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 = 100 120 US HY 115 EMBIG 110 S&P 500 105 100 95 GBI-EM Global Div. (USD unhedged) 90 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Source: J.P. Morgan AC Joyce Chang (1-212) 834-4203 email@example.com J.P. Morgan Securities LLC See the last page for analyst certification and important disclosures. www.morganmarkets.com Joyce Chang Emerging Markets Research (1-212) 834-4203 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org 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% 2 J.P. Morgan Securities LLC Emerging Markets Research Joyce Chang AC Emerging Markets Outlook and Strategy for 2013 (1-212) 834-4203 email@example.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 3 J.P. Morgan Securities LLC Emerging Markets Research Joyce Chang AC Emerging Markets Outlook and Strategy for 2013 (1-212) 834-4203 firstname.lastname@example.org 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 4 J.P. Morgan Securities LLC Emerging Markets Research Joyce Chang AC Emerging Markets Outlook and Strategy for 2013 (1-212) 834-4203 email@example.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 markets. 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 5 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 firstname.lastname@example.org email@example.com November 21, 2012 J.P. Morgan Securities LLC Trang Nguyen AC (1-212) 834-2475 firstname.lastname@example.org 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 6 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 email@example.com firstname.lastname@example.org November 21, 2012 email@example.com J.P. Morgan Securities LLC J.P. Morgan Securities LLC Alisa Meyers AC Jarrad Linzie AC (1-212) 834-9151 (1-212) 834-7041 firstname.lastname@example.org email@example.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% 250 60 60% 50 46.8 200 50% 40 43.3 150 40% 30 30% 100 20 20% 50 10% 10 0 - 0% -3.4 -10 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 7 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 firstname.lastname@example.org email@example.com November 21, 2012 firstname.lastname@example.org 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 Bolivia 400 Cote D'Ivoire Congo 2013 Issuance Forecast 300 Dominican Republic Ecuador 2012 Issuance YTD 200 Egypt 100 El Salvador* Fiji 0 Gabon December 2010 December 2011 December 2012 Ghana Source: J.P. Morgan Guatemala Jamaica Jordan NEXGEM market value rises by nearly Kenya Nigeria 40% Paraguay Pakistan 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% well. 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 8 J.P. Morgan Securities LLC J.P. Morgan Securities plc J.P. Huffman AC HollyMorgan Securities LLC Jonny Goulden AC Emerging Markets Research Joyce Chang AC (1-212) 834-4953 (44-20) 7134-4470 Emerging Markets Outlook and Strategy for 2013 (1-212) 834-4203 email@example.com firstname.lastname@example.org email@example.com November 21, 2012 JPMorgan Chase Bank N.A., London Michael Marrese AC (44-20) 7134-7547 firstname.lastname@example.org 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 Indonesia 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 8 6 Regional highlights 4 2 EMEA EM markets outperform despite Euro 0 area recession and European bank -2 deleveraging -4 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. 9 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 (1-212) 834-4203 email@example.com firstname.lastname@example.org email@example.com November 21, 2012 J.P. Morgan Securities LLC JPMorgan Chase Bank N.A., HK Felipe Q Pianetti AC Bert Gochet AC (1-212) 834-4043 (852) 2800 8325 firstname.lastname@example.org email@example.com 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. 25.0% 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 0.2% 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. CEMBI CEMBI CEMBI EMBIG EMBIG EMBIG 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 10 J.P. Morgan Securities LLC JPMorgan Chase Bank N.A., London Emerging Markets Research Joyce Chang AC Michael Marrese AC Emerging Markets Outlook and Strategy for 2013 (1-212) 834-4203 (44-20) 7134-7547 firstname.lastname@example.org email@example.com November 21, 2012 J.P. Morgan Securities LLC Luis Oganes AC (1-212) 834-4326 firstname.lastname@example.org 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 30 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 15.0 5 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 1 See European Credit Outlook & Strategy 2013: As Good as it Gets? Stephen Dulake et al., 14 November 2012. 11 J.P. Morgan Securities LLC JPMorgan Chase Bank N.A. Emerging Markets Research Joyce Chang AC Haibin Zhu AC Emerging Markets Outlook and Strategy for 2013 (1-212) 834-4203 (852) 2800-7039 email@example.com firstname.lastname@example.org November 21, 2012 JPMorgan Chase Bank N.A. Grace Ng AC (852) 2800-7002 email@example.com 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 12 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 6 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 2 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 12 J.P. Morgan Securities LLC Emerging Markets Research Luis Oganes AC Joyce Chang AC Emerging Markets Outlook and Strategy for 2013 834-4326 (1-212) 834-4203 firstname.lastname@example.org email@example.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 Energy 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 ($/mt) 20880 -19.7% 21500 22000 22500 23000 22250 6.6% Agriculture Corn ($/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 13 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 834-4203 firstname.lastname@example.org email@example.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 EMEA EM 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 14 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 firstname.lastname@example.org November 21, 2012 email@example.com 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 %GDP 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 15 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 firstname.lastname@example.org email@example.com firstname.lastname@example.org 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 16 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 email@example.com firstname.lastname@example.org 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 Potential 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 17 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 email@example.com firstname.lastname@example.org email@example.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 18 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 firstname.lastname@example.org email@example.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 Potential 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 2013 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 19 JPMorgan Chase Bank N.A., London J.P. Morgan Securities LLC JPMorgan Chase Bank, N.A., Emerging Markets Research Michael Marrese AC Joyce Chang AC Johannesburg Emerging Markets Outlook and Strategy for 2013 (44-20) 7134-7547 (1-212) 834-4203 Sonja Keller AC firstname.lastname@example.org email@example.com (27-11) 507-0376 November 21, 2012 JPMorgan Chase Bank N.A., London firstname.lastname@example.org Brahim Razgallah AC (44-20) 7134-7546 email@example.com 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 deposits. 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 20 J.P. Morgan India Private Limited J.P. Morgan Securities plc J.P. Morgan Securities LLC Sajjid Z Chinoy (AC) Ben Ramsey AC Emerging Markets Research Joyce Chang AC (91-22) 6157-3386 (1-212) 834-4308 Emerging Markets Outlook and Strategy for 2013 (1-212) 834-4203 firstname.lastname@example.org email@example.com firstname.lastname@example.org November 21, 2012 J.P. Morgan Securities LLC Vladimir Werning (AC) (1-212) 834-4144 email@example.com 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 21 J.P. Morgan Securities LLC J.P. Morgan Securities LLC J.P. Morgan Securities LLC Emerging Markets Research Joyce Huffman AC Holly Chang AC Felipe Q Pianetti AC Emerging Markets Outlook and Strategy for 2013 (1-212) 834-4953 (1-212) 834-4203 (1-212) 834-4043 firstname.lastname@example.org email@example.com firstname.lastname@example.org 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 email@example.com firstname.lastname@example.org 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 Full- 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 22 J.P. Morgan Securities LLC J.P. Morgan Securities LLC Emerging Markets Research Joyce Chang AC Holly Huffman AC Emerging Markets Outlook and Strategy for 2013 (1-212) 834-4203 (1-212) 834-4953 email@example.com firstname.lastname@example.org November 21, 2012 J.P. Morgan Securities plc Jonny Goulden AC (44-20) 7134-4470 email@example.com 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 Actual 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% returns) 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 23 J.P. Morgan Securities plc J.P. Morgan Securities LLC J.P. Morgan Securities (Asia Pac.) Ltd Emerging Markets Research Jonny GouldenAC Joyce Chang AC Yang-Myung Hong AC Emerging Markets Outlook and Strategy for 2013 (44-20) 7134-4470 (1-212) 834-4203 (852) 2800-8028 firstname.lastname@example.org email@example.com firstname.lastname@example.org November 21, 2012 J.P. Morgan Securities LLC Alisa Meyers AC (1-212) 834-9151 email@example.com 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% 300 300 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 200 150 We expect EM corporates to maintain the tightening 100 trend in line with other credit assets classes; we target 50 275-300bp 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 24 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 firstname.lastname@example.org email@example.com November 21, 2012 firstname.lastname@example.org J.P. Morgan Securities LLC J.P. Morgan Securities LLC Alisa Meyers AC Franco Uccelli AC (1-212) 834-9151 (1-305) 579-9415 email@example.com firstname.lastname@example.org 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 13.0 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, 10.0 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 7.0 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 25 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 email@example.com firstname.lastname@example.org email@example.com November 21, 2012 JPMorgan Chase Bank N.A., Singapore J.P. Morgan Securities LLC Matt Hildebrandt AC Trang Nguyen AC (65) 6882-2253 (1-212) 834-2475 firstname.lastname@example.org email@example.com 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 1,500 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 26 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 firstname.lastname@example.org email@example.com firstname.lastname@example.org 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 email@example.com firstname.lastname@example.org 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% 0 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 27 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 email@example.com firstname.lastname@example.org email@example.com November 21, 2012 J.P. Morgan Securities LLC Alisa Meyers AC (1-212) 834-9151 firstname.lastname@example.org 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 100 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) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD 2012F 2013F 450 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 200 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 53.3 100 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 0 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 continue 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 28 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 834-8580 email@example.com firstname.lastname@example.org 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. 29 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 email@example.com firstname.lastname@example.org 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 America 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 Brazil 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 30 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 email@example.com firstname.lastname@example.org email@example.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 firstname.lastname@example.org email@example.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 31 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 firstname.lastname@example.org November 21, 2012 email@example.com firstname.lastname@example.org 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 strength and OW Southeast Asia versus G-10 FX 1.5 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 0.5 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. 32 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 email@example.com November 21, 2012 firstname.lastname@example.org 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 supported 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 5 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 -1 (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. 33 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 email@example.com firstname.lastname@example.org email@example.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 firstname.lastname@example.org email@example.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. %oya 9 Top FX trade: Buy 6-month (May 17) 25D USD put/MXN call 10y Gsec (Strike 12.82, vol 10.05%, 116bp premium– indicative) 8 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’ 6 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 34 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 firstname.lastname@example.org email@example.com firstname.lastname@example.org November 21, 2012 J.P. Morgan Securities plc Laura Bierer AC (44-20) 7134-9173 email@example.com 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: 4.0% Receive Jan’16 versus Pay Jan’15 DI futures DV01 Neutral. Target: 30bp (Current 50bp) 2.0% 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 4.0% 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 80 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% 20 0.0% 0 CEE non-CEE 2013 Growth Potential Growth Rate cuts (bps, RHS) Source: J.P. Morgan 35 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 firstname.lastname@example.org email@example.com firstname.lastname@example.org 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 email@example.com firstname.lastname@example.org 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 36 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 email@example.com Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org (1-212) 834-4203 email@example.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 firstname.lastname@example.org email@example.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 37 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 firstname.lastname@example.org email@example.com firstname.lastname@example.org 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 email@example.com firstname.lastname@example.org 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 38 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 email@example.com firstname.lastname@example.org 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. 39 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 email@example.com firstname.lastname@example.org November 21, 2012 Latin America Outlook for 2013 Argentina 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 40 J.P. Morgan Securities LLC Emerging Markets Research Franco UccelliAC (305) 579-9415 Emerging Markets Outlook and Strategy for 2013 email@example.com November 21, 2012 Barbados 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 41 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 firstname.lastname@example.org email@example.com November 21, 2012 Bolivia 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 42 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 firstname.lastname@example.org email@example.com November 21, 2012 Banco J.P. Morgan S.A. Cassiana Fernandez (55-11) 3048-3369 firstname.lastname@example.org Brazil 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. 43 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 email@example.com firstname.lastname@example.org November 21, 2012 Chile 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 44 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 email@example.com firstname.lastname@example.org November 21, 2012 J.P. Morgan Securities LLC Dennis Badlyans (1-212) 834-9150 email@example.com 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 45 J.P. Morgan Securities LLC Emerging Markets Research Franco UccelliAC (305) 579-9415 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org 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 46 J.P. Morgan Securities LLC Emerging Markets Research Franco UccelliAC (305) 579-9415 Emerging Markets Outlook and Strategy for 2013 email@example.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 47 J.P. Morgan Securities LLC Emerging Markets Research Ben RamseyAC (1-212) 834-4308 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org November 21, 2012 Ecuador 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 48 J.P. Morgan Securities LLC Emerging Markets Research Franco UccelliAC (305) 579-9415 Emerging Markets Outlook and Strategy for 2013 email@example.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 49 J.P. Morgan Securities LLC Emerging Markets Research Franco UccelliAC (305) 579-9415 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org November 21, 2012 Guatemala 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 50 J.P. Morgan Securities LLC Emerging Markets Research Franco UccelliAC (305) 579-9415 Emerging Markets Outlook and Strategy for 2013 email@example.com November 21, 2012 Jamaica 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 51 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 firstname.lastname@example.org email@example.com Mexico 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 52 J.P. Morgan Securities LLC Emerging Markets Research Franco UccelliAC (305) 579-9415 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org November 21, 2012 Panama 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 53 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 email@example.com firstname.lastname@example.org November 21, 2012 Peru 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 54 J.P. Morgan Securities LLC Emerging Markets Research Franco UccelliAC (305) 579-9415 Emerging Markets Outlook and Strategy for 2013 email@example.com November 21, 2012 Uruguay 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 55 J.P. Morgan Securities LLC Emerging Markets Research Ben RamseyAC (1-212) 834-4308 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org November 21, 2012 Venezuela 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 56 JPMorgan Chase Bank N.A., London Branch J.P. Morgan Securities plc Emerging Markets Research AC Anthony Wong (44-20) 7134-7549 Jonny Goulden (44-20) 7134-4470 Emerging Markets Outlook and Strategy for 2013 email@example.com firstname.lastname@example.org November 21, 2012 EMEA EM Outlook for 2013 Croatia 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 57 JPMorgan Chase Bank N.A., London Branch J.P. Morgan Securities plc Emerging Markets Research AC Nicolaie Alexandru (44-20) 7742-2466 George Christou (44-20) 7134-7548 Emerging Markets Outlook and Strategy for 2013 email@example.com firstname.lastname@example.org 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 58 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 email@example.com firstname.lastname@example.org November 21, 2012 Egypt 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 59 JPMorgan Chase Bank N.A., London Branch Emerging Markets Research Giulia PellegriniAC (44-20) 7742-6959 Emerging Markets Outlook and Strategy for 2013 email@example.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 60 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 firstname.lastname@example.org email@example.com November 21, 2012 Georgia 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 61 JPMorgan Chase Bank N.A., London Branch J.P. Morgan Securities plc Emerging Markets Research AC Nora Szentivanyi (44-20) 7134-7544 Jonny Goulden (44-20) 7134-4470 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org email@example.com November 21, 2012 J.P. Morgan Securities plc George Christou (44-20) 7134-7548 firstname.lastname@example.org Hungary 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 62 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 email@example.com firstname.lastname@example.org November 21, 2012 Iraq 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 63 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 email@example.com firstname.lastname@example.org November 21, 2012 Israel 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 64 JPMorgan Chase Bank N.A., London Branch Emerging Markets Research Giulia PellegriniAC (44-20) 7742-6959 Emerging Markets Outlook and Strategy for 2013 email@example.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 65 JPMorgan Chase Bank N.A., London Branch Emerging Markets Research Brahim RazgallahAC (44-20) 7134-7546 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org November 21, 2012 Jordan 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 66 JPMorgan Chase Bank N.A., London Branch Emerging Markets Research AC Nicolaie Alexandru (44-20) 7742-2466 Emerging Markets Outlook and Strategy for 2013 email@example.com November 21, 2012 Kazakhstan 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 67 JPMorgan Chase Bank N.A., London Branch Emerging Markets Research Brahim RazgallahAC (44-20) 7134-7546 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org November 21, 2012 Kuwait 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. 68 JPMorgan Chase Bank N.A., Istanbul Branch Emerging Markets Research Yarkin CebeciAC (90-212) 319-8599 Emerging Markets Outlook and Strategy for 2013 email@example.com November 21, 2012 Latvia 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 69 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 firstname.lastname@example.org email@example.com November 21, 2012 Lebanon 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 70 JPMorgan Chase Bank N.A., Istanbul Branch Emerging Markets Research Yarkin CebeciAC (90-212) 319-8599 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org November 21, 2012 Lithuania 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 71 JPMorgan Chase Bank N.A., London Branch Emerging Markets Research Giulia PellegriniAC (44-20) 7742-6959 Emerging Markets Outlook and Strategy for 2013 email@example.com November 21, 2012 Nigeria 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 72 JPMorgan Chase Bank N.A., London Branch J.P. Morgan Securities plc Emerging Markets Research AC Nora Szentivanyi (44-20) 7134-7544 Jonny Goulden (44-20) 7134-4470 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org email@example.com November 21, 2012 J.P. Morgan Securities plc George Christou (44-20) 7134-7548 firstname.lastname@example.org Poland 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 73 JPMorgan Chase Bank N.A., London Branch Emerging Markets Research Brahim RazgallahAC (44-20) 7134-7546 Emerging Markets Outlook and Strategy for 2013 email@example.com November 21, 2012 Qatar 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 74 JPMorgan Chase Bank N.A., London Branch J.P. Morgan Securities plc Emerging Markets Research AC Nicolaie Alexandru (44-20) 7742-2466 Jonny Goulden (44-20) 7134-4470 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org email@example.com November 21, 2012 J.P. Morgan Securities plc George Christou (44-20) 7134-7548 firstname.lastname@example.org Romania 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 75 J.P. Morgan Bank International LLC J.P. Morgan Securities plc Emerging Markets Research AC Anatoliy Shal (7-495) 937-7321 Jonny Goulden (44-20) 7134-4470 Emerging Markets Outlook and Strategy for 2013 email@example.com firstname.lastname@example.org November 21, 2012 J.P. Morgan Securities plc George Christou (44-20) 7134-7548 email@example.com Russia 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 76 JPMorgan Chase Bank N.A., London Branch Emerging Markets Research Brahim RazgallahAC (44-20) 7134-7546 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org 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 year-end. 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 77 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 email@example.com firstname.lastname@example.org November 21, 2012 Serbia 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 78 JPMorgan Chase Bank, N.A., Johannesburg Branch JPMorgan Chase N.A., London Branch Emerging Markets Research AC Sonja Keller (27-11) 507-0376 Jose Cerveira (44-20) 7742-3556 Emerging Markets Outlook and Strategy for 2013 email@example.com firstname.lastname@example.org 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 email@example.com firstname.lastname@example.org 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 79 JPMorgan Chase Bank N.A., London Branch Emerging Markets Research Brahim RazgallahAC (44-20) 7134-7546 Emerging Markets Outlook and Strategy for 2013 email@example.com November 21, 2012 Tunisia 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 80 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 firstname.lastname@example.org email@example.com November 21, 2012 J.P. Morgan Securities plc Jonny Goulden (44-20) 7134-4470 firstname.lastname@example.org Turkey 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. resilience 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 81 JPMorgan Chase Bank N.A., London Branch Emerging Markets Research Brahim RazgallahAC (44-20) 7134-7546 Emerging Markets Outlook and Strategy for 2013 email@example.com November 21, 2012 UAE 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, 82 JPMorgan Chase Bank N.A., London Branch J.P. Morgan Securities plc Emerging Markets Research AC Nicolaie Alexandru (44-20) 7742-2466 Jonny Goulden (44-20) 7134-4470 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org email@example.com November 21, 2012 Ukraine 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 83 JPMorgan Chase Bank N.A., London Branch Emerging Markets Research Giulia PellegriniAC (44-20) 7742-6959 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org 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 84 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 email@example.com firstname.lastname@example.org 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 email@example.com firstname.lastname@example.org EM Asia Outlook for 2013 China 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 85 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 email@example.com firstname.lastname@example.org November 21, 2012 J.P. Morgan India Private Limited Abhishek Panda (91-22) 6157-3387 email@example.com India 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 86 JPMorgan Chase Bank, N.A., Singapore Branch Emerging Markets Research Sin Beng OngAC (65) 6882-1623 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org November 21, 2012 J.P. Morgan Securities Singapore Private Limited Daniel Hui (65) 6882-2216 email@example.com Indonesia 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 balances 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 87 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 firstname.lastname@example.org email@example.com November 21, 2012 J.P. Morgan Securities Singapore Private Limited Daniel Hui (65) 6882-2216 firstname.lastname@example.org Korea 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 88 JPMorgan Chase Bank, N.A., Singapore Branch Emerging Markets Research Sin Beng OngAC (65) 6882-1623 Emerging Markets Outlook and Strategy for 2013 email@example.com November 21, 2012 J.P. Morgan Securities Singapore Private Limited Daniel Hui (65) 6882-2216 firstname.lastname@example.org Malaysia 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 89 JPMorgan Chase Bank, N.A., Singapore Branch Emerging Markets Research Matt HildebrandtAC (65) 6882-2253 Emerging Markets Outlook and Strategy for 2013 email@example.com November 21, 2012 J.P. Morgan Securities Singapore Private Limited Daniel Hui (65) 6882-2216 firstname.lastname@example.org Philippines 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 90 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 email@example.com matt.l.Hildebrandt@jpmorgan.com November 21, 2012 J.P. Morgan India Private Limited Abhishek Panda (91-22) 6157-3387 firstname.lastname@example.org 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 91 JPMorgan Chase Bank, N.A., Singapore Branch Emerging Markets Research Benjamin ShatilAC (65) 6882-2311 Emerging Markets Outlook and Strategy for 2013 email@example.com November 21, 2012 J.P. Morgan Securities Singapore Private Limited Daniel Hui (65) 6882-2216 firstname.lastname@example.org Thailand 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 92 JPMorgan Chase Bank, N.A., Singapore Branch Emerging Markets Research Matt HildebrandtAC (65) 6882-2253 Emerging Markets Outlook and Strategy for 2013 email@example.com November 21, 2012 Vietnam 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 93 JPMorgan Chase Bank N.A., New York Emerging Markets Research Carlton Strong (1-212) 834-5612 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org 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 Asia/Pacific 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 Europe 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 94 J.P. Morgan Securities LLC Emerging Markets Research Tejal Ray (1-212) 834-8580 Emerging Markets Outlook and Strategy for 2013 email@example.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 Americas 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 95 J.P. Morgan Securities LLC Emerging Markets Research Tejal Ray (1-212) 834-8580 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org 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 Asia 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. 96 J.P. Morgan Securities LLC Emerging Markets Research Tejal Ray (1-212) 834-8580 Emerging Markets Outlook and Strategy for 2013 email@example.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 97 J.P. Morgan Securities LLC Emerging Markets Research Tejal Ray (1-212) 834-8580 Emerging Markets Outlook and Strategy for 2013 firstname.lastname@example.org 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 98 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 EMEA EM 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 99 J.P. MORGAN EMERGING MARKETS RESEARCH CONTACT INFORMATION Joyce Chang Global Head of Emerging Markets and Credit Research (1-212) 834-4203 email@example.com Latin America firstname.lastname@example.org MD, Strategy / Economics (Latin America) (1-212) 834-4326 email@example.com VP, Economics (Mexico) (52-55) 5540-9558 firstname.lastname@example.org ED, Economics (Brazil) (55-11) 4950-3634 email@example.com Assoc, Economics (Mexico) (52-55) 5540-9339 firstname.lastname@example.org ED, Strategy (Andean Region) (1-212) 834-4308 email@example.com Assoc, Strategy / Economics (Argentina and Chile) (1-212) 834-4321 firstname.lastname@example.org ED, Strategy (Central America and Caribbean) (1-305) 579-9415 email@example.com Assoc, Economics (Brazil) (55-11) 4950-3243 firstname.lastname@example.org ED, Strategy / Economics (Argentina and Chile) (1-212) 834-4144 email@example.com Analyst, Economics (Brazil, Colombia and Peru) (55-11) 4950-3322 firstname.lastname@example.org VP, Economics (Brazil, 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