Barclays Capital -Commodity expeditions

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					                                                                                                         Emerging Markets Research
                                                                                                                                    18 April 2013

The Emerging Markets Weekly
                                                                                           EM Top Trades                                                2
Commodity expeditions                                                                      EM Dashboard                                                 6

                                                                                           EM FX Views on a Page                                       30
Resurgent global growth concerns and the slump in commodity prices have
combined to create an unhelpful market backdrop for EM assets. However, with               EM Credit Portfolio                                         32
accommodative central bank policies still in place, supporting EM fixed income             EM Local Bond Portfolio                                     33
markets, these recent market moves could be interpreted as yet another chapter in
                                                                                           Data Review & Preview                                       34
what essentially remains the same story. We suggest exploiting the divergent effects
of lower commodity prices on EM countries, highlighting switches from select               FX Forecasts and Forwards                                   38
Russian and SA credits into Turkey, India and Indonesia.                                   Official Interest Rates                                     39

Macro Outlooks
                                                                                           What we like
Emerging Asia: A lower energy bill – Who gains?                                     8      Rates          India: Buy 10y bonds
With energy prices dropping, Asia’s external balances are likely to improve. Thailand,     FX             Hungary: Sell HUF, buy PLN
Korea, Philippines and India will benefit significantly from lower oil prices.             Sov Credit     Venezuela: Switch into PDVSA17N
EEMEA: More rate cuts as growth is key concern                                   10        Sov Credit     Slovenia: Buy Slovenia 22s
Turkey cut its main policy rates 50bp, bringing the repo rate to 5.0%. Next week we
expect Hungary to continue its loosening cycle, possibly with a 50bp cut.                  Weekly EM Asset Performance
Latin America: Split ways                                                             12     EM FX              One-week change                Current
                                                                                             INR/USD                                    1.0% 53.97
Global economic conditions will continue to influence policymakers in Latin America. The   KRW/USD                                   0.5%    1,124
Brazilian Copom’s dovish rate hike reflects global uncertainty.                            TWD/USD                                 0.2%      29.88
                                                                                            TRY/USD               -0.7%                       1.80
                                                                                            CLP/USD           -1.4%                            476
Strategy Focus                                                                             MXN/USD         -1.9%                             12.28
                                                                                            BRL/USD       -2.0%                               2.02
India: Lower inflation, commodities major relief                                     14     RUB/USD     -2.4%                                31.58
                                                                                            ZAR/USD -3.1%                                     9.18
The fall in commodity prices, if sustained, could reduce India’s current account deficit   EM 5y Rates           One-week change            Current (%)
by nearly 1% of GDP. This may result in fewer hikes in domestic fuel prices, which            Russia                                14 bp       6.23
                                                                                            Malaysia               -1 bp                        3.16
contribute over 25% to inflation. We expect weak growth to lead to more RBI easing.          S.Africa              -1 bp                        5.67
                                                                                           Indonesia              -2 bp                         5.09
                                                                                               Brazil            -4 bp                          9.19
Thailand: Lower inflation; stay overweight ThaiGBs                                    17        India           -5 bp                           7.69
                                                                                               Korea           -6 bp                            2.66
Given the recent fall in global commodity prices and the THB's appreciation, we lower         Turkey      -12 bp                                5.88
                                                                                             Mexico    -16 bp                                   4.22
our inflation forecasts. We continue to recommend being overweight ThaiGBs. We still          Poland -19 bp                                     3.01
view the long end of the steep ThaiGB curve (more so in 20-30y basket) as attractive.      EM Credit index OAS One-week change          Current (bp)
                                                                                           Venezuela                                  118 bp 837
                                                                                              S.Africa             15 bp                      172
Venezuela: Elections result increases uncertainty                                  19        Hungary             7 bp                         366
The presidential election has given Nicolas Maduro a very tight victory that has been      Philippines           6 bp                         127
                                                                                                Russia          4 bp                          171
questioned by the opposition. It is a strong political defeat for chavismo that leaves         Mexico           4 bp                          115
                                                                                                 Brazil         1 bp                          113
Maduro in a weak position to move ahead with the expected reforms.                          Indonesia    -1 bp                                183
                                                                                               Turkey    -2 bp                                178
                                                                                            Argentina -10 bp                                1,179
EM Credit: Global EM oil & gas companies: implications of lower oil prices          22       EM Equity          One-week change                Current
Our oil analysts see few fundamental catalysts for a short-term recovery in prices. We          Sensex                                2.6% 19,016
                                                                                              Shanghai                -1.0%                 2,198
believe that corporate investors will worry about the effects of lower oil on major EM       Turkey ISE              -1.3%                 83,038
                                                                                                   Kospi          -2.6%                     1,900
countries and their national champion quasi-sovereign O&G companies.                                S&P          -2.9%                      1,547
                                                                                           JSE All share        -3.2%                      37,853
Slovenia: Manageable threats                                                          27       FTSE JSE         -3.4%                      33,305
                                                                                               Bovespa         -3.8%                       53,300
Slovenia faces significant challenges in the banking sector and non-negligible financing           Bolsa     -4.6%                         42,354
                                                                                             Russia RTS -7.4%                               1,328
needs. We think the government can likely manage without financial assistance from
                                                                                           Note: EM FX, Rates, Equity charts as of 18 March
the Eurogroup. We recommend buying Slovenia ‘22s.                                          2013. EM Credit chart as of 17 January 2013 and data
                                                                                           based on Barclays Global EM Sovereigns USD index.
                                                                                           EM rates are 5y generic government bonds in local
                                                                                           currency. Positive movement in EM FX chart
                                                                                           Source: Bloomberg, Barclays Research
Barclays | The Emerging Markets Weekly

Hungary      Short HUF/Long PLN: The Hungarian central bank is likely to limit access to the 2w repo facility for some participants, implying a
             rate cut. Separately, we expect the MNB to cut rates next week. Poland’s NBP is still in a hesitating mode about rates. We think
             PLN/HUF should benefit from that.
India        Long 10y bonds: The developments this week have been very positive for India government bonds: 1) WPI inflation in March moved
             to a 40-month low, rising just 5.96%y/y versus market expectations of 6.3%. The print is also ~80bp lower than the RBI’s guidance
             for March WPI and strengthens the case for monetary policy easing by RBI at 3 May policy meeting. 2) India is the biggest beneficiary
             in the EM Asia from the plunge in gold prices and a drop in oil prices. The current levels, if sustained, should wipe about USD20bn, or
             1% of GDP, off the current account deficit of the next 12 months. 10y bond yields have dropped 23bp in April, and we see room for
             another 37bp drop in the next six months. We expect the RBI to cut rates 50bp until June 2013.
Thailand     Extend duration in ThaiGBs (20y-30y): The declining commodity prices should lead to a drop in inflation. Indeed, we have just
             lowered our 2013 inflation forecasts for the year and expect the BoT to remain on hold this year. Given the curve has been steep
             relative to rest of the region, owing to inflationary concerns and monetary policy uncertainty, we expect the risk premium to
             compress and the curve to flatten. Moreover, the weakening of the JPY and the “portfolio effect” of the BoJ's QE programme should
             benefit ThaiGBs at the margin, given the country's positive growth story and its trade connections with Japan.
Poland       IRS 5v2 steepener, long 10y bonds: We expect the bull steepening of the curve to continue. Given the weak data releases and the
             ECB’s dovish comments, the chances for a rate cut in May are growing. The government has many assets; thus, fiscal deterioration
             will not necessarily mean higher bond supply. We think ASWs at the longer end of the curve are too wide.
Israel       Long 10y bonds: We reiterate our long 10y nominal bond recommendation. The Israeli curve remains one of the steepest curves in
             EM. With inflation still sliding down and BE remaining high, we expect demand to be skewed toward 10 y nominal bonds.
Colombia     Reiterate our long Global COP 2021s recommendation: Global COP bonds have been underperforming the equivalent local TES
             bonds and appear attractive, in our view. COP weakness following the recent verbal intervention, weak commodities prices and the
             change in the regulation of pension funds explain part of this underperformance. Still, the global accommodative monetary stance,
             positive external technical factors (eg, the BoJ's QE programme) and low inflation pressure should anchor Colombia yields. In the
             context of the global hunt for real yield, Colombia’s remain high. We favor the 2021s maturity.

Slovenia     Buy Slovenia 22s. Although Slovenia faces significant challenges, we remain of the opinion that they are manageable. Following the recent
             correction, we think that most possible scenarios should lead to tighter spreads in the medium term; hence, we reiterate our positive view on
             Slovenia sovereign credit. We highlight Slovenia 22s as our preferred instrument to express this view (see the Slovenia focus piece).
Corporate Switch from senior Turkish Banks such as AKBNK into SBERRU. Turkish bank issuance is set to double the size of the segment this
Credit    year ($12bn). At equal spread, we prefer Russian banks such as national champion quasi-sovereign SBERRU, where issuance needs
          are more modest and fundamentals strong.
 Venezuela Switch into PDVSA17N out PDVSA 22. We move Venezuela credit from overweight to neutral: we think the political gridlock could
           delay implementation of economic measures and potentially accelerate the deterioration of Venezuela’s already fragile
           fundamentals. On a relative value basis, following the recent flattening of the curve on the belly, we recommend switching out of a
           PDVSA22 position into PDVSA17N, which offers a higher recovery-adjusted spread and more attractive carry/roll-down.

FIGURE 1                                                                      FIGURE 2
Spread versus rating in the European periphery and in CEE:                    PDVSA curve has been flattening following the political
Slovenia looks mispriced and offers value, in our view                        noise: we switch out PDVSA22s into PDVSA17N

500                                                                            280
                                                          Port EUR21s
450                    Slov 22s                                                260
400                                          Hung 21s
350                                                         Serbia 22s
                                    EUR22s                                     220
300                   Italy                     Croa 21
                     EUR21s                                                    200
                                             Rom 22s
                                  Ireland                                      180
150             Lith 22s     Latvia 21s             Average rating
100                                                                            140
                                                                                 Nov-12       Dec-12        Jan-13       Feb-13      Mar-13
             A-     BBB+     BBB    BBB-      BB+    BB
                                                                                                  PDVSA17Ns - PDVSA37s Spread differential
Note USD bonds shown, except for EUR government bonds of Portugal, Spain,     Source: Barclays Research
Italy and Ireland. Source: Bloomberg, Barclays Research

18 April 2013                                                                                                                                           2
Barclays | The Emerging Markets Weekly


                                            Commodity expeditions
Piotr Chwiejczak                            Resurgent global growth concerns and the slump in commodity prices have combined to
+44 (0)20 3134 4606                         create an unhelpful market backdrop for EM assets. However, with accommodative               central bank policies still in place, supporting EM fixed income markets, these recent
                                            market moves could be interpreted as yet another chapter in what essentially remains
Andreas Kolbe                               the same story. We suggest exploiting the divergent effects of lower commodity prices
+44 (0)20 3134 3134                         on EM countries, highlighting switches from select Russian and SA credits into Turkey,                  India and Indonesia. In EM FX and local markets, we remain cautious on the ZAR, but see
                                            compelling opportunities to be long Indian and Thai local government bonds.

                                            What happened
Resurgent global growth                     Economic data releases over the past week have continued to fuel global growth and recovery
concerns…                                   concerns: China Q1 GDP data late last week came in weaker than expected at 7.9% y/y,
                                            supporting our cautious view on China’s recovery and our below-consensus growth forecast of
                                            7.9% for 2013. US consumer data led our colleagues to revise down their US Q1 GDP growth
                                            estimate from 3.5% to 3.0%, while preliminary April consumer confidence and March IP data
                                            indicate that helpful growth factors earlier in the year are waning going into Q2.

…and a slump in commodity                   Growth concerns have likely fed into the sharp fall in commodity prices, with gold and oil
prices                                      particularly in the spotlight (Figure 1). Some parts of EM, such as the South African rand,
                                            and broader risk markets have come under some pressure against this background but have
                                            remained rather orderly in most places, with demand for risky assets anchored by continued
More monetary policy easing                 accommodative global monetary policies. As a latest example, the ECB has signalled a
in developed markets, with the              potential interest rate cut. Within the EM space, the monetary policy picture was more
picture slightly more mixed                 mixed: Turkey’s 50bp interest rate cut across the board this week was more aggressive than
in EM                                       expected, while Brazil hiked by 25bp.

                                            European developments have taken a back seat, but the ongoing election of an Italian
                                            President, and the potential implications for a new parliamentary elections roadmap, may
                                            bring the political agenda in Europe back to the fore. A successful T-bill auction has
                                            alleviated pressures on Slovenia this week – we explore the country’s prospects and
                                            opportunities from an EM investor’s perspective in our focus piece.

FIGURE 1                                                                      FIGURE 2
A sharp fall in commodity prices…                                             …helpful for some, painful for others
                                                                                       Net exports
 1,900      USD                                                         120
                                                                               10%     (% of GDP)
 1,800                                                                  115                                                                              Oil             Gold
 1,700                                                                  110     6%
 1,600                                                                  105     2%
 1,500                                                                  100     0%
 1,400                                                                  95
 1,300                                                                  90     -6%
 1,200                                                                  85





                                                                                                                          S. Africa

                                                                                                                                                                        S. Africa

     Mar-12         Jun-12       Sep-12       Dec-12      Mar-13
            Gold, spot price              Brent, active contract, RHS
Source: Bloomberg, Barclays Research                                          Source: Barclays Research

18 April 2013                                                                                                                                                                               3
Barclays | The Emerging Markets Weekly

                                                                    What we think – another chapter in the same story?
Negative effects for EM FX                                          The recent corrections in commodity prices have undoubtedly been sharp. However, to the
if the commodity price                                              extent that they potentially reflect weak demand and increasing global growth concerns,
drop persists                                                       they may in fact be seen as another expression of what, in our view, remains a lacklustre
                                                                    global economic environment. Balancing this, the central bank policy measures that have
                                                                    been supportive of EM fixed income markets remain of course in place, with the latest boost
                                                                    coming from the BoJ and the ECB’s indications that it may cut rates. These policy measures
                                                                    are unlikely to benefit all EM markets in the same way. For example, in the latest Barclays
                                                                    Japanese bond investor survey, 17 April 2011, US equity and Japanese equity markets are
                                                                    identified by Japanese investors as the most promising, rather than EM equity markets.
                                                                    Particularly if the recent selloff in commodities turns out to be not a short correction but a
But ongoing support for EM                                          rather a symptom of fragility in the global system, we think that EM FX could be negatively
fixed income markets from                                           affected. However, for EM fixed income markets, generally, the notion of lacklustre growth
policy makers’ reaction to                                          supporting core rates and central banks unlikely to reverse the easing course for the time
growth concerns                                                     being should be helpful – at least in the near-to-medium term. The continued demand for
                                                                    duration in EM credit and parts of EM local markets, on aggregate, seems to provide
                                                                    evidence for this (Figure 3) and we continue to recommend select longs in long-duration
                                                                    bonds (eg, in ThaiGBs, MBonos or in Turkey cash credit). Against this backdrop, the latest
                                                                    developments could be seen as another chapter of an ongoing story, rather than a critical
                                                                    new juncture in the investment landscape.

                                                                    Divergent effects on EM countries…

Russia and South Africa –                                           On a more granular and bottom-up level, however, if the sharp commodity moves persist,
negative implications from                                          they will clearly create divergent effects. The sharp fall in gold prices does not bode well for
lower oil and gold prices                                           the African gold exporters (South Africa, but also smaller economies with a large share of
                                                                    gold in their export basket, particularly Ghana). A USD10 drop in the (average annual) price
                                                                    of oil also leads, according to our estimates, to a 0.4% deterioration in growth, along with a
                                                                    0.8% of GDP wider budget deficit and a 0.3% of GDP smaller current account surplus in
                                                                    Russia, everything else being equal (see Russia: Oil price sensitivity redux, 17 April 2013, for
                                                                    a more detailed discussion).

India, Turkey and Indonesia                                         At the other end of the spectrum, we estimate that India’s current account deficit could
among the beneficiaries                                             shrink by c.1% of GDP and a reduction in oil under-recoveries would reduce the necessity

FIGURE 3                                                                                          FIGURE 4
Demand for duration reflected in flat EM spread curves                                            EM credit – screening for “winners and losers” from oil

                                    70                                                                                                                                   benefi
  Avg. 10s30s Z-sprd slope across

                                                                                                     0.15        Correlation
                                                                                                     0.10        5y CDS, oil
      Global EM credit curves

                                    65                                                                              price                        SOAF India (State       from
                                                                                                     0.05                          Turkey                bank)           lower
                                    60                                                                                                                                   oil
                                                                                                    -0.05                                                  CDX EM
                                    55                                                                                           Brazil
                                                                                                                                          Indo     Petrobras             vulne
                                    50                                                              -0.15
                                             Current                                                                                                                     rable
                                                                                                    -0.20                                                                to
                                                                                                    -0.25                                                 Gazprom        lower
                                                                                                                          Mexico                                         oil
                                    40                                                              -0.30
                                                                                                                                   Pemex                                 prices
                                         1             1.1                1.2              1.3
                                                                        10s30s UST slope (%)
                                                                                                            50           100         150            200        250
                                             Daily observations over the past year                                                                        5y CDS, current
Source: Bloomberg, Barclays Research                                                              Note: Negative correlation means wider spreads when oil prices fall and vice
                                                                                                  versa. Based on daily observations over the past three years.
                                                                                                  Source: Markit, Bloomberg, Barclays Research

18 April 2013                                                                                                                                                                     4
Barclays | The Emerging Markets Weekly

                                  for domestic fuel price hikes, which contribute over 25% to current inflation. Similarly, lower
                                  oil import prices can only be helpful for Turkey’s current account deficit (which we estimate
                                  would decline by 0.5-0.6% of GDP if the average annual oil price drops by USD10). Helpful
                                  inflation effects and an alleviation of fiscal pressures via a lower subsidy bill should also be
                                  helpful factors of lower commodity prices in Indonesia.

                                  …create tactical opportunities
Supportive data flow for INR      While our commodity colleagues expect demand for core commodities (oil in particular) to
                                  pick up again towards the second half of the year (having lowered their annual average oil
                                  price forecast for Brent to USD112 recently), perceptions of the risk of a prolonged slump in
                                  commodity prices should create opportunities to exploit some of the above mentioned
                                  divergences. In EM FX, were the commodity weakness to persist with continued pressures
                                  filtering into EM equities, commodity exporter currencies (RUB, BRL, ZAR) are likely to be initial
                                  underperformers versus commodity importer currencies such as IND, TRY or CE3 currencies.
                                  For INR, the latest data flow and lower commodity prices seem particularly supportive.

Select switches from Russian,     Similarly, in credit, in line with their status as oil exporting countries, Russia and Mexico
SA credits into Turkey, India,    credit spreads have historically been negatively affected by lower oil prices (Figure 4). We
Indonesia                         think some fundamentally weaker/higher leverage Russian oil and gas credits, such as
                                  Rosneft, may be vulnerable in the current environment, while the supportive effects of lower
                                  commodity prices on India and Indonesia should offer support for the Indian credit space as
                                  well as Pertamina in Indonesia (see Focus piece on EM credit). We also think our
                                  recommendation to switch from the South Africa 41s into Turkey 34s/36s/38s may receive
                                  renewed support.

Long Indian, Thai government      For EM local rates, the current global situation is likely to create room for further easing
bonds, long-end Mbonos            measures, where possible. Turkey is already pushing the boundaries further, cutting
                                  nominal rates, partly driven by the assumption that inflation will drop fast in the future. We
                                  expect Poland, Hungary, India and potentially Russia, Romania or even Mexico to follow.
                                  We expect a parallel compression of the rates rather than steepening as we still believe
                                  investors are underweight duration. In Asia we see a compelling opportunity in being long
                                  Indian and Thai government bonds. In LatAm we continue to favour the long-end Mbonos.
                                  Slightly more nuanced in EEMEA, we continue to expect bull steepening of the Polish curve,
                                  but acknowledge that, with the increased appetite for duration, rates may move down more
                                  in parallel.

18 April 2013                                                                                                                     5
Barclays | The Emerging Markets Weekly

Bruno Rovai               +55 11 3757 7772                                                                

                                                                                                         P&L to target/
Description                                             Entry date   Entry   Current   Target    Stop     P&L to stop   Analyst

Credit (11)
Argentina: Buy Boden 15                                05-Mar-2013 14.44%    13.38%    10.50% 16.00%         1.10       Guarino, Vargas
Argentina: Buy Bonar 13                                11-Dec-2012 9.94%     7.75%     7.00%    12.00%       0.18       Guarino
Argentina: Buy Par                                     01-Apr-2013   29.4     33.6      35.0     27.0        0.21       Guarino, Vargas
Brazil: Sell 2023 basis                                22-Oct-2012   75bp     73bp     35bp     95bp         1.74       Guarino
Hungary/Serbia: Buy Hung 21s, sell Serb 21s            24-Jan-2013   25bp     10bp     50bp     -20bp        1.33       Kolbe
Mongolia: Switch out of MONGOL 18s/DBMMN 17s           22-Mar-2013 125bp     112bp     80bp     140bp        2.33       Save
into MONGOL 22s
Philippines: Buy Global peso notes 22s and 36s         11-Jan-2013   124bp   130.9bp                                    Save
Philippines: Sell 10y CDS, sell Philip 21s             11-Jan-2013   72bp     68bp     50bp      85bp        1.06       Save
Turkey/S. Africa: Sell SOAF 41s, buy Turkey 36s        19-Mar-2013   40bp     25bp      0bp      60bp        0.71       Kolbe
Ukraine: Buy Nafto 14s, 5y CDS against it (DV01-       02-Aug-2012 130bp      40bp      0bp      80bp        1.00       Kolbe
Venezuela: Buy PDVSA17N                                18-Apr-2013   94.65    94.65    100.00   90.00        1.15       Guarino
FX (11)
Argentina: Sell USD?ARS 3m NDF (stop: spot @ 5.85)     19-Mar-2013   5.65     5.63       -        -            -        Brown
Brazil: Buy BRL/sell CZK                               19-Mar-2013   10.01    9.80     10.40     9.80          -        Loureiro, Chow
Chile: Buy BRL/sell CLP                                19-Mar-2013    239     235       243      232         2.18       Brown
China: Buy 12m USD/CNY put spread (strikes: 6.26 and 17-Jan-2013      0bp     40bp     256bp      -            -        Verdi, Pepper
6.10) and sell 12m USD/CNY call (strike: 6.39)
Colombia, Peru: Buy COP-PEN basket against JPY         22-Mar-2013    100     103.4     106       97         0.41       Brown
Malaysia: Buy a 3m 1x2 USD/MYR put spread (strikes:    19-Mar-2013   37bp     14bp     194bp      -            -        Verdi, Pepper
3.10 and 3.04)
Mexico: Buy MXN/sell JPY                               11-Dec-2012   6.48     7.96      8.50     7.70        2.08       Brown
Poland: Buy PLN/sell HUF                               20-Feb-2013   69.9     72.27     76.0     71.0        2.94       Chow
Romania: Buy RON/sell EUR                              19-Mar-2013   4.42     4.37      4.30     4.47        0.68       Chow
Singapore: Buy 3m CAD/SGD call spread (strikes 1.23,   19-Mar-2013   26bp    -40bp     244bp      -            -        Verdi, Pepper
1.26) and sell 3m CAG/SGD put (strike 1.195)
Turkey: Sell TRY/buy BRL                               19-Mar-2013   1.088    1.114     1.05     1.13        4.00       Chow, Loureiro
Rates (21)
Chile: Buy Global CLP 20                               19-Mar-2013 4.23%     4.40%     4.00%    4.60%        2.00       Guarino
China: Sell 2y USDCNH fwd vs. buy 2y USDCNY NDF        07-Mar-2013 515bp     600bp      0bp     800bp        3.00       Arsenin, Arora
Colombia: Buy Global COP 21                            19-Mar-2013 3.85%     3.98%     3.60%    4.10%        3.17       Guarino
Czech Republic: 5y2y DV01 steepener                    31-Jan-2013   30bp     27bp     50bp     10bp         1.35       Chwiejczak
Czech Republic: Receive 2y FX basis                    17-Jan-2013   -25bp   -30bp     -100bp    0bp         2.33       Chwiejczak
Hong Kong: Receive 1y fwd 2y xccy basis                05-Nov-2012   15bp     -3bp       -        -            -        Arora, Arsenin
Hungary: 5y2y DV01 steepener                           24-Jan-2013    8bp     1bp      100bp    -10bp        9.00       Chwiejczak
India: Buy 10y bonds vs. pay 5y OIS                    11-Jan-2013   67bp     70bp     50bp      75bp        4.00       Arora, Arsenin
India: Buy 10y bonds                                   26-Mar-2013 7.94%     7.77%     7.40%    8.15%        0.87       Arora, Arsenin
India: INR 1s2s OIS steepener                          27-Mar-2013   -27bp   -27bp     -10bp    -40bp        1.31       Arora, Arsenin
Israel: Buy 10y nominal bond (March 23)                15-Nov-2012 4.17%     3.70%     3.70%    4.15%          -        Chwiejczak
Malaysia: Buy 3y MGS vs. pay 1y1y NDIRS                25-Jan-2013   -10bp   -15bp       -        -            -        Arora, Arsenin
Mexico: Buy UDI 35                                     11-Dec-2012 2.59%     1.95%     1.75%    3.00%        0.18       Guarino
Mexico: Long Mbono 42                                  19-Jun-2012   7.15%   5.50%     5.50%    6.80%          -        Guarino
Mexico: Pay 10y TIIE, receive 10y US swap              19-Mar-2013    350     337       390      320         3.12       Guarino
Poland: 5y2y DV01 steepener                            21-Feb-2013    8bp     13bp     20bp      -5bp        0.39       Chwiejczak

18 April 2013                                                                                                                              6
Barclays | The Emerging Markets Weekly

                                                                                             P&L to target/
Description                                 Entry date   Entry   Current   Target    Stop     P&L to stop   Analyst

Romania: Buy 10y local bond, FX unhedged   24-Jan-2013   6.90%   5.60%     5.00%    6.50%        0.67       Chwiejczak
Russia: Buy Jul22 OFZ, FX unhedged         19-Mar-2013 7.03%     6.94%     6.00%    7.50%        1.68       Chwiejczak
Singapore: Enter SGS 10s30s flattener      07-Feb-2013   128bp   114bp     110bp    140bp        0.15       Arora, Arsenin
Turkey: 10v2 flattener (DV01-neutral)      27-Mar-2013   82bp     84bp     40bp     110bp        1.69       Chwiejczak
Turkey: Buy 10y bonds                      11-Dec-2012 6.59%     6.60%     6.10%    7.25%        0.77       Chwiejczak
Closed trades (2)                           Entry date   Entry   Current   Target    Stop     Date closed   Analyst
Poland: Buy 10y CPI-linked bonds           25-Sep-2012   2.68%   1.73%     1.20%    2.00%    18-Apr-2013    Chwiejczak
Venezuela: Buy PDVSA 22                    12-Mar-2013 9.98%     11.06%    9.20%    11.00%   18-Apr-2013    Guarino

Source: Barclays Research

18 April 2013                                                                                                                7
Barclays | The Emerging Markets Weekly


                                               A lower energy bill – Who gains?
Rahul Bajoria                                  • With energy prices dropping, Asia’s external balances are likely to improve.
+65 6308 3511
                                               • Thailand, Korea, Philippines and India will benefit significantly from lower oil prices.

                                               • This drop in energy costs also poses downside risks to our inflation forecasts, and
Wai Ho Leong                                        could allow for looser monetary conditions.
+65 6308 3292                       Since February, commodity prices, particularly Brent oil, which is down 16% from its peak,
                                               have fallen sharply. As the most immediate impact of lower oil prices is on current account
                                               balances, we revisit our estimates of the potential impact of lower energy prices, notably oil,
                                               on Asia’s external position (see, A higher energy bill – Who pays?, 15 March 2012). Asia
                                               remains a large net importer of oil, as its growth is fuelled by relatively high oil consumption
                                               intensity. Malaysia is the only major economy in the region that exports energy
                                               commodities, making it a clear outlier in Asia.

                                               We estimate that for every USD10/bbl fall in the price of crude oil over 12 months, the
                                               region’s current account balance improves by ~USD3.6bn per month. Based on our
                                               forecasts, this implies that if oil prices were to average USD90/bbl for the next year, Asia’s
                                               current account surplus would increase by more than 25%, a meaningful improvement. We
                                               do not adjust for the elasticity of demand for oil. At lower prices, we assume that the same
                                               oil volumes are consumed, so the actual impact on Asia’s current account balance may not
                                               be as favourable, especially if growth is stronger and consumption increases at the margin.

                                               Even so, our analysis shows that the impact on individual economies varies. The biggest
                                               beneficiaries of the drop in oil prices are India, the Philippines, Thailand and Korea. Given a
                                               relatively benign growth outlook, we believe these economies should also receive a boost to
                                               their domestic growth from the consequent improvement in their terms of trade. Further,
                                               currency stability should ensure that the benefits are passed on to consumers.

                                               On the flip side, Malaysia is likely to see a modest drop in its current account balance on
                                               lower oil prices. We estimate that a fall in crude oil to USD90/bbl from our current
                                               assumption of USD110/bbl would subtract 1.1pp from the country’s current account
                                               surplus as a percentage of GDP. Indonesia may not benefit a lot, as their export earnings
                                               depend on any corresponding reaction in palm oil prices.

Current account sensitivity to oil prices
                         2012                                     2013 (Current account balance as a % of GDP)                                           pp change
Benchmark crude                                                                                                                                             if oil is
(USD/bbl)                 105           60           70           80            90          100          110          120          130          140         USD90
Korea                     3.8%         6.0%         5.3%         4.5%         3.8%         3.1%         2.3%          1.6%         0.9%         0.1%       ▲1.5%
Singapore#               18.6%        22.1%        21.7%        21.1%        20.5%         19.8%        19.0%        18.2%        17.3%        16.3%       ▲1.5%
Thailand                  0.7%         3.6%         3.0%         2.4%         1.8%         1.3%         0.7%          0.1%        -0.5%        -1.1%       ▲1.2%
Philippines               3.6%         5.5%         5.1%         4.7%         4.3%         3.9%         3.5%          3.1%         2.8%         2.4%       ▲0.8%
India                    -5.1%        -2.2%        -2.6%         -3.0%        -3.4%        -3.8%        -4.2%        -4.6%        -5.0%        -5.4%       ▲0.8%
Taiwan                   10.5%        11.3%        11.0%        10.6%        10.2%         9.8%         9.4%          9.0%         8.7%         8.3%       ▲0.8%
China                     2.3%         3.3%         3.2%         3.0%         2.8%         2.7%         2.5%          2.3%         2.2%         2.0%       ▲0.3%
Indonesia                -2.8%        -2.1%        -2.2%         -2.2%        -2.3%        -2.4%        -2.4%        -2.5%        -2.6%        -2.6%       ▲0.1%
Malaysia                  6.4%         2.9%         3.3%         4.0%         4.4%         5.2%         5.5%          6.1%         6.5%         7.2%       ▼1.1%
Note: * Indicates base scenario for average prices in 2013. Benchmark crude oil is a simple average of Brent, Dubai Fateh and WTI spot price. #given the external
reliance of the economy, Singapore’s non-oil exports too are sensitive to changes in oil prices. Source: Barclays Research

18 April 2013                                                                                                                                                           8
Barclays | The Emerging Markets Weekly

FIGURE 2                                                                           FIGURE 3
Barring Malaysia, every major economy in the region is a net                       EM Asia’s current account can improve materially on the
energy importer                                                                    back of lower oil prices

  8                                                                                45
  6                                                                                40
  4                                                                                35
  2                                                                                30
  0                                                                                25
 -2                                                                                20
 -4                                                                                15
 -6                                                                                10
 -8                                                                                 5
-10                                                                                 0
         TH      KR      TW       IN      PH        SG        CN     ID    MY                            60       70      80        90    100   110   120    130      140
                      Net energy balance (2012, % of GDP)                                                        EM Asia: Monthly current a/c balance (USD bn)
Source: CEIC, Barclays Research                                                    Source: CEIC, Barclays Research

                                                  Inflation could also be lower than previously anticipated
                                                  Lower oil prices have a beneficial impact on inflation as well. In the past two weeks, we have
                                                  cut our inflation forecasts for Thailand and India (see in focuses), and identify downside
                                                  risks to our forecasts for China, Korea, and Taiwan. On average, fuel prices account for
                                                  ~10% of inflation baskets in most economies, with high income economies of Singapore
                                                  and Hong Kong having the smallest weights, while India has the largest fuel component.

                                                  The impact of this energy-related easing in inflation pressures should allow central banks to
                                                  either keep monetary policy accommodative or potentially loosen it further. We currently
                                                  forecast all central banks in emerging Asia to maintain policy rates, barring India, where we
                                                  expect the RBI to cut the repo rate by another 50bp. If energy prices trend lower, we would
                                                  only expect further monetary easing in India, while all the other central banks are likely to
                                                  stay put, unless growth momentum slows rapidly.

FIGURE 4                                                                           FIGURE 5
India and Indonesia have the highest CPI weights for energy                        Countries with large subsidy bills benefit the most from
                                                                                   lower oil prices given the impact on inflation
                                                                                                                 Impact of 20% oil price drop on CPI inflation
14%                                                                                                      0.0

12%                                                                                                      -0.5
                                                                                     percentage points

10%                                                                                                      -1.0
 2%                                                                                                      -3.5
 0%                                                                                                               IN    ID     MY    TH    PH   KR    SG    TW   CN    HK
          IN     ID     MY    TH        CN     KR        PH    TW     SG      HK                                Barclays estimate
                                                                                                                Assuming 100% Pass-through (Estimates by CPI Weights)
                        Energy weight in CPI (%)                    Average
Source: CEIC, Barclays Research                                                    Source: CEIC, Barclays Research

18 April 2013                                                                                                                                                               9
Barclays | The Emerging Markets Weekly


                                                     More rate cuts as growth is key concern
Daniel Hewitt                                       • Turkey cut its main policy rates 50bp, bringing the repo rate to 5.0%. Next week we
+44 (0)20 3134 3522                                             expect Hungary to continue its loosening cycle, possibly with a 50bp cut.
                                                    • Policymakers remain focused on growth, as, for example, consumer demand has
                                                                been on a weakening trend in the region.

                                                    • This week, the low and declining inflation levels in Poland and Israel persisted, while
                                                                inflation remained high in South Africa.

Turkey central bank cuts policy                     Turkey’s central bank (CBT) cut each of its three major policy rates by 50bp, lowering its
rates aggressively by 50bp                          interest rate corridor to 4-7% and the repo rate to 5%. While cuts were expected, the
                                                    aggressiveness of the move surprised most. It came mainly in response to a stronger foreign
                                                    capital flow outlook in the wake of the BoJ’s QE and possibly to renewed rating upgrade
                                                    speculation following positive comments by rating agencies. The CBT is also likely to feel
                                                    pressure to support growth in light of a still modest recovery in activity thus far, while the oil
                                                    price decline could alleviate some inflation and C/A pressures. Although the CBT can
                                                    effectively tighten the market rates within the corridor by reducing the liquidity provided via
                                                    its repos, this week’s decision clearly sent a dovish message. The main risk of CBT’s strategy
                                                    is for inflation (at 7.3% in March) to surprise on the upside over the summer months.

Hungary accelerates                                 In Hungary, the NBH is in the middle of a long, slow loosening cycle, having reduced its base
policy loosening through                            rate a cumulative 200bp during the past eight months to 5.0%, a post-1990 low. However,
unorthodox measures…                                inflation has declined even more, down some 300bp since August 2012, and at 2.2% y/y also at
                                                    a post-1990 low. Thus, the real rate has widened to a relatively high 280bp (Figure 1).
                                                    Underlying inflation is well below the 3% target. While headline inflation has been artificially
                                                    pushed lower by cuts in administered energy prices, it has been pushed up by hikes in indirect
…and could cut rates by 50bp                        taxes (estimated by the NBH to push inflation up by 1pp). Thus, accelerated monetary policy
next week                                           loosening appears justified, and we think this supports a 50bp cut at the rate decision meeting
                                                    next week. We think that the rate will be cut to 3.5% in this cycle. However, the situation has
                                                    become more complicated with Governor Matolcsy’s announcement that the NBH plans to
                                                    exclude foreign banks from participating in its 2w facility. By pushing liquidity directly out to
                                                    banks, this is an alternative means of loosening monetary policy that will lead to lower market

FIGURE 1                                                                                       FIGURE 2
High real rates in Hungary and Poland support further cuts                                     Russia growth indicators mixed
  8%                                                                                             20     Russia real sector indicators, % y/y


  2%                                                                                             10




                                                                           Czech R.


                                                    S. Africa

                                                                                                   Mar-10    Sep-10    Mar-11     Sep-11       Mar-12    Sep-12 Mar-13
     Inflation (% y/y), March                     Policy rate (%)
                                                                                                                  IP            Retail sales            Investment
     Real policy rate (%)                         Inflation target (mid), 2012
Source: National sources, Haver Analytics                                                      Source: Rosstat

18 April 2013                                                                                                                                                        10
Barclays | The Emerging Markets Weekly

                                                  interest rates and HUF weakness as the new liquidity tries to find a home. However, the NBH
                                                  may be inclined to sell FX to partially offset this liquidity injection and limit its effect on FX
                                                  markets. As Governor Matolcsy indicated, NBH monetary policy is still evolving.

Poland and Israel inflation                      In releases this week, the declining trend in central Europe inflation persists as Poland CPI
decelerate, South Africa                         decelerated to 1.0% y/y in March as expected, well below the 2.5% target. This keeps real
inflation unchanged                              rates quite high at around 200bp, and we expect further CPI declines in Q2 on base effects.
                                                 In addition, IP was down 2.9% in March. We reiterate our view that the NBP will cut further,
                                                 possibly beginning in May. Israel CPI decelerated to 1.3% y/y on base effects, also as
                                                 expected. Inflation volatility is likely in the next months due to gyrations of the base effects.
                                                 In addition, there is uncertainty from fiscal policy adjustments as the 2013 budget is being
                                                 finalised. At the same time, with the base rate relatively low at 1.75%, we think the BoI is
                                                 likely to remain on hold. However, if growth were to take another downward dip, the BoI
                                                 could cut one more time. In South Africa, CPI was unchanged at 5.9%, just inside the 3-6%
                                                 target, and core inflation declined slightly to 5.1% y/y. With domestic demand weak, we
                                                 think the SARB will remain on hold until H2 14.

Russia growth indicators were                    Russia growth indicators in March were mixed with overall positive momentum. IP was up
mixed in March                                   2.6% y/y from -2.1% in February, showing a reversion to the 2012 trend after two
                                                 disappointing months. Retail sales re-accelerated to 4.4% y/y from 2.5% in February, yet
                                                 were still below expectations. Real wages remained buoyant yet slowed slightly to 4.2% y/y.
                                                 The main disappointment was investment, which returned to negative growth at -0.8% y/y
                                                 as residential construction stagnated. With inflation running well above the target at 7.0%
                                                 y/y in March and unlikely to subside until June, we expect the CBR will not start policy
                                                 easing until Q3 when we think inflation will approach the 6.0% target.

Weakening consumer demand                        Consumer demand in EEMEA has been easing for over a year, exerting downward pressure on
weighs on growth in region                       growth. Retail sales slowed, in particular in CEE-4 (Figure 3). However, retails sales data out
                                                 this week in Russia and South Africa improved. Likewise real wages growth has slowed,
                                                 particularly in the CEE-4, while Russia and South Africa wages have been more resilient.
                                                 Consumer confidence provides a possible indication of future demand trends; it remains well
                                                 below average overall. But there has been a notable closing of the gap between regions with
                                                 CEE-4 consumer confidence improving, while in Israel and South Africa, in particular, it has
                                                 deteriorated (Figure 4). In Turkey, consumer confidence improved moderately in Q1 13 after
                                                 declining in the previous two quarters, and in Russia, it has remained above average without a
                                                 clear trend.

FIGURE 3                                                                         FIGURE 4
EEMEA consumer demand slowing                                                    Consumer confidence divergent trends

  10%                                                                              15
                                                                                                     Consumer confidence (normalized)
   8%                                                                              10
   6%                                                                                5
   0%                                                                               -5

  -2%                                                                             -10
                              Note: includes Russia, Poland, S.
  -4%                         Africa, Czech R., Hungary, Romania.                 -15
    Feb-09            Feb-10           Feb-11           Feb-12      Feb-13        -25
                                                                                    Mar- 07 Mar- 08 Mar- 09 Mar- 10 Mar- 11 Mar- 12 Mar- 13
                       EEMEA real retail sales (weighted, % y/y)
                       EEMEA real wage (weighted, % y/y)                                    CEE-4 (avg)             Russia, Turkey, S. Africa, Israel (avg)
Source: National statistical offices, Haver Analytics                            Source: EC, national sources, Haver Analytics

18 April 2013                                                                                                                                                 11
Barclays | The Emerging Markets Weekly


                                        Split ways
Marco Oviedo                            • Global economic conditions will continue to influence policymakers in Latin America.
+52 55 5241 3331
                                        • The Brazilian Copom’s dovish rate hike reflects global uncertainty; we expect
                                               Banxico to keep rates at 4.0% and believe its view on flows will be key.
Marcelo Salomon                         The global economic background should continue to dominate monetary policy decisions in
+1 212 412 5717                         LatAm. The Copom started hiking rates this week in Brazil, but it delivered a much more            dovish-than-expected message in the communiqué. Global uncertainties were likely the
                                        catalyst, but the lack of conviction in the first upward movement of the cycle reaffirms our
                                        view that economic activity has a more important role than inflation in the BCB’s reaction
                                        function. In Mexico, Banxico meets on April 26, and although no surprises are anticipated –
                                        with the board expected to keep rates at 4.0% – its reading on the effects of the Japanese
                                        monetary policy expansion should help us understand how it perceives the balance of risks
                                        as the structural reform agenda pumps even more interest in the Mexican economy.

BCB started a tightening cycle,         The Brazil’s Central Bank started a new tightening cycle with the Selic interest rate hike of 25bp
but in a much more dovish way           to 7.5%, validating market expectations and anticipating the beginning of the tightening cycle..
than we expected                        However, the overall tone of the statement was unexpectedly dovish, in our view. The decision
                                        was split, and the two dissident votes were casted for no hikes (Directors Aldo Luiz Mendes
                                        and Luiz Awazu Pereira da Silva). This split was a big surprise to the market as well, which over
                                        the previous week had traded based on news articles (for example, “Food Prices rise and
                                        threaten inflation target,” O Globo April 9, 2013 ) discussing the government’s pressure on the
                                        BCB. Figure 2 shows Jan2014 DI swap contract, which two days before the decision embarked
                                        in a very hawkish trend, pricing the possibility that the government had already sanctioned a
                                        50bp hike and that the BCB would sound hawkish.

                                        But in the statement accompanying this month’s decision, the BCB did not make any
                                        decisive strong hawkish statements either, quite on the contrary: at the same time it stated
                                        that the high, resilient and disperse inflationary process called for a monetary policy
                                        response (i.e., a hike), domestic and especially external uncertainties recommended
                                        cautious movements. These offsetting forces help us understand the bank’s actions. It had

FIGURE 1                                                                FIGURE 2
Inflationary pressures are a concern in Brazil (IPCA, % y/y)            Large market frustration following dovish start of tightening
                                                                        cycle (Jan2014 DI swap contract, %)

% y/y                                                                    %
 14                                                                       8.5


 10                                                                       8.0


   6                                                                      7.5


   2                                                                      7.0
   Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12                  Jan-13           Feb-13            Mar-13    Apr-13
                     IPCA         Food group          Services
Source: IBGE, Barclays Research                                         Source: Bloomberg, Barclays Research

18 April 2013                                                                                                                          12
Barclays | The Emerging Markets Weekly

                                         to act to re-anchor inflation expectations, but its concern about the global economic
                                         outlook (which is being marked by slower growth, excessive monetary policy expansion in
                                         the G3, and falling commodity prices) and even domestically, prevented a bolder move. The
The Copom’s dovish signals               minutes of this meeting (due out April 25) should help shed more light on the matter. We
imply to us that the cycle could         have revised our forecast and now expect the BCB to deliver three more consecutive 25bp
be even shorter than we are              rate hikes in the coming meetings, lifting the Selic rate up to 8.25% by August.
expecting and the risk that
inflation remains high are               But starting a tightening cycle by sending a dovish signal, in our view has a cost. It implies
growing                                  that the risks are skewed for a smaller cycle than what we have been forecasting. If inflation
                                         falls at a faster-than-expected pace or growth (domestic or abroad) underperforms
                                         expectations, we believe the Copom could call off the hikes. More importantly, there is a
                                         growing risk that re-anchoring of inflation expectations, which we believe is critical, will take
                                         longer and could keep inflation at a higher level. We are expecting the IPCA to reach 6.0%
                                         by year-end, while consensus (BCB Focus survey) has it at 5.68%. Failing to normalize policy
                                         in a more decisive manner could risk pushing consensus up.

                                         In Mexico, the next monetary policy meeting will take place on April 26. At the previous one,
                                         the board implemented a 50bp “once-for-all” cut of the reference rate. It made clear that
                                         this cut was not the beginning of an easing cycle. Moreover, the board said that it expected
                                         annual inflation to increase in March, but to decline later in the second half of the year,
                                         without compromising the inflation convergence to its target (3% +-1%). The recent
                                         inflation prints are confirming this trend, as annual inflation jumped to 4.25% in March.
Banxico should sound a bit
more hawkish, but no changes             However, the increase was a bit higher than expected. With perishable food prices being the
are expected. More interesting           reason for unexpected rise, we do not expect a reaction from Banxico in the next meeting; it
will be its take on Japanese QE          should maintain the reference rate at 4.0%. The board probably would add some hawkish tone
and flows                                as it continues to monitor inflation pressures in the short-run. The board will offer its view of
                                         the recent monetary policies announced by the Bank of Japan and how it has increased the
                                         already abundant global liquidity. On the other hand, the Mexican economy is still under high
                                         expectations as the structural reform agenda is advancing fast and the flows to the economy
                                         continue supporting low rates in the domestic market and strong levels of the MXN. In this
                                         context, more accommodative language by the board for the medium term in the communiqué
                                         or in the minutes is possible, suggesting that further monetary action cannot be ruled out.

FIGURE 3                                                                FIGURE 4
Food prices lifting inflation in Mexico                                 Flows continue to drag Mexican yields down, especially in
                                                                        the longer end of the curve

% y/y                                                                   %
 12                                                                      8.0
   6                                                                     6.0
   0                                                                     4.0
   Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12                 Apr-12     Jun-12    Aug-12     Oct-12   Dec-12     Feb-13 Apr-13
                    Headline inflation       Food inflation                                          30-year         10-year
Source: INEGI, Barclays Research                                        Source: Bloomberg, Barclays Research

18 April 2013                                                                                                                              13
Barclays | The Emerging Markets Weekly


                                  Lower inflation, commodities major relief
Siddhartha Sanyal                 The fall in commodity prices, if sustained, could reduce India’s current account deficit
+91 22 6719 6177                  by nearly 1% of GDP. This may result in fewer hikes in domestic fuel prices, which    contribute over 25% to inflation. We expect weak growth to lead to more RBI easing.

                                  Crude oil and gold are India’s two major commodity imports, both of which have increased
Rahul Bajoria
                                  significantly in recent years. India’s oil imports are typically sticky and not very sensitive to
+65 6308 3511
                                  price. On the other hand, the surge in gold import demand in recent years has been mostly
                                  speculative, responding to high inflation and a steady surge in gold prices (Figure 2). This
                                  implies that in the case of a downward trending price, not only could the gold import bill
                                  decline, there is a possibility of lower volumes as well.

                                  We have examined the potential change in India’s net import bill in light of the recent drop
                                  in the prices of these two commodities, under the assumption that there will be no change
                                  in oil/gold import volumes due to the price changes. Given the observed price-demand
                                  relationship in recent years, we believe this is a conservative assumption.

                                  If gold prices remain flat at USD1400/oz, and Brent crude price averages USD100/bbl, we
                                  estimate that India’s net import bill for these two commodities could fall by nearly USD7bn
                                  and more than USD13bn, respectively, in FY 13-14 on flat volume assumptions. This would
                                  result in net savings of around USD20bn in import costs, and reduce the current account
                                  deficit to USD66bn (around 3.2% of GDP), significantly lower than our baseline estimate of
                                  over USD85bn (4.1% of GDP). We do not factor in any drops in other metal prices, such as
                                  copper/palladium/silver, which could cut the current account deficit further.

                                  Meaningful inflation benefit from lower commodity prices
                                  The impact of lower commodity prices is markedly favourable for India’s inflation dynamics.
                                  Hikes in administered prices alone have contributed around 1.7 percentage points to the
                                  current headline inflation rate of c.6.0% (Figure 3). If oil prices remain low, the need to hike
                                  administered prices will ease – eg., under-recoveries on diesel would decline to less than
                                  INR3/litre if Brent crude averages USD100/bbl, compared with around INR6.5/litre at the
                                  beginning of the financial year when oil was around USD112/bbl. Moreover, we estimate
                                  that an average Brent crude price of USD100/bbl would push inflation for non-administered
                                  items of the fuel group negative on a y/y basis in the coming months, given a high base.

                                  FIGURE 1
                                  Sensitivity of India’s FY 13-14 current account balance to gold and oil price changes

                                                                                                    Brent (USD/bl)

                                                                          80              90              100              112              120

                                                                                         Current account balance (USD bn)

                                                        1200              -39             -49              -60             -73              -81
                                                        1300              -42             -52              -63             -76              -84

                                      Gold              1400              -45             -55              -66             -79              -87
                                    (USD/oz)            1500              -48             -58              -69             -82              -90
                                                        1625              -51             -62              -73             -85              -94
                                                        1700              -54             -64              -75             -88              -96
                                  Note: Price assumptions are average for FY13-14. Highlighted cells show baseline assumption and potential forecast.
                                  Source: Haver Analytics, CEIC, GoI, Barclays Research

18 April 2013                                                                                                                                       14
Barclays | The Emerging Markets Weekly

                                             FIGURE 2
                                             Surge in gold imports since 2008 has predominantly been a function of rising prices

                                              3.5                                                                                                 100,000
                                              3.0                 Normal
                                                                  demand & price                                                                  80,000
                                              2.5                 phase                                                                           70,000

                                              2.0                                                                                                 60,000
                                              1.5                                                                                                 40,000
                                                                                                                                     hiked to
                                                                                                             QE related price
                                                                                                                                     control      30,000
                                              1.0                                                            increase ;
                                                                                                             speculative /                        20,000
                                              0.5                                                            investment demand
                                              0.0                                                                                                 0
                                                Sep-03                 Feb-06                  Jul-08                Nov-10              Apr-13
                                                                            Gold imports (% of GDP)                 Gold (INR/oz, RHS)
                                             Source: Haver Analytics, GoI, Bloomberg, Barclays Research

                                             The impact of weak domestic economic momentum is already being felt on inflation as the
                                             WPI moved lower in recent months despite high food inflation and administered fuel price
                                             hikes. Indeed, headline inflation touched a 40-month low in March, at just 5.96% y/y, versus
                                             market and our expectations of 6.3%, and significantly lower than the Reserve Bank of India’s
                                             (RBI) projection of 6.8%. Core inflation, which had softened to 3.5% y/y from about 8% a year
                                             back, is expected to fall further in coming months – we expect core WPI to average 3% y/y in
                                             H2 13. The impact of the recent fall in commodity prices will also be felt more in the coming
                                             months. Notably, our global commodities research team has recently revised down its
                                             projections for oil prices. Taking such trends and forecasts into account, we are revising our
                                             India inflation forecasts and now expect it to average around 6% in FY 13-14 (6.3% earlier).

                                             Despite the downside surprises in recent inflation prints, the final number for January was
                                             revised up by a large 69bp (to around 7.3%), which raises some concerns. However, of the
                                             69bp of upward revision, we estimate that the contribution from manufacturing goods
                                             (weight: ~65% of overall WPI) was less than 10bp. The largest contribution came from the
                                             fuel group (nearly 35bp), which is not a surprise as administered prices were hiked in
                                             January but this was not accounted for in the provisional index. Another c.25bp of the

FIGURE 3                                                                          FIGURE 4
Hikes in administered fuel group items contribute over 25%                        Core inflation moves lower; softening remains broad-based
(in pp) to current inflation

                                                               PP                       PP contribution to core WPI
                                                           contribution            10
  9                                                          to WPI
  8                                                                                 8
  7                                                                                 6
  6                                                                                 4
  5                                                                                 2
  4                                                                                 0
  3                                                                                -2
  1                                                                                 Mar-09           Mar-10           Mar-11       Mar-12         Mar-13
                                                                                              Textiles                           Chemicals
   Feb-11   Jul-11     Dec-11            May-12    Oct-12     Mar-13                          Base metals                        Machinery
        Administered fuel prices           WPI ex admin fuel prices                           Others                             Non-food manufacturing
Source: Haver Analytics, Barclays Research                                        Source: Haver Analytics, Barclays Research

18 April 2013                                                                                                                                             15
Barclays | The Emerging Markets Weekly

                                             upward revision came from primary products. In sum, while the January inflation revision
                                             looks worryingly large, we believe that it is largely one-off and does not pose any
                                             meaningful threat to the inflation trajectory in the coming months.

                                             Growth indicators stay weak; RBI set to ease further in coming months
                                             On the other hand, growth indicators remain very weak. Despite the (tiny) growth in
                                             headline industrial production (IP) for February – released last week – our trimmed mean IP
                                             growth measure showed a meaningful 3.4% y/y contraction, which clearly underscores the
                                             broad-based weakness in industrial activity. Several other growth indicators – such as the
                                             purchase managers’ index (PMI), automobile sales growth, trends in capex – also remained
                                             markedly weak (see More stumbling blocks for India’s recovery hopes, 5 April 2013).

                                             While guidance from the RBI remains cautious, we believe the flow of macroeconomic data
                                             – repeated downside surprises in inflation, a more benign trade deficit and weak growth
                                             indicators – is creating room for further monetary easing in the coming months. We
                                             reiterate our long-standing view of another 50bp of repo rate cuts by mid-2013 despite the
                                             RBI’s very cautious guidance. The likelihood of further rate cuts (25-50bp) in subsequent
                                             quarters has of late been rising, in our opinion. The central bank has recently become more
                                             committed to proactively managing systemic liquidity, in our view. As the cash reserve ratio
                                             (CRR) has been reduced by 200bp since January 2012 and is now at its historical low, we
                                             expect OMOs to be the preferred tool for liquidity injections by the RBI in the near term (we
                                             expect about INR750bn during H1 13-14).

                                             Lower trade deficit offering some respite
                                             The improvement in external trade performance will also offer some respite and allow the
                                             RBI to continue to support growth. Indeed, the trade deficit fell to a two-year low of
                                             USD10.3bn in March, significantly below the USD17.9n average deficit in January-February
                                             2013 and the USD16.6bn average deficit during April 2012-February 2013. The
                                             improvement came predominantly from lower imports, which fell 2.9% y/y (April-February
                                             3.6% y/y), while exports rose to an 11-month high, at 7.0% y/y growth. Despite the
                                             favourable latest print, India’s trade deficit remains high – we expect 4.1% of deficit in
                                             FY 13-14. However, the recent drop in commodity prices should have a positive impact on
                                             India’s external trade balance and, if sustained at current levels, could cut the current
                                             account deficit by almost 1% of GDP, based only on the price effects.

FIGURE 5                                                                  FIGURE 6
Positive February IP growth due entirely to spike in volatile             Softening in trade deficit offers some relief
goods production
 100                                                                       -15
  90                                                                       -20
  80                                                                       -25
                                                                             Mar-09          Mar-10          Mar-11            Mar-12   Mar-13
   Nov-08         Nov-09          Nov-10        Nov-11      Nov-12                                      Trade balance (USD bn)
                                                                                                        Trade balance ex oil*
            IP ex volatile goods (Jan 2009 = 100)        Volatile goods                                 Trade balance ex oil, gold*

Source: Haver Analytics, Barclays Research                                Note: * Indicates data only through February 2013.
                                                                          Source: Bloomberg, CEIC, Barclays Research

18 April 2013                                                                                                                                16
Barclays | The Emerging Markets Weekly


                                             Lower inflation; stay overweight ThaiGBs
Rahul Bajoria                                Given the recent fall in global commodity prices and the THB's appreciation, we lower
+65 6308 3511                                our inflation forecasts. We continue to recommend being overweight ThaiGBs. We still                   view the long end of the steep ThaiGB curve (more so in 20-30y basket) as attractive.

                                             Following the recent falls in global commodity prices, the THB’s appreciation and our
Rohit Arora
                                             commodities team’s downward revisions to their crude oil price forecasts, we have lowered
+65 6308 2092
                                             our Thai inflation forecasts. We now expect headline inflation to average 2.9% in 2013
                                             (previously 3.6%) and core inflation 1.7% (1.9%). The Bank of Thailand cut its 2013 inflation
                                             projection to 2.7% in its latest monetary policy report (see Thailand Monetary Policy Report:
                                             BoT likely to keep rates unchanged, 12 April 2013). For 2014, our headline inflation forecast
                                             is reduced to 3.2% (previously: 3.8%). The downward revisions are driven mainly by our
                                             expectations of lower fuel prices and more benign demand-led price pressures.

                                             Domestically, upside growth risks stem from an expansive fiscal stance, and related policy
                                             implementation. Downside risks to growth come mainly from weak external demand.
                                             According to the BoT’s inflation report, the global outlook is showing signs of stabilisation,
                                             but the external environment remains fragile. Its base scenario is still for modest global
                                             growth, but domestic demand from Asia is expected to support the Thai economy.

                                             Inflation expectations in Thailand are stable, and despite strong growth and a rise in
                                             minimum wage levels, inflationary pressures remain relatively benign. Core inflation is
                                             expected remain firmly within the target range of 0.5-3.0%, which means policy action is
                                             likely to be determined by growth surprises. We believe the BoT is likely to maintain its
                                             neutral guidance in the coming months. In its latest policy statement, the central bank said
                                             that a “continuation of the accommodative monetary policy stance remains appropriate”,
                                             which, in our view, signals that policy rates are likely to be kept at 2.75% for longer. As
                                             such, we believe the BoT will keep rates unchanged through 2013.

FIGURE 1                                                                   FIGURE 2
We now expect inflation to remain rangebound                               Thailand – Growth and inflation forecasts

                                                                                                  BoT            BoT          Barclays   Barclays
                                                                                                  2013           2014           2013       2014
                                                                                                forecast       forecast       forecast   forecast

                                                                           GDP                  5.1 (4.9)      5.0 (4.8)          5.0      5.5

                                                                           Core CPI             1.6 (1.7)      1.7 (1.6)          1.7      1.9
                                                                           Headline CPI         2.7 (2.8)      2.7 (2.6)          2.9      3.2
   Mar-11       Sep-11     Mar-12     Sep-12    Mar-13   Sep-13

         TH: Raw food           Energy         Core       CPI (% y/y)

Source: Haver Analytics, Barclays Research                                 Numbers in parentheses indicates previous forecasts;
                                                                           Source: Bank of Thailand, Barclays Research

18 April 2013                                                                                                                                    17
Barclays | The Emerging Markets Weekly

                                           Rates strategy: Stay overweight ThaiGBs
                                           Declining inflation should help extend the rally in ThaiGBs: Declining commodity prices
                                           and their positive impact on inflation and inflation expectations should help extend the rally
                                           in ThaiGBs, in our view. The bond and swap curves remain relatively steep, partly on
                                           account of an inflation risk premium (see Figure 3). This risk was partially priced out when
                                           ThaiGBs bull flattened sharply in early April, but we think the momentum behind the bond
                                           rally will remain strong. Demand from foreign investors has increased, driven by a
                                           combination of the strong THB, rally in global rates and diminishing concerns about supply.

                                           Valuations attractive at long end: We still view the long end of the steep ThaiGB curve
                                           (more so in 20-30y basket) as attractive. The 10s20s part of the curve (~40bp) has almost
                                           the same steepness as 3s10s (41bp), which in itself is steep compared with the region's
                                           mid-yielders (ie, Malaysia, Korea), as shown in Figure 2. Likewise, the steepness of ~34bp in
                                           the 20s30s curve for a duration extension of only 3 years is also attractive, in our view.

                                           Therefore, we continue to recommend being overweight ThaiGBs. We think ThaiGBs are an
                                           easier choice compared with the rest of Asean – ie, Malaysia (election uncertainty),
                                           Indonesia (policy mix) and even the Philippines (very stretched valuations).

                                           A positive Japanese angle: The weakening of the JPY and the “portfolio effect” of the BoJ’s
                                           monetary stimulus are likely to result in greater inflows into EM, in our view. While flow data
                                           and anecdotal evidence suggest this has yet to happen, we expect the flows to pick up,
                                           especially those towards higher-yielding assets. In EM Asia, while the biggest beneficiaries
                                           of such flows may be high yielders such as India and Indonesia, we think ThaiGBs could also
                                           benefit at the margin, given the economy’s positive growth story and connections with
                                           Japan: Japanese investors are familiar with Thailand, supplying most of the FDI into the
                                           country (approximately 40% of net FDI in 2012). Unlike in the case of NIEs, we think the
                                           THB's appreciation of approximately 22% YTD against the JPY is a positive, given that
                                           Thailand net imports 7% of its GDP from Japan. As Thailand is an important part of the
                                           Japanese automotive sector’s supply chain, lower import prices should support corporate
                                           profitability and make re-exports more competitive.

                                           Supply concerns diminishing: The targeted Q1 gross bond supply of THB145bn is lower
                                           than gross issuance of THB173bn in Q4. We estimate that the average duration of bond
                                           issuance will also drop by around 9% to 9.4y in the Apr-Jun quarter from 10.2y in Jan-Mar.
                                           Hence, we expect the total supply of duration this quarter to decline significantly.

FIGURE 3                                                                 FIGURE 4
High risk premium (curve steepness) to diminish amid                     ThaiGBs steep relative to the region
declining inflation
  45                     5y bond vs. 3m bill (bp)
                                                                                                    KRW           MYR        THB
  35                                                                                   3.70

  30                                                                                   3.50
                                                                           Yield (%)

  10                                                                                   2.90

   5                                                                                   2.70
   0                                                                                   2.50
  -5                                                                                          0    5             10          15       20
          THB         HKD        SGD       MYR      KRW       INR                                         Maturity (years)
Source: Bloomberg, Barclays Research                                     Source: Bloomberg, Barclays Research

18 April 2013                                                                                                                          18
Barclays | The Emerging Markets Weekly


                                            Elections result increases uncertainty
Alejandro Arreaza                           The presidential election has given Nicolas Maduro a very tight victory that has been
+1 212 412 3021                             questioned by the opposition. It is a strong political defeat for chavismo that leaves              Maduro in a weak position to move ahead with the expected reforms. Therefore, we
                                            moved Venezuela from overweight to neutral. On a relative basis, following the belly
Alejandro Grisanti                          flattening, we recommend staying engaged in the short end of the bond curve
+1 212 412 5982                             (PDVSA17N).
                                            Chavismo loses political ground
Donato Guarino                              On Sunday, April 14, the National Electoral Council (CNE) announced that Nicolas Maduro
+1 212 412 5564                             had won the presidential election called following the death of President Chavez on March                 5. However, the preliminary official results gave Maduro a margin of victory of just 235,000
                                            votes (1.6pp). The opposition candidate, Henrique Capriles Radonski, has not recognized
                                            the results, claiming irregularities in the electoral process. This is likely to create a very
                                            uncertain political situation. Apart from the opposition’s claims about the fairness of the
                                            election, Maduro’s legitimacy could also be questioned because the outcome could be seen
                                            as a strong political defeat for chavismo, which lost a significant portion of its popular
                                            support. Maduro’s slim majority may also make it difficult for him to govern effectively.

The election result was very                With 99% of the votes counted, the CNE announced that Maduro obtained 50.7% (7.5mn),
tight but is unlikely to be                 slightly more than opposition candidate Capriles, who received 49.1% (7.3mn). Among the
revised                                     votes not yet counted are those of Venezuelans living abroad, who in the past have tended
                                            broadly to favor the opposition. These votes could further tighten the result, although the
                                            CNE said it is irreversible. However, Capriles has not recognized the outcome, presented a
                                            compilation of 3,200 irregularities in the voting process, and has asked for a 100% recount.
                                            Initially, Maduro accepted the recount; however, the day after the election, he took a step
                                            back and the authorities are presenting it as not legally possible. Given the government’s
                                            institutional control, it seems difficult to expect a revision of the result.

The political situation is tense            The political situation in Venezuela turned tense as the opposition announced protests;
but noise is expected to decline            however, the risk of widespread violence has been contained. The government increased
                                            the tension, responding with a very radical speech to the opposition’s demands for a

FIGURE 1                                                                  FIGURE 2
Maduro’s slight victory (%)                                               Chavismo loses ground (mn votes)
                   Others,                                                 8.5


     Capriles,                                            Maduro,          7.0
      49.1%                                               50.7%


                                                                                      Chavez            Capriles   Maduro            Capriles
                                                                                               Oct-12                       Apr-13
                   Maduro        Capriles        Others
Source: CNE, Barclays Research                                            Source: CNE, Barclays Research

18 April 2013                                                                                                                                   19
Barclays | The Emerging Markets Weekly

                                  recount. However, we view as positive the decision of the opposition to cancel the protests
                                  called for Wednesday (April 17), which should avoid violence. Capriles will funnel his
                                  complaints through institutional channels. We do not expect him to put at risk the huge
                                  political capital he gained in Sunday’s elections. We believe the noise peaked on Tuesday
                                  and should start to decline in the coming days (see Venezuela: Noise expected to decline,
                                  April 17, 2013).

Chavismo lost a significant       Beyond any doubts about the election process, the result can be seen as a strong political
portion of its popular support    defeat for chavismo. Given the sympathy effect created by President Chavez’s death, the
                                  short campaign period (one month), restrictions on the media, and the demobilization of
                                  the opposition after two defeats last year, the consensus among political analysts was that
                                  Maduro would win the election easily. However, as we noted in Venezuela: Turnout will be
                                  the key, April 12, 2013, despite all these adverse conditions, the opposition had managed to
                                  close the gap substantially, which had stood at about 15pp less than two weeks before the
                                  election. Moreover, relative to October’s election, when Chavez won against Capriles by
                                  10.8pp, chavismo lost nearly 700,000 votes (8%) to the opposition. The result could also
                                  highlight the relative weakness of Maduro’s leadership, which appears heavily dependant
                                  on the emotional connection that Chavez had with large sections of the population.
                                  Therefore, even though chavismo has won this election, the sustainability of this political
                                  movement, which was always centred on the personal leadership of Chavez, could face
                                  serious challenges in the longer term.

Capriles cements his role as      On the other side, even though he lost the election, Capriles is likely to cement his position
the main leader of the            as the main leader of the opposition. The fact that he achieved a much better-than-
opposition                        expected result should mitigate the downside of the defeat. His fast rise in such a short
                                  campaign shows how his charismatic leadership has revitalised the opposition after two
                                  consecutive defeats last year and penetrate chavismo’s political support base. Nonetheless,
                                  Capriles will now face the challenge of defending the votes that he obtained and
                                  denouncing any alleged government abuses in order to preserve the unity of the
                                  opposition, containing any possible actions by the more radical groups that could doubt
                                  the possibility of securing political change through the electoral pace. But the result does
                                  show growing support among the electorate for the opposition, which, if sustained, is
                                  likely to increase their prospects of one day forming a government.

                                  Maduro misreads the results
Maintaining a radical position    After the announcement of the results Maduro has maintained a radical speech, accusing the
could weaken more Maduro          opposition of conspiring to sabotage the economy and overturn him. In addition, he took the
                                  election results as confirmation that the government has to move forward with its 21st-
                                  century model of socialism and radical stance. Despite the close result, he did not call for unity
                                  or try to reduce the level of confrontation and polarization. In our view, trying to move forward
                                  with a radical stance could create governability problems for Maduro. He will not only have to
                                  face the resistance of a strengthened opposition, but also questions from his own followers. In
                                  that vein, the President of the National Assembly and a chavista leader, Diosdado Cabello,
                                  have opened the debate by calling for the government to conduct some self-criticism after the
                                  result. This could be the first sign of divisions within the chavismo movement.

Maduro’s weak political           In addition to a complicated political situation, Maduro inherits a country in a strained
situation could limit his         economic position. A huge increase of expenditures ahead of last year’s elections drove a
capacity to implement             significant deterioration in Venezuela’s fiscal accounts. A first step in dealing with the deficit
economic reforms                  was the devaluation of the currency over the past two months. However, that move has
                                  already accelerated inflation and, we think, will continue to push it higher in the coming
                                  months. At the same time, restrictions on access to FX have caused scarcity problems. The
                                  combined effects of the fiscal adjustment and restrictions on FX supplies are likely to drive
                                  the economy into recession this year, in our view. The situation demands rapid actions from

18 April 2013                                                                                                                    20
Barclays | The Emerging Markets Weekly

                                  the government and poses a risk for Maduro’s already weak leadership. Given his thin
                                  margin of victory, we believe he cannot afford to move in a more radical direction, but also
                                  that he has lost room to maneuver toward a more moderate position.

                                  When Maduro announced the currency devaluation and the creation of SICAD (an
                                  alternative source of FX for the private sector), we thought these were positive signals of
                                  moderation. In addition, we expected some changes in his cabinet after the election.
                                  However, given his narrow victory, Maduro could face difficulties moving ahead with
                                  reforms and could be trapped in the status quo. Delays to measures on the economic front
                                  could continue to weigh on Venezuela’s fundamentals. Although high oil prices continue to
                                  provide Venezuela a strong ability to pay, it would remain on an unsustainable path.

                                  Moving to neutral from overweight
We recommend staying              The risk that the political gridlock could delay the implementation of the economic
engaged in the short end of the   measures and accelerate the deterioration of Venezuela’s already fragile fundamentals,
bond curve                        recent pressures on oil prices if sustained, stretched valuations and challenging technicals
                                  suggest to us that the bonds, for now, have limited room to outperform. Therefore, we
                                  move Venezuela to neutral from overweight. We prefer to be neutral rather than
                                  underweight, given the bonds’ possible sizable carry and the medium-term potential. We
                                  would stay engaged in the short end of the bond curve.

                                  Since Sunday’s election, Venezuela/PDVSA bonds have plunged by historical standards.
                                  Prices recovered marginally since Wednesday once it became clear that the friction between
                                  the opposition and the government would not escalate into violence, but prices are still well
                                  below their pre-election levels. Market liquidity was particularly affected on Tuesday, with
                                  bid-ask spreads extremely wide, suggesting that investors – having added to positions on a
                                  belief in the credit’s long-term fundamental story and attractive valuations – were now
                                  willing to sell bonds on the very depressed bid side of the market.

                                   On a relative value basis, long-maturity bonds took the biggest hit in terms of price
                                  percentage. In particular, the convex, low dollar-price bonds at the long end of the PDVSA
                                  bonds suffered the most. This should not come as a surprise, given that the short end is
                                  concentrated in few hands and that its default risks are low, resulting in limited liquidation.
                                  In spread terms, both curves flattened, but PDVSA bonds underperformed. We recommend
                                  allocatin weight to the belly of the PDVSA curve (PD17N).

                                  FIGURE 3
                                  Venezuela/PDVSA bonds curve: Belly of the curve looks attractive - PD17N, PD17
                                    Recovery Adjusted Spread (bp)
                                   1,000                      PD17
                                    950                                     PD22
                                                       PD15                                         VE26          VE31
                                    850                                 VE19               VE24                                        PD37
                                                                            VE20             VE25          VE28
                                                   PD14              VE18N                                                    VE34
                                    800                                                               VE27
                                    750           VE14                                                                                VE38
                                           0                    5               10                    15                 20             25
                                                                                     Average Life (yrs)

                                  Source: Barclays Research

18 April 2013                                                                                                                            21
Barclays | The Emerging Markets Weekly


                                                  Global emerging market oil & gas companies:
                                                  implications of lower oil prices
Aziz Sunderji                                    Our oil analysts see few fundamental catalysts for a short-term recovery in prices. We
+1 212 412 2218                                  believe that corporate investors will worry about the effects of lower oil on major EM                       countries and their national champion quasi-sovereign O&G companies.

                                                 At the sovereign level, lower oil improves the current account for importers and, in some
Stella Cridge
                                                 countries with energy subsidies, fiscal dynamics; beneficiaries could include India, Turkey,
+44 (0)20 3134 9618
                                                 and Indonesia. Mexico and Brazil should not be strongly affected. Russia comes from a
                                                 position of strength but would be negatively affected by lower oil.
Avanti Save                                      At the sector level, in a more-severe-than-expected drop in oil, any underperformance in the
+65 6308 3116                                    O&G sector would be mitigated by the fact that most O&G names are higher rated, lower                         spread, lower beta quasi-sovereigns and have historically outperformed during the risk-offs
                                                 that typically accompany much lower commodity prices.
Andreas Kolbe
+44 (0)20 3134 3134                              At the single-name level, under a lower oil scenario, companies that are exposed to global                       energy prices would obviously suffer. This group includes Mexico’s PEMEX and the Russian
                                                 issuers, including Rosneft and Lukoil. Some names, because they are located in net
Krishna Hegde, CFA                               importing countries that would see positive sovereign dynamics under lower oil or because
+65 6308 2979                                    they sell primarily to local consumers at fixed prices, would be relatively insulated from                       lower oil prices. This group includes Brazil’s Petrobras; Indonesia’s Pertamina.

                                                 Country effects
At the sovereign level, under                    Mexico: Mexico is a net oil exporter. Net oil exports were 1.0% of GDP in 2012. While crude
moderately lower oil prices, we                  oil exports reached 4.0%, these were partially offset by gasoline imports. On the fiscal side,
see a limited effect on Mexico                   the federal government hedges oil revenues through put options at the price level projected
and Brazil                                       in the budget (USD86 per barrel in 2013). In that sense, the recent decline should have a
                                                 limited effect, as it implies only lower excess revenues and a partial benefit of lower gasoline

FIGURE 1                                                                         FIGURE 2
Mexico, Pemex, Russia, Gazprom have been more correlated                         Heavy issuance from the oil sector has contributed to
with oil prices than importers such as India, Turkey                             underperformance, with more to come

                                                                       benefi      USD issuance in first 16 weeks of year ($bn)
  0.15        Correlation
  0.10        5y CDS, oil                                                         25
                 price                 SOAF India (State               from
  0.05                          Turkey         bank)                   lower
                                                                       oil        20
 -0.05                                                  CDX EM
                               Brazil                                             15
                                        Indo     Petrobras              vulne
 -0.15                                                                  rable     10
 -0.20                                                                  to
 -0.25                                                  Gazprom         lower
                       Mexico                                                      5
 -0.30                                                                  prices
 -0.35                                                                             0
         50           100          150            200        250                              2010             2011           2012        2013

                             5y CDS, current                                           Asia       Potential PETBRA issuance       LatAm   EEMEA
Note: Negative correlation means wider spreads when oil prices fall, and vice    Source: Dealogic, Barclays Research
versa. Based on daily observations over the past three years.
Source: Markit, Bloomberg, Barclays Research

18 April 2013                                                                                                                                     22
Barclays | The Emerging Markets Weekly

                                   prices as the government subsidizes this product.

                                   Brazil is not a substantial importer or exporter of oil, so volatility in oil prices has a limited
                                   current account effect. If anything, lower oil prices should marginally decrease the trade
                                   balance surplus, but again at levels that do not change current account dynamics. The price
                                   of oil also has very little effect on domestic inflation (because domestic prices are fixed, and
                                   the difference financed by Petrobras), nor on fiscal accounts.

Russia has robust                  Russia is a major exporter of oil and gas and has historically experienced large swings in
fundamentals, but the              its growth rate and current account during oil volatility. But fundamentals are more
sovereign and quasis have          robust than historical price action suggests. For example, fiscal accounts are not
historically sold off when oil     worrisome even with moderately lower oil: even with Urals oil at $91/bbl ($6 below
has fallen                         today’s price and ~$20/bbl below the average price YTD), the fiscal deficit in 2013 would
                                   only be 2.9% of GDP (contributing to a small debt-to-GDP ratio of 10%). Moreover,
                                   Russia’s current account should contract only $10bn in a $10/bbl decline in oil. In the
                                   medium term, we estimate the effect of a USD10 drop in average oil price at c.0.4pp off
                                   headline GDP growth rate.

Turkey stands to benefit from a    Turkey runs a substantial current account deficit, which is mainly a function of domestic
current account perspective…       demand growth and global oil prices (as Turkey imports most of its energy). As a rule of
                                   thumb, each $10 change in the oil price increases (or reduces) the current account deficit
                                   by about USD5bn (0.5-0.6% of GDP). Under our base case assumption for 2013, domestic
                                   demand-driven growth of 4.4% and an average oil price of about $110/bbl, we expect the
                                   current account deficit to widen to 6.6% of GDP this year, from a 5.9% deficit in 2012 (and
                                   only 2.2% growth). The risks seem balanced at the moment between additional monetary
                                   easing further boosting credit growth-related imports on the one side, and lower oil prices
                                   lowering the energy import bill on the other.

…as does Indonesia, and also       Indonesia’s current account and fiscal bill would be supported by lower oil. The country is a
from a fiscal perspective          net importer of oil, and we estimate that for every $10/bbl decrease over a year, the current
because the government             account deficit shrinks by 0.1% of GDP. Indeed, Indonesia’s tenuous current account
subsidizes oil sold domestically   position favourable/lower oil prices should be supportive for the current account at the
                                   margin. From a fiscal standpoint, the country also subsidies oil, and investors have been
                                   concerned about the high subsidy bill (a USD10/bbl decrease in the price of oil directly
                                   decreases the budget deficit by IDR8.6trn). We do not see an imminent change in this
                                   subsidy policy because of upcoming elections; lower oil prices and lower subsidies would be
                                   favourable for Indonesia’s fiscal position.

India also a beneficiary           India’s major commodity-related imports include oil, and its net oil imports are typically
on its current account             insensitive to price. The effect of lower commodity prices is meaningfully favourable for India’s
                                   current account position and inflation dynamics. If Brent crude remains at USD100/bl, India’s
                                   net import bill for these commodities could fall over USD7bn, given our flat volume
                                   assumptions. This would result in the current account deficit falling to USD20bn (about 1% of
                                   GDP) and bringing it below our baseline estimate of over USD85bn (4.1% of GDP).

                                   Sector effects
UST risk, supply, and              The O&G sector globally has underperformed over the past year. At first glance, this is
idiosyncratic factors have         incongruous with energy prices, which have averaged $112 over the past year, the highest
weighed on the sector              in the post-crisis era. We identify three important factors that have driven this:

                                   • UST risk: Investor concerns about rising UST yields have led to spread underperformance in
                                         low beta credits in general. Given the strong representation of such credits in global EM
                                         O&G (most of the O&G names in EM are higher rated, quasi-sovereign entities, trading at
                                         relatively tight spreads), these concerns have had a strong effect on the sector. Moreover,
                                         because of the stronger linkages with sovereigns than higher yielding, non-quasi-sovereign

18 April 2013                                                                                                                     23
Barclays | The Emerging Markets Weekly

                                         issuers, O&G names have suffered during the YTD widening in sovereign spreads and EM
                                         sovereign bond outflows.

                                  • Supply: Oil has become more expensive to extract, requiring large capex programmes.
                                         Names such as Petrobras and Gazprom have multi-billion dollar yearly financing needs
                                         as a result. Industry consolidation has also led to substantial issuance needs, especially
                                         in EEMEA with Rosneft’s acquisition of TNK-BP. Indeed, EEMEA O&G issuance this year
                                         totals over $5bn, versus less than $2bn in the same period last year, with substantially
                                         more to come, in our view. Similarly, Asian O&G remain significant issuers, given M&A
                                         and large capex plans.

                                  • Idiosyncratic risk: This has affected LatAm in particular, with OGX the single worst
                                         performer in the global O&G sector over the past year and one of the worst performing
                                         across sectors.

Most O&G names are lower          To the extent that the drivers of underperformance for the sector have not been related to
spread quasi-sovereigns and       energy prices as much as other factors, we do not believe that the path ahead should be
have historically outperformed    contingent on energy pricing. In a more severe-than-expected drop in oil, any
during the risk-offs that         underperformance in O&G would be mitigated by the fact that most O&G names are higher
typically accompany lower         rated, lower spread, lower beta quasi-sovereigns and have historically outperformed during the
commodity prices                  risk-offs that typically accompany much lower commodity prices. That said, in such a scenario,
                                  the sector would likely underperform low beta peers.

                                  Single-name effects
                                  Pemex (Mexico)
PEMEX is relatively               Pemex receives part of the difference between regulated prices in Mexico and international
more exposed to                   prices through the IEPS tax. Combined with exports, which are based on market prices, this
lower oil than peers…             exposes Pemex to oil price fluctuations. Pemex is a very low cost producer, but has an
                                  extremely high tax burden and limited fiscal autonomy. Therefore, issuance needs vary
                                  depending on oil prices, as well as government budget decisions. Pemex’s 2013 budget is
                                  based on an average oil price of $85/bbl, in which case the company expects $9.7bn in
                                  gross issuance and $3.3bn in net issuance. Perhaps more importantly, though, Pemex is
                                  expected to benefit from fiscal and sector reform, with news likely in 2H13. Assuming
                                  reform is passed, we believe Pemex should trade 50bp wide to Mexico sovereign bonds,
                                  leaving 25bp of performance from current levels.

…and Petrobras less               Petrobras, OGX (Brazil)
                                  Petrobras is relatively insulated from shifts in oil prices because 1) it is paid domestically set
                                  prices for gasoline and diesel and 2) it is a net importer of both fuels and, therefore, benefits
                                  to the extent the parity between domestic and international prices is reduced. That said, the
                                  company has a massive investment plan and very high financing needs; we expect at least
                                  $18bn in gross issuance this year. Therefore, even modest deterioration in the fundamental
                                  outlook could affect bond spreads. We remain cautious on the 1H13 outlook but believe
                                  issuance overhang is resulting in the bonds’ trading cheap; we expect 40-45bp of
                                  compression when issuance finally materializes. In the case of OGX, we believe bond price
                                  volatility is tied to the fundamental outlook regarding the production ramp-up and funding
                                  needs, rather than oil prices.

18 April 2013                                                                                                                    24
Barclays | The Emerging Markets Weekly

Current pricing and historical performance for global EM quasi sovereign Oil and Gas issuers and selected related quasis
                                                                           spread to                                                          Current 1y
Quasi                       Sovereign               Quasi         Sov         Sov         mean          1 wk     1 month   3 month   1 year    z-score
PERTIJ 2021              Indonesia 2021              266          182          83           88           10        8         18        4         -0.3
PERTIJ 2022                  Indonesia               252          176          76            --          -3        3         9         --         --
PLNIJ 2020*              Indonesia 2020              263          188          75           96               3     7         2        -30        -0.8
PLNIJ 2021*                  Indonesia               264          182          82           96               5     5         16       -16        -0.6
PLNIJ 2042*                  Indonesia               255          180          75            --          -8        -1        0         --         --
GAZPRU 2021                Russia 2020               273          152          122          114              0     19        10       12         0.6
PETBRA 2021                 Brazil 2021              252           95          157          141              6     20        12       38         1.1
ECOPET 2019              Colombia 2019               191          115          75           83           -30       2         9        -36        -0.5
PEMEX 2021                 Mexico 2022               171           95          76           90           -8        -6        -19      -38        -1.3
RASGAS 2020                 Qatar 2020               172          140          32           11           -7        28        14       -5         1.2
TAQAUH 2019              Abu Dhabi 2019              187          129          58           93           10        -1        -30      -62        -1.3
*Note: PLNIJ is not an O&G issuer but is included here for comparative purposes. Source: Barclays Research

                                               Rosneft, Lukoil (Russia)
                                               Rosneft most exposed, we see Lukoil bonds as an attractive alternative
Russian credit typically takes                Russian credit as a whole (sovereign, corporates and banks) has historically taken the oil
the oil price as a lead indicator             price as a lead indicator of bond trading levels on account of the high oil dependency of
of trading levels                             sovereign credit and the many benchmark issuers in Russia’s oil and gas sector. Although
                                              we see the recent drop in Brent below $100/bbl as a short-term phenomenon and expect
                                              the full-year 2013 average to be $112/bbl, the recent downward price moves act as a
                                              reminder of the risk to Russian corporate bond valuations of such moves.

We see Rosneft as most                        We see Rosneft as most vulnerable in a falling oil price environment, for three reasons. First, it
vulnerable in a falling oil price             has a significant short-term financing need following its recent acquisition of TNK-BP. As
environment                                   highlighted by S&P this week, Rosneft faces large maturities in 2013, 2014 and 2015 of $6.6bn,
                                              $15.9bn and $16.2bn, respectively. While the company is seeking to give itself some breathing
                                              space, such as through the recent agreement of a $10bn prepayment from oil traders
                                              (including Vitol), Rosneft management indicated that it will seek to return to the capital markets
                                              following the closing of the TNK-BP acquisition (which was completed in March).

                                               Second, Rosneft has indicated that net leverage is likely to reach c2x following the
                                               acquisition, which is significantly above peers such as Lukoil (0.2x at FY12), GazpromNeft
                                               (0.6x) and Gazprom (0.6x 9M 12 LTM).

Rosneft’s leverage is higher                  Finally, we see execution risk in the integration of the TNK-BP operations, which is
than peers and faces execution                necessary to maintain TNK-BP’s traditionally strong free cash flow ($6bn in 2012).
risk in the integration of TNK-               Rosneft’s own core operations are likely to be stretched, given ongoing high capex
BP assets                                     (Rosneft generated only c.$300mn of free cash flow in 2012 before dividends and plans
                                              to keep capex flat y/y in real terms).

Lukoil retains a strong                       In contrast, Lukoil came to market this week to meet much of its financing gap for 2013,
credit profile, with limited                  and debt maturities remain relatively light (only $700mn in 2013 and $1.6bn in 2014).
refinancing needs                             Although the company also faces high capex in 2013 (c$16bn), cash flow is likely to remain
                                              strong under our baseline 2013 oil price environment (EBITDA in 2012 was $19bn) (please
                                              see EM Corporate Credit: Lukoil - Rise in capex ahead, but supportive outlook for credit, 8
                                              March 2013). Also, Russian firms do not take the full effect of falling oil, given the high tax
                                              take (60% for crude, and 66% for selected oil product exports, for example).

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Barclays | The Emerging Markets Weekly

Lukoil also has less paper        In addition, those issuers with less Eurobond paper (Lukoil $8bn after the new issues) tend
outstanding relative to peers     to outperform those with more debt such as Gazprom (c$29bn) in periods of market
such as Gazprom                   weakness. As a result, we see Lukoil’s 2018, 2019 and 2020 bonds as an attractive
                                  alternative to Rosneft.

                                  Pertamina (Indonesia)
Indonesia: value in               As discussed above, lower oil prices are supportive of Indonesia’s subsidy bill (fiscal
the quasi-sovereigns              position) and current account. Therefore, we expect O&G quasi-sovereign Pertamina to
                                  benefit. Pertamina bonds are trading at the middle of the range versus the quasi-sovereign
                                  and believe the bonds should benefit from an improved sentiment towards Indonesia. We
                                  recommend legging into long-end Indonesia bonds (including quasi-sovereigns) and expect
                                  spreads to settle close to January levels. In the coming months, Pertamina is widely
                                  expected to issue USD2.5bn (10/30y) bonds, and we believe current spreads are already
                                  taking this into account. In fact, we would expect supply to reprice the curve tighter, like it
                                  did in the Indonesia sovereign in early April.

                                  Bharat Petroleum, Indian Oil, Reliance (India)
India: National champions in      India should benefit significantly, given the lower oil and gold prices (See India: Gold and oil
O&G and banks attractive          prices - Major silver linings? 15 April 2013). This would alleviate macro concerns regarding
                                  current account, fiscal deficit and inflation. If current levels of commodity prices persist, we
                                  would expect spreads to compress. At an idiosyncratic basis, the profitability of Indian state-
                                  owned oil & gas companies such as Bharat Petroleum and Indian Oil would benefit due to
                                  lower under-recoveries. In this sector, our top pick within Indian credit is the Reliance 40s.

18 April 2013                                                                                                                  26
Barclays | The Emerging Markets Weekly


                                  Manageable threats
Eldar Vakhitov                    This is an excerpt from Slovenia: Manageable threats, 18 April 2013.
+44 (0)20 7773 2192
                                  Slovenia faces significant challenges in the banking sector and non-negligible financing
                                  needs. However, in our view, public debt can remain on a sustainable path, provided
Apolline Menut                    fiscal consolidation continues. Thus, we think the government can likely manage without
+44 (0) 20 3555 0862              financial assistance from the Eurogroup. Should this assistance become necessary, it       would likely be sector-focused on bank restructuring. Most possible scenarios should
                                  lead to tighter spreads in the medium term. We recommend buying Slovenia ‘22s.
Andreas Kolbe
+44 (0)20 3134 3134               Recession persists, with another GDP contraction likely in 2013        After a timid export-driven recovery in 2010, Slovenia slipped back into a double-dip
                                  recession, recording six consecutive quarters of negative growth since Q3 2011. Recession
Double-dip recession              intensified in 2012 with GDP falling 2.3% and 8.3% from its 2008 pre-crisis peak, on the
continues as real GDP shrank      back of strong fiscal consolidation and an abrupt reduction of foreign inflows and credit to
by 2.3% in 2012                   the corporate sector. We expect prolonged economic weakness in 2013 and forecast a
                                  further -1.9% GDP contraction. We expect the economy to start recovering in 2014,
Further deterioration is          supported by a recovery in global activity. However, this normalisation is highly conditional
expected in 2013, driven by       on the resolution of the banking crisis and a successful restructuring of the highly leveraged
falling domestic demand           corporate sector.

                                  Political risks have fallen, but the new government faces tough challenges
Political risks have fallen but   The disclosure of corruption allegations against former Prime Minister Janez Jansa opened a
the new government faces          period of heightened political uncertainty, culminating in a no-confidence vote in February.
tough challenges                  We believe that the formation of a new coalition government led by PM Alenka Bratusek has
                                  reduced short-term political risks, although tough challenges remain. The new government
                                  has reiterated its commitment to pursue fiscal consolidation, continue reform
                                  implementation and fix the banking sector. By 9 May, the government pledged to send to
                                  the EU its programme of measures to avoid the crisis.

                                  FIGURE 1
                                  Slovenia’s banking system scale is much smaller compared with Cyprus
                                    Capital adequacy ratio, latest
                                                              Bubble size:
                                     7                  Bank assets (% GDP)
                                    11                           Spain
                                                                                      Portugal            Slovenia
                                                                               Poland        Hungary              Romania
                                    17                                                                    Lithuania
                                             Turkey      Czech
                                                                             Latvia                                         Ukraine
                                    21                                                               Croatia                 Serbia

                                         0                  5                  10                  15                   20                  25
                                                                                                                     NPL (% total loans), latest
                                  Note: Slovenia’s bank assets are c.150% of GDP. Source: IMF, Haver Analytics, Barclays Research

18 April 2013                                                                                                                                      27
Barclays | The Emerging Markets Weekly

                                                   Banking sector needs recapitalisation, a ‘’bad bank’’ has been created
Banking sector problems                            The banking sector has been the weak spot in the Slovenian economy. Public ownership in the
stem from corporate sector                         banking system is very high (accounting for c.40% of banking loans) and has been reflected in
indebtedness and                                   weak corporate governance, which contributed to the poor asset quality. The share of NPLs in
weak governance                                    total loans increased to about 15% and is likely to rise further due to the ongoing recession.
                                                   Capital adequacy, at 12%, is one of the lowest in the region. According to the government,
                                                   initial recapitalisation needs amount to about 2.7% of GDP. While it is hard to estimate these
                                                   with precision, we think they could turn even bigger. Importantly however, the scale of the
                                                   Slovenian banking system is not comparable with that of Cyprus: bank assets amount to
Initial recapitalisation needs                     c.150% of GDP, compared with c.700% in Cyprus. In October 2012, the government
amount to c.3% of GDP                              established the Bank Asset Management Company (BAMC) which will take over the
                                                   impaired assets and try to recover what is left of them. This will be financed by the issuance
                                                   of government-guaranteed bonds of up to EUR4bn (11% of GDP), which will likely be
                                                   spread over several years (under the current law, the BAMC has a five-year mandate).

                                                   Fiscal consolidation should continue to ensure debt sustainability
Fiscal consolidation has                           Fiscal consolidation was remarkable in 2012, leading to a reduction of the general
been remarkable, but                               government deficit (on an ESA95 basis) to 3.7% of GDP from 6.4% in 2011. Under the
should continue to ensure                          current measures, the deficit is likely to be closer to 4% of GDP in 2013, in our view. Public
debt sustainability                                debt reached 54% of GDP in 2012, more than doubling since 2008, though still remaining
                                                   among the lowest in the euro area. Taking into account bank initial bank recapitalisation
                                                   costs (2.7% of GDP) and maximum possible debt issuance by the BAMC (11% of GDP), it
                                                   could reach 72% of GDP in 2013. Delayed recovery or further capital injections into the
                                                   banking system represent the main downside risks; thus pursuing fiscal consolidation
                                                   remains crucial for public debt to be sustainable.

Financing needs are high                           Assuming the budget deficit will be close to 4% of GDP, we estimate financing needs at
                                                   c.EUR3bn for the remainder of the year. There are no bond maturities before April 2014. Taking
                                                   into account the EUR0.6bn cash surplus from the recent T-bill auction and buyback, the
                                                   government still needs to obtain about EUR2.5bn this year, according to our calculations. It has
                                                   already indicated that part of this could be obtained through privatisation. For 2014, the
                                                   financing needs appear to amount to EUR4-4.5bn depending on the extent of fiscal
                                                   consolidation. This does not take into account possible increase in bank recapitalisation costs,
                                                   should such a need arise. In addition, one should keep in mind the government-guaranteed
                                                   bond issuance by BAMC of up to EUR4bn which may be spread over several years.

FIGURE 2                                                                                  FIGURE 3
Fiscal consolidation is crucial for debt to stabilise                                     Public debt amortisation highest in Q2 14
               Public debt (% GDP) - fiscal adjustment                                     1,800         Government amortization payments (EUR bn)
                              scenarios                                                    1,600
                                                        11pp increase due                  1,200
                                                        to BAMC debt issuance*             1,000
  2005          2007        2009         2011        2013         2015        2017           200
           Optimistic (1pp adjustment in 2013-2017)                                             0
           Baseline (1pp adjustment in 2014-2017)                                                    Q2 13     Q3 13    Q4 13       Q1 14    Q2 14    Q3 14   Q4 14
           Pessimistic (no adjustment, delayed recovery in 2013-2017)
                                                                                                                                 T-bills    T-bonds
Note: *Assuming it will be done entirely in 2013 (it may be spread over several years).   Source: Bloomberg, Barclays Research
Source: Haver Analytics, Barclays Research

18 April 2013                                                                                                                                                    28
Barclays | The Emerging Markets Weekly

                                             The government could manage on its own, while possible assistance would
                                             be focused on the banking sector
Slovenia could request a                    Despite a challenging banking sector and large financing needs, we think the government
financial assistance facility for           could avoid the bailout given its relatively low public debt ratio. Otherwise, a possible
the recapitalisation of the                 financing assistance by the Eurogroup could be tailored in a similar fashion as in Spain:
banking sector                              sector-specific focused on bank restructuring and recapitalisation. In this case, Slovenia
                                            would have to agree on a memorandum of understanding (MoU) with the Troika including
                                            plans to restructure its banking system, improve governance, supervision and regulation, as
                                            well as privatisation plans.

                                             Strategy: Most scenarios should lead to tighter spreads – long Slovenia
                                             sovereign credit
Slovenia’s challenges not                   Since the escalation of the Cyprus crisis, Slovenia has increasingly moved into the market’s
comparable with Cyprus’,                    spotlight and its sovereign spreads have widened substantially (Figure 4). As we analyse
in our view                                 above, Slovenia faces significant challenges, but we do not think they are unmanageable or
                                            comparable with those in Cyprus or Greece.

Debt haircut for sovereign                  Financing needs for Slovenia are non-negligible, but debt levels and the size of the banking
bondholders is highly unlikely              sector problems seem still at a level that would suggest that Slovenia can revert to a
                                            sustainable economic path. Hence, in a scenario in which Slovenia were to find it difficult to
                                            access markets for its financing needs and, in an extreme scenario, applies for a fully-
                                            fledged Troika programme, it would seem very unlikely that sovereign bondholders would
                                            be forced to take a haircut on debt holdings.

Spreads are likely to tighten in            If Slovenia is indeed able to obtain sufficient market financing (our base case scenario),
most scenarios, and we                      supply pressures may limit any potential rally. However, on balance, we think that most
recommend being long                        possible scenarios should lead to tighter spreads in the medium-term and hence reiterate
Slovenia credit                             our positive view on Slovenia credit. For international investors, we do not think the spread
                                            pick-up of Slovenia’s domestic EUR-denominated paper over the international USD ‘22s is
                                            generous enough for the likely more limited liquidity. Thus, we highlight Slovenia ‘22s as the
                                            preferred instrument to express our positive view.

FIGURE 4                                                                  FIGURE 5
Slovenia ‘22s spreads have come under pressure post Cyprus                Spread versus rating in the European periphery and in CEE:
                                                                          Slovenia looks mispriced and offers value, in our view
 500                             Cyprus/troika intial agreement                   Z-spread
          Z-sprd                                                          500
                                 with bank depositor "bail-in"                                                                        Port EUR21s
 450                                                                      450                     Slov 22s
                                                                          400                                           Hung 21s
                                                                          350                                                           Serbia 22s
 350                                                                                                           EUR22s
                                                                          300                    Italy                      Croa 21
 300                                                                                            EUR21s
                                                                                                                        Rom 22s
 250                                                                                                         Ireland
 200                                                                      150             Lith 22s      Latvia 21s              Average rating
   11-Dec          11-Jan          11-Feb       11-Mar         11-Apr
                   Slovenia $22s                Croatia $21s
                                                                                        A-     BBB+     BBB    BBB-      BB+     BB       BB-
                   Serbia $21s                  Hungary $21s
Source: Bloomberg, Barclays Research                                      Note: USD bonds shown, except for EUR government bonds of Portugal, Spain,
                                                                          Italy and Ireland. Source: Bloomberg, Barclays Research

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Barclays | The Emerging Markets Weekly

                                                                                              Current strategy/                   Vol adj m
Currency    Tactical bias     Strategic directional view                                      trades we like                      returns**

Emerging Asia
PHP         Neutral           Solid growth, supportive BoP and a government oriented
                              towards reform provide a constructive fundamental
                              backdrop for the currency. However, dollar strength and                                                0.50
                              smoothing operations from the central bank will limit the
                              degree of PHP appreciation.
CNY         Bullish           We expect the PBoC to allow continued CNY appreciation in Buy a 12m USD/CNY put spread
                              the context of a still-large current account surplus, ongoing (strikes: 6.26 and 6.10) and sell a
                              FDI and portfolio flows. For 2013, we forecast 2%             12m USD/CNY call (strike: 6.39)
                              appreciation versus the USD.
TWD         Neutral           In the near term, JPY weakness should remain a drag on
                              the TWD. Ever-closer trading links with China will likely
                              provide a source of more balanced economic growth and
                              drive long-term TWD appreciation.
KRW         Neutral           USD/JPY strength, delays to the fiscal supplementary
                              budget and elevated tensions with North Korea are likely
                              to limit KRW appreciation in the very near term. Beyond
                              that, increasing support from the balance of payments
                              and improving economic growth due to increasing
                              electronics exports will likely support the won.
MYR         Bullish           We expect election uncertainty to be transitory and for         Buy a 3m 1x2 USD/MYR put
                              equity and bond flows to continue into Malaysian                spread (strikes: 3.10 and 3.04)
                              markets, which should be framed by strong economic
                              growth momentum.
INR         Neutral           INR appreciation relies on larger-than-expected RBI rate
                              cuts and/or faster political reform momentum, which
                              would likely boost sentiment and equity inflows. However,                                              0.15
                              sticky inflation could inhibit the RBI’s ability to loosen
                              monetary policy.
IDR         Bearish           We expect the IDR to underperform its regional peers in
                              2013. Indonesia faces an unfavorable combination of a
                              structural current account deficit and market concerns                                                 0.02
                              about central bank policy management amid rising
                              political risks.
THB         Neutral           We expect the low-beta THB to remain supported through
                              2013 by strong, broadly balanced economic growth.
                              However, this may be offset slightly by a shrinking current
                              account surplus this year.
HKD         Neutral           Recent FX intervention suggests increased hot money
                              inflows. We continue to think the USD/HKD peg fulfils the                                             -0.03
                              objectives of the central bank.
SGD         Bearish           With economic growth likely to remain sluggish and core         Buy a 3m CAD/SGD call spread
                              inflation to remain benign, we expect the SGD to depreciate     (strikes: 1.23 and 1.26) and sell
                              on a trade-weighted basis in the near term.                     a 3m CAD/SGD put (strike:
Latin America
ARS         Bearish           In our view, for the ARS, the question is not whether it will   Short USD/ARS in 3m NDF
                              depreciate but by how much. We take advantage of the
                              election’s timing to capture the high risk premia priced into                                          0.47
                              the NDF curve.
CLP         Neutral/Bearish   Chile’s economy has shown some signs of weakening and Long BRL/short CLP
                              although the USD/CLP has rallied we still believe that the
                              cross is mostly exposed to downside risk although the                                                  0.26
                              carry is still attractive.
COP         Neutral/Bullish   The soft patch in global activity is having an effect on the    Long basket 50% PEN and 50%
                              COP driving it lower against the USD. However, we still         COP/JPY
                              expect FDI inflows to keep the downside pressure on the                                                0.24
                              USD/COP, although the government will likely stand in
                              the way of any large movement.

18 April 2013                                                                                                                                 30
Barclays | The Emerging Markets Weekly

                                                                                                           Current strategy/                        Vol adj m
 Currency       Tactical bias           Strategic directional view                                         trades we like                           returns**

 BRL           Neutral/bullish          Rising real rates and a refocus by the BCB on containing           Short TRY / long BRL. Long
                                        inflation expectations suggest a tactical opportunity to pick      BRL/short CZK
                                        up the BRL’s carry against CZK. Divergent monetary policy                                                      0.23
                                        cycles argue for being long the BRL versus the TRY.
 PEN           Neutral/Bullish          Although the BCRP will lean against flows, the PEN should          Long basket 50% PEN and 50%
                                        continue to appreciate at a more or less constant rate.            COP/JPY                                     0.22

 MXN           Bullish                  The impressive agenda of structural reforms that Peña              Long MXN/short JPY
                                        Nieto’s government seems to be implementing could
                                        result in an investment boom. We like the MXN from a                                                           0.09
                                        structural point of view and remain long the currency.
 Emerging EMEA
 EGP           Neutral                  Egypt is reliant on ad hoc bilateral loans, as an IMF
                                        program remains on hold. Meanwhile, the unfulfilled retail
                                        demand for the USD has led to a parallel FX rate, which at                                                     1.37
                                        some stage needs to be corrected.
 RUB           Bullish                  Positioning in the RUB has, by our estimates, lightened
                                        and Russian local bond yields continue to look appealing
                                        for global EM investors. When inflation decelerates (in                                                        0.83
                                        H2), we look for rate cuts, which could spur more
                                        portfolio inflows.
 RON*          Bullish                  The low volatility and high carry on local bonds should            Short EUR/RON
                                        push the RON higher. The government has made
                                        progress on ‘prior-action’ commitments to the IMF,                                                             0.37
                                        spurring foreign demand for local assets.
 PLN*          Bullish                  The weakening of domestic demand has one positive                  Long PLN/HUF
                                        upshot: it is causing the C/A deficit to narrow, providing
                                        some support for the PLN, particularly as the source of                                                        0.10
                                        financing for the deficit remains high and stable. This
                                        provides a good RV opportunity to be long PLN/HUF.
 ZAR           Bearish                  Investors’ confidence in the provision of ample global
                                        liquidity, in the wake of BoJ actions, helped allay concerns
                                        about SA’s ability to fund its twin deficits. However, this                                                   -0.05
                                        has probably prolonged the adjustment process and may
                                        lead to an even larger ZAR adjustment later.
 ILS           Neutral                  The current account is slowly improving and is likely to
                                        receive an additional boost when domestic gas
                                        production ratchets up in late Q2. BoI intervention will                                                      -0.13
                                        however slow the pace of ILS gains.
 TRY           Bearish                  The CBT’s support of growth likely means a willingness to Short TRY/BRL
                                        ease funding rates into capital inflows, but keeping them
                                        stable in the face of outflows. We see TRY
                                        underperforming BRL, as Brazil’s monetary stance is at a                                                      -0.14
                                        polar opposite (hiking into FX weakness, but unchanged
                                        into FX depreciation).
 CZK*          Bearish                  Low yields and low FX volatility make the CZK a good               Long EUR/CZK, long BRL/CZK
                                        funding currency. Funding out of the CZK should at some
                                        stage benefit from CNB intervention to buy FX, as risks of                                                    -0.21
                                        deflation are mounting.
 HUF*          Bearish                  Rate cuts are likely to put pressure on the HUF. The room Long PLN/HUF
                                        for cuts may also be increasing given the NBH’s plans to
                                        help facilitate a further reduction in external debt.                                                         -0.28

 UAH           Bearish                  High external funding needs and a lack of policy direction
                                        make us nervous about the UAH. Although the drain on
                                        FX reserves has been modest since the beginning of the
                                        year, we think it will be temporary as private sector
                                        confidence in the government’s economic policies is low.
Note: *Versus the EUR. **The difference between our six-month currency forecast against the outright forward, weighted by the square root of the six-month implied
vol. Source: Barclays Research

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                                     OAS (bp)                   OAD                   Weights (%)                      Total Returns (%)                                       Bonds we recommend…

                        31-Dec-12       16-Apr-12      3mF                 Benchmark Model Tactical bias         1w    Q1 13 QTD      2013 YTD     3mF                  Buying                            Selling

EM Portfolio                244            267         255       7.6           100        100                    0.0       2.6          -0.1        0.4
Arg, Ven, Ukr               787            849         797       5.6          13.2        12.6      neutral     -3.2       0.1          -0.8        0.9
Other                       159            177         170       8.0          86.8        87.7      neutral      0.5       3.0           0.0        0.4
EM Asia                     160            176         179       8.7           14          15        over        0.6       2.5          -0.1        0.3
Philippines                 109            127         127       9.3           5.8        5.9       neutral      0.6       2.3          -0.2        1.3   PHILIP 30/31/32/34s
Indonesia                   161            183         188       8.6           7.0        7.4        over        0.7       2.7          -0.6        1.2   INDON 38/42/43
Sri Lanka                   346            348         348       5.8           0.8        0.8       neutral      0.1       2.7           1.6        1.5   SRILAN 15s                        SRILAN 22s
Vietnam                     323            254         269       4.3           0.4        0.8        over        0.2       1.4           4.5        0.9   VIETNM 16s, 20s
Mongolia                    372            396         386       6.3           0.3        0.3       neutral     -0.1       2.9           0.5        1.8   MONGOL 22
EEMEA                       208            239         236       6.5           44          44       neutral      0.3       2.6           0.3        0.3
Turkey                      163            178         163       8.2          10.6       13.6        over        1.0       4.1           0.1        1.6   Turkey 34s, 36s, 38s              Turkey 10y sector
Russia                      140            171         166       6.5           9.5        10.0      neutral      0.2       2.3          -0.8        1.1   Russia 30s, 28s, 42s              Russia 15s, 17s
Qatar                       114            119         119       6.9           4.7        4.4       under        0.6       1.7           0.3        1.0   Qatar 20s, 22s                    Qatar 40, 42s
Poland                      110            125         130       6.0           3.2        1.3       under        0.6       1.6           0.7        0.8                                     Poland 15s, 15Ns, 22s, 23s
Lebanon                     404            436         446       4.9           3.3        3.1       under        0.0       -0.1          0.9        1.5
Ukraine                     650            622         642       4.4           3.5        2.6       under       -1.1       0.6           3.3        1.8   Ukraine 14s, Nafto 14s            Ukraine 16s, 16Ns, 17s, 17Ns
Hungary                     335            366         336       6.2           2.5        3.0        over        0.0       5.7           0.1        2.0   Hungary 18s, 20s, 21s, 23s
South Africa                144            172         182       6.8           2.1        1.1       under       -0.4       2.3          -0.6        0.9                                     SOAF 41s
Lithuania                   156            163         158       5.2           1.9        2.4        over        0.3       2.4           0.6        1.0   Lithuania 20s, 21s, 22s
Croatia                     317            324         314       5.6           1.8        1.5       under        0.0       4.0           1.2        1.5   Croatia 17s, 19s
Egypt                       458            597         637       7.2           0.3        0.2       under       -0.4       6.3          -6.6        1.6                                     Egypt 20s
Latvia                      168            173         168       5.3           0.6        0.6       neutral      0.4       2.2           0.9        1.0
Latin America               293            326         299       8.7           40          40       neutral     -0.5       2.7          -0.5        0.6
Brazil                      88             113         103       8.4           9.5        9.6       neutral      0.7       3.3          -1.2        1.3   BR41, BR27, BR34, BR26            BR17, BR27
Mexico                      109            115         100      10.5           8.9        8.9       neutral      0.6       4.1           0.9        1.7   MX100, MX33, MX34                 MX19, MX22, MX15
Venezuela                   756            837         737       6.2           7.1        7.4       neutral     -6.3      -3.1          -1.7        4.4   PDVSA17N, PDVSA17                 PDVSA22
Argentina                  1012            1179       1165       5.4           2.6        2.6       neutral      2.2       8.0          -3.4        3.8   Bonar13, Boden15
Colombia                    104            114          99       8.8           3.9        3.9       neutral      0.5       3.4           0.1        1.5   CO19                              CO41
Peru                        107            115         100      11.3           2.8        2.8       neutral      0.9       4.4           0.2        1.8   PE50                              PE37, PE19
Panama                      119            132         117       9.5           2.1        1.6       under        1.2       4.2          -0.4        1.7   PA36
Uruguay                     121            149         144      11.7           1.4        1.2       under        1.0       4.2          -1.6        1.7   UY36, UY45
El Salvador                 377            335         335       9.0           1.2        1.2       neutral      0.1       0.1           5.8        1.8   ELSalv41s                         ELSalv 35s
Dominican Republic          357            405         410       5.6           0.7        0.4       under        0.1       0.8          -0.8        1.5   DR21
Rest of Index               244            267         255       7.6           100        100                    0.0       2.6          -0.1        0.4
Note: *Benchmark forecast. Benchmark is a variant of the Barclays Global EM Sovereigns index, featuring USD only bonds. Changes in view denoted in bold. Additional Countries (Abu Dhabi, Bulgaria, Gabon, Pakistan, Ghana)
were previously known as Off-Index Allocations. Source: Barclays Research

18 April 2013                                                                                                                                                                                                            32
Barclays | The Emerging Markets Weekly

                              17-Apr-13                                Weights         Overall Duration Total Returns FX Unhedged (%)                              Bonds we recommend…

                            Yield to                                Current                                Past              3m
                   Duration Worst          Mkt val                  Market    Model     bias      bias     Week    QTD YTD Forecast                       Buying                           Selling

EM Local              4.98       4.66     1,687,029 100%            100.00    100.00                       -0.13   1.83   1.81   1.71

Latin America         4.00       6.97      442,598     26%           27.71    29.51     over               -1.12   5.97   5.97   3.80

Brazil                2.75       8.82      203,587     12%           15.58    16.38     over      long     -1.28   4.03   4.03   5.39    NTN-F'21
Chile                 3.80       5.09       7,310       0%           0.36      0.36    neutral   neutral   -0.86   3.11   3.11   2.07    Global'20
Colombia              4.47       4.34       77,698      5%           3.92      3.92    neutral    long     -1.07   -0.28 -0.28   3.70    Global'21, '27                      TES'24
Mexico                6.27       4.71      154,003      9%           7.84      8.84     over      long     -0.84   13.09 13.09   0.77    Mbono'42, Mbono'31                  Mbono'24
EEMEA                 4.92       4.55      509,523     30%           29.83    27.03    under               -0.70   -0.44 -0.44   -0.82

Czech Republic        6.27       1.28       46,920      3%           3.04      1.54    under      long     0.62    -2.92 -2.92   -2.46

Hungary               3.72       4.85       32,554      2%           2.22      1.22    under     short     1.08    1.83   1.83   -4.67   HGB 16c Feb'15                     HGB 20a Nov'20
Israel                5.07       2.75       51,093      3%           3.01      3.01    neutral    long     0.79    4.39   4.39   -0.71

Poland                4.70       3.08      112,462      7%           6.60      6.60    neutral   short     -0.23   -0.18 -0.18   -0.59   POLGB Apr'15, Apr'18, Oct'23
Romania               2.74       5.12       14,921      1%           0.74      1.74     over     short     n.a.    n.a.   n.a.   1.78    ROMGB JaN'16, Oct'15
Russia                4.84       6.36       88,739      5%           4.70      5.70     over      long     -2.93   -1.63 -1.63   8.89    OFZ Jul'22
South Africa          6.54       6.44       90,095      5%           5.15      3.35    under     neutral   -2.61   -4.46 -4.46   -5.89   R208                               R204, R209
Turkey                3.40       5.89       72,739      4%           4.38      3.88    under      long     0.30    2.38   2.38   -3.03   TURKGBi Oct'22                     TURKGB Mar'17, Jan'15
EM Asia               5.68       3.27      734,908     44%           42.47    43.47    neutral             0.94    0.72   0.72   2.12
India                 6.75       7.85       10,601      1%           0.54      1.54     over      long     1.49    5.65   5.65   5.18    IGB 8.15% 22, 8.97% 30, 8.3% 42
Indonesia             7.26       5.80       79,758      5%           4.00      4.00    neutral    long     0.73    -0.62 -0.62   -1.16   FR65 May’33                         FR66 May’18
Malaysia              5.58       3.25       86,192      5%           5.43      5.43    neutral   short     0.15    2.61   2.61   0.08    MGS 20s
Philippines           9.04       3.27       63,599      4%           2.57      2.57    neutral   neutral   1.14    15.20 15.20   0.87
South Korea           4.94       2.78      398,907     24%           25.24    24.74    neutral   short     1.10    -2.42 -2.42   3.79                                        2022s, Oct 31s
Thailand              6.49       3.28       95,851      6%           4.69      5.19     over      long     1.01    8.06   8.06   -1.37   ILB217A, ThaiGB LB326A
Note: Bolding indicates change in bias. Source: Barclays Research

18 April 2013                                                                                                                                                                                        33
Barclays | The Emerging Markets Weekly

Joey Chew

Review of last week’s data releases
Main indicators                                Period Previous Barclays Actual             Comments

China: Industrial production (% y/y)            Mar        9.9       10.2         8.9      The pick up in final demand is not strong enough to offset
                                                                                           overcapacity in some industries.
China: Fixed asset investments                  Mar        21.2      21.3         20.9     Slower property and manufacturing investment offset robust
(% y/y, YTD)                                                                               infrastructure investment.
China: Retail sales (% y/y)                     Mar        12.3       12.5        12.6     Daily consumption and property-related sales both picked up.
China: GDP (% y/y)                               Q1        7.9        7.9         7.7      Growth is still within the government’s comfort range.
India: WPI (% y/y)                              Mar        6.8        6.3         6.0      Lower inflation provides room for the RBI to cut rates in May.
Singapore: Non-oil domestic exports             Mar       -30.6       -7.0        -4.8     Pharmaceutical exports rebounded, but electronics shipments
(% y/y)                                                                                    are still depressed.

Preview of week ahead
Monday 22 April                                                         Period           Prev 2           Prev 1     Latest       Forecast      Consensus
08:30          Taiwan: Unemployment rate (%)                              Mar              4.2             4.2         4.2           4.2            4.2
16:00          Taiwan: Export orders (% y/y)                              Mar              8.5             18.0       -14.5          3.5            1.6
Tuesday 23 April                                                        Period           Prev 2           Prev 1     Latest       Forecast      Consensus
09:45          China: Flash HSBC manufacturing PMI, index                   Apr           52.3             50.4       51.6            –              –
13:00          Singapore: CPI (% y/y)                                     Mar              4.3             3.6         4.9           4.3             –
16:00          Taiwan: Industrial production (% y/y)                      Mar              2.1             19.1       -11.5          1.0            1.8
Singapore: We expect a net negative impact on private road transport cost inflation from the fall in COE premiums in February
and March, and the increase in additional registration fees for some types of cars. This should help lower headline inflation. The
core measure should be relatively stable at 1.8% in March (Feb: 1.9%).

Taiwan: March exports rose 3.3% y/y, despite a high base. We forecast IP to also rise. March manufacturing PMI recovered to
51.2 (Feb: 50.2; Jan: 51.5).

Thursday 25 April                                                       Period            Prev 2       Prev 1        Latest       Forecast      Consensus
07:00          Korea: GDP (% q/q /% y/y) – prelim. est.                      Q1          0.3/2.4      0.0/1.6       0.3/1.5       0.8/1.4        0.4/1.0
16:00          Philippines: BSP policy rate (%)                              –            3.50             3.50       3.50           3.50           3.50
25-27 Apr      Thailand: Customs exports (% y/y)                          Mar             13.5             16.1        -5.8          4.7             –
Korea: We think the economy likely grew faster in Q1 than in most of 2012, helped by a recovery in exports and a gradual
improvement in investment.

Philippines: We expect the BSP to keep the policy rate unchanged at 3.50% as inflation is expected to remain within the target
band in 2013. However, the central bank looks inclined to further cut SDA rates – we expect a total of 50-100bp of cuts in the
coming months, with a 50bp cut in the April meeting likely.

Thailand: More favourable base effects and recovering demand in major Asian trading partners should support export growth.

Friday 26 April                                                         Period           Prev 2           Prev 1     Latest       Forecast      Consensus
13:00          Singapore: Industrial production (% y/y)                   Mar              1.6             -0.1       -16.6          -3.0            –
–              Thailand: Manufacturing production (% y/y)                 Mar             23.0             10.2        -1.2          1.7             –
Singapore: The March rebound in pharmaceutical exports suggests an improvement in biomedical IP. However, overall IP will
still likely contract, dragged down by electronics IP given the high base.

Thailand: We expect a modest rebound in IP on the back of a stronger auto sector performance.

Note: Release dates and consensus estimates are subject to change. Source: Bloomberg, Barclays Research

18 April 2013                                                                                                                                              34
Barclays | The Emerging Markets Weekly

Eldar Vakhitov, Daniel Hewitt, Christian Keller, Vladimir Pantyushin, Alia Moubayed, Piotr Chwiejczak, Peter Worthington
Review of last week’s data releases
Main indicators                               Period Previous Barclays Actual Comments
Serbia: CPI EU harmonized (% y/y)              Mar    12.4     11.9    11.2 Driven by falling food, electricity and transport inflation
Turkey: Unemployment rate (%)                  Jan    10.1      -      10.6 Driven by seasonal factors
Czech: Current account (CZK bn)                Feb     6.0      -      27.7 Surge in surplus due to low income payments, rising trade surplus
Israel: CPI (% y/y)                            Mar     1.5     1.3      1.3   Inflation decelerates as expected on base effects
Poland: Current account (EUR bn)               Feb    -1.7      -      -0.9 Lower deficit compared with consensus forecast
Poland: Trade balance (EUR bn)                 Feb     0.0      -       0.6   Higher than consensus
Poland: CPI (% y/y)                            Mar     1.3     0.9      1.0   Lower than consensus – April print should inch down to 0.6% y/y
Poland: Budget level YTD (PLN bn)              Mar    -21.7     -      -24.4 Lower tax income causing deficit widening
Romania: Current account YTD (EUR bn)          Feb     0.5      -       0.3   Surprising Jan-Feb C/A surplus due to narrowing of trade deficit
Russia: Industrial production (% y/y)          Mar    -2.1     2.0      2.6   Expected return to trend growth
Ukraine: Trade balance YTD (USD bn)            Feb     0.0     -0.9    -0.9 As expected, trade deficit remains wide
Turkey: Benchmark repo rate (%)                Apr    5.50     5.25    5.00 A larger-than-expected move, highlighting the CBT’s dovishness
Turkey: Overnight lending rate (%)             Apr    7.50     7.50    7.00 Given elevated credit growth, we had not expected a lower ceiling
Turkey: Overnight borrowing rate (%)           Apr    4.50     4.00    4.00 As expected by most, as a means to counter TRY appreciation
Poland: Core inflation (% y/y)                 Mar     1.1     0.9      1.0   Core continues to inch down amid weak domestic demand
Ukraine: Retail trade YTD (% y/y)              Mar    14.8     15.0    13.4 Slight moderation, with further slowing likely in the near future
                                                                              Slightly better than expected, due to subdued food inflation
South Africa: CPI (% y/y)                      Mar     5.9     6.0      5.9
South Africa: Retail Sales constant (% y/y)    Feb     2.2      -       3.8   Surprisingly strong, but could be due to volatility of data series
Poland: Average gross wages (% y/y)            Mar     4.0     2.0      1.6   Lower than expected
Poland: Employment (%y/y)                      Mar    -0.8     -0.9    -0.9 As expected
Israel: Trade balance (USD bn)                 Mar    -1.0      -      -1.1 Both exports and import volumes decline as balance improves
Russia: Real wages (% y/y)                     Mar     3.3     4.6      4.2 Seems to be on a lower trend compared to a few months ago
Russia: Retail sales real (% y/y)              Mar     3.0     3.2      4.4   Re-acceleration after February dip
Russia: Unemployment rate (%)                  Mar     5.8     5.8      5.7   Slightly lower
Russia: Investment (% y/y)                     Mar     0.3     1.2     -0.8 Another poor investment reading
Ukraine: Industrial production (% y/y)         Mar    -6.0     -5.0    -5.2 IP remains in recession
Hungary: Average gross wages (% y/y)           Feb     2.5      -       2.7   Flat in real terms
Poland: Sold Industrial output (% y/y)         Mar    -2.1     -1.8    -2.9 Lower demand limits production
Poland: PPI (% y/y)                            Mar    -0.3     -0.8    -0.6 Strong zloty and weaker commodity prices imply lower PPI

Preview of week ahead
Tuesday 23 April                                              Period     Prev 2          Prev 1             Latest              Forecast     Consensus
 09:00 Poland: Retail sales (% y/y)                            Mar        -2.5             3.1               -0.8                  0.0          0.4
 09:00 Poland: Unemployment rate (%)                           Mar        13.4            14.2               14.4                 14.4         14.4
 13:00 Hungary: Deposit rate (%)                               Apr        5.50            5.25               5.00                 4.50         4.75
Poland: We expect weak retail sales print. The labour market is weak but real rates are high; consumers are likely very careful
with their spending decisions.
Hungary: We expect the NBH to accelerate its easing cycle by cutting 50bp this month after eight consecutive monthly 25bp
cuts. We think the jump to 50bp is justified by the sharp declines in inflation to 2.2%, well below the 3% target, and the weak
economic performance. However, the recent announcement of unorthodox methods to loosen monetary policy could act as
an alternative to increasing the pace of cuts.
Wednesday 24 April                                            Period     Prev 2          Prev 1             Latest              Forecast     Consensus
12:30 Turkey: Industrial confidence                            Apr       102.1           107.5              112.1                  -             -
12:30 Turkey: Capacity utilization (%)                         Apr        72.4            72.2               72.7                  -             -
Turkey: On SA basis, capacity utilization made a more noticeable upward move in March. We expect this trend to continue.
Industrial confidence could be somewhat weaker after the strong showing in March.

18 April 2013                                                                                                                                            35
Barclays | The Emerging Markets Weekly

Thursday 25 April                                      Period    Prev 2     Prev 1    Latest      Forecast       Consensus
10:30 South Africa: PPI (% y/y)                         Mar       5.4        5.8       5.4          5.2             5.3
      Ukraine: Current account (USD bn)                 Q1        -3.8       -4.0      -4.9         -2.0           -1.8
South Africa: Producer prices of final manufactured goods are expected to rise modestly with base effects causing a drop in the
y/y rate of inflation.
Ukraine: We expect the C/A deficit to remain large this year at c.USD13bn, although an improvement on 2012 (USD14.8bn).
Friday 26 April                                       Period     Prev 2     Prev 1    Latest      Forecast       Consensus
 08:00 Hungary: Unemployment rate (%)                Mar          10.7       11.2      11.6          -             11.7
Hungary: While the Hungary economy appears to be past the bottom of the cycle, there are still no clear signs of recovery and
therefore unemployment could keep rising for a few more months.

18 April 2013                                                                                                                36
Barclays | The Emerging Markets Weekly

Alejandro Arreaza, Sebastián Brown, Guilherme Loureiro, Bruno Rovai, Marco Oviedo, Sebastian Vargas

Review of the week’s data releases

Main indicators                             Period     Previous Barclays   Actual       Comments

Peru: Unemployment rate, %                   Mar         6.4       -        6.4         Fast growth keeps labor market tight
Peru: Economic activity index, % y/y         Feb         6.2      5.9       5.0         Construction sector deceleration leads to growth moderation
Brazil: Selic overnight rate, %                                                         BCB hiked the Selic rate in a split decision (two members voted
                                             Apr         7.25     7.25      7.50
                                                                                        for maintening rates), bringing a dovish statement, in our view.

Preview of the week ahead
Monday 22 April                                                  Period       Prev 2            Prev 1         Latest       Forecast      Consensus
    9:00     Mexico: Retail sales, % y/y                           Feb            3.5            -1.8            1.8           -0.8            -
Mexico retail sales: We expect the retail sales index to decrease by 0.2% m/m sa, following a 2.1% m/m expansion in the previous
month. Our forecast is influenced by the drop of 0.7% m/m sa in auto sales and the contraction of 1.4% m/m sa in consumption of
goods imports.
Wednesday 24 April                                               Period       Prev 2            Prev 1         Latest       Forecast      Consensus
    9:00     Mexico: Bi-weekly CPI, % 2w/2w                        Apr         0.15              0.24           0.52           -0.40           -
    9:00     Mexico: Bi-weekly CPI core, % 2w/2w                   Apr         0.18              0.24           0.26           0.04            -
    9:30     Brazil: Current account balance, USD bn               Mar         -8.4              -11.4          -6.6           -6.0            -
Mexico Bi-weekly CPI: There was important downward pressure in this release: perishable food prices should decline after the
strong jump during the previous fortnight, in addition to the first round of electricity prices decreasing, reflecting the beginning of
government subsidies. Core inflation should be well behaved, while headline infaltion should peak at 4.40% y/y.
Thursday 25 April                                                Period       Prev 2            Prev 1         Latest       Forecast      Consensus
    7:30     Brazil: COPOM meeting minutes                         Apr             -               -              -              -             -
    8:00     Brazil: Unemployment rate, %                          Mar            4.6             5.4            5.6            6.0           5.9
    9:00     Mexico: Economic activity index, % y/y                Feb            3.9             1.4            3.2            0.8            -
   15:00     Argentina: Industrial Production, % y/y               Mar         -3.4               0.2           -4.4             -            0.0
Brazil COPOM meeting minutes: Following the decision of hiking the Selic rate by 25bp, in the minutes we expect a more detailed
view on the drivers behind the reasoning of the two dissedent members who voted for maintaining rates in the April meeting. The
minutes could give us some color on what risk factors could interrupt the tightening cycle.

Mexico IGAE: We expect this monthly GDP proxy to expand by 0.6% m/m sa during February, accelerating from the previous 0.2%
print. Nonetheless, growth trend should soften to 1.1% 3m/3m saar. Should our estimate prove correct, our Q1 13 real GDP tracker
would remain at our forecast of 2.0% q/q saar.
Friday 26 April                                                  Period       Prev 2            Prev 1         Latest       Forecast      Consensus
      -      Colombia: Overnight lending rate, %                   Apr         4.00              3.75           3.25           3.25          3.25
    7:30     Chile: BCCh meeting minutes                           Apr             -               -              -              -             -
    9:00     Mexico: Trade balance, USD mn                         Mar        961.7            -2866.4          46.1             -             -
    9:30     Brazil: Total outstanding loans, BRL bn               Mar       2368.3             2366.1         2384.0            -             -
   10:00     Mexico: Overnight rate, %                             Apr         4.50              4.50           4.00           4.00          4.00
Chile BCCh meeting minutes: The pre-meeting speculation of a possible intervention in the currency market quickly faded after the
BCCh’s press release barely mentioned the CLP as a factor in its decision to keep rates on hold. While last week’s weakening of the
CLP against the USD makes an intervention less of a pressing concern, we will still look at the minutes to see whether an
intervention was considered at all by the BCCh board.

Mexico overnight rate: No change in the overnight rate is expected at this meeting. We expect some hawkish tone as inflation has
accelerated; however, the board’s assessment of the ongoing global monetary easing and capital inflows to the country could
provide more color on Banxico’s next move.

18 April 2013                                                                                                                                       37
Barclays | The Emerging Markets Weekly

                                            FX forecasts                             Forecast vs outright forward

                            Spot    1m          3m           6m       1y      1m          3m           6m             1y

G7 countries
EUR/USD                     1.31    1.29       1.28        1.25     1.23     -1.4%       -2.2%       -4.6%          -6.3%
USD/JPY                     98.2   103.0      103.0        103.0    98.0     4.9%        5.0%         5.1%          0.2%
GBP/USD                     1.53    1.52       1.50        1.47     1.47     -0.6%       -1.9%       -3.8%          -3.8%
USD/CHF                     0.93    0.95       0.97        1.00     1.03     2.2%        4.4%         7.8%          11.4%
USD/CAD                     1.03    1.02       1.01        1.00     0.99     -0.6%       -1.7%       -2.9%          -4.2%
AUD/USD                     1.03    1.01       0.99        0.97     0.95     -1.7%       -3.2%       -4.5%          -5.3%
NZD/USD                     0.84    0.82       0.82        0.81     0.79     -2.5%       -2.1%       -2.7%          -3.9%
Emerging Asia
USD/CNY                     6.18    6.21       6.20         6.16     6.10    -0.4%       -0.6%       -1.3%          -2.4%
USD/HKD                     7.76    7.76       7.76         7.76     7.76    0.0%        0.0%         0.0%          0.1%
USD/INR                 53.97      54.00      54.00        54.50    55.00    -0.3%       -1.4%       -2.0%          -3.9%
USD/IDR                 9,716      9,750      9,850        9,900    10,000   0.1%        0.5%        -0.2%          -1.8%
USD/KRW                 1,124      1,105      1,095        1,090    1,080    -1.6%       -2.7%       -3.5%          -4.9%
USD/LKR                125.70      126.50     127.00       128.00   128.00   -0.3%       -1.4%       -2.8%          1.8%
USD/MYR                     3.03    3.04       3.04         3.02     2.98    -0.1%       -0.4%       -1.6%          -3.7%
USD/PHP                 41.24      40.50      40.00        39.50    39.00    -1.8%       -2.8%       -4.1%          -5.1%
USD/SGD                 1.235      1.260      1.260        1.255    1.250    2.0%        2.0%         1.6%          1.2%
USD/THB                 28.67      29.50      29.25        29.00    29.00    2.7%        1.5%         0.2%          -0.6%
USD/TWD                 29.88      29.60      29.40        29.00    28.75    -1.6%       -1.3%       -1.9%          -2.6%
USD/VND                20,898      20,950     20,950       20,900   20,900   -0.1%       -1.2%       -3.2%          -4.8%
Latin America
USD/ARS                     5.16    5.11       5.24         5.45     5.94    -3.1%       -7.2%       -12.5%         -20.4%
USD/BRL                     2.02    1.95       1.95         2.00     2.00    -3.7%       -4.5%       -3.5%          -6.3%
USD/CLP                     476     472        473          473      475     -1.3%       -1.9%       -3.1%          -4.7%
USD/MXN                 12.27      12.15       12.30       12.30    12.20    -1.3%       -0.6%       -1.3%          -3.8%
USD/COP                 1,844      1,840       1,833       1,817    1,800    -0.5%       -1.4%       -3.1%          -5.4%
USD/PEN                     2.59    2.59       2.58         2.57     2.55    -0.2%       -0.7%       -1.4%          -2.3%
EUR/CZK                 25.83      25.75       26.00       26.25    26.25    -0.3%       0.7%         1.6%          1.7%
EUR/HUF                     298     300        307          315      320     0.2%        1.9%         3.8%          4.2%
EUR/PLN                     4.11    4.18       4.10         4.13     4.15    1.3%        -1.1%       -0.9%          -1.6%
EUR/RON                     4.38    4.37       4.32         4.30     4.25    -0.5%       -2.6%       -3.5%          -6.7%
USD/RUB                 31.58      31.00       30.00       29.00    29.00    -2.4%       -6.4%       -10.8%         -13.2%
BSK/RUB                 35.96      35.05       33.78       32.26    32.00    -3.1%       -7.5%       -12.9%         -16.0%
USD/TRY                     1.80    1.83       1.87         1.86     1.85    1.5%        3.0%         1.4%          -1.4%
USD/ZAR                     9.18    9.20       9.60         9.50     9.20    -0.2%       3.3%         1.0%          -4.5%
USD/ILS                     3.63    3.70       3.70         3.70     3.65    1.8%        1.6%         1.4%          -0.5%
USD/EGP                     6.90    6.80       6.92         7.20     7.00    -3.7%       -6.3%       -7.8%          -18.7%
USD/UAH                     8.14    8.20       8.20         9.60     9.60    0.0%        -1.2%       10.3%          2.1%
Source: Barclays Research

18 April 2013                                                                                                                38
Barclays | The Emerging Markets Weekly

                                                      Start of cycle                                                      Forecasts as at end of
                                                                                                   Next move
Official rate                    Current             Date              Level      Last move        expected      Q2 13       Q3 13    Q4 13        Q1 14
% per annum (unless stated)
Fed funds rate                   0-0.25        Easing: 17 Sep 07       5.25    Dec 08 (-75-100)   Beyond 2014    0-0.25     0-0.25    0-0.25       0-0.25
BoJ overnight rate                 0.10        Easing: 30 Oct 08       0.50     Oct 10 (0-10)     Q1 16 (+20)    0-0.10     0-0.10    0-0.10       0-0.10
ECB main refinancing rate          0.75        Easing: 3 Nov 11        1.50      Jul 12 (-25)       End 2014      0.75       0.75      0.75         0.75
Emerging Asia
China: 1y bench. lending rate      6.00         Easing: 7 Jun 12       6.56      Jul 12 (-31)     Beyond Q1 14    6.00       6.00      6.00         6.00
Hong Kong: Base rate               0.50        Easing: 19 Sep 07       6.75     Dec 08 (-100)     Beyond Q1 14    0.50       0.50      0.50         0.50
India: Repo rate                   7.50        Easing: 17 Apr 12       8.50      Mar 13 (-25)      Q2 13 (-50)    7.00       7.00      7.00         7.00
Indonesia: O/N policy rate         5.75        Easing: 11 Oct 11       6.75      Feb 12 (-25)     Beyond Q1 14    5.75       5.75      5.75         5.75
Korea: Base rate                   2.75        Easing: 12 Jul 12       3.25      Oct 12 (-25)     Q1 14 (+25)    2.75        2.75      2.75         3.00
Sri Lanka: Reverse repo            9.50        Easing: 12 Dec 12       9.75      Dec 12 (-25)      Q2 13 (-25)    9.25       9.00      9.00         9.00
Malaysia: O/N policy rate          3.00      Tightening: 4 Mar 10      2.00     May 11 (+25)      Q1 14 (+25)     3.00       3.00      3.00         3.25
Philippines: O/N lending           3.50        Easing: 19 Jan 12       4.50      Oct 12 (-25)     Beyond Q1 14    3.50       3.50      3.50        3.50
Taiwan: Rediscount rate           1.875      Tightening: 24 Jun 10     1.38     Jun 11 (+12.5)    Beyond Q1 14   1.875       1.875    1.875        1.875
Thailand: O/N repo rate            2.75        Easing: 30 Nov 11       3.50      Oct 12 (-25)     Beyond Q1 14    2.75       2.75      2.75         2.75
Vietnam: Reverse repo rate         7.00          Easing: Jul 11        15.00    Dec 12 (-100)     Q4 13 (+100)    7.00       7.00      8.00         8.00
Emerging Europe, Middle East & Africa
Czech Republic: 2w repo rate       0.05        Easing: 8 Aug 08        3.75      Nov 12 (-20)     Beyond Q1 14    0.05       0.05      0.05         0.05
Hungary: 2w deposit rate           5.00        Easing: 28 Aug 12       7.00      Mar 13 (-25)     Apr 13 (-50)    3.75       3.50      3.50         3.50
Poland: 2w repo rate               3.25        Easing: 7 Nov 12        4.75      Mar 13 (-50)     May 13 (-50)    2.75       2.50      2.50        2.50
Romania: Key policy rate           5.25        Easing: 4 Feb 08        10.25     Mar 12 (-25)      Q4 13 (-25)    5.25       5.25      4.75         4.25
Russia: Overnight repo rate        5.50      Tightening: 13 Sep 12     5.25      Sep 12 (+25)     Sep 13 (-25)    5.50       5.25      5.25         5.00
South Africa: Repo rate            5.00        Easing: 11 Dec 08       12.00     Jul 12 (-50)     Sep 14 (+50)   5.00        5.00      5.00        5.00
Turkey: 1w repo rate              5.00         Easing: 20 Nov 08       16.75     Dec 12 (-25)     Q1 14 (+50)     5.00       5.00      5.00         5.50
Egypt: Deposit rate                9.75     Tightening: 24 Nov 11      8.25     Mar 13 (+50)      May 13 (+50)   10.25       10.25    10.50        10.50
Israel: Discount rate              1.75        Easing: 26 Sep 11       3.25      Dec 12 (-25)     Q1 14 (+25)    1.75        1.75      1.75        2.00
Latin America
Brazil: SELIC rate                7.50         Easing: 31 Aug 11       12.50    Apr 13 (+25)      May 13 (+25)   7.75        8.25      8.25         8.25
Chile: Monetary policy rate        5.00      Easing: 12 January 12     5.25      Jan 12 (-25)     Q4 13 (+25)     5.00       5.00      5.25         5.25
Colombia: Repo rate                3.25        Easing: 27 Jul 12       5.25      Mar 13 (-50)     Jan 14 (+25)    3.25       3.25      3.25         4.00
Mexico: Overnight rate             4.00        Easing: 16 Jan 09       8.25      Mar 13 (-50)     Beyond 2013     4.00       4.00      4.00         4.00
Peru: Reference rate               4.25      Tightening: 6 May 10      1.25     May 11 (+25)      Oct 13 (+25)   4.25        4.25      5.00        5.00

Note: Changes denoted in bold. Source: Barclays Research

18 April 2013                                                                                                                                              39
Barclays | The Emerging Markets Weekly

Christian Keller                         Koon Chow
Head of Emerging Markets Research        Head of EM Strategy
+44 (0)20 7773 2031                      +44 (0)20 777 37572  

Latin America
Alejandro Grisanti                       Marcelo Salomon                           Donato Guarino                     Marco Oviedo
Co-head LatAm Research                   Co-head LatAm Research                    Head of LatAm Strategy             Chief Economist - Mexico
Economist - Ex-Brazil, Chile, Mexico     Economist- Brazil, Chile, Mexico          Rates/Credit                       +52 55 5241 3331
+1 212 412 5982                          +1 212 412 5717                           +1 212 412 5564              
Alejandro Arreaza                        Sebastian Brown                           Guilherme Loureiro                 Bruno Rovai
Economist - Latin America                Economist - Chile /Strategist - FX        Economist - Brazil/Strategist -    Economist - Latin America
+1 212 412 3021                          +1 212 412 6721                           Rates/FX                           +55 11 3757 7772               +55 11 3757 7372         
Sebastian Vargas
Economist - Argentina, Uruguay
+1 212 412 6823

Asia Pacific
Jon Scoffin                              Nigel Chalk                               Igor Arsenin                       Krishna Hegde, CFA
Head of Research, Asia Pacific           Head of EM Asia Research                  Head of FI Strategy, EM Asia       Head of Ásia Credit Research
+65 6308 3217                            +65 6308 2625                             +65 6308 2801                      +65 6308 2979               
Rohit Arora                              Rahul Bajoria                             Jian Chang                         Joey Chew
Strategist - Rates                       Economist - India, Malaysia, Thailand     Economist – China, Hong Kong       Economist - Singapore
+65 6308 2092                            +65 6308 3511                             +852 2903 2654                     +65 6308 3211              
Yiping Huang                             Wai Ho Leong                              Hamish Pepper                      Siddhartha Sanyal
Chief Economist - EM Asia/China          Senior Economist - Korea, Malaysia,       Strategist - FX                    Chief Economist - India
+852 2903 3291                           Singapore, Taiwan                         +65 6308 2220                      +91 22 6719 6177                +65 6308 3292                   
Avanti Save                              Prakriti Sofat                            Nick Verdi                         Lingxiu (Steven) Yang
Strategist - Credit                      Economist - Indonesia, Philippines, Sri   Strategist - FX                    Economist - China, Hong Kong
+65 6308 3116                            Lanka, Vietnam                            +65 6308 3093                      +852 2903 2653                 +65 6308 3201                     

Emerging EMEA
Christian Keller                         Koon Chow                                 Jeff Gable                         Piotr Chwiejczak
Head of EEMEA Research                   Strategist - EEMEA FX                     Head of ABSA Capital Research      Strategist - Rates
+44 (0)20 7773 2031                      +44 (0)20 777 37572                       +27 11 895 5368                    +44 (0)20 3134 4606                     piotr.chwiejczak
Daniel Hewitt                            Michael Keenan                            Andreas Kolbe                      Mamokete Lijane
Senior Economist - CEE, Israel           Strategist - SA, SSA FX                   Strategist - Credit                Strategist – SA,SSA Rates
+44 (0)20 3134 3522                      +27 (0) 11 895 5513                       +44 (0)20 313 43134                +27 11 895 5612          
Ridle Markus                             Alia Moubayed                             Dumisani Ngwenya                   Vladimir Pantyushin
Economist - SSA                          Senior Economist - MENA                   Strategist - SSA Rates             Chief Economist - Russia, CIS
+27 11 895 5374                          +44 (0)20 313 41120                       +27 (0)11 895 5346                 +7 495 7868450         
Eldar Vakhitov                           Peter Worthington
Economist - CEE                          Economist - South Africa
+44 (0)20 777 32192                      + 27 11 895 5646    

EM Corporate Credit
Christopher Buck                         Stella Cridge                             Ivan Fernandes                     Autumn Graham
Head of Latin America Corporate Credit   +44 (0)20 313 49618                       +1 212 412 3428                    +1 212 412 2839
+1 212 412 3418
Stanislav Ponomarenko                    Anibal Valdes                             Antoine Yacoub                     Aziz Sunderji
+7 495 786 8451                          +1 212 412 3419                           +971 4 36 21038                    EEMEA/LatAm Corporate Credit              Strategy
                                                                                                                      +1 212 412 2218
Golib Zohidov
+44 (0)20 777 31513

18 April 2013                                                                                                                                            40
Analyst Certification
We, Donato Guarino, Piotr Chwiejczak, Andreas Kolbe, Bruno Rovai, Rahul Bajoria, Wai Ho Leong, Daniel Hewitt, Marco Oviedo, Marcelo Salomon,
Siddhartha Sanyal, Rohit Arora, Alejandro Arreaza, Alejandro Grisanti, Aziz Sunderji, Apolline Menut, Eldar Vakhitov, Joey Chew, Christian Keller, Alia
Moubayed, Vladimir Pantyushin, Peter Worthington, Sebastián Brown, Guilherme Loureiro and Sebastian Vargas, hereby certify (1) that the views
expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report
and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research

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Description: Resurgent global growth concerns and the slump in commodity prices have combined to create an unhelpful market backdrop for EM assets. However, with accommodative central bank policies still in place, supporting EM fixed income markets, these recent market moves could be interpreted as yet another chapter in what essentially remains the same story. We suggest exploiting the divergent effects of lower commodity prices on EM countries, highlighting switches from select Russian and SA credits into Turkey, India and Indonesia