6   target ranges
  Chile                1.5     -0.4    -0.7          -1.3      -3.8      -5.4   CPI %Dec/Dec
  Colombia            -2.1     -0.8    -1.0          -3.1      -2.9      -3.0                                                                    Inflation
  Ecuador             -1.0     -2.5    -3.0          -0.4      -0.5      -1.5                                 2011           2012      2013       target
  Mexico              -2.5     -2.4    -2.4          -0.5      -0.4      -0.7   Latin America                  7.2            6.0       6.8
  Peru                 1.9      2.0     1.5          -1.9      -2.8      -3.5     Argentina                    9.5            9.6      10.2          —
  Uruguay             -0.9     -1.7    -1.4          -3.1      -3.1      -3.0     Brazil                       6.5            5.5       5.3     4.5 (+/-2.0)
  Venezuela           -4.0     -8.0    -2.5           8.6       4.5      6.5      Chile                        4.4            2.5       3.2     3.0 (+/-1.0)
Source: J.P. Morgan                                                               Colombia                     3.7            2.9       3.0     3.0 (+/-1.0)
                                                                                  Ecuador                      5.4            5.1       4.6          —
                                                                                  Mexico                       3.8            4.2       3.6     3.0 (+/-1.0)
With growth near potential and inflation within target                            Peru                         4.7            2.9       3.0     2.0 (+/-1.0)
ranges, Latin American central banks will have little                             Uruguay                      8.6            8.5       7.5     5.0 (+/-1.0)
                                                                                  Venezuela                    29.0          19.0      35.0          —
reason to adjust policy rates in 2013. Among the six                            Source: J.P. Morgan
inflation targeters in Latin America, this year’s inflation is
expected to fall within target ranges in Brazil, Chile,
Colombia and Peru, and to exceed them in Mexico and                             Table 15: Latin America: Policy rates adjustment unlikely
                                                                                 Policy rate %
Uruguay. For 2013, only Uruguay is expected to miss its                                                                                    2013
inflation target once again, although the trend will point                                              Current       4Q12       1Q     2Q      3Q       4Q
south. Given these growth and inflation dynamics, our                           Latin America            6.12         6.12      6.12   6.11    6.11     6.53
monetary policy forecasts pencil in no interest rate moves                        Brazil                 7.25         7.25      7.25   7.25    7.25     8.00
in Chile, Colombia, Mexico and Peru in the remainder of                           Chile                  5.00         5.00      5.00   5.00    5.00     5.00
                                                                                  Colombia               4.75         4.75      4.75   4.75    4.75     4.75
2012 and the whole of 2013. The only changes are                                  Mexico                 4.50         4.50      4.50   4.50    4.50     4.50
expected in Brazil (where the forecast assumes that the                           Peru                   4.25         4.25      4.25   4.25    4.25     4.25
Copom hikes the Selic by 75bp in 4Q13) and Uruguay                                Uruguay                9.00         9.00      9.00   8.50    8.50     8.50
                                                                                Source: J.P. Morgan
(where we expect a 50bp rate cut in 2Q13). The risks

  J.P. Morgan Securities LLC
J.P. Morgan Securities LLC              JPMorgan Chase Bank N.A., London                Emerging Markets Research
  Joyce Chang AC
Luis Oganes AC                          Michael Marrese AC                              Emerging Markets Outlook and Strategy for 2013
  (1-212) 834-4203
(1-212) 834-4326                        (44-20) 7134-7547
luis.oganes@jpmorgan.com                michael.marrese@jpmorgan.com                    November 21, 2012

 Table 16: Latin America: Macro prudential controls to remain in place for Brazil
                            FX regime                                          Recent measures                                            Possible future measures
 Argentina     Non convertible and capital outflow     A number of measures aiming to prevent capital outflows            Market worries over formalization of dual exchange rates,
               controls remain in place with a         (restricting FX transactions) have been implemented since          and for the so-called “pesofication” initiatives from the
               minimum holding period of 1 year and    November 2011. Amongst them: FX purchases must be pre-             government.
               US$2 million outflow per month          cleared with IRS (for households, corporates and banks);
                                                       exemption on sale of FX from exports eliminated (energy and
                                                       mining firms); limit on USD purchases lowered to 20% wage
                                                       (wage earners); export FX proceeds (above US$2 million)
                                                       must be sold in 30-days (prev 180 days); imports must be
                                                       precleared with IRS and Sec. of Commerce.
 Brazil        Non Convertible. Tax of 6% on foreign   BCB started selling regular swaps in May. Until June it sold       The flow of fund has been negative since August and
               fixed-income investment, 0% on          almost US$17 billion in swaps. At the same time Govt               Seasonality suggests more pressure towards the end of
               equity investment, 6% in short term     reduced the average maturity of external borrowing that will       the year, but inflation concerns should prompt BCB’s
               (up to 2 years of average maturity)     is charged by the 6% IOF to 2 years, from 5 years and              intervention to hold the ceiling of the range (USDBRL
               external debt and 6.38% tax on credit   changed the regulation for exports prepayment (PA), which is       2.00-2.10) if need be. Regular swaps would be the
               card expenditures that occurred         still limited to 360 days (unlimited before), but now banks and    primary instrument in this case. Economic recovery could
               abroad. Banks deposit 60% reserve       other corporates abroad (not only importers) will be allowed       be BRL positive, but the USDBRL 2.00 level should be
               requirement on short USD position in    to fund it. Since August however, BCB resumed reverse              maintained in the short term with government activeness.
               spot market, IOF of 1% is charged on    swaps intervention in August. Its swap book is now long            Spot intervention could resume if the lower bound of the
               increases in the net long BRL           US$5billion (with positions due on Dec 3 (US$3.1billion) and       range would be tested
               exposures built through derivatives     Jan 1 (US$1.99 billion). BCB has not intervene in the spot
               that exceeds US$10 million              market since April 2012.
 Chile         Non Convertible. No capital controls    None                                                               BCCh could consider adequate to engineer a moderation
                                                                                                                          in private spending through traditional—or, more likely,
                                                                                                                          non-traditional (macro prudential)—policy tools at its
                                                                                                                          disposal. This is particularly true if, as has happened in
                                                                                                                          the last quarters, resilience in activity is accompanied by a
                                                                                                                          deterioration of the external equilibrium. Therefore, we
                                                                                                                          believe that BCCh confronts a situation where it might
                                                                                                                          consider implementation of stricter macro-prudential
                                                                                                                          guidelines for the banking system as a way to manage the
                                                                                                                          domestic and external equilibrium.
 Colombia      Non Convertible. 34% tax on income      USD purchases of US$20 million per day and                         Domestic growth uncertainty and murky global
               and capital gains and 6% WHT on         complementary actions (such as postponing the USD inflows          environment bring uncertainty amid government
               coupon payments for bonds with          from the official sector and punctual increase in daily            willingness to intervene put the COP on the weak side.
               maturities up to 5 years and 4% for     purchases)
               longer bonds.
 Mexico        Free floating and deliverable. No FX    Banxico sells US$400 million under its ‘minimum price’ daily       None
               controls.                               US dollar auctions mechanism (2% depreciation rule from its
                                                       previous close)
 Peru          Non Convertible. Reserve                BCRP acts promptly in dollar market buying or selling dollars.     BCRP should keep monitoring the currency acting at any
               Requirements on foreign deposits        The Bank also used dollar-linked CDs and dollar repos to           side to reduce the PEN volatility.
               (120%), 30% tax on interest paid to     provide dollar liquidity to the markets. During the appreciation
               non-residents. Limits on pension fund   phase, BCRP raised reserve requirements on inflows from
               short USD positions                     abroad.
 Source: J.P. Morgan

 EMEA EM outlook: Slower growth and                                                      within 20% of potential. Countries just below that growth
 fiscal balances are contained                                                           metric include Israel, Turkey, UAE, and other Sub-Saharan
                                                                                         African economies. Bulgaria, Poland and Egypt are likely to
                                                                                         expand at 40-50% of potential. Meanwhile, Croatia, Czech
 We expect EMEA EM to grow 2.9% in 2013, slightly
                                                                                         Republic, Hungary, Romania, and Ukraine are poised to be
 lower than our 3.2% forecast for 2012 and 28% lower
                                                                                         the biggest laggards in the region. We project fiscal surpluses
 than the region’s potential growth. Our 2013 forecasts
                                                                                         (or growing reserve funds) in all major energy exporters, and
 incorporate the assumptions of zero Euro area growth, tepid
                                                                                         moderate deficits in most other countries (except for
 economic expansion in Germany, elevated but stable oil
                                                                                         substantial deficits in Egypt, Lebanon, South Africa and
 prices, declining/stable oil production among most of the
                                                                                         Ukraine). With regard to the current account, we see
 region’s oil producers (except for Angola and Ghana), and
                                                                                         surpluses for energy exporters along with Hungary, and
 continued fiscal consolidation (or a decreased fiscal stimulus
                                                                                         narrowing deficits in all other EMEA EM countries (which is
 in the GCC). Ghana, Nigeria, Zambia, Saudi Arabia, Qatar,
                                                                                         especially important for Turkey and South Africa).
 Kazakhstan, Russia, and South Africa are projected to grow

JPMorgan Chase Bank N.A.,
J.P. Morgan Securities LLC London                                               Emerging Markets Research
Michael Marrese
Joyce Chang AC AC                                                               Emerging Markets Outlook and Strategy for 2013
(44-20) 7134-7547
(1-212) 834-4203
joyce.chang@jpmorgan.com                                                        November 21, 2012

Table 17: EMEA EM: Growth inching lower in 2013                                 National Bank of Hungary delivered a third consecutive
Real GDP %oya                                                                   25bp cut in October (75bp since August), in an attempt to
                                2011          2012      2013         GDP        kick-start credit growth even though supply shocks have
EMEA EM                         5.3            3.2       2.9          4.0       pushed inflation substantially above target. We forecast
  Bulgaria                      1.7           1.0        1.5          3.5       75bp of additional easing in Hungary. In response to the
  Croatia                       0.0           -1.5       0.5          2.5       worsening growth outlook, the National Bank of Poland
  Czech Republic                1.7           -1.1       0.0          3.5
  Egypt                         1.8           2.2        2.6          5.0
                                                                                delivered a 25bp cut to 4.5%. We have 100bp in
  GCC                           7.3           5.0        3.1          3.9       additional easing in our Polish rate forecast, with the
  Hungary                       1.7           -1.4       0.5          3.0       policy rate falling to 3.50% by mid-2013. Contrary to the
  Israel                        4.8           3.0        3.1          4.0       regional trend, the National Bank of Romania surprised
  Kazakhstan                    7.5           4.7        5.5          6.0
  Nigeria                       7.8           6.5        6.7          7.5
                                                                                the market by turning more hawkish; we expect 50bp in
  Poland                        4.3            2.3       1.6          3.5       rate hikes in Romania in 1Q13.
  Romania                       2.5           0.0        0.8          4.0
  Russia                        4.3            3.6       3.0          3.5
  South Africa                  3.1           2.3        2.7          3.3
  Turkey                        8.5            2.8       3.7          5.0       Table 19: EMEA EM: Inflation grinding lower
  Ukraine                       5.2           0.3        1.0          4.5       CPI %Dec/Dec
Source: J.P. Morgan                                                                                                                           Inflation
                                                                                                                2011      2012     2013        target
                                                                                EMEA EM                          5.8       5.3      5.1
                                                                                  Bulgaria                       3.0       5.0      3.5           —
Table 18: EMEA EM: Current account and fiscal balances to improve                 Croatia                        2.1       5.5      3.0           —
modestly especially for energy exporters                                          Czech Republic                 2.4       2.9      2.4       2.0 (+/-1)
%GDP                                                                              Egypt                         10.8       7.3      8.8           —
                          Fiscal balance             Current account balance      GCC                            3.6       2.6      3.3           —
                      2011 2012 2013                 2011      2012     2013      Hungary                        4.1       5.5      5.1           3.0
EMEA EM                1.8      0.8     0.0           4.0       4.4      3.1      Israel                         2.2       2.3      2.3         1.0-3.0
  Bulgaria            -2.0     -1.3    -1.3           0.9       0.6      -0.5     Kazakhstan                     7.4       6.3      6.7         6.0-8.0
  Croatia             -5.6     -3.8    -3.2          -1.0      -0.8      -1.3     Nigeria                       10.3      11.8     10.2      single digits
  Czech Republic      -3.3     -3.4    -2.9          -2.9      -1.1      -0.4     Poland                         4.6       2.9      2.4      2.5 (+/-1.0)
  Egypt               -9.9    -11.1    -9.3          -2.6      -3.2      -3.1     Romania                        3.1       5.4      5.1      3.0 (+/-1.0)
  GCC                 15.4     12.4     8.6          18.9      21.3     16.7      Russia                         6.1       7.0      5.8         5.0-6.0
  Hungary              4.3     -2.8    -3.2           0.9       1.5      2.8      South Africa                   6.1       5.4      5.4         3.0-6.0
  Israel              -3.3     -3.8    -3.5          -0.2       0.0      -0.8     Turkey                        10.5       7.0      6.2      5.0 (+/-2.0)
  Kazakhstan           5.6      4.8     4.4           7.2       7.0      7.8      Ukraine                        4.6       1.2      8.1           —
  Nigeria             -4.6     -2.9    -2.5           6.9       6.2      5.6    Source: J.P. Morgan
  Poland              -5.0     -3.8    -3.6          -4.3      -3.5      -3.0
  Romania             -5.3     -2.9    -2.8          -4.4      -3.2      -3.6
  Russia               0.8      0.0    -0.2           5.3       4.8      3.1    Table 20: EMEA EM: Central bank easing done with the exception of
  South Africa        -4.2     -4.8    -4.5          -3.3      -5.7      -5.3
  Turkey              -1.3     -2.5    -2.7          -7.0      -6.8      -6.5
                                                                                Hungary and Poland
                                                                                 Policy rate %
  Ukraine             -5.0     -5.1    -4.4          -6.2      -7.7      -6.3
Source: J.P. Morgan
                                                                                                      Current     4Q12     1Q      2Q        3Q      4Q
                                                                                EMEA EM                5.40       5.29    5.24    5.24      5.19    5.17
                                                                                  Czech Republic       0.05       0.05    0.05    0.05      0.05    0.05
We see inflation moderating on an end-December                                    Hungary              6.25       6.00    6.00    5.50      5.50    5.50
over-year-ago basis in 2013 even though average                                   Israel               2.25       2.25    2.25    2.25      2.25    2.25
                                                                                  Nigeria              12.00      12.00   11.25   11.25 10.25       10.00
inflation could be higher in a few countries.                                     Poland               4.50       4.25    3.75    3.50      3.50    3.50
Importantly, we believe that most central bank easing has                         Romania              5.25       5.25    5.75    5.75      5.75    5.75
occurred, with the exception of Poland and Hungary. The                           Russia               5.50       5.50    5.50    5.50      5.50    5.50
Czech National Bank and the Bank of Israel both recently                          South Africa         5.00       5.00    5.00    5.00      5.00    5.00
                                                                                  Turkey               6.27       5.85    6.00    6.25      6.25    6.25
surprised with moderate rate cuts in response to subdued                        Source: J.P. Morgan
economic activity and weak inflationary forces. The

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Table 21: EMEA EM: Macro prudential controls focus on limiting currency volatility
                                FX regime                                                   Recent measures                                     Possible future measures
Czech          Free floating and convertible.                  None                                                                         FX intervention to buy EUR
Hungary        Free floating and convertible. Periodic         The NBH conducted euro sale tenders to help banks close out their open       Potential introduction of more
               conversions of EU funds on the market.          FX mortgage-related positions. As of July 1, 2012 banks must comply with     widespread regulation of local
                                                               the foreign exchange funding adequacy ratio (minimum 65%), forcing them      banks’ FX swap exposure.
                                                               to seek more stable and longer term FX financing.
Israel         Managed float and convertible.                  The Supervisor of Banks at the BOI to issue directive limiting the loan to
                                                               value ratio in mortgages to 70%. (to 75% for those acquiring a first home
                                                               and to 50% for those purchasing an investment apartment). This is done to
                                                               cool down the mortgage loan growth
Poland         Free floating and convertible. Periodic on-     Payment-to-income ratio on FX mortgages limited to 42%.
               market conversion of EU funds by the
               Ministry of Finance. Direct FX intervention
               by the NBP is rare and used mostly as a
               signaling tool.
Romania        Managed float versus EUR and convertible.       A law allowing the Romanian state to support banks was enacted. Repo         Potential for small cuts in reserve
                                                               capped to control liquidity and defend RON.                                  requirements for both RON and FX
Russia         Managed float versus a basket of EUR and        The exchange rate corridor was widened again recently; Tighter liquidity     Moving towards more currency
               USD (45%/55%). Current band of the              conditions have made the CBR more inclined to buy FX on the market; the      flexibility; float the currency by 2015
               basket is between 31.65 and 38.65               CBR introduced an FX swap facility as part of its toolkit.
South          Freely convertible. SARB does intervene on      The retail borrower’s net income should not exceed                           None
Africa         occasion. No capital controls
Turkey         Free float and convertible. The CBRT is         The CBRT has started to narrow its interest rate corridor by cutting the     Risk of aggressive intervention is
               keeping the lira volatility low by increasing   upper band. The banks are now allowed to keep up to 60% of their TRY         low.
               or reducing its effective funding rate within   required reserves in FX and up to 30% of TRY required reserves in gold.
               its interest rate corridor. The CBRT also
               allows the banks to keep a portion of their
               TRY required reserves in FX and by playing
               with the costs associated with this scheme,
               the Bank tries to reduce FX volatility
Source: J.P. Morgan

Geopolitical and country specific risks
remain high in 2013
                                                                                         Social unrest and further ratings downgrades
Fears that Middle East tensions escalate into                                            in South Africa
military conflict
                                                                                         In South Africa, risks of large-scale strikes and further
Once again, commodity prices have moved higher on                                        social unrest remain elevated in 2013 with one more
fears that rising tensions between Iran and Israel will                                  ratings downgrade expected. Socioeconomic pressures,
lead to a military confrontation in 1Q13. Although this is                               strained relations between trade unions and workers, and
not our baseline scenario, headline risk will remain high.                               institutional failures have led to a spate of unprotected
Mid-year presidential elections in Iran will also add some                               strikes in the mining sector this year. Production losses
uncertainty to the outlook because possible popular protests                             peaked in October, knocking out an estimated 40% of gold
could destabilize Iran’s social situation. Furthermore,                                  and platinum output and leading to a likely contraction in
international negotiations between the P5+1 Group and Iran                               GDP in the current quarter. The strikes have now largely
will likely re-accelerate next year with possible bilateral                              been resolved, often with the promise of one-off payments
talks with the United States. However, the dramatic rise of                              and job re-grades that leave existing wage agreements
tensions between Israel and the Gaza strip have                                          technically intact. However, the existing wage bargaining
complicated the balance of risks, especially after the Israeli                           system in mining has broken down, and we see risks of
army linked Iran to rockets fired from the Gaza strip, along                             further industrial action in the first half of 2013 when
with strong criticism from Egypt’s Freedom and Justice                                   parties meet for multi-year wage negotiations. Moreover,
Party. Cross-border incidents in the Golan will also fuel                                the required substantial reforms needed to restore healthier
further geopolitical tensions through 1H13. Such                                         labor relations in mining are unlikely to gain traction. In
developments will keep the oil price premium elevated, in                                our view, chances of an Arab spring uprising remain very
our view.                                                                                small, but copycat strikes could spill over to sectors with

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similar underlying issues and more volatile industrial               be extended. Consequently, “technical default” only
relations, such as private security, transportation, local           becomes a risk subsequently. With BCRA already
municipalities and possibly electricity generation in 2013.          accelerating the ARS crawl to a high 20% p.a. over the past
Moody’s and Standard & Poor’s have already downgraded                month, we do not expect a gap devaluation nor an
South Africa by one notch this year, partly due to the               unraveling of capital outflow controls. Given the latter’s
strikes, and we expect a further downgrade by Fitch in               effectiveness we do not expect “pesofication” risks to
early 2013 with risks of further downgrades if unprotected           materialize and the government will continue to pay local
strikes widen.                                                       law USD bonds normally. Consensus is for growth to
                                                                     rebound in 2013 to above GDP strike prices thanks to
Possibility that India fails to implement                            Brazil recovery and to bumper soy crop. However the risks
proposed reforms and faces further                                   are shifting down because BRL will not be allowed to
downgrades                                                           appreciate this time and floods are delaying crop planting.
                                                                     In October mid-term elections will be held and fiscal policy
A packed election calendar in 2013 increases the risks of            is liable to be expanded further so that BCRA reserves will
policy slippage and a potential ratings downgrade in                 be eroded to the tune of US$3 billion.
India. Investor sentiment received a significant boost in
India in September on the back of a slew of reforms by the           Succession speculation and potentially
government including liberalizing FDI norms, reducing                disorderly devaluation in Venezuela
capital inflow frictions, and increasing fuel prices.
However, some of that positive sentiment has faded over              Venezuelan President Hugo Chavez won a decisive re-
the last few weeks. The INR has lost nearly all its gains as         election in October, but the political landscape remains
markets have realized that the game-changing reforms                 unsettled. Key economic decisions such as FX devaluation
needed to boost investment and growth will be a much                 and development of the Orinoco heavy crude belt are
harder slog for the government. The government has thus              delayed pending definition. The formal political calendar
far been unable to generate even internal support for some           remains beholden to gubernatorial elections in December
of these reforms, much less create the legislative majorities        and municipal elections in April. These undercards will
needed to pass some of these bills. These challenges will be         determine how much political space the opposition has
magnified by a packed political calendar in 2013, with ten           going forward, and whether Henrique Capriles (who lost to
provincial elections leading up to the general elections in          Chavez in October) can get reelected in Miranda state—key
2014. If the government does not push ahead with key                 to him maintaining the leadership position of a unified
proposals (national investment board, land acquisition bill,         opposition. Having a credible national leader such as
FDI in insurance) in the next few months, the risks of               Capriles is critical for the opposition given the ongoing
policy slippages, and therefore of a ratings downgrade, will         uncertainty over Chavez’s health, the potential game-
rise sharply as the year progresses and politics increasingly        changing wildcard in Venezuelan politics. While plans for
drive policy. In turn, this could lead to a weakening bias for       succession have started to become more defined, with
the INR next year and exacerbate inflationary pressures,             Foreign Minister Maduro assuming the Vice Presidency, it
reinforcing the stagflationary situation currently at hand.          remains unclear whether the government would proceed
These are risks against a baseline INR view that is still            with a new election in the event Chavez has to step down
cautiously constructive (see India country page).                    (as the current constitution mandates), or whether they will
                                                                     look to change the constitution to ensure that Maduro
Argentina litigation contributes to ongoing                          assumes the remainder of Chavez’s six-year term. Markets
uncertainty over debt servicing outlook                              would not react favorably to constitutional reform, as it
                                                                     would raise the risks of short-term political tension, while
Argentina faces a critical year for idiosyncratic risks.             potentially taking the upside of an eventual opposition
The central issue will involve the resolution of pari passu          government off the table until 2019. Nonetheless, for now,
litigation by the Appeals Court or, if the latter rules against      no news is good news as Venezuela’s double-digit yields
the sovereign, potentially in a review by the Supreme                are a global outlier given the country’s strong ability and
Court. We believe odds favor normal payment of US$3                  willingness to pay.
billion December coupons because we expect the stays to

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Joyce Huffman AC
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                                                                               Table 22: Spot FX to replace duration as key factor for GBI-EM
2013 Performance outlook                                                       performance in 2013
                                                                               Region                        Carry           Duration     Spot       Total
                                                                               GBI-EM Global Div             5.59%            -1.08%     5.14%      9.82%
EM local markets to outperform EM credit                                       Asia                          4.27%             0.14%     4.95%      9.62%
in 2013                                                                        EMEA EM                       6.26%            -2.08%     4.55%      8.81%
                                                                               Latin America                 6.51%            -1.32%     6.41%     11.86%
                                                                               Source: J.P. Morgan
We expect EM local markets to return low double digits
in 2013, outpacing forecasts for hard currency assets of                       Performance across regions should be more balanced in
7-8%. Bottoms-up estimates for the GBI-EM GD for yields                        2013, with EM Asia keeping pace (+9.6%) and Latin
and FX spot suggest roughly 10% of return for 2013. With                       America outperforming (+11.9%) somewhat versus
FX volatility having declined, liquidity high, and the global                  EMEA EM (+8.8%) after underperforming EMEA this
backdrop more stable heading into 2013 given the G-3                           year. Nigeria should outperform (21.3%) given high carry
policy stance, carry and FX spot should be the dominant                        and duration gains, and South Africa’s performance should
factors, with each contributing 5-5.5% to total returns. This                  show a meaningful rebound (14.7%) due to expected 2H
would be a shift from 2012 when duration was a key                             FX gains. We enter the year long duration in Nigeria but
contributor to performance and EM FX spot was close to                         underweight duration and FX in South Africa given
flat on the year. For 2013, we look for duration overall to                    ongoing tensions in the mining sector and the ramifications
drag 2013 performance by approximately 1%. Whereas EM                          for growth and the current account deficit. Brazil (+14.3%)
central banks cut rates by 69bp on average in 2012, we                         and Mexico (+13.1%) should be strong performers as well
expect relatively steady policy rates in 2013, with moderate                   given high carry in the former and above potential growth
easing forecast for EMEA EM and EM Asia and moderate                           in both which will be supportive of FX as the year
tightening anticipated by the end of next year for Latin                       progresses. We recommend long MXN and OW duration in
America. We consequently expect fewer trends in rates                          Brazil in the GBI-EM Model Portfolio, but we are currently
markets in 2013 given this dynamic and largely focus on                        neutral BRL. In EM Asia, we expect Indonesia to be the
intra-regional themes.                                                         best performer both in terms of total returns (13.9%) and
                                                                               relative improvement over 2012 for two reasons: IDR FX
                                                                               appreciation on an improving capital account and inflows
                                                                               and a continued rally in Indonesian rates as underweight
                                                                               bond investors rebuild their positions to neutral.

Table 23: We expect double digit returns in local markets for 2013
                                                        year                       Yield                                    Spot
                      Carry and Duration     Spot FX
Country                                                 2013     2012 YTD   Current Forecast         Local Return    Current Forecast    Spot Return
GBI-EM Global Div                                        9.8%     13.0%       5.6%       5.9%            4.5%                               5.1%
Nigeria                                                 21.3%     28.8%      12.6%       10.5%          20.7%        157.8       157.0      0.5%
South Africa                                            14.7%      3.6%       7.1%       7.2%            6.6%        8.819       8.200      7.6%
Brazil                                                  14.3%      4.4%       8.3%       8.7%            7.3%        2.078       1.950      6.6%
Indonesia                                               13.9%      4.9%       5.8%       5.6%            7.6%        9632        9100       5.8%
Mexico                                                  13.1%     19.5%       5.8%       6.1%            4.0%        13.06       12.00      8.8%
Hungary                                                 11.6%     30.8%       6.3%       7.1%            3.7%        220.6       205.0      7.6%
Thailand                                                 8.1%      5.9%       3.3%       3.4%            2.7%        30.72       29.20      5.2%
Turkey                                                   7.9%     23.7%       6.7%       7.4%            5.0%        1.799       1.750      2.8%
Colombia                                                 6.7%     18.1%       4.9%       5.0%            4.1%        1819        1775       2.5%
Russia                                                   6.4%     13.3%       7.0%       7.7%            4.2%        31.45       30.79      2.1%
Malaysia                                                 6.4%      7.4%       3.4%       3.6%            2.4%        3.065       2.950      3.9%
Peru                                                     4.1%     22.8%       4.7%       5.0%            2.2%        2.598       2.550      1.9%
Poland                                                   3.9%     18.1%       3.9%       4.9%           (0.2%)       3.227       3.100      4.1%
Chile                                                    1.9%     19.8%       4.0%       4.0%            4.0%        480.0       490.0     (2.0%)
               -10%    0%       10%        20%    30%
Source: J.P. Morgan

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Joyce Chang AC                    Holly Huffman AC                      Emerging Markets Outlook and Strategy for 2013
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joyce.chang@jpmorgan.com          holly.s.huffman@jpmorgan.com          November 21, 2012

J.P. Morgan Securities plc
Jonny Goulden AC
(44-20) 7134-4470
A key source of risk for GBI-EM performance, as was                     Table 25: J.P. Morgan interest rate forecasts will rise modestly by
the case in both 2011 and in 2Q 2012, remains the broad                 4Q13
USD. The outlook for the euro appears more stable relative                                     19-Nov-12    4Q12   1Q13   2Q13   3Q13    4Q13
to the previous two years, and the JPMorgan G-10 FX team                Rates
expects the euro to tick higher throughout the year, ending             Effective funds rate        0.16    0.14   0.10   0.10    0.10    0.10
at 1.34, as balance of payments dynamics and real interest              3-month LIBOR               0.31    0.30   0.26   0.26    0.26    0.26
rate differentials favor the euro over the dollar. Should the           3-month T-bill (bey)        0.09    0.08   0.05   0.05    0.05    0.05
                                                                        2-year Treasury             0.24    0.28   0.25   0.22    0.22    0.25
Euro area again fall into recession, more ECB easing and                5-year Treasury             0.63    0.80   0.75   0.75    0.75    0.90
wider peripheral spreads are likely to cause the euro decline           10-year Treasury            1.61    1.85   1.80   1.80    1.80    2.00
from current levels. The longer-term relationship between               30-year Treasury            2.76    3.05   3.00   3.00    3.00    3.15
the euro and EM FX has held relatively steady this year,                Source: J.P. Morgan

with GBI-EM FX continuing to exhibit a beta of 0.82
relative to the euro. EM FX recently has weakened relative              We see few scenarios where the EMBIG would experience
to the EUR; assuming some normalization of this, a EUR                  a negative return, but total returns could be lower if DM
decline to 1.24 would suggest roughly flat EM FX spot                   growth falters. EM fixed income could also deliver lower
returns for the GBI-EM next year, taking our total USD                  returns if DM growth picks up and equities are favored.
forecast to approximately 6%. EUR weakness to 1.18                      EM fixed income remains a defensive asset class to hold,
would imply flat returns for the GBI-EM overall, with FX                and we forecast 0.5-8.5% total returns under different
losses negating carry. A separate risks to our forecasts is a           global growth scenarios.
significant back-up in Treasury rates should growth
accelerate more than expected. While some duration markets              1. Base case—G-4 QE supports fixed income and also
would be affected by this more than others, we believe EM                  results in moderate lift to global economy by end-
FX gains would offset this at the GBI-EM level, assuming                   2013: US growth is expected to accelerate over the year
growth expectations for EM increase as well.                               (from 1.0%q/q saar in 1Q to 2.5% in 4Q) as the fiscal
                                                                           cliff is resolved through a modest fiscal tightening of 1%
Table 24: 2013 EUR forecast                                                of GDP which leads to US growth remaining in the 1-
EUR/USD                                                                    2.5% range which has prevailed for several years. This
                      1Q13           2Q13         3Q13           4Q13
New                   1.28           1.30         1.32           1.34      growth range has been supportive for credit spreads. EM
Previous              1.30           1.32         1.34            NA       sovereign and corporate spreads will tighten
Source: J.P. Morgan                                                        approximately 50bp-85bp in 2013 relative to current
                                                                           levels of 302bp and 361bp, respectively while Treasury
EMBIG and CEMBI to return 7-8.5%                                           yields rise modestly by 40bp with the Fed’s QE3
                                                                           program likely to wind down in 1H14, this should be
We forecast EMBIG and CEMBI returns in the 7-8.5%                          more priced in by the end of 2013. (7% to 8.5%
range but consider a range of outcomes as there is likely                  returns)
to be a degree of correlation between EM spreads and US
Treasury yields. Although spread compression drove                      2. Stronger than expected DM growth and higher US
returns this year, returns have been helped by lower US                    Treasury yields: The US fiscal cliff is successfully
Treasury yields since the global financial crisis. Our US                  resolved in 1Q13 with greater bipartisanship support than
Treasury analysts expect Treasury yields to move higher and                expected, fueling a market rebound and prompting cash-
caution that markets are setting up for another rate whipsaw.              rich corporates to increase investment. The US housing
Fiscal uncertainty and more Fed stimulus are compressing                   market continues to improve. Europe exits recession and
rates lower but J.P. Morgan expects higher rates next year,                the periphery remains stable, with continued official
with the 10-year Treasury yield rising to 2.00% by end-2013.               support. China’s new leadership embarks on a large
Table 25 outlines J.P. Morgan’s US interest rate forecasts.                stimulus program in March 2013 after the new Congress
Given the strong balance sheets in EM and supportive                       is seated. Investors prefer equities over fixed income and
environment for credit, we believe that spreads have room                  EM fixed income experience outflows. US Treasury
for modest tightening (50-85bp).                                           yields rise by more than 75bp and spreads trade in a more
                                                                           volatile range for the EMBIG and CEMBI. (5.0-6.5%

                                                                        3. Weaker than expected DM growth—US falls off the
                                                                           fiscal cliff: Dysfunctional US congress fails to deliver a
                                                                           satisfactory solution to the US fiscal cliff, reigniting fears

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J.P. Morgan Securities LLC
Alisa Meyers AC
(1-212) 834-9151

      of recession. Peripheral Europe fails to meet the                    and QE3 foster a favorable environment. We expect CEMBI
      conditions to receive official support in a timely manner            total return of 7.5-8.5% for 2013 based on our spread target
      and peripheral yields spike again with US Treasuries                 and 7-year UST forecast of about 1.45%. This is lower than
      favored as a flight-to-quality trade. Geopolitical risks             the 2012 year-to-date return of 13.3% as we assume
      increase with Israeli military action against Iran a greater         narrower spread compression of 60-85bp (versus 106bp so
      risk. EM market volatility rises but US Treasury yields              far in 2012) and a rise in UST yields (versus a 40bp decline).
      move slightly lower with 10-year yields at 1. 25% at end-            Should growth surprise to the upside, CEMBI spreads could
      2013 and spreads 75-90bp wider. (0.5-2.5% returns)                   move closer to the post-crisis tight of 246bp, but returns
                                                                           would likely be offset by higher UST yields. In an adverse
 We target EMBIG spreads in the 225-250bp range for                        scenario involving a downside growth surprise and lower
 year-end 2013, with full-year returns forecast in the 7-                  UST yields, spreads could move back up to 450bp, reducing
 8% range. Our base-case scenario for 2013 is a year in                    the total return to about 0.5%.
 which EM technicals remain supportive, fundamentals are
 stable-to-improving on aggregate with regional differences,               Our base case CEMBI target implies around a 50bp
 and where current valuations will mean lower returns                      spread premium to EMBIG, which is in line with the
 compared to 2012. EMBIG spreads have tightened 124bp in                   average during 2012. While CEMBI should normally
 2012 to 302bp currently, and with a yield of 4.70% as 10-                 outperform when spreads tighten, we maintain some
 year UST yields have moved nearly 30bp lower to 1.65%. In                 reservations on further compression over EMBIG due to the
 our base case, we see EMBIG spreads tightening 50-75bp                    large difference in the supply dynamic. Although there
 from current levels to the 225-250bp range, with UST’s at                 should be enough support to digest the supply as long as
 1.80-2.0%, consistent with J.P. Morgan’s US interest rates                inflows continue, vulnerability against an overall market
 forecast. That would put returns in the 7-8% range (table 26).            selloff would still be higher. That said, we do believe
 The assumption underpinning the forecast is that EM                       CEMBI valuations offer more of a cushion compared to the
 sovereign debt fundamentals are stable-to-improving and that              JULI and EMBIG given that the current CEMBI spread is
 technicals remain supportive of the asset class. Our EM                   meaningfully higher than the post-crisis tight of 246bp. In
 sovereign supply forecast shows lower net supply than 2012                addition, the 116bp spread of CEMBI IG over JULI (ex-EM)
 at US$10 billion, which should easily get absorbed by the                 is towards the wider end of the recent range. The
 US$70 billion of EM inflows we forecast. A more bullish                   performance of HY is likely to be a variable for spread
 growth and risk environment could see EMBIG spreads at                    performance, as yields are facing resistance currently given
 200-225bp with UST yields at 2.50%, which would see                       the yield of 7.5% is close to the all-time low (7.3%). Thus,
 returns more likely around 6.3% (Table 26). A more negative               such stickiness in yield expectations may keep spreads from
 growth scenario with some macro shocks could see spreads                  tightening in the near term, but we think a downward
 up at 375bp with UST yields down to 1.25%, leaving returns                adjustment of investors’ yield expectations should eventually
 at 2.5%.                                                                  enable spreads to tighten further. Additionally, we feel
                                                                           crossover investors may continue to find value in CEMBI
 Table 26: Our base-case forecasts see EMBIG returns of 7-7.5%,            HY versus US BBs, offering over 200bp pickup.
 with spreads in the 225-250bp range for year-end 2013
 Returns (%)                                                               Chart 11: CEMBI IG is at the wider end of the range over US HG
                                       10-year UST Yield                   CEMBI IG versus JULI ex-EM spread (bp)
 EMBIG spread (bp)     1.25%   1.50%    1.80% 2.00% 2.250%         2.50%
 200                   15.3%   13.4%    11.1%     9.7%    7.9%      6.3%    400                  CEMBI IG - JULI ex-EM
 225                   13.3%   11.4%     9.1%     7.7%    5.9%      4.2%                         CEMBI IG
 250                   11.4%    9.4%     7.2%     5.7%    4.0%      2.3%    350
                                                                                                 JULI ex-EM
 275                    9.5%    7.5%     5.3%     3.8%    2.1%      0.4%
 300                    7.6%    5.7%     3.4%     2.0%    0.3%     -1.4%
 325                    5.9%    3.9%     1.7%     0.2%   -1.5%     -3.2%    250
 350                    4.1%    2.2%    -0.1%    -1.5%   -3.2%     -4.9%
 Source: J.P. Morgan
 We expect EM corporates to maintain the tightening                         100
 trend in line with other credit assets classes; we target
 275-300bp for CEMBI Broad spreads at year-end. Our
 spread targets for CEMBI IG and HY are 210-235bp and                         0
                                                                              Jan-10        Jul-10     Jan-11       Jul-11   Jan-12   Jul-12
 500-525bp, respectively. The main drivers that have been                  Source: J.P. Morgan
 supporting credit from the middle of 2012 should remain in
 place, with inflows leading to robust demand while low rates

J.P. Morgan Securities (Asia Pac.) Ltd        J.P. Morgan Securities LLC
 J.P. Morgan Securities LLC                                                          Emerging Markets Research
Yang-Myung Hong AC                            Andrew Szmulewicz AC
 Joyce Chang AC                                                                      Emerging Markets Outlook and Strategy for 2013
(852) 2800-8028                               (1-212) 834-4029
 (1-212) 834-4203
ym.hong@jpmorgan.com                          andrew.j.szmulewicz@jpmorgan.com       November 21, 2012
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Alisa Meyers AC                               Franco Uccelli AC
(1-212) 834-9151                              (1-305) 579-9415
alisa.meyers@jpmorgan.com                     franco.a.uccelli@jpmorgan.com

Chart 12: Yields are near record lows for HY, providing some                         NEXGEM markets to deliver 9-10% total
resistance to spread tightening
CEMBI HY yield to maturity (%)                                                       returns in 2013
                                                                                     Having outperformed the EMBIG in 2012, NEXGEM
 12.0                                                                                will enter 2013 with positive momentum. As the hunt for
 11.0                                                                                yield amid low international interest rates continues,
                                                                                     demand for diversification remains strong. New entrants
                                                                                     into the NEXGEM index will increase investment choices,
  9.0                                                                                and NEXGEM credits are poised to remain well supported.
  8.0                                                                                This will allow NEXGEM issuers to retain their ability to
                                                                                     issue at highly competitive spreads, as was recently
                                              All-time low = 7.33%                   illustrated by Bolivia, which despite its interventionist
  6.0                                                                                policies in late October, managed to price a debut global
                                                                                     bond at under a 5% yield. In 2013, we expect the
Source: J.P. Morgan
                                                                                     relationship between EMBIG and NEXGEM spreads to
                                                                                     hold. NEXGEM spreads have maintained nearly a 1.5-beta
                                                                                     relationship with EMBIG spreads. Forecasting a 50-75bp
Table 3: CEMBI 2013 returns at different UST and spread scenarios                    tightening of EMBIG spreads leads us to expect a 75-100bp
% return to year-end                                                                 tightening of NEXGEM from current levels near 470. As
                                                                                     such, based on a year-end EMBIG spread target in the 225-
                                         7-year UST yield (%) at year-end 2013       250bp range, and 10-year US Treasuries in the 1.8%-2.0%
CEMBI Broad (bp)       1.00      1.15     1.30      1.45     1.60    1.75   1.90
                                                                                     range, we can expect further outperformance of NEXGEM,
      200              15.6      14.8     14.0      13.2     12.3    11.5   10.7
      225              14.0      13.2     12.4      11.5     10.7     9.9    9.1     with returns in the 8-10% range, slightly ahead of the 7-8%
      250              12.5      11.6     10.8      10.0      9.2     8.3    7.5     return forecasted on the EMBIG.
      275              10.9      10.1       9.3      8.4      7.6     6.8    6.0
      300               9.4       8.6       7.8      6.9      6.1     5.3    4.5     Table 27: NEXGEM to return 9.0-10.0% for year-end 2013
      325               8.0       7.1      6.3       5.5      4.7     3.8    3.0     Returns (%)
      350               6.5       5.7      4.9       4.0      3.2     2.4    1.6                                                      10-year UST Yield (%)
      375               5.1       4.3      3.5       2.7      1.8     1.0    0.2
                                                                                     NEXGEM spread (bp)            1.40      1.60      1.80    2.00   2.20          2.40      2.60
      400               3.7       2.9      2.0       1.2     0.4     -0.4    -1.3
                                                                                           280                     20.0      18.7      17.5    16.3   15.1          13.9      12.7
      425               2.4       1.5      0.7      -0.1     -0.9    -1.8    -2.6
                                                                                           305                     18.2      17.0      15.8    14.6   13.4          12.1      10.9
      450               1.1       0.3      -0.6     -1.4     -2.2    -3.0    -3.9
                                                                                           330                     16.5      15.3      14.1    12.9   11.7          10.5      9.2
                                         7-year UST yield (%) at year-end 2013
                                                                                           355                     14.9      13.7      12.4    11.2   10.0           8.8      7.6
 CEMBI Broad IG (bp)          1.00    1.15 1.30 1.45 1.60 1.75 1.90                        380                     13.3      12.0      10.8     9.6    8.4           7.2      6.0
        135                   16.0    15.1 14.2 13.4 12.5 11.6 10.7                        405                     11.7      10.5       9.2     8.0    6.8           5.6      4.4
        160                   14.3    13.4 12.5 11.6 10.8               9.9   9.0          430                     10.1       8.9       7.7     6.5    5.3           4.0      2.8
        185                   12.6    11.7 10.8 10.0             9.1    8.2   7.4          455                      8.6       7.4       6.2     5.0    3.7           2.5      1.3
        210                   10.9    10.1      9.2      8.3     7.5    6.6   5.7          480                      7.1       5.9       4.7     3.5    2.3           1.0      -0.2
        235                   9.4      8.5      7.6      6.7     5.9    5.0   4.1    Note: NEXGEM spreads are subject to significant rebalance risk due to the less diversified
        260                   7.8      6.9      6.1      5.2     4.3    3.4   2.6    nature of the index. Potential inclusion of Argentina midyear may have a large impact on
        285                   6.3      5.4      4.5      3.7     2.8    1.9   1.0    aggregate spreads.
        310                   4.8      3.9      3.0      2.2     1.3    0.4   -0.4   Source: J.P. Morgan
                                        5-year UST yield (%) at year-end 2013
CEMBI Broad HY (bp)       0.45       0.60 0.75 0.90 1.05 1.20                1.35    In Latin America and the Caribbean, the Dominican
       425                20.9       20.2 19.6 18.9 18.2 17.5                16.8
       450                19.5       18.8 18.2 17.5 16.8 16.1                15.4
                                                                                     Republic and Guatemala are likely to increase their
       475                18.2       17.5 16.8 16.1 15.4 14.7                14.0    contribution to NEXGEM and Paraguay may become
       500                16.8       16.1 15.4 14.7 14.1 13.4                12.7    its newest member in 2013. As it stands, the Dominican
       525                15.5       14.8 14.1 13.4 12.7 12.0                11.4    financing plan for next year calls for the issuance of a
       550                14.2       13.5 12.8 12.1 11.4 10.7                10.1
       575                12.9       12.2 11.5 10.9 10.2               9.5    8.8
                                                                                     US$500 million global bond to help cover the
       600                11.7       11.0 10.3          9.6     8.9    8.2    7.5    government’s funding needs. Meanwhile, the Guatemalan
Source: J.P. Morgan                                                                  government’s stated preference to rely more heavily on

J.P. Morgan Securities plc
J.P. Morgan Securities LLC            J.P. Morgan Securities LLC    Emerging Markets Research
Joyce Pellegrini AC
Giulia Chang AC                       Eric Beinstein AC             Emerging Markets Outlook and Strategy for 2013
(44-20) 7742-6959
(1-212) 834-4203                      (1-212) 834-4211
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Matt Hildebrandt AC                   Trang Nguyen AC
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external markets for financing and the August 2013                  billion. Credit markets in 2012 responded to lower yields
maturity of a global bond make it likely that the country           and strong demand with greater issuance. In 2013, we
will also issue next year. Lastly, Paraguay has expressed           expect a modest decline in supply across US and EM
intent to place a benchmark bond in early 2013. Given               spread products (US HG, US HY, EM sovereigns, EM
Paraguay’s economic characteristics, it is likely that the          corporate) to US$588 billion, an 18% drop compared to
new issue will qualify for inclusion in the NEXGEM index.           2012. In 2013, we expect structured product markets
                                                                    (MBS, CMBS, and ABS) to net shrink by US$224 billion
Next year may also see new NEXGEM entrants and                      as maturities and paydowns exceed new issuance. Together
repeat issuers in Sub-Saharan Africa. Kenya seems                   with US and EM credit net issuance, this results in total
likely to raise around US$750 million next year sometime            US$-denominated net issuance of US$364 billion. If one
after the March general elections to refinance the two-year         then subtracts US$480 billion of mortgages the Fed is set to
US$600 million syndicated external loan it took out last            purchase (US$40 billion/month), the result is net supply
May. Tanzania has stated numerous times that plans for a            available to the market of US$ spread product of -US$116
US$500 million are underway, though the timeline has                billion. Thus, we believe that the favorable technical
often shifted and remains fluid. In the meantime, Nigeria           environment which has contributed to the strong spread
and Angola are also likely to return to the market next year.       rally in 2012 will be in place next year.
Nigeria’s 2013 budget plans include external financing
worth US$1 billion and Angola recently announced that it
                                                                    Chart 13: Net spread product issuance is low after accounting for
may issue as much as US$2 billion next year, following              Fed purchases in QE3
this year’s successful international private placement.
Ghana, has indicated repeatedly its desire to approach the                                                 Total spread product net issuance
market again should conditions be favorable but has not
made any more specific announcements regarding a                                                           Fed adjusted - Total spread product
                                                                     1,000                                 net issuance
potential second issue. Lastly, Côte d’Ivoire might look to
get a credit rating next year in order to prepare for future
issuance.                                                              500                                                              364

The supply of EM Asia sovereign bonds should rise next                   0
year, while 2013 may mark a second consecutive year                                                                                       -116
where no NEXGEM eligible debt is issued in the MENA                   -500
region. The Asia region is expected to issue US$2 billion                     2004 2005 2006 2007 2008 2009 2010 2011 F2012 F2013
in 2013, up from US$1.5 billion this year and US$1 billion
                                                                    Source: J.P. Morgan
in 2011. That said, we recognize that there is some
downside risk to this forecast as Sri Lanka may opt not to
come to the market, which would leave issuance at US$1.5            The primary driver of inflows in 2012—namely the
billion next year, or flat compared to this year’s new              shortage of spread products—will remain intact going
supply. In the MENA region, while there may be increased            into 2013, supporting strong demand for EM; we
issuance, it is likely to be mostly of the Sukuk variety            forecast US$70 billion of inflows to EM fixed income in
(especially in Egypt) which is not eligible for EMBI or             2013 compared to US$85 billion expected for full-year
NEXGEM inclusion.                                                   2012. While the supportive technical dynamics for fixed
                                                                    income should sustain inflow momentum across spread
EM technicals to remain supportive                                  products, the impact on EM fixed income will likely be less
                                                                    significant compared to other assets. Mortgages will benefit
EM inflows to remain elevated in 2013 at                            from direct Fed buying while US high grade corporates will
US$70 billion                                                       benefit from a reduction in net issuance from US$354
                                                                    billion this year to US$215 billion forecast for 2013. In
                                                                    comparison, EM corporates, EM sovereigns and US high
J.P. Morgan forecasts that the shortage of spread
                                                                    yield corporates are expected to maintain comparable levels
products will be greater in 2013 since QE3 only began
in September of 2012, and we expect it to continue                  of net US$-denominated issuance in 2013. As such, EM
throughout the full year 2013. There will be US$726                 fixed income will likely experience marginally less direct
billion of coupons paid on USD spread product in 2013,              benefit from the broader global low-supply backdrop
and net supply after Fed purchases will be -US$116 billion,         compared to 2012. While 2013 EM fixed income inflows
so the excess of coupons over supply will be US$842                 are unlikely to match the US$85 billion expected for full-
                                                                    year 2012 and US$80 billion recorded in 2010, our US$70

J.P. Morgan Securities LLC
 J.P. Morgan Securities LLC                 J.P. Morgan Securities (Asia Pac.) Ltd   Emerging Markets Research
Trang NguyenAC
 Joyce Chang AC                             Yang-Myung Hong AC                       Emerging Markets Outlook and Strategy for 2013
(1-212) 834-2475
 (1-212) 834-4203                           (852) 2800-8028
 joyce.chang@jpmorgan.com                   ym.hong@jpmorgan.com                     November 21, 2012
J.P. Morgan Securities LLC                  J.P. Morgan Securities LLC
Carmen Collyns AC                           Alisa Meyers AC
 (1-212) 834-3921                           (1-212) 834-9151
carmen.p.collyns@jpmorgan.com               alisa.meyers@jpmorgan.com

billion forecast compares favorably to US$43 billion in                              accounting for US$24 billion. In terms of issuance patterns
2011 and US$47 billion in 2009 and US$43 billion in 2007                             by rating group, the market’s bias for investment grade
(chart 14).                                                                          supply should continue; 70% of our 2013 forecast will be
                                                                                     supplied from investment grade rated governments. Many
The composition of inflows will likely experience a                                  sovereigns, such as Brazil, have had little need to tap the
material shift, with local currency to play catch-up as                              international markets for debt financing purposes.
valuations look more attractive while tail risks                                     However, issuance patterns suggest that sovereign issuance
associated with a spike in EM FX volatility have abated.                             is likely driven by governments taking advantage of the
With the GBI-EM yield at 5.6%, EM local markets offer                                low interest rate environment to improve their debt profile.
nearly 100bp in yield pick-up over similar duration EM
corporates (4.9% yield) and longer-duration EM sovereigns                            Table 28: EM sovereigns expected to issue US$77.2 billion in 2013
(4.7% yield). For 2013, we project outperformance of the                             US$ million
                                                                                                                          2012F       2012 YTD   2013F
GBI-EM, which should deliver low double-digit returns
                                                                                     Gross supply                         81,033       72,662    77,150
versus more modest 7-8% returns for the EMBIG and                                    Estimated cash flows                 63,916       62,323    68,197
CEMBI. EM FX volatility—which had been a major                                         Amortizations                      25,028       25,421    29,016
obstacle for inflows to return to local markets following the                          Coupons                            38,888       36,902    39,182
11% decline of the GBI-EM in September 2011—appears                                  Net supply                           17,117       10,339    8,953
more tame following QE3. Indeed, inflows to local markets                            Source: Bond Radar and J.P. Morgan
have accounted for roughly 35% of total inflows since mid-
September compared to less than 20% from January to                                  Across the NEXGEM universe, we project a total of
August.                                                                              US$9.3 billion in gross sovereign issuance—a rebound
                                                                                     from the US$4 billion supplied during 2012, but below
Chart 14: EM fixed inflows to remain elevated in 2013, albeit lower                  the record US$11 billion raised in 2010. Almost 50% of
than 2012, with local currency inflows to play catch-up                              our new issuance expectations come from Sub-Saharan
US$ billion                                                                          Africa, where sovereigns are likely to follow up on the
                      Local            External           Total                      strong market demand for issuance this year in the cases of
100                                                                85.0
                                            80.0            77.2                     Angola and Zambia. NEXGEM cashflows are projected at
 80                                                                       70.0       US$3billion, well below the expected gross issuance.
 60              43.3                46.8          43.3
         32.9                                                                        In EM corporate markets, we expect new issuance
 40                                                                                  activity to remain robust going into 2013, although
 20                                                                                  volumes are likely to be below the record set in 2012. Our
                              -3.4                                                   2013 forecast of US$281 billion would be roughly 10%
                                                                                     lower than our full year 2012 forecast of US$310 billion.
 -20                                                                                 This is partially a reflection of the moderate amount of
 -40                                                                                 maturities that need to be refinanced next year and strong
        2006     2007         2008   2009   2010   2011 2012YTD 2012F 2013F          opportunistic issuances that have already taken place in
Source: J.P. Morgan                                                                  2012, with some of it being prefinancing for 2013 and even
                                                                                     2014. Another factor for the lower issuance expectation is
Increase in EM issuance seems modest                                                 the decline in the spillover effect from reduced syndicated
relative to demand                                                                   loan availability, which was driven by the pullout of
                                                                                     European banks from the second half of 2011. Indeed, while
We expect EM external sovereign issuance to increase                                 syndicated loan issuance YTD remains half of 2011 levels
in 2013, as was the case in 2012, but overall net supply                             (US$137 billion, versus US$282 billion last year), activity
should remain modest. We estimate a total of US$77.2                                 appears to be picking up with about US$38 billion completed
billion in 2013 gross issuance, US$9 billion higher than                             over the past 2 months (chart 15). Based on our estimated
next year’s expected cashflows of US$68.2 billion. The                               2013 reinvestment cash flows of US$128 billion—
US$48 billion in net issuance (gross issuance minus                                  comprising maturities of US$53 billion and coupons of
amortizations) should raise the outstanding debt stock of                            US$75 billion—we forecast net issuance (gross supply net of
EM countries to US$706 billion next year from US$658                                 maturities) at US$227 billion and net financing (net issuance
billion currently. Only Latin America is projected to have                           minus coupons) at US$153 billion. This compares to net
negative net financing. Meanwhile, issuance from                                     supply of US$254 billion and net financing of US$203
Emerging Europe represents almost 50% of the total 2013                              billion expected for 2012. While new issue yields declined to
forecast with Russia, Poland, Turkey, and Romania                                    their lowest levels, the record volume of supply

 J.P. Morgan Securities (Asia Pac.) Ltd                           J.P. Morgan Securities LLC
J.P. Morgan Securities LLC                                                                                          Emerging Markets Research
 Yang-Myung Hong AC                                               Tejal Ray AC
Joyce 2800-8028                                                                                                     Emerging Markets Outlook and Strategy for 2013
 (852) Chang AC                                                    (1-212) 834-8580
(1-212) 834-4203
 ym.hong@jpmorgan.com                                             tejal.t.ray@jpmorgan.com
joyce.chang@jpmorgan.com                                                                                            November 21, 2012
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(1-212) 834-9151

corresponding to an annualized growth rate of 29% this year                                                         from IG bonds versus 67% in 2012. Rating migration
contributed to expected coupon payments that are US$23                                                              would be one of the factors behind this trend, with Turkish
billion higher year-over-year in 2013.                                                                              banks upgraded to IG earlier in 2012.

Chart 15: EM corporate external issuance expected to remain strong                                                  Table 30: Net EM corporate issuance to decline to US$227 billion in
in 2013                                                                                                             2013
EM corporate external bond issuance (US$ billion)                                                                                             2013 Gross
                                                                                                                                               issuance              2013            2013          Net
 350            Middle East & Africa               Latin America          Emerging Europe                  Asia
                                                                                                                    US$ million                 forecast          Amortizations    Coupons       supply*
 300                                                                                                                Asia                         90,950             18,348          24,225        72,602
                                                                                                                    EM Europe                    62,000             18,729          16,241        43,271
 250                                                                                                                Latin America                80,575              8,302          26,486        72,273
                                                                                                                    Middle East & Africa         47,075              7,967          7,613         39,108
 200                                                                                                                All EM                      280,600             53,346          74,565       227,254
 150                                                                                                                Note: Net issuance is Gross - Amortizations
                                                                                                                    Source: J.P. Morgan
  50                                                                                                                Chart 16: Reduced syndicated loan primary activity contributed to
                                                                                                                    growth in bond issuance during 2012
     0                                                                                                              EM corporate external syndicated loan volumes (US$ billion)

                                                                                                                                                                                  Middle East & Africa
Source: Bond Radar and J.P. Morgan                                                                                   400                                                          Latin America
                                                                                                                     350                                                          EM Europe
Table 29: Expect higher corporate cashflows and lower net                                                            300                                                          Asia
financing in 2013
                                                                           2012                                      250
 US$ billions                        2012F           2012 YTD            Remaining             2013F
 Gross supply                        310.0             288.6               21.4                280.6
 Estimated cash flows                107.3             103.5                3.8                127.9                 150
   Amortizations                      56.1              49.4                6.7                 53.3
   Coupons                            51.2              54.0               -2.9                 74.6
 Net supply                          253.9             239.1               14.7                227.3                  50
 Net financing                       202.7             185.1               17.6                152.7
Source: Bond Radar and J.P. Morgan
                                                                                                                            2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
                                                                                                                    Source: Reuters and J.P. Morgan
By region, we expect to see some deceleration in the
pace of activity from this year’s record levels in Asia                                                             Convergence of DM and EM ratings to
and Latin America, while EM Europe volumes should
be marginally higher with a more meaningful pick-up in
Middle East and Africa. Specifically, our forecasts see
Asia and Latin America volumes declining to US$91                                                                   The gap between DM and EM sovereign ratings
billion and US$81 billion, from US$125 billion and US$95                                                            continues to narrow, with a growing concentration of
billion expected for 2012, respectively. The moderation in                                                          ratings in the triple-B rated bucket. The deepening of the
Asia is due to an expected drop in supply from debut                                                                Eurozone crisis this year resulted in a wave of DM sovereign
issuers, many of which came to the market in 2012 due to                                                            ratings downgrades. The year began on a sour note as
the lower availability of syndicated loans following the                                                            Standard & Poor’s downgraded nine Eurozone sovereigns in
pullback by European banks. In Latin America, the                                                                   January, and since then a total of 16 DM sovereigns have
decrease in issuance comes from the HY segment, led by                                                              experienced 41 downgrades by Moody’s, Standard & Poor’s
large-sized corporate issuers and small banks. Meanwhile,                                                           and Fitch in comparison with only the 3 upgrades this year
issuance from Middle East and Africa is expected to                                                                 (chart 17). A total of two triple-A rated countries were
accelerate by 50% to US$47 billion in 2013 on the back of                                                           downgraded by Standard and Poor’s this year—Austria and
refinancing needs as well as capex/growth financings. We                                                            France. This week, France also lost its triple-A rating from
also expect Russian issuers and Turkish banks to keep the                                                           Moody’s and is now rated Aa1/AA+. Four Eurozone
momentum in EM Europe and lead to a slightly higher                                                                 countries have fallen to non-investment grade status over the
issuance number of around US$62 billion. We forecast IG                                                             past year, including Cyprus, Greece, Ireland and Portugal,
to make up an even greater part of new supply than in                                                               while Spain (Baa3/BBB-) and Ireland’s (Ba1/BBB+)
2012, at 79% (versus 74% this year), which is mainly due                                                            borderline investment-grade ratings remain on negative
to EM Europe where 79% of volumes are expected to be                                                                outlook. EM has been a clear contrast: 54 EM sovereigns

 J.P. Morgan Securities LLC
J.P. Morgan Securities LLC                                               Emerging Markets Research
 Joyce Chang
Tejal Ray AC AC                                                          Emerging Markets Outlook and Strategy for 2013
 (1-212) 834-4203
tejal.t.ray@jpmorgan.com                                                 November 21, 2012

have experienced 26 upgrades and 18 downgrades. The EM                   Table 31: Convergence of EM and DM notable in the Triple-B rated
sovereign ratings upgrades-to-downgrades ratio is still                  space
                                                                                                                            Standard &
running well over 1:1, even accounting for the series of                                              Moody’s                  Poor’s            Fitch
downgrades in the Middle East region. Notable downgrades                                           Rating   View          Rating     View   Rating     View
included Bahrain, Egypt, and Tunisia in the Middle East,                 Bahrain                    Baa1     (-)           BBB        (-)    BBB
Belarus, Hungary, Serbia and South Africa in EMEA, and                   Barbados                   Baa3     (-)           BB+
Argentina, Barbados, Belize, El Salvador, and Venezuela                  Brazil                     Baa2     (+)           BBB              BBB
                                                                         Bulgaria                   Baa2                   BBB              BBB-
in other EM regions. Meanwhile, of the 25 upgrades                       Colombia                   Baa3                   BBB-       (+)   BBB-
achieved so far this year, four EM sovereigns have                       Costa Rica                 Baa3                    BB              BB+
attained investment grade status: Latvia, Indonesia,                     Croatia                    Baa3     (-)           BBB-       (-)   BBB-
Uruguay and Turkey.                                                      Iceland                    Baa3     (-)           BBB-             BBB-
                                                                         India                      Baa3                   BBB-       (-)   BBB-       (-)
                                                                         Indonesia                  Baa3                   BB+        (+)   BBB-
                                                                         Ireland                    Ba1      (-)          BBB+        (-)   BBB+
Chart 17: DM ratings downgrades since 2008 totaling 132                  Italy                      Baa2     (-)          BBB+        (-)    A-        (-)
Number of upgrades and downgrades
                                                                         Kazakhstan                 Baa2                  BBB+              BBB+
 60                 Developed Up                Developed Down           Latvia                     Baa3     (+)           BBB-       (+)   BBB-
                    Emerging Up                 Emerging Down            Lithuania                  Baa1                   BBB              BBB
 50                                                                      Mexico                     Baa1                   BBB              BBB
                                                                         Morocco                    Ba1                    BBB-             BBB-
 40                                                                      Panama                     Baa3                   BBB              BBB
                                                                         Peru                       Baa2     (+)           BBB        (+)   BBB
 30                                                                      Romania                    Baa3     (-)           BB+              BBB-
                                                                         Russia                     Baa1                   BBB              BBB
                                                                         South Africa               Baa1     (-)           BBB        (-)   BBB+       (-)
 20                                                                      Spain                      Baa3     (-)           BBB-       (-)   BBB        (-)
                                                                         Thailand                   Baa1                  BBB+              BBB
 10                                                                      Trinidad & Tobago          Baa1                     A
                                                                         Tunisia                    Baa3     (-)            BB              BBB-       (-)
  0                                                                      Uruguay                    Baa3     (+)           BBB-             BB+        (+)
          2007          2008          2009       2010      2011   2012   Source: Moody’s, Standard & Poor’s, Fitch, and J.P. Morgan
Source: Moody’s, Standard & Poor’s, and Fitch

The slew of Eurozone downgrades and EM upgrades                          While the ratings momentum will likely slow for EM
has resulted in a traffic jam in the triple-B space as                   sovereigns, we still expect 18 additional upgrades,
                                                                         surpassing the 13 downgrades in the coming year. Of
Eurozone and EM sovereign ratings have converged
(table 31). A range of Eurozone economies, including                     the upgrades expected, Latin America will benefit in
Italy (Baa2/BBB+/A+), Ireland (Ba1/BBB+) and Spain                       particular. Brazil, Colombia, and Peru are likely to be
(Baa3/BBB-/BBB) are now rated well below or on par                       bumped up the ratings scale in the Investment Grade
with EM sovereigns such as Russia (Baa1/BBB), Mexico                     space, and the chances that Fitch moves Uruguay’s rating
(Baa1/BBB), Brazil (Baa2/BBB) and Peru (Baa2/BBB).                       in line with the other agencies to Investment Grade are
                                                                         also high. In EM Asia, Indonesia, which already achieved
                                                                         Investment Grade status from Moody’s in January 2012
2013 will see a continuation in the DM and EM ratings                    and from Fitch in December 2011, is a likely candidate
convergence story. We expect ratings pressure to persist                 for an upgrade from Standard & Poor’s. China, Hong
on DM sovereigns: a total of 20 DM sovereigns remain on                  Kong, Sri Lanka and Morocco are potential upgrade
negative outlook from one of the three rating agencies,                  candidates by Moody’s. All three agencies could upgrade
and DM debt ratios are likely to continue to rise into next              Latvia, as it continues to reclaim peak ratings lost in the
year. The US sovereign ratings are still at risk given the               aftermath of the financial crisis. Multi-agency rating
fiscal cliff and debt ceiling woes. We are more                          upgrades for Turkey are also expected following an
constructive on Spain’s ability to maintain its Investment               upgrade from Fitch, which placed the sovereign in the
Grade rating by all three rating agencies. Since ECB OMT                 Investment Grade camp early in November. Meanwhile,
was announced, if Ireland is able to regain market access,               forecasted downgrades are still concentrated in the MENA
Moody’s could lift its rating to Baa3.                                   region, particularly for Pakistan, Kuwait, and Tunisia.

 J.P. Morgan Securities LLC
J.P. Morgan Securities LLC                                               Emerging Markets Research
JoyceRay AC AC
 Tejal Chang                                                             Emerging Markets Outlook and Strategy for 2013
  (1-212) 834-8580
(1-212) 834-4203
joyce.chang@jpmorgan.com                                                 November 21, 2012

Following downgrades from Moody’s and Standard &
Poor’s, Fitch could also mark down ratings in South Africa.
Elsewhere, Vietnam is expected to be the sole downgrade
candidate in EM Asia. We do not envision India losing its
Investment Grade rating next year, but risks increase if fiscal
slippage occurs and the government strays from passing key
reforms. Central American and Caribbean credits have the
highest downgrade possibilities, including El Salvador and
Barbados. Table 32 highlights our 2013 sovereign ratings
upgrade and downgrade forecasts.

Table 32: Upward ratings moment in 2013 concentrated in Latin
Expected one notch upgrade/downgrade candidates in 2013
                            Upgrade candidates
       Moody’s               Standard & Poor’s              Fitch
        China                    Indonesia                  Latvia
      Hong Kong                    Korea                   Uruguay
       Sri Lanka                   Latvia
        Latvia                     Turkey
       Morocco                     Belize
        Turkey                   Colombia
        Belize                      Peru
                          Downgrade candidates
       Moody’s               Standard & Poor’s               Fitch
       Pakistan                   Vietnam                    Kuwait
        Tunisia                  Argentina                  Tunisia
       Barbados                                           South Africa
       Argentina                                           Argentina
                                                          El Salvador
Source: J.P. Morgan

J.P. Morgan Securities LLC                 J.P. Morgan Securities LLC           Emerging Markets Research
JoyceHuffman AC
Holly Chang AC                             Felipe Q Pianetti AC                 Emerging Markets Outlook and Strategy for 2013
(1-212) 834-4203
         834-4953                          (1-212) 834-4043
holly.s.huffman@jpmorgan.com               felipe.q.pianetti@jpmorgan.com       November 21, 2012

JPMorgan Chase Bank N.A., HK               J.P. Morgan Securities plc
Bert Gochet AC                             George Christou AC
(852) 2800 8325                            (44-20) 7134-7548
bert.j.gochet@jpmorgan.com                 george.g.christou@jpmorgan.com

                                                                                Southeast Asian FX versus G-10 FX; we recommending
Top trades for 2013                                                             being OW THB in the GBI-EM Model Portfolio as a proxy
                                                                                for the region but UW Malaysia given crowded positioning
                                                                                and political risks into 2013. Also OW IDR given
GBI-EM Model portfolio top trades for                                           underweight positioning, improving cyclical factors, and
2013                                                                            attractive carry.

Entering 2013, we are constructive on EM FX overall
and focus on the following factors to set our allocations:                      EM rates overall are less attractive entering 2013 in
growth prospects, valuations, positioning, and policy.                          comparison with the broader rally seen in 2012. We find
Within Latin America, we expect positive currency                               good opportunities in Brazil, where we have been
performance for the year given supportive, and in some                          recommending long duration positions for the past year.
cases above potential, growth in the region. We recommend                       Continue to look for flattening in the front end of the curve
OW positions in MXN given the combination of above-                             as rate hike expectations may be too aggressive. Positive
potential growth and a central bank that is likely to permit                    credit dynamics, technicals, and attractive carry should
FX gains; fiscal and energy reforms would be a further                          result in lower yields in Russia and Turkey; be overweight
boost to the peso. In EMEA EM, more attractive growth in                        versus Poland and South Africa which are vulnerable to
Russia and Turkey relative to CEE should support RUB                            risk aversion given weak local dynamics. In EM Asia,
and TRY in 1H13; we recommend being OW these                                    overweight duration in Indonesia given underweight
currencies versus PLN where we expect lower growth                              positioning is likely to neutralize as investors focus again
prospects to trigger 100bp of easing in 2013. Also UW                           on carry and local factors have turned more positive.
ZAR given weaker growth and current account dynamics                            Outside of the portfolio context, stay long rates in India
on the back of mining disputes. In EM Asia, cyclical                            given the likelihood of another round of easing from the
strength and positive current account dynamics favor                            RBI in 2013.

Table 33: GBI-EM Model Portfolio: Current positioning and excess returns YTD

                                       Current Views                                       Returns from 30-Dec-11 to 19-Nov-12
                      Current                                               MP Excess Returns (bp)
                                Duration           FX                                                                     Local            FX
                      Weight                                                USD         Local             FX
 GBI-EM               100.0%       N          100% Invested                  76            23             53
 Asia                  27.7%      OW              OW                         12              -            11
 EMEA EM               44.9%       N                N                        17             -3            15
 Latin America         27.4%       N              OW                         35            19             16
 Indonesia             10.0%      OW              OW                           1            -1              1
 Malaysia              10.0%       N              UW                         15              2            12
 Thailand               7.2%       N              OW                          -4            -1             -3
 Hungary                6.1%       N                N                         -2            -1             -1
 Poland                 9.8%      UW              UW                          -1             1             -2
 Nigeria                0.5%      OW                N                          -             -              -
 Russia                 8.8%      OW              OW                         22              3            19
 Turkey                10.1%      OW              OW                           8             1              6
 South Africa          10.1%      UW              UW                          -8            -1             -7
 Brazil                 9.8%      OW                N                        14              6              9
 Chile                  0.2%       N                N                         -1             -             -1
 Colombia               4.5%       N                N                          5           10              -5
 Mexico                10.3%      UW              OW                         16              1            14
 Peru                   2.5%       N                N                          1             3             -2

Source: J.P. Morgan                                                                                             -20     0        20   40    60   80

J.P. Morgan Securities LLC HK
 JPMorgan Chase Bank N.A.,                   JPMorgan Chase Bank N.A.           Emerging Markets Research
Joyce ChangAC
 Bert Gochet AC                              Daniel Hui AC                      Emerging Markets Outlook and Strategy for 2013
(1-212) 834-4203
 (852) 2800 8325                             (65) 6882-2216
joyce.chang@jpmorgan.com                                                        November 21, 2012
 bert.j.gochet@jpmorgan.com                  daniel.hui@jpmorgan.com

EM Asia: FX themes to dominate, but be                                          Chart 19: Asian central banks have turned unusually permissive
                                                                                s.d of intervention less s.d spot move, 3mma
long Indonesia and India rates as well                                           2.5

EM Asia FX: Long IDR and KRW, short MYR,                                          2.0                      JPM FX policy indicator, Asia ex CH          USD
and OW Southeast Asia versus G-10 FX
Asian FX Themes: Constructive cyclicals, FX policy                                1.0
and varied rebalancing In contrast to the sharp fall in                                                                                             CB bias
growth momentum of 2012, Asia in 2013 should see                                                                                                         for
modest growth lift while inflation will gradually track
higher. The better cyclicals should better attract investor                       0.0
flows (mostly underweight in 2012 due to China                                                                                                         USD
slowdown concerns) as the combination of better macro                            -0.5                                                              weakness
                                                                                        Jul-09         Jul-10            Jul-11           Jul-12
balance sheets in Asia and exceptionally easy global
                                                                                 Source: J.P. Morgan
policy stances reinforces diversification from DM.
Importantly, recent FX policy permissiveness even as the
                                                                                Be short USD/KRW as a vanguard for the shift toward
external environment remains soft and inflation absent, is
                                                                                increased FX policy permissiveness, as well as for the
a new paradigm to track in 2013. If this proves enduring,
                                                                                most attractive currency fundamentals. KRW is already
then not only will Asian currencies outperform but, if
                                                                                showing clear evidence that FX policy has shifted away from
combined with easier domestic policy, it will also
                                                                                a policy of absolute reserve accumulation and directional
encourage better growth rebalancing. This is most
                                                                                currency weakness and towards a more passive and
relevant in North Asian countries where the large-
                                                                                asymmetric policy of volatility reduction. With the FX
surplus/structural revaluation theme still persists. We are
                                                                                policy barrier removed, KRW should perform much more in
more constructive that policy permissiveness will endure
                                                                                line with its valuation, surpluses, and flows and should be a
in KRW than TWD. Elsewhere, though, we have already
                                                                                top Asia FX performer in 2013.
seen examples of currency overshoots and depreciation
adjustment cycles occur in INR and IDR. INR from here
                                                                                IDR recovery next year. Real money investors hold an IDR
is a constructive, if challenging currency, but we are more
                                                                                underweight, but the currency’s underperformance may be
upbeat IDR, where relative devaluation versus Asia and
                                                                                coming to an end as the current account normalizes, BI
an improving current account will make the currency
                                                                                tightens at the margins, and global financial market stability
more attractive in early 2013. For the rest of ASEAN FX,
                                                                                persists. Especially as the desired depreciation adjustment in
currencies have already richened considerably and current
                                                                                IDR has been accelerated by the recent strengthening of
account surpluses narrowed, but this should not impede
                                                                                other Asian currencies, IDR should be bottoming out; it is
further cyclical strength especially in SGD, and THB.
                                                                                now attractive on a total return basis and should start to play
                                                                                catch up with the rest of Asia starting 1H 2013.
Chart 18: Improving cyclicals to re-attract Asian FX overweights
     60                                                                    2    Underweight MYR on political risk: Hedge against
                                                                                unexpected global contagion by funding in MYR, where
     55                                                                    1    investors are overweight and foreign bond ownership is
                                                                                highest, and also where political risks loom in early 2013.
     50                                                                    0    Thus, short MYR/IDR makes for a very attractive positive
                                                                                carry, relative value, and mean reversion play.
     45                                                                    -1
                                                                                Go long a basket of SGD and THB versus a basket of
                                  Global Mfg PMI (LHS)                          USD, EUR, and JPY on continued domestically driven
     40                                                                    -2
                                  Ave JPM Investor survey AFX position          cyclical strength of Southeast Asia and solid current
     35                                                                    -3   account fundamentals. This should make these three core
       Jan 08   Oct 08   Jul 09     Apr 10    Jan 11     Oct 11   Jul 12        performers versus G-10 FX given cyclical growth there will
Source: J.P. Morgan                                                             remain substantially sub-trend, and where central banks are
                                                                                deploying their balance sheet directly.

J.P. Morgan Securities LLC
JPMorgan Chase Bank N.A., HK                                                              Emerging Markets Research
Joyce Chang AC
Bert Gochet AC                                                                            Emerging Markets Outlook and Strategy for 2013
(1-212) 834-4203
(852) 2800 8325
joyce.chang@jpmorgan.com                                                                  November 21, 2012

EM Asian rates: struggling to rally further                                                do not expect foreign buying and its downward pressure on
                                                                                           yields to subside, but our constructive view on Asian
The backdrop in 2013 for Asian rates will be more                                          economies will preclude the overall Asian local bond
challenging than it was in 2012. Yield curves have fallen                                  complex from rallying. There are two countries where we
to historical lows, partly because of rate cuts, but in more                               still see immediate value in owning bonds (India and
cases because of large foreign bond buying. Yield levels                                   Indonesia), and we describe their alpha characteristics
have become difficult to justify on fundamentals alone. We                                 below. In other markets we avoid outright rates risk.

Table 34: Overview of Asian rates curve implications from policy actions and QE inflows
                                                           Bias for easing via:                                                   Implications for               Yield curve
                                 Monetary policy?                                         Fiscal policy?                            Further QE                      bias
Korea          HIGH: Markets imply a 25bp cut in 1Q13, but             MEDIUM: Korea's may use fiscal easing in early       Continuous foreign               Marginally
               further easing beyond that is much less likely          2013 once the December election is decided,          buying of short term KTB         Steeper on easing
                                                                       but the bias remains relatively low within Asia.     and MSB                          and supply bias
Thailand       MEDIUM: The BOT may cut again under political           HIGH: The Thai government is strongly inclined       Marginal foreign buying          Steeper on easing
               pressure, even though growth is relatively              to support growth with spending                      as yields are low                and supply bias
Malaysia       LOW: The BNM is not inclined to ease, as growth         HIGH: The Malaysian government is inclined to        Continuous foreign               Steeper on supply
               is strong and the government is spending                support pre-election growth with spending            buying of bonds                  bias
China          LOW: Chinese authorities remain concerned with          HIGH: Growth support in 2013 from increase in        Limited impact on bonds          Steeper on
               house price appreciation, show a bias for shorter       government-led investment spending                   but appreciation pressure        prospects for
               term liquidity measures (OMO)                                                                                on CNY                           upturn in growth
Singapore      LOW: Inflation is sticky in Singapore and the           N/A: Singapore bond market will not react to any     Continuous foreign               Flatter and lower
               labor market is tight, so MAS will be reluctant to      fiscal stimulus plans.                               buying of short-dated            versus USD curve
               ease into next year, preferring to keep its tight                                                            SGS
               policy in place.
Taiwan         LOW: Inflation is around 2%, and liquidity flush,       HIGH: Plans exist to boost public investment         N/A: Inflows to onshore          Unchanged /
               so we see no action by CBC next year                    and attract private participation to new projects.   bonds are restricted             Flatter
                                                                       If successful, can add 1% to GDP in 2013
India          HIGH: We expect 25-50bp of rate cuts, as WPI            LOW: India needs to reduce its debt, not enlarge     Limited impact on inflows        Flatter and lower
               inflation peaks in 1Q and drifts towards 7% into        it                                                   unless RBI re-opens the          on RBI rate cuts
               year end                                                                                                     Gsec FII limits
Indonesia      N/A (No bias to ease): BI is biased to hike             N/A (No bias to ease): Indonesia’s growth rate       Growing foreign Inflows          Flatter and lower
               FASBI and bring up money market rates, to slow          above 6% does not need stimulus                      into the long end of the         on inflows
               down credit growth                                                                                           INDOGB curve for carry
Source: J.P. Morgan

In Indonesia, we recommend overweight duration. For                                        Chart 20: EM investors are underweight Indonesia FX and rates
nearly a year now, investors have been underweight                                                                                                      FX          Rates
INDOGB according to JP Morgan surveys, but such                                              4
positions will be difficult to sustain in a low volatility                                   3
environment. Investors are returning to carry positions, and                                 2
at 6% (before tax), INDOGB are the last remaining easily                                     1
accessible high-carry bonds in EM Asia. Add to that our                                      0
view that the IDR will turn around in 2013 and strengthen
(see the EM Asia FX section), and the stage is set for a
slow rally of the long end of the INDOGB yield curve. As                                    -2
Bank Indonesia retains a bias to raise the FASBI rate, we                                   -3
would avoid the 5-year section of the curve (as it trades                                   -4
below the policy rate), and rather prefer the 15-year or the                                  Sep-08             Sep-09          Sep-10           Sep-11             Sep-12
20y point, as 10s/15s and 10s/20s curves are still steep                                   Source: J.P. Morgan
relative to 5s/10s. We expect yields to fall 30-50bp, as
investors reduce shorts next year.

 JPMorgan Chase Bank LLC HK
 J.P. Morgan Securities N.A.,        J.P. Morgan Securities LLC         Emerging Markets Research
 Bert Gochet AC
 Joyce Chang AC                      Dennis Badlyans AC                 Emerging Markets Outlook and Strategy for 2013
 (852) 2800 8325
 (1-212) 834-4203                    (1-212) 834-9150
 joyce.chang@jpmorgan.com            dennis.x.badlyans@jpmorgan.com     November 21, 2012
J.P. Morgan Securities LLC           JPMorgan Chase Bank Sucursal, BA
Felipe Q Pianetti AC                 Carlos J Carranza AC
(1-212) 834-4043                     (54-11) 4348-3425
felipe.q.pianetti@jpmorgan.com       carlos.j.carranza@jpmorgan.com

In India, we expect the RBI to cut rates by 25-50bp in                  aggressive easing cycle, while CLP strength reflected
2013 as the underlying growth story remains weak.                       Chile’s above trend growth. Current account deficits should
Inflation is likely to peak at 8% in 1Q and eventually to               continue to reflect plenty and cheap funding for the
decline to 7% by end of the year, providing an opening for              investment grade countries in the region and stability in
this additional round of easing. We expect Indian bond                  commodity prices, thus remaining as a secondary driver for
yields will decline in line with these rate cuts as the yield           currency price action. The correlation between the
curve is upward sloping. Therefore, we recommend buying                 speculative currencies—BRL and MXN—should stay
the 5-year bond (at 8.15%). In the event of 25-50bp of cuts,            below historical levels, as BCB will likely keep the BRL
the yield will drop to 7.6% as repo rates move to 7.5%. If,             weakness bias through asymmetrical intervention. Indeed,
however, the RBI does not cut, then the upside in yields is             at the time of writing there is an active debate in the market
limited to 10-15bp as demand from RBI, banks and FIIs                   of whether the Brazilian authorities may want to shift the
should remain strong regardless. However, we advise                     trading range for the BRL weaker. Hefty positioning on
investors to hedge the INR FX risk by paying 1-year NDFs                MXN argues strategic long 6-month to 1-year low delta
at 6.23% as we are not constructive on the rupee for 2013.              USD puts; energy and fiscal reforms would be a plus. Also
We also caution that investors should be patient as rate cuts           be long MXN in the GBI-EM Model Portfolio. The
may be delayed; meanwhile, the positive carry on Indian                 fundamentally driven FX, CLP and COP could re-test 2012
bonds (even after hedging FX risks) will create a cushion               highs. Finally, PEN’s 3% appreciation trend stays into next
that absorbs some short-term losses as we wait for the                  year, while BRL slow drift points towards stability for the
delivery of rate cuts.                                                  ARS (17%) crawling peg. Short-term models suggest that
                                                                        Latin America currencies are largely fair to coincidental
Chart 21: India bonds offer positive carry unlike OIS                   risky factors.
 9                                                                      Top FX trade:
                                                                            Buy 6-month (May 17) 25D USD put/MXN call
                                             10y Gsec                          (Strike 12.82, vol 10.05%, 116bp premium–

                                                                        Latin America Rates: Regional convergence
 7                                                                      to dominate; be OW duration only in Brazil
            Repo - Rev Repo                  5y OIS
                                                                        Historical low real policy rate levels and above potential
                                                                        growth should put inflation at the top of central banks’
                                                                        agenda in the region. Brazil remains as our only long
 Jan-12               Apr-12        Jul-12              Oct-12
Source: J.P. Morgan                                                     duration position; in Mexico, we hold an UW position as it
                                                                        seems the richest bond market in Latin America. However,
                                                                        extremely low yields in developed markets should continue
Latin America: Supportive FX backdrop;
                                                                        to cap the upside for broad-based short duration positions.
OW duration in Brazil                                                   Indeed, cross-country convergence trades should offer an
                                                                        interesting way to position in 2013. The spread between
Latin America FX: Positive growth bias to                               local yields / rates versus the US are at or near historical
support FX in 2013                                                      lows, which should keep US rates as the primary risk for
                                                                        local markets next year. We like receiving Chile swaps
                                                                        versus paying Mexico TIIE in the 5-year region; Chile’s
Subpar but still positive growth in the US should keep
                                                                        flat yield curve seems fairly priced given exceptionally
growth cyclical specifics as the dominant drivers for
                                                                        high real police rates (the highest among global IRS
Latin America currencies. J.P. Morgan is penciling in
                                                                        markets), while the flat curve in Mexico is flow driven and
above potential GDP growth for the four major FX markets
                                                                        remain at odds with its zero real policy rates. Peru
in the region (Mexico, Brazil, Chile, and Colombia), hence
                                                                        outperformance versus Colombia also looks extreme,
2013 FX exposure in the region should be taken with a long
                                                                        offering GBI investors an interesting cross-Andean switch.
bias. In fact, cyclical drivers were well aligned with Latin
                                                                        On inflation, front-end breakevens in Mexico seem
America currency performances in 2012; the BRL
                                                                        expensive; 2s/5s steepeners are a more efficient way to
underperformance is in line with poor growth and an
                                                                        position for inflation risks. Brazil IPCA index risk
                                                                        undermines the mid-part of the NTN-B curve; we favor 14s

J.P. Morgan Securities plc
 J.P. Morgan Securities LLC         J.P. Morgan Securities plc       Emerging Markets Research
Jonny Goulden AC
 Joyce Chang AC                     George Christou AC               Emerging Markets Outlook and Strategy for 2013
(44-20) 7134-4470
 (1-212) 834-4203                   (44-20) 7134-7548
 joyce.chang@jpmorgan.com           george.g.christou@jpmorgan.com   November 21, 2012
J.P. Morgan Securities plc
Laura Bierer AC
(44-20) 7134-9173

for the carry. Finally, in Chile, 2-year breakevens look             Chart 22: EMEA EM central banks likely to welcome some FX
cheap.                                                               strength with CPI to lie close to the upper band in 2013
                                                                     CPI forecast versus central bank targets (%oya)

Duration recommendations:                                             8.0%                 Mid band         2013 avg CPI            2013 eop CPI

          OW Brazil in the Model Portfolio (Favor LTN’16
           and NTN-F 23)                                              6.0%

Curve recommendations:
          Receive Jan’16 versus Pay Jan’15 DI futures
           DV01 Neutral. Target: 30bp (Current 50bp)
Convergence theme recommendations:
          Receive 5-year CLP swaps versus Pay 5-year TIIE            0.0%
           swaps. Target 60bp (Current 12bp)                                    Hun          Rus      Pol      Tur        SA       Cze     Rom          Isr
                                                                     Source: J.P. Morgan
          OW TES 24s versus UW SOB 26s. Spread target
           125bp (Current 175bp)                                     EMEA EM FX: Long RUB and TRY versus
                                                                     PLN and ZAR
Inflation recommendations:
          Enter 2s5s steepeners in TIIE swaps. Target 50bp          In FX, move overweight TRY and retain an overweight
          Buy 2-year Breakevens in Chile. Target 3.2%               in RUB; move underweight in PLN and stay
          Buy Aug’14 NTN-B.                                         underweight ZAR, keeping an overall neutral stance on
                                                                     EMEA EM FX. The divergence in growth between CEE
                                                                     and non-CEE countries will be the dominant driver of
EMEA EM: Divergence between CEE and                                  EMEA EM FX in the first part of 2013 (chart 23). Russia
Russia, Turkey                                                       GDP is forecast to grow at 3.3%oya in 2013 and Turkey at
                                                                     3.7%oya, with both avoiding policy rate cuts, in our view.
Lower growth will result in Central & Eastern European               By contrast, CEE growth will average 1.0% (versus
(CEE) local markets underperforming Russia and                       potential of 3.3%), and central banks will continue to cut
Turkey in 1H13, with the beta to global risk likely to be            policy rates (100bp in Poland, 75bp in Hungary, and
more of a driver in 2H13. The combination of global                  possible extraordinary measures in the Czech Republic).
liquidity driven by G-10 central bank actions, lower global          Despite most of these cuts being priced in by rate markets,
growth and fiscal cliff concerns will mean fewer top-down            we think their delivery will lead to FX underperformance.
drivers for EMEA EM local markets at the start of 2013. We           We open an outright short PLN/RUB trade (target 9.00,
see more value in trading intra-regional themes, which will          stop 10.00). The regional outlier is ZAR, where we retain
primarily be driven by the lower GDP growth in CEE versus            our underweight. Currency weakness will likely result from
non-CEE countries. We, therefore, prefer local market                the deteriorating current account deficit (to 7% of GDP in
exposure in Russia and Turkey versus CEE in Q1 due to                1Q13) exacerbated by the recent strikes, and by slowing
higher FX return prospects and attractive bond yields. In            foreign bond flows which help finance this deficit.
2H13, we expect relative performance to be driven more by
global beta factors, as fiscal cliff concerns should have            Chart 23: Rate cuts due to weak growth will help drive CEE FX
abated and global risk sentiment picks up. This should allow         underperformance relative to non-CEE FX within EMEA EM
regional EMEA FX to perform better given its high beta.                5.0%                                                                        160
Pressure for FX intervention may also re-surface in 2H13,                                                                                          140
though we downplay this risk for EMEA EM with the                                                                                                  120
exception of Turkey, as central banks are still likely to be           3.0%                                                                        100
more concerned about inflation and so comfortable with                 2.0%                                                                        60
some currency strength (chart 22). In bonds, EMEA EM                                                                                               40
returns are likely to be driven by carry as yields drift higher.       1.0%
                                                                       0.0%                                                                        0
                                                                                           CEE                                 non-CEE
                                                                                2013 Growth            Potential Growth          Rate cuts (bps, RHS)
                                                                     Source: J.P. Morgan

J.P. Morgan Securities plc
                       LLC        J.P. Morgan Securities Ltd     Emerging Markets Research
George Christou AC
Joyce Chang AC                    Yang-Myung Hong AC             Emerging Markets Outlook and Strategy for 2013
(44-20) 7134-7548
(1-212) 834-4203                  (852) 2800-8028
joyce.chang@jpmorgan.com          ym.hong@jpmorgan.com           November 21, 2012

J.P. Morgan Securities plc        J.P. Morgan Securities LLC
Jonny Goulden AC                  Alisa Meyers AC
(44-20) 7134-4470                 (1-212) 834-9151
jonathan.m.goulden@jpmorgan.com   alisa.meyers@jpmorgan.com

EMEA EM Rates: Long Russia, Nigeria,                             sovereigns, and with valuations looking stretched in some
Turkey versus South Africa and Poland                            quasi-sovereigns as corporate earnings are affected by
                                                                 prolonged low global growth. We keep underweights in
In local rates, stay overweight duration in Russia and           China Metals and Sovcomflot (Russia) in our EMBIG
Nigeria and add an overweight in Turkey; stay                    Model Portfolio.
underweight duration in South Africa and add an
underweight in Poland. We favor overweight duration              Stay selective in low spread sovereigns and NEXGEM
positions in Russia, Nigeria and Turkey as higher yielding       countries. With many low spread EM sovereigns having
bond markets with stable FX outlooks and positive                spreads below 150bp, we are overweight countries where
positioning technicals. In Russia, we expect close to US$10      we see fundamental improvements, likely rating agency
billion in foreign inflows (10% of amount outstanding) as        upgrades and still room for some spread compression. To
the OFZ market becomes Euroclearable in January 2013.            this end we are overweight Turkey and Indonesia where we
The positive outlook for RUB in the first half of 2013           see external imbalance improvements, likely continued
should also encourage allocation into OFZs. Nigeria has the      rating upgrades and spreads still at the wider end of the low
highest yield in the GBI-EM GD index and a stable FX             spread segment of the EMBIG. We are underweight South
outlook, with inflation set to fall allowing 200bp of cuts by    Africa and Lithuania against these, where political and
the CNB. We expect further inflows from EM dedicated             economic risks are not reflected in still low spreads in our
funds into Nigeria local bonds in 2013. We recommend             view. NEXGEM countries have outperformed as a group
adding overweight duration positions in Turkey given its         but performance within this sector remains
attractive yield, stable FX outlook and likelihood of further    idiosyncratically driven and that is how we recommend
ratings upgrades to investment grade. We balance these           positioning. Within Sub-Sahara Africa we are overweight
allocations with underweights in South Africa and Poland.        Angola and Gabon which we see as two of the strongest
In South Africa, FX and credit risks, combined with slower       credits in the region, versus underweight Zambia where we
foreign bond flow momentum now that South Africa’s has           see scope for underperformance. Elsewhere in NEXGEM,
already entered the WGBI, will continue to weigh on              we stay overweight Georgia as spreads still have further to
bonds. We concentrate our underweights in the 5-10 year          tighten post election. Within the high spread part of the
part of the curve given the large foreign positioning there.     EMBIG we remain overweight Venezuela where wide
In Poland, the significant rate cuts in the pipeline should      spreads are still attractive and should benefit most from
trigger a bull curve steepening, while the flatness of           spread compression.
Poland’s yield curve relative to other EM curves gives little
yield compensation for country-specific or global risks.         EM corporates top trades for 2013
EMBIG model portfolio top trades for                             Compressed valuations keep us more selective in Asia
2013                                                             and Latin America, and we see better relative value in
                                                                 EM Europe and the Middle East. The strong credits
Overweight EM Sovereigns as we head into 2013, with              within the IG and HY (mainly BB) segments in Asia and
focus on regional divergences through an underweight             Latin America have continued to receive strong support,
in EMEA EM. Our base-case is for the market                      with spread and yields at or close to the post-crisis tights in
environment in 1Q13 to be a continuation of 4Q12 where           many cases. Thus, such IG credits are likely to move in line
macro risks around Euro area financing and the growth            with overall markets rather than deliver outperformance as
impact of the US fiscal cliff limit the upside and supportive    in 2012, and we would prefer names that have specific
developed market central banks limit the downside. That          catalysts or lagged peers. In addition, we see the good
keeps us overweight EM sovereigns in our EMBIG Model             quality HY credits more as carry plays with stable income
Portfolio as spreads should gradually move lower as these        rather than large capital appreciation. A potential upside
risks resolved and positive technicals asset themselves. We      surprise for HY credits would be if the market perception
still see opportunities in relative positioning. Regionally we   around the yield floor shifts downward, enabling more
stay underweight Central & Eastern Europe (CEE) as the           spread compression. EM Europe and the Middle East do
part of the EM sovereign universe where growth forecast          not necessarily seem more attractive in the context of
are weakest, debt burdens are higher than EM averages and        recent spread history. However, the Middle East’s average
where political risks remain. We reflect this with               rating of A2/A- with maturity of 6.7 years makes the 259bp
underweights in Ukraine, Romania and Lithuania. We also          spread still look attractive against the 218bp spread for
see reason to be underweight quasi-sovereign corporates          CEMBI single A. We think further lifting of the geo-
versus sovereigns where supply/demand dynamics favor             political risk that has been an overhang should enable
                                                                 spreads to continue rerating. Although EM Europe is the

 J.P. Morgan Securities (Asia Pacific)   J.P. Morgan Securities plc
 Limited                                 Nachu Nachiappan AC
 Soo Chong Lim AC
 J.P. Morgan Securities LLC              (44-20) 7325-6823               Emerging Markets Research
 (852) 2800-7931
 Joyce Chang AC                          nachu.nachiappan@jpmorgan.com   Emerging Markets Outlook and Strategy for 2013
 (1-212) 834-4203
 joyce.chang@jpmorgan.com                J.P. Morgan Securities plc      November 21, 2012
J.P. Morgan Securities LLC
Jacob Steinfeld AC                       Maxim Miller AC
(1-212) 834-4066                         (44-20) 7742-9946
jacob.a.steinfeld@jpmorgan.com           maxim.miller@jpmorgan.com

lowest rated region at Baa3/BB+, we think major                          homebuilding and HY TMT with UW on Urbi, Javer and
corporates and banks in the BBB rating range offer value                 NII, and MW on two stressed credits due to valuations
given the solid fundamentals and spread pick-up over the                 (Axtel and Maxcom). We also remain cautious in
quasi-sovereigns. We would note, however, that the region                Argentina as performance will continue to be driven by the
is also more vulnerable to renewed risk aversion out of                  sovereign litigation (only two OWs: TGS and Autopistas
Europe, which would be a variable.                                       del Sol), while in Chile, we are neutral with expected
                                                                         improvement in the electricity sector balanced by weak
Asia: Our overall investment theme is to stay with good                  Pulp & Paper industry dynamics and fairly priced HY
quality names for carry, and selectively go down the                     credits. In Colombia and Peru, we continue to be
capital structure or credit curve to pick up yield. We are               constructive on fundamentals, but feel that corporates in
keeping exposures to the commodity names light (e.g.                     both countries already trade relatively expensive (only OW
Indonesian coal mines) until we have better visibility on                is Southern Copper Peru as we like the copper story). In
commodity prices. For banks, we remain broadly                           CAC, we like Digicel, but feel valuations are already tight
comfortable with fundamentals, and like owning names that                and have an UW rating on Petrotrin. Finally, we have an
are well positioned to benefit from stable economic                      OW on PDVSA due to attractive valuations, relatively high
outlooks in countries such as Malaysia (CIMB) and                        oil prices and our belief they have the willingness to pay.
Thailand (SCB). We also like owning KDB as an option on
a government guarantee, but otherwise believe tight spreads              EM Europe: We remain constructive on most of the
are close to fair value. Down the capital structure, “old                Russian IG oil and gas names we cover, and believe the
style” lower Tier 2 bonds offer good value, as they trade at             risk-reward propositions are still attractive vs. global
attractive discounts and will likely benefit from scarcity               peers. While being somewhat volatile during 2Q this year,
value going forward. In India, we expect volatility through              oil prices have remained steadily high through 2H. Even
2013 and prefer to stay on the sidelines. In IG, we prefer               if we experience more volatility in oil and gas prices in
landlords in Hong Kong (Sun Hung Kai, Hang Lung) and                     FY13, we think Russian majors are well positioned to
consumption story plays in China (Tingyi, Tencent), and                  prevent a material deterioration in credit fundamentals.
would also reach down the capital structure for yield in                 The one name we would be cautious on is TNK-BP as the
well structured hybrids (Hutch 6% perps, CKI 7% perps)                   ongoing acquisition by Rosneft will put pressure on the
that incentivize issuers to meet the first call. In Chinese              balance sheet and eventually feed through to TNK-BP.
property, we recommend a barbell strategy, sticking to                   We see value in: Lukoil 19s (277bp), Lukoil 20s (287bp),
some high-quality BB names (Country Garden ‘18s, Agile                   Novatek 16s (263bp) and Gazprom 19s (275bp). On the
‘17s new) for carry and dipping selectively into single-B                bank side, a lot of fresh supply has put pressure on
credits (KWG ’17s new, Kaisa ‘15s) to improve yield. We                  secondary spreads, leading to some widening of Sberbank
are UW Indonesian corporates as it is bifurcated with good               and VTB senior bonds relative to quasi-sovereigns (VEB,
quality names trading at tight level and high yielding bonds             Eurasian Development Bank). We like VTB 17s (z+412bp
having idiosyncratic risks that may not appeal to some                   offer) and SBERRU (17s, z+268bp offer) and do not
investors.                                                               expect deterioration in fundamentals in the medium term.
                                                                         We are fundamentally positive on Turkish banks but
Latin America: We are generally neutral—although we                      current spreads seem relatively tight. We do see some
have reduced our UW calls on the back of a more                          residual value in the front end of Akbank (15s, z+265
positive macroeconomic backdrop, we maintain a                           offer) and Isbank (16s, z+280bp offer). We note very tight
cautious bias due to relatively tight valuations and some                pricing of newly issued subordinated debt (VTB 22s 65bp
deteriorating credit stories. Macro fundamentals in Brazil               over senior, SBERRU 22s 50bp over senior). Although
have started to improve and the worst in credit trends seems             technicals for subdebt may stay strong for a while as
to have passed. However, we still keep an underweight bias               investors chase yields, current levels do not seem
as we feel better quality credits are already tightly priced.            sustainable and we expect some widening versus senior
We see value in a few credits carrying more risk but also                next year.
higher returns, or present relative value opportunities
(GVO, Votorantim curve, Odebrecht perps, belly of                        Middle East & Africa: We hold a constructive view on
Petrobras curve), while remaining cautious on idiosyncratic              GCC credits going into 2013 as tail risks associated with
situations with weakening fundamentals (Suzano, Marfrig,                 the Arab Spring and Iran-Israel showdown have now taken
Gol, Tam, CSN, Braskem). In Mexico, we also expect a                     a backseat while oil prices continue to be robust and the
supportive macro and maintain OW on Cemex long-end                       higher expected issuance should be manageable. Valuations
and MW/OWs on good quality but relatively tightly priced                 appear mixed but a granular analysis reveals value across
IG (AMX, Televisa, Telmex). We are cautious on Mexican                   the board. Highly rated Abu Dhabi GREs (AA or AA) such

J.P. Morgan Securities plc      J.P. Morgan Securities plc
                                                                      Emerging Markets Research
 J.P. Nazim Securities LLC
ZafarMorganAC                   Giulia Pellegrini AC
 Joyce Chang AC                                                       Emerging Markets Outlook and Strategy for 2013
(44-20) 7777-9132               (44-20) 7742-6959
 (1-212) 834-4203
zafar.nazim@jpmorgan.com        giulia.pellegrini@jpmorgan.com
 joyce.chang@jpmorgan.com                                             November 21, 2012
J.P. Morgan Securities LLC      JPMorgan Chase Bank N.A., Singapore
Franco Uccelli AC               Matt Hildebrandt AC
(1-305) 579-9415                (65) 6882-2253
franco.a.uccelli@jpmorgan.com   matt.l.hildebrant@jpmorgan.com

as Mubadala (AA, 21s offered at z+165bp), IPIC (AA, 20s               medium term we see its spreads moving closer to lower
offered at z+200bp) and Taqa (A, 21s offered at z+190bp)              spread Nigeria and Gabon. We do not inherently view
are best compared to average EM spreads for the rating                Zambia’s fundamentals as unsound and remain constructive
buckets (AA: z+146bp, A: z+195bp). QTEL (A, 19s                       on the economy, despite some headwinds. However, we
offered at z+173bp) on the other hand appears cheap when              believe Zambia currently trades too rich in general and too
compared to EM IG telcos. Similarly, strong standalone oil            tight to Angola in particular. We see the spread between the
and gas credits such as Rasgas and Dolphin appear cheap               two credits potentially widening by 40bp in the near term.
relative to developed market comps in the US and Europe.              In early October, we moved overweight Gabon on the back
Lastly, Dubai credits that appeared to be fully valued or             of its underperformance following the country being put on
even expensive start looking attractive once viewed with              negative watch by S&P and some political noise. Since
the backdrop of improvement in credit and Dubai                       then, Gabon spreads have gradually tightened.
fundamentals, and implicit Abu Dhabi support for the city-
state. In South Africa, the situation around the mining               In Sub-Saharan Africa, we also continue to find local
unrest has tamed materially for issuers we cover, ending              markets opportunities in Nigeria as particularly good
altogether for Gold Fields while AngloGold still has one              value. We keep our long 6-month T-bills (FX unhedged)
mine on strike. The pay resolution in the gold sector was             recommendation, since we view 6-month TBills as
also more moderate versus other sectors. It is possible,              currently offering the most value at 12.8% amid the
however, that the unrest moves to the public sector. We are           slowdown in GBI-EM Index related inflows in recent
thus MW Gold Fields, AngloGold, Naspers and Transnet                  weeks and our forecast of a stable naira. We believe that
and UW Eskom.                                                         the currency will continue to trade range bound, around the
                                                                      157 level, into early 2013 as FX reserves rise amid hard
NEXGEM views for 2013                                                 currency inflows from elevated oil prices, ongoing power
                                                                      sector privatization reforms and, to some extent, GBI-EM
Our preferred countries in Central America and the                    Index inclusion. We also maintain our long January 2022s
Caribbean for 2013 are the Dominican Republic and                     FGNs (FX unhedged) and overweight Nigeria in the GBI-
Guatemala. We like the Dominican Republic on the                      EM Model Portfolio. We note the risk for some short-term
expectations that the new government will restore fiscal              underperformance vis-à-vis our 10.5% target on the
order and Guatemala due to its broad macro stability, fiscal          January 2022s, because of the slowdown in GBI-EM
discipline, and low public debt burden. Put differently, we           related inflows. However, we think that duration exposure
believe the Dominican Republic has the potential to fix what          in Nigeria will continue to offer value in early 2013. This is
is broken and Guatemala to keep anything from breaking.               in view of the appealing yield premium (around 600bp)
The remaining NEXGEM countries in CAC, namely Belize,                 Nigeria still offers over the GBI-EM index; the prospects
El Salvador, and Jamaica, are idiosyncratic stories with less         for more inflows coming through in the new year on
certain endings. The outcome of Belize’s current bond                 belated positioning by some “passive investors”; lower
restructuring is still very much binary and may result, via a         planned domestic borrowing; inflation easing from 1Q13;
principal haircut, in the country’s exclusion from EMBIG              and the CBN starting to cut rates in March.
and NEXGEM eligibility. Meanwhile, El Salvador continues
to struggle with low growth and a relatively high fiscal              In EM Asia, Sri Lanka is our top pick for local and
deficit and shows no signs of being able to break away from           external debt for 2013 due to good value relative to
its current predicament in the near term. Lastly, growth in           similarly rated credits and a constructive fundamental
Jamaica, which has been virtually non-existing for several            outlook. In addition to strong growth prospects, improving
years, continues to disappoint and to hinder the country’s            debt dynamics, and prudent economic policy stance, Sri
ability to improve its weak fiscal standing and lower its hefty       Lanka is only expected to issue US$500 million in 2013, if
debt burden.                                                          at all, which should keep technicals supportive. We remain
                                                                      less constructive on Vietnam due to banking sector
In the Sub-Saharan Africa region, our top external debt               concerns, but a low external debt load and still solid growth
picks are Angola and Gabon, which we are overweight                   prospects mitigates risks to a large extent. On the contrary,
versus our underweight in Zambia. We view our                         Pakistan looks vulnerable for pullback given its recent rally
overweight in Angola as a relative value proposition versus           against the EMBIG, the fragility of its economy, and noise
our underweight in Zambia. We find the 20bp credit spread             related to upcoming presidential and parliamentary
between Angola and Zambia as too tight against a backdrop             elections in 1H13. In local markets, we are long the Sri
of high oil prices, volatile copper prices, and a one-notch           Lankan 2-year benchmark bond, which at 12.6%, offers the
credit rating differential. While Angola’s strong                     highest carry in the region. Beyond the 2-year bond, the
performance since issuance is a near-term risk, over the              curve flattens and does not provide much reward for the

J.P. Morgan Securities LLC Singapore
JPMorgan Chase Bank N.A.,                                      Emerging Markets Research
Joyce Chang AC AC
Matt Hildebrandt                                               Emerging Markets Outlook and Strategy for 2013
(1-212) 834-4203
(65) 6882-2253
matt.l.hildebrant@jpmorgan.com                                 November 21, 2012

additional risk. The currency did depreciate 15% early this
year, but reform measures implemented in 1H12 have led
to improved balance of payment dynamics and higher FX
reserve coverage. Since midyear, the rupee has
strengthened slightly and we expect only modest
depreciation, if any, over the next year. Do note that this
recommendation may be difficult to implement right now
as the foreign investor quota is full. However, the limit is
fixed as a percentage (12.5%) of total outstanding bond
supply and new space will open up as bond supply grows.

J.P. Morgan Securities LLC          JPMorgan Chase Bank Sucursal Buenos Aires Emerging Markets Research
Vladimir WerningAC (212) 834-4144   Carlos Carranza (54-11) 4348-3425       Emerging Markets Outlook and Strategy for 2013
vladimir.werning@jpmorgan.com       carlos.j.carranza@jpmorgan.com          November 21, 2012

Latin America Outlook for 2013
                                                                            strong as its weakest link. But the due process to reach a
                                                              B3/B/B        final ruling involves both the District Court (at least through
                                                                            December 1) as well as the Appeals Court (thereafter). The
Confronted with the mother of all litigation                                potential timeframe involving the latter tilts the odds in
                                                                            favor of debt payments being made in December.
    Risk of technical default widens CDS basis
    Odds favor December coupons being paid                                 The potential District Court ruling and the potential
                                                                            denial for “en banc” Appeals Court review can constitute
    Stay marketweight external debt                                        a negative headline for bonds during December. It is fair to
                                                                            assume that Judge Griesa gathers all relevant facts from the
Fundamentals and politics in 2013                                           filings and rules on the two pending issues (pro rata formula
Markets inflate the risk of technical default. Markets have                 and injunctions on third parties) in the time frame anticipated
suffered severely as the litigation in US Courts between                    (i.e., by December 1), and it is fair to assume his ruling
Argentina and holdout creditors inflates the risk of the                    favors litigating creditors. Moreover, it also seems fair to
sovereign being pushed toward “technical debt default.”                     assume that Argentina’s petition for an “en banc” Appeals
Paradoxically, the potential court remedy—ratable payments                  Court hearing is denied (the normal panel of three judges
or no payments, instead of attachments—has had the effect                   ruled partially, but so far unanimously, against Argentina).
of making NY law less valuable the closer it comes to being
enforceable: currently the local law premium on USD bonds                   However, potential negative developments are independent of
has turned a negative 170bp.                                                the expected Appeals Court rehearing of the pari passu case.
                                                                            This rehearing should require another round of briefing and oral
The possible end-game of pari passu litigation in US Courts is              arguments before a definitive mandate. Although scheduling of
effectively the important issue at stake. If, after considering the         this process is at the discretion of the Appeals Court, the latter is
impact on third-party and financial intermediaries, the Appeals             unlikely to embrace an expedited process to parallel the District
Court upholds its partial ruling against Argentina, the negative            Court’s ambitious timeline (i.e., less than one month). Thus, a
NY law premium should widen even further. Unless judges                     ruling—and hence the threat of a potential lifting of the stays—is
propose (an unlikely) cram-down solution mimicking the                      more likely to be delivered after December payments have been
restructuring, Argentina will be inclined to take actions that raise        made. If the ruling is adverse to Argentina, the latter is likely
risk of technical default. This would happen if foreign law bond            to pursue a petition for review to the Supreme Court.
payments either sit idle in the bondholder trust after Argentina
makes payments or are re-routed elsewhere by Argentina without              The NY Fed is asking the Court to engage in due
bondholder consent. But this is unlikely because Argentine                  diligence. Critical to whether this final ruling is adverse to
politicians will likely interpret that their obligations are                Argentina will be the consideration of the injunctions effects
extinguished de facto when funds cease to be Argentina’s                    on third parties and financial intermediaries.
property and reach the bondholder trustee, BoNY (even though,
                                                                            Market strategy
de jure BoNY needs to transfer them to the registered holder).
                                                                            In external debt, stay marketweight.
Another source of technical default risk lies in the possibility
that BoNY refuses to receive funds from Argentina during                    In FX, hold short 1-month USD/ARS: Headline risks
December, but that seems unlikely. A 90-day advanced notice                 regarding remain in place, but we continue to see low impact
is required to forfeit a trust contract. But it could refrain from          in the short-dated NDFs.
transferring funds to the exchange securities holders. This would
become a risk once stays are lifted and BoNY feels that final                 Argentina macro forecasts
court order overrides its contractual obligation to distribute
bondholder property to the beneficiaries. We believe that as long                                                    2012    2013         2014
as the stays remain in place, BoNY is likely to continue to                   Growth (%oya)                          2.7      3.6          1.5
comply with its commitments as bondholder trustee.                            Inflation (%eop)                       9.6      10.2        11.0
                                                                              USD/ARS (eop)                          5.0      5.7          6.7
At the moment, the pressing issue involves the payment                        Current account (% GDP)                -0.1     -1.0         -1.6
risk on Argentina’s restructured bonds during
                                                                              Primary fiscal balance (% GDP)         -0.1     -1.0         -1.5
December. Close to US$3 billion of foreign law Exchange
                                                                              Public debt/GDP (%)                    41.5     42.0        43.0
Securities are due. The risk of coupon payments being made
or not depends on the actions of many participants—judges,                    Ratings outlook: Possible downgrade.
Argentina, and the bondholder trustee Bank of New York                        Source: J.P. Morgan
(BoNY)—and a (payment) chain is understood to be as

J.P. Morgan Securities LLC                                      Emerging Markets Research
Franco UccelliAC (305) 579-9415                                 Emerging Markets Outlook and Strategy for 2013
franco.a.uccelli@jpmorgan.com                                   November 21, 2012

                                                                2.6%y/y increase to US$4.18 billion in the stock of debt
                                         Baa3/BB+/NR            should lower the burden to 90.4% of GDP in 2013.

Mild recovery in sight                                          Tourism to remain broadly flat. Tourism value-added
                                                                shrank 3.7%oya in January-September, constrained by a
    Growth is still missing                                    decline in both the number of long-stay tourist arrivals and
    Slow progress on the fiscal front                          tourism receipts. While the latest tourist arrivals figures show
                                                                a 4.8%oya decrease to 378,000 for January-August, the
    Tourism sector still soft                                  latest revenue tally shows a 2.5% drop to US$715 million
                                                                (16.1% of projected GDP) for January-September. Given the
Fundamentals and politics in 2013                               ongoing decline in arrivals, we expect tourism earnings to
                                                                fall 2%y/y to US$935 million (21.0% of projected GDP) in
Opposition is likely to win the January 2013 election.
                                                                2012 from US$953 million (22.1% of GDP) in 2011,
Despite the ample parliamentary majority enjoyed by the
                                                                prompting tourism value-added to contract by approximately
ruling Democratic Labor Party, the popularity of PM
                                                                3% this year, before remaining generally flat next year, as a
Freundel Stuart has steadily declined driven by the grim
                                                                recovery in high-end tourism flows continues to lag.
state of the economy. Against this backdrop, the leader of
the opposition Owen Arthur is likely to return as PM for the
                                                                CAD to narrow amid muted demand. The current account
fourth time following the January 2013 election.
                                                                deficit narrowed 25.1% to US$181 million (4.1% of projected
                                                                2012 GDP) in January-September from US$241 million (5.6%
Growth likely to be lackluster. Real GDP inched up
                                                                of GDP) a year earlier. The CAD widened 41.4% to US$366
0.2%oya in January-September, posting a small
                                                                million (8.5% of GDP) in 2011 from US$259 million (6.1%
improvement on the 0.1% expansion it recorded a year
                                                                of GDP) in 2010, underpinned by a 7.8% plunge in tourism
earlier. Growth was supported by modest expansion in the
                                                                receipts and a 2.9% increase in merchandise imports
construction and financial services sectors, and constrained
                                                                triggered by higher international oil and other commodity
by weak tourism performance and lower manufacturing and
                                                                prices. Although the foreign exchange earning sectors are not
agriculture output. The central bank expects real economic
                                                                projected to expand significantly in 2012, the CAD is officially
output to rise only marginally in 4Q12, provided the winter
                                                                expected to decrease from last year, as long as domestic
tourism season does not disappoint and construction
                                                                demand remains muted and average international oil prices
continues to expand moderately. Our current forecast calls
                                                                continue to inch lower. Our current forecast calls for the
for real GDP to expand 0.3% in full-2012, down from +0.6%
                                                                CAD to close 2012 at US$335 million (7.5% of GDP) before
last year, and to rebound to 1.0% in 2013.
                                                                moderating to US$320 million (6.9% of GDP) in 2013.
Fiscal consolidation advances, but at a slow pace. The
fiscal deficit widened 28.0% to US$130 million (5.9% of         Market strategy
GDP) in April-September, the first half of FY2012/13, from      No allocation: Weak growth prospects and a relatively high
US$102 million (4.7% of GDP) a year earlier. The shortfall      fiscal deficit will do little to materially improve Barbados’s
plunged 48.1% to US$201 million (4.7% of GDP) in                debt dynamics in the near term. That said, and despite their
FY2011/12 from US$388 million (9.1% of GDP) in 2010.            limited liquidity, at 6.7% some yield hungry investors may
Although the official Medium-Term Fiscal Strategy (MTFS)        find Barbadian bonds compelling.
calls for the fiscal deficit to moderate to 4.0% of GDP in
FY2012/13, we expect the shortfall to decline only to 4.5%
of GDP (US$200 million), before further contracting to          Barbados macro forecasts
3.5% of GDP (US$160 million) in FY2013/14.                                                             2012      2013    2014
                                                                Growth (%oya)                           0.3      1.0      1.5
Public debt burden set to decline, but stay high. The public
                                                                Inflation (%eop)                         6.0      4.5     4.5
debt stock inched up 0.3% to US$4.08 billion in September
                                                                USD/BBD (eop)                            2.0      2.0     2.0
from US$4.07 billion in December. Public debt rose 7.3% to      Current account (% GDP)                 -7.5     -6.9    -6.6
US$4.07 billion (94.3% of GDP) in 2011 from US$3.79 billion     Headline fiscal balance (% GDP)         -4.5     -3.5    -3.0
(89.3% of GDP) in 2010. We expect growth of 0.1%y/y in          Public debt/GDP (%)                     91.6     90.4    88.0
the debt stock, which would take it to US$4.07 billion, to be   Ratings outlook: Possible Moody’s downgrade.
lower than growth in nominal GDP (3.0%) in 2012, resulting      Source: J.P. Morgan
in a decrease in the public debt-to-GDP ratio to 91.6%. A

J.P. Morgan Securities LLC          Banco J.P. Morgan S.A.             Emerging Markets Research
Ben RamseyAC (1-212) 834-4308       Laura Karpuska (55-11) 3048-3322   Emerging Markets Outlook and Strategy for 2013
benjamin.h.ramsey@jpmorgan.com      laura.a.karpuska@jpmorgan.com      November 21, 2012

                                                                       External tailwinds have driven twin surpluses and reserve
                                                Ba3/BB-/BB-            accumulation, for now. After posting an average 8.8% of
                                                                       GDP surplus in the four years up to 2008, Bolivia’s current
Macro buffers, micro questions                                         account position has remained positive. Strong exports (both
                                                                       prices and volumes in the gas and mining sectors) should
    Commodities-driven twin surpluses have led to a
                                                                       deliver a still robust 2.5% of GDP surplus in 2012, a bit higher
     large stock of reserves and ratings upgrades                      than the 2.3% of 2011. Still, recent years have seen higher
    Nationalizations mark a tense relationship with the               growth in imports, higher services and income deficits, and an
     private sector                                                    overall decline in workers remittances, pointing to modest
                                                                       vulnerabilities. Likewise, the overall public sector fiscal surplus
    Public investment needs and a 2014 election cycle                 peaked in 2008 at 5.1% of GDP, declining to 0.8% in 2011.
     will leave twin surpluses vulnerable to gas prices                So far in 2012, revenues growth has outstripped expenditures,
                                                                       pointing to a potential modest improvement in 2012 (we expect
Fundamentals and politics in 2013                                      1.0% of GDP). Looking ahead, however, expenditure
Growth and gas. GDP growth has averaged 4.7% in the last               pressure will increase due to public investment needs and the
half decade, peaking at 6.1% in 2008 before slipping to a still        2014 election cycle, leaving both fiscal and external accounts
quite firm 3.4% during the 2009 global crisis. The years since         dependent on the whims of commodities prices.
have seen gradual recovery to 5.2% in 2011, with fiscal
                                                                       Ratings upgrades in 2012 were supported by
expansion supporting consumption, while public investment has
                                                                       macroeconomic buffers, but regulatory uncertainty and
ramped up—in part to increase gas production.
                                                                       social tension are key constraints. All three major rating
Notwithstanding the nationalization of the hydrocarbons sector
                                                                       agencies raised Bolivia to the BB- level in 2012, citing the
in 2006, gas production has tripled in the last decade to reach an
                                                                       extremely solid sovereign balance sheet relative to peers,
average 45.7 mmc/d in 1H12. Growth has been driven by
                                                                       and the decent prospects for state-led investment to translate
exports to Argentina (10.2 mmc/d) and Brazil (27.3 mmc/d),
                                                                       the promise of abundant natural resouces into sustained
facilitated by pipeline and infrastructure development, and long-
                                                                       growth. While risks related to commodities prices are clear,
term export contracts with both countries. Bolivia has roughly
                                                                       international reserves of nearly 50% of GDP and almost one
17-18 years worth of proven reserves at current production
                                                                       year of current account payments represent an important
levels, so investment in the sector must continue to increase to
                                                                       buffer against external crises, and debt levels are very low.
meet domestic demand growth and export commitments.
                                                                       Lingering questions are related to historically weak
As institutional uncertanties hold back private investment,            institutions and high levels of social and political conflict.
much rests on the shoulders of the public sector. The                  With President Morales likely to seek another 5-year term in
government of Evo Morales has been in office since 2006,               2014, social demands may be on the rise.
adopting a confrontational attitude toward the “neo-liberal” status
quo, pushing for more state-led social inclusion, and embracing
                                                                       Market strategy
the Chavez-led ALBA regional agenda. Nationalization of                In external debt, no allocation: Pending the likely
strategic sectors focused first on hydrocarbons, followed by           inclusion of the new 10-year benchmark in the EMBI series
mining, telecoms, and more recently power. Up to now, the              during month-end rebalance. Despite Bolivia’s glittering
Morales administration has benefitted from the combination             sovereign credit metrics, we are concerned that the market
of higher international commodity prices and increased state           may tend to associate the credit with its higher-yielding
ownership in commodities extraction sectors, providing                 ALBA partners in a more risk averse backdrop.
plenty of resources for public investment to take the lead
without compromising fiscal or external accounts. With high
commodities prices and expanding volumes, nearly half of                Bolivia macro forecasts
NFPS revenues are now coming from commodities sectors. Of
                                                                                                            2012        2013      2014
course, this dependency of gas prices, and to a lesser degree
minerals, is also a vulnerablity. And the offshoot of the uncertain     Growth (%oya)                        4.4        4.7        5.7
business climate is sluggish private investment: equivalent to          Inflation (%eop)                     5.8        5.1        5.8
just 6.7% of GDP in 2011, compared to 12.7% for total public            Current account (%GDP)               2.5        2.0        1.7
investment. Even so, the potential of Bolivia’s resource                Primary fiscal balance (%GDP)        0.8        0.4        -0.3
sector and the possibility for partnerships with government             Public debt/GDP (%)                 31.5        29.1      28.1
enterprises has led net FDI to steadily grow from US$0.5                Ratings outlook: No change.
billion in 2008 to a projected US$0.95 billion in 2012.                 Source: J.P. Morgan

Banco J.P. Morgan S.A.                 J.P. Morgan Securities LLC         Emerging Markets Research
Fabio AkiraAC (55-11) 3048-3634        Felipe Pianetti (1-212) 834-4043   Emerging Markets Outlook and Strategy for 2013
fabio.akira@jpmorgan.com               felipe.q.pianetti@jpmorgan.com     November 21, 2012
Banco J.P. Morgan S.A.
Cassiana Fernandez (55-11) 3048-3369

                                                                          Rates low for long, and FX locked in a range; at least
                                              Baa2/BBB/BBB                reforms are moving. Following a period of hyperactive
                                                                          economic policy actions, we expect less activism in 2013. As
Less policy activism, more reforms                                        such, monetary authorities should keep the Selic rate at 7.25%
                                                                          for a prolonged period, starting a tightening cycle only in
    Growth is accelerating in 2H12, but sustainability
                                                                          4Q13. Eventual inflationary pressures should initially be
     through 2013 is the main challenge                                   contained using macroprudential instruments, and even some
    Inflation well behaved on regulatory factors, keeping                FX appreciation could be allowed, provided the
     rates and FX unchanged                                               manufacturing industry and exports are in good shape. In the
                                                                          near-term, the BRL range of 2.0-2.1 versus USD should be
    With the worst behind us, government is becoming                     preserved, without relying on changes to capital controls as
     more focused on supply-side reforms                                  flows are relatively neutral. However, we recognize that the
                                                                          selloff of late and the absence of any intervention even with
Fundamentals and politics in 2013                                         the FX rate threatening the upper bound of the range is raising
                                                                          the risk that the government could be engineering a shift in fx
Growth back to potential in 2013, following two years of
                                                                          fluctuation band. Now that the worst has passed in terms of
underperformance. After posting a 7.5% GDP growth rate in
                                                                          cyclical trends, BRL is less overvalued in our view, and the
2010, Brazil’s performance has been disappointing, slowing to
                                                                          real interest rate is at a historically low level. The government
2.7% in 2011, and to an expected 1.4% this year. Last year’s
                                                                          is finally focusing more on improving the supply side of the
deceleration was self-inflicted, but it was aggravated by negative
                                                                          economy, after spending much of its efforts on demand-
global factors and a downward credit cycle. These factors also
                                                                          boosting initiatives. The supply side agenda is dedicated to
delayed the effects of the broad policy easing implemented
                                                                          accelerating infrastructure investment, promoting broad-based
since August 2011, but we are starting to see the economy
                                                                          tax relief, implementing pension reform, and overhauling
gaining traction, and Brazil’s growth pace finally rebounded to
                                                                          private capital markets. However, at the same time, the
around 4.5% in 2H12. An improvement in consumption is
                                                                          government threatens the market and entrepreneurs with
leading the initial recovery, but we are looking for the resumption
                                                                          protectionist measures, as well as unilateral shifts in the
of capex and infrastructure to provide more sustainability to the
                                                                          regulatory environment that reduce the visibility of investment
growth outlook in 2013. The recovery in investments amid a
                                                                          and overshadow most of the structural improvements of late.
murky global scenario is the main challenge ahead. We forecast
real GDP growth at 4.1% next year, with investment expansion
                                                                          Market strategy
improving from -2.6% this year to 6.0% in 2013. Another
important assumption is a normalization in credit markets. It             In external debt, we are marketweight.
seems credit is now growing at a more sustainable pace of 16%
(from 25%p.a. between 2005 and 2011), and NPL rates are                   In FX, we hold neutral USD/BRL in the GBI-EM
stabilizing after spiking over recent quarters.                           Model Portfolio.

2013 IPCA will juggle upward cyclical pressures and                       In local rates, we hold overweight duration with a
downward regulatory factors. Labor markets remained                       flattening bias. BCB is committed to keeping rates low
tight during the soft-patch, keeping wage pressures and                   for long, and the recent steepening in the curve is likely
inflation risks high, as well as depressing corporate profits.            to pay back.
Inflation declined from the September 2011 peak of 7.3% to
4.9% last June, but has already accelerated to 5.5%. Slow                 Brazil macro forecasts
global growth helps to anchor inflation, but domestic
pressures are a source of concern. While fresh food and                                                          2012      2013     2014
agricultural commodities prices will play an important role               Growth (%oya)                          1.4       4.1      4.0
in inflation dynamics ahead, gasoline, energy prices and                  Inflation (%eop)                       5.5       5.3      5.0
transportation fees will also be key sources of uncertainty               USD/BRL (eop)                          2.05      1.95     2.00
                                                                          Current account (% GDP)                -2.4      -2.6     -2.4
that could significantly impact inflation in 2013. We are                 Primary fiscal balance (% GDP)          2.3       2.3     2.6
forecasting this year’s IPCA at 5.5%, and next year’s at                  Public debt/GDP (%)                    58.3      57.0     62.7
5.3%, assuming that local gasoline prices will increase                   Ratings outlook: Upgrade by Moody’s.
further this year, and only part of the electricity price decline
                                                                          Source: J.P. Morgan
expected by the government will be implemented.

J.P. Morgan Securities LLC          J.P. Morgan Securities LLC       Emerging Markets Research
Vladimir WerningAC (212) 834-4144   Diego Pereira (1-212) 834-4321   Emerging Markets Outlook and Strategy for 2013
vladimir.werning@jpmorgan.com       diego.w.pereira@jpmorgan.com     November 21, 2012

                                                                     current account deficit (close to 6.5% of GDP according to our
                                                    Aa3/A+/A+        estimations). As BCCh acknowledges, the latter could beckon
                                                                     uncomfortable policy adjustments if terms of trade were to
A number of reasons to consider                                      unexpectedly revert to normal levels, as occurred in 1998
(preemptive) macroprudential policies                                following the Asian crisis. We anticipate that the wider the
                                                                     current account deficit gets, the less inclined monetary
    The domestic versus external equilibrium dilemma                authorities will be to cut the policy rate. Under such a scenario,
     will center the policy debate in 2013                           they will likely become more inclined to consider intervening in
    BCCh might implement macro-prudential rules in                  the peso or introducing macro prudential measures (particularly
     2013, followed by FX intervention                               if structural external disequilibrium is accompanied by
                                                                     currency strengthening, which has not been the case so far).
    We are neutral CLP and like 2-year breakevens
                                                                     If fiscal policy is placed on auto-pilot, monetary policy is left
                                                                     in command. Recently, BCCh President Vergara has discussed
Fundamentals and politics in 2013                                    the importance of accommodating fiscal policy (in light of the
Chile’s economic activity keeps surprising to the upside.            pace of public spending growth), while Minister of Finance
Economic activity in Chile continued to defy lackluster global       Larrain has deferred fiscal responsibility (in light of the
growth. In fact, the strong domestic demand and better than          effective net savings of the public sector). In our view,
expected mining sector performance help to explain the               discrepancies in diagnosis from authorities do raise the odds
aggregate activity momentum. Indeed, despite fewer workdays          that, in the absence of public sector adjustment, BCCh could
affecting some sectors like industry, strong activity in the         consider engineering a moderation in private spending through
service sectors (where the workday difference had a smaller          traditional—or, more likely, non-traditional (macroprudential)—
impact) propelled headline growth. In all, 3Q12 economic             policy tools at its disposal. This is particularly true if, as has
growth continued to run above potential, both on an annual           happened in the last quarters, resilience in activity is
basis (5.4%oya) and on a sequential basis (5.2%3m/3m, saar).         accompanied by a deterioration of the external equilibrium.
Moreover, the consolidation of a lower unemployment rate, the        Therefore, we believe that the BCCh is confronting a
rebound in household confidence and import performance in            situation where it might consider implementation of stricter
October suggest no signs of pending deceleration.                    macro-prudential guidelines for the banking system as a way
                                                                     to manage the domestic and external equilibrium.
Above-potential economic growth has not fueled inflation
pressures. Inflation has not been a concern in Chile, as             Market strategy
headline inflation has remained below BCCh targets since             In external debt, we stay marketweight.
June. Annual inflation in October printed 2.9%oya, while
core CPI (IPCX1) stood at 2.0%. In spite of above-potential          In FX, we hold neutral USD/CLP in the GBI-EM
growth and a tight labor market, the lion’s share of monthly-        Model Portfolio.
headline-CPI variations was explained by volatile goods
(food, fuel and electricity prices). Non-tradable inflation has      In local rates, buy 2-year breakevens: With breakevens at
remained pretty benign, posting 4.4%oya in October,                  2.8%, while short-term carry remains a drag, higher inflation
substantially below the 5.5% year peak in February. Overall,         expectations bode well, in our view.
we still see some upward pressures coming from the service
sector in the pipeline, as a payback from above-potential
                                                                      Chile macro forecasts
economic growth. We expect CPI to close the year at 2.5%
                                                                                                          2012        2013       2014
and we maintain a 3.2% Dec/Dec inflation forecast for 2013.
                                                                      Growth (%oya)                        5.4         4.5        4.5
                                                                      Inflation (%eop)                    2.5          3.2       3.0
BCCh should increasingly scrutinize trade balance
                                                                      USD/CLP (eop)                       480         490        520
deterioration if fiscal policy is left on auto-pilot. The current
                                                                      Current account (% GDP)             -3.8        -5.4       -4.0
account deficit (-2.7% of GDP in 2Q12) and the trade balance
                                                                      Primary fiscal balance (% GDP)      0.3         -0.4       -0.2
deterioration have attracted BCCh’s attention lately. We
                                                                      Public debt/GDP (%)                 11.3        11.2       11.0
understand that authorities are not concerned about the level of
                                                                      Ratings outlook: No change.
the effective trade surplus and current account deficit per se.
                                                                      Source: J.P. Morgan
Rather, they are preemptively eyeing the much wider structural

J.P. Morgan Securities LLC          Banco J.P. Morgan S.A.             Emerging Markets Research
Ben RamseyAC (1-212) 834-4308       Laura Karpuska (55-11) 3048-3322   Emerging Markets Outlook and Strategy for 2013
benjamin.h.ramsey@jpmorgan.com      laura.a.karpuska@jpmorgan.com      November 21, 2012
J.P. Morgan Securities LLC
Dennis Badlyans (1-212) 834-9150

                                                                       Pressure on underlying inflation should continue to be
Colombia                                 Baa3/BBB-/BBB-                minimal, as softer economic data and slowing credit growth
                                                                       has mitigated previous concerns over possibly overheating
Give peace a chance?                                                   household demand. Our forecast anticipates inflation closing
                                                                       2012 and 2013 at 2.9%, below the midpoint of the target
    Santos is betting on peace talks with the FARC                    range, in part as subpar growth provides some slack.
    Growth is running slightly below trend, while                     Nonetheless, BanRep is so far unmoved by the more
     inflation is controlled; BanRep on hold                           sluggish domestic activity prints of late, as they see the
                                                                       pillars of domestic demand remaining solid (terms of trade,
    External accounts to remain supportive of COP                     consumer confidence and still-strong labor markets). The
                                                                       board appears less concerned than before over the poor
Fundamentals and politics in 2013                                      global growth outlook, so long as terms of trade remain
Can peace prosper? While the first half of President Santos’s          supportive and financial markets send a buoyant signal for
2010-14 term was marked by economic reforms and a return to            confidence. All told, it appears BanRep will only be shaken
“investment grade” status, the second half—and perhaps his             off its current on-hold stance by a much sharper external
decision to seek reelection—may be defined by the outcome of           shock and/or signs of outright contraction in domestic activity.
peace talks with the FARC. Santos has been careful not to
                                                                       Strong terms of trade, some improvement in exports to
repeat the perceived mistakes of the failed peace initiative under
                                                                       unreliable neighboring markets (i.e., Venezuela) and
Pastrana, refusing to concede a cease fire or put the economic
                                                                       still-robust FDI flows continue to support COP. Both the
model per se on the negotiating table. He has also made clear
                                                                       currency and local rates could also further benefit in 2013 from
that talks would not drag on indefinitely. As such, it should not
                                                                       Finance Minister Cardenas’s decision to reduce the income tax
be surprising if this episode ultimately breaks down. However,
                                                                       for foreign fixed income investors to 14% from 33%, as part of
for now there appears to be a good faith effort on both sides to
                                                                       a broader, supposedly revenue-neutral tax reform that intends to
reach a lasting resolution to Colombia’s decades-old conflict. In
                                                                       spur labor market formalization and make the tax code more
economic terms, there would be costs to reintegration, but hope
                                                                       progressive (approval is expected by December or January). In
for a possible peace dividend. In our view, part of that dividend
                                                                       this context, BanRep should continue to guard against excessive
was already realized in the form of improved security
                                                                       COP strength via daily interventions (modestly higher in recent
conditions under the Uribe administration, which allowed for
                                                                       months), complemented by ad hoc government purchases.
higher levels of investment and commerce, as well as the opening
                                                                       Indeed, the authorities may feel more comfortable increasing
up of Colombia’s oil sector. While it may be on the optimistic
                                                                       intervention now that they have finally made use of their
side, Finance Minister Cardenas has estimated that full
                                                                       new so-called “monetary TES” as a sterilization tool.
achievement of peace could add 1-2%-pts to annual GDP growth.

2012 activity indicators are neither robust nor showing
                                                                       Market strategy
signs of outright weakness. We see modest downside risk                In external debt, we are marketweight.
to our 4.3% full-year 2012 growth call, but growth should
remain solid into 2013, when we see 4.5%, a touch below                In FX, we hold neutral USD/COP exposure.
potential that we think is closer to 5%. Payback from strong
construction and a downshift in both industry and commerce             In local rates, position for a flatter curve: Rates should stay
explains our call for 3Q growth to decelerate to 2.8%q/q (saar)        near current levels. The passage of the tax bill is supportive of
from 6.7% in 2Q. While manufacturing remains sluggish,                 longer tenors; reducing the tax rate on foreign investors to 14%
underlying conditions remain firm for domestic demand:                 should attract flows into the long end as early as January.
labor markets and credit have cooled but remain solid; terms
of trade remain supportive of national income; and the                 Colombia macro forecasts
public sector investment, though uneven, should provide a                                                       2012    2013      2014
boost. Besides these drivers, oil production should regain             Growth (%oya)                             4.3     4.5      5.0
traction in 2013 and reduce the drag from net exports.                 Inflation (%eop)                          2.9     3.0      3.0
                                                                       USD/COP (eop)                            1,800   1,775    1,825
Inflation is not an issue and BanRep should stay on hold.              Current account (% GDP)                   -2.9    -3.0     -3.2
Headline inflation has settled near the 3% midpoint of the             Primary fiscal balance (% GDP)             1.5     1.0     1.5
target range, down from 3.7% in December 2011. The lack                Public debt/GDP (%)                      35.00   35.00    35.00
of pass-through from higher international commodity prices             Ratings outlook: Expected S&P upgrade.
over the summer has muted volatility from fresh food prices.           Source: J.P. Morgan

J.P. Morgan Securities LLC                                         Emerging Markets Research
Franco UccelliAC (305) 579-9415                                    Emerging Markets Outlook and Strategy for 2013
franco.a.uccelli@jpmorgan.com                                      November 21, 2012

Costa Rica
                                                                   year, the outcome for the first 10 months of the year
                                            Baa3/BB/BB+            suggests that there may be scope for outperformance.
Fiscal underperformance to continue                                High fiscal deficit boosts public debt burden. Total public
                                                                   debt surged 15.9% (US$2.85 billion) to US$20.70 billion in
    General elections are around the corner                       August from US$17.85 billion in December. The increase
    Growth momentum is strong                                     was driven by an 18.0%ytd (US$2.45 billion) spike in
                                                                   domestic debt, which currently accounts for 78% of the total,
    Public debt burden is on the rise                             and a 9.3% (US$395 million) expansion in external debt.
                                                                   Total public debt grew 14.6% (US$2.28 billion) to
Fundamentals and politics in 2013                                  US$17.85 billion in 2011 from US$15.58 billion in 2010. As
New electoral cycle is about to start. Given her relatively        a percentage of GDP, total public debt climbed to 44.2% in
low approval ratings and tense relations with the opposition,      2011 from 43.4% in 2010. We forecast the stock of public
President Laura Chinchilla will likely achieve only limited        debt to swell 18.1%y/y to US$21.09 billion in 2012 and by a
progress implementing her reform (particularly fiscal)             further 8.6% to US$22.91 billion in 2013, boosting the
agenda. With presidential and legislative elections scheduled      public debt-to-GDP ratio to 47.7% and 47.3%, respectively.
for February 2014, the level of political noise is bound to
increase next year.                                                External deficits to widen. The trade deficit expanded 5.9% to
                                                                   US$4.42 billion (10.0% of projected GDP) in January-
Growth to moderate but stay healthy. The monthly index             September from US$4.17 billion (10.3% of GDP) a year earlier,
of economic activity (IMAE) expanded 3.4%oya in September,         underpinned by a 10.4%oya surge to US$8.61 billion in exports
down from 5.0% a year earlier and 3.7% in August, taking           and an 8.8% increase to US$13.03 billion in imports. The trade
the 12-month trailing rate of expansion to 5.8%, slightly lower    shortfall grew 41.0% to US$5.81 billion (14.4% of GDP) in
than 5.9% in August. Showing strong positive momentum,             2011 from US$4.12 billion (11.5% of GDP) in 2010, the result
real GDP expanded 5.5%oya in 1H12, higher than 3.5% in             of a 10.2% increase to US$10.41 billion in exports and a 19.5%
1H11 and 5.2% in 2H11. Encouraged by better-than-expected          rise to US$16.22 billion in imports. We expect the trade deficit
results, the central bank recently raised its real GDP growth      to widen 14.5%y/y to US$6.65 billion (15.0% of GDP) in 2012
forecasts to 4.8% in 2012, a level that some locals still view     and by a further 6.7% to US$7.1 billion (14.6% of GDP) in
as conservative, and 4.2% in 2013 from 3.8% and 3.5%,              2013, leading the current account deficit to inch up to US$2.29
respectively. Real GDP grew 4.2%y/y in 2011, compared              billion (5.2% of GDP) this year and US$3.3 billion (6.8% of
with the 4.7% expansion in 2010; the central bank estimates        GDP) next year from US$2.19 billion (5.4% of GDP) in 2011.
the country’s growth potential at 4.4%.
                                                                   Market strategy
Inflation not a factor any more. A 0.5%m/m rise in the
                                                                   No allocation: Costa Rica has underperformed the CACI
October CPI, compared with a 0.2% climb a year earlier, led
                                                                   regional index in 2012, constrained by its failure to implement
annual inflation to inch up to 4.7% from 4.5% in September.
                                                                   fiscal reform that would lower the elevated deficit. Given low
Last year’s 4.7% annual reading was lower than 2010’s
                                                                   hope that reform will be passed and that a material fiscal
5.8% print and in line with the official 5% (+/-1%) target.
                                                                   consolidation will materialize during President Chinchilla’s
Our current forecast calls for inflation to increase slightly to
                                                                   last full year in office, and with bonds currently yielding less
4.9% in 2012, meeting the 5% (+/-1%) official target for the
                                                                   than 4%, we believe their upside is limited.
year, before declining to 4.2% in 2013.

In the absence of reform, fiscal deficit to remain high.           Costa Rica macro forecasts
Despite a 10.0%oya surge in tax revenues in January-                                                   2012         2013    2014
October, a 9.5% expansion in total expenditures caused the         Growth (%oya)                        4.8         4.2      4.4
central government deficit to widen 7.0% to CRC796 billion         Inflation (%eop)                     4.8          4.5     4.5
(US$1.59 billion), equivalent to 3.5% of projected GDP,            USD/CRC (eop)                       505          515     520
from CRC744 billion (US$1.43 billion), equivalent to 3.6%          Current account (% GDP)             -5.2         -6.8    -5.5
of GDP, a year earlier. While the latest official forecast calls   Headline fiscal balance (% GDP)     -5.8         -6.8    -5.5
for the central government deficit to widen to 4.7% of GDP         Public debt/GDP (%)                 47.7         47.3    46.5
in 2012 and to stay around that level in 2013 from 4.1% last       Ratings outlook: No change.
                                                                   Source: J.P. Morgan

J.P. Morgan Securities LLC                                            Emerging Markets Research
Franco UccelliAC (305) 579-9415                                       Emerging Markets Outlook and Strategy for 2013
franco.a.uccelli@jpmorgan.com                                         November 21, 2012

Dominican Republic
                                                                      Public debt burden on the rise. The non-financial public
                                                       B1/B+/B        sector (NFPS) debt rose 12.7% (US$2.1 billion) to US$18.7
                                                                      billion in September from US$16.6 billion in December.
Fixing the fiscal remains a tall order                                NFPS debt grew 12.0% (US$1.8 billion) to US$16.6 billion
                                                                      in 2011 from US$14.8 billion in 2010. NFPS debt inched up
    Growth to outperform regional averages
                                                                      to 32.2% of projected 2012 GDP in September from 29.8%
    High fiscal deficit to aggravate debt burden                     of 2011 GDP in December. We forecast the stock of NFPS
                                                                      debt to surge 15.1%y/y to US$19.1 billion in 2012 and by a
    Remittances to recover, tourism to strengthen                    further 7.3% to US$20.5 billion in 2013, boosting the NFPS
Fundamentals and politics in 2013                                     debt-to-GDP ratio to 32.9% and 34.1%, respectively.

New president, same old challenges. Danilo Medina of the              Remittances to recover slightly. Remittances fell 4.0% to
ruling PLD was sworn in as president on August 16 to serve            US$2.25 billion in January-September from US$2.34 billion
a four-year term. His administration’s key near-term policy           a year earlier, as growth of 3.6% in 1Q12 did not compensate
challenges will be to restore fiscal order and fix a deficient        declines in both 2Q12 (-4.9%oya) and 3Q12 (-10.0%).
electricity sector, itself a significant fiscal drag. The next        Remittances surged 6.7%y/y to US$3.2 billion (5.8% of
general elections are scheduled for 2016.                             GDP) in 2011. While the central bank expects remittances to
                                                                      finish this year close to their 2011 levels, the tally for the
Despite moderation, growth outperformance set to                      first nine months suggests that the official forecast may be a
continue. Real GDP grew 3.9%oya in January-September,                 tad optimistic. We forecast remittances to recover somewhat
slightly lower than 4.2% a year earlier. Real GDP rose                in 2013, rising to around US$3.4 billion, the level originally
4.5%y/y in 2011, higher than the average for Latin America,           projected for 2012.
yet lower than 7.8% in 2010. Based on recent trends, the
central bank expects real GDP to expand 4.0%y/y in 2012,              Tourist arrivals to extend ascent. Foreign tourist arrivals
underpinned by continued strength in the mining and                   rose 7.3%oya to 3.05 million in January-September from 2.84
services sectors. The latest IMF forecast calls for the               million a year earlier, building on the favorable
Dominican economy to expand an average of 4.9% per year               performance posted in full-2011, when they rose 5.2%y/y to
between 2013 and 2017, higher than the 3.7% regional                  more than 3.70 million. As global flows strengthen, we expect
average for all of Latin America and the Caribbean.                   arrivals to grow 6%y/y to 3.93 million this year and by an
                                                                      additional 5% to 4.12 million in 2013.
Price pressures to remain subdued. Monthly CPI climbed
0.2% in October, compared to virtually no change a year earlier,      Market strategy
lifting annual inflation to 2.8% from 2.6% in September, yet still
lower than the 5.5% (+/-1%) official inflation target for full-year   In external debt, we are marketweight: Despite the
2012. We forecast headline inflation to close 2012 at 4.0%, down      Dominican Republic’s well documented fiscal deterioration and
from 7.8% in 2011, before inching up to 4.5% in 2013. Last            lingering electricity sector challenges, its bonds have
January, the Central Bank formally implemented an inflation-          outperformed the broad EM market in 2012. While the
targeting scheme; the target for next year stands at 5.0% (+/-1%).    government’s efforts to adopt corrective measures are
                                                                      commendable, we believe implementation risk is quite high.
Despite reform, fiscal deficit to stay high. The latest
government estimate puts the consolidated public sector
deficit for 2012 at DOP187 billion (US$4.7 billion, or                Dominican Republic macro forecasts
8.2% of projected GDP), more than twice last year’s                                                       2012         2013   2014
DOP82 billion (US$2.1 billion, or 3.9% of GDP) level. We
                                                                      Growth (%oya)                        4.0         3.0    5.0
expect the implementation of a tax reform and the
                                                                      Inflation (%eop)                     4.0          5.0    4.5
rationalization of expenditures to narrow the deficit to a            USD/DOP (eop)                       39.7         41.3   43.0
still sizable 5.6% of projected GDP in 2013. The Medina               Current account (% GDP)             -7.6         -7.0   -4.0
administration has indicated that the recently approved               Headline fiscal balance (% GDP)     -8.2         -5.6   -3.5
fiscal reform is not only necessary to lower the elevated             Public debt/GDP (%)                 43.7         44.5   42.5
deficit, but also to pave the way for a new IMF agreement,            Ratings outlook: No change.
which should be finalized in early 2013.                              Source: J.P. Morgan

J.P. Morgan Securities LLC                                            Emerging Markets Research
Ben RamseyAC (1-212) 834-4308                                         Emerging Markets Outlook and Strategy for 2013
benjamin.h.ramsey@jpmorgan.com                                        November 21, 2012

                                                                      financing constraints and perhaps renewed fears over
                                                    Caa1/B/B-         dollarization in the context of worst-case external scenarios—
                                                                      and accentuated by Correa’s combative relationship with local
Four more years, again                                                banks—will be a limitation on private investment. That said,
                                                                      public investment will remain strong so long as oil prices
    Correa is the strong favorite in February elections              remain high and Chinese bilateral lending ample.
    Dollarization commitment is strong, but large non-               The political commitment to dollarization seems strong but
     oil trade deficit points to external vulnerability               depends on oil-generated current account surpluses or
    International court cases are worth watching                     foreign lending. The reacceleration of growth since 2H10 has
                                                                      coincided with a return of the trade and current accounts to
Fundamentals and politics in 2013                                     deficits—notwithstanding modestly higher oil production and a
                                                                      return to historically positive terms of trade. Ecuador ran a
President Correa will stand for his second reelection under           US$0.2 billion current account deficit (0.4% of GDP) in 2011,
Ecuador's new constitution on February 17, 2013. Correa               and a US$1.6 billion gap (2.8%) in 2010. The current account
last won in April 2009 in the first round vote, after his initial     posted a US$0.4 billion surplus (0.6% of full-year GDP) in
election (under the old constitution) in 2006. His six-year           1H12 on higher oil prices, but the monthly trade balance sunk
domination of Ecuador’s political landscape represents a              into deficit in the May-August period. More revealing, the12-
historic break from the deadlocks and instability of the previous     month trailing non-oil trade deficit stood at a record US$9.2
decade. Following his first election, Correa managed to rewrite       billion as of September, growing from US$8.6 billion at end-
the old constitution and marginalize the traditional political        2011, and US$7.6 billion at end-2010. The magnitude of the
parties. The new constitution has tilted the balance of power         non-oil deficit suggests a structural shift, considering that
toward the executive, and while this has achieved stability, the      Ecuador ran an average 1.9% of GDP surplus in 2005-2009,
concern is that Ecuador has followed a familiar “illiberal”           before the Correa government began its aggressive fiscal push.
democratic model that has undermined checks and balances,
limited press freedom, and left institutions politicized. Public      Court cases will continue to make headlines. After a US
investment and popular social initiatives have helped keep a          district court overturned an injunction, and the US Supreme
floor under Correa’s approval ratings. Indeed, despite some           Court refused to hear the case, Ecuador is aggressively pursuing
erosion, no Ecuadorean president in recent memory has had             US$19 billion local judgment against Chevron for decades old
popularity this resilient so far into his mandate.                    environmental issues—a ruling the company calls fraudulent.
                                                                      Separately, Ecuador is seeking to annul a US$1.7 billion
Correa is the preemptive favorite barring a severe economic           ICSID arbitration ruling in favor of Oxy stemming from the
shock. Preliminary polls show him supported by 40-55% of              2007 takeover of the company’s operations. While resolution
intended voters. The most interesting opponents are banker            may drag on, the sums are large enough to eventually have a
Guillermo Lasso (9-18%) of the newly formed CREO party,               meaningful impact on government finances.
and left-wing environmentalist and former Correa ally Alberto
Acosta (2-7%). A familiar group of marginal contenders                Market strategy
include businessman Alvaro Noboa, former Quito mayor
Moncayo and Former Presidents Gutierrez and Bucaram. A                In external debt, we are marketweight: Ecuador may
second round would be required if Correa fails to attain at least     continue to flirt with re-establishing market access.
40% of the vote with a 10%-pt margin of victory.                      Nonetheless, we continue to believe yield levels likely
                                                                      demanded by the market (which has yet to forget the 2009
Public investment is driving growth. Ecuador printed one of           default) will not be politically palatable to Ecuador.
the region’s highest full-year growth rates in 2011, accelerating
to 8.0% in the recently revised series from 3.3% in 2010 and          Ecuador macro forecasts
1.0% in 2009, and the fastest pace since 2004 (8.2%). Growth                                              2012         2013    2014
in 1H12 slowed to 5.8%oya, with domestic demand cooling on            Growth (%oya)                        5.0         4.0     4.0
the margin, but remaining firm. On the supply side, growth was        Inflation (%eop)                     5.1          4.6    4.5
led by strong performance in construction, oil refining, and          Current account (% GDP)             -0.5         -1.5    -1.0
public utilities. For 2012, we revised up our forecast to 5% from     Primary fiscal balance (% GDP)      -1.5         -2.0    -1.5
4% alongside the 2Q GDP release and the introduction of the           Public debt/GDP (%)                 25.7         28.7    29.5
revised series. The resiliency of oil prices has so far limited any   Ratings outlook: No change.
downside risk linked to the government’s ability to maintain its
                                                                      Source: J.P. Morgan
aggressive public investment budget. Looking ahead, external

J.P. Morgan Securities LLC                                       Emerging Markets Research
Franco UccelliAC (305) 579-9415                                  Emerging Markets Outlook and Strategy for 2013
franco.a.uccelli@jpmorgan.com                                    November 21, 2012

El Salvador
                                                                 shortfall, significantly higher than the US$618 million (2.5%
                                             Ba3/BB-/BB          of GDP) originally envisaged. As part of the Fiscal
                                                                 Sustainability Accord signed with the opposition in October,
Low growth remains entrenched                                    the government made a commitment to reduce the deficit to
                                                                 2.7% of GDP in 2013.
    Electoral cycle draws near
    Fiscal accord to lower deficit                              Public debt burden to trend higher. The stock of total
                                                                 public debt grew 3.4% (US$439 million) to US$13.39
    Remittances on the upswing                                  billion in September from US$12.95 billion in December.
                                                                 Public debt climbed 10.0% (US$1.17 billion) to US$12.95
Fundamentals and politics in 2013                                billion in 2011 from US$11.78 billion in 2010. As a
                                                                 percentage of GDP, public debt rose to 56.2% last year from
New electoral cycle is about to commence. The victory of         55.0% in 2010, as growth in the debt stock exceeded growth
the right-wing opposition Arena in the March legislative and     in nominal GDP (+7.6%y/y). We expect the public debt-to-
municipal elections will likely exacerbate tensions with the     GDP ratio to rise to 57.2% (US$13.6 billion) in 2012 and to
executive during President Mauricio Funes’s final two years      58.0% (US$14.4 billion ) in 2013, as economic growth stays
in office. Moreover, with presidential elections scheduled for   relatively low and the fiscal deficit relatively high.
March 2014, the level of political noise is likely poised to
increase next year.                                              Remittances to continue to climb. Remittances increased
                                                                 5.5%oya to US$303 million in September, taking the tally
Growth to stay subdued. The monthly index of economic            for the first nine months of the year to US$2.89 billion, up
activity grew only 0.7%oya (sa) in August, significantly         6.9% from US$2.71 billion a year earlier. Remittances
lower than the 3.4% expansion it posted a year earlier. The      totaled US$3.65 billion in 2011, 6.3% higher than in 2010.
latest monthly print took the 12-month moving average to         After peaking at 18.7% of GDP in 2006, remittances
1.4%oya, down from 1.6% in July. After plunging 3.1%y/y          gradually declined to 15.8% of GDP last year. The
in 2009 amid the global recession, real GDP rebounded in         government expects remittances to increase 6.1%y/y to
2010, growing 1.4% before inching up 1.5% last year.             US$3.87 billion in 2012 and we expect them to grow by a
Although the government had initially projected growth of        further 7.0% to US$4.16 billion in 2013. Despite their
2.5% for this year, we believe increased global headwinds        healthy expansion in absolute terms, the contribution of
will likely limit the expansion to around 1.3% before it         remittances to GDP is likely to only inch up to 16.3% this
rebounds to 1.8% in 2013.                                        year and 16.7% in 2013.

Consumer price pressures to remain contained. A                  Market strategy
0.1%m/m rise in the October CPI, compared with a 0.1%
decline a year earlier, led annual inflation to increase to      In external debt, we are marketweight: El Salvador
0.9% from 0.8% in September. Bolstered by a modest               continues to struggle with low growth, a relatively high
recovery in domestic demand, the full-2011 reading (+5.1%)       fiscal deficit, and an expanding public debt burden. Against
was higher than 2010’s 2.1% print. Given recent trends and       this backdrop, and with early 2014 elections likely to
expected base effects during the latter part of the year, our    amplify negative political noise next year, we believe the
current forecast calls for headline inflation to moderate to     country’s bonds are unlikely to outperform in the near term
1.5% in 2012, roughly in line with the latest 1.4% official      and hence stay marketweight.
projection, before nearly doubling to 2.9% as economic
                                                                 El Salvador macro forecasts
activity picks up somewhat.
                                                                                                          2012    2013   2014
Fiscal deficit to trend lower. The deficit of the non-
                                                                 Growth (%oya)                            1.3     1.8    2.0
financial public sector (NFPS) shrank 24.9% to US$465
                                                                 Inflation (%eop)                          1.5     2.9    2.8
million (2.0% of projected GDP) in January-September from        Current account (% GDP)                  -6.0    -6.5   -5.5
US$620 million (2.7% of GDP) a year earlier. The NFPS            Headline fiscal balance (% GDP)          -3.8    -2.7   -2.5
deficit closed 2011 at 3.9% of GDP (US$907 million), lower       Public debt/GDP (%)                      57.2    58.0   57.5
than 4.3% (US$920 million) in 2010. For 2012, the                Ratings outlook: Possible Fitch downgrade.
government is forecasting a US$906 million (3.8% of GDP)         Source: J.P. Morgan

J.P. Morgan Securities LLC                                                Emerging Markets Research
Franco UccelliAC (305) 579-9415                                           Emerging Markets Outlook and Strategy for 2013
franco.a.uccelli@jpmorgan.com                                             November 21, 2012

                                                                          2011, leading the public debt-to-GDP ratio to moderate to
                                                Ba1/BB/BB+                24.2% last year from 24.6% the year before. We expect
                                                                          growth in the public debt stock (+10.5% to US$12.56 billion)
Smooth sailing                                                            to exceed nominal GDP growth (+7.8% to US$50.56 billion)
                                                                          in 2012, resulting in an increase in the public debt-to-GDP
    Growth and inflation poised to rebound
                                                                          ratio to 24.8%, where it is likely to stay in 2013.
    Fiscal consolidation set to continue
                                                                          Despite recent uptick, CAD still manageable. The trade
    Remittances to remain strong                                         deficit widened 8.4%oya to US$4.97 billion (9.8% of projected
                                                                          GDP) in January-September. The shortfall climbed 14.3%y/y
Fundamentals and politics in 2013                                         to US$6.15 billion (13.1% of GDP) in 2011. The widening of
Political challenges will persist. The government’s overall               last year’s trade deficit contributed to deterioration in the
stance is likely to remain pro-market, and we expect it to pursue         current account deficit, which rose to 3.1% of GDP from 1.5%
orthodox policies to safeguard macro stability. However, party            in 2010. We expect the trade deficit to grow 10.5%y/y to
politics and the threat of legislative paralysis may constrain            US$6.79 billion (13.4% of projected GDP) in 2012 and by a
the ability of President Otto Pérez Molina, of the right-wing             further 9.2% to US$7.42 billion (13.5% of projected GDP) in
Partido Patriota, to pursue his policy agenda and deliver                 2013, taking the CAD to 3.9% of GDP this year and 3.6% next.
significant improvemernts in security. Indeed, organized crime
and drug-trafficking will continue to upset the political scene.          Remittances continue to climb. Remittances grew only
                                                                          0.3%oya to US$366 million in September, its lowest level of
After moderating this year, growth is set to rebound next                 the year, taking the tally for the first nine months of the year
year. The monthly index of economic activity increased 4.2%oya            to US$3.59 billion, 8.8% higher than a year earlier. In 2011,
in August, up from 4.0% in July and 3.5% a year earlier, taking           remittances climbed 6.1%y/y to a record high of US$4.38
the 12-month moving average to 3.5%, down from 3.9% a year                billion. Despite their nominal growth, remittances as a
earlier. Real GDP expanded 3.0%oya in 1H12, down from                     percentage of GDP fell to 9.3% in 2011 from 10.0% in 2010
4.2% in 1H11. Real GDP rose 4.1%y/y in 2011, up from 2.9%                 and an all-time high of 12.1% in 2007. We forecast an
in 2010. We expect robust remittance and FDI inflows to                   8.3%y/y expansion to US$4.74 billion (9.4% of projected
underpin real GDP growth of 3.1%y/y in 2012, in line with                 GDP) in remittances for 2012 and a further 6.0% increase to
the latest official 2.9-3.3% projection, and 3.3% in 2013.                US$5.03 billion (9.2% of projected GDP) for 2013.

After moderating this year, inflation is set to rebound                   Market strategy
next year. The 0.03%m/m rise in the September CPI,
                                                                          In external debt, we are marketweight: In early June,
compared with a 0.04% decline a year earlier, caused annual
                                                                          Guatemala placed its first benchmark bond in history. Given
inflation to increase to 3.4% from 3.3% in September. Our
                                                                          the government’s stated preference to rely more heavily on
current forecast calls for inflation to moderate to 4.3% in
                                                                          external markets for financing purposes and the August 2013
2012 (official target: 3.5-5.5%) before climbing to 5.3% in
                                                                          maturity of a Guatemalan global bond, it is likely to issue a
2013 (official target: 3.0-5.0%) from 6.2% in 2011.
                                                                          second benchmark bond next year. With most of the upside
Fiscal deficit on its way down. The fiscal deficit narrowed to            on the first bond already realized, we would wait for the
US$503 million (1.0% of projected GDP) in January-September               second to make our next move.
from US$699 million (1.5% of GDP) a year earlier. In 2011, the
fiscal deficit contracted 3.3% to US$1.32 billion (2.8% of GDP)
from US$1.37 billion (3.3% of GDP) in 2010. Bolstered by a                Guatemala macro forecasts
tax reform approved earlier this year, the fiscal deficit is officially
                                                                                                              2012         2013    2014
projected to decline to 2.4% in 2012 and to 2.2% in 2013.
                                                                          Growth (%oya)                        3.1         3.3      3.3
Public debt burden little changed. Total public debt rose                 Inflation (%eop)                     4.3          5.3     4.5
7.2% (US$813 million) to US$12.18 billion in September                    USD/GTQ (eop)                        7.9          8.0     8.1
                                                                          Current account (% GDP)             -3.9         -3.6    -3.6
from US$11.36 billion in December. Public debt grew
                                                                          Headline fiscal balance (% GDP)     -2.4         -2.2    -1.9
12.1% (US$1.22 billion) to US$11.36 billion in 2011 from                  Public debt/GDP (%)                 24.8         24.8    24.6
US$10.14 billion in 2010. Growth in the stock of public debt
                                                                          Ratings outlook: No change.
was slightly lower than growth in nominal GDP (+13.7%) in
                                                                          Source: J.P. Morgan

J.P. Morgan Securities LLC                                           Emerging Markets Research
Franco UccelliAC (305) 579-9415                                      Emerging Markets Outlook and Strategy for 2013
franco.a.uccelli@jpmorgan.com                                        November 21, 2012

                                                                     shortfall targeted for the period. The official forecast calls for
                                                     B3/B-/B-        the deficit to decline to 3.8% of projected GDP in FY2012/13.
Muted growth prospects                                               Public debt burden to decline slightly. The stock of total
                                                                     public debt inched up 1.4%ytd (US$257 million) to US$19.1
    Price pressures set to moderate                                 billion in July. Public debt climbed 6.3%y/y to US$18.8 billion
    Fiscal deficit to narrow, but stay high                         in 2011 from US$17.7 billion in 2010. As a percentage of
                                                                     GDP, public debt declined to 130.5% in 2011 from 134.1%
    After big plunge, NIR to recover slightly                       in 2010. We expect public debt to grow 4.6%y/y to US$19.7
                                                                     billion, equivalent to 129.1% of GDP in 2012, and to
                                                                     decrease slightly to around 128% of GDP in 2013.
Fundamentals and politics in 2013
New IMF agreement will impose constraints. The PNP                   Remittances to consolidate small gains. Remittances shrank
government of Portia Simpson Miller that took office in              2.6%oya to US$170 million in August, posting their second
January 2012 enjoys a parliamentary majority and has a               consecutive decline and taking the tally for January-August
strong mandate. Although economic policy is likely to remain         to US$1.37 billion, up 2.5% from US$1.33 billion a year
market-friendly, austerity measures under a new IMF accord           earlier. Remittances totaled US$2.03 billion (14.0% of GDP)
to be finalized in 2013 will afford the government little            in 2011, up 6.2% from US$1.91 billion (14.4% of GDP) in
scope for fiscal stimulus. Elections are not due until 2016.         2010 and their highest annual tally since 2008. Our current
                                                                     forecast calls for remittances to increase 3% to US$2.09
Growth to stay anemic. According to Bank of Jamaica (BOJ)            billion (13.7% of projected GDP) in 2012 and by a further
estimates, real GDP shrank between 0.0-1.0%oya in 3Q12               4% to US$2.17 billion (13.7% of projected GDP) in 2013.
following a 0.1% contraction in 1H12. The BOJ forecasts
real GDP to decrease between 0.0-2.0%oya in 4Q12, driven             Plunge in NIR to be reversed. Net international reserves
by elevated international uncertainty, weak domestic demand,         (NIR) plunged 9.9%m/m (US$125 million) to US$1.13 billion
a tight fiscal stance, and the adverse effects of Hurricane Sandy.   in October, taking the cumulative decline for the first 10 months
While the mid-point of the third and fourth quarter projections      of the year to 42.4%. October’s contraction was underpinned
puts real GDP growth for full-2012 at -0.4%y/y, the BOJ sees         by a 6.0%m/m decrease to US$1.99 billion in foreign assets
the economy contracting anywhere between 0.1% and 0.8%               (primarily currency and deposits) held by the BOJ. Based on
this year. Beyond 2012, the IMF expects the Jamaican economy         recent trends, we expect reserves to drop 49.1%y/y to US$1
to expand an annual average of 1.2% over the next five years,        billion (6.6% of projected GDP) this year and to rebound
considerably lower than the IMF’s projected 3.7% annual              10% to US$1.08 billion (6.8% of projected GDP) in 2013.
average for Latin America and the Caribbean as a whole.
                                                                     Market strategy
Inflation to trend downward. Monthly CPI surged 1.9% in              In external debt, we are marketweight: Growth, which
September, compared to a 0.7% climb a year earlier, leading          has been virtually non-existent for several years, continues
annual inflation to increase to 6.7%, from 5.4% in August. The       to disappoint and hinder Jamaica’s ability to materially
BOJ expects inflation to expand from 7.3% in FY2011/12               improve its weak fiscal standing and lower its hefty debt
(April-March) to 7.5-9.5% in FY2012/13, before moderating            burden. Other than a surprisingly benign IMF program, we
to 6-8% in FY2013/14. Accordingly and based on recent trends,        fail to identify a supportive near-term catalyst.
we expect annual inflation to close 2012 at around 8%, higher
than the 6.0% recorded in 2011, yet below the 11.5% average
                                                                      Jamaica macro forecasts
for the past 10 years, and to further decline to 7% in 2013.
                                                                                                          2012        2013      2014
Fiscal performance likely to improve. The fiscal deficit              Growth (%oya)                       -0.4         1.0       1.2
came in at US$341 million (2.2% of projected GDP) in                  Inflation (%eop)                      8.0         7.0      6.0
April-September, the first half of FY2012/13, lower than the          USD/JMD (eop)                        91.8        97.0    101.8
US$477 million (3.2% of GDP) posted a year earlier and the            Current account (% GDP)             -11.7       -11.1    -10.0
US$396 million (2.5% of projected GDP) shortfall budgeted             Headline fiscal balance (% GDP)      -5.0        -4.8     -5.0
for the period. The fiscal deficit printed at 6.2% of GDP             Public debt/GDP (%)                 129.1       128.0    127.0
(US$929 million) in FY2011/12, matching the result for                Ratings outlook: No change.
FY2010/11, yet underperforming the 5.9% of GDP revised                Source: J.P. Morgan

Banco J.P. Morgan S.A., Institución de Banca Múltiple,                 Emerging Markets Research
J.P. Morgan Grupo Financiero                                           Emerging Markets Outlook and Strategy for 2013
Gabriel LozanoAC (52-55) 5540-9558   Iker Cabiedes (52-55) 5540-9339   November 21, 2012
gabriel.lozano@jpmorgan.com          iker.x.cabiedes@jpmorgan.com

                                                                       loopholes and simplify collection in payroll and income tax
                                               Baa1/BBB/BBB            schemes. We are penciling in that an increase in the VAT in
                                                                       food and medicines from 0% to 10% would increase tax
A brave new year                                                       collection by 1.6% of GDP, which could have a one-off
                                                                       effect on consumer prices of around 100bp in 2014. The
    We expect the economy to expand 3.6% in 2013
                                                                       other important fiscal challenge will be to reduce states’
    However, downside growth risks from the US fiscal                 dependence on federal participations by enforcing local
     cliff remain                                                      governments to collect taxes. On the energy front, it is not
                                                                       clear yet if the reform will be focused on further increasing
    Reforms are expected to continue next year, as the                private participation in the crude oil industry, or if natural
     new government gains traction                                     gas and electricity will be favored instead. Even though the
                                                                       road for reforms is likely to be bumpy, we believe both bills
                                                                       will go through Congress. We should also keep in mind that
Fundamentals and politics in 2013
                                                                       a broader proposal to allow for further private sector
Domestic demand should offset moderation in external                   participation in key sectors such as transportation and
demand. The Mexican economy expanded solidly during                    telecommunications cannot be discarded.
most of 2012, supported by broad-based growth in services
and industrial activities. While the external sector has been          Banxico to hold rates but keep a hawkish bias. While we
the main engine of economic growth on the back of a                    expect monetary policy to remain on hold in 2013, the
vigorous manufacturing boom, consumer credit, employment               sustained economic expansion combined with potential
and investment continue to show positive rates of expansion.           second-round effects (i.e. stemming from higher public-price
Such conditions have supported Mexico’s resilience to the              adjustments) could push the central bank to hike its policy
moderation in the US, despite their important economic and             rate sooner rather than later.
financial ties. Looking towards 2013, several risks are
                                                                       Overall, we remain reasonably optimistic. Next year
starting to take shape, particularly challenges affecting the
                                                                       should confirm that the external sector is witnessing a
global economy and the prospects for structural reforms in
                                                                       structural change driven by further investment in
Mexico. First, the uncertainty behind the US fiscal cliff
                                                                       manufacturing. In addition, sound fundamentals,
could dent consumption and investment confidence
                                                                       healthy growth and the prospects for reforms, should
worldwide, which would impact the Mexican economy in
                                                                       favor a stronger peso, potentially reaching 12.00 by
spite of its recent over-performance. Hence, while we are
                                                                       year-end in our view.
maintaining our 3.6% annual growth forecast for next year,
we acknowledge that risks remain to the downside.                      Market strategy
It is time for reforms. Indeed, the second challenge facing            In external debt, we are marketweight.
Mexico stems from the potential scope for reforms. As was
the case recently with the approval of labor reform, we                In FX, we moved to neutral MXN: The peso failed to
anticipate domestic politics to take the center stage in 2013          outperform its coincidental risky assets amid positioning
as the incoming administration looks set to push further on            overhang despite strong growth figures.
structural reforms. In this context, we believe the recent
approval of labor reform, proposed by President Calderón               In local rates, we hold an underweight position: It seems
under the new fast-track status, reflects the political                the richest bond market in Latin America.
willingness amongst law-makers. Such collaboration                     Mexico macro forecasts
suggests the PRI can count on the opposition (mainly the
                                                                                                                    2012   2013   2014
PAN) to support Peña Nieto’s plans to open the energy sector
and simplify the tax code, particularly as both reforms are            Growth (%oya)                                3.9    3.6    3.6
not likely to differ much from what the outgoing administration        Inflation (%eop)                              4.2    3.6   3.4
                                                                       USD/MXN (eop)                                12.5   12.0   11.8
proposed. Hence, the prospects of such reforms remain                  Current account (% GDP)                      -0.4   -0.7   -1.0
better positioned than they have looked for years.                     Primary fiscal balance (% GDP)               -0.2   -0.2   -0.2
                                                                       Public debt/GDP (%)                          32.8   32.4   32.4
Tackling fiscal and energy reforms. The fiscal reform will
                                                                       Ratings outlook: Possible positive review.
aim to increase tax revenues by raising the value added tax
                                                                       Source: J.P. Morgan
(possibly by including food and medicine), and close

J.P. Morgan Securities LLC                                        Emerging Markets Research
Franco UccelliAC (305) 579-9415                                   Emerging Markets Outlook and Strategy for 2013
franco.a.uccelli@jpmorgan.com                                     November 21, 2012

                                                                  Tourism receipts to consolidate gains. Bolstered by a
                                         Baa2/BBB/BBB             6.8%oya increase in tourist arrivals to 1.2 million, tourism
                                                                  revenues surged 19.2% to US$1.3 billion in January-July, up
Great story, low value                                            from US$1.1 billion a year earlier. Tourist arrivals surged
                                                                  15.2%y/y to 1.94 million in 2011, boosting tourism revenues
    Growth to exceed potential
                                                                  14.9% to US$1.93 billion (6.3% of GDP), up from US$1.68
    Canal and tourism revenues on the rise                       billion (6.3% of GDP). Our current forecast calls for the
                                                                  number of visitors to increase around 6%y/y per annum,
    FDI inflows to strengthen further                            taking tourism earnings to US$2.3 billion (6.4% of GDP) in
                                                                  2012 and US$2.5 billion (6.1% of GDP) in 2013.
Fundamentals and politics in 2013
                                                                  CAD downward trend to be extended. The current account
Despite noise, politics will stay fairly supportive. Recent       deficit narrowed 48.6% to US$1.11 billion (3.2% of projected
widespread demonstrations and corruption scandals have            GDP) in 1H12 from US$2.16 billion (7.1% of GDP) in 1H11.
undermined the image of President Ricardo Martinelli.             The CAD widened 35.4% to US$3.87 billion (12.6% of GDP)
However, given his strong position in congress, we believe        in 2011 from US$2.86 billion (10.8% of GDP) in 2010.
governability is likely to remain safe until the next elections   While our current forecast calls for the CAD to expand 8.8%
in May 2014. With the polls drawing near, political noise is      to US$4.21 billion (12.0% of GDP) in 2012 and to remain at
set to pick up in the second half of 2013.                        that level in 2013, we recognize there is scope for
                                                                  outperformance given the favorable results for 1H12.
Robust growth to remain the norm. Growth in the
monthly index of economic activity (IMAE) came in at              FDI to strengthen considerably. Foreign direct investment
9.3%oya in August, higher than the 8.5% expansion it              totaled US$1.421 billion (4.1% of projected GDP) in 1H12,
posted a year earlier, taking average cumulative growth for       up 0.3% from US$1.416 billion (4.6% of GDP) in 1H11.
the first eight months of the year to 9.4%oya, up from 8.2%       FDI amounted to US$2.79 billion (9.1% of GDP) in 2011,
a year earlier. Real GDP surged 10.6%oya in 1H12, slightly        up 18.7% from US$2.35 million (8.8% of GDP) in 2010 and
lower than the 10.8% expansion it posted in full-2011, when       its highest level since 2006. FDI inflows financed 72% of
it grew at the fastest pace in Latin America. Our current         the CAD last year, lower than the 82% coverage ratio posted
forecast calls for real GDP to expand 10.0% in 2012 and to        the year before. The IMF expects FDI inflows to increase
moderate to a still strong 7.3% in 2013, bolstered by the         12.1%y/y to US$3.13 billion (8.8% of GDP) in 2012,
ongoing expansion of the Canal and an ambitious public            equivalent to 74% of the projected CAD, and by an
spending program. Growth potential is estimated at 6%.            additional 10.7% to US$3.46 billion (8.4% of GDP) in 2013.

Moderation in inflation well underway. Monthly CPI rose           Market strategy
0.1% in October, down from 0.2% a year earlier, leading annual
inflation to decline to 5.3% from 5.4% in September. Based        In external debt, we are marketweight: Panamanian bonds
on recent trends, we expect annual inflation to moderate to       have underperformed the broad EM market in 2012. While
5.3% in 2012 and 3.4% in 2013 from 6.3% last year.                Panama’s fundamental prospects remain quite bright, with
                                                                  its bonds trading tight to similarly-rated Brazil and Peru,
Rise in Canal revenues to continue. Despite a 3.2%oya             diversification aside, we think they offer limited value.
decline in cargo tonnage traveling through the Canal, toll
revenues rose 4.0% to US$1.07 billion in January-July from
US$1.03 billion a year earlier. Toll revenues totaled             Panama macro forecasts
US$1.78 billion in 2011, 17.9% higher than in 2010. A 15%                                             2012         2013    2014
hike in toll rates introduced in October should continue to       Growth (%oya)                       10.0         7.3     6.8
boost revenues going forward. Indeed, we estimate that after      Inflation (%eop)                      5.3          3.4     4.3
total Canal earnings surged 24% to US$2.30 billion (7.5% of       Current account (% GDP)             -11.8        -10.2   -10.0
GDP) in 2011, they will rise 7.5% to US$2.48 billion (8.1%        Headline fiscal balance (% GDP)      -2.6         -2.3    -2.0
of GDP) in 2012 and by a further 8.0% to US$2.67 billion          Public debt/GDP (%)                 40.9         40.3    39.5
(7.5% of GDP) in 2013.                                            Ratings outlook: No change.
                                                                  Source: J.P. Morgan

J.P. Morgan Securities LLC            Banco J.P. Morgan S.A.             Emerging Markets Research
Ben RamseyAC (1-212) 834-4308         Laura Karpuska (55-11) 3048-3322   Emerging Markets Outlook and Strategy for 2013
benjamin.h.ramsey@jpmorgan.com        laura.a.karpuska@jpmorgan.com      November 21, 2012

                                                                         private investment and macro stability more broadly—which
                                             Baa2/BBB/BBB                in turn helps explain the rebound in business confidence
                                                                         from the lows after Humala’s 2011 election.
GDP keeps churning out growth
                                                                         Peru has been tightening monetary policy amid strong
    Domestic demand, underpinned by improved
                                                                         domestic demand and above-target inflation, but the policy
     business and consumer sentiment, is rock solid                      rate has been, and should remain, unchanged. BCRP’s
    Mining tension remains an issue, but the FDI                        inaction on the policy rate has not reflected complacency; in fact,
     pipeline is steady                                                  the bank has tightened monetary conditions in 2012 via reserve
                                                                         requirements. October’s surprisingly benign inflation result—
    BCRP to remain on hold for the foreseeable future                   0.16%m/m deflation—takes some pressure off the authorities
                                                                         and tends to validate their patience with the policy rate, as
                                                                         inflation now looks back on track to drop within the 2%+/-100bp
Fundamentals and politics in 2013
                                                                         target range by year end. Last week, we revised our 2012
Peru is the growth outperformer in Latin America. GDP                    inflation forecast to 2.9% from 3.3% previously. For 2013, we
growth has averaged 6.3% in the first three quarters of the year,        still see 3%, but with risks skewed to the downside in the
with 3Q posting 6.5% pace. Activity reflects strong domestic             absence of new supply shocks. While we cannot rule out more
demand, as business confidence has increased despite the                 tweaking of the macroprudential framework, we remain of the
uncertainty around mega mining projects, and consumer                    view that BCRP will keep the policy rate on hold for the
confidence has also remained firm. Investment grew by nearly             foreseeable future. Despite strong domestic demand and
16% in 1H12, driven by both a recovery in private investment             headline CPI over the target, underlying inflation has been well
and growing momentum from public investment. Private                     behaved and the central bank’s main objective seems to be to
consumption grew at a 6.3% pace in 1H12, supported by real               maintain credibility in the context of ongoing strong intervention
wage growth and supportive credit conditions. On the supply              in the FX spot market to lean against PEN appreciation.
side, growth continues to be led by the construction sector
(16.2% growth in the first 3 quarters), backed up by the steady          Market strategy
performance of commerce (6.8% over the same period).
Manufacturing remains sluggish (1% oya in Jan-Sep), but                  In external debt, we are marketweight: Strong credit metrics
mining has bounced back (3.6% Jan-Sep, and 5%oya growth in               and growth dynamics should support upward ratings momentum
September) 4.8%, led by increased copper and zinc production             in 2013, but credit markets have already taken notice.
(attributed to the Antamina project) as well as increased
hydrocarbon output (especially natural gas, but lately oil). In all,     In FX, we hold neutral PEN: USD/PEN is less than 1%
the acceleration of growth in 3Q12 vis-à-vis 2Q leaves upside            from long-term trend appreciation. In our view, the BCRP
risk to our full-year 6.0% forecast. Looking ahead to 2013, we           may act to tame the sell-off if credit growth in foreign
see a trend-like 6.0% pace maintained, as domestic demand                currency shows a decline and the sol slips more than 2%
drivers seem firm but balanced by external uncertainties.                from trend appreciation.

Mining still in the spotlight and should continue testing                In rates, we favor the long end of the Soberano curve:
Humala. President Humala’s popularity remains resilient                  We see better carry opportunities, while we are not
compared to his predecessors: it has softened to around 40%,             expecting much in terms of a directional move in yields.
impacted not only by concern over mining conflicts, but also
security problems (sporadic violence from Shining Path,                  Peru macro forecasts
lately targeting Camisea gas infrastucture). Mining sector
                                                                                                                2012          2013   2014
tension remains an issue to watch, especially as the Conga
                                                                         Growth (%oya)                           6.0           6.0   6.5
mega-project seems delayed indefinitely. But so long as
                                                                         Inflation (%eop)                       2.9           3.0    3.0
protests are contained to one or two projects, the overall
                                                                         USD/PEN (eop)                          2.57          2.55   2.62
pipeline of new mining investment remains sufficiently large             Current account (% GDP)                -2.8          -3.5   -3.7
to keep FDI and expansion in the sector on an upward                     Headline fiscal balance (% GDP)         2.3          2.2    2.1
trajectory, in our view. Overall, we think Humala and his                Public debt/GDP (%)                     6.1           4.5   5.3
cabinet have emerged from the 2012 incidents having                      Ratings outlook: Expected upgrades from Moody’s and S&P.
reinforced their once questioned credentials for supporting              Source: J.P. Morgan

J.P. Morgan Securities LLC                                         Emerging Markets Research
Franco UccelliAC (305) 579-9415                                    Emerging Markets Outlook and Strategy for 2013
franco.a.uccelli@jpmorgan.com                                      November 21, 2012

                                                                   Fiscal deficits will stay relatively low. The consolidated
                                         Baa3/BBB-/BB+             fiscal deficit widened to 2.8% of GDP (US$1.3 billion) in
                                                                   the 12 months through September from 2.3% in August. The
Inflation saga to linger                                           deterioration was largely the result of higher fuel purchases
                                                                   by ANCAP, the state-owned oil company, and increased
    Growth slows to more sustainable levels
                                                                   government transfers. The fiscal shortfall narrowed to a 4-year
    Inflation to remain key policy challenge                      low of 0.9% of GDP in 2011, down from 1.1% of GDP in
                                                                   2010 and 1.7% in 2009. Prompted by higher-than-expected
    Fiscal pressures are well contained                           energy costs, the government recently raised its fiscal deficit
                                                                   forecast for 2012 to 1.7% of GDP from an earlier 1.0%
Fundamentals and politics in 2013                                  estimate, and for 2013 to 1.4% from 0.9% previously.

Political effectiveness may suffer ahead of elections.             External shortfalls will remain in check. The trade
While President Jose Mujica’s Frente Amplio (FA) is likely         deficit narrowed 6.6%oya in January-September,
to remain the dominant political force for the foreseeable         underpinned by a 12.0% surge in exports and a 7.3%
future, the coalition’s effectiveness may weaken as its            increase in imports. Exports totaled US$6.7 billion and
orthodox economic policies clash with more radical views           imports amounted to US$8.6 billion in January-September,
within the ruling center-left coalition ahead of the 2014          resulting in a trade deficit of US$1.9 billion, down from a
elections. That said, the FA’s proven legislative discipline       US$2.0 billion shortfall a year earlier. The trade deficit
should diminish the risk of a stalemate.                           widened 44.6%y/y to US$2.7 billion (5.9% of GDP) in
                                                                   2011, boosting the current account deficit to US$1.4 billion
Healthy, albeit lower, growth. The CERES leading activity          (3.1% of GDP) from US$863 million (2.2% of GDP) in
index increased 1.0%m/m in September, its strongest gain in        2010. Based on recent trends, we expect the trade deficit to
12 months, confirming that real GDP grew in 3Q12 and will          contract 4.6%y/y to US$2.6 billion (5.4% of projected
probably rise in 4Q12 after expanding 4.2%oya in 1Q12 and          GDP) in 2012 before inching up 3.2% to US$2.7 billion
3.8% in 2Q12. Real GDP grew 5.7% in full-year 2011, down           (5.3% of projected GDP) in 2013, contributing to a CAD
from 8.9% in 2010. Our latest forecast calls for real GDP to       of around US$1.5 billion (3.1% and 3.0% of projected
expand 3.5% this year, slightly lower than the government’s        GDP, respectively) in both years.
4.0% projection, and 4.0% next year.
                                                                   Market strategy
High inflation is here to stay. Consumer prices rose by a
higher-than-expected 1.2%m/m in October, leading annual            In external debt, we are marketweight: Despite consolidating
inflation to increase to 9.1%, its highest level since January     its IG status and broadening its investor base, Uruguay’s
2009, from 8.6% in September. The full year 2011 inflation         bonds have slightly underperformed the broad EM market so
of 8.6% was significantly higher than the 6.9% posted in 2010.     far this year. While we view the country as a solid credit
Our current forecast calls for inflation to decrease slightly to   story and a good candidate for further upgrades, its global
8.5% in 2012, considerably higher than the 4-6% official           bonds continue to trade tight to Brazil and look rich to us.
target range, before moderating to a still high 7.5% in 2013.

To hike, or not to hike, that is the question. Recognizing
that its policy options to curb elevated inflation are limited,
the government has ruled out further increases to the              Uruguay macro forecasts
reference rate (currently set at 9%) in the near term and has
                                                                                                            2012           2013   2014
indicated that it will favor instead “non-traditional” policy
                                                                   Growth (%oya)                             3.5           4.0    4.0
alternatives, such as negotiated price controls, the
                                                                   Inflation (%eop)                          8.5            7.5    6.5
postponement of public tariff increases, and the reduction of
                                                                   USD/UYU (eop)                            19.8           20.6   21.6
fuel prices. Questioning the likely effectiveness of the           Current account (% GDP)                  -3.1           -3.0   -2.5
government’s heterodox approach, the IMF has insisted that         Headline fiscal balance (% GDP)          -1.7           -1.4   -1.2
further tightening is preferable.                                  Public debt/GDP (%)                      57.3           56.3   55.0
                                                                   Ratings outlook: Possible Moody’s and Fitch upgrades.
                                                                   Source: J.P. Morgan

J.P. Morgan Securities LLC                                          Emerging Markets Research
Ben RamseyAC (1-212) 834-4308                                       Emerging Markets Outlook and Strategy for 2013
benjamin.h.ramsey@jpmorgan.com                                      November 21, 2012

                                                                    use. The budget does not contemplate parallel quasi-fiscal
                                                   B2/B+/B+         social and infrastructure spending via PDVSA, Fonden, or the
                                                                    Chinese funds, estimated at 12-14% of GDP in recent years.
One political cycle ends, another begins
                                                                    Strategic decisions on the economy remain paralyzed for
    Uncertainty over Chavez’s health could unleash a               now. Devaluation seems inevitable, especially after a sharp and
     new political cycle                                            sustained jump in the black market FX rate since August, and
                                                                    a slowdown in flows from the SITME parallel platform since
    Devaluation expected, deep structural change is not
                                                                    October. Lack of USD supply follows election-year fiscal and
    Double-digit yields compensate risks; stay overweight          monetary stimulus that has led to bloated levels of domestic
                                                                    currency liquidity (M2 has grown 60% in the last 12 months).
Fundamentals and politics in 2013                                   Meanwhile, the re-election of President Chavez has left a
                                                                    lingering sense of uncertainty and concern over the future
President Chavez won a decisive reelection in October, but          business climate. These USD demand drivers add to the overall
the political landscape remains unsettled. The formal               imbalances on the FX market. Are structural changes to the
political calendar remains beholden to gubernatorial elections      FX regime possible? It is highly unlikely that the government
in December and municipal elections in April. With the              would dismantle CADIVI or controls per se. As long as
presidential election decided, these undercards will determine      Finance Minister Giordani remains the dominant actor in the
how much political space the opposition has going forward,          economic cabinet, we do not see a return to a legally
and ultimately whether they will be perceived as a credible         sanctioned private FX market along the lines of the old
alternative to eventually govern the country. The most              “permuta” system. Thus, if SITME is scrapped, the
important gubernatorial race is in the Miranda state, where         government would probably replace it with something
defeated MUD alliance presidential candidate Henrique               similar: a platform based on bond trading that allows for the
Capriles is running for re-election. While Capriles lost in         setting of an implied FX rate higher than the official rate.
October on the national stage, he proved to be an energetic         The scope for structural change could depend on whether
and credible challenger who took on an uphill battle against        SITME or a similar system could be liberalized on the
an iconic president armed with an oil windfall. This time           margin so as not to rely so much on primary bond issuance.
around, Capriles is favored to defeat former Chavez Vice
President Elias Jaua. A win should leave Capriles well              On the oil sector, wait and see. PDVSA-led JV’s in the
positioned to maintain the leadership position of a unified         Orinoco heavy crude belt have been in a wait-and-see mode
opposition, a crucial development given Chavez’s health             pending political definition, and they may have to wait
remains the key unknown in Venezuelan politics. While               longer. Key among the lingering constraints to additional
plans for succession have started to become more defined,           investment is the overly punitive windfall tax. Meanwhile,
with Foreign Minister Maduro assuming the Vice Presidency,          2013 may finally deliver resolution to the pending mega-
it remains unclear whether the government would proceed             arbitration cases Exxon and Conoco have against Venezuela
with a new election in the event Chavez has to step down (as        at the ICSID, stemming from 2007 expropriations.
the current constitution mandates), or whether they will look
to change the constitution to ensure that Maduro assumes the        Market strategy
remainder of Chavez’s six-year term.
                                                                    In external debt, we are overweight: 2013 might turn out
The 2013 central government budget is based on what we              to be a surprisingly more important political year than 2012,
would view as typically unrealistic assumptions: 6% GDP             depending on how the succession issue plays out. Headline
growth, $55/bbl oil, 14-16% inflation, and an unchanged 4.3         risk warrants being nimble, but double-digit yields still
FX rate. J.P. Morgan expects growth to slow to 0% in 2013,          compensate investors.
accompanied by a devaluation to USD/VEF6.5, and inflation
                                                                     Venezuela macro forecasts
rising back above 30%, while Venezuelan oil is seen around
$100/bbl. The budget targets a 4.7% of GDP deficit, and                                                  2012        2013    2014
authorizes VEF116.7 billion of debt issuance (US$27 billion at       Growth (%oya)                        5.0        0.0     3.5
the 4.3 official FX rate, or 6.3% of the 2013 nominal GDP            Inflation (%eop)                    19.0        35.0    30.0
projected in the budget), which it says will continue to be aimed    USD/VEF (eop)                       4.30         6.5     8.0
mostly at the domestic market. As has been the case in the past      Current account (% GDP)              4.5         6.5     5.0
few years, the expected windfall from higher-than-budgeted oil       Primary fiscal balance (% GDP)      -4.5         1.5     0.0
prices, as well as the expected eventual devaluation, will be        Public debt/GDP (%)                 36.3        40.3    40.3
channeled to non-transparent funds to maximize discretionary         Ratings outlook: No change.
                                                                     Source: J.P. Morgan

JPMorgan Chase Bank N.A., London Branch   J.P. Morgan Securities plc        Emerging Markets Research
Anthony Wong (44-20) 7134-7549            Jonny Goulden (44-20) 7134-4470   Emerging Markets Outlook and Strategy for 2013
anthony.wong@jpmorgan.com                 jonathan.m.goulden@jpmorgan.com   November 21, 2012

EMEA EM Outlook for 2013
                                                                            accession with the removal of subsidies and higher customs
                                            Baa3/BBB-/BBB-                  taxes to non-EU partners (notably, Bosnia and Herzegovina
                                                                            and Serbia). The gross external debt ratio remains above
EU accession set for July 1                                                 100% of GDP.
    Croatia to accede to the EU on July 1, as scheduled
                                                                            We expect Croatia’s rating outlook to change to stable
    2013 growth recovery is likely to be muted                             from negative, while maintaining its investment grade
                                                                            status. Although the inauspicious domestic and external
    Government to continue on fiscal consolidation path                    growth environments are not supportive of an outright credit
                                                                            upgrade, the government has displayed a strong commitment
Fundamentals and politics in 2013                                           to fiscal consolidation which has led to the removal of the
                                                                            negative outlook by Fitch. We expect similar action by
EU accession is slated for July 1, 2013; we expect Croatia                  Moody’s and S&P in 2013—although we note that Moody’s
to join the EU as scheduled. The long-standing dispute                      is less positive on the outlook. This year, the government has
with Slovenia over Nova Ljubljanska Banka is close to being                 shown good progress with its reform agenda and has
resolved. Croatia is looking to reclaim EUR270 million of                   outperformed on the fiscal front (via better tax collections
former deposits held by savers from Croatia. It was reported                and restraint on expenditures). This year’s adjustment has
that financial experts from both Croatia and Slovenia have                  focused on better targeting of subsidies, restraints on
reached a compromise solution over the NLB dispute. The                     expenditures, and improved tax collection. Next year,
solution will be submitted to both governments. The NLB                     reforms in public sector wages (including additional public
dispute has held back Slovenia’s ratification of Croatia’s EU               sector job cuts) and further limitation on health expenditures
accession (slated for July 1, 2013) and Slovenia said last                  will help narrow the budget deficit further. The government
month that it will not ratify Croatia until after the dispute is            looks on track to meet its 2012 budget deficit target of 3.8%
resolved. Thus far, 19 out of 27 member states have                         of GDP. While implementation risks remain high and the
approved Croatia’s accession.                                               growth outlook remains weak, we expect the government to
                                                                            further reduce its deficit to around 3% in 2013.
The economy is currently in recession; recovery is likely
to be subdued in 2013. J.P. Morgan forecasts 2013 growth                    Market strategy
of just 0.5%y/y, a mild improvement from this year’s 1.5%
contraction. Economic activity data have disappointed                       In external debt, we are marketweight: The benefits of
throughout 2012 and are expected to remain weak for 1H13.                   EU accession in 2013 are already priced-in, in our view,
The continuation next year of the government’s fiscal                       with the economy in recession and an above-EM-average
consolidation program will likely subtract from GDP                         debt burden. With Croatia likely to remain investment
growth. At the same time, rising unemployment and still                     grade, we see few catalysts for underperformance and
depressed credit growth will constrain consumer spending—                   remain marketweight.
households remain highly indebted and will continue their
deleveraging next year. Nevertheless, we see a more resilient
recovery beginning in 2H13 on the back of increased private
investment flows following EU accession and gradual
improvement in the external environment.

External vulnerabilities remain high despite the                            Croatia macro forecasts
narrowing of the current account deficit. The current                                                                 2012           2013            2014
account improved in 2012 on the back of solid tourism
                                                                            Growth (%oya)                              -1.5           0.5            1.8
revenues. The services balance is likely to improve next year
                                                                            Inflation (%eop)                           5.5            3.0            2.9
as the government continues to focus on boosting tourism
                                                                            EUR/HRK (eop)                              7.5            7.5            7.6
with the reduction in tourism related taxes. However, the
                                                                            Current account (% GDP)                    -0.8           -1.3           -1.5
trade balance remains a problem—international
                                                                            Fiscal balance (% GDP)                     -3.8           -3.2           -3.0
competitiveness is hampered by substantial non-price
                                                                            Public debt/GDP (%)                        52.0           54.3           55.6
weaknesses, which have severely limited export growth
performance—in addition, some sectors (agriculture,                         Ratings outlook: Outlook changes to stable from negative, no change in ratings.
shipbuilding) may be negatively impacted as a result of EU                  Source: J.P. Morgan

JPMorgan Chase Bank N.A., London Branch   J.P. Morgan Securities plc          Emerging Markets Research
Nicolaie Alexandru (44-20) 7742-2466      George Christou (44-20) 7134-7548   Emerging Markets Outlook and Strategy for 2013
nicolaie.alexandru@jpmorgan.com           george.g.christou@jpmorgan.com      November 21, 2012

Czech Republic
                                                                              growth surpasses 2% (previously the government was
                                                      A1/AA-/A+               aiming a balanced budget in 2016). We think this decision is
                                                                              growth supportive after 2013, but some positive effects
Fiscal consolidation to continue, but less                                    could be seen next year together with market expectations
pronounced                                                                    for less fiscal tightening. We look for GDP to contract 1.1%
                                                                              in 2012 and to be flat in 2013.
    Ruling coalition to remain fragile, but likely to
     survive until next elections in 2014                                     We expect disinflation to continue in 2013 despite the
    Fiscal tightening to hurt growth in 1H13, but a                          possible VAT hike and given the slack in demand. The
     recovery is likely afterwards                                            VAT hike could add a maximum of 0.8%-pt to headline CPI,
                                                                              but an impact of just 0.5-0.7%-pt is more likely. Inflation
    Disinflation is expected to continue in 2013                             should fall below 2.5%oya at the end of 2013 from about 3%
                                                                              in 2012. At the same time, core inflation (ex-regulated, fuel
                                                                              and food prices) will probably increase mildly above 0%
Fundamentals and politics in 2013                                             from the negative zone. The economic environment supports
Prime Minister Necas was reelected president of ODS at                        loose monetary conditions, but with interest rates at 0.05%
the early November party congress and also survived a                         the bank’s main tool will probably be FX intervention; we
seventh no-confidence vote. Necas leads a coalition                           expect it in 1H13. Buying large amounts of EUR makes little
composed of ODS, TOP09 and Lidem and survived with the                        sense for the CNB so it might actually act to limit CZK
minimum required support (101 votes out of 200), even                         strengthening next year. We expect the current account
though his coalition government has 100 seats in parliament.                  deficit to narrow to almost 0% of GDP next year so this
Coalition support in parliament will remain fragile next year                 should represent a strong reason for CZK appreciation.
and a government collapse cannot be ruled out. According to
opinion polls, in the case of early elections the socialists                  Market strategy
(CSSD) should win and many of the current MPs would lose
                                                                              In local markets, we remain long the Czech 21s bonds
their seat in parliament. Presidential elections are scheduled
                                                                              but take profit on our 14x17 FRA receiver: We expect
for January 2013 with President Klaus’s second term
                                                                              yields to grind lower at the start of the year. The Czech
expiring in March 2013. For the first time since the creation
                                                                              Republic continues to have among the most attractive FX
of the Czech Republic, the new president will be elected by
                                                                              hedged, volatility-adjusted yields in EMEA EM and among
a two-round popular ballot. Jan Fischer (independent), who
                                                                              the steepest slopes in the region after South Africa. Credit
was Prime Minister during 2009-2010, is the favorite to win,
                                                                              risks are lower compared to the likes of South Africa and
followed by Milos Zeman (SPOZ). Presidential elections are
                                                                              Hungary while there also continues to be a non-negligible
important because the president appoints the board of the
                                                                              probability that some form of unorthodox monetary policy
CNB and also nominates Constitutional judges.
                                                                              easing may occur next year. We hold our long CZK21 bond
                                                                              trade but close our 14x17 (rolled from 15x18) at a 20bp
The government’s commitment to fiscal consolidation
                                                                              profit as the expected fall in Pribor will only be gradual.
remains strong, but we see less tightening after 2013.
Both VAT rates will increase by 1%-pt starting January
                                                                              In FX, we remain neutral: We see only a small chance for
2013 (to 15% and 21%, respectively) given that the
                                                                              FX intervention with EUR/CZK above 25.10.
confidence vote was linked to the approval of the fiscal
consolidation package. Additional measures like a tax hike
for high income earners, lower pension indexation and                         Czech Republic macro forecasts
additional spending cuts can be expected. These measures                                                          2012         2013   2014
will have a negative impact on growth and a limited upward                    Growth (%oya)                        -1.1        0.0    2.1
impact on consumer prices. Overall the commitment for a                       Inflation (%eop)                     2.9         2.4    2.1
budget deficit below 3% of GDP in 2013 is strong and we                       EUR/CZK (eop)                        25.5        24.9   24.5
think the target will be reached (Czech Republic is under                     Current account (% GDP)              -1.1        -0.4   -1.2
Excessive Deficit Procedure). However, the fact that the                      ESA-95 fiscal balance (% GDP)        -3.4        -2.9   -2.9
government was close to collapse before the last confidence                   Public debt/GDP (%)                  45.7        46.8   49.7
vote led to a change in its plan post-2013. PM Necas stated                   Ratings outlook: No change.
that budget deficit will not be lowered further unless GDP                    Source: J.P. Morgan

JPMorgan Chase Bank N.A., London Branch   J.P. Morgan Securities plc        Emerging Markets Research
Brahim RazgallahAC (44-20) 7134-7546      Jonny Goulden (44-20) 7134-4470   Emerging Markets Outlook and Strategy for 2013
brahim.x.razgallah@jpmorgan.com           jonathan.m.goulden@jpmorgan.com   November 21, 2012

                                                                            administrative measures to save energy costs more so than
                                                          B2/B/B+           measures directly targeting the poor.
Elections, the IMF, and reforms                                             Delays to embrace structural reforms will increase future
                                                                            adjustment costs. Namely, fiscal consolidation is the most
    Legislative elections and adoption of constitution to
                                                                            pressing reform scheduled to be implemented next year. But
     extend uncertainty through 1H13                                        the authorities continue to prefer defending the currency, in
    IMF agreement critical to stabilize near-term outlook                  our view. FX reserves cover less than three months of
                                                                            imports and only 8% of broad money supply (well below the
    Downside risks for the implementation of reforms;                      20% threshold). External financial support should help
     energy subsidy reform could be delayed to 2H13                         stabilize the import coverage ratio close to its current levels
                                                                            by June 2013. However, delays to structural reforms and the
                                                                            changing dynamics of the trade balance could increase the
Fundamentals and politics in 2013
                                                                            probability of devaluation in January 2014. In the meantime,
Political uncertainty to remain elevated in 2013 although                   the authorities are likely to rely on further issuance of dollar-
tail risks have been substantially reduced. Adoption of a                   denominated T-bills in the new fiscal year.
new constitution will be critical to the outlook, in our view
as it will determine the timing of parliamentary elections. In              Market strategy
fact, several reforms will most likely be delayed to the post-
legislative election period due to popular opposition against               In external debt, we remain marketweight: Political and
these reforms. However, risks to dissolve the Constituent                   economic uncertainty remain elevated, although the outlook
Assembly remain after the Administrative Court recently                     may stabilize with an IMF agreement and as IMF talks are
transferred to the case to the Supreme Constitutional Court.                currently ongoing we remain marketweight. Markets have
If the 100-member assembly is dissolved, President Mursi                    already priced in an IMF deal since the visit of Christine
will reappoint the new members after consulting with civil                  Lagarde in August. Even if the final agreement provides a
society. But this could delay parliamentary elections at least              loan larger than the government’s request of US$4.8 billion,
until 4Q13, adding substantial downside risks to the outlook.               we see little room for market outperformance.
While the probability of this scenario is relatively low,
discussions concerning the draft constitution are likely to be              In FX, we favor 3-month EGP NDF on the back of
delayed and the referendum could be held in early 2013.                     currency intervention: We believe the authorities will
Importantly, we believe a broad-based consensus needs to                    continue to defend currency stability especially ahead of
emerge ahead of December 12, which marks the end of the                     parliamentary elections. The stabilizing ratio of FX reserve
6-month legal period of the assembly.                                       coverage close to 3-month of imports will likely provide the
                                                                            authorities with more comfort to maintain FX stability.
An IMF agreement is imminent, with the letter of intent                     External support from Qatar and Turkey helped stabilize
likely to be signed by end-November. Yet, implementation                    reserves which should also increase in 1H13 after the
of policy reforms will likely be challenging. We believe an                 finalization of an IMF agreement. We believe negotiations
IMF deal will be relatively flexible but fiscal consolidation               with the IMF will remain relatively flexible focusing on
will be of utmost importance in negotiations with particular                fiscal consolidation more so than currency flexibility.
focus on subsidy reform. After the IMF loan is finalized,
financing needs will be broadly covered during the fiscal
year helped by financial support from Turkey, Qatar, and                    Egypt macro forecasts
other bilateral and multilateral creditors. The authorities will                                                 FY2011/12   FY2012/13   FY2013/14
also likely issue an Islamic bond in 1H13. However, fiscal                  Growth (%oya)                           2.2         2.6          3.0
and external financing needs will likely remain elevated in                 Inflation (%eop)                        7.3         8.8         14.1
FY2013/14 calling for urgent reforms that could accelerate                  USD/EGP (eop)                          6.06         6.1          6.8
the return of private sector investors. While unpopular                     Current account (% GDP)                -3.2        -3.1          -2.9
reforms look set to be delayed at least until after the                     General government balance (% GDP)     -11.1       -9.3          -7.9
elections, the government announced several reforms that                    Public debt/GDP (%)                    84.1        88.6         91.4
could be shortly introduced (e.g., increasing fuel prices for               Ratings outlook: No change.
Octane-95). Yet, popular discontent could shift the focus on                Source: J.P. Morgan

JPMorgan Chase Bank N.A., London Branch                           Emerging Markets Research
Giulia PellegriniAC (44-20) 7742-6959                             Emerging Markets Outlook and Strategy for 2013
giulia.pellegrini@jpmorgan.com                                    November 21, 2012

Gabon                                         NR/BB-/BB-          Ghana                                                   NR/B/B+
We see a rating downgrade as unlikely                             Elections are likely to run smoothly
    Growth looks set to remain in the 4-5% band                       We see some fiscal tightening after elections
    We do not see much scope for political instability                More currency weakness next year
Fundamentals and politics in 2013                                 Fundamentals and politics in 2013
Growth looks set to remain in the 4-5% band in the                The December general elections are unlikely to result in
medium term, driven by oil. The economic diversification          any significant change in economic policy or any
program is likely to pay off only in the long term.               instability. Like in 2007, they are likely to be another
Meanwhile, public investment should provide some stimulus.        close—but peaceful—call between the two largest parties.
At 4.6%, 2013 real GDP growth looks set to be modestly
                                                                  Some fiscal consolidation is on the cards, but growth
lower than in 2012, as the effects of the Africa Cup of Nations
                                                                  should remain buoyant. After this profligate election year
wear off and oil production reaches a plateau. Oil production     (deficit of 8.7% of GDP), we see the deficit dropping by
looks set to rise modestly in the medium term as high oil         nearly 4%-pt of GDP by 2014 but note the possibility of more
prices make even deep offshore exploration more attractive.       gradual tightening. We project real GDP to expand 7.8% in
                                                                  2013 as oil production finally reaches the often missed target
We believe the risks of a rating downgrade to be low,
                                                                  of 120,000 by mid-year and oil prices remain elevated.
despite S&P’s outlook change to negative. This was based
on the government’s failure to catch up with voluntary            Any monetary policy easing is likely to be backloaded to
payments of the sinking fund used to redeem the $2017s and        support the cedi. The BoG is unlikely to start easing in
the accumulation of new arrears. The government, however,         early 2013, when the cedi should see renewed pressure.
has committed to resume payments and has been                     Price pressures are likely to remain high for most of 2013
implementing a plan to regularize arrears, although we see        with the harvests and base effects softening CPI prints more
potential risks arising from the public investment program.       visibly only toward the end of the year. While the cedi may
                                                                  weaken only modestly by end-2012, we see it selling off
Sporadic episodes of disorder may continue to occur but
                                                                  more markedly in 1H13 due to challenging current account
we continue to expect political stability in the near term.
                                                                  dynamics and large maturities testing foreign investors’
In August, opposition protests were triggered by the return
                                                                  confidence in this highly positioned and small market.
home of opposition leader Mba Obame, as had happened in
2011. However, these were short-lived and are unlikely to
                                                                  Market strategy
result in broad instability in the near term.
                                                                  In external debt, we are marketweight: The longer-term
Market strategy                                                   growth potential is balanced by short-term challenges.
In external debt, we are overweight: We see room for              In local markets, we are sidelined FX and local bonds:
spreads to further outperform. Bonds underperformed in early      The cedi is unlikely to weaken past the USD/GHS1.9 level
4Q12 following S&P’s credit outlook revision to negative. We      this year amid recent inflows, but 1H13 may see better entry
believe the rating agency concerns were overdone and the          levels in both rates and FX.
fundamentals remain solid amid high oil prices.
Gabon macro forecasts                                             Ghana macro forecasts
                                  2012       2013       2014                                          2012         2013      2014
Growth (%oya)                      5.1       4.6         4.9      Growth (%oya)                        7.4         7.8       7.1
Oil production (mbpd)             0.24       0.24        0.25     Oil production (mbpd)                0.09        0.10      0.13
Inflation (%eop)                  3.5        2.5         3.0      Inflation (%eop)                      9.6         8.8       7.9
USD/XAF (eop)                     510        508         515      USD/GHS (eop)                        1.90        1.95      1.98
Current account (% GDP)            6.7        6.2         6.5     Current account (% GDP)             -10.4        -7.8      -7.2
Fiscal balance (% GDP)            5.8        5.0         4.1      Fiscal balance (% GDP)               -8.7        -6.3      -4.9
Public debt/GDP (%)               16.5       15.5        15.8     Public debt/GDP (%)                  47.6        46.2      45.9
Ratings outlook: No change.                                       Ratings outlook: No change.
Source: J.P. Morgan                                               Source: J.P. Morgan

JPMorgan Chase Bank N.A., London Branch   J.P. Morgan Securities plc        Emerging Markets Research
Anthony WongAC (44-20) 7134-7549          Jonny Goulden (44-20) 7134-4470   Emerging Markets Outlook and Strategy for 2013
anthony.wong@jpmorgan.com                 jonathan.m.goulden@jpmorgan.com   November 21, 2012

                                                                            We see three positives from the election outcome. First,
                                                  Ba3/BB- /BB-              the fact that Saakashvili did not challenge the results—
                                                                            which were considered transparent by external observers—
A new president and a new ruling party                                      provides Georgia with a claim to being a true democracy.
                                                                            Second, Ivanishvili’s government is expected to keep an
    Presidential election in October 2013
                                                                            economic policy profile similar to that of the previous
    Unexpected change in government is not likely to                       government. In other words, the new government will
     alter business-friendly policies                                       likely be pro-EU and pro-NATO (the subsequent cabinet
                                                                            appointments support this view). Finally, Ivanishvili’s
    Growth to remain robust and we remain overweight                       victory may result in improved relations with Russia,
                                                                            possibly resulting in the removal of Russian trade and
Fundamentals and politics in 2013                                           labor restrictions.

The presidential election is scheduled for October 2013,                    Economic activity to remain resilient with trend-like
but constitutional amendments have reduced its                              growth in 2013. While 2013 growth is likely to moderate
importance. A number of significant changes to the                          from the above trend pace of 7% seen this year, it is
constitution were made in 2010, which mean the next                         expected to remain at a trend-like 6%y/y. Growth has been
president will have less power since the amendments will                    particularly strong in manufacturing, construction, and
come into effect after the election. The new president will                 tourism. While real productivity gains have facilitated
have a relatively minor role in day-to-day governance and                   better-than-expected growth in 2012, the authorities have
policy setting—given that the president will no longer have                 been proactive in securing private investment in key sectors
the right to initiate legislation nor have executive power. The             which is expected to support growth in 2013. Moreover,
government, led by the prime minister will hold this power.                 export growth is expected to remain robust next year, as
Although the president will retain the right to veto new bills,             Georgia’s main export partners are expected to record higher
a simple majority in parliament will be sufficient to overturn              economic growth (note that exports to the Euro area are less
the veto (reduced from the 60% currently required). We                      than 15% of total exports). The increase in exports will help
expect a peaceful transition as current President Saakashvili               narrow the large current account deficit to an estimated 7.5%
completes his final term in office.                                         of GDP next year.

Political noise to moderate in 2013 after a hotly contested                 Market strategy
parliamentary election in 2012. The opposition Georgian
Dream coalition claimed a surprise victory over the ruling                  In external debt, we remain overweight: We have had an
party in the key parliamentary elections. The 2012                          overweight on Georgia since the start of 2Q12 as we felt
parliamentary election was one of the most important                        spreads had widened too much on European concerns, given
elections in Georgia’s history for two reasons. First,                      that exports to and bank lending exposure from the Euro
executive powers will be transferred to the prime minister in               area were low. Georgia has been a slow outperformer since,
2013. Second, events in the run-up to the elections made it a               with growth strong and the elections not changing the
much tighter contest than earlier opinion polls had                         supportive economic stance of the previous government. We
suggested. The events created a heated political                            still see potential for spreads to outperform slowly and
environment—with accusations of intimidation, politically                   remain overweight.
motivated arrests, and a prison abuse scandal damaged the
ruling party’s credibility. The scandal produced widespread                 Georgia macro forecasts
criticism against the ruling party (UNM), and gave Bidzina                                                        2012       2013   2014
Ivanishvili’s Georgian Dream (GD) coalition greater-than-                   Growth (%oya)                         7.0        6.0    6.0
expected support at the polls. GD won over 50% of the                       Inflation (%eop)                      0.2        5.4    6.0
proportional representation party-list seats and secured about              USD/GEL (eop)                         1.67       1.66   1.65
half of the remaining 73 seats (in individual constituencies,               Current account (% GDP)               -10.0      -7.5   -6.5
decided by plurality voting)—resulting in 85 seats in the                   Primary fiscal balance (% GDP)        -3.3       -3.2   -3.0
150-seat parliament.                                                        Public debt/GDP (%)                   35.2       35.0   34.0
                                                                            Ratings outlook: One notch upgrade.
                                                                            Source: J.P. Morgan

JPMorgan Chase Bank N.A., London Branch   J.P. Morgan Securities plc        Emerging Markets Research
Nora Szentivanyi (44-20) 7134-7544        Jonny Goulden (44-20) 7134-4470   Emerging Markets Outlook and Strategy for 2013
nora.szentivanyi@jpmorgan.com             jonathan.m.goulden@jpmorgan.com   November 21, 2012
J.P. Morgan Securities plc
George Christou (44-20) 7134-7548

                                                                            talks to resume. The government’s incentive to conclude a
                                                Ba1/BB+ /BB+                deal has significantly diminished. Debt financing costs have
Weak growth poses a fiscal challenge                                        collapsed and government buffers are sufficient to cover
                                                                            external debt repayments through 2013. The buffers have
    Recovery from recession likely to be shallow                           been boosted by above-plan local currency issuance, which
                                                                            the NBH has readily converted into FX. The government has
    The threat of losing EU funds will continue to act as                  also sought alternative sources of FX financing, such as
     a strong incentive for fiscal discipline                               euro-denominated bonds aimed at domestic investors.
    NBH easing to continue as long as market conditions
     remain favorable                                                       Inflation to remain well above target, but this will not
                                                                            stand in the way of NBH easing. Inflation is likely to ease
                                                                            to around 5% but is unlikely to fall back below 4% until
Fundamentals and politics in 2013                                           2014 % in our forecasts. Much of the inflation overshoot
                                                                            owes to government measures and food prices, with
We expect a return to moderate growth early next year.
                                                                            underlying measures of inflation in the 3-4% range. The
Growth will continue to be driven solely by net exports,
                                                                            external MPC members have decided to look through the
although the drag from domestic demand should diminish
                                                                            first round effects of indirect tax and the food price shock
over the course of the year. Increasing production at the
                                                                            and are unlikely to be deterred by high inflation unless
recently installed auto plant with large capacity has been
                                                                            demand driven inflation pressures emerge. The MPC is
helping to boost IP and exports. The government’s labor
                                                                            likely to keep cutting rates in an effort to boost lending as
market policies are likely to lift the labor participation rate.
                                                                            long as market conditions remain favorable. Our base case
However, a crippling tax burden on the financial sector will
                                                                            is for the NBH to cut to 5.50% by 2Q13, with risks skewed
continue to drag down Hungary’s growth potential.
                                                                            to the downside.
Household consumption and investment are set to remain
sluggish due to falling real disposable incomes, tight lending
conditions and economic uncertainty. The government’s                       Market strategy
subsidized mortgage schemes, coupled with NBH rate cuts,                    In local markets, we remain marketweight in HUF and
should help to counter the impact of weaker demand and                      rates in our Model Portfolio: Continued underweight
high fiscal burden on banks that have constrained lending.                  positioning in HUF as well as the NBH’s desire to link risk
The scheme allowing households to fix their FX mortgage                     premia with rate cuts will cap significant depreciation
repayments, and other government measures, should help to                   pressures on HUF. We look for moderate FX depreciation in
contain the rise in non-performing loans.                                   1H13 and a recovery in 2H13. In rates, we remain neutral in
                                                                            our model portfolio, though are biased to position for
The 2013 fiscal deficit will likely be close to 3% of GDP.                  steepeners as rate cuts materialize.
We expect the budget deficit to widen marginally to 3.2% of
GDP in 2013 from 2.8% of GDP in 2012. This is above the                     In external debt, we remain marketweight: Hungarian
government’s target of 2.7% of GDP for 2013. Positively,                    bonds have tightened 217bp over 2012, despite growth
the fact that the European Commission (EC) expects 2013                     weakening and an IMF deal remaining elusive. We prefer
deficit to be below the 3% limit has removed the threat of                  underweights in other Central and Eastern European
Hungary’s’ cohesion funds being suspended next year. We                     sovereigns, where market reactions are more predictable.
still think Hungary will remain subject to the EU’s excessive
deficit procedure because the EC expects the budget deficit                 Hungary macro forecasts
to rise to 3.5% of GDP in 2014. But the EC’s benign budget                                                         2012      2013   2014
deficit forecast for 2013 has bought the government time,
                                                                            Growth (%oya)                          -1.4      0.5    1.5
probably until next summer, to come up with additional
                                                                            Inflation (%eop)                       5.5       5.1    3.6
fiscal tightening measures, in our view.
                                                                            EUR/HUF (eop)                          285       275    270
                                                                            Current account (% GDP)                1.5       2.8    3.2
We do not foresee an IMF/EU financing agreement
                                                                            ESA general government balance (% GDP) -2.8      -3.2   -3.5
unless market conditions worsen substantially.
                                                                            Public debt/GDP (%)                    78.6      77.8   77.0
Negotiations on an IMF/EU supported program have stalled
after the first round of formal talks ended in July and, while              Ratings outlook: No change.
relations have not broken down, there is no date for formal                 Source: J.P. Morgan

JPMorgan Chase Bank N.A., London Branch   J.P. Morgan Securities plc        Emerging Markets Research
Brahim RazgallahAC (44-20) 7134-7546      Jonny Goulden (44-20) 7134-4470   Emerging Markets Outlook and Strategy for 2013
brahim.x.razgallah@jpmorgan.com           jonathan.m.goulden@jpmorgan.com   November 21, 2012

                                                                            Relations between Baghdad and KRG (the government
                                                      NR/NR/NR              of the semi-autonomous northern region of Iraq)
                                                                            should be tested again next year. After resolving the oil
A new player in global oil markets                                          payment dispute in September and the agreement with the
                                                                            semi-independent region to increase oil exports to 250kbd
    Iraq to become a key player in global oil markets;
                                                                            in 2013, tensions could reemerge due to KRG unilateral
     outlook largely depends on political backdrop                          crude exports through Turkey. In fact, according to a KRG
    Risks to renewed political tensions to remain                          spokesman, light oil was recently swapped for refined
     elevated in 2013                                                       products with a private Turkish company which was then
                                                                            exported through Turkey. Baghdad considers the deal
    Relations between Baghdad and KRG could be                             illegal as it opposes any oil sales not approved by the
     tested again                                                           central government. In addition, the recent move of Exxon
                                                                            Mobil to focus production on the northern oilfields after
                                                                            the exit from the southern field West Qurna 1 could add
Fundamentals and politics in 2013
                                                                            some downside risks to the relationship between the two
Iraq is set to provide most incremental MENA crude                          governments next year.
production looking forward. With Libya’s crude supply
recovering to almost pre-crisis levels and GCC countries                    The 2013 budget will be closely tied to the ability to reach
producing well above their OPEC quota, the steady uptrend                   crude production targets. For instance, oil exports are
in Iraqi crude production will provide a buffer against risks               projected to increase to 2.9mbd, of which KRG will account
of sudden supply disruptions. Crude oil production has                      for 250kbd. But risks to supply disruptions similar to early
steadily increased to 3.4mbd according to the oil minister,                 2012 could reduce revenues. The US$118.6 billion budget
and the country hopes to raise oil exports by 300kbd to                     was based on an oil price breakeven of $106/bbl according
2.9mbd in 2013. The IEA expects Iraqi crude supply to                       to our estimates, but the 2013 breakeven level will be higher
double to 6.1mbd by 2020 and to increase to 8.3mbd in 2035                  if oil exports fall short of the government’s projections. We
which would require investments of more than US$25 billion                  believe the US$47.3 billion allocation for investment
per year (10% of projected hydrocarbon revenues).                           projects could be the first element to be adjusted should oil
According to the IEA, failure of the country’s oil expansion                revenues remain well below budget assumptions.
plans could “put global energy markets on course for
troubled waters.” The latter highlights the rapidly changing                Market strategy
dynamics of crude oil supply across the region with the
                                                                            In external debt, we remain marketweight: Long-term
steady rise of Iraq.
                                                                            fundamental improvements as oil production increases are
                                                                            balanced by a still unstable domestic political environment.
The surprise dismissal of the Central Bank governor on
                                                                            Tensions with the KRG also pose a risk to the benefits of oil
October 16 over allegations of corruption could weaken
                                                                            supply and we stay marketweight.
independence of the Central Bank. Also, the move has
also revived the debate on Al-Maliki’s concentration of
powers. Opposition factions, especially Al-Iraqiya coalition,
have fiercely criticized the dismissal, accusing the
government of weakening the Central Bank’s independence.
While these events have revived the debate about
concentration of powers of Prime Minister Al-Maliki, the                    Iraq macro forecasts
draft law extending the two-mandate limit in the constitution                                                    2012        2013    2014
to the post of prime minister and head of parliament is set to              Growth (%oya)                         9.4         9.9    10.2
revive tensions between the State of Law coalition and the                  Inflation (%eop)                      7.0         5.8     6.2
opposition. The draft law, which could end Al-Maliki’s                      USD/IQD (eop)                        1,165       1,165   1,165
government after the next parliamentary elections in 2014, is               Current account (% GDP)              -1.7         3.1     5.6
unlikely to be passed in our view. In fact, even if the draft               General government balance (% GDP)   -2.3         1.9     3.6
legislation is approved by parliament, it will require the                  Public debt/GDP (%)                  75.6        68.1    62.9
2005 constitution to be amended before being approved by                    Ratings outlook: Not rated.
popular referendum.                                                         Source: J.P. Morgan

JPMorgan Chase Bank N.A., Istanbul Branch   J.P. Morgan Securities plc          Emerging Markets Research
Yarkin CebeciAC (90-212) 319-8599           George Christou (44-20) 7134-7548   Emerging Markets Outlook and Strategy for 2013
yarkin.cebeci@jpmorgan.com                  george.g.christou@jpmorgan.com      November 21, 2012

                                                                                effect on spending in the first months of next year, because
                                                            A1/A+/A             of the limitation of monthly expenditure to one-twelfth of
                                                                                the previous year’s budget until a new budget is passed.
Well balanced growth outlook                                                    Hence, we see the budget deficit narrowing to 3.5% of
                                                                                GDP in 2013 from 3.8% this year.
    Economic growth has stabilized around 3%
    Fiscal performance starts improving after the                              The BoI is expected to remain on hold given that
     budgetary measures                                                         growth remains moderate but respectable and as
                                                                                inflation is fully entrenched in the 1-3% target range.
    BoI is likely to remain on hold in the coming months                       Inflation has recently been surprising to the downside
                                                                                thanks to lower food and energy prices, and currently
Fundamentals and politics in 2013                                               stands at 1.8%. Going forward, given the respectable but
                                                                                modest growth in economic activity and the stable outlook
Growth has stabilized around 3.0%oya. The economy has                           in commodity prices, we see inflation remaining relatively
grown surprisingly well so far this year, relieving worries                     stable around the middle of the 1-3% inflation target. The
about the vulnerability of the economy to weaker global                         BoI surprised everyone by cutting its policy rate by 25bp to
growth momentum and damping expectations of a longer                            2.00% in October. Rapid activity in the housing market has
monetary easing cycle. GDP expanded 3.3%oya in the first                        been one of the key concerns of the BoI. Importantly,
half of the year. Resilient private consumption and                             concomitant with the interest rate decision, the supervisor
especially the jump in exports were the main drivers of                         of banks at the BoI issued a directive limiting the loan-to-
growth while there was significant slowdown in government                       value ratio for mortgages to 70%. This macroprudential
consumption and total capital investment. We expect only a                      measure is expected to calm down mortgage loan growth
gradual slowdown in 2H and see full-year growth at 3.0%.                        and has provided room for the BoI to cut its policy rate in
The rise in geopolitical risks has already led to a fall in                     an effort to support the activity elsewhere in the economy.
consumer sentiment. The so-called “locked profits law”—                         Despite the cut, BoI sounds quite neutral. Hence, we do not
which allows international companies to pay reduced tax                         see this as the first step of a new cutting cycle. Rather, we
rates if they promise to invest half of their profits in Israel—                see this as a standalone cut, with the BoI to remain on hold
could lead to stronger investments but only in time.                            in the coming months.
Furthermore, the VAT and income tax hikes will surely lead
to a fall in disposable income. The housing market remains                      Market strategy
supportive of growth but its contribution could falter
following the new macroprudential measures in the                               In local markets, we expect FX and rates to suffer at the
mortgage market. As far as export performance is                                start of the year as fears of an attack on Iran are likely
concerned, Europe still has a large share (about 35%) in                        to revive after the January elections: In our base case
Israeli exports and thus contribution of net exports to growth                  scenario of no attack, ILS should appreciate after Iran
should remain modest. As a result, we do not expect a                           worries have faded, especially in 2H13 as global growth is
significant change in the growth performance and see GDP                        likely to pick up. As US Treasury yields are expected to rise
growth at 3.1% in 2013.                                                         in the latter part of 2013, Israeli rates would likely follow as
                                                                                no more rate cuts are expected and the economy continues
Fiscal performance is bottoming out following the                               to perform solidly.
implementation of the austerity measures. The 12-month
trailing budget deficit had expanded to 4.1% of GDP from                        Israel macro forecasts
2.9% in the twelve months to July. Following BoI                                                                    2012         2013    2014
Governor Fischer’s warning, the government approved a
                                                                                Growth (%oya)                        3.0         3.1      3.3
package of sweeping austerity measures which included
                                                                                Inflation (%eop)                     2.3         2.3      2.0
among other things a 1.0% increase in income tax and a
                                                                                USD/ILS (eop)                       3.95         3.85     3.60
1.0% rise in VAT, to 17% from 16%. These tax hikes and
                                                                                Current account (% GDP)              0.0         -0.8     -1.8
some spending discipline reflected immediately in the
                                                                                Primary fiscal balance (% GDP)      -3.8         -3.5     -3.0
monthly fiscal data and the 12-month trailing deficit fell to
                                                                                Public debt/GDP (%)                 70.5         69.0     67.5
3.9% of GDP in October. Due to the upcoming general
elections in January, the 2013 budget bill could not be                         Ratings outlook: No change.
approved in parliament. This will likely have a restraining                     Source: J.P. Morgan

JPMorgan Chase Bank N.A., London Branch                            Emerging Markets Research
Giulia PellegriniAC (44-20) 7742-6959                              Emerging Markets Outlook and Strategy for 2013
giulia.pellegrini@jpmorgan.com                                     November 21, 2012

Ivory Coast                                      NR/NR/NR          Kenya                                                   B1/B+/B+
Arrears clearing plan is agreed on                                 Elections are likely to run smoothly
      Coupon arrears will be cleared by 2014                           The shilling is likely to weaken in 1H13
      Progress on reforms will be key                                  A debut Eurobond is likely after elections
Fundamentals and politics in 2013                                  Fundamentals and politics in 2013
Eurobond holders have agreed to a government proposal              March elections remain a key risk event. Our base case is
to clear arrears and swap defaulted securities for 2032            for elections not to degenerate into instability but recent
bonds. The proposal sees holders waiving any event of              attacks have heightened risks. We do not expect major
default, getting coupon arrears paid back by 2014 and              changes in economic policy regardless of the winner. A
accepting the swap of US$187 million of defaulted Sphynx           peaceful election outcome would set Kenya on a more solid
Notes/Standard Bank debt for 2032 bonds. The outstanding           growth path, despite lingering risks from the International
amount of 2032s increased to US$2.52 billion from US$2.33          Criminal Court case on some presidential candidates.
billion and ownership has broadened.
                                                                   We see the shilling weakening around elections. Despite
Renewed focus on reforms in 2013. Public investment                600bp in rate cuts, it has remained rather stable in 2H12. We
should continue to support growth, although this will ease         see the shilling weakening only modestly into end-2012
from this year’s high base. Sustainable growth is contingent       (USD/KES86) and more significantly, towards the 90 level,
on progress on several reforms, namely in the cocoa/coffee,        around elections next year amid risk aversion dollarization
oil and gas, mineral and financial sectors. As reforms             and a sizable current account deficit.
progress, we expect the country to look to get a credit rating
so to approach again the capital market in the medium term,        Easing should continue, but at a slower pace. The large
although no plans have been announced.                             differential inflation – MPR (4% – 11%) and the need to boost
                                                                   growth will prompt more rate cuts in 2013. However, the CBK
Violence remains a concern, while the recent government            will want to avoid adding pressure on the shilling while base
dissolution may simply result in a cabinet reshuffle. Attacks      effects peter out and high commodity prices exercise some
have continued since the summer and limited progress on            inflationary pressures. We see the MPR being cut to 8% in 2013.
disarmament, indictments for conflict-related crimes and
political reconciliation represents a risk to watch. The recent    We expect growth to pick up after elections. Real GDP
dissolution of the government might instead result in a            growth is set to post at 4.1% for full-2012, on the back of
cabinet reshuffle that maintains political equilibria unchanged.   poor performance in 1H12 (3.4%). After the elections,
                                                                   growth should pick up as uncertainty wanes and monetary
Market strategy                                                    conditions ease. If elections run smoothly, we expect to see
                                                                   Kenya debut with a US$750 million Eurobond in 2013.
In external debt, we stay marketweight: Broader
ownership post the recent debt-swap and strong 2012                Market strategy
performance may prompt some investors to trim positions
and take some profit in the short term, but we do not expect       In FX, we remain sidelined: 1Q13 should provide for
a sharp sell-off and remain marketweight.                          better entry levels, although trading restrictions will continue
                                                                   to provide some support to the KES.

    Ivory Coast macro forecasts                                    Kenya macro forecasts
                                   2012        2013        2014                                        2012         2013      2014
    Growth (%oya)                   8.6        6.7         7.1     Growth (%oya)                        4.1         4.9        5.6
    Inflation (%eop)                2.7         3.0         2.5    Inflation (%eop)                      4.3         6.5        5.0
    USD/XOF (eop)                  510         508         515     USD/KES (eop)                         86          90         92
    Current account (% GDP)        -2.7        -3.5        -4.7    Current account (% GDP)             -10.2        -8.9       -7.6
    Fiscal balance (% GDP)         -4.0        -3.5        -4.2    Fiscal balance (% GDP)               -6.5        -5.2       -4.5
    Public debt/GDP (%)            40.5        38.5        37.6    Public debt/GDP (%)                  51.5        49.5       47.7
    Ratings outlook: Not rated.                                    Ratings outlook: No change.
    Source: J.P. Morgan                                            Source: J.P. Morgan

JPMorgan Chase Bank N.A., London Branch                           Emerging Markets Research
Brahim RazgallahAC (44-20) 7134-7546                              Emerging Markets Outlook and Strategy for 2013
brahim.x.razgallah@jpmorgan.com                                   November 21, 2012

                                                                  financial support to bridge fiscal financing needs. Foreign
                                               Ba2/BB/NR          grants have remained relatively low this year following a
                                                                  US$1.4 billion transfer from Saudi Arabia in 2011. The
Reforms tied to legislative elections                             fiscal cost of power generation also pushed debt of the
                                                                  National Electric Power Company (NEPCO) to JOD2.5
    The outcome of parliamentary elections to dominate
                                                                  billion (US$3.5 billion), of which 75% is bank claims. If
     2013 outlook                                                 energy subsidies are not reformed, total debt of the public
    Fiscal consolidation to top reform agenda; risks to          entity could increase to JOD4 billion by end-2013, according
     policy implementation to remain elevated                     to NEPCO’s CEO. With gas supply from Egypt set to
                                                                  remain low through most of next year and fuel price hikes
    Jump in dollarization to reduce monetary policy              facing broad-based discontent, the public debt-to-GDP ratio
     space further                                                could remain well above its legal ceiling of 60% for an
                                                                  extended period after increasing 20% over the first eight
                                                                  months of 2012.
Fundamentals and politics in 2013
Parliamentary elections on January 23 will represent a            Real GDP growth to accelerate this year but fiscal
test to the 2013 outlook. King Abdullah dissolved the             consolidation will largely weigh on 2013 growth. The
parliament on October 4, but the political rift between           rebound in the financial and real estate sector should support
opposition and pro-government supporters has increased. In        recovery this year, despite the slowdown in the
fact, the Muslim Brotherhood has tied its participation in the    manufacturing sector. However, we estimate real GDP
upcoming elections to amendment of electoral laws, which          growth will decrease to 2.8% in 2013 driven by fiscal
seems increasingly unlikely, in our view. The voter               tightening, in order to keep public debt on a sustainable
registration has been relatively weak and pressure from           track. In addition, we believe the headline inflation nearing
street protests could add some downside risks to the outlook.     5% and dollarization rates up 4.8%-pts since December 2011
The future government could face fierce criticism from            will substantially reduce the ability of monetary policy to
opposition factions, which could weaken the commitment to         conduct countercyclical policies. The jump in dollarization
structural reforms. Jordan has recently signed a loan             of deposits could also push the central bank to increase its
agreement with the IMF (800% of quota), but street protests       policy rates after a 100bp hike earlier in 2012.
will test the government’s ability to implement fiscal
consolidation. In fact, widespread protests erupted soon after
the government's announcement that it would raise fuel
prices between 14% and 54% on November 13 (diesel and
kerosene prices were raised 33%). After several local media
reports of possible administrative measures being
implemented, the government opted for a cash subsidy
system targeted to the poor. Legislative elections were hoped
to confirm the approval of the reform process from the past
year, but extended political tensions and street protests could
test the country’s outlook.

Fiscal consolidation will top the government’s priority
agenda next year. With the budget deficit at 8.3% of full-
year GDP in January-August, the authorities will need to
introduce new measures to reduce the burden of subsidies on
public expenditure. For instance, Egypt agreed to raise its
gas exports to 60mcf after the deterioration of security in the
Sinai Peninsula led Jordan to switch to more expensive oil
for power generation. However, the new target falls far
below the 240mcf agreement between the two countries
signed in 2004. In case the energy subsidy reform is delayed
further, Jordan will remain highly reliant on external

JPMorgan Chase Bank N.A., London Branch                           Emerging Markets Research
Nicolaie Alexandru (44-20) 7742-2466                              Emerging Markets Outlook and Strategy for 2013
nicolaie.alexandru@jpmorgan.com                                   November 21, 2012

                                                                  problem loans is not fully operational and the bank-run
                                      Baa2/BBB+/BBB+              Special Purpose Vehicles contributed little to unload bad
                                                                  loans off the balance sheets.
Economic growth to remain strong
                                                                  The external position remained strong this year and we
   Political situation should remain stable, but
                                                                  think it will improve into 2013. We think growth will be
    presidential successor is unclear                             less based on consumption, depressing imports. At the same
   GDP growth composition to change in favor of                  time, exports are expected to grow strongly supported
    industry and to accelerate next year                          mainly by increased oil output. We think that the current
                                                                  account surplus will increase to almost 8% of GDP next
   NBK is likely to maintain tight control of the KZT            year. Kazakhstan also enjoys the biggest inward FDI in
                                                                  EMEA EM (as a percentage of GDP) and given the
                                                                  opportunities in the oil sector we think this trend will persist.
Fundamentals and politics in 2013
                                                                  Oil revenues also support a strong position of the general
Who will succeed President Nazarbayev? We do not think            government and we expect the budget balance to remain in a
a successor will be officially announced anytime soon, but        large surplus next year as well (between 4% and 5% of
Timor Kulibayev, the president’s son-in-law, seems to be          GDP). Inflation will likely remain in the 6% to 8% target
the most likely candidate. Yet, in our view, he does not have     band and this should prevent the NBK from tightening.
the backing of all the key political groups. In late
September, the president named a new prime minister in            Market strategy
what can be seen as an attempt to strengthen the grip over
the country. Prime Minister Massimov, a loyalist, resigned        In FX, the currency remains tightly managed within the
and was appointed head of the presidential administration         USD/KZT145-151 and the central bank could give up on
(Massimov served as PM since January 2007 and was re-             this range only if USD/RUB moves higher: We think
confirmed in the position after parliamentary elections in        marginal relaxation in the upward band (to USD/KZT152) is
January 2012). We think the former head of the presidential       likely early next year as a way to compensate for growth
administration was dismissed because he was becoming too          slowdown once interest rate cuts are not possible anymore
powerful and he had links to persons accused of corruption.       (the policy rate is at 5.50%, while inflation is trending higher
The current prime minister is Serik Akhmetov, who is also         and is expected to end both this year and 2013 above 6%).
known to be close to President Nazarbayev.

High commodity prices will support strong economic
performance. Economic activity should decelerate until
2Q13, but accelerate afterwards. We anticipate GDP growth
of 5.5% next year and to accelerate further in 2014 (IMF and
official: 6% for 2012). Growth will be supported by oil and
non-oil sectors of the economy. We look for an increase in
oil output due to production from Kashagan field after
March 2013 (the output in the first phase should be 370-
450kbpd). However, in the short term, the economy is
slowing due to falling external demand and weak agriculture
output. GDP growth was 5.2%oya for the first nine months          Kazakhstan macro forecasts
of 2012, below the 5.6% posted in 1H12. All sectors                                                   2012         2013     2014
decelerated sharply, except construction, retail and
                                                                  Growth (%oya)                        4.7         5.5      6.0
wholesale trade. Industrial output fell into negative territory
                                                                  Inflation (%eop)                     6.3         6.7      7.4
and we expect the weakness to persist into 1Q13. However,
                                                                  USD/KZT (eop)                       152          152      155
favorable base effects, increased production capacities and
                                                                  Current account (% GDP)              7.0         7.8       6.5
improvement in demand from China and Russia are likely to
                                                                  Fiscal balance (% GDP)               4.8         4.4      4.0
support strong IP growth especially in 2H13. Another
                                                                  Public debt/GDP (%)                 10.0         9.0       9.0
downside risk to growth comes from the fragile banking
                                                                  Ratings outlook: No change.
system, and we do not think the authorities will be able to
                                                                  Source: J.P. Morgan
find a solution for it next year. The fund for centralized

JPMorgan Chase Bank N.A., London Branch                          Emerging Markets Research
Brahim RazgallahAC (44-20) 7134-7546                             Emerging Markets Outlook and Strategy for 2013
brahim.x.razgallah@jpmorgan.com                                  November 21, 2012

                                                                 The FY2012/13 draft budget was approved by the emir
                                             Aa2 / AA/ AA        after a 6-month delay and is projected to increase 9% to
                                                                 KWD21.2 billion (US$75 billion). The wage bill is expected
Elections unlikely to unlock the crisis                          to increase 16% during the fiscal year, on top of the 24% rise
                                                                 last year. The steady increase in the wage bill (22% of total
    Political upheavals reached a new peak; tensions
                                                                 expenditure) has increasingly reduced flexibility of public
     likely to remain elevated after legislative elections       financing to rapidly adjust to lower oil prices. Capital
    Hydrocarbon sector to become a drag on real GDP             spending is often lower than budget estimates and the
     growth in 2013                                              difficult political backdrop could delay several projects
                                                                 further. Besides the increase in current spending, the budget
    Fiscal performance to remain strong during the              could post a large surplus of up to 32% of GDP, compared to
     fiscal year                                                 the projected deficit of KWD7.3 billion.

                                                                 Recovery in credit growth has been the slowest across the
Fundamentals and politics in 2013
                                                                 GCC, after the UAE. In particular, domestic credit to the
Kuwait is the first MENA sovereign with AA rating that           private sector decelerated to 4.8%oya in September after
could be negatively affected by regional upheavals,              posting a steady-but-slow uptrend. Renewed uncertainty will
despite its strong balance sheet. Fitch has recently warned      likely weigh on confidence and keep domestic banks
of a possible negative action on its credit rating, should       relatively cautious. Note that claims growth on the private
political developments spillover into heightened instability.    sector averaged 3.4% over the previous three years and if
Kuwait’s political crisis has seen a clear escalation in         this trend is extended, private domestic demand could
political demands which are unlikely to ease after the           remain weak through most of 2013. Also, the ability of the
legislative elections on December 1. While the opposition        central bank to stimulate the economy will be constrained by
has already called for an electoral boycott, a continuation of   the peg to the dollar. Overall, the outcome of legislative
parliament’s confrontational questioning of the Cabinet          elections will be critical to the country’s economic outlook
would likely extend the political stalemate. In fact, the        amid the drag from the hydrocarbon sector.
elections in December will be the second this year, and the
sixth since 2006. In the past, political divisions were
contained to tensions between several opposition factions
and members of the parliament. But recently, several
factions have called for constitutional amendments to move
toward a constitutional monarchy. The election campaign
will likely be dominated by ongoing street protests
organized by the opposition. The political outlook in 2013
will be tilted to the downside as legislative elections are
unlikely to ease tensions.

Kuwait’s economic performance is in sharp contrast to
its political backdrop. Real GDP growth was boosted by
crude oil production and prices as the onus of adjustment
largely fell on the Gulf Trio (Saudi Arabia, Kuwait, and
UAE) since early 2011. Currently, crude output reached           Kuwait macro forecasts
2.8mbd in September, according to the IEA—one of its                                                     2012     2013   2014
highest levels in more than four decades. This uptrend could     Growth (%oya)                           5.9      1.0    3.2
however be reversed in 2013 should OPEC members agree            Inflation (%eop)                        2.1      3.4    3.3
to cut production targets next year. The oil sector could then   USD/KWD (eop)                           0.28     0.28   0.28
become a drag on growth, while the non-hydrocarbon sector        Current account (% GDP)                 39.8     36.4   31.2
could remain weak on the back of political upheavals that hit    General government balance (% GDP)      34.1     22.1   24.2
confidence. Public spending will in fact be focused on           Public debt/GDP (%)                     4.0      3.8    3.8
current rather than capital expenditures, while the impact on
                                                                 Ratings outlook: One notch downgrade.
confidence and liquidity could keep recovery in the private
                                                                 Source: J.P. Morgan
sector (dominated by the financial sector) relatively weak.

JPMorgan Chase Bank N.A., Istanbul Branch                         Emerging Markets Research
Yarkin CebeciAC (90-212) 319-8599                                 Emerging Markets Outlook and Strategy for 2013
yarkin.cebeci@jpmorgan.com                                        November 21, 2012

                                                                  debt should fall to 40% of GDP within the next two years.
                                            Baa3/BBB/BBB          Meanwhile, partly thanks to the continued fiscal discipline
                                                                  and partly to a stable currency, inflation has fallen
Euro adoption more likely than ever                               consistently in recent months. At the beginning of the year,
                                                                  inflation was seen as the most difficult Maastricht criteria to
   Growth performance has become more balanced and
                                                                  satisfy. Encouragingly, despite the strong growth
    broad based                                                   performance, inflation has fallen to a two-year low of 1.6%,.
   Fiscal targets are set to be exceeded again                   We see inflation stabilizing below the 2% mark in the
                                                                  coming months and increasing to 2.2% by end-2014.
   We expect Latvia to adopt the euro in 2014
                                                                  We expect Latvia to formally adopt the euro at the
Fundamentals and politics in 2013                                 beginning of 2014. The country has already satisfied all of
                                                                  the Maastricht criteria and EU authorities will start the
The Latvian economy has proven to be more resilient to            evaluation process in March. After the European
the worsening in the global growth momentum than                  Commission and the ECB prepare their reports, the
expected. GDP growth surprised to the upside, reaching            European Council, comprised by the heads of government of
5.3% in 3Q12, expanding 1.7%q/q (sa) or 7.0% (saar). This         the EU member states, will give the final decision in July.
was arguably the best sequential performance in Europe and        Euro adoption has been seen as the best exit from the quasi-
the best Latvian record since 2Q11. Importantly, growth has       currency board structure that Latvia has adopted. S&P raised
become much more balanced and broad-based in recent               Latvia’s credit rating by one-notch to BBB mainly on the
months, with most of the sectors growing at respectable rates     improved prospects of euro adoption in 2014. The outlook is
and thereby contributing to the overall growth performance.       positive, implying that further upgrades could be in the
While domestic retail sales were up 10%oya, exports               pipeline if Latvia’s bid for euro adoption is accepted. In
managed to grow 13%oya in the first nine months of 2012.          order to speculate what could happen to Latvia’s credit
                                                                  rating after euro adoption, look at Estonia’s case. Currently
This strong performance caused us to revise the 2012              Estonia is rated at A1 by Moody’s, AA- by S&P and A+ by
growth forecast up to 5.1% from 4.5%. The fundamental             Fitch. These are all at least five notches above Latvia’s
basis for the recent impressive economic growth has been          rating. Although the pace of rating upgrades will most
improvement in export competitiveness. Latvia is now              probably depend on Latvia’s macro performance, the
reaping the benefits of the internal devaluation of three years   difference shows the potential for improvement in ratings.
ago. One advantage Latvia has is that its exports are directed
mainly to the relatively rapid growing countries in Europe.       Market strategy
However, this picture could change as Germany and Poland
(two major exports markets) slow down. Furthermore,               In external debt, we stay marketweight: Latvia’s USD-
continued fiscal consolidation along with the stagnation in       denominated bond issued in June saw the country enter the
bank lending will likely hurt domestic demand. Hence, we          EMBIG index. We are marketweight as fundamentals
see GDP growth slowing to 3.5% in 2013 before getting             remain solid, with low spreads already reflecting this.
closer to the potential growth rate of 5.0% in 2014.

Fiscal performance remains strong while inflation is
expected to remain low. Continued fiscal consolidation has
been Latvia’s main achievement in recent years. Public            Latvia macro forecasts
sector deficit fell sharply to 4.5% in 2011 from 10.2% of                                                   2012          2013        2014
GDP in 2009. Especially encouraging has been the
                                                                  Growth (%oya)                             5.1            3.5         4.3
government’s internalization of the need for fiscal discipline.
                                                                  Inflation (%eop)                          1.7            1.9         2.2
Consequently, the extra revenues resulting from fiscal
                                                                  EUR/LVL (eop)                            0.7028         0.7028      0.7028
reforms have not been spent and the fiscal targets have been
                                                                  Current account (% GDP)                   1.5            0.2         -2.3
consistently overachieved. The planned budget deficit for
                                                                  Fiscal balance (% GDP)                    -1.8           -1.0        -0.8
this year was 2.5% of GDP, but the performance so far
                                                                  Public debt/GDP (%)                       42.5           41.5        40.0
suggests that the deficit will likely fall to around 1.8%. We
see the deficit getting reduced further to 1.0% of GDP in         Ratings outlook: One notch upgrade from all main rating agencies.
2013 and further to 0.8% in 2014. In this scenario, public        Source: J.P. Morgan

JPMorgan Chase Bank N.A., London Branch   J.P. Morgan Securities plc        Emerging Markets Research
Brahim RazgallahAC (44-20) 7134-7546      Jonny Goulden (44-20) 7134-4470   Emerging Markets Outlook and Strategy for 2013
brahim.x.razgallah@jpmorgan.com           jonathan.m.goulden@jpmorgan.com   November 21, 2012

                                                                            years, which could hit domestic consumption if this lasts any
                                                            B1/B/B          longer. Note that dollarization of deposits has remained
                                                                            stable around 64% this year, but uncertainty and the
Embracing new uncertainties                                                 deterioration in purchasing power could add renewed
                                                                            upward pressure. Against this background, ample reserves at
    Regional risks to remain elevated; political tensions
                                                                            the central bank and proactive intervention should cushion
     to dominate 2013, but Cabinet to survive                               the impact on the banking system, in our view.
    Uncertainty to temper economic recovery;
     dollarization could rebound                                            The primary fiscal balance has improved this year after
                                                                            a weak performance in 2011. This performance was driven
    Primary balance improved this year; wage hikes to                      by expenditures, which leveled off, while revenues posted a
     weigh on 2013 fiscal outlook                                           mixed picture. Customs tax revenues printed a notable
                                                                            rebound this year, but VAT revenues remained relatively
                                                                            weak. The 2013 budget projects expenditures of US$15.3
Fundamentals and politics in 2013
                                                                            billion and a deficit of US$3.1 billion. But the budget is
Spillovers from Syria represent the major downside risks                    widely expected to be rejected by parliament—the
for next year. While the recent kidnappings in the northern                 parliament has not approved the budget since 2005. Upside
city of Tripoli are examples of potential spillovers from                   risks to political tensions will likely keep the burden of wage
Syria, we believe the killing of the top security chief on                  increases (estimated at US$1 billion) in debt rather than
October 19 could have more lasting effects on the country’s                 financed by higher revenues. Note that the external debt
outlook. Renewed street clashes and tensions between the                    increased US$1.8 billion this year, its highest increase in
March 8 and March 14 coalitions highlight new uncertainties                 eight years. While one-third of outstanding Treasury bills are
that will hit sentiment and growth. In the meantime, the                    held by the central bank, bank holding of T-Bills remains at
probability of a government collapse similar to early 2011 is               its lowest level since 2005 and represents a relatively good
relatively low, in our view, although supporters of the March               stress indicator.
14 coalition will maintain the pressure. Talks between the
March 8 and March 14 coalitions are set to be difficult and                 Market strategy
could last an extended period of time. Parliamentary
                                                                            In external debt, we stay marketweight: Regional tensions
elections scheduled for the spring are unlikely, in our view,
                                                                            are set to keep some downside risks for Lebanon bonds into
to defuse political tensions.
                                                                            2013, and will also weigh on growth. However, with bond
                                                                            spreads already 42bp wider over 2012 and international
Heightened uncertainty will likely keep real growth
                                                                            investors significantly underweight as local demand remains
below trend in the coming years. The coincident indicator
                                                                            strong, we stay marketweight.
and electricity consumption already point to negative real
GDP growth during the summer and most likely in 4Q12.
Full-year real GDP could slow down below 1% in 2012
before posting a modest recovery in 2013. The tourism
sector will remain the most negatively impacted, as 40% of
Arab tourists used to visit through Syria. In addition,
summer clashes that followed the kidnapping crisis and the
recent killing of the top security chief will likely push total
arrivals to the lowest level of the past five years.                        Lebanon macro forecasts
                                                                                                                 2012        2013    2014
Deposit inflows bottomed out during the summer, but                         Growth (%oya)                         0.7         2.0     2.5
renewed violence could spur a shift toward dollar                           Inflation (%eop)                     10.1         7.9     6.5
deposits. Deposit growth has reached 7.4%oya in                             USD/LBP (eop)                        1,504       1,504   1,504
September, a level slightly above the 5-6% threshold to                     Current account (% GDP)              -15.8       -15.7   -14.7
finance the private and public sector. Potential renewed                    General government balance (% GDP)   -8.4        -8.9    -8.2
violence or heightened political uncertainty, especially ahead              Public debt/GDP (%)                  134.8       136.0   136.2
of parliamentary elections, could extend the downtrend in
                                                                            Ratings outlook: No change.
deposit growth. Also, credit growth to the private sector
                                                                            Source: J.P. Morgan
remained on a steady downtrend over the previous two

JPMorgan Chase Bank N.A., Istanbul Branch                         Emerging Markets Research
Yarkin CebeciAC (90-212) 319-8599                                 Emerging Markets Outlook and Strategy for 2013
yarkin.cebeci@jpmorgan.com                                        November 21, 2012

                                                                  has surely been supportive of growth. There are two factors
                                            Baa1/BBB/BBB          behind the resilience in export performance. First, price
                                                                  competitiveness improved, led by the internal devaluation of
Political turmoil could hit prices                                the last four years. Secondly, Lithuania benefits from being
                                                                  largely detached from Europe’s southern periphery and from
   Formation of the new government takes time due to
                                                                  its proximity to a cluster of recently relatively solid
    debates over misconduct                                       economies, including not only Poland, the other two Baltic
   Growth remains strong thanks to export resilience             countries and Germany, but also Russia. Both of these
                                                                  factors are likely to remain valid and, despite weaker global
   Euro adoption will likely get delayed due to sticky           growth prospects and tamed domestic demand, GDP growth
    inflation                                                     is expected to slow down only marginally to 3.0% in 2013
                                                                  from an expected 3.2% this year.
Fundamentals and politics in 2013
                                                                  Fiscal performance is expected to remain strong but euro
A political crisis seems to have been avoided. The                adoption will likely be delayed due to high inflation. The
Constitutional Court decision of validating the election          outgoing Kubilius government managed to bring down the
results, but political noise is likely to remain high with the    public deficit to an expected 3.1% this year from 8.9% of
focus on the relations between the new government and             GDP in 2009. Although the winning coalition advocated for
President Grybauskaite. In the general elections held in the      fiscal easing during the election campaigns, they have
last week of October, Prime Minister Kubilius and the             recently adopted a more prudent rhetoric. Thus, we see the
coalition parties (including his Homeland Union) got              public deficit falling below 3% of GDP next year. The real
punished by the voters largely because of the herculean           risk lies in the stubbornly high inflation. Annual inflation
austerity measures implemented in the last three years.           has fallen to 3.1% from a peak of 5.0% in the last 18
                                                                  months, but some administrative price hikes and the sharp
Four opposition parties (former Finance Minister Algirdas
                                                                  increase in minimum wages that the election winning parties
Butkevicius’s Social Democrats, the Labor Party led by
                                                                  have promised will likely prevent a meaningful drop next
Russian-born entrepreneur Viktor Uspaskich, impeached
                                                                  year. As the inflation gets sticky around the 3% mark,
President Rolandas Paksas’s populist Order and Justice            Lithuania will most probably not be able to satisfy the
Party, and the Lithuanian Polish Action) altogether secured       Maastricht criteria on price stability and hence is unlikely to
78 seats in the 141-seat parliament. Although the parties         adopt the euro in 2014.
immediately reached an agreement to form a coalition
government, the formation of a government has been                Market strategy
slowed down by debates over misconduct. President
Grybauskaite decided to ask the Constitutional Court’s            In external debt, we are underweight: We recently moved
view on the validity of the election results citing criminal      underweight Lithuania, given tight spreads and increased
cases against the Labor Party and some of its leaders for         political risk from a left-leaning coalition that is likely to be
election and accounting violations. At the end, the court         less fiscally conservative. Lower regional growth also poses
decided that violations during last month’s parliamentary         risks into 2013, with valuation unattractive as spreads have
election were not substantial enough to invalidate the            tightened 263bp in 2012.
results, avoiding a potential constitutional crisis had the
ballot been annulled. Now the base case scenario is that the
four-party coalition will be formed excluding those
suspected Labor Party members from key posts. However,            Lithuania macro forecasts
the mandate of the prospective coalition has been tarnished                                           2012         2013     2014
and we see further friction between the president and the
                                                                  Growth (%oya)                        3.2          3.0      4.2
government in the coming months.
                                                                  Inflation (%eop)                     3.1          2.8      2.5
                                                                  EUR/LTL (eop)                       3.453        3.453    3.453
Growth has so far surprised to the upside thanks to the
                                                                  Current account (% GDP)             -2.8         -3.2      -4.5
strong export performance. Lithuania managed to secure
                                                                  Fiscal balance (% GDP)              -3.1         -2.8      -2.3
GDP growth of 4.4%oya in 3Q12. In seasonally-adjusted
                                                                  Public debt/GDP (%)                 40.1         39.4     98.2
annual terms, this corresponded to a growth of 5.4%, which
                                                                  Ratings outlook: No change.
was the highest growth rate seen since 2Q11. The 11%oya
                                                                  Source: J.P. Morgan
increase in exports scored in the first nine months of the year

JPMorgan Chase Bank N.A., London Branch                                Emerging Markets Research
Giulia PellegriniAC (44-20) 7742-6959                                  Emerging Markets Outlook and Strategy for 2013
giulia.pellegrini@jpmorgan.com                                         November 21, 2012

                                                                       has often stated that its aim is to rebuild its FX reserves
                                                 Ba3/BB-/BB-           buffers—up over 30% in 2012.

Fiscal discipline and progress on reforms                              Progress has been faster in power sector reforms than in
                                                                       oil and gas. In recent months a number of successful bidders
    S&P upgrades the country’s rating by one notch                    have been announced for the privatization of the unbundled
    Fundamentals to strengthen further amid reforms                   state power company. Contracts worth more than US$1.3
                                                                       billion have been awarded, with payments to come through
    But overhauling the oil sector will remain key                    in 1H13. In contrast, oil and gas sector reforms have been
                                                                       slow. The government has been cleaning up the sector by
Fundamentals and politics in 2013                                      indicting fraudsters among fuel importers and auditing oil-
                                                                       related transactions. The partial removal of the fuel subsidy
The recent floods are likely to dampen growth. The                     and the closing of loopholes have also helped rebuild FX
September floods damaged fields and oil pipelines. While oil           reserves and balances in the Excess Crude Account to
production has been largely restored, the impact on next year’s        US$8.4 billion. However, these remain under threat due to
agriculture season is still difficult to predict. Given the floods,    outstanding fuel subsidy payments and an ongoing dispute
slow progress on oil reforms, and fiscal tightening, real GDP          with state governors. This has also raised concerns around
growth is likely to remain modestly below potential (7.5%) in          prospective inflows to the new Sovereign Wealth Fund.
the medium term, at around 7%, with FDI to the energy sector           Finally, the Petroleum Industry Bill has been making slow
and private credit growth providing some support.                      progress through parliament. Our base case remains for an
Fiscal consolidation efforts are set to continue. The deficit          approval around mid-2013. Despite these concerns, S&P
is likely to be around 3% of GDP, down from 4.6% last year.            viewed reform progress as an important factor justifying the
The 2013 budget plans may still see changes as parliament              one-notch upgrade to BB- from B+.
pushes for a higher oil budget price than the proposed                 Market strategy
$75/bbl. However, the government seems set to maintain the
deficit below 3% of GDP, planning a -2.2% for next year.               In external debt, we stay marketweight: Fundamentals
                                                                       look set to improve further but valuations also reflect this.
2013 deficit funding plans include a new Eurobond and
less domestic issuance. Nigeria plans to issue a new US$1              In FX, we stay sidelined: The naira looks set to trade range
billion Eurobond next year as the authorities shift the focus          bound (USD/NGN157-158) amid the usual seasonal
from domestic to external debt in an effort to reduce the              fluctuations.
government’s borrowing costs. In 2013, Nigeria plans to
issue NGN727 billion (US$4.6 billion) domestically, down               In local rates, we are long 6-month T-bills and the
8% from this year. It also intends to set up a NGN100 billion          January 2022 FGNs, FX unhedged: We still see value in
sinking fund to repay maturing FGN bonds. This is likely to            6-month bills at 13.8%, especially in the short term with
put downward pressure on local yields, in our view.                    inflows in the FGNs having slowed markedly. Looking into
                                                                       2013, we think that duration exposure via the 2022s (target:
Inflation is set to ease in 2013, with the MPC likely to start         10.5%; stop loss: 14.0%) will continue to offer value amid
cutting rates in March. Base effects and tight monetary policy         high yields, lower domestic issuance, falling inflation,
should result in inflation dropping to around 9% in 1H13,              monetary easing and new inflows.
giving the MPC room to cut rates from the current 12% starting
in March, in our view. Monetary easing will likely be gradual          Nigeria macro forecasts
                                                                                                           2012         2013     2014
and slow down in the latter part of the year when inflation may
raise its tail again due to the impact of this year’s floods on 2013   Growth (%oya)                        6.5          6.7     7.2
harvests. We see the MPR closing 2013 at 10%.                          Oil production (mbpd)                 2.5          2.5     2.5
                                                                       Inflation (%eop)                    11.8         10.2      8.9
There is limited scope for currency appreciation, as the               USD/NGN (eop)                       157.0        157.0   158.0
CBN rebuilds FX reserves and keeps the naira stable.                   Current account (% GDP)               6.2          5.6     4.2
Despite the prospect of oil prices remaining elevated, oil             Fiscal balance (% GDP)               -2.9         -2.5    -2.8
production stabilizing around 2.5mbpd, FDI coming into the             Public debt/GDP (%)                  17.4         16.7    16.1
power sector and portfolio inflows continuing, we see the              Ratings outlook: No change.
naira trading range-bound at the 157-158 level. The CBN                Source: J.P. Morgan

JPMorgan Chase Bank N.A., London Branch   J.P. Morgan Securities plc        Emerging Markets Research
Nora Szentivanyi (44-20) 7134-7544        Jonny Goulden (44-20) 7134-4470   Emerging Markets Outlook and Strategy for 2013
nora.szentivanyi@jpmorgan.com             jonathan.m.goulden@jpmorgan.com   November 21, 2012
J.P. Morgan Securities plc
George Christou (44-20) 7134-7548

                                                                            Inflation to fall back to target by March; NBP set to cut
                                                          A2/A-/A-          another 100bp. Inflation has fallen back to the NBP’s target
                                                                            band (3.4%oya in October) and is set to slow further. We
Inflation slide creates room for rate cuts                                  expect a decline to 2.9% by end-2012 and to 2.5% by March
                                                                            2013. Inflation expectations have also eased back to the target
    Growth to remain well below trend through 2013 as
                                                                            band. The decline in headline inflation has been accompanied
     domestic demand continues to slow                                      by a slide in core inflation (1.9% in October), which we
    NBP to cut rates to 3.50% by April 2013                                expect to slow to 1.5% on the back of the cyclical slowdown
                                                                            and earlier zloty appreciation. Polish households will also
    We move underweight in FX and duration in our                          benefit from lower energy prices early next year thanks to
     Model Portfolio and recommend short PLN/RUB                            Poland’s new gas import agreement with Russia. We expect
                                                                            inflation to move sideways for most of 2H13, hovering around
                                                                            the 2.5% target midpoint. We think the NBP is much too
Fundamentals and politics in 2013
                                                                            optimistic in forecasting an inflation decline to 1.5% next
Sequential growth is likely to recover in 1H13, but will                    year. Even so, the projected decline in inflation and sharply
remain below trend. Growth momentum seems to have                           weaker growth will prompt the NBP to continue its easing
slowed sharply; we forecast just 0.5%q/q (saar) in 2H12                     cycle. We expect a further 100bp in rate cuts to 3.50% by
from an average 2% in 1H12. We then look for growth to                      April 2013. This would still leave real rates comfortably in
rebound to 1.8% in 1H13, which is consistent with the                       positive territory, which is a key condition for the NBP.
annual rate slowing to just 1.0% by 1H13. Polish growth is
still forecast to be the strongest in Central Europe and we                 Market strategy
remain reasonably confident that Poland will avoid
recession. Growth prospects for Germany (Poland’s main                      In local markets, we move underweight in FX and
export market) have deteriorated. Yet, net exports are likely               duration in our Model Portfolio and recommend short
to contribute positively to 2013 growth as import demand                    PLN/RUB: We expect Poland to underperform in 1H13.
will slow even more sharply, narrowing in the current                       The zloty is likely to weaken throughout 1H13, particularly
account deficit further. The contribution of domestic demand                versus the RUB and TRY where growth should remain solid
is likely to be seriously hampered by weaker labor market                   and rate cuts are unlikely. PLN may benefit from a pickup in
conditions, worsening consumer confidence, and slowing                      global risk sentiment in 2H13. In rates, we think the IRS and
EU fund inflows. Investment growth is likely to turn                        bond curves are too flat considering the amount of expected
negative as public spending is curbed by fiscal consolidation               policy rate cuts in the pipeline. We are positioning for curve
needs and the end of the EU financial perspective, while                    steepening in our Model Portfolio.
uncertain demand prospects will continue to weigh on
private investment. Recent regulatory changes point to some                 In external debt, we stay marketweight: Poland remains one
easing in lending standards for consumers next year, but                    of the stronger economies in Central and Eastern Europe, but
credit growth is set to slow further in the near term.                      current spreads of 131bp make it one of the tightest sovereigns
                                                                            in the EMBIG and growth in 2013 is forecast to undershoot
The budget deficit is likely to remain on a declining path,                 Asian and Latin American low spread comparisons.
but official targets have become much less ambitious. The
government has relaxed its ambitious fiscal targets and is
now looking to contain the deficit at 3.0-3.5% of GDP next
year compared to an earlier target of 2.2% of GDP. The
growth assumption underlying the 2013 budget (2.2%) looks                   Poland macro forecasts
                                                                                                                   2012      2013    2014
too ambitious to us. We expect the fiscal deficit to remain
broadly stable at 3.6% next year, which is slightly above the               Growth (%oya)                          2.3       1.6      2.3
official target. Most of the fiscal slippage we forecast will               Inflation (%eop)                       2.9       2.4      2.3
come from the revenue side as opposed to higher spending.                   EUR/PLN (eop)                          4.22      4.15    3.90
We expect the public debt-to-GDP ratio (on Polish                           Current account (% GDP)                -3.5      -3.0    -2.8
methodology) to remain below the 55% threshold thanks to                    ESA general government balance (% GDP) -3.8      -3.6    -3.2
the ongoing privatization drive and dividends from state-                   Public debt/GDP (%)                    56.0      56.3    56.3
owned companies. However, on EU methodology, public                         Ratings outlook: No change.
debt is set to remain above 56% through 2014.                               Source: J.P. Morgan

JPMorgan Chase Bank N.A., London Branch                         Emerging Markets Research
Brahim RazgallahAC (44-20) 7134-7546                            Emerging Markets Outlook and Strategy for 2013
brahim.x.razgallah@jpmorgan.com                                 November 21, 2012

                                                                represent the dominant driver of inflationary pressures next
                                             Aa2/AA/NR          year. Also, easing rent disinflation suggests that the drag
                                                                from oversupply in the real estate market has eased. The
Adjusting to lower growth                                       60% generous increase to public wages will add demand-
                                                                pull factors to headline inflation. But upside risks are more
    Oil and gas to drive real GDP growth lower through
                                                                related to large infrastructure spending, which could push
     next year                                                  asset prices higher, especially land.
    Lower revenues will reduce the budget surplus;
     higher wage bill to reduce flexibility of the budget       The exposure of domestic banks to the public sector has
                                                                increased rapidly since 2009. Credit to the economy
    Headline inflation to pose upside risks in the coming      extended its downtrend, posting 32%oya in September
     years; bank exposure to public lending elevated            compared to its 41% peak in May. These figures are broadly
                                                                driven by the public sector, which grew rapidly since mid-
                                                                2011. Credit to the private sector has also slowed down
Fundamentals and politics in 2013
                                                                driven by a sharp deceleration in personal loans and land.
The rapid expansion in real GDP has reversed this year          Yet, bank profitability will remain comfortable next year.
with growth in single digits for the first time since 2005.     The rapid expansion of the loan book in recent years pushed
As the LNG sector expansion comes to a halt, the FIFA           the loan-to-deposit ratio to a peak of 135% in March before
World Cup in 2022 will drive non-hydrocarbon growth in          decreasing to 123% in September. In our view, large
the coming years. Real hydrocarbon GDP should have              financing requirements for infrastructure spending and an
contracted in 3Q12 becoming a drag on growth. We estimate       elevated loan-to-deposit ratio will likely encourage debt
that full-year growth slowed to 5.1% in 2012 from 13% the       issuance in the coming years.
previous year. While growth in the LNG sector was likely
flat, the notable decline in crude production by 60kbd or 9%,   Market strategy
since December represented an additional drag on growth;
                                                                In credit, switch from Qatar 6.55% due 2019 to Abu
this most probably will be extended through 1Q13. We
                                                                Dhabi 6 ¾% due 2019: The large economic expansion in
forecast real GDP growth to slowdown further to 4.2% in
                                                                Abu Dhabi will slow in the coming years as most large
2013, although non-hydrocarbon growth will be supported
                                                                infrastructure projects are completed. At the same time,
by public spending. For example, Qatar is planning new
                                                                Qatar has embarked on a large scale expansion to prepare for
project tenders worth US$30 billion in 2013/14.
                                                                the FIFA World Cup in 2022. This will require a significant
                                                                increase in capital spending and we believe external debt
The budget deficit reached 2.6% of GDP in 1H12, mainly
                                                                levels will notably increase before the end of the decade. In
on the back of lower revenues in 2Q12. We estimate the
                                                                addition, Abu Dhabi will likely benefit from a steady
budget surplus to fall to 4.0% of GDP this year before
                                                                recovery in Dubai where refinancing risks have eased in
posting a modest rebound to 4.6% in 2013. This will be
                                                                recent years. We believe Qatari credit should trade wider
lower than the government’s target of 8.0% of GDP during
                                                                than Abu Dhabi, especially since the 2019 bond spread
the fiscal year. The government increased wages to public
                                                                differential is at one of its lowest levels this year. Also, the
servants by 60% and to military personnel up to 120%, one
                                                                spread differential on the 2019 bonds has lagged the
of the highest across the region in recent years, second only
                                                                widening of spreads on the 2014 bonds.
to Libya. The wage bill has therefore reduced the flexibility
of public finances to adjust to lower hydrocarbon revenues,
especially if the LNG sector is affected by the global          Qatar macro forecasts
expansion of shale gas.                                                                              2012        2013    2014
                                                                Growth (%oya)                        5.1         4.2     4.0
Inflation dynamics are rapidly changing with risks to the       Inflation (%eop)                     1.8         3.6     4.9
upside in the coming years. Headline inflation posted its       USD/QAR (eop)                        3.64        3.64    3.64
highest reading in recent years and accelerated 2.6%oya in      Current account (% GDP)              19.2        16.1    12.5
September from 2.3% the previous month and is set to            General government balance (% GDP)   4.00        4.6     4.2
remain on a steady uptrend, reflecting higher food prices and   Public debt/GDP (%)                  37.0        36.0    41.0
easing rent deflation. Rent accounts for 32% of the Qatari      Ratings outlook: No change.
CPI basket or 2.4 times the food weight and will therefore      Source: J.P. Morgan

JPMorgan Chase Bank N.A., London Branch   J.P. Morgan Securities plc        Emerging Markets Research
Nicolaie Alexandru (44-20) 7742-2466      Jonny Goulden (44-20) 7134-4470   Emerging Markets Outlook and Strategy for 2013
nicolaie.alexandru@jpmorgan.com           jonathan.m.goulden@jpmorgan.com   November 21, 2012
J.P. Morgan Securities plc
George Christou (44-20) 7134-7548

                                                                            absorbed in 2013. Foreign banks are gradually reducing their
                                             Baa3/BB+/BBB-                  exposure on Romania and FDI is also falling. Bank lending
                                                                            is shifting from hard currency to RON, but demand is rather
The economy will likely stagnate again                                      low given the elevated interest rates and the associated
                                                                            uncertainty (the focus on controlling the exchange rate
    Political uncertainty will probably persist after the                  induces volatility in interest rates). Given the political
     December 9 elections                                                   uncertainties and changes in tax policy, we see some
    Weak growth will require a renewal of the EU/IMF                       downside risks to our 2013 GDP growth forecast of 0.8%.
     agreement in 2Q13                                                      We look for inflation to increase above 6%oya in 1H13,
    NBR could hike the policy rate aiming to stabilize                     but to fall to 5% at end-2013. The central bank is more
     the currency                                                           optimistic, forecasting end-2013 inflation at 3.5%oya.
                                                                            Nonetheless, inflation will most likely remain outside the
                                                                            2.5%±1%-pt target band next year and the NBR’s optimistic
Fundamentals and politics in 2013
                                                                            forecast probably assumes a good agricultural year that would
Politics will likely remain tense next year, particularly in                push food prices sharply lower. We look for inflationary
1Q13. We expect the current ruling coalition (USL) to win                   pressures from regulated prices and second-round effects due
narrowly the December 9 parliamentary elections and                         to hikes in regulated prices and exchange rate weakening.
impose its PM. Yet, cohabitation with President Basescu                     Given weak domestic demand, we believe the NBR is tempted
will likely prove troublesome again. The risk of a third                    to ease. Yet, external repayments (mainly to the IMF) are big
impeachment of Basescu remains elevated and there is also a                 and currency stabilization, in our view, requires hikes in the
possibility of early presidential elections (instead of late                policy rate. We forecast two 25bp hikes in 1Q13.
2014). The USL announced its intention to lower the budget
deficit next year, but measures likely to be taken to achieve               Market strategy
this goal are not clear, especially given the USL intention to              In local market, we expect rates to trade higher and
change tax policy. There is a high likelihood that the flat tax             RON to weaken in 2013: We are positioned with a 6-month
will be scrapped and progressive taxation will be introduced.               cross-currency payer as the NBR will likely have to use
Also mentioned in the local press are possible lower social                 liquidity measures to tighten rates in order to stabilize the
contributions and lower VAT for food.                                       leu toward the end of 2012 as well as into next year. Our
Our base case is that Romania will sign a new deal with                     outlook for the RON is also bearish but negative carry
the EU/IMF in 2Q13. The president announced that a                          prevents us from entering a short RON position now. We see
decision was taken by Romanian authorities to reach a new                   potential for long EUR/RON positions at the start of next
EU/IMF deal (current agreement expires Mar. 2013).                          year. The NBR should allow enough FX weakness in the
Romania remains dependent on EU/IMF support to access                       months after the elections to counter the negative carry.
capital markets because of political uncertainty, lack of vision            In external debt, we remain underweight: Within our
on how to support growth, and lack of credibility over the                  EMBIG Model Portfolio we prefer underweights in the EMEA
sustainability of the fiscal consolidation. Government officials            EM region where growth prospects are lower, debt burdens
suggested that budget deficit targets for next year will be                 higher and where spreads have retraced significantly making
1.7% of GDP versus 2.2% for 2012 (these are cash targets).                  valuations less attractive again. With Romania slipping into
We expect the ESA95 budget deficit for both 2012 and 2013                   recession and elections still upcoming, we stay underweight.
to be below 3% of GDP. In our view, Romania remains
attractive from the point of view of public debt (expected at               Romania macro forecasts
about 37% of GDP in 2013), but FX denominated debt is                                                           2012         2013   2014
currently about 58% of total debt and is likely to increase.                Growth (%oya)                        0.0         0.8    2.0
                                                                            Inflation (%eop)                     5.4         5.1    4.5
The economy is stagnant. Economic activity sharply
                                                                            EUR/RON (eop)                       4.55         4.85   5.00
decelerated during past few months and we look for GDP
                                                                            Current account (% GDP)             -3.2         -3.6   -3.9
contraction in 4Q12 (3Q12 contracted 0.5%q/q). Next year
                                                                            Primary fiscal balance (% GDP)      -2.9         -2.8   -2.6
we expect a mild recovery driven by improved absorption of
                                                                            Public debt/GDP (%)                 35.5         36.9   37.7
EU funds. Romania managed to attract only EUR0.7 billion
during the first nine months of 2012 versus a full-year target              Ratings outlook: No change.
of EUR3.5 billion; we forecast EUR2 billion will be                         Source: J.P. Morgan

J.P. Morgan Bank International LLC   J.P. Morgan Securities plc        Emerging Markets Research
Anatoliy Shal (7-495) 937-7321       Jonny Goulden (44-20) 7134-4470   Emerging Markets Outlook and Strategy for 2013
anatoliy.a.shal@jpmorgan.com         jonathan.m.goulden@jpmorgan.com   November 21, 2012
J.P. Morgan Securities plc
George Christou (44-20) 7134-7548

                                                                       Barring substantial growth/inflation surprises, or changes in
                                         Baa1/BBB/BBB                  CBR leadership (current CBR Chairman Ignatiev retires in
                                                                       2Q13), we expect rates to remain unchanged in 2013. The
Slower growth and inflation in 2013                                    announced alterations to some of the CBR’s refinancing
                                                                       facilities, in particular a greater reliance on floating rates and
    We forecast growth to slow below trend in 2013                    more active use of longer-term refinancing facilities, may
    Inflationary pressures expected to moderate                       result in a slight implicit monetary policy loosening from 2Q13.

    CBR to stay on hold; RUB to outperform in 1Q13                    A market-unfriendly pension reform could be a risk. The
                                                                       government appears close to cutting down the funded pillar
                                                                       of the pension system by radically reducing obligatory
Fundamentals and politics in 2013
                                                                       contributions to the funded part (from 6% to 2%). If such a
Broad-based policy tightening is expected to result in                 decision is taken, this will place the pension system on an
growth slowing below trend in 2H12 and 1H13. Aside                     unsustainable path in the long run, as Russia’s population is
from anemic global growth, Russia’s economy is expected to             aging fast. This would also reduce the inflow of long-term
be affected by a trinity of policy-tightening steps. First,            money to the market and eliminate a natural buyer of
monetary policy tightening seen in 2011-12 will continue to            government and corporate paper.
weigh on domestic demand growth. Reacting to prior
increases in money market rates, credit and deposit rates              Market strategy
have continued to rise in recent months. Second, the CBR
                                                                       In local markets, we remain overweight duration, but
plans to tame the consumer credit boom via macroprudential
                                                                       take a 4.7% profit on our long Jun’17 OFZ trade and
regulation. Tighter provisioning rules for non-collateralized
                                                                       switch into the OFZ Feb27s: OFZ liberalization is likely to
consumer lending and other measures are expected to pull
                                                                       lead to a continued rally in rates at the start of 2013
banks’ capital adequacy ratio further down in 2013. This, in
                                                                       benefiting back end bonds, though worries about inflation
turn, should soon become a binding constraint for further
                                                                       and diminished support from foreign inflows could
credit expansion. Finally, fiscal policy is expected to become
                                                                       contribute to higher yields by end-2013.
more restrictive due to implementation of the new budget
rule. The Ministry of Finance estimates that the non-oil               In FX, we take a 1.7% profit on our short USD/RUB
federal budget deficit—a good proxy for the fiscal position            trade and open a short PLN/RUB trade, though we
for an oil economy—should fall by almost 1% of GDP. Off-               maintain our RUB FX OW in our Model Portfolio: We
budget measures should partially smooth the shock, but the             think that RUB will outperform at the start of the year as
net effect may reach around 0.5% of GDP, we estimate.                  current account dynamics improve and regional peers
Note that fiscal policy began tightening in 2H12—a payback             continue to cut rates. We take profits on our outright short
for the pre-election spending spree in early 2012.                     USD/RUB trade and switch into a less directional short
                                                                       PLN/RUB trade.
Slower growth is good news for core inflation, as the
economy is already operating at full capacity. The negative            In external debt, we remain marketweight in our
output gap closed in early 2012, and unemployment declined             EMBIG Model Portfolio, with a quasi-sovereign
to slightly below the neutral rate by mid-2012. Fortunately,           underweight in Sovcomflot: Russia’s strong balance sheet
this has not resulted in a material rise in private sector wage        is already reflected in low spreads but we see downside risks
growth. Nonetheless, inflation has been a concern. Therefore,          for quasi-sovereign Sovcomflot on weaker fundamentals and
the slowdown in 2013 growth (3%) to slightly below potential           risk of a government partial sale taking it out of the EMBIG.
(3.5%), together with the corresponding easing in underlying
inflationary pressures, should be a relief for the CBR.                Russia macro forecasts
                                                                                                           2012         2013      2014
The CBR is expected to keep policy rates unchanged in
                                                                       Growth (%oya)                        3.6         3.0       3.7
2013, though changes to refinancing facilities may result in
                                                                       Inflation (%eop)                     7.0         5.8       5.6
modest easing of monetary conditions. The mini rate hiking
                                                                       USD/RUB (eop)                       31.3         30.8      31.5
cycle that the CBR embarked on this fall has come to an end.
We believe the CBR’s hawkishness was aimed at containing               Current account (% GDP)              4.8         3.1       1.6
rising inflationary expectations—spurred by cost-push                  Fiscal balance (% GDP)               0.0         -0.2      -0.5
inflation—and improving credibility of its inflation targeting         Public debt/GDP (%)                 10.3         11.0      11.3
framework. However, the mounting signs that the economy is             Ratings outlook: No change.
cooling off are expected to temper the CBR’s hawkishness.              Source: J.P. Morgan

JPMorgan Chase Bank N.A., London Branch                         Emerging Markets Research
Brahim RazgallahAC (44-20) 7134-7546                            Emerging Markets Outlook and Strategy for 2013
brahim.x.razgallah@jpmorgan.com                                 November 21, 2012

Saudi Arabia
                                                                the near-term outlook of the Saudi real estate market, but
                                            Aa3/AA-/AA-         signals an increasing high-level commitment to deal with the
                                                                need to increase real estate supply and meet growing
Oil production likely to fall in 2013                           demand from the young and fast-growing population.
                                                                Despite its adoption, the mortgage law will have to be tested
   Onus of adjustment in global oil markets largely fell
                                                                in courts, which will provide creditors better visibility on
    on the Kingdom; output could fall in 2013                   their ability to enforce mortgage contracts. In the past,
   Credit to extend steady recovery through next year,         uncertainty related to enforcing mortgage contracts deterred
    which should support domestic demand                        banks from increasing their lending to the real estate market.

   Mortgage law to boost real estate lending but it            Bank financing of the real estate market is one of the
    should not be a near-term game changer                      lowest across the MENA region and accounts less than
                                                                10% of banks’ credit portfolio (2% of GDP). Not only
                                                                that but the market is largely dominated by commercial real
Fundamentals and politics in 2013
                                                                estate, representing almost 80% of total lending to the sector.
The Kingdom has played a critical role in the stability of      The experience of regional peers shows that foreclosure
global oil markets since early 2011. After several supply       remains little tested and the development of mortgage
disruptions over the previous two years, the onus of            lending a long-term process. That said, banks should offer
adjustment has largely fallen on Saudi Arabia with crude        the most dynamic channel to develop housing finance over
output at 9.7mbd or 1.6mbd above its OPEC quota in              the medium-term. Underdeveloped local markets (especially
October. As a result, real GDP growth posted its strongest      the long-end of the curve) have thus far limited the ability of
performance since 2003; oil prices also helped nominal GDP      non-deposit institutions to raise long-term funding on capital
to post its highest expansion in three decades. In addition,    markets. We believe real estate supply is not projected to
these dynamics boosted international reserves to                balance with dynamic demand before 2025. The Kingdom’s
US$630 billion in September. Potential production cuts          Ninth Development Plan highlights the commitment to
could however reverse the strong performance of the             tackle this area with additional housing needs estimated at
previous two years. Real oil GDP could therefore become a       1.25 million units during 2010-14.
drag on growth in 2013 but the non-hydrocarbon sector is set
to remain resilient. The budget surplus is expected to narrow   Market strategy
substantially next year. Assuming a 20% increase to
                                                                In FX, we position for tighter Saudi 5-year interest rate
expenditure, we estimate that the oil price breakeven could
                                                                swaps relative to USD 5-year interest rate swaps: Since
increase to $90/bbl if production falls to 9mbd and toward
                                                                the end of the summer, the spread of Saudi 5-year swap
$105/bbl should output fall closer to the OPEC quota.
                                                                rates to the US has widened to its highest level this year.
                                                                We believe the spread should tighten to nearly 60bp before
The steady recovery in credit growth will be key to boost
domestic demand next year. Credit to the private sector
accelerated 14.8%oya in September posting its highest
reading since March 2009. This recovery will likely be
extended in 2013 although this trend will remain below pre-
Lehman levels. Credit growth to the public sector could
remain relatively weak as oil surpluses finance capital
spending. Note that deposit and loan growth remained            Saudi Arabia macro forecasts
relatively close since mid 2010 but the loan-to-deposit ratio                                        2012        2013   2014
increased more than 3%-pts this year. This could have           Growth (%oya)                        5.6         3.5    4.5
contributed to push interbank rates upward. Also, excess        Inflation (%eop)                     3.6         3.8    4.2
reserves with the central bank remain elevated, suggesting      USD/SAR (eop)                        3.75        3.75   3.75
that banks are probably still cautious.                         Current account (% GDP)              26.0        19.1   15.7
                                                                General government balance (% GDP)   12.4        8.2    2.1
The Council of Ministers approved the long-awaited              Public debt/GDP (%)                  6.1         5.3    5.1
mortgage law earlier this year to boost real estate             Ratings outlook: No change.
financing. The law is not expected to dramatically change       Source: J.P. Morgan

JPMorgan Chase Bank N.A., London Branch   J.P. Morgan Securities plc      Emerging Markets Research
Anthony WongAC (44-20) 7134-7549          Jonny Goulden (44-20) 7134-4470 Emerging Markets Outlook and Strategy for 2013
anthony.wong@jpmorgan.com                 jonathan.m.goulden@jpmorgan.com November 21, 2012

                                                                          improvement in the fiscal deficit. However, we expect some
                                                    NR/BB-/BB-            fiscal slippage and foresee a fiscal deficit of 5% next year.
A testing year for fiscal consolidation                                   We forecast a mild rebound in 2013 growth to 1.5%
                                                                          underpinned by net exports. Growth has disappointed in
    Getting back on track with the IMF
                                                                          2012 with weather related disruptions and general weakness
    A moderate rebound in growth led by net exports                      in domestic demand. Domestic demand is expected to fall
                                                                          further in 2013, mainly as a result of fiscal consolidation.
    In external debt, we move back to marketweight                       However, exports are expected to be supported by a
                                                                          significant export expansion as the new Fiat auto plant
Fundamentals and politics in 2013                                         begins to increase production capacity.

The IMF mission visited Serbia in November and                            CPI accelerated sharply to 12.9%oya in October from
discussions have begun on a new loan arrangement. A                       10.3% in September. The 2.8%m/m jump was much higher
new IMF deal is likely to be struck in early 2013, and would              than we anticipated. We now see CPI ending the year at
provide an important backstop for Serbia. Earlier this year,              14.1%oya from 13.0% previously. The impact of inflation
the IMF highlighted that “Serbia’s economic outlook is                    from food is expected to dissipate gradually, but inflation is
clouded by weak economic conditions and sizable domestic                  expected to remain volatile and well above the NBS target
and external imbalances.” The IMF expects a fall in real                  throughout 2013.
GDP of 0.5% this year (J.P. Morgan: -1.0%) and
underscores upside inflation pressures emanating from the                 The NBS announced that it will keep its inflation-
food price shock. On the fiscal side, the IMF has urged the               targeting monetary policy framework. The 1-week
authorities to embark on greater fiscal consolidation than                repurchase rate will be retained as its key monetary policy
what was presented in the 2012 supplementary budget (in                   instrument. In its Monetary Policy Report, the NBS said
fact, the supplementary budget presented a higher deficit                 that it will continue to target medium-term inflation
than originally planned). The focus of the IMF’s visit                    stability by changing interest rates in “a consistent and
centered on the draft budget for 2013, the fiscal                         predictable manner, depending on economic conditions
consolidation program and the medium-term                                 and inflation outlook.”
macroeconomic framework.
                                                                          Market strategy
Returning to negotiations with the IMF is a signal that
the government is committed to reducing the budget                        In external debt, we remain underweight.
deficit. Relations with the Fund have improved relative to
August this year when the new government passed a
controversial central bank law (which limited the
independence of the NBS) against the recommendation of
the IMF and EC. Since then, the government quickly
reversed the law and announced drastic cuts in the 2013
budget deficit. The government is also looking to increase
labor flexibility and discouraging early retirement.

Budget execution in focus next year. We expect some                        Serbia macro forecasts
fiscal slippage but believe there is a lower risk of derailing                                                2012         2013   2014
the IMF package again. The previous IMF deal was frozen                    Growth (%oya)                       -1.7        1.5    2.0
after heavy pre-election spending pushed the deficit level to              Inflation (%eop)                   14.1         9.5    7.0
unsustainable levels, breaching the legislative limit of 4.5%.             EUR/RSD (eop)                       113         117    120
The government is targeting a reduction in the budget deficit              Current account (% GDP)            -10.8        -8.6   -7.0
to 3.6% for 2013 from 6.7% this year. The announced VAT                    Fiscal balance (% GDP)              -6.7        -5.0   -4.0
increase, and lower-than-inflation indexation of wages and                 Public debt/GDP (%)                60.0         63.0   63.5
pensions are expected to contribute to the majority of the                 Ratings outlook: No change.
                                                                           Source: J.P. Morgan

JPMorgan Chase Bank, N.A., Johannesburg Branch   JPMorgan Chase N.A., London Branch   Emerging Markets Research
Sonja Keller (27-11) 507-0376                    Jose Cerveira (44-20) 7742-3556      Emerging Markets Outlook and Strategy for 2013
sonja.c.keller@jpmorgan.com                      jose.a.cerveira@jpmorgan.com         November 21, 2012
J.P. Morgan Securities plc                       J.P. Morgan Securities plc
Jonny Goulden (44-20) 7134-4470                  George Christou (44-20) 7134-7548
jonathan.m.goulden@jpmorgan.com                  george.g.christou@jpmorgan.com

South Africa
                                                                                      to annual inflation in January 2013. Given the likely breach
                                                   Baa1/BBB/BBB+                      of the inflation target band around mid-year and continued
                                                                                      outlook deterioration, we see only a 25% chance of a rate cut
Effects of strikes to spill over into 1H13                                            in 2013. Instead, rates should hold until 2H14 or beyond
                                                                                      with an output gap of around 3.5% of GDP next year.
     Recovery in mining production to underpin technical
      bounce, but growth remains sub-trend                                            Further growth disappointments, relative to Treasury
     Current account deficit to widen further in 1Q13 on                             forecasts, are likely to lead to modest revenue under-
      mining export losses before easing to 5%                                        collection next year, without material implications for
                                                                                      the deficit and issuance. The National Treasury projects a
     Likely breach of inflation target band in mid-2013                              budget deficit of 4.8% and 4.5% of GDP in FY12/13 and
      suggests limited scope for rate cut                                             FY13/14, respectively, but this is based on relatively benign
                                                                                      GDP growth assumptions of 2.5%y/y in 2012 and 3.0% in
                                                                                      2013. We expect tax revenues and capital expenditures to
Fundamentals and politics in 2013
                                                                                      undershoot projections, thus keeping the deficit close to
Large-scale industrial action in mining has weighed on                                Treasury’s targets. Ratings agencies will likely closely
economic activity since August and the consequences are                               monitor measures of fiscal flexibility, particularly as they
set to spill over into 2013. GDP should contract 1%q/q (ar)                           relate to the public sector wage bill. The public wage bill
in the current quarter as the losses from mining shave off 2-                         targets in the budget are, in our opinion, difficult to achieve,
2.5%-pts from growth. With most of the strikes now settled,                           and ratings agencies are likely to retain their negative
mining production will be slowly ramped up and reach near                             outlook for South Africa. In addition, we expect Fitch to
pre-strike levels by early 2Q13, underpinning a bounce in                             follow through with a one-notch downgrade to BBB on hard
growth in 1Q13. Meanwhile, manufacturing production,                                  currency debt after Moody’s and S&P both downgraded
which likely contracted in 4Q12, should improve modestly                              South Africa since September.
in 2013. We therefore see GDP growth improve to 2.7%y/y
in 2013 from 2.3% this year, yet remain below trend growth                            Market strategy
of 3.3%. Industrial relations in the mining sector remain
                                                                                      In local markets, we expect rates and FX to remain
tense and risks of further strikes are elevated in 2Q13, when
                                                                                      under pressure at the start of the year, but FX to rally in
multi-year wage settlements are negotiated.
                                                                                      2H13 as ZAR and global risks abate: We position with an
                                                                                      underweight in ZAR and duration in the start of the year, but
We expect the current account deficit to deteriorate
                                                                                      are likely to reposition in 2Q13. We remain bearish for now
further and peak close to 7% of GDP in 1Q13 before
                                                                                      as the largest current account impact from the strikes should
settling at around 5% in 2H13. Worsening terms of trade,
                                                                                      not be felt until the end of the year and wage negotiations in
high capital goods imports due to public sector infrastructure
                                                                                      1Q13 could renew pressures. As country specific and global
projects, and volatile commodity exports have led to a
                                                                                      risks ease in 2H13, high beta ZAR could outperform.
widening trade deficit since mid-2011. In the near term, we
see a further sharp deterioration as the hit to exports from
                                                                                      In external debt, we remain underweight: Compared to
mining production losses will likely only peak in December.
                                                                                      other low-spread EM Sovereigns, downside risks remain and
We estimate that the strikes will add 1.5-2%-pts of GDP to
                                                                                      have still to be fully reflected in spreads in our view.
the current account deficit in 4Q12 and 1Q13, bringing it
close to 7% of GDP. The outlook for 2H13 improves as
exports recover and we expect a full-year deficit of 5.3% in                          South Africa macro forecasts
2013 from 5.7% in 2012 and 3.3% in 2011.                                                                                      2012     2013    2014
                                                                                      Growth (%oya)                            2.3     2.7      3.6
Inflation should rise further to peak at 6.5% in mid-2013
                                                                                      Inflation (%eop)                         5.4     5.4      5.0
before easing back to the target band by end-2013, in our
                                                                                      USD/ZAR (eop)                           8.85     8.20    8.35
view. Food inflation, which remained contained through
                                                                                      Current account (% GDP)                  -5.7    -5.3    -4.6
most of this year, has now begun to jump higher and is the
                                                                                      Fiscal balance (% GDP)                   -4.8    -4.5    -3.7
key driver of inflation. Pass-through from recent currency
                                                                                      Public debt/GDP (%)                     41.3     42.4    42.7
weakness and high administered price inflation are further
contributing factors. In addition, we estimate that the CPI                           Ratings outlook: One notch downgrade by Fitch.
basket re-weighting and re-basing should add 0.35-0.4%-pt                             Source: J.P. Morgan

JPMorgan Chase Bank N.A., London Branch                            Emerging Markets Research
Brahim RazgallahAC (44-20) 7134-7546                               Emerging Markets Outlook and Strategy for 2013
brahim.x.razgallah@jpmorgan.com                                    November 21, 2012

                                                                   relatively high growth assumption of 4.5% next year.
                                            Ba3/BB/BBB-            Public spending will be driven by a 12% increase to the
                                                                   wage bill and the elevated burden of subsidies (particularly
Lower growth next year                                             energy subsidies), which will be 2.7 times higher than their
                                                                   2010 level. Revenues will likely fall below the
    The political and economic outlook should suffer
                                                                   government’s projections. The fragile economic
     large downside risks in 2013                                  environment should in fact keep tax revenues relatively
    Budget deficit to widen substantially next year; wage         weak while repetitive strikes will likely reduce further
     bill to reduce flexibility of public finances                 revenues from public sector entities.

    Headline inflation to remain elevated and                     The increase in headline inflation reflects supply and
     increasingly driven by demand-pull factors                    demand factors. The broadly-based increase in the CPI
                                                                   points to weaker expectations, the impact of excess liquidity,
                                                                   and the substantial increase in the wage bill. Average wages
Fundamentals and politics in 2013
                                                                   increased at their highest pace in a decade and reached
The rapid deterioration in the political and economic              7%oya in 2Q12. Demand-pull factors could pose a dilemma
outlook is reflected in our 2013 forecast. Tentative               to the central bank in 2013, as policy space has been
attempts to ease the political and social malaise have failed      substantially reduced. Total refinancing from the central
to reach a broad-based national consensus. And the rapidly         bank reached 8% of GDP this year and monetary policy will
changing political landscape has contributed to mounting           likely be moderately tightened in 2013 to reduce upside risks
tensions in recent months following the several defections         to headline inflation. Recently, the central bank raised its
within the Constituent Assembly that have altered                  policy rate and tightened credit rules to reduce import
representation of the different political factions. Importantly,   growth. But without fiscal consolidation and structural
the absence of a clear roadmap for legislative and                 reforms, the relatively loose monetary policy could be
presidential elections, delays to structural reforms and           extended further, adding some demand-pull pressures.
recurrent violence have largely deterred confidence. The
political stalemate is likely to be extended, in our view, with    Market strategy
large downside risks amid the deterioration in
                                                                   In credit, we switch from Tunisia sovereign bond 4 ½%
macroeconomic fundamentals and sizable refinancing needs
                                                                   due 2020 to Bahrain sovereign bond 5 ½% due 2020: The
in 2013. In particular, higher oil prices will likely continue
                                                                   CDS spread differential between the two countries has
to weigh on public finances and the external account in the
                                                                   increasingly priced in the relative deterioration of Tunisia’s
absence of reforms.
                                                                   outlook with Bahrain sovereign debt protection trading
                                                                   120bp inside Tunisia. However, sovereign bonds still do not
Heightened uncertainty and the European debt woes
                                                                   fully reflect this divergence with the spread between the two
should keep real GDP growth well below potential in the
                                                                   bonds at 60bp. Bahrain gross public debt-to-GDP ratio is
coming years. The moderate rebound in 1H12 reflects base
                                                                   10%-pts lower than Tunisia and has a more favorable
effects and a modest improvement in tourism and
                                                                   sovereign rating outlook. In addition, Bahrain will continue
manufacturing. However, renewed violence since the
                                                                   to benefit from generous support from the rest of GCC
summer has taken its toll on the tourism sector and
                                                                   countries while higher oil prices boost public revenues.
exacerbated the bank exposure of the tourism industry.
According to the IMF, one-third of hotels faced severe
financial distress in 2011. As violence delays the recovery of     Tunisia macro forecasts
the sector, NPLs related to the industry are likely to jump in                                             2012     2013   2014
coming years. Importantly, net exports will likely remain a        Growth (%oya)                           2.4      2.0    2.8
drag in the absence of structural reforms to boost export          Inflation (%eop)                        5.2      4.8    3.9
performance. For example, social tensions and recurrent            USD/TND (eop)                           1.60     1.62   1.65
strikes have reduced phosphate exports since the revolution.       Current account (% GDP)                 -7.5     -8.0   -6.7
                                                                   General government balance (% GDP)      -6.2     -7.1   -6.5
The 2013 budget deficit will likely widen to its highest           Public debt/GDP (%)                     49.9     50.2   53.9
level in more than two decades. The budget, which is to            Ratings outlook: One notch downgrade.
be approved by the Constituent Assembly, is based on the           Source: J.P. Morgan

JPMorgan Chase Bank N.A., Istanbul Branch   J.P. Morgan Securities plc          Emerging Markets Research
Yarkin CebeciAC (90-212) 319-8599           George Christou (44-20) 7134-7548   Emerging Markets Outlook and Strategy for 2013
yarkin.cebeci@jpmorgan.com                  george.g.christou@jpmorgan.com      November 21, 2012
J.P. Morgan Securities plc
Jonny Goulden (44-20) 7134-4470

                                                                                will likely keep the CAD wide, but it is encouraging to see
                                                   Ba1/BB/ BBB-                 the government taking some structural measures that could
                                                                                support the sustainability of external rebalancing over the
CAD narrows but inflation remains high                                          medium to long run. The recently introduced government
                                                                                incentives to stimulate private pension contributions will
    Turkey manages to land softly thanks to export
                                                                                increase household saving gradually and over time.
    External rebalancing is expected to continue albeit at                     Tax and administrative price hikes help the fiscal
     a slower pace                                                              performance, but push inflation up. A series of VAT and
                                                                                special consumption tax hikes along with increases in
    Administrative price hikes keep inflation high                             natural gas and electricity prices introduced by the
                                                                                government will probably be enough to keep the budget
                                                                                deficit in the 2.0-2.5% of GDP range in the coming months.
Fundamentals and politics in 2013
                                                                                However, the increase in administrative prices is the main
Turkey has managed to land softly as the weakness in                            reason why inflation is currently at 7.8%. Thanks to weak
domestic demand was offset by resilient exports. After                          domestic demand, second-round effects of these supply
9.2% growth in 2010 and 8.5% growth in 2011, the economy                        shocks will be limited. Still, we see inflation remaining
expanded only by 3.1% in 1H12. Growth was solely driven                         persistently above the 7% mark until August 2013 and
by export strength, while consumption and investment                            falling only to 6.2% (higher than the official forecast of
posted negative growth rates. The key factor behind export                      5.3%) by end-2013.
strength has been the success of the Turkish exporters in
diversifying away from the slow-growing EU to faster-                           Market strategy
growth regions like the Middle East and Africa. Particularly
notable is the jump in exports to Iraq, Libya, and the GCC                      In local markets, we move overweight duration and FX:
countries. As import demand in these countries is structural                    Turkey is likely to be an outperformer in 1H13. Strong
rather than cyclical, this transformation will likely support                   growth compared to Central and Eastern Europe and low FX
the sustainability of Turkey’s export strength. The main                        volatility should help TRY outperform other EMEA EM FX
reason behind the domestic demand weakness has been the                         peers in 1H13. FX interventions risks may, however,
risks of a possible contagion from Europe and concerns over                     materialize in 2H13, capping potential TRY outperformance.
the Syrian problem. Also influential has been the high                          In rates, high yields, low rates and FX volatility and
borrowing costs. As the CBRT eases monetary policy, bank                        potential rating upgrades make Turkish bonds standout in
lending rates have started to come down. Lower rates along                      the region next year.
with the fading of Syria-related risks will likely lead to a
recovery in domestic demand. However, as the CBRT                               In external debt, we are overweight: We see medium-term
remains wary of a risk of a sharp recovery in demand and                        outperformance versus other low spread EMBIG sovereigns
remains ready to react, we see only a gradual recovery in                       as fundamentals continue to improve, with a larger-than-
demand conditions. Hence, we see GDP growth increasing                          expected improvement in external imbalances. We also now
to 3.7% in 2013 from 2.8% this year.                                            see further ratings upgrades as more imminent and spreads
                                                                                are still wide to other low spread EM sovereign comparables.
Rapid external rebalancing has been one of this year’s
key Turkish achievements. The 12-month trailing current                         Turkey macro forecasts
account deficit narrowed sharply to US$55.8 billion (7.2%                                                              2012          2013    2014
of GDP) as of end-September from US$77.1 billion (10.0%                         Growth (%oya)                           2.8           3.7    4.5
of GDP) as of end-2011. While we expect the improvement                         Inflation (%eop)                        7.0           6.2    5.8
to lose some momentum in the coming months, we still see                        USD/TRY (eop)                          1.80          1.75    1.70
the deficit shrinking further to 7.0% of GDP by the end of                      Current account (% GDP)                 -6.8          -6.5   -6.5
this year and to 6.8% of GDP by the end of 2013. The sharp                      Fiscal balance (% GDP)                  -2.5          -2.3   -2.3
(and probably temporary) increase in unprocessed good                           Public debt/GDP (%)                    39.5          38.1    37.0
exports supported the improvement but CAD was sharply
                                                                                Ratings outlook: One notch upgrades by Moody’s and S&P.
narrower even if the unprocessed gold trade is excluded. The
                                                                                Source: J.P. Morgan
low savings rate and high dependence on energy imports

JPMorgan Chase Bank N.A., London Branch                          Emerging Markets Research
Brahim RazgallahAC (44-20) 7134-7546                             Emerging Markets Outlook and Strategy for 2013
brahim.x.razgallah@jpmorgan.com                                  November 21, 2012

                                                                 which could remain elevated this year supported by high oil
                                              Aa2/NR/NR          production levels. Collection of public revenues is likely to
                                                                 disappoint in 2013, reducing public spending. According to
Abu Dhabi: The country’s growth engine                           our estimates, the consolidated fiscal accounts in last year’s
                                                                 budget were based on an oil price breakeven of $80-85/bbl.
    Abu Dhabi to remain engine of real GDP growth; oil
                                                                 The steady increase in the oil price assumption has reduced
     production to become a drag in 2013                         the flexibility of the budget to rapidly adjust to lower oil
    Steady recovery in Dubai to be extended though              prices. Yet, capital spending is expected to decrease in the
     2013; no impact on trade with Iran in 1H12                  coming years as most megaprojects are completed.

    Central bank rules on bank exposure to delay credit         Weak recovery of credit to the economy will likely be
     recovery to 2H13                                            extended through 2013. The unintended consequence of the
                                                                 central bank rule limiting bank exposure to local
                                                                 governments and GREs is the delayed credit growth. While
Fundamentals and politics in 2013
                                                                 we believe banks are not expected to comply with the rule in
Abu Dhabi expects the emirate to remain the engine of            the coming years, banks will likely remain cautious during
growth and to grow 5.7% annually in 2013-16. The                 the gradual adjustment of their balance sheets. The uptrend
Department of Economic Development expects real GDP              in UAE credit growth could thus remain the weakest across
growth of 3.9% this year (J.P. Morgan: 4.1%) boosted by the      the GCC, weighing on private domestic demand. In the
non-hydrocarbon sector, which is expected to grow 5.5%           meantime, we estimate that NPLs are likely to stabilize
this year before accelerating to 6.5% over the next four         around 10% early next year after leveling off close to 8.0-
years. Non-hydrocarbon growth will be largely driven by          8.5% during the summer.
household consumption and investment, which is projected
to grow 9.6% and 11.3%, respectively, this year. Note that       Market strategy
higher crude supply and oil prices provided a timely boost to
                                                                 In credit, we switch from Qatar 6.55% due 2019 to Abu
public revenues amid rapid expansion. Yet, as the pace of
                                                                 Dhabi 6 ¾% due 2019: The large economic expansion in
infrastructure spending slows down, real GDP growth will
                                                                 Abu Dhabi will slow down in coming years as most large
likely remain below government projections, in our view. A
                                                                 infrastructure projects are completed. At the same time,
cutback in domestic oil production next year would reinforce
                                                                 Qatar has embarked on a large scale expansion to prepare for
this view. UAE real GDP growth will thus increasingly
                                                                 the FIFA World Cup in 2022. This will require a significant
depend on the pace of economic recovery in Dubai, three
                                                                 increase in capital spending and we believe external debt
years after the Dubai World restructuring.
                                                                 levels will notably increase before the end of the decade. In
                                                                 addition, Abu Dhabi will likely benefit from a steady
Most economic indicators point to a steady-but-slow
                                                                 recovery in Dubai, where refinancing risks have eased in
recovery in Dubai post-2011. The emirate has attracted
                                                                 recent years. We believe Qatari credit should trade wider
capital and tourism inflows in part due to regional social
                                                                 than Abu Dhabi, especially that the 2019 bond spread
instability. For example, the flow of passengers through
                                                                 differential is at one of its lowest levels this year. Also, the
Dubai airport increased 13% in January-September while the
                                                                 spread differential on the 2019 bonds has lagged the
size of real estate transactions have been recovering steadily
                                                                 widening of spreads on the 2014 bonds.
since early 2009, although the total size per transaction
remains on a downtrend. There are no indications that
international sanctions against Iran have affected bilateral     UAE macro forecasts
trade. IMF data shows that UAE-Iran trade, which is largely                                           2012        2013    2014
dominated by exports from Dubai, increased 33% between           Growth (%oya)                        3.8         2.9     3.6
late 2010 and June 2012.                                         Inflation (%eop)                     0.9         2.2     3.1
                                                                 USD/AED (eop)                        3.67        3.67    3.67
The Cabinet approved a balanced 2013 federal budget              Current account (% GDP)              8.2         6.1     7.2
with total spending projected at US$12.1 billion. The            General government balance (% GDP)   8.6         7.2     6.1
Ministry of Finance will publish the consolidated budget on      Public debt/GDP (%)                  14.1        15.4    15.3
a quarterly basis starting in 2013, taking a bold step toward
                                                                 Ratings outlook: No change.
more transparency. The first published consolidated
                                                                 Source: J.P. Morgan
accounts show a US$9.9 billion surplus in the UAE in 2011,

JPMorgan Chase Bank N.A., London Branch   J.P. Morgan Securities plc        Emerging Markets Research
Nicolaie Alexandru (44-20) 7742-2466      Jonny Goulden (44-20) 7134-4470   Emerging Markets Outlook and Strategy for 2013
nicolaie.alexandru@jpmorgan.com           jonathan.m.goulden@jpmorgan.com   November 21, 2012

                                                                            external demand for iron ore and steel, but now the
                                                          B2/B+/B           contraction seems to have worsened because of high interest
                                                                            rates. We expect GDP growth to be close to zero in 2012
The year of adjustment                                                      (from 2.5%oya for 1H12) and only about 1% next year.
                                                                            However, risks appear skewed to the downside given the
    The new government is likely to enjoy stable support
                                                                            possible UAH devaluation and higher gas prices affecting
     in the new parliament                                                  domestic demand more than we currently anticipate. The
    IMF deal should happen in 2H13 after devaluation                       risk of no meaningful recovery in demand for steel is also
                                                                            quite marked. As a result, we may not rule a scenario with
    We look for UAH to devalue to 9.5/USD in 1Q13                          negative GDP in 2013 and this would further complicate
                                                                            implementation of reforms required by the IMF and by the
Fundamentals and politics in 2013                                           state of the economy.

The final results of the Central Electoral Commission                       Local authorities are likely to ask the IMF for help only
show a clear victory of the main ruling party. Party of                     as a last resort. We expect a new program in 2H13 (the
Regions (PoR) has 185 seats in the new parliament while the                 current deal is off-track and expires on December 27).
three opposition parties have together 178 seats. PoR can                   Because of elections, adjustments required by the IMF were
rely on communists (32 seats) and probably on most of the                   delayed and imbalances grew in the meantime. Yet, before
independents (50 seats) to secure a stable majority (226 seats              signing a deal we think the IMF will continue to insist on a
are needed for a majority). Given the composition of the new                30% hike in gas prices for households and almost 60% for
parliament and the history of defectors from opposition                     utility companies, in order to push for more exchange rate
parties, we do not rule out that PoR could strengthen its                   flexibility and better control over public spending. Inflation
position during the next 1-2 years. Popular support for                     was at 0%oya in October, but we look for acceleration to
President Yanukovych is at all-time lows (below 10%) and                    almost 10% next year on the back of currency depreciation
his re-election in March 2015 will likely be achieved only if               and adjustments in regulated prices (mainly natural gas).
the constitution is changed so that the president is elected by
the parliament. We believe that the strong results after the                Market strategy
elections might cause PoR to implement some reforms
sooner rather than later. A new government will probably be                 In external debt, we remain underweight: Ukraine
announced after mid-December, but its domestic and                          sovereign spreads have tightened 222bp over 2012 as
external policies will probably not deviate strongly from the               markets have priced lower regional stress from Europe. In
previous government.                                                        Ukraine, growth is weakening and an IMF deal which would
                                                                            help stabilize the financing situation is still unlikely to
The UAH will probably weaken before end-1Q13. Money                         happen soon, even now that the elections have passed.
market rates have reached levels not seen even before the
40% devaluation in late 2008. FX reserves (excluding gold)
fell sharply in both September and October (by US$4 billion
in total). The current account deficit is widening fast (it is
already at about 7% of GDP on a rolling basis) and a
correction next year would be possible only with a flexible
exchange rate. The slow UAH depreciation has been
engineered with elevated interest rates, exacerbating the                   Ukraine macro forecasts
economic downturn. The NBU implemented the law                                                                  2012         2013   2014
requiring exporters to surrender 50% of their hard currency                 Growth (%oya)                        0.3         1.0     4.1
proceeds to the central bank for the next six months (the law               Inflation (%eop)                     1.2         8.1     7.5
was approved in parliament on November 6). This capital                     USD/UAH (eop)                        8.4         9.0     9.5
restriction further delays an IMF agreement. The regulation                 Current account (% GDP)             -7.7         -6.3   -5.5
would ensure inflows around US$3 billion per month for the                  Fiscal balance (% GDP)              -5.1         -4.4   -3.5
next six months but would not solve the fundamental issues                  Public debt/GDP (%)                 39.2         41.8   41.6
and pressure on the currency will likely persist. The                       Ratings outlook: No change.
economy was slowly entering recession as a result of weak                   Source: J.P. Morgan

JPMorgan Chase Bank N.A., London Branch                            Emerging Markets Research
Giulia PellegriniAC (44-20) 7742-6959                              Emerging Markets Outlook and Strategy for 2013
giulia.pellegrini@jpmorgan.com                                     November 21, 2012

Angola                                        Ba3/BB-/BB-          Zambia                                                   B1/B+/B+
High oil prices to support macro stability                         High public spending set to continue
    Growth set to rise on higher oil and gas production                Domestic borrowing to increase by over 40%
    The Eurobond rally may have more to go                             ZMK set to weaken on higher imports
Fundamentals and politics in 2013                                  Fundamentals and politics in 2013
Oil and gas production is likely to be higher in 2013,             Expansionary fiscal policy and higher copper prices should
supporting economic growth. For 2012, we forecast real             support growth, despite slow progress on reforms. The
GDP growth of 7.1%, while in 2013 we expect higher oil and         deficit is projected to remain c.4.3% of GDP, similar to 2012,
gas production, following maintenance work on existing oil         but spending should go up by 16% and domestic issuance by
pipelines and the LNG plant going live. We also see the            43%. Higher public spending is likely to support growth and so
energy, transport, and construction sectors performing well on     will an expected rebound in copper prices (J.P. Morgan estimate:
public investment spending and government arrears settlement       US$8,850 pmt average, up 10% from 2012). Slow progress on
so we project real GDP growth to rebound to 7.5% in 2013.          mining sector reforms and power cuts should dampen growth
                                                                   potential but we still see it at a solid 7.3% in 2013.
Macroeconomic stability is likely to get further entrenched
in 2013. After the 2008 oil price shock, Angola has rebuilt its    Inflation is likely to end the year marginally above target
FX reserves buffers (US$33 billion), returned to twin              with some price pressures to persist in 2013. We see
surpluses, brought inflation to the high single-digits, and kept   inflation closing 2012 at 7.3%oya on the back of pressures
public debt low. The recent launch of a US$5 billion               from smaller harvests, higher public spending and the
Sovereign Wealth Fund represents another step forward for          doubling of the minimum wage. Last month the BoZ has
reforms, despite concerns on transparency. Based on our            signaled that it is ready to act by hiking the MPR (currently
house view for Brent oil prices to average $113/bbl in 2013,       at 9.25%). Price pressures should remain somewhat elevated
we expect the country to maintain strong economic                  next year amid expansionary fiscal plans. The BoZ may hike
fundamentals. However, higher public investment is likely to       another 50-75bp over the next six months especially if the
erode the twin surpluses in the medium-term. Oil price also        kwacha comes under some pressure.
remains a key risk to watch.
                                                                   Market strategy
Market strategy
                                                                   In FX, we stay sidelined: The kwacha is likely to close 2012
In external debt, we are overweight: An improving macro            around USD/ZMK5,200, supported by FX intervention and rate
picture supported by high oil prices and production gives the      hiking, despite some possible jitters sparked by its rebase. Rising
Angola $2019s room to further outperform, despite the 4Q12         imports and lax fiscal policy should see it weaken towards 5,300
rally. We view this overweight as a relative value position        in 2013 instead, testing the resolve of the BoZ.
within Sub-Sahara Africa (SSA) against our underweight in
Zambia, expecting spreads between these countries to widen         In external debt, we are underweight: While we remain
further. We see Angola spreads moving closer to similarly          relatively constructive on long-term fundamentals, Zambia is
rated Nigeria and Gabon within SSA.                                trading too tight to Angola, given a one-notch rating
                                                                   differential, volatile copper prices and slow reform progress.
Angola macro forecasts                                             This is a regional relative value play on valuation grounds.
                                  2012       2013        2014      Zambia macro forecasts
Growth (%oya)                     6.9         7.5         5.9                                          2012         2013       2014
Oil production (mbpd)             1.80       1.85        1.90      Growth (%oya)                        6.8          7.3        7.9
Inflation (%eop)                  9.5         8.5         7.8      Inflation (%eop)                     7.3          7.0        6.0
USD/XAF (eop)                     95.0       95.0        95.0      USD/ZMK (eop)                       5,200        5,300      5,400
Current account (% GDP)           7.1         8.0         9.0      Current account (% GDP)              0.8          1.9        2.6
Fiscal balance (% GDP)            6.5         5.5         6.0      Fiscal balance (% GDP)              -4.3         -4.5        -4.0
Public debt/GDP (%)               28.5       30.4        29.6      Public debt/GDP (%)                 25.8         26.4        23.6
Ratings outlook: No change.                                        Ratings outlook: No change.
Source: J.P. Morgan                                                Source: J.P. Morgan

JPMorgan Chase Bank, N.A., Hong Kong JPMorgan Chase Bank, N.A., Hong Kong   Emerging Markets Research
Haibin ZhuAC (852) 2800-7039         Grace Ng (852) 2800-7002               Emerging Markets Outlook and Strategy for 2013
haibin.zhu@jpmorgan.com              grace.h.ng@jpmorgan.com                November 21, 2012
JPMorgan Chase Bank, N.A., Hong Kong JPMorgan Chase Bank (China) Co. Ltd.
Lu Jiang (852) 2800-7053             Ying Gu (86-21) 5200-2833
lu.l.jiang@jpmorgan.com              ying.k.gu@jpmorgan.com

EM Asia Outlook for 2013
                                                                            We do not expect significant push-up in policy easing in
                                                    Aa3/AA-/A+              2013. The new government is likely to continue to adopt the
                                                                            mix of proactive fiscal and prudent monetary policies, so as
A moderate recovery going ahead                                             to ensure the firming up of the recovery process. Fiscal
                                                                            policy will continue to support infrastructure investment,
    The economy on a moderate recovery path
                                                                            improve the social safety network and facilitate income
    Inflation should pick up but remains benign                            redistribution. On the monetary policy front, we expect
                                                                            PBoC to keep interest rates on hold for 2013. The central
    New leadership, but no big change in policy                            bank should focus on liquidity management via open market
                                                                            operations (especially reverse repos) and RRR cuts.
Fundamentals and politics in 2013
                                                                            In line with moderate easing, economic recovery down
As the impact of moderate easing measures has                               the road tends to be moderate. We expect a relative stable
gradually gained traction, we expect real GDP to rise                       growth dynamic in 2013, with the economy expanding
8.2%q/q (saar) and 7.4%oya in 4Q12. Entering 2013,                          8.0%q/q (saar) in 1Q13 and at around 8.2% in each of the
GDP growth is likely to turn up moderately to average                       remaining quarters.
7.9%oya in 1H13 and stabilize at 8.1%oya in 2H13. Our
full-year GDP forecast now stands at 8.0%oya for 2013.                      Market strategy
In our view, external headwinds will remain the major drag                  In FX, we expect a modest appreciation of USD/CNY
for growth in the coming quarters. We expect net exports to                 exchange rate in 2013, but no linearity of appreciation
drag headline growth by 0.4%-pt next year, similar to the                   pattern ahead: Broadly speaking, recent strengthening of
impact in 2012. On the domestic side, consumption will remain               CNY was triggered by the reverse in global risk sentiment
supportive, with steady labor market conditions and solid wage              and stronger dollar-selling flows from Chinese exporters and
gains. Growth on fixed asset investment (FAI) is likely to turn             corporate hedgers. Although downward momentum in spot
up slightly to 21.5%oya next year, compared to our forecast of              CNY may persist in the near term, we caution against overly
21.2%oya for 2012. Acceleration in policy easing since mid-                 optimistic expectations on appreciation. Reflecting China’s
2012 has supported pick-up in public investment such as                     gloomy exports and reduced current account surplus, CNY
infrastructure, railway, environment protection and clean                   may only see a modest 1-2% appreciation next year,
energy, and the trend is likely to carry on into 2013. Meanwhile,           following a broad USD weakness. Going forward 2013, we
recent stabilization in real estate investments as well as easing           also expect a gradual liberalization in exchange rate regime,
pressure on the manufacturing sector’s de-stocking pressure, if             with increased two-way flexibility of both the fixings and
sustained, will support recovery in private investment.                     spot trading, ongoing capital account opening (both through
                                                                            USD and cross-border RMB channels), and some possibility
The headline CPI is likely to turn up moderately toward                     of further band widening. Rather than returning to a straight-
the end of 2012 as the favorable base effect disappears,                    line appreciation pattern, RMB will become more cyclical to
but will remain well below the government’s 4%                              both global and domestic market developments.
inflation target. Going into 2013, inflation is likely to pick
up further. We expect the headline figure to end 2013 at
about 3.6%oya, with a full-year average of 3.2%oya.
                                                                            China macro forecasts
                                                                                                                 2012        2013   2014
The 18th CPC National Congress appointed the new
generation of leaders for the next decade. As widely                        Growth (%oya)                        7.6         8.0    7.9
expected, Xi Jinping succeeded Hu Jintao to become the                      Inflation (%eop)                     2.4         3.6    3.7
new top leader and Vice Premier Li Keqiang will take the                    USD/CNY (eop)                        6.22        6.15   6.05
premier role next March. Despite the leadership transition,                 Current account (% GDP)              3.1         2.9    2.4
we do not expect substantial changes in economic policy.                    Primary fiscal balance (% GDP)       -2.0        -2.0   -1.2
The new leaders will most likely continue the economic                      Public debt/GDP (%)                  14.6        14.3   13.6
agenda as outlined in the 12th 5-year plan toward a more                    Ratings outlook: Upgrade expected.
sustainable, consumption-driven growth model.                               Source: J.P. Morgan

J.P. Morgan India Private Limited   J.P. Morgan Securities LLC       Emerging Markets Research
Sajjid ChinoyAC (91-22) 6157-3386   Jahangir Aziz (1-202) 393-6530   Emerging Markets Outlook and Strategy for 2013
sajjid.z.chinoy@jpmorgan.com        jahangir.x.aziz@jpmorgan.com     November 21, 2012
J.P. Morgan India Private Limited
Abhishek Panda (91-22) 6157-3387

                                                                     will depend on the fiscal outturn for FY13 and the budget for
                                           Baa3/BBB-/BBB-            next year. Authorities vow to keep this year’s deficit at 5.3% of
                                                                     GDP (budget: 5.1%), but the risks of more slippage remain
Sustaining policy momentum is key                                    high. If consolidation is achieved by postponing expenditures
                                                                     to next year, achieving the FY14 deficit target of 4.8% of GDP
    Growth to decelerate to below 6% in FY13, and
                                                                     will become more challenging, especially given the packed
     further reforms are key to future growth prospects
                                                                     election calendar in 2013 and 2014. Significant fiscal slippage
    RBI likely to cut rates by 25-50bp in 1Q13 but space            this year or lack of credibility in next year’s budget could
     for more monetary easing is limited                             trigger a downgrade. Conversely, sticking to the fiscal road-
    Absent more reforms in 2013, FX likely to drift                 map and making progress on the goods and services tax (GST)
     downwards on high inflation and current account                 will help the country preserve its investment grade status.

Fundamentals and politics in 2013                                    FX could drift down unless government takes reforms to
                                                                     their logical conclusion. The slew of government measures
GDP growth expected to stay below 6.0%oya in FY13.                   in the last two months resulted in a meaningful appreciation
Growth decelerated to 6.5% in FY12 (year ending March 2012)          of the rupee. However, the currency has lost almost all of its
from 8.4% the year before and is forecast to decelerate further      gains in recent weeks, as markets worry about whether the
in the current year, likely printing well below 6% (J.P. Morgan:     government can push ahead with the game-changing reforms
5.6%oya with a downward bias). Key to the deceleration is that       it has promised. If the reform momentum can continue into
the investment slowdown has been compounded by slowing               2013, the rupee could stay on an appreciating path. But if
consumption growth (as stubbornly high CPI has squeezed              policy slippages linger (as seems increasingly likely), the
purchasing power) and a sharp slowdown in export growth.             currency will be biased towards weakness on the back of
While activity is likely to decelerate further in 3Q12, leading      high inflation and a high current account deficit.
indicators (PMI, auto sales, exports) suggest that industrial
activity may have bottomed. However, any acceleration in the         Market strategy
second half of the financial year is likely to be modest unless
the government can work toward resolving implementation              In local currency debt, we expect bond yields to
bottlenecks and jumpstart the private investment cycle.              decline by 40-50bp in line with RBI rate cuts: The 5-year
                                                                     bond with current yield at 8.15% is attractive as rate cuts are
Modest growth acceleration depends on government                     not priced in. If RBI cuts by 25-50bp, the yield drops to 7.6%
actions. With limited monetary easing likely in 2013 (see            by end-2013 with repo rate at 7.5%. Upside risks to yields is
below), growth reacceleration will be largely contingent on          limited to 10-15bp because demand from RBI, banks and
government actions to kick-start investment. If the government       FIIs will remain strong. We recommend investors to hedge
is able to push ahead with a National Investment Board (to clear     the FX risk through 1-year NDFs.
the backlog of projects awaiting approval), pass a balanced land
acquisition bill, and induce public sector enterprises to invest     In FX, the INR looks less vulnerable in 2013 than this
their cash surpluses, growth could accelerate to 6.0% in FY14.       year: The adjustment looks complete and a calmer global
                                                                     backdrop should limit further weakness. In the long term, the
Space for easing expected to be limited in 2013 as inflation         impact of recent reform measures, if fully implemented, will
stays uncomfortably high. Inflation continues to remain              be important for more stable CAD financing. In the near
uncomfortably high with the WPI close to 7.5% and the CPI            term, two risks linger: an S&P downgrade and mid-term
stubbornly close to double digits. Key to the evolution of           general elections. We like the value and remain constructive
inflation in 2013 will be FX performance and global                  on INR in the medium term, but until mid-2013 the
commodity prices. If the rupee continues to lose momentum,           environment will likely be volatile and tactical for the INR.
inflationary pressures should remain uncomfortably high. The
RBI has indicated a reasonable probability of rate cuts in 1Q13
but, with inflation expected to stay sticky and potentially          India macro forecasts
accelerate in the coming months, it faces a difficult balancing                                          2012         2013     2014
act at the January review. We expect 25-50bp of rate cuts in         Growth (%oya)                        5.6         6.0      6.5
1Q13, but we do not pencil in any more cuts in 2013 until            Inflation (%eop)                     8.0          7.3     6.8
government actions lead to a sustained rupee appreciation and        USD/INR (eop)                       55.0         55.5     54.0
credible fiscal consolidation is underway.                           Current account (% GDP)             -3.7         -3.5     -3.3
                                                                     Primary fiscal balance (% GDP)      -5.6         -5.3     -5.0
Staying close to the fiscal roadmap will be key to averting a        Public debt/GDP (%)                 75.9         72.7     72.8
rating downgrade. While the government’s recent fiscal               Ratings outlook: No change.
actions may have averted a rating downgrade for now, much            Source: J.P. Morgan

JPMorgan Chase Bank, N.A., Singapore Branch                      Emerging Markets Research
Sin Beng OngAC (65) 6882-1623                                    Emerging Markets Outlook and Strategy for 2013
sinbeng.ong@jpmorgan.com                                         November 21, 2012

J.P. Morgan Securities Singapore Private Limited
Daniel Hui (65) 6882-2216

                                                                 during 3Q11 that prevented a disorderly sell-off in financial
                                              Baa3/BB+/BBB-      markets from affecting the macro economy.
On cusp of positive inflection                                   Aside from the external balances, another focal point will
                                                                 be the inflation trajectory. Here, the expected increase in
    Investment turn to reduce pressure on external
                                                                 electricity tariffs by 15% over the year, which assumes four
                                                                 quarterly hikes, is expected to lift overall headline inflation by
    Current account forecast to shift to a modest surplus       0.20-0.43%-pt. The larger impact would be in the event that
     in 2013                                                     subsidized prices for RON88 motor gasoline are raised next
                                                                 year, though at this point, this is not embedded in the current
    Inflation to tick up modestly in 2013, assuming no
                                                                 J.P. Morgan forecast for inflation to average 4.2%oya in 2013.
     change in subsidized motor gasoline prices
                                                                 2013 promises to be a busy political year ahead of the
Fundamentals and politics in 2013                                2014 parliamentary and presidential elections. One
                                                                 concern is that the political environment could lead to a
Recent data paint a mixed picture of the economy. The
                                                                 rising need for political alliances and thus opening the door
3Q12 GDP release suggests that consumption has been
                                                                 for the extraction of political rents, which could affect
underpinned by strong private demand, while fixed
                                                                 sentiment among foreign investors.
investment data hint that some moderation could be in the
offing following the strong expansion since 2009. This view
                                                                 Market strategy
assumes that the transmission of income effects from
commodity terms of trade will remain modest—as has been          In sovereign debt, we remain overweight: Indonesia has
the case with the recent weakness in coal and crude palm oil     lagged the recent market rally. Better relative value along
prices. And, combined with a marginal tightening in high-        with improved BoP dynamics and strong economic
powered money growth, these income effects should restrain       fundamentals led us to go overweight earlier this month.
overall credit and investment and thus help slow the pace of
domestic demand from the already-elevated levels of activity.    In FX, we are overweight: As Indonesia experiences a soft
Despite the rise in global crude oil prices during 3Q12, crude   landing, investor underweights seen throughout 2012 should
palm oil and coal—two important commodities for                  turn more neutral. In particular, the rupiah, after showing
Indonesia—have not recovered since the price slowdown in         better stability, should start to recover in early 2013. The
2Q12 and should, with a lag, filter through to slower domestic   recent renewed appreciation in the rest of Asia has not only
demand, especially fixed investment. Indeed, the somewhat        helped deliver some of the relative currency adjustment that
surprising development is that the recent stabilization in       policymakers had been looking for, but will set up IDR as a
China’s growth has not delivered the commodity upturn that       good catchup play as the current account turns more neutral,
would normally accompany such an inflection.                     and external deficit concerns fade.

This mix of steady domestic consumption and slowing              In Indonesia, we recommend overweight duration:
investment over the next few quarters underpins the              Favorable positioning, combined with accessible high-carry
J.P. Morgan forecast for 2013. We will be watching high-         bonds and a strengthening currency, should set the stage for
frequency data around credit growth, capital goods imports,      a slow rally in the long end of the INDOGB yield curve.
and durables goods in the coming months. One by-product
of this growth forecast could be an inflection point in the      Indonesia macro forecasts
current account deficit during late 2012 and into 1H13,                                               2012        2013      2014
leading to a modest surplus during 1H13 and suggesting a
                                                                 Growth (%oya)                         5.7         4.5      5.8
more supportive backdrop for the currency over the next few
                                                                 Inflation (%eop)                      4.6         4.3      5.0
quarters. Perhaps the more important observation is that this
                                                                 USD/IDR (eop)                        9,750       9,100    9,100
would be the first time since the Asian crisis that Indonesia
                                                                 Current account (% GDP)              -2.4         0.4      -0.5
has not experienced a period of significant market and
                                                                 Primary fiscal balance (% GDP)       -0.8        -0.4      -0.6
economic volatility following an inflection of the balance of
                                                                 Public debt/GDP (%)                  23.0        22.6      22.0
payments from surplus into deficit. While there are a
                                                                 Ratings outlook: Upgrade expected.
multitude of reasons for this, one key factor has been the
implementation of the Crisis Management Protocol (CMP)           Source: J.P. Morgan

JPMorgan Chase Bank, N.A., Seoul Branch                           Emerging Markets Research
Jiwon LimAC (82-2) 758-5509        Min Joo Kang (82-2) 758-5512   Emerging Markets Outlook and Strategy for 2013
jiwon.c.lim@jpmorgan.com           minjoo.mj.kang@jpmorgan.com    November 21, 2012

J.P. Morgan Securities Singapore Private Limited
Daniel Hui (65) 6882-2216

                                                                  high-tech sector’s inventory-to-shipment ratio down and the
                                                   Aa3/A+/AA-     non-tech sector ratio stabilizing. However, business
                                                                  sentiment remains depressed, so it seems premature to
Mild growth recovery, but risks still lurk                        expect an upturn. Indeed, while the demand for replacement
                                                                  investment has been rising, political campaign calls for
    Export gains likely to broaden
                                                                  stricter regulations on large conglomerates could be holding
    Domestic demand mixed, calling for policy help               back investment.

    Macro policy to be more supportive in early 2013             The Bank of Korea should maintain its easing bias for
                                                                  the coming quarters we believe. We do not exclude the
Fundamentals and politics in 2013                                 possibility of rate cuts in 1H13, but this will require further
                                                                  deterioration of growth environment—enough to threaten
We expect real growth to recover to 3.0% in 2013, with            the forecast of 3%-level GDP growth for full-2013.
exports to rise and fiscal policy to turn more supportive.
Real GDP growth has slowed for three straight quarters            Instead, focus should shift to fiscal policy. Drawing from
since 1Q12, but demand-side conditions now look aligned to        the government’s proposed 2013 budget, fiscal policy is not
support an improvement in manufacturing output which              expected to turn supportive with the consolidated surplus
should lift the overall GDP growth modestly starting this         targeted to rise to KRW30.6 trillion (or 2.2% of GDP) in
quarter. The key risks to our growth view are external            2013 from KRW18.1 trillion (or 1.4% of GDP) in 2012.
demand, especially in DM countries, and any possible policy       However, we expect the fiscal plan to change in the process
interruptions after the presidential election in December.        of getting the National Assembly’s approval, and there is a
                                                                  possibility of a supplementary budget. In the medium term,
After suffering through most of 2012, Korea’s exports             though, the government will eventually neutralize the
have turned up since mid-3Q, after controlling for seasonal       positive impact of the spending increase by hiking taxes in
and irregular factors. Prices played an important role in         latter part of 2013, concentrating primarily on high-income
improving nominal performance, but even in volume terms           households and larger firms.
exports have improved thanks to better demand from China
and other Asian countries. By product, gains were narrowly        Market strategy
concentrated in electronics and oil products, but there are
signs of broadening improvement. Vessel exports are an            In FX, we are long KRW versus USD, TWD, and JPY:
exception with deliveries having peaked in 2011 (recall the       We expect KRW to be a top performer in 2013, on the back
orders-to-production lag is 2-3 years). In 2013, we expect        of a shift in F/X policy. A policy regime which is now
non-vessel exports to see a more meaningful recovery.             delivering more asymmetric volatility reduction rather than
                                                                  targeting absolute currency weakness and reserve
Private consumption has been volatile, but—reading                accumulation, means that the won’s cheap valuation (one of
beyond the noise—it has been modestly trending higher.            the most attractive in Asia) and persistently large current
However, the gain in consumers’ real purchasing power             account should play a greater role in determining its
appears to have slowed recently, despite the rise in              performance over time.
employment. One impediment may be the debt servicing
burden of Korean households, but the Bank of Korea and the
government have the room to ease it (see “Korea: micro            Korea macro forecasts
policy to ease household debt servicing burden,” Global                                                      2012    2013    2014
Data Watch, August 31, 2012). In 2013, the key question           Growth (%oya)                               2.3     3.2    3.5
mark will be whether financial and real estate asset values       Inflation (%eop)                            1.8     3.4    3.4
will rise to generate a positive wealth effect. They              USD/KRW (eop)                              1,080   1,020   990
respectively require improvement of the Euro area’s debt          Current account (% GDP)                     3.2     2.3    2.0
problem and further deregulation of the housing market, as        Primary fiscal balance (% GDP)              1.4     1.9    1.5
potential buyers are delaying to buy houses, thus pulling         Public debt/GDP (%)                         34      33     34
down housing prices, but driving up rent prices. Meanwhile,       Local market issuance (gross), KRW trillion 79.8   79.9    80.0
the corporate sector has been reducing inventory and              Ratings outlook: Upgrade expected.
business equipment investment. According to monthly data,         Source: J.P. Morgan
manufacturers’ destocking appears be almost over, with

JPMorgan Chase Bank, N.A., Singapore Branch                      Emerging Markets Research
Sin Beng OngAC (65) 6882-1623                                    Emerging Markets Outlook and Strategy for 2013
sinbeng.ong@jpmorgan.com                                         November 21, 2012
J.P. Morgan Securities Singapore Private Limited
Daniel Hui (65) 6882-2216

                                                                 unlikely to see major gains and could in fact lose seats. In
                                                   A3/A-/A-      this scenario, the current policies will likely remain in
                                                                 place and fiscal reform/consolidation will be a key focus.
Politics front and center
                                                                 Although the outcome remains unclear, two recent
    2013 signals fiscal consolidation amid firm fixed
                                                                 developments are worth noting. First, the opposition PKR
     investment                                                  and the Islamic-leaning PAS in particular have become more
    Subsidy rationalization penciled in 2013, with              internally factionalized possibly making them less coherent
     accompanying lift in inflation                              to the broader electoral base. The UMNO has also been
                                                                 reaching out to voters that would normally lean towards
    On election watch: 1Q13 a possibility                       PKR and PAS. Second, the election timing has been dragged
                                                                 out for over a year, exhausting the opposition’s resources.
Fundamentals and politics in 2013
                                                                 Market strategy
The trend of soft external demand and firm domestic
demand, led by infrastructure investment and steady              In FX, we are underweight the MYR as a hedge: There
incomes, is expected to continue through 2013. Growth is         are several hurdles particular to Malaysia which should keep
now expected to expand 3.7%y/y in full-year 2013. This           it from outperforming its peers. First, Malaysian local
forecast assumes a quarterly growth trajectory of 3.5%q/q        markets are the highest owned (foreign ownership, percent
(saar) in 1H13 and 4.0% in 2H13. Domestic demand is              of total outstanding bonds) and the most overweight (for
expected to contribute 3.9%-pts to the figure, while net         rates and FX in surveys) among its peers, even though it has
exports subtract 0.2%-pt, as we forecast the current account     not outperformed in 2012. Second, Malaysia faces an
to narrow further.                                               uncertain political environment in 1H13, which other
                                                                 countries do not (2014 polls in India and Indonesia mean
The recently released 2013 budget sets some of the tone          politics will only intensify later in 2013). So while MYR will
for our macro forecasts. The underlying thrust of the            likely gradually appreciate alongside the broader Asia FX
budget emphasizes further fiscal consolidation and subsidy       block, we like UW as a hedge against our other Asia FX OW’s.
reform following a couple years of stops and starts. Notably,
inflation is expected to rise to between 2.0-3.0%oya in 2013     In rates, we recommend a neutral bond position: Gross
from a forecasted average of 1.6%oya in 2012. Fixed              bond supply of MGS and GII in 2013 will be flat to last
investment is also expected to continue to expand, up            year, even though Malaysia is generally expanding
8.0%oya in 2013. And while this marks a deceleration from        investment spending and overall financing needs are rising.
the 14.1%oya pace in 2012, this would still raise the            The government will likely continue tapping quasi-
investment-to-GDP ratio to 26% from 25.6% in 2012, and           government and other off-balance avenues for this
up from the recent average of between 22-24% in the past         fundraising. As such, 2013 supply of MGS (the mainstay
decade. The overall implication is that it would be difficult    instrument for foreign investment in Malaysia) should be
under this forecast for the central bank to justify any easing   relatively restrained, while foreign investment in Malaysia
of the policy rate.                                              shows little signs of slowing into next year. We refrain from
                                                                 overweighting Malaysia however, as there is little hope for
The main focus however is on elections. Logistically,            monetary easing from BNM and upcoming elections may
elections can be held as soon as within two weeks of being       generate temporary rates and FX market volatility.
called and usually occur around school holidays, which           Malaysia macro forecasts
sets up March as a likely date. Elections have to be called                                          2012         2013   2014
by the end of April and have to be held within two months
                                                                 Growth (%oya)                        5.0         3.7     4.5
of being announced, making June 2013 the latest date for
                                                                 Inflation (%eop)                     1.2         2.6     2.4
elections. December is not open due to the flooding during
                                                                 USD/MYR (eop)                       3.04         2.95   2.95
that time of year. The outcome of the 13th general
                                                                 Current account (% GDP)              3.9         3.1     3.0
elections is largely unpredictable, but we believe the
                                                                 Primary fiscal balance (% GDP)      -2.3         -1.8    -1.3
incumbent Barisan Nasional coalition will likely win. Of
                                                                 Public debt/GDP (%)                 53.0         53.5   53.2
the 220 parliamentary seats, we expect 130-144 seats to
                                                                 Ratings outlook: No change.
remain with the UMNO while the opposition, with the
                                                                 Source: J.P. Morgan
exception of the DAP (Democratic Action Party), is

JPMorgan Chase Bank, N.A., Singapore Branch                       Emerging Markets Research
Matt HildebrandtAC (65) 6882-2253                                 Emerging Markets Outlook and Strategy for 2013
matt.l.hildebrandt@jpmorgan.com                                   November 21, 2012
J.P. Morgan Securities Singapore Private Limited
Daniel Hui (65) 6882-2216

                                                                  recent years, capital inflows have picked up, nearly rivaling
                                                                  the size of the current account. This has led to strengthening
                                                                  pressure on the peso, which has in turn led to FX
More of the same expected next year                               intervention and higher sterilization costs. With
                                                                  fundamentals improving, large current and financial account
    Trend growth in 2013 to disappoint policymakers
                                                                  surpluses should keep the BoP well supported, FX reserves
     and leave inflation low; expect monetary easing              rising, and PHP strengthening.
    Persistently strong BoP flows could lead to
     macroprudential measures                                     More macroprudential measures likely in 2013. To
                                                                  reduce strengthening pressures on the peso, BSP has limited
    Fiscal dynamics to improve further as government             bank net open positions, raised capital charges on NDFs,
     struggles to raise spending                                  starved the market of foreign exchange by use of its FX
                                                                  forward book, and banned foreigners from investing in its
                                                                  Special Deposit Accounts. So far, these measures have been
Fundamentals and politics in 2013
                                                                  ineffective. In 2013, we expect BSP to continue to cut its
Economic growth to slow from recently robust rates. GDP           policy rates and potentially raise reserve requirements to
growth surged in 1H12, averaging 6.1%oya. But much of this        keep sterilization costs from intervention down.
was due to an inventory swing and to a surge in exports
following recovery in the regional supply-chain from flooding     Weak fiscal spending is good for debt dynamics but not
in Thailand late last year. These one-off events should not be    growth. The government looks likely to underspend again
repeated, which combined with much lower than budgeted            this year. In 2011, the deficit was 2.0% of GDP versus a
fiscal outlays and muted global growth will leave economic        budgeted deficit of 3.2% and this year it is likely to be 2.4%
growth in the Philippines well below the government’s stated      against a 2.6% target. These small deficit figures are good
6-7% target next year. We forecast GDP growth of 3.5% next        for the debt trajectory, which is forecast to fall to 49.0% of
year, with growth potentially slowing to below 3%oya in 1H.       GDP by the end of this year from 52.4% a few years ago.
                                                                  However, weak government spending is negative for near-
Inflation resuming benign trend as flooding-relating              term growth as well as longer term potential growth and
effects dissipate. Inflation printed at or below the lower        productivity. Thus, we would prefer to see modestly larger
bound of BSP’s 3-5% target range in six of the first seven        deficits and a slower pace of fiscal consolidation.
months of 2012. It jumped in August and September
following severe flooding in Luzon but the most recent            Market strategy
report showed inflation falling back down to 3.1%oya in
                                                                  In FX, we are overweight: The PHP will continue to
October. Slow growth, strong peso, and soft import price
                                                                  solidly perform in 2013, with large remittance surpluses
pressures should keep inflation subdued. We expect inflation
                                                                  remaining the dominant characteristic underpinning a
to remain in the lower half of BSP’s inflation target range
                                                                  gradually strengthening currency. In particular, while
over the outlook horizon.
                                                                  macroprudential policies may help moderate some of the
                                                                  more speculative pressure on the currency, such measures
BSP set to ease monetary policy further. BSP has eased
                                                                  cannot sustainably stop or reverse the strength in the
100bp this year, more than any other central bank in EM
                                                                  currency while net remittance inflows remain large.
Asia. We expect another 50bp of easing as slow growth, low
inflation, and a strong peso keeps BSP biased toward further
easing. FX will be in the spotlight in 2013. Lower rates          Philippines macro forecasts
should reduce interest in peso fixed income instruments,                                              2012         2013   2014
reducing appreciation pressure on the peso. Also,                 Growth (%oya)                        5.3         3.5     5.0
sterilization costs for BSP have risen and are tied to the        Inflation (%eop)                     3.2         3.1     3.7
policy rate. A lower policy rate will bring down these costs      USD/PHP (eop)                       42.0         41.1   39.4
and provide BSP more flexibility to intervene in the FX           Current account (% GDP)              3.7         3.1     3.2
market when the peso comes under strengthening pressures.         Primary fiscal balance (% GDP)       0.4         0.7     0.7
                                                                  Public debt/GDP (%)                 48.9         47.6   45.3
Strong BoP balance to persist from large current and
                                                                  Source: J.P. Morgan
capital account surpluses. The Philippines’ strong BoP
position has traditionally been a current account story. But in

J.P. Morgan India Private Limited   JPMorgan Chase Bank, N.A., Singapore Branch   Emerging Markets Research
Sajjid ChinoyAC (91-22) 6157-3386   Matt Hildebrandt (65) 6882-2253               Emerging Markets Outlook and Strategy for 2013
sajjid.z.chinoy@jpmorgan.com        matt.l.Hildebrandt@jpmorgan.com               November 21, 2012
J.P. Morgan India Private Limited
Abhishek Panda (91-22) 6157-3387

Sri Lanka
                                                                                  acceleration in inflation (which reached 9.8% in August)
                                                         B1/B+/BB-                was the sharp rise in food inflation due to the drought-
                                                                                  related supply shocks. Authorities believe that, as supply
Growth slows but macro stability returning                                        normalizes, there will be significant downward pressure on
                                                                                  food inflation. Core inflation, which has increased, is
    Growth to slow below 7% in 2012 and accelerate                               expected to moderate as growth continues to decelerate.
     only modestly in 2013                                                        We expect the CBSL to remain on hold in 1H13 as
    2013 budget targets further consolidation but                                inflationary pressures remain above their comfort zone.
     questions still linger about the 2012 fiscal targets                         Rate cuts cannot be ruled out later in the year if inflation
                                                                                  and the current account are under control by then.
    Stability is returning with the trade deficit shrinking,
     FX reserves stabilizing and inflation likely peaking                         FX stabilizes as trade and current account deficit
                                                                                  narrow. After depreciating by more than 15% in the first
Fundamentals and politics in 2013
                                                                                  two months of the year, LKR has shown a remarkable
Growth is set to slow to below 7.0% in 2012 in response                           stability over the last few months while the trade deficit
to policy-induced tightening. After growing 8.3%y/y in                            sharply declined and capital flows have picked up, as the
2011—the highest growth rate since its independence—the                           macroeconomic balances and reserve coverage have
Sri Lankan economy is poised to slow sharply in 2012, with                        stabilized. With growth—and therefore imports—
growth expected to print closer to 6.5%y/y. Growth                                unlikely to reaccelerate sharply, the trade and current
averaged 7.2% in 1H12, but is likely to decelerate further in                     account deficits are not expected to surge. However,
2H as the effects from the earlier policy tightening (125bp of                    with inflation still expected to remain above that of most
rate hikes, credit growth controls, domestic fuel price                           trading partners, we expect the Rupee to have a slight
increases) combine with a slowing global economy.                                 depreciating bias over the next year to contain the extent
                                                                                  of real appreciation of the currency
A modest acceleration to 6.8% is likely in 2013 if the
global economy turns up. With government intending to                             Market strategy
stay on a path of fiscal consolidation, which should be a drag
on activity, the key determinants of growth in 2013 will be                       In sovereign debt, we remain marketweight: We like
private investments and exports. If the government can                            medium-term fundamentals and are more comfortable with
prevent large fiscal slippage and thereby avoid crowding out                      the near-term outlook, given the series of policy reform
private investments, growth is expected to get a slight fillip,                   measures implemented earlier this year. However, Sri Lanka
especially if global growth gets a lift and boosts the external                   has benefitted from the recent market rally and thus, for
sector of the economy.                                                            technical reasons, we remain marketweight.

2013 budget targets further fiscal consolidation but                              In local markets, we are long LKR local 2-year
questions still linger about 2012. Authorities reiterated                         benchmark bond: This recommendation may be difficult
their commitment to the budgeted fiscal deficit of 6.2% of                        to carry as the foreign investor quota has been filled.
GDP in 2012—the lowest in 20 years—and pledged to                                 However, the limit is fixed as a percentage (12.5%) of total
reduce the deficit further to 5.8% in 2013. But questions                         outstanding and new positions should rise as bond supply
remain. Tax revenues are running significantly under budget                       grows. At 12.6%, the 2-year bond still offers the highest
while expenditures are running ahead. Reaching—or staying                         carry in the region.
near—the budgeted levels should therefore require a
significant cut in public investment, which raises questions                      Sri Lanka macro forecasts
about the quality of the fiscal consolidation. Even if the 2012                                                        2012        2013   2014
target is reached, the revenue assumptions for 2013 still                         Growth (%oya)                        6.5         6.8    7.0
appear overly ambitious, putting next year’s targets at risk.                     Inflation (%eop)*                    8.5         7.5    7.0
                                                                                  USD/LKR (eop)*                       130         132    135
The Central Bank of Sri Lanka continues to stay on                                Current account (% GDP)              -4.5        -4.7   -5.0
hold. After raising rates by 125bp, the CBSL has stayed on                        Primary fiscal balance (% GDP)       -6.5        -6.2   -6.0
hold over the last six months, taking comfort from the fact                       Public debt/GDP (%)                  81.5        80.0   78.0
that inflation, though still elevated, appears to have peaked,                    Ratings outlook: Upgrade expected.
and its tightening measures from earlier in the year
                                                                                  * End December
continue to have effect. A key driver of the recent                               Source: J.P. Morgan

JPMorgan Chase Bank, N.A., Singapore Branch                        Emerging Markets Research
Benjamin ShatilAC (65) 6882-2311                                   Emerging Markets Outlook and Strategy for 2013
benjamin.shatil@jpmorgan.com                                       November 21, 2012
J.P. Morgan Securities Singapore Private Limited
Daniel Hui (65) 6882-2216

                                                                   THB300 billion flood-defense project, will keep public debt
                                           Baa1 /BBB+/ BBB         on an upward trajectory.
Momentum to slow into next year                                    With domestic activity shifting down a gear, we expect
                                                                   the current account to stay in surplus through early
    Growth should decelerate notably after recovering
                                                                   2013. After falling into deficit on the back of a surge in
     from last year’s flooding                                     imports related to the post-flood rebuilding earlier this year,
    Populist fiscal policies should boost income and              the current account trend has reverted back to a surplus.
     support domestic demand, while public debt rises              Even though we had expected export growth to remain
                                                                   lackluster toward the New Year, import growth should be
    Benign inflation outlook leaves room for further              muted, sustaining the surplus into early 2013. Yet, public
     monetary easing                                               investment projects currently in the pipeline could lead to
                                                                   some deterioration of external balances later in the year.
Fundamentals and politics in 2013
                                                                   Inflationary pressures remain muted, giving the Bank of
Growth should slow next year after the post-flood                  Thailand space for further monetary policy easing. The
rebuilding surge in 2012. Thailand’s economy is expected           BoT surprised the market with a 25bp preemptive cut in
to moderate to a below-trend 2-2.5%q/q (saar) pace early           October, taking out insurance against a possible further slip
next year as sluggish external demand continues to weigh on        in external demand. With the underlying inflation trajectory
growth. The impulse from fiscal rebates, easy credit               expected to remain benign into 2013, we think the BoT has
conditions, and post-flood rebuilding—which together had           room to ease further. If growth slows materially into 4Q12
underpinned a boost in growth through 1H12—is also                 and 1Q13, as is our expectation, a further 25bp cut cannot be
expected to diminish notably into 2013, leading to an overall      ruled out.
moderation in sequential growth of domestic demand.
                                                                   Market strategy
Populist fiscal policies should continue to support
                                                                   In FX, we are overweight THB: Thailand retains one of the
domestic demand—but to a lesser degree. A key policy of
                                                                   better FX fundamentals in ASEAN. It maintains a solid
Pheu Thai Party’s government has been a program of fiscal
                                                                   current account surplus, despite some weakness in the trade
measures that have bolstered domestic activity through
                                                                   account this year as lagged effects of the export disruption
rebates, wage increases, and tax cuts. Of these, the
                                                                   and rebuilding import boost lingered. The trade balance side
government’s rice price pledge has been a key scheme, with
                                                                   should continue to improve while, importantly, the
the government buying the crop directly from farmers at
                                                                   invisibles, including tourism related inflows remain strong.
guaranteed above-market prices. With the program extended
                                                                   While additional fiscal spending in 2013 may once again lift
through 2013, rural incomes will remain supported into next
                                                                   the import bill, this should be offset by positive growth. The
year. However, shorter-term programs, such as the auto and
                                                                   cyclical impact boosted domestic demand, hence supporting
home purchase rebates, are set to expire. The overall impulse
                                                                   the THB, which already has one of the more attractive carry
from fiscal programs onto growth is thus expected to slow
                                                                   profiles in Asia.
into next year, which should translate into a cooling in
domestic demand from high levels in 1H12.
                                                                   Thailand macro forecasts
While the government maintains its supportive stance,                                                  2012         2013    2014
public debt should continue to rise. Overall public sector         Growth (%oya)                        5.7         4.5      4.0
debt rose from around 40% of GDP at end-2011 to 44.9% of           Inflation (%eop)                     3.2         1.2      1.8
GDP in 3Q12—the highest share since the 2009 stimulus              USD/THB (eop)                       30.5         29.2    28.0
package—and is set to continue to rise in 2013. The central        Current account (% GDP)             -0.2         1.2      2.8
government budget deficit and off-budget programs could            Primary fiscal balance (% GDP)       3.5         3.5      3.5
keep the overall fiscal deficit close to THB1 trillion, or about   Public debt/GDP (%)                 44.7         48.0    50.2
5.2% of GDP, in the 2012/13 fiscal year. In particular, the
                                                                   Ratings outlook: No change.
nationwide implementation of the new minimum wage, as
                                                                   Source: J.P. Morgan
well as acceleration in public investment spending from a

JPMorgan Chase Bank, N.A., Singapore Branch                       Emerging Markets Research
Matt HildebrandtAC (65) 6882-2253                                 Emerging Markets Outlook and Strategy for 2013
matt.l.hildebrandt@jpmorgan.com                                   November 21, 2012

                                                                  Banking sector’s concerns will linger, but government
                                               B2 /BB-/B+         has fiscal space to absorb losses. The depth and breadth of
                                                                  impaired assets is still unknown with estimates of non-
Bank and SOE concern front and center                             performing loans (NPLs) by the SBV having risen from low
                                                                  single digits early this year to around 10%. Rating agencies
   Vietnam’s more prudent macroeconomic policy mix
                                                                  estimate NPLs between 10% and 13%. What we do know is
    is set to persist; VND is unlikely to move much               that bank balance sheets are weak and that most of the bad
   Risk of a BoP or sudden banking sector crisis is              debt is denominated in local currency. The benefit of VND-
    unlikely as long as inflation remains contained               denominated debt is that the SBV can act as a lender of last
                                                                  resort. External debt crisis concerns are grossly misplaced.
   Muddle-through scenario most likely as fiscal policy          Moreover, at around 50% of GDP, government debt is low
    is forced to absorb banking sector losses                     enough to absorb a large amount of debt loss. The credit-to-
                                                                  GDP ratio was 120% at the end of last year, so if NPLs are
                                                                  15% and the recovery rate on loans is zero, the government’s
Fundamentals and politics in 2013
                                                                  debt-to-GDP ratio would rise to around 70% (assuming no
Prudent policy mix will persist in 2013 and leave growth          use of bank capital as a buffer). While such a rise in
lackluster for a second straight year. Since the middle of        sovereign debt would be worrying, it would not be
last year, the effects of Resolution 11 have been felt.           devastating. The government is currently establishing an
Inflation is forecast to slow to 9.2% this year from 18.7%        asset management company (AMC) to buy bad assets from
last year and credit growth is likely to be about 4% this year    banks (many of which were made into SOEs), but details
compared to 12% last year (and an average 33% in the              about size, timing, and means of financing are not yet clear.
previous seven years). As a result of softer credit growth, the
economy cooled to around 5% growth this year from 5.9%            Muddle-through scenario most likely in coming years.
in 2011 while the trade deficit will only likely be around 1%     While Vietnam appears unlikely to suffer a severe or sharp
of GDP compared to 8% last year. With stability still at the      shock, several banks have required liquidity assistance or
top of the government’s agenda, the policy stance should          have needed to be merged with larger and healthier banks.
remain tight next year. Growth should come in around 5.5%,        The biggest risk currently is that policymakers drag their feet
which though high relative to global standards, is low in         rather than quickly and aggressively deal with bank balance
comparison to the 7% we estimate is required to keep up           sheet problems. Instead, banks will require several years to
with population trends.                                           heal. In our base case scenario, corporate access to credit
                                                                  will be compromised, which will lead to slower growth. We
Monetary policy to stay on hold, keeping BoP position             expect Vietnam to muddle-through with sub-par growth
and VND supported. Inflation has slowed dramatically              (5.5%-6.0% per year) in coming years and no clear
from a peak of 23.0%oya in August of last year to a low of        resolution to bank or SOE restructuring needs.
5.0% in August this year. Price pressures have firmed a bit,
with inflation rising 7.0%oya in October, but we expect it to     Market strategy
remain contained in 2013. Our current forecast shows
                                                                  In sovereign debt, we remain marketweight: The more
inflation peaking around 12%oya in the middle of next year
                                                                  constructive macroeconomic environment is encouraging but
and averaging 9.7% in 2013. With policy rates between 8%
                                                                  banking sector concerns and lack of a clear, executable plan
and 10%, there is no room for any monetary easing and little
                                                                  to address NPL problems leaves us marketweight.
need for tightening (though risk is that the State Bank of
Vietnam will hike rates once). While real interest rates will     Vietnam macro forecasts
remain modestly negative for much of the year, monetary                                                  2012      2013     2014
conditions should be sufficient to prevent portfolio capital      Growth (%oya)                           5.2       5.6      6.2
from fleeing. Thus, large and sticky FDI and remittance           Inflation (%eop)                        9.2       9.7      9.1
inflows will offset a modestly wider trade deficit and will       USD/VND (eop)                          20,900    21,400   21,800
lead to higher FX reserves. These flows, along with solid if      Current account (% GDP)                 0.4       -1.0     -1.7
not spectacular growth, and prudent macroeconomic policy          Primary fiscal balance (% GDP)          -1.8      -0.7     -0.9
more broadly, should keep the VND supported.                      Public debt/GDP (%)                     48.4      46.6     45.5
                                                                  Ratings outlook: Downgrade expected.
                                                                  Source: J.P. Morgan

JPMorgan Chase Bank N.A., New York                            Emerging Markets Research
Carlton Strong (1-212) 834-5612                               Emerging Markets Outlook and Strategy for 2013
carlton.m.strong@jpmorgan.com                                 November 21, 2012

Global Economic Outlook
The global economic outlook in summary
                                   Real GDP growth (%oya)     Consumer prices (%oya)                Current account balance (% GDP)
                                  2012                2013   2012                 2013               2012                    2013
The Americas
United States                     2.2                  1.7    2.1                  1.5                -3.1                   -3.0
Canada                            2.2                  2.1    1.9                  2.1                -3.2                   -3.2
Latin America                     2.9                  3.8    6.1                  6.6                -0.9                   -1.4
 Argentina                        2.7                  3.6    9.5                 10.0                -0.1                   -0.1
 Brazil                           1.4                  4.1    5.4                  5.5                -2.1                   -2.4
 Chile                            5.4                  4.5    3.1                  3.1                -3.8                   -5.4
 Colombia                         4.3                  4.5    3.2                  3.2                -2.9                   -3.0
 Ecuador                          5.0                  4.0    5.2                  4.7                -0.5                   -1.5
 Mexico                           3.9                  3.6    4.2                  3.8                -0.4                   -0.7
 Peru                             6.0                  6.0    3.7                  2.7                -2.8                   -3.5
 Venezuela                        5.0                  0.0   21.2                 30.0                 4.5                    6.5

Japan                             1.5                  0.0    0.0                 -0.1                1.0                     0.5
Australia                         3.5                  2.5    1.9                  3.2               -3.9                    -4.6
New Zealand                       2.6                  2.9    1.2                  1.9               -5.9                    -6.4
Emerging Asia                     6.1                  6.5    3.7                  4.1                2.6                     2.4
 China                            7.6                  8.0    2.7                  3.4                3.6                     3.3
 Hong Kong                        1.2                  3.2    4.0                  3.7                3.2                     2.5
 India                            5.6                  6.0    9.7                  8.7               -3.2                    -2.9
 Indonesia                        5.7                  4.5    4.3                  4.2               -2.4                     0.4
 Korea                            2.3                  3.2    2.2                  3.0                3.2                     2.2
 Malaysia                         5.0                  3.7    1.6                  2.1                3.9                     3.1
 Philippines                      5.3                  3.5    3.0                  2.8                3.1                     2.6
 Singapore                        1.5                  2.5    4.7                  4.0               20.1                    15.3
 Taiwan                           1.2                  3.4    1.8                  1.8                8.9                     8.5
 Thailand                         5.7                  4.5    3.0                  3.5               -0.2                     1.1

Africa/Middle East
Israel                            3.0                  3.1    1.9                  2.4                -1.5                   -1.6
South Africa                      2.3                  2.7    5.6                  5.8                -5.7                   -5.3

Euro area                         -0.4                 0.0    2.5                  1.8                1.0                     1.0
Norway                             2.5                 2.6    1.3                  1.2               13.6                    15.9
Sweden                             4.0                -0.3    2.6                  1.2                6.8                     5.5
Switzerland                        2.7                 2.0    0.7                  0.8               12.4                    10.1
United Kingdom                    -0.1                 1.2    2.8                  2.6               -2.9                    -0.6
Emerging Europe                    3.2                 2.9    5.5                  5.9                4.4                     3.1
 Bulgaria                          1.0                 1.5    3.1                  3.3                0.6                    -0.5
 Czech Republic                   -1.1                 0.0    2.9                  2.2               -1.1                    -0.4
 Hungary                          -1.4                 0.5    5.8                  4.9                1.5                     2.8
 Poland                            2.3                 1.6    3.8                  2.7               -3.5                    -3.0
 Romania                           0.0                 0.8    3.2                  5.5               -3.2                    -3.6
 Russia                            3.6                 3.0    5.1                  6.8                4.8                     3.1
 Turkey                            2.8                 3.7    9.0                  7.2               -6.8                    -6.5

Global1                           2.3                  2.4    2.9                  2.8                  …                      …
 Developed market economies       1.1                  0.9    2.0                  1.5                -0.9                   -0.8
 Emerging market economies        4.4                  5.1    4.6                  5.0                 2.2                    1.7
1. J.P. Morgan sample
Source: J.P. Morgan

J.P. Morgan Securities LLC                       Emerging Markets Research
Tejal Ray (1-212) 834-8580                       Emerging Markets Outlook and Strategy for 2013
tejal.t.ray@jpmorgan.com                         November 21, 2012

Exchange Rate end-of-period Forecasts versus US dollar
                                    March 2013   June 2013              September 2013            December 2013
Europe, Middle East and Africa EM

                ILS                    4.00         4.00                     3.95                     3.85
                CZK                   19.80        19.35                    18.94                     18.58
                PLN                    3.36         3.31                     3.18                     3.10
                HUF                    227          223                      216                       205
               RUB                    31.31        31.50                    31.25                     30.79
                TRY                    1.80         1.80                     1.75                     1.75
                ZAR                    9.00         8.70                     8.50                     8.20


                ARS                    5.20         5.35                     5.55                     5.70
                BRL                    2.02         2.00                     1.98                     1.95
                CLP                    470          490                      490                       490
               COP                    1775          1775                     1775                     1775
               MXN                    12.40        12.20                    12.10                     12.00
                PEN                    2.56         2.56                     2.55                     2.55
                VEF                    6.50         6.50                     6.50                     6.50

EM Asia

               CNY                     6.28         6.25                     6.20                     6.15
               HKD                     7.80         7.80                     7.80                     7.80
                INR                   55.00        55.50                    55.50                     55.50
                IDR                   9550          9400                     9250                     9100
               KRW                    1070          1060                     1040                     1020
               MYR                     3.02         3.00                     2.97                     2.95
                PHP                   40.65        40.25                    39.80                     39.40
               SGD                     1.20         1.18                     1.17                     1.16
                THB                   30.15        29.80                    29.50                     29.20
               TWD                    28.70        28.60                    28.40                     28.20
Source: J.P. Morgan

J.P. Morgan Securities LLC                                                                                 Emerging Markets Research
Tejal Ray (1-212) 834-8580                                                                                 Emerging Markets Outlook and Strategy for 2013
tejal.t.ray@jpmorgan.com                                                                                   November 21, 2012

Asia and Latin America Credit Ratings
                   Moody’s              S&P               Fitch                    Recent Moody’s Action                            Recent S&P Action                         Recent Fitch Action
                Rating View        Rating View        Rating View                  Action                  Date                  Action                 Date                Action                  Date
China              Aa3     (+)       AA-                A+                     Affirmed, O/L (+)         Apr-15-12         Affirmed, O/L stable        Dec-06-11      Affirmed, O/L stable       Apr-11-12
Fiji Islands       B1       (-)        B                NR      NR             Affirmed, O/L (-)          Oct-04-11        Affirmed, O/L stable        Mar-01-12
Hong Kong          Aa1     (+)       AAA                AA+                    Affirmed, O/L (+)         Sep-20-11         Affirmed, O/L stable        Aug-17-12      Affirmed, O/L stable       Sep-24-12
India             Baa3               BBB-     (-)      BBB-       (-)        Affirmed, O/L stable        Jun-25-12       O/L chngd to (-), Affirmed    Apr-25-12    O/L chngd to (-), Affirmed   Jun-18-12
Indonesia         Baa3               BB+      (+)      BBB-                  Affirmed, O/L stable         Jul-16-12          Affirmed, O/L (+)         Apr-23-12      Affirmed, O/L stable       Nov-21-12
Korea              Aa3                A+                AA-              Upgrade, O/L chngd to stable Aug-27-12            Upgrade, O/L stable         Sep-13-12 Upgrade, O/L chngd to stable Sep-06-12
Malaysia           A3                 A-                 A-                  Affirmed, O/L stable        Jun-07-12         Affirmed, O/L stable         Jul-27-12     Affirmed, O/L stable       Aug-01-12
Pakistan          Caa1      (-)       B-                NR      NR Downgrade, O/L chngd to (-) Jul-13-12                   Affirmed, O/L stable         Jul-20-12
Singapore          Aaa               AAA                AAA                  Affirmed, O/L stable        Apr-30-12         Affirmed, O/L stable        Aug-30-12      Affirmed, O/L stable       Mar-26-12
Sri Lanka          B1      (+)        B+                BB-                    Affirmed, O/L (+)         Nov-16-12     O/L chngd to stable, Affirmed   Feb-29-12      Affirmed, O/L stable       May-04-12
Taiwan             Aa3               AA-                A+                   Affirmed, O/L stable        Oct-22-12         Affirmed, O/L stable        Aug-08-12      Affirmed, O/L stable       Sep-13-12
Thailand          Baa1              BBB+                BBB                  Affirmed, O/L stable        Apr-16-12         Affirmed, O/L stable        Nov-22-11      Affirmed, O/L stable       May-09-12
Turkmenistan       WR      WR         NR      NR        NR      NR                Withdrawn              Sep-09-10                                                         Withdrawn             Feb-24-05
Vietnam            B2                BB-                B+              Downgrade, O/L chngd to stable Sep-28-12       O/L chngd to stable, Affirmed   Jun-06-12      Affirmed, O/L stable       May-11-12

                   Moody’s              S&P               Fitch                    Recent Moody’s Action                            Recent S&P Action                         Recent Fitch Action
                Rating View        Rating View        Rating View                  Action                  Date                  Action                 Date                Action                  Date
                                                                                              Latin America
Argentina           B3      (-)       B-      (-)        B         -       O/L chngd to (-), Affirmed    Sep-17-12          Downgrade, O/L (-)         Oct-31-12        Rating Watch (-)         Oct-30-12
Barbados           Baa3     (-)      BB+                NR      NR         O/L chngd to (-), Affirmed     Jun-13-11   Downgrade, O/L chngd to stable   Jul-17-12
Belize              Ca      (-)       SD      NM        NR      NR         O/L chngd to (-), Affirmed    Aug-21-12    Downgrade, O/L not meaningful Aug-21-12
Bolivia             Ba3              BB-                BB-              Upgrade, O/L chngd to stable Jun-08-12            Affirmed, O/L stable        Oct-16-12      Upgrade, O/L stable        Oct-02-12
Brazil             Baa2    (+)       BBB                BBB                    Affirmed, O/L (+)          Apr-30-12    Upgrade, O/L chngd to stable    Nov-17-11      Affirmed, O/L stable        Jul-27-12
Chile               Aa3               A+      (+)       A+                   Affirmed, O/L stable         Apr-24-12          Affirmed, O/L (+)         Feb-08-12      Affirmed, O/L stable       Jan-30-12
Colombia           Baa3              BBB-     (+)      BBB-                  Affirmed, O/L stable        Feb-14-12       O/L chngd to (+), Affirmed    Aug-15-12      Affirmed, O/L stable       Jun-19-12
Costa Rica*        Baa3               BB                BB+                  Affirmed, O/L stable        Sep-08-11         Affirmed, O/L stable        Feb-13-12      Affirmed, O/L stable       Feb-14-12
Cuba               Caa1               NR      NR        NR      NR           Affirmed, O/L stable        Feb-28-12
Dominican Republic B1                 B+                 B      (+)          Affirmed, O/L stable         Oct-10-11        Affirmed, O/L stable        Apr-27-12    O/L chngd to (+), Affirmed   Jan-05-11
Ecuador            Caa1                B                 B-     (+)          Upgrade, O/L stable         Sep-13-12     Upgrade, O/L chngd to stable    Jun-07-12    O/L chngd to (+), Affirmed   Oct-24-12
El Salvador         Ba3              BB-                BB        (-)       Downgrade, O/L stable        Nov-05-12         Affirmed, O/L stable        Dec-29-11    O/L chngd to (-), Affirmed    Jul-24-12
Guatemala           Ba1               BB                BB+                  Upgrade, O/L stable         Jun-01-10     O/L chngd to stable, Affirmed   Sep-06-12      Affirmed, O/L stable        Jul-31-12
Honduras            B2                 B      (+)       NR      NR           Affirmed, O/L stable        Dec-28-11       O/L chngd to (+), Affirmed    Jun-14-11
Jamaica             B3                B-      (-)        B-                  Upgrade, O/L stable         Mar-02-10           Affirmed, O/L (-)         Oct-08-12      Affirmed, O/L stable       Feb-06-12
Mexico             Baa1              BBB                BBB                  Affirmed, O/L stable        Aug-18-11         Affirmed, O/L stable         Jul-09-12     Affirmed, O/L stable       May-11-12
Nicaragua           B3                NR      NR        NR      NR           Upgrade, O/L stable         May-26-10
Panama             Baa2              BBB                BBB              Upgrade, O/L chngd to stable Oct-31-12        Upgrade, O/L chngd to stable    Jul-02-12      Affirmed, O/L stable       May-31-12
Paraguay            B1               BB-                NR      NR           Affirmed, O/L stable        Nov-02-11     O/L chngd to stable, Affirmed   Aug-29-12
Peru               Baa2    (+)       BBB      (+)       BBB                    Upgrade, O/L (+)          Aug-16-12       O/L chngd to (+), Affirmed    Aug-28-12      Affirmed, O/L stable       Nov-09-12
Trinidad & Tobago Baa1                A                 NR      NR           Affirmed, O/L stable        Feb-27-12         Affirmed, O/L stable        Dec-16-11
Uruguay*           Baa3    (+)       BBB-               BB+     (+)            Upgrade, O/L (+)           Jul-31-12        Upgrade, O/L stable         Apr-03-12    O/L chngd to (+), Affirmed   Apr-24-12
Venezuela           B2                B+                B+        (-)        Affirmed, O/L stable        Mar-13-12         Affirmed, O/L stable        Aug-10-12    O/L chngd to (-), Affirmed   Apr-04-12

* S&P issue rating is one notch above the issuer credit rating
See key on the following page for explanation of ratings terminology and procedures.

J.P. Morgan Securities LLC                                                                     Emerging Markets Research
Tejal Ray (1-212) 834-8580                                                                     Emerging Markets Outlook and Strategy for 2013
tejal.t.ray@jpmorgan.com                                                                       November 21, 2012

EMEA EM and Developed Markets Credit Ratings
                  Moody’s       S&P          Fitch                   Recent Moody’s Action                            Recent S&P Action                            Recent Fitch Action
                 Rating View Rating View Rating View                 Action                 Date                   Action                 Date                  Action                  Date
                                                                                    EMEA EM
Angola            Ba3    (+)    BB-          BB-     (+)    O/L chngd to (+), Affirmed     Aug-22-12         Affirmed, O/L stable        Aug-22-12     O/L chngd to (+), Affirmed     May-23-12
Bahrain           Baa1   (-)   BBB    (-)   BBB                  Affirmed, O/L (-)         Oct-27-11           Affirmed, O/L (-)          Jul-20-12      Affirmed, O/L stable          Jul-23-12
Botswana           A2            A-          NR    NR         Affirmed, O/L stable         Mar-21-12         Affirmed, O/L stable         Jul-23-12
Bulgaria          Baa2         BBB          BBB-              Affirmed, O/L stable         May-28-12         Affirmed, O/L stable        Aug-10-12        Affirmed, O/L stable         Jul-17-12
Croatia           Baa3   (-)   BBB-   (-)   BBB-            O/L chngd to (-), Affirmed     May-31-12           Affirmed, O/L (-)         Apr-03-12    O/L chngd to stable, Affirmed   Sep-05-12
Czech Republic     A1           AA-          A+               Affirmed, O/L stable          Jul-17-12        Affirmed, O/L stable        Aug-24-12    O/L chngd to stable, Affirmed   Dec-13-11
Egypt              B2    (-)     B    (-)    B+      (-)    O/L chngd to (-), Affirmed     Sep-12-12      O/L chngd to (-), Affirmed     Aug-23-12         Downgrade, O/L (-)         Jun-15-12
Estonia           Ba3           BB-          BB      (-)     Downgrade, O/L stable         Nov-05-12         Affirmed, O/L stable        Dec-29-11     O/L chngd to (-), Affirmed      Jul-24-12
Gabon              NR    NR     BB-   (-)    BB-     (+)                                                  O/L chngd to (-), Affirmed     Sep-07-12     O/L chngd to (+), Affirmed     Apr-05-12
Ghana              NR    NR      B           B+                                                              Affirmed, O/L stable        Nov-21-12        Affirmed, O/L stable        Sep-21-12
Hungary           Ba1    (-)    BB+   (-)    BB+     (-)       Downgrade, O/L (-)          Nov-24-11          Downgrade, O/L (-)         Dec-21-11         Downgrade, O/L (-)         Jan-06-12
Israel             A1           A+            A               Affirmed, O/L stable         Dec-28-11         Affirmed, O/L stable        Oct-17-12        Affirmed, O/L stable        Apr-25-12
Jordan            Ba2    (-)    BB    (-)    NR    NR       O/L chngd to (-), Affirmed     Feb-08-11           Affirmed, O/L (-)          Jul-25-12
Kazakhstan        Baa2         BBB+         BBB+              Affirmed, O/L stable         Nov-07-11         Upgrade, O/L stable         Nov-07-11    Upgrade, O/L chngd to stable    Nov-20-12
Kenya              B1           B+           B+                                                              Affirmed, O/L stable        Dec-22-11        Affirmed, O/L stable        Aug-06-12
Kuwait            Aa2           AA           AA            O/L chngd to stable, Affirmed   Aug-05-10         Affirmed, O/L stable        May-28-12        Affirmed, O/L stable         Jul-24-12
Latvia            Baa3   (+)   BBB    (+)   BBB-            O/L chngd to (+), Affirmed     Jun-06-11    Upgrade, O/L chngd to positive   Nov-09-12    O/L chngd to stable, Affirmed   Dec-13-11
Lebanon            B1            B    (-)     B                Upgrade, O/L stable         Apr-13-10      O/L chngd to (-), Affirmed     May-28-12        Affirmed, O/L stable         Jul-05-12
Lithuania         Baa1         BBB          BBB            O/L chngd to stable, Affirmed   Mar-31-10     O/L chngd to stable, Affirmed   Apr-13-11        Affirmed, O/L stable        May-03-12
Morocco*          Ba1          BBB-         BBB-               Affirmed, O/L stable        Mar-15-12      O/L chngd to (-), Affirmed     Oct-11-12        Affirmed, O/L stable        Nov-07-12
Nigeria           Ba3           BB-          BB-                                                         Upgrade, O/L chngd to stable    Nov-07-12        Affirmed, O/L stable        Oct-19-12
Oman               A1            A           NR    NR         Affirmed, O/L stable         Jan-18-12     O/L chngd to stable, Affirmed    Jul-02-12
Poland             A2            A-           A-              Affirmed, O/L stable         Dec-20-11         Affirmed, O/L stable        Aug-07-12        Affirmed, O/L stable        Feb-29-12
Qatar             Aa2           AA           NR    NR         Affirmed, O/L stable         Oct-04-11         Affirmed, O/L stable         Jul-25-12
Romania           Baa3   (-)    BB+         BBB-            O/L chngd to (-), Affirmed     Jun-29-12         Affirmed, O/L stable        May-25-12        Affirmed, O/L stable        Jun-28-12
Russia            Baa1         BBB          BBB               Affirmed, O/L stable         Feb-29-12         Affirmed, O/L stable        Jun-27-12        Affirmed, O/L stable        Aug-16-12
Saudi Arabia      Aa3           AA-          AA-              Affirmed, O/L stable         May-16-12         Affirmed, O/L stable        May-07-12        Affirmed, O/L stable        Apr-02-12
Serbia             NR    NR     BB-   (-)    BB-     (-)                                                 Downgrade, O/L chngd to (-)     Aug-07-12      O/L chngd to (-), Affirmed    Aug-16-12
South Africa      Baa1   (-)   BBB    (-)   BBB+     (-)       Downgrade, O/L (-)          Sep-27-12          Downgrade, O/L (-)         Oct-12-12      O/L chngd to (-), Affirmed    Jan-13-12
Tunisia           Baa3   (-)    BB          BBB-     (-)        Affirmed, O/L (-)          Sep-14-11    Downgrade, O/L chngd to stable   May-23-12          Affirmed, O/L (-)         Feb-27-12
Turkey            Ba1    (+)    BB          BBB-                Upgrade, O/L (+)           Jun-20-12     O/L chngd to stable, Affirmed   May-01-12        Upgrade, O/L stable         Nov-05-12
Ukraine            B2    (-)    B+    (-)     B             O/L chngd to (-), Affirmed     Dec-15-11      O/L chngd to (-), Affirmed     Mar-15-12        Affirmed, O/L stable         Jul-10-12
UAE               Aa2           NR    NR     NR    NR         Affirmed, O/L stable         Jan-31-12
Zambia             B1           B+           B+    (-)        Assigned, O/L stable         Nov-07-12         Affirmed, O/L stable        Mar-30-12      O/L chngd to (-), Affirmed    Mar-01-12

                  Moody’s       S&P          Fitch                   Recent Moody’s Action                            Recent S&P Action                            Recent Fitch Action
                 Rating View Rating View Rating View                 Action                 Date                   Action                 Date                  Action                  Date
                                                                            Developed Markets
Canada            Aaa          AAA          AAA         Affirmed, O/L stable               Jan-09-12        Affirmed, O/L stable         Oct-25-11        Affirmed, O/L stable      Sep-05-12
Germany           Aaa    (-)   AAA          AAA       O/L chngd to (-), Affirmed            Jul-23-12       Affirmed, O/L stable         Aug-01-12        Affirmed, O/L stable      Aug-08-12
France            Aa1    (-)   AA+    (-)   AAA (-)      Downgrade, O/L (-)                Nov-19-12     Downgrade, O/L chngd to (-)     Jan-13-12          Affirmed, O/L (-)       Jun-18-12
Austria           Aaa    (-)   AA+    (-)   AAA           Affirmed, O/L (-)                Sep-21-12     Downgrade, O/L chngd to (-)     Jan-13-12        Affirmed, O/L stable      Nov-09-12
Netherlands       Aaa    (-)   AAA    (-)   AAA       O/L chngd to (-), Affirmed            Jul-23-12     O/L chngd to (-), Affirmed     Jan-13-12        Affirmed, O/L stable      Jun-26-12
Sweden            Aaa          AAA          AAA         Affirmed, O/L stable               Dec-23-11        Affirmed, O/L stable         Oct-24-12        Affirmed, O/L stable       Jul-19-12
Norway            Aaa          AAA          AAA         Affirmed, O/L stable               Oct-24-11        Affirmed, O/L stable         May-30-11        Affirmed, O/L stable      Jun-22-12
Switzerland       Aaa          AAA          AAA         Affirmed, O/L stable               Oct-24-11        Affirmed, O/L stable         Jan-13-09        Affirmed, O/L stable      Jun-21-12
Australia         Aaa          AAA          AAA         Affirmed, O/L stable               Jun-12-12        Affirmed, O/L stable         Sep-18-12        Affirmed, O/L stable      Oct-26-12
United Kingdom    Aaa    (-)   AAA          AAA (-)   O/L chngd to (-), Affirmed           Feb-13-12        Affirmed, O/L stable          Oct-11-11         Affirmed, O/L (-)       Sep-28-12
United States     Aaa    (-)   AA+    (-)   AAA (-)   O/L chngd to (-), Affirmed           Aug-02-11          Affirmed, O/L (-)          Jun-08-12          Affirmed, O/L (-)        Jul-10-12
New Zealand       Aaa           AA           AA         Upgrade, O/L stable                Dec-16-11        Affirmed, O/L stable         Aug-02-12        Affirmed, O/L stable      Sep-11-12
Belgium           Aa3    (-)    AA    (-)    AA  (-)     Downgrade, O/L (-)                Dec-16-11      O/L chngd to (-), Affirmed     Jan-13-12         Downgrade, O/L (-)       Jan-27-12
Spain             Baa3   (-)   BBB-   (-)   BBB (-)   O/L chngd to (-), Affirmed           Oct-16-12         Downgrade, O/L (-)          Oct-10-12         Downgrade, O/L (-)       Jun-07-12
Japan             Aa3           AA-   (-)    A+  (-)   Downgrade, O/L stable               Aug-24-11      O/L chngd to (-), Affirmed     Apr-26-11         Downgrade, O/L (-)       May-22-12
Italy             Baa2   (-)   BBB+   (-)     A- (-)     Downgrade, O/L (-)                 Jul-13-12    Downgrade, O/L chngd to (-)     Jan-13-12          Affirmed, O/L (-)        Jul-19-12
Ireland           Ba1    (-)   BBB+   (-)   BBB+         Downgrade, O/L (-)                 Jul-12-11         Affirmed, O/L (-)          Aug-02-12    O/L chngd to stable, Affirmed Nov-14-12
Portugal          Ba3    (-)    BB    (-)    BB+ (-) Downgrade, O/L chngd to (-)           Feb-13-12          Affirmed, O/L (-)          Aug-02-12          Affirmed, O/L (-)       Nov-12-12
Iceland           Baa3   (-)   BBB-         BBB-          Affirmed, O/L (-)                Nov-16-11        Affirmed, O/L stable         Oct-17-12        Upgrade, O/L stable       Feb-17-12
Greece             C     WR    CCC    (-)   CCC WR Downgrade, O/L withdrawn                Mar-02-12      O/L chngd to (-), Affirmed     Aug-07-12     Downgrade, O/L withdrawn May-17-12

J.P. Morgan Securities LLC                                                                                 Emerging Markets Research
Tejal Ray (1-212) 834-8580                                                                                 Emerging Markets Outlook and Strategy for 2013
tejal.t.ray@jpmorgan.com                                                                                   November 21, 2012

Local Currency Ratings (GBI-EM Broad Countries)
                Moody’s              S&P                Fitch                   Recent Moody’s Action                             Recent S&P Action                              Recent Fitch Action
               Rating View     Rating View        Rating View                   Action                 Date                     Action                  Date                   Action                     Date
Brazil          Baa2     (+)     A-                 BBB                    Affirmed, O/L (+)         Jun-20-12           Affirmed, O/L stable         Jul-09-12          Affirmed, O/L stable           Jul-27-12
Chile           Aa3             AA         (+)      AA-               Upgrade, O/L chngd to stable Apr-24-12               Affirmed, O/L (+)          Feb-08-12          Affirmed, O/L stable           Jan-30-12
China           Aa3      (+)    AA-                 AA-         (-)        Affirmed, O/L (+)         Apr-15-12           Affirmed, O/L stable         Dec-06-11            Affirmed, O/L (-)            Apr-11-12
Colombia        Baa3           BBB+        (+)      BBB                   Affirmed, O/L stable       May-31-11        O/L chngd to (+), Affirmed      Aug-15-12          Affirmed, O/L stable           Jun-19-12
Hungary         Ba1      (-)    BB+        (-)     BBB-         (-)       Downgrade, O/L (-)         Nov-24-11           Downgrade, O/L (-)           Dec-21-11          Downgrade, O/L (-)             Jan-06-12
India           Baa3            BBB-       (-)     BBB-         (-)       Affirmed, O/L stable       Jun-25-12        O/L chngd to (-), Affirmed      Apr-25-12       O/L chngd to (-), Affirmed        Jun-18-12
Indonesia       Baa3            BB+        (+)     BBB-                   Affirmed, O/L stable        Jul-16-12            Affirmed, O/L (+)          Apr-23-12     Upgrade, O/L chngd to stable Dec-15-11
Malaysia         A3              A                      A                 Affirmed, O/L stable       Jun-07-12           Affirmed, O/L stable         Jul-27-12          Affirmed, O/L stable           Aug-01-12
Mexico          Baa1             A-                BBB+                   Affirmed, O/L stable       Aug-18-11           Affirmed, O/L stable         Jul-09-12          Affirmed, O/L stable           May-11-12
Peru            Baa2     (+)   BBB+        (+)     BBB+                    Upgrade, O/L (+)          Aug-16-12        O/L chngd to (+), Affirmed      Aug-28-12          Affirmed, O/L stable           Nov-09-12
Poland           A2              A                      A                 Affirmed, O/L stable       Dec-20-11           Affirmed, O/L stable         Aug-07-12          Affirmed, O/L stable           Feb-29-12
Russia          Baa1           BBB+                 BBB                   Affirmed, O/L stable       Feb-29-12           Affirmed, O/L stable         Jun-27-12          Affirmed, O/L stable           Aug-16-12
South Africa    Baa1     (-)     A-        (-)          A                 Downgrade, O/L (-)         Sep-27-12           Downgrade, O/L (-)           Oct-12-12       O/L chngd to (-), Affirmed        Jan-13-12
Thailand        Baa1             A-                    A-                 Affirmed, O/L stable       Apr-16-12           Affirmed, O/L stable         Nov-22-11          Affirmed, O/L stable           May-09-12
Turkey          Ba1      (+)    BBB-                BBB                    Upgrade, O/L (+)          Jun-20-12      O/L chngd to stable, Affirmed May-01-12              Upgrade, O/L stable            Nov-05-12

RATING SCALE                                                                                                   STANDARD TERMINOLOGY AND PROCEDURES
                               MOODY’s           S&P             Fitch                                                MOODY’s                S&P                                               Fitch
Upper Investment Grade          Aaa               AAA            AAA
                                Aa1               AA+            AA+               Not currently subject                   STABLE                           STABLE                             STABLE
                                Aa2                AA             AA                    to change
                                Aa3               AA-            AA-
                                 A1                A+             A+
                                 A2                 A              A            Possible long-term change              OUTLOOK (+or-)                  OUTLOOK (+or-)                   OUTLOOK (+or-)
                                 A3                A-             A-            Likely to be put on review
Lower Investment Grade          Baa1             BBB+           BBB+
                                Baa2              BBB            BBB
                                Baa3             BBB-           BBB-            Likely change in short term             REVIEW (+or-)                CREDITWATCH (+or-)              RATING WATCH (+or-)
Non-Investment Grade            Ba1               BB+            BB+
                                Ba2                BB             BB
                                Ba3               BB-            BB-
Lower Non-Investment Grade       B1                B+             B+                                              UPGRADE / DOWNGRADE              UPGRADE / DOWNGRADE            UPGRADE / DOWNGRADE
                                 B2                 B              B                                                AFFIRMED / STABLE                AFFIRMED / STABLE              AFFIRMED / STABLE
                                 B3                B-             B-
                                Caa1             CCC+           CCC+        Moody’s ratings are qualified by outlooks and reviews while S&P and Fitch ratings are qualified by outlooks and watches.
                                Caa2             CCC            CCC         A review/watch is indicative of a likely short-term movement.
                                Caa3             CCC-           CCC-        An outlook suggests that a review/watch or a long/intermediate-term movement is likely.
                                 Ca               CC             CC
                                 C                 C              C         (+) positive outlook      + positive review/watch
Default                                           SD             RD         (-) negative outlook      - negative review/watch
                                                                            WR Rating Withdrawn
                                                   D              D

J.P. Morgan Securities LLC                                                               Emerging Markets Research
                                                                                         Emerging Markets Outlook and Strategy for 2013
                                                                                         November 21, 2012

Index of Prior Features
Reports and feature articles available on www.morganmarkets.com
Article Title                                                                                                                                                    Date
Latin America
Mexico: A structural challenge ahead                                                                                                                  October 19, 2012
Chile: A conscientious objector faces “currency war” draft                                                                                             October 5, 2012
Brazil at a crucial juncture to address potential growth                                                                                            September 28, 2012
Uruguay Trip Notes: Well equipped to fend off external shocks                                                                                        September 5, 2012
Brazil: BRL close to, but still stronger than, fair value                                                                                              August 31, 2012

Turkey: CAD narrows even apart from gold exports                                                                                                      November 9, 2012
Ukraine election preview and what to expect afterward                                                                                                  October 26, 2012
CE-4: Romania hit most by food price shock, Poland least                                                                                               October 19, 2012
South Africa: Perfect storm leads to likely GDP contraction                                                                                             October 5, 2012
South Africa: CPI re-weighting to lift inflation projections                                                                                           August 31, 2012

EM Asia
Hong Kong: Tackling strong capital inflows                                                                                                           November 9, 2012
Thailand: Fiscal transfers pushing up public debt                                                                                                     October 26, 2012
Indonesia: Tracking signs of a credit cycle inflection                                                                                                October 12, 2012
China’s local government stimulus: castles in the air                                                                                                  October 5, 2012
Mixed messages in Emerging Asia’s manufacturing data                                                                                                September 28, 2012
Singapore: MAS to ease or not to ease? A tough question                                                                                             September 28, 2012
A brief history of Indonesia’s fiscal financing                                                                                                     September 28, 2012
Taiwan trade hinges on G-3 demand as China stabilizes                                                                                               September 21, 2012
PBoC’s quantitative measures: RRR and OMO                                                                                                            September 7, 2012
India’s falling potential growth                                                                                                                     September 7, 2012
Malaysia: The math behind the energy balance                                                                                                         September 7, 2012
Korea: Micro policy to ease HH debt servicing burden                                                                                                   August 31, 2012

Relative Value/Trade Strategies/Portfolio Research
EMBIG Model Portfolio Rebalancing November 2012                                                                                             November 8, 2012 (Monthly)
Emerging Markets Cross Product Strategy Weekly                                                                                               November 5, 2012 (Weekly)
Emerging Markets Cross Product Strategy Weekly                                                                                                October 29, 2012 (Weekly)
Emerging Markets Cross Product Strategy Weekly                                                                                                October 22, 2012 (Weekly)
Emerging Markets Cross Product Strategy Weekly                                                                                                October 15, 2012 (Weekly)
EMBIG Model Portfolio Rebalancing October 2012                                                                                               October 11, 2012 (Monthly)
Venezuela: Calm after the storm: Move back to overweight in our EMBIG Model Portfolio                                                                  October 10, 2012
Emerging Markets Cross Product Strategy Weekly                                                                                              September 24, 2012 (Weekly)
EMBIG Model Portfolio: Shift to M/W in Venezuela and O/W in Argentina                                                                               September 18, 2012
Emerging Markets Cross Product Strategy Weekly                                                                                              September 17, 2012 (Weekly)
EMBIG Model Portfolio Rebalancing September 2012                                                                                            September 8, 2012 (Monthly)
EMBIG Model Portfolio Update: Egypt                                                                                                                     August 21, 2012

Special Reports
Highlights from the IMF/World Bank Annual Meetings                                                                                                     October 18, 2012
NEXGEM relative outperformance continues                                                                                                                October 5, 2012
Mrs. Watanabe returns to EM after a 2-year hiatus                                                                                                       October 3, 2012
EM Rerates as an Asset Class: EM Fixed Income Passes a Second Stress Test                                                                              August 10, 2012
Mexico: Views from our research trip                                                                                                                      June 22, 2012
Latin America: Joining the downward growth revisions fest                                                                                                  June 1, 2012
How resilient are the core EM economies to external shocks?                                                                                               May 17, 2012
Highlights from the Next Generation Markets Seminar                                                                                                      April 24, 2012
Highlights from IMF/World Bank Spring Meetings                                                                                                           April 24, 2012
NEXGEM solidly outperforms during market downturn: Stay overweight                                                                                       April 17, 2012
Latin America: Views from our IADB Investor Seminar                                                                                                     March 21, 2012
NEXGEM outperforms broader EMBIGD YTD, but lags broader EMBIGD High Yield returns                                                                     February 17, 2012

For J.P. Morgan’s latest views on global fixed income, foreign exchange, equity, and commodity strategy, please see www.morganmarkets.com

                                                                               Joyce Chang
                                                           Global Head of Emerging Markets and Credit Research
                                                                             (1-212) 834-4203

Latin America
luis.oganes@jpmorgan.com          MD, Strategy / Economics (Latin America)          (1-212) 834-4326    gabriel.lozano@jpmorgan.com       VP, Economics (Mexico)                            (52-55) 5540-9558
fabio.akira@jpmorgan.com          ED, Economics (Brazil)                            (55-11) 4950-3634   iker.x.cabiedes@jpmorgan.com      Assoc, Economics (Mexico)                         (52-55) 5540-9339
benjamin.h.ramsey@jpmorgan.com ED, Strategy (Andean Region)                         (1-212) 834-4308    diego.w.pereira@jpmorgan.com      Assoc, Strategy / Economics (Argentina and Chile) (1-212) 834-4321
franco.a.uccelli@jpmorgan.com     ED, Strategy (Central America and Caribbean) (1-305) 579-9415         tamara.wajnberg@jpmorgan.com      Assoc, Economics (Brazil)                         (55-11) 4950-3243
vladimir.werning@jpmorgan.com     ED, Strategy / Economics (Argentina and Chile)    (1-212) 834-4144    laura.a.karpuska@jpmorgan.com     Analyst, Economics (Brazil, Colombia and Peru)    (55-11) 4950-3322
cassiana.fernandez@jpmorgan.com VP, Economics (Brazil, Colombia and Peru)           (55-11) 4950-3369

Europe, Middle East and Africa (EMEA EM)
michael.marrese@jpmorgan.com       MD, Strategy / Economics (EMEA EM,              (44-20) 7134-7547    nicolaie.alexandru@jpmorgan.com    VP, Economics (EMEA EM, Romania,                (44-20) 7742-2466
                                   Russia and Kazakhstan)                                                                                  Czech Republic, Ukraine and Kazakhstan)
yarkin.cebeci@jpmorgan.com         ED, Economics (Turkey, Israel, and Baltics)     (90-212) 319-8599    giulia.pellegrini@jpmorgan.com     VP, Strategy / Economics                        (44-20) 7742-6959
                                                                                                                                           (Sub-Saharan Africa)
sonja.c.keller@jpmorgan.com        ED, Economics (South Africa)                    (27-11) 507-0376
                                                                                                        anatoliy.a.shal@jpmorgan.com       VP, Economics (Russia)                          (7-495) 937-7321
brahim.x.razgallah@jpmorgan.com ED, Strategy / Economics (Middle East              (44-20) 7134-7546
                                and North Africa)                                                       jose.a.cerveira@jpmorgan.com       Analyst, Economics (EMEA EM)                    (44-20) 7742-3556
nora.szentivanyi@jpmorgan.com      ED, Economics (Poland, Hungary                  (44-20) 7134-7544    anthony.wong@jpmorgan.com          Analyst, Economics (Croatia, Serbia,            (44-20) 7134-7549
                                   and Czech Republic)                                                                                     Georgia, Bulgaria and Iceland)

EM Asia
david.g.fernandez@jpmorgan.com       MD, Strategy / Economics (EM Asia)             (65) 6882-2461      sinbeng.ong@jpmorgan.com             ED, Strategy / Economics (Southeast Asia) (65) 6882-1623

jiwon.c.lim@jpmorgan.com             MD, Economics (Korea)                          (82-2) 758-5509     haibin.zhu@jpmorgan.com              ED, Economics (China)                          (852) 2800-7039

jahangir.x.aziz@jpmorgan.com         ED, Economics (India)                          (1-202) 585-1254    matt.l.hildebrandt@jpmorgan.com      VP, Economics (EM Asia, Philippines,           (65) 6882-2253
                                                                                                                                             Singapore and Vietnam)
sajjid.z.chinoy@jpmorgan.com         ED, Economics (India)                          (91-22) 6157-3386   minjoo.mj.kang@jpmorgan.com          Assoc, Economics (Korea)                       (82-2) 758-5512
grace.h.ng@jpmorgan.com              ED, Economics (China and Taiwan)               (852) 2800-7002     benjamin.shatil@jpmorgan.com         Analyst, Economics (Southeast Asia)            (65) 6882-2311

Global Strategy
eric.beinstein@jpmorgan.com          MD, Strategy                                   (1-212) 834-4211    tejal.t.ray@jpmorgan.com             VP, Strategy                                   (1-212) 834-8580
bert.j.gochet@jpmorgan.com           ED, Strategy (Asia Local Markets)              (852) 2800-8325     carlos.j.carranza@jpmorgan.com       Assoc, Strategy (Latin America)                (54-11) 4348-3425
jonathan.m.goulden@jpmorgan.com      ED, EM Credit Strategy                         (44-20) 7134-4470   george.g.christou@jpmorgan.com       Assoc, Strategy (EMEA EM Local Markets)        (44-20) 7134-7548
holly.s.huffman@jpmorgan.com         ED, Strategy                                   (1-212) 834-4953    ying.k.gu@jpmorgan.com               Assoc, Strategy (China Local Markets)          (86-21) 5200-2833
daniel.hui@jpmorgan.com              ED, Strategy (Asia FX)                         (65) 6882-2216      trang.m.nguyen@jpmorgan.com          Assoc, Strategy                                (1-212) 834-2475
felipe.q.pianetti@jpmorgan.com       ED, Strategy (Latin America)                   (1-212) 834-4043    abhishek.x.panda@jpmorgan.com        Assoc, Strategy (India Rates Markets)          (91-22) 6157-3387
dennis.x.badlyans@jpmorgan.com       VP, Strategy (Latin America)                   (1-212) 834-9150    laura.bierer@jpmorgan.com            Analyst, Strategy (EMEA EM)                    (44-20) 7134-9173
jason.j.mortimer@jpmorgan.com        VP, Strategy (Asia Local Markets)              (852) 2800-8329     carmen.p.collyns@jpmorgan.com        Analyst, Strategy                              (1-212) 834-3921

ym.hong@jpmorgan.com                ED, Corporate Strategy (Asia)                   (852) 2800-8028     daniel.sensel@jpmorgan.com          VP, Corporate Strategy (Latin America)          (1-212) 834-7202
soo.ch.lim@jpmorgan.com             ED, Corporate Strategy (Asia)                   (852) 2800-7931     varun.x.ahuja@jpmorgan.com          Assoc, Corporate Strategy (Asia)                (852) 2800 8030
nachu.nachiappan@jpmorgan.com       ED, Corporate Strategy (EMEA EM)                (44-20) 7134-7552   anne-marie.hendriks@jpmorgan.com Assoc, Corporate Strategy (EMEA EM)                (44-20) 7742-7432
jacob.a.steinfeld@jpmorgan.com      ED, Corporate Strategy (Latin America)          (1-212) 834-4066    matthew.hughart@jpmorgan.com        Assoc, Corporate Strategy (Asia)                (852) 2800 8029
zafar.nazim@jpmorgan.com            ED, Corporate Strategy (EMEA EM)                (44-20) 7134-7551   alisa.meyers@jpmorgan.com           Assoc, Corporate Strategy                       (1-212) 834-9151
isabela.p.bacchi@jpmorgan.com       VP, Corporate Strategy (Latin America)          (55-11) 4950-6725   esha.ranganath@jpmorgan.com         Analyst, Corporate Strategy                     (1-212) 834-2516
daniel.cc.fan@jpmorgan.com          VP, Corporate Strategy (Asia)                   (852) 2800-8080

Index and Quantitative Analysis
victor.dituro@jpmorgan.com           ED, Analytics                                  (1-212) 834-7072    paul.x.glezer@jpmorgan.com           VP, Analytics                                  (1-212) 270-8185
gloria.m.kim@jpmorgan.com            ED, Index Management                           (1-212) 834-4153    andrew.j.szmulewicz@jpmorgan.com     VP, Index Management                           (1-212) 834-4029
jarrad.k.linzie@jpmorgan.com         ED, Index Management                           (1-212) 834-7041    andre.r.harvey@jpmorgan.com          Assoc, Analytics                               (1-212) 834-7190
ann.m.fausto@jpmorgan.com            VP, Analytics                                  (1-212) 834-7037    kenneth.ling@jpmorgan.com            Assoc, Analytics                               (1-212) 834-4483
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Emerging Market research uses a rating of Marketweight, which is equivalent to a Neutral rating.
J.P. Morgan Credit Research Ratings Distribution, as of September 28, 2012
                                    Overweight            Neutral     Underweight
EMEA Credit Research Universe           26%                 51%            24%
   IB clients*                          55%                 67%            50%
Represents Ratings on the most liquid bond or 5-year CDS for all companies under coverage.
* Percentage of investment banking clients in each rating category.

Valuation and Methodology: In J.P. Morgan's credit research, we assign a rating to each issuer (Overweight, Underweight or Neutral) based on our credit view of the issuer and
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