BC-Emerging Markets Weekly

EMERGING MARKETS RESEARCH
26 January 2012
THE EMERGING MARKETS WEEKLY What happens at the crossroads?

The intensity of the month-old global risk rally raises questions not only about its sustainability, but also how EM central banks are likely to react to relative currency gains, based on growth, inflation, balance sheet and historical considerations. We expect few central banks to aggressively fade, let alone reverse, their currencies recent outperformance, which is still modest versus the Q4 11 underperformance.
EM Views on a Page EM Dashboard EM FX Views on a Page EM Credit Portfolio EM Local Bond Portfolio Data Review & Preview FX Forecasts and Forwards Official Interest Rates What we like Credit Rates FX Long Argentina USD Discount SGD 1y forward 3s10s IRS steepener Long SGD vs. a USD-EUR basket
2 19 20 22 23 24 31 32
Macro Outlooks
Emerging Asia: Selective and calibrated easing 8 Growth is starting to bottom out in EM Asia, as shown in Koreas Q4 GDP report. We expect momentum to improve in Q1, supported by a resurgence in exports. Some EM Asia central banks continue to ease monetary policy, using calibrated approaches to support economic growth. EEMEA: Rate decisions amid growth concerns 10 After two years of consistent performance, EEMEA growth is beginning to decelerate. It will likely ease further this year on the back of poor euro area growth. In Russia, growth concerns and modest inflation justify easing, but we expect the CBR to be cautious in the lead-up to presidential elections, and to remain on hold. In other rate decisions this week, we expect the Czech Republic to keep policy rates on hold, Romania to continue cutting rates and Egypt to raise rates. Latin America: Trading places 12 Mapping trade flows is critical to understanding spillovers from the global economy to Latin America. China has become a key trading partner for LatAm countries, especially Brazil and Chile. The cost of this trend, especially for Brazil, is that rising commodity exports, along with renewed USD weakness, could spur protectionism.
Weekly EM Asset Performance

RUB/USD TRY/USD MXN/USD ZAR/USD KRW/USD BRL/USD CLP/USD INR/USD TWD/USD 0.3% 0.2% 0.9% 0.8% EM FX 1.4% 1.9% 1.9% 1.5% 3.6%
Strategy Focus
Indonesia: More room to run 14 We have a constructive view on Indonesia. Inclusion of the countrys sovereign bonds in global bond indexes is likely to generate USD200-400mn of buying by passive investors who need to match their benchmark. Furthermore, active investors are likely to be buyers because Indonesia trades 151bp wide of the Barclays Capital Global Aggregate index. Turkey: Another adjustment in FX policy 17 The Central Bank of Turkey seems to be signaling considerable comfort with the lira, having cancelled the daily FX auctions. Although the global risk environment is supportive of Turkish assets, we argue for being cautious on lira and we reiterate our RV trade to selling lira versus the rand.
Pol 5yr IRS EM Rates India 2yr IRS Kor 2yr IRS CZK 5yr IRS CLP 2yr IRS SA 2yr IRS Indo 5yr Gov Mex TIIE 5yr -14 bp Hun 5yr IRS -16 bp Braz Jan 14 -19 bp Indo 5yr CDS Mex 5yr CDS Phils 5yr Braz 5yr CDS SA 5yr CDS Rus 5yr CDS Turk 5yr Hun 5yr CDS Arg 5yr CDS Veni 5yr CDS EM Credit
6 bp 5 bp 3 bp -1 bp -3 bp -5 bp -5 bp
0 bp -1 bp -4 bp -5 bp -7 bp -12 bp -18 bp
-40 bp -43 bp -53 bp 4.6% 4.3% 2.6% 2.2% 2.0% 1.7% 1.4% 1.0% 0.4% EM Equity
Russia Turkey ISE Sensex Kospi Bovespa FTSE JSE JSE All Shanghai S&P Bolsa -1.1%
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 33
Note: EM Assets Performance charts as of 26 January 2012. Source: Bloomberg, Barclays Capital
Barclays Capital | The Emerging Markets Weekly
EM VIEWS ON A PAGE
What happened Markets Risky assets continued to rally this week, buoyed by an implicit loosening in US monetary policy and solid global economic data. EM and G10 commodity currencies are having a strong week with the HUF, PLN, MYR, RUB and NOK outperforming. In equities, EM bourses are outperforming developed market peers. Solid Asian economic activity data suggest the region is lifting out of a mid-cycle slowdown. Singapores December output rose a stronger-than-expected 7.8% m/m (consensus: 2.2%). In EMEA, Russia industrial production growth came in slightly weaker than expected. In developed economies, European survey data (ie, flash PMIs, German IFO) surprised to the upside. In Asia, the Reserve Bank of India left its policy rate unchanged but cut the cash reserve ratio by 50bp to 5.50%, in a surprise to markets. The Bank of Thailand lowered its policy rate by 25bp to 3.0%, in line with expectations. In EMEA, the Bank of Israel delivered a counter-consensus 25bp policy rate cut to 2.50% that was consistent with our forecast. Meanwhile, the National Bank of Hungary and the Central Bank of Turkey left their policy rates unchanged at 7.0% and 5.75%, respectively. The continuing rally in risky assets suggests that bad news related to the Greek PSI issues continues to be priced out. However, discussions remain ongoing, with no near-term conclusion seemingly in sight. Indeed, recent comments from the IIF, IMF and the EU suggest that a deal may be difficult to reach ahead of next weeks EU summit.
Global data
Monetary policy
Euro watch
What we think EM assets We think policymakers, particularly in Asia, will re-focus this year on still-sticky inflation, with disinflationary FX appreciation potentially allowing for rate cuts, particularly in EMEA and LatAm. If risk appetite continues to rebound, non-Japan Asian currencies are likely to continue underperforming high-yielding EM currencies with strong fundamentals and less interventionist central banks, as well as the AUD and NZD.
What we like Asset class Trade FX Long SGD vs. a USD-EUR basket Rationale A stronger-than-expected rise in Singapore's December industrial output, the rise in CPI inflation to 5.7% y/y and a likely rebound in GDP growth in Q1 12 will see the MAS favouring slow SGD NEER appreciation rather than a more dovish exchange rate policy, in our view. We estimate that the SGD NEER is currently trading 0.6% below the midpoint of the policy band. Improving risk sentiment, driven by stabilisation in economic data as well as decreased systemic risk in money markets following the European LTRO operation should maintain the steepening bias in the SGD IRS curve near term. With the FOMC expecting exceptionally low levels for the federal funds rate at least through late 2014, this is likely to result in the belly of the curve being favoured in dollar-linked curves like the SGD and HKD. We continue to recommend a SGD 1y forward 3s10s IRS steepener. The forward steepener has a positive roll down of 10bp/annum. While we acknowledge that medium-term fundamentals are deteriorating, FX depreciation pressures have been reduced due to stricter authorities control and an increase in local interest rates. External bonds were particularly penalized after the election, amid concerns of internal peso outflows. We have been recommending the short-end of the dollar curve, but as the curve has steepened, we now highlight long-end bonds, particularly the USD discount.
Rates SGD 1y forward 3s10s IRS steepener
Credit Long Argentina USD Discount
Figure 1: Global equity market fund positioning, endNovember 2011

3% 2% 1% 0% -1% -2% -3% -4% -5%
Cash Tu rk ey Indi a Th ai la n Hung d a Indon ry Phi li p esi a pi ne s Mex ic o Cze c h R ep Moro . cc o Sout h Af r ica Chi le Pol a Colo n d mbi a R uss ia Bra zi l Chi n Mal a a ysia Kore Ta i w a an
Figure 2: Net foreign equity and bond inflows, based on EPFR fund flow data (1-18 January 2012, USD bn)
4 Equity inflows 3 2 Bond inflows
Overweight relative to MSCI EM benchmark index
Underweight relative to MSCI EM benchmark index
1 0 -1 EM EM Asia Latam EMEA

Source: EPFR, Barclays Capital
Source: EPFR, Barclays Capital
26 January 2012
EMERGING MARKETS OUTLOOK
What happens at the crossroads?

Olivier Desbarres +65 6308 2073 olivier.desbarres@barcap.com Nick Verdi +65 6308 3093 nick.verdi@barcap.com
The intensity of the month-old global risk rally raises questions about its sustainability but also how EM central banks are likely to react to relative currency gains, based on growth, inflation, balance sheet and historical considerations. We expect few central banks to aggressively fade, let alone reverse, their currencies recent outperformance, which is still modest versus the Q4 11 underperformance. We expect them this year to refocus on still sticky inflation with Central European and Turkish central banks likely to welcome FX appreciation to the extent it allows greater room for rate cuts. But we do not expect a revolution in NJA exchange rate policy, merely a modest evolution in policymakers priorities, and central banks in Peru and South Africa are likely to continue their FX purchases. We also think the risk is mounting of central banks in NJA, Russia, Brazil and Chile fading further sustained and/or rapid FX appreciation. Should risk appetite sour, we still see Central European currencies and the INR as the weakest links. We maintain our long SGD and RUB vs EUR-USD basket trade recommendations. FX appreciation is also likely to support a further compression of risk premia in local rates markets, and we highlight select receivers at the short end of curves in EEMEA and 1y TIIE in Mexico. EM sovereign credit has participated in the rally, but heavy supply has likely held back performance. As supply pressures get digested and core rates remain low for longer, we think cash credit has further room to perform.
Surge in risk appetite leading to EM currency outperformance
The surge in global risk appetite, driven by a growing expectation of a soft landing in global growth, the ECBs provision of liquidity via the LTRO and the Feds commitment to loose monetary policy, has seen significant foreign equity flows, particularly into Asia, and the outperformance of mostly high-yielding G10 commodity and EM currencies. But markets are potentially reaching an important juncture, with the brisk pace of this month-old rally pointing to a possible slowing or even pullback in risk appetite. Eurozone event risk in Q1 remains elevated. While the LTRO has undoubtedly eased bank funding stress, its impact on sovereign solvency has been mixed. The lack of agreement on Greek PSI leaves the door open to a more extreme credit event, contagion to other peripheral countries (eg, Portugal) and the need for far-reaching eurozone/IMF financial support (please see A Greek decision tree, 26 January 2012). Furthermore, while the tail risk of a hard landing in global growth has eased, growth this year is likely to be 0.4pp lower than in 2011, accentuating the challenge of fiscal consolidation. We take some comfort from investors showing a degree of discrimination. The rally has been more then just short-covering in favour of high-beta EM currencies, with (barring a few exceptions) investors buying currencies (PLN, MXN, INR) in which they had the greatest degree of conviction back in December (please see Global Macro Daily, 26 January 2012). Moreover, there is further headroom for foreign inflows into EMEA equities and non-Japan Asia (NJA), in our view. This suggests that some of our directional trades offer insulation against temporary swings in risk appetite and room for relative value trades based on fundamentals rather than positioning per se.
Tail risks from eurozone and sluggish global growth
More than just about high beta, high carry
26 January 2012
What now for EM central banks?
This in turn raises the question of whether EM currencies will be allowed to outperform, which is in turn dependent (among other things) on the relative outlook for growth and inflation, the economys relative openness, competitiveness and reliance on external debt and of course the central banks propensity to guide its currency. We expect few central banks to aggressively fade let alone reverse their currencies recent outperformance. First, in NEER terms, the rallies have been modest compared to the underperformance in Q4 11 and NJA currencies in particular remain cheap (Figure 1). More fundamentally, we think policy-makers will re-focus this year on still sticky inflation and allow some disinflationary FX appreciation (see FX Focus: Evolution, not revolution, in Asian reaction functions, 26 January 2012). We think Central European and Turkish policy-makers welcome currency appreciation as it reduces households and corporates sizeable external debt-servicing costs and gives central banks greater room to cut policy rates. In LatAm, we expect Bank Mexico to remains hands-off. But we do not expect a revolution in NJA exchange rate policy, merely a modest evolution in policymakers priorities. We expect central banks in Peru and South Africa to continue their FX purchases. We also think the risk is mounting of central banks in NJA, Russia, Brazil and Chile fading further sustained and/or rapid FX appreciation and keeping their currencies broadly aligned with regional peers. Figure 2 below shows the asymmetry of FX intervention, proxied by the change in central bank FX reserves for NJA (adjusted for valuation effects), and actual FX intervention data for LatAm and EMEA. The first eight months of 2011 (risk-on) were characterised by large FX inflows into EM but also large increases in central bank FX reserves, particularly in NJA, and only modest currency appreciation (Figure 3). In contrast, central banks FX intervention in September-December (risk-off) was far more modest, and they ultimately allowed their currencies to weaken (Figure 3). Assuming this global risk appetite rebound extends nearterm, NJA currencies are likely to continue underperforming high-yielding EM currencies with strong fundamentals and less interventionist central banks, and the AUD and NZD. Should risk appetite sour, we still see Central European currencies as the weakest link given their close ties with the eurozone. NJA central banks would likely allow modest currency weakening should renewed concerns about global growth weigh on FX inflows into Asia, but
Central banks unlikely to reverse recent EM currency outperformance, given sticky inflation and opportunity to cut rates
But wholesale change in FX policy unlikely
Central bank FX intervention was asymmetric last year
In risk-off environment, Central European currencies and the INR still the most vulnerable
Figure 1: Behavioural Effective Exchange Rate (BEER) deviation from fair value
25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25%
HKD
USD
ILS
TWD
MXN
MYR
KRW
AUD
CAD
NZD
SGD
ZAR
EUR
IDR
INR
PLN
HUF
CHF
NOK
CNY
TRY
THB
Source: Barclays Capital
26 January 2012
RUB
GBP
PHP
CZK
BRL
4
JPY
SEK
they have the tools and the willingness to support their currencies. The INR remains the most vulnerable, in our view, given Indias high twin deficits and still-high inflation and interest rates. We now turn to individual countries and currencies in EEMEA and LatAm. For both regions, we broadly rank countries in increasing order of FX intervention risk. For a more detailed discussion about Asian central bank FX policy reaction functions, please refer to FX Focus: Evolution, not revolution, in Asian reaction functions, 26 January 2012. Poland and Hungary: We think policymakers, particularly in Hungary, would welcome further currency appreciation to support households with FX-linked liabilities and help attract foreign inflows into local-currency government bonds. National Bank of Poland (NBP) officials have also indicated they see room for further EUR/PLN downside, and our model has EUR/PLN fair value at around 4.00-4.10, about 5% below current levels. We think the National Bank of Hungary (NBH) views the current EUR/HUF level as still a little higher than fair value. We thus think the NBP and NBH would meet, say, a further 10% appreciation versus the USD with rate cuts rather than FX intervention. Turkey: We think the CBT is unlikely to buy dollars aggressively soon. We think the TRY trade weighted exchange rate is now near levels which the central bank (CBT) described a couple months ago as desirable and fair. We think the CBT would welcome further modest strength as it would enable it to halt current dollar-selling auctions. At a later stage, it would help ease back on lira liquidity (via Open Market Operations or Reserve Requirement Ratio cuts), start gradually cutting rates to support growth. and/or build FX reserves again. We think the CBT would probably wait for a safety window of appreciation before intervening with the purpose of weakening the lira. Russia: The Central Bank of Russia (CBR) has historically been the most interventionist of the EEMEA central banks, in our view. We think it would be inclined to fade any further rapid RUB appreciation or volatility to maintain export competitiveness (the RUB is rich on our BEER model) and rebuild FX reserves. But the CBRs bias has shifted somewhat towards a more laisser-faire FX management to better absorb the strains associated with global shocks and re-focus on the longer-term goal of managing still
Figure 2: Estimated size of central bank FX intervention (adjusted for valuation effects, % of GDP)*
10% 8% 6% 4% 2% 0% -2% -4% Mexico Poland Turkey S. Africa India Colombi Peru Russia Korea Israel Brazil Indonesi Chile Thailand Taiwan Philippin China Singapor Malaysia Jan-Aug 2011 Sep-Dec 2011
Figure 3: Change in Nominal Effective Exchange Rates (NEERs)

10% 5% 0% -5% -10% -15% Mexico Poland Turkey S. Africa India Colombi Peru Russia Korea Israel Brazil Indonesi Chile Thailand Taiwan Philippin China Singapor Malaysia
Jan-Aug 2011 Sept-Dec 2011
Note: Change in central bank FX reserves for NJA and FX intervention data for LatAm and EMEA; positive/negative sign refers to increase/decrease in FX reserves. Source: Barclays Capital
26 January 2012
quite high inflation. South Africa: We think the risk of the SARB stepping up dollar purchases is low. We estimate that the ZAR is still undervalued by 2%, 13% and 15%, respectively, in real effective exchange rate (REER) terms, versus our BEER model and in purchasing power parity (PPP) terms versus USD. Accounting for revaluation effects, the SARBs dollar purchases have slowed in recent months from a monthly average of $300-500mn last year. Over and above the significant opportunity cost of buying dollars, as result of the wide interest rate differential, the SARB tends to stay out the FX market during periods of risk aversion. Also, given that domestic inflation is trending higher and portfolio inflows have been modest, we think the SARB will refrain from picking up the pace of dollar buying; we note that the SARB governor was a tad more hawkish at last weeks MPC conference. We think the SARB would slow intervention in the event of strong FDI flows, a plausible scenario given the currently very negative ZAR basis spread. Mexico. The central bank is probably the most flexible in the region. Last Fridays monetary policy statement signalled some comfort regarding the inflation outlook given the fall in USD/MXN. We do not see relevant risks of intervention in USD/MXN and see value in being short CHF/MXN given the still supportive risk-taking environment. Brazil: We think the risk of central bank FX intervention is mounting, in our view. So far, verbal intervention has dominated but market participants have become more sensitive to intervention risks given that USD/BRL is only 3.5% away from the level (1.70) at which the central bank started its intervention programme. Chile: Intervention risks are also likely with USD/CLP below 490 and only 0.7% away from the 465 level at which the central bank launched an intervention programme last year in the face of mounting pressure from exporters. Colombia. There has not been much guidance from policy-makers; the government has historically expressed concern when USD/COP has traded below 1820 and the central bank started buying dollars when USD/COP hit 1780 in September 2010. Peru: The central bank has continued to buy USD in recent weeks to cap the pace of currency appreciation even if it has no specific currency target in mind.
Some comfort not only for FX, but also for rates and credit
A supportive environment for carry trades and receivers
The indication from the Fed this week that US rates are likely to remain very accommodative for an extended period (and even longer than previously communicated) has undoubtedly been supportive of EM local rates. Combined with the general appreciation trend in EM FX and the more stable liquidity environment fuelled by receding bank funding pressures, this is likely to encourage carry trades in EM rates. While this backdrop should be generally supportive for receivers, the implications for curve shapes are more mixed, as bond investors have to balance the risk of a liquidity-driven bond curve bull flattening and a reflation view-led bond curve steepening. The lower-for-much-longer rates environment should also be supportive of EM credit, as concerns about a back-up in UST yields eating into total returns have likely been alleviated further. EM credit has not been a bystander in the year-to-date rally, but the heavy supply pipeline has held back the performance of cash credit in particular. As supply is being digested and the supply overhang caused by unfavourable issuance conditions in H2 11 clears, we think EM credit has some further room to perform.
EM credit held back by issuance, but conditions favourable for cash credit in particular
26 January 2012
What we like
Remain long the SGD and RUB vs EUR/USD baskets
FX: We maintain our recommendation of being long the SGD versus a weighted USD-EUR basket, initiated on 6 December 2011 and currently up 2.9%. The rise in Singapore's core CPI inflation to 2.6% y/y in December -- a two-year high -- and likely rebound in GDP growth in Q1 12 will see the MAS favouring slow SGD NEER appreciation rather than a more dovish exchange rate policy, in our view. We estimate that the SGD NEER is trading 0.6% below the midpoint of the MAS policy band (Singapore: Core inflation up, even as headline moderates slightly, 25 January 2012). In EEMEA FX, our favoured directional long is in the ruble against both the dollar and the euro. This is supported by high carry (especially on local bonds) and what we think are asymmetric risks to the upside on oil prices. We have been stopped out of our long EUR/PLN recommendation, and it is unclear what would cause the zloty to underperform again in the near term; this feeds into our decision to turn market weight (from underweight) Poland in our local bond model portfolio. Rates: We reiterate our recommendation to receive short-end rates in Mexico. Our 1y TIIE receiver has performed well, but we see further room for rates to decline, as the market is not yet pricing in the cuts we envision. The Fed's commitment for rates to be on hold until 2014 (effectively an additional monetary easing, as it was not expected by the market), together with the ongoing deceleration in Mexico's activity, should lead Banxico to cut policy rates 25bp in March and 25bp in April, in our view. In EEMEA, short-end rates are also likely to be the largest beneficiaries, as they enjoy reduced funding costs and needs for policy hikes as FX recovers. We recommend HUF 3m T-bills and 5y TRY bonds FX hedged and like receivers of PLN 1y1y IRS and ZAR 5y IRS. For Asia rates, the most clear-cut trade at this juncture is in USD-linked curves, in our view, where we expect the belly to get received most on favourable carry and lower volatility. We hold on to our SGD IRS 1y forward 3s10s steepener, in line with this view (entry 120bs, current 128bp, target 140bp). It has a positive roll-down of 10bp/annum. Credit: The supportive environment for cash credit should cause the basis in EM to widen (ie, cash outperforming CDS) and, hence, support our recommendation to buy the Turkey 5y basis (5y CDS, $16s/$17s). We think the trade has further room to perform, as after the new issue and amid improving liquidity conditions in the local banking sector, there should be some technical support for Turkey cash credit in particular. Among the outright long credit opportunities, we continue to consider Qatar long-end valuations as attractive and highlight Argentinas long end. Argentina has continued to outperform. While we acknowledge that the medium-term fundamentals are deteriorating, the FX depreciation pressures have been reduced significantly due to the authorities stricter control and an increase in the local interest rates (the Badlar rate trades at 15.18% versus 11% preelection). The external bonds were particularly penalized after the election, amid concerns over internal peso outflows. However, as valuations and the technical position had become very supportive, Argentina credit rallied. We have been recommending the short end of the dollar curve (Boden 15s), but as the curve has steepened, we now highlight the long-end bonds, particularly the USD Discount, as our instruments of choice at this stage.
Receive Mexico 1y TIIE, shortend rates in EEMEA (FX-hedged)
Turkey negative basis to compress further, Qatar longend and Argentina USD Discounts as outright longs
26 January 2012
MACRO OUTLOOK: EMERGING ASIA
Selective and calibrated easing

Rahul Bajoria +65 6308 3511 rahul.bajoria@barcap.com Wai Ho Leong +65 6308 3292 waiho.leong@barcap.com
Growth is starting to bottom out in EM Asia, as shown in Koreas Q4 GDP report. We expect momentum to improve in Q1, supported by resurgence in exports. Some EM Asia central banks continue to ease monetary policy, using calibrated approaches to support economic growth.
Korea: GDP growth likely bottomed out in Q4

We see more signs that growth in EM Asia is bottoming out. The advance estimate showed that Koreas GDP expanded 0.4% q/q sa in Q4, slightly slower than Q3s 0.5% increase. For 2011 as a whole, GDP growth averaged 3.6%, slightly less than expected (BarCap: 3.7%, MOSF/BoK: 3.8%). Despite the weaker-than-expected print, we are not pessimistic, for two reasons. First, there could be further upward revisions (up to 0.1% q/q) to the advance estimate next month, given that December was generally a much stronger month for activity. Second, Q4 was likely the bottom for GDP in this mid-cycle slowdown. Looking ahead, we expect GDP to reaccelerate to 1% in Q1 12, driven by resurgent exports. The recent stabilisation in US activity indicators, supported by resilient Chinese consumer demand, will be a key factor of support. For 2012, we continue to project growth will slow only moderately, to 3.5%. Given that there are no signs of distress in Koreas labour market, and with growth likely to rebound in Q1, we continue to believe the Bank of Korea will keep the policy rate unchanged through Q1 12. The focus of policy is likely to remain on the cost of living ahead of the National Assembly elections on 11 April. In our view, the central bank is likely to preserve its limited policy buffer unless 2012 growth is projected to fall below 3% (BoK: 3.7%, BarCap: 3.5%), job losses mount and inflation expectations subside.
Growth most likely bottomed out in Q4 11 in Korea
No sign of stress on domestic front, we expect BoK to keep rates on hold
India: Calibrated move towards supporting growth

RBI surprised with a CRR cut of 50bp
Central banks are employing calibrated approaches to monetary easing, where required. The Reserve Bank of India (RBI) left its policy rates unchanged, in line with expectations, but cut the cash reserve ratio 50bp to 5.5%, surprising us and the market. The RBI based its
Figure 1: Korea: We look for a pick-up in Q1 GDP

100 80 60 40 20 0 -20 -40 -60 -80 -100 Dec-07 80 70 60 50 40 30 20 Dec-11
Figure 2: Korea: Resilient services demand

10 8 6 4 2 0 -2 -4 -6 Q407 Q208 Q408 Q209 Q409 Q210 Q410 Q211 Q411 Mfg Construction Servicecs Others (incl Net Taxes) pp contribution to GDP (% y/y)
Dec-08
Dec-09
Dec-10
KR: Exports (% 3m/3m saar) US ISM New Orders (LHS)

Source: CEIC, Barclays Capital
26 January 2012
move on three factors. First, it flagged rising downside risks to growth, as reflected in its reduction of its FY 11-12 GDP forecast to 7.0%, from 7.6%. At the same time, WPI inflation is moving in line with the central banks expectations, and is likely to hit the RBIs projected 7.0% y/y by March 2012. Finally, with liquidity conditions tighter than the central bank prefers, the RBI felt that the cut in the CRR would help correct the ongoing structural imbalances in banking sector liquidity.
Policy gearing shifting towards supporting growth, risks of a March rate cut cannot be discounted
We continue to see risks of a 25bp repo rate cut at the March mid-quarter policy review, while maintaining our base case that the rate-cutting cycle will start in April. Even with the CRR cut, the RBI has said that non-food manufacturing inflation remains elevated and has eased sufficiently to justify policy rate reductions. Upside risks to inflation also stem from a weaker currency and elevated global commodity prices. On growth, RBI is worried about the slowdown in capital spending. Pressure from large government borrowing is compounding the problem, with the RBI talking openly about the risks of private investment being crowded by the large pipeline of government bond auctions. The RBI expects a modest rebound in growth in FY12-13, along with marginally lower inflation, which we again sense is something that can broadly be achieved. We maintain our view of a slow but calibrated reduction in policy rates in FY12-13. However, given the ongoing pressures on liquidity, another 50bp cut in the CRR in March cannot be ruled out at this stage.
Thailand: Policy accommodation appears to be over

Bank of Thailand reduced policy rate by 25bps, signal end of rate cuts for now
The Bank of Thailand reduced its policy rate another 25bp to 3.0%. However, the central bank clearly indicated the move is temporary and designed to accommodate flood reconstruction efforts, and should not be seen as putting rates on a downward trend. Indeed, in line with improving data, the sharp drop in business sentiment and consumer confidence is starting to reverse and is showing nascent signs of improvement. This, along with government spending on flood reconstruction (USD11bn, expected to start from endFebruary, once the budget is approved), should shore up growth from Q1. We do not expect the BoT to reduce its policy rate further. For now, our base case is that the BoT will keep rates on hold until end-Q3 12 and may start withdrawing monetary stimulus at that time as the economy returns "normal" (neutral output gap). However, given the fragile global growth backdrop and risks that reconstruction efforts will fall behind schedule, we think the possibility that rates will remain on hold for longer cannot be discounted.
Figure 3: India: Core prices remain sticky

9 IN: "Core" inflation (%, y/y) "Core" inflation (%, y/y, 3mma)
Figure 4: Thailand: Early signs of improvement

86 84 82 80 78
76 74
72 70 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11
-3 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11

TH: Consumer confidence (point estimate)

26 January 2012
MACRO OUTLOOK: EMERGING EUROPE, MIDDLE EAST AND AFRICA
Rate decisions amid growth concerns

Vladimir Pantyushin +7 495 786 8450 vladimir.pantyushin@barcap.com Daniel Hewitt +44 (0)20 3134 3522 daniel.hewitt@barcap.com EEMEA growth slows, with emphasis shifting towards domestic demand, particularly consumption
After two years of consistent performance, EEMEA growth is beginning to decelerate. It will likely ease further this year on the back of poor euro area growth. In Russia, growth concerns and modest inflation justify easing, but we expect the CBR to be cautious in the lead-up to presidential elections, and to remain on hold. In other rate decisions this week, we expect the Czech Republic to remain on hold, Romania to continue cutting and Egypt to raise rates. When Q4 11 growth is released, we expect to see weaker figures across the EEMEA region (Figure 1). The global slowdown, particularly the lacklustre euro area performance, has depressed EEMEA exports, leading to a lower pace of growth and greater reliance on domestic demand. In some regions, buoyant retail sales performance will provide a cushion for instance in the CIS region, with double-digit growth in Ukraine and Kazakhstan. As the consumer sector comes to the forefront, improvements in inflation in several countries (again the CIS region, but also Israel, Bulgaria, the Baltics, Romania, and Serbia) will provide additional support. Since fiscal balances are already stretched, we expect support to the real economy will more likely come from rate cuts, particularly in the above group of countries. Poland, Lithuania and Ukraine will be among the first to report Q4 GDP growth. In Poland, a positive surprise is possible, despite softening PMIs, as hard data remained strong in Q4 11. However in Q1 12, we expect growth to slow gradually. In Lithuania, after the very strong growth in 2011, likely close to 6% y/y, we expect the economy to slow to 2.5% in 2012 still a comparatively robust number in the regional context, however. For Ukraine, our forecasts point to a deceleration of growth to 4.3% y/y in Q4 11 from 6.6% in Q3. For Russia, the Q4 11 GDP growth release will have an important impact on the rate decision later this week. We predict growth decelerated to 4.2% y/y from 4.8% in Q3 11. Meanwhile, consumer inflation has declined sharply, from above 9% y/y in H1 11 to 6.1% in December and we forecast 4.3% in January (Figure 2). While slower inflation justifies further easing, we believe the CBR will wait until after the 4 March presidential elections before resuming rate cuts. Figure 2: Inflation trend justifies further easing in Russia
16%
First Q4 growth figures from Poland, Lithuania and Ukraine
Russian growth/inflation mix justifies further easing, which we expect to resume at end-March
Figure 1: Growth decelerating across EEMEA

12 10 8 6 4 2 0 Hungary Turkey Poland Romania S. Africa Russia Czech R. Israel
Real GDP (% y/y)

Q1-11 Q2-11 Q3-11 Q4-11F
14% 12% 10% 8% 6% 4% Jan-08
Jan-09
Jan-10 Core CPI (% y/y)
Jan-11 Refinancing rate
CPI (% y/y)
Source: National sources, Haver Analytics, Barclays Capital
Source: Rosstat, CBR, Haver Analytics, Barclays Capital
26 January 2012
10
Czech: CNB likely stays on hold throughout 2012
In the Czech Republic, we expect the CNB to maintain its policy rate at 0.75% for the 18th consecutive month. Inflation at 2.4% y/y remains near the centre of the 1-3% inflation target (excluding administered prices, inflation is only 1.5% y/y). Domestic demand is weak and not a factor pushing prices up. On the other side, Czech entered into recession in Q3 11 and the decline probably accelerated in Q4. However, the CNB has pointed out that cutting the rate is not likely to increase bank lending, which is constrained by low domestic demand and limits on bank financing. Governor Singer recently stated that he expects the CNB policy rate to remain unchanged throughout 2012; previously, the CNB had forecast rate hikes beginning Q4 12. The Romanian NBR meets next week amid continuing street demonstrations. We expect it to reduce rates by 25bp, to 5.5%. This will be the third consecutive cut and we expect two more similar cuts during the next two meetings, bringing the rate to 5.0%. Inflation decelerated to 3.1% y/y in December (from 4.8% at mid-2011), near the middle of the 24% target range and is likely to ease further due to favourable base in H1 12. Meanwhile, the political situation in Romania is tense as daily demonstrations continue, asking for the resignation of the President and the government and new elections. With parliamentary elections already scheduled for November this year, we do not think the government will resign. But clearly the continuing demonstrations are causing nervousness in Romanias financial markets. In Egypt, the political transition continues to weigh heavily on economic activity: there is significant retrenchment in tourism, while the manufacturing and construction sectors have scaled down investment. Yet, with inflation at elevated levels (at 9.5% y/y in December from 9.1% y/y in November), and risks of additional inflationary pressures remaining high, we believe the CBE will raise rates by another 100bp. An additional factor supporting a hike is the CBE's attempt to stem increasing currency pressures reflected in the continued rapid decline in FX reserves. In Turkey, the CBT kept rates on hold as expected. The repo rate is no longer the primary liquidity window for the CBT. Instead, the lending rate, at about 12%, is being relied on, as well as other means of regulating liquidity. While inflation at 10.5% y/y in 2011 is well above the 5% target (for 2012), the CBT expects inflation to decline by the end of 2012. In Israel, the central bank cut rates by 25bp to 2.5%, the third such cut in the past five months, continuing its intermittent cycle. Rate cuts have been more rapid than anticipated as inflation has decelerated to 2.2% y/y in December from above 4% y/y in mid-2011. Housing inflation has eased, and domestic demand appears to be weakening as the economy suffers from the global slowdown. We expect an additional 25bp rate cut in this cycle. Further cuts depend on the severity of the slowdown in Europe and spill over into Israel. In Hungary, the NBH decided to keep its policy rate on hold at 7.0% following two consecutive 50bp rate increases. One reason was the recent currency appreciation, which has lowered financial risk. In addition, following last month's split decision, the majority of MPC members apparently view the policy rate as being sufficiently high to keep inflation contained. Hungarian markets have rebounded on optimism that the government will be able to start negotiations with the IMF/EU on a support programme. Meanwhile, the EU demands that the government changes several laws associated with the new constitution. In addition, Hungary has been declared in violation of the Excessive Deficit Procedure. Hungary could be subject to extensive financial penalties unless it brings its laws and fiscal policies in line with EU guidelines. We think the government will eventually come to terms with the IMF/EU, but only perhaps after additional market sell-offs put pressure on the government to act.
11
Romania: NBR likely to hold amid ongoing street demonstrations
We expect Egypt to raise rates further to stem currency pressures
This week Israel cut while Turkey remained on hold
Hungary: NBH on hold as currency appreciates reflecting renewed optimism on IMF/EU programme prospects and improved global risk appetite
26 January 2012
MACRO OUTLOOK: LATIN AMERICA
Trading places
Marcelo Salomon +1 212 412 5717 marcelo.salomon@barcap.com
Mapping trade flows is critical to understanding spillovers from the global economy to Latin America. China has become a key trading partner for LatAm countries, especially Brazil and Chile. The cost of this trend, especially for Brazil, is that rising commodity exports, along with renewed USD weakness, could spur protectionism.
Understanding the patterns of trade helps map the effect of spillovers from the developed world
Trade is the main channel via which changes in the outlook for global growth affect activity in Latin America. Of the three major sources of uncertainty in H2 11 fear of a US double dip, fear of a hard landing in China, and the European debt crisis the first two have abated while the third remains at the front of market participants minds. Yet even in Europe, soft activity indicators (PMI releases) are beginning to show that growth is not in free fall and could start showing some signs of dynamism, especially in the northern part of the region. Mapping the patterns of trade is critical to an understanding of the effect of spillover from the developed world to Latin America. Figure 1 plots the flow of exports from Latin Americas four largest inflation targeters (Brazil, Mexico, Chile and Colombia) to the EU, US and China. Mexico remains closely tied to the US, which takes 75% of its exports; however, some diversification has occurred: this share has dropped from 81% on the eve of the 2008 crisis (August 2008), with China and other destinations benefiting from this trend. Colombia also has strong ties to the US (42%) but is heavily dependent on commodities (especially oil), which dampens the importance of geographical ties, though not of global growth. Exports from Chile and Brazil are very similar in terms of destination. Exports to the US and EU are roughly of the same order of magnitude (shares of 10% and c.20%, respectively). Chiles dependence on China is greater than Brazils, but this gap is closing very fast. Compared with the pre-crisis period, the share of Brazilian exports to China has nearly doubled, to 16% from 9%. Growth in the share of Chiles exports to China was strong but slightly more modest (up 52%). With Chinese growth remaining vibrant in the aftermath of Figure 1: Latam export destination (% total exports 12-month rolling in August 2011)
80% 70% 60% 50% 40% 30% 21% 20% 10% 0% EU US Chi Oth EU US Chi Oth EU US Chi Oth EU US Chi Oth 16% 10% 19% 10% 22% 16% 4% 6% 2% 53% 48% 42% 38% 75%
Mexico is closely tied to the US, though some diversification into China has been taking place
Chile and Brazil have similar exposures to the US, EU and China
18%
Brazil
Source: Haver, Barclays Capital
Chile
Colombia
Mexico
26 January 2012
12
but Chiles large exposure to trade makes it more vulnerable than Brazil
the US housing crisis and still showing signs of only a soft landing in 2012, it seems very likely that the importance of this market will continue to rise. But the main economic difference between Chile and Brazil lies in their relative openness. Chile is a small open economy (trade accounts for 65% of GDP) while Brazil is a large closed economy (trade is 20% of GDP). Hence, even though both are affected by global economic cycles, the impact on Chiles real growth is larger than on that of Brazil. China is playing a critical role, both directly and indirectly, in demanding more exports and sustaining large hard currency flows into countries such as Brazil and Chile. In 2011, Chinas imports of Brazilian goods rose by more than 35% (12-month rolling data), while its imports of Chilean goods rose by a little less than 15% (based on our forecast for the year, as we have trade data only through November for Chile). Figure 2 shows the seasonally adjusted monthly level of Chinese imports from our inflation targeters sample in Latin America. On an annualized basis, China is already buying USD 67bn of Brazilian goods, which should amount to nearly 24% of total Brazilian exports by the end of the year (we forecast total Brazilian exports at USD 280bn) and making China one of the Brazils key trading partners. Relative to changes in the terms of trade (Figure 3), the increase in Chinese demand becomes even more important. In the first three quarters of 2011, terms of trade rose by 2.7% in Brazil and contracted by 3.5% in Chile. Hence, prices, which have played a very important role for LatAm exporters since 2007, took a backseat in 2011. In our sample, Colombia benefited most from terms of trade last year, with a 12% increase.
China is importing more from the region, especially from Brazil and Chile
The cost of the new trend is a larger share of commodity exports, which has been a concern, especially for Brazil
But this new trend comes at a cost that some policymakers in the region have been trying hard to fend off: a growing share of commodity exports. This has been the case in Colombia and Brazil, whose dependence on commodity exports rose by 17pp and 12pp, respectively, to 69% and 48%, in August 2008-November 2011. (At the other end of the spectrum are Chile and Mexico, whose dependence on commodities fell by 2pp and 3pp, respectively, to 60% and 16%.) Combined with the new wave of currency appreciation in the region, this rise in the commodity share of exports in our view has the potential to spur non-commodity exporting sectors to become even louder in their claims for protection.
Figure 2: Strong Chinese imports (USD mn/month SA)

6,000 5,000 4,000 3,000 2,000 1,000 0 Jan-08 Brazil
Source: Haver, Barclays Capital
Figure 3: despite more modest increases in terms of trade* (Index)

145 135 125 115 105 95 85 75
Apr-09 Chile
Jul-10 Colombia
Oct-11 Mexico
65 Q1:08 Q3:08 Q1:09 Q3:09 Q1:10 Q3:10 Q1:11 Q3:11 Brazil Chile Colombia Mexico
Note: Terms of trade = export prices/import prices. Source: Haver, Barclays Capital
26 January 2012
13
STRATEGY FOCUS: INDONESIA
More room to run

Avanti Save +65 6308 3116 avanti.save@barcap.com Krishna Hegde, CFA +65 6308 2979 krishna.hegde@barcap.com Prakriti Sofat +65 6308 3201 prakriti.sofat@barcap.com
This article is a shortened version of the report published on 20 January 2012. We have a constructive view on Indonesia. Inclusion of the countrys sovereign bonds in global bond indexes is likely to generate USD200-400mn of buying by passive investors who need to match their benchmark. Furthermore, active investors are likely to be buyers because Indonesia trades 151bp wide of the Barclays Capital Global Aggregate index.
Summary of recommended positioning

Our recommendation is to buy the INDON 21s and the INDOIS 18s sukuk bonds. We recommend a neutral stance on INDON 42s and would look to buy INDON 38s as they cheapen against the curve. We think the move in the 5y INDON CDS is somewhat overdone. Long-dated bonds: we recommend a hold on the INDON 42s. For the INDON 38s, we expect the bonds to continue to cheapen against the curve, given it is relatively less liquid. As these bonds cheapen versus the INDON 42s, we would look to add on dips (Figure 3). Following the upgrade, the INDON 42s have experienced a sharper rally than the INDON 38s highlighting investors preference for liquidity. The fair differential for long-end Indonesian bonds versus the Philippines is ~0-10bp, in our view. Long-dated Indonesian bonds have rallied 10-15bp more than Philippines; we view the compression as a fair reflection of the incremental buying that we expect from passive investors. Short-dated bonds and the belly of the curve: We like the front-end bonds (INDON 14s, 15s, 16s and 17s), but they are illiquid and execution can be challenging. In the belly of the Indonesian curve, we prefer to add 10y bonds (INDON 21s). The INDON 21s have not rallied as much as longer-dated bonds, and the 10s30s curve has inverted to -5bp from about 14bp before the upgrade. Among Indonesian quasi-sovereigns, we like Perusahaan Listrik Negaras (PLN) 10y bonds at a spread of more than 130-140bp to the Indonesian sovereign. The PLNIJ 21s are currently indicated 99bp wide of the INDON 21s. Sukuk bonds: Demand for sukuks is driven by the strong liquidity of Islamic banks, the relatively scarce sukuk supply and limited availability of alternative Islamic investment products. Islamic banks also have a preference for higher-quality sukuk paper; therefore, Indonesias upgrade should benefit its sukuk bonds at the margin. We see value in the INDOIS 18s, these bonds are relatively more liquid than other front-end bonds (quoted 12bp wider than the INDON 18s) and we expect demand from Middle Eastern banks to be supportive. CDS: Following the upgrade, Indonesia CDS compressed to 12bp from 20bp versus the Philippines. The basis between the Indonesia 10y bonds and 5y CDS has turned negative (Figure 1). Therefore, we think CDS move may be somewhat overdone.
26 January 2012
14
Figure 1: 5y CDS spread vs 10y Indonesia bonds (bp)

350 300 250 200 150 100 Jun-11 INDON 5y CDS INDON 21s (ASW) Basis 50 40 30 20 10 0 -10 -20 -30 -40 -50 Jul-11 Aug-11 Oct-11 Nov-11 Dec-11
Note: ASW for the bond spread. Source: Barclays Capital
Figure 2: Spread comparison of Indonesia and other EM sovereigns and indices

Ratings Brazil Colombia Hungary Indonesia Mexico Panama Peru Philippines Russia South Africa Turkey Global Aggregate Index Global EM Sovereign Index
OAS 170 200 816 249 190 198 215 218 313 261 407 99 425
Amt outstd (USD bn) 35.1 12.8 21.0 20.3 35.6 7.2 8.3 23.3 29.2 10.8 40.3 37303.5 394.5
Avg life 12.5 14.3 6.9 11.1 16.3 14.3 18.7 13.5 7.9 8.3 11.0 7.6 11.5
Baa2/BBB/BBB Baa3/BBB-/BBBBa1/BB+/BB+ Baa3/BB+/BBBBaa1/BBB/BBB Baa3/BBB-/BBB Baa3/BBB/BBB Ba2/BB/BB+ Baa1/BBB/BBB A3/BBB+/BBB+ Ba2/BB/BB+ AA2/AA3 Ba1/Ba2
How much should Indonesia compress following its upgrade? We believe long-dated Indonesian sovereign bonds for should trade nearly flat to the Philippines. Indonesias 10y bonds have not tightened much since the upgrade, and we think there is still potential for them to compress against Philippines. Index demand to drive spreads for liquid bonds: We believe Indonesias inclusion in the Barclays Global Aggregate Index (Global Agg) will generate USD200-400mn of incremental buying from passive, benchmarked investors. We also expect demand from active investors, given that Indonesia trades (249bp) wide of the Global Agg (98.5bp) and underweighting Indonesia will create a drag of 151bp versus the benchmark.
26 January 2012
15
Figure 3: Indonesia curve before and after the upgrade (spread)

280 bp 270 260 250 240 230 220 210 life 200 0 5 10 15 20 25 30 35 16-Jan-12 20-Jan-12
Outlook for Indonesia credit

In the medium term, we believe supportive labour dynamics and a rising investment-to-GDP ratio suggest that Indonesias potential GDP growth will rise to 7.5-8.0% over the coming decade. Indonesia received annual FDI inflows of more than USD10bn in 2010 and 2011. We believe this trend will continue given: 1) the countrys rising middle income group; 2) its vast commodity resources; and 3) its relatively lower labour costs, compared with Chinas coastal region. The sovereigns fiscal and debt positions are expected to remain much better than higher-rated peers. Also, economic policy management continues to improve. In terms of structural reforms, the creation of the OJK (Financial Services Authority) and recent passage of the Land Acquisition Bill (despite political opposition) underpin the sovereigns positive ratings trajectory. Recent charges of official corruption are concerning and appear to have hurt President Yudhoyonos approval ratings, which continue to fall. These developments could slow the reform agenda in the near term. Towards the latter part of 2012, we believe the political focus will shift towards potential candidates for the presidential election in 2014, as President Yudhoyono is not allowed to run for a third term. Risks: Despite higher FX reserves (December 2011: USD110bn) and prudential measures to deter hot money inflows since the global financial crisis, Indonesias financial system remains vulnerable to risk sentiment given heavy offshore positioning in the local bond and equity markets. The economy is highly leveraged to commodity prices (65% of exports). Its dependence on China has risen directly, through exports, and indirectly, owing Chinas growing influence on global commodity markets and prices. A sharper-than-expected Chinese slowdown would be a risk for Indonesia. We forecast Indonesias economy will expand 6.2% in 2012; however, if there is a global recession, we believe Indonesia's growth will be 4.5% (see Indonesia: Better buffered, but not immune, 21 October 2011).
Incremental demand for Indonesia assets

We believe the upgrade to IG is likely to boost investment inflows from Japan. At the same time central banks have also been diversifying into IndoGBs. We believe positive sentiment towards the IDR and Indonesias local-currency bond market will provide a more constructive backdrop for credit and support spreads in the medium to long term (see Emerging Asia Sovereign Credit: Stirred, not shaken, 8 December 2011 for more details).
26 January 2012 16
STRATEGY FOCUS: TURKEY
Another adjustment in FX policy

Koon Chow +44 (0)20 7773 7572 koon.chow@barcap.com
This article is an expanded version of the 25 January 2012 note Central Bank of Turkey: Another Tweak in FX Policy. The Central Bank of Turkey (CBT) seems to be signaling considerable comfort with the lira, having cancelled the daily FX auctions. Although the global risk environment is supportive of Turkish assets, we argue for being cautious on lira and we reiterate our RV trade to selling lira versus the rand. CBT governor Basci indicated on January 26 his general comfort with the policy tools of the Bank that he expected the lira to remain firm. He also said that the Turkish monetary stance could be changed following the recent surprise-dovish statement from the Fed. This suggests that the CBT may loosen liquidity conditions in Turkey. The recent decisions and announcements by the CBT, as a possible lira negative, may be ignored by the market for now. However, the lira would face a significant challenge if the Turkish economy slows more sharply. At that stage the CBT would likely have to make the tough choice between defending the lira and its inflation targets or taking a growth and C/A supportive stance. We think the bias could be to the latter as indicated by governor Bascis recent comments.
CBT has cancelled its daily FX auctions and seems willing to offer more lira liquidity
From daily to ad hoc FX auctions

Given the challenges ahead, we remain cautious the lira but recognise that with the rising levels of investor risk appetite that lira cautions is best expressed in an RV trade versus ZAR
Tuesdays monetary policy decision was largely a non-event (the key policy rates and required reserve ratios of the banks were kept unchanged). However, the CBT announced it would no longer hold the daily FX selling auctions (where the rules were $50mn under normal conditions and a $1.7bn cap on consecutive days) instead opting for ad hoc FX selling auctions with a cap of $500mn. The CBT did not rule out ad hoc non-auction interventions and these are probably still in the CBT's FX toolbox. The CBT left unchanged the guidance range on regular 1wk repo lending (at 5.75%) at 3-7bn lira, but said it would lend up to a maximum of 20bn lira at its 1mth window on 27 January, up from 12bn lira at the previous auction. Admittedly, these are not significant changes (a $500mn auction is the equivalent of two weeks' worth of the recent daily auctions). However, in stepping back from the FX market
Figure 1: The lira and Central Bank FX interventions
300 100 -100 -300 -500 -700 -900 -1,100 -1,300 -1,500 Apr-08
H eavy FX sales (USD /TR Y 1.90, Bask 2.20)
FX buying (below USD /TRY 1.70, Bask 2.10) Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
2.3 2.2 2.1 2 1.9 1.8 1.7 1.6 1.5 1.4 2.6bn 1.3 1.2 1.1 Oct-11
FX intervention (-ve = FX sales)

Source: Central Bank of Turkey
USD /TR Y, RH S
USD -EUR basket/TRY, R H S
26 January 2012
17
and in providing more lira liquidity, we believe the CBT is signalling that it is comfortable with where the lira has appreciated to and probably does not want to see further strong gains. This is consistent with past official steps on the exchange: when the lira depreciated through 1.74 per USD and 2.10 per basket of EUR-USD (a proxy for the trade weighted measure of the lira) on 5 August 2011, the CBT started intervening by selling foreign currency and became increasingly aggressive toward 1.90 and 2.20, respectively. In October, this was reinforced by open market operations, squeezing lira liquidity. At current exchange rate levels, especially on the basket measure (at 2.07), the lira is back near to the early-August levels. The CBT was last buying foreign currency (in daily auctions) toward the end of July 2011 when USD/TRY was 1.69 and the basket measure was 2.06.
The lira is nearing levels where the Central Bank was last buying FX (July 2011)
Not only is the CBT signalling comfort on the lira, but also its actions probably reflect some desire to conserve its already moderate levels of FX reserves. The FX reserves have fallen to $75.3bn as of the 20 January and down 5.4bn y/y and down 18.6bn from the July 2011 highs. Moreover, in terms of coverage ratios (to short-term debt, for example), Turkish FX reserves are at the low end of the Emerging Markets distribution (see our publication, EM FX: leaning against or blown about by the wind, 5 January 2012). A weak exchange rate helps in the adjustment of the current account deficit, one of Turkey's main macroeconomic challenges right now. We are forecasting a sharp slowdown in the economy in 2012 but we do not, given sticky imports in Turkey especially of energy, expect the current account deficit to fall below 7.5% of GDP from 9.5% in 2011. The greatest dilemma for the CBT is likely to be when the economy slows more aggressively. We have already seen signs of manufacturing and consumer activity flagging and 2012 is likely to see these trends extended. At the latter stages of the slowdown the CBT may need to choose between supporting growth and the current account adjustment or supporting the lira and containing inflation, which has already been pushed above 10% on the back of last year's depreciation. The risks of the former keep us cautious on the lira and the real test will be if the unfolding slowdown dovetails with another period of risk aversion.
Figure 2: Industrial production and credit growth (particularly) are slowing

70 60 50 40 0 30 20 10 -10 -20 30 20 10
Figure 3: But confidence indicators have not fallen sharply. The big test is still ahead
120 110 100 90 80 70 60 50 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 60 55 50 45 40 35 30
-30 0 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Private sector credit growth (%, y/y),LHS Industrial production (%, y/y), RHS
Source: Haver Analytics, Barclays Capital
Turkey: Consumer Confidence (NSA, Index) Turkey: Real Sector Confidence Index (NSA, Avg) PMI, RHS
Source: Haver Analytics, Barclays Capital
26 January 2012
18
EM DASHBOARD
Alanna Gregory 212 412 5938
Entry date
alanna.gregory@barcap.com
P&L to target/ P&L to stop Analyst
Description Credit (7) Buy the Turkey 5y basis (5y CDS, $16s/$17s) Buy Egypt 5y CDS Long Qatar 42s Sell Russia/Kaz/Dubai 5y CDS vs. Cro/Rom/Czech Sell the Russia basis ($15s, 3y CDS) Long PDVSA 17 New Long Argentina EUR Warrant FX (10) Sell AUD/KRW 1m forward Short CHF/MXN Short AUD/BRL Long SGD vs USD-EUR basket (60%-40%) Long ILS / short CZK Sell 3m ATMF USD call/BRL put Sell 3m ATMF USD call/MXN put Short basket / long RUB Short TRY / long ZAR Long EUR / short RON Rates (14) Receive 1y TIIE INR 1y fwd OIS 2s5s steepener HUF 3M T-bill (FX implied rates financed) Long Jun 14 Mbonos MYR Receive1y1y vs. 5y Poland: Receive 1Y1Y FWD SGD 1y fwd 3s10s steepeners SOAF Long 5Y bond (R157) Turkey Long bond JAN16 FX hedge KRW 2s5s steepener Israel: 5Y-2Y steepner DV01 China: 2s5s NDIRS steepener Israel: ILS 10Y CPI BE South Africa: Receive 5y IRS Closed Trades (4) Jan13-Jan15 flattener Long MYR / short TWD 3m NDF Long EUR / short PLN Receive 1y1y fwd TIIE
Entry
Current
Target
Stop
19-Jan-12 06-Dec-11 06-Dec-11 06-Dec-11 06-Dec-11 28-Apr-11 06-Jun-10 06-Jan-12 06-Jan-12 05-Jan-12 06-Dec-11 06-Dec-11 06-Dec-11 06-Dec-11 06-Dec-11 06-Dec-11 15-Nov-11 20-Jan-12 12-Dec-11 06-Dec-11 06-Dec-11 06-Dec-11 06-Dec-11 06-Dec-11 06-Dec-11 06-Dec-11 08-Nov-11 12-Oct-11 15-Sep-11 29-Jul-11 06-Dec-11 06-Dec-11 15-Nov-11
-95bp 520bp 285bp 64bp -20bp 72 6.05 1,181 14.38 1.89 100 5.02 1.79 13.65 35.78 4.38 4.36 4.85% 5bp 250bp 4.72% 33bp 4.70% 120% 6.70% 9.95% 60bp 0bp 2.00% 7.35% 70% 9.53 4.41
-70bp 565bp 270bp 40bp -35bp 80 12 1,182 14.11 1.85 102.90 5.09 1.75 12.98 34.60 4.36 4.340 4.81% 19bp 4.74% 27bp 4.69% 122% 6.50% 3.25bp 63bp 17bp 2.15% 6.68% 93% 9.76 4.33 5.1%
-30bp -120bp 650bp 230bp 150bp -70bp 85 13 1,187 13.50 1.8 103.50 5.40 33.80 4.20 4.50 4.50% 45bp 4.50% 50bp 4.00% 140% 6.40% 20bp 100bp 40bp 2.50% 6.00% 20% 9.8 4.6 4.25% 560bp 300bp 0bp 0bp 75 10 1,215 14.60 1.92 98.50 5.00 36.00 4.60 4.28 5.00% -15bp 4.85% 20bp 5.00% 110% 7.20% -5bp 50bp -10bp 7.40% 95% 9.45 4.28 5.45%
0.80 17 1.33 2.75 1.75 1.00 0.50 3.46 1.24 0.71 0.14 3.44 0.57 0.67 4.00 1.11 2.18 3.29 2.23 1.50 0.14 0.17 2.03 2.57 0.85 0.16 0.94 Date Closed
Kolbe Kolbe, Moubayed Kolbe Kolbe Kolbe Arreaza, Cruz, Grisanti, Guarino Guarino Desbarres, Verdi Melzi, Felices, Wynne Felices, Melzi, Desbarres Desbarres, Verdi Chow Melzi Melzi Chow Chow Chow Melzi Rachapudi Chwiejczak Melzi Arora Chwiejczak Arora Gable, Chwiejczak Chwiejczak Wang Chwiejczak Wang Chwiejczak Chwiejczak, Gable
10.10% 10.00% 10.70%
11-Nov-11 4.25bp
26-Jan-12 Melzi 26-Jan-12 Desbarres, Verdi 24-Jan-12 Chow 20-Jan-12 Melzi
12-Aug-11 4.93%
Note: As of 26 January 2012 (trades are updated regionally). Methodology: P&L to target/P&L to stop is a measure of how much can be gained relative to how much can be lost. Both are calculated from the current value and reported in dollars. This measure does not take probabilities into account. Source: Barclays Capital
26 January 2012
19
FX VIEWS ON A PAGE
Currency Tactical bias Strategic directional view Current strategy/ trades we like Vol adj Score 6m returns (1-5)
Emerging Asia THB Bullish The performance of the THB has been remarkably resilient, despite political change and the effect of flooding on economic activity. Expansionary monetary and fiscal policy should support economic growth and the currency. Elevated inflation, robust export growth, and a tight labour market augur for KRW appreciation. The INR has outperformed its regional peers year-to-date. If risk appetite continues to improve, USD/INR could fall further. However, weak fundamentals are likely to limit INR appreciation. Resilient growth, a healthy fiscal position, and the roll-out of the governments divestment program should support the currency. The recent underperformance of the IDR vis--vis the wider region is likely to reverse as risk appetite rises. While economic activity remains relatively firm, core inflationary pressures are benign, running at about 1% y/y. As such, the CBC has little incentive to allow the TWD to appreciate. The central banks preference for the PHP not to be an outlier in terms of regional performance points to modest currency appreciation. Rising CNY deposits onshore could result in the RMB-isation of the economy. We expect the USD/CNY to slowly move lower as the PBoC leans against still-elevated inflation. We expect the MAS to maintain a bias towards currency Long SGD vs USD (60%)-EUR appreciation near the centre of the NEER policy band, which (40%) basket we estimate to be +/-275bp with a +2% slope. Sell AUD/KRW 1m forward
0.58
4.00
KRW INR
Bullish Neutral
0.29
3.90
0.35
3.80
MYR
Bullish
0.32
3.80
IDR TWD
Bullish Neutral
0.16
3.25
-0.04
3.00
PHP
Bullish
0.10
2.95
HKD CNY SGD
Neutral Bullish Bullish
-0.30 -0.02
2.60 2.55
0.04
2.30
Latin America MXN Bullish Still inexpensive valuation, not crowded positioning, limited intervention risks, and capped depreciation potential by existing intervention programs (selling USD). Strong FX intervention biases us to a neutral stance. Copper prices supportive, but monetary policy easing in the pipeline. Should remain supported by high oil prices (Barclays Capital sees significant upside risks to oil prices). Sell AUD/BRL (target 1.8) Sell CHF/MXN (target 13.5) 0.20 0.20 0.20 0.16 0.16 3.30 3.20 3.20 2.80 2.50
PEN CLP COP BRL
Neutral Neutral Bullish
Neutral/bullish Risk environment is supportive, yet intervention remains a threat, especially if USD/BRL falls below 1.70.
26 January 2012
20
Currency
Tactical bias
Strategic directional view
Current strategy/ trades we like
Vol adj Score 6m returns (1-5)
Emerging EMEA EGP Bearish The CBE has tried to stabilise the EGP against capital flight, but FX reserves have fallen sharply. It may take a hard decision in a couple of months to allow a float/devaluation before reserves fall below a prudent level. Russias resilience to euro contagion is supported by sticky oil prices and argues for going long the RUB against a EURUSD basket. Strong local growth and higher yields should help retain capital in the country. The willingness voiced by the Hungarian government to agree to what is needed to bring IMF/EU loans plus stronger global risk appetite will likely trigger for hedging of HUF shorts. Fundamentals remain fragile, however. Short EUR-USD basket/long RUB
0.34
3.70
RUB
Bullish
0.19
3.10
HUF*
Neutral
-0.31
3.00
RON*
Long EUR/short RON Neutral/Bearish The risk environment is supportive for the RON but low yields and recent signs of political unrest (public protests against the governments past austerity measures) keep us in our short RON recommendation for now. Neutral/bearish Turkeys high external funding needs and uncertain monetary policy will likely weigh against the lira relative to the stronger currencies in EEMEA. The CBT has stopped its daily FX auctions, which could leave the TRY vulnerable if and when global investor risk appetites were to recede. Bullish Strong commodity prices and attractive local asset prices (on bonds) should mean capital inflows if global liquidity conditions stabilise. This should benefit the ZAR more than other high-beta EEMEA currencies. We remain cautious on the PLN, given the external funding needs of Poland, but the recent increase in global risk appetite has stopped us out of our shorts and we await a stabilization in the market before setting new ones. Opportunity for an RV trade against the CZK, given Israels Long ILS/Short CZK stronger balance of payments and lower vulnerability to euro area contagion. The ILS should benefit from our house view of lower EUR/USD (and the past correlation between ILS/CZK and EUR/USD). Short TRY/long ZAR
0.00
2.95
TRY
0.03
2.75
ZAR
Short TRY/long ZAR 0.11 2.75
PLN*
Neutral
-0.19
2.65
ILS
Neutral/Bullish
-0.10
2.05
CZK*
Neutral/bearish The Czech Republic has the strongest balance sheet among Long ILS/Short CZK CEE countries; however, the currency should still suffer, as the Czech economy may slip back into a recession. Neutral/bearish High carry reflects investor fears of devaluation. An agreement with the IMF or Russia on gas imports may alleviate these concerns, but there has been little progress in this direction. Meanwhile, FX reserves are being depleted slowly by some internal capital flight. Neutral/bullish Being a commodity producer (oil) and having a positive C/A create a cushion for uncertainty in global capital flows. However, low liquidity in this FX market may limit the appeal of the KZT.
-0.18
1.80
UAH
KZT
Note: * Versus EUR. The variable score is an index that ranks EM currencies according to vol-adjusted returns, PPP valuation, carry, systemic risk, basic balance/GDP and reserves accumulated over the past 5y/GDP. For more details on the trade recommendations, please see the EM Dashboard. Note that bold text indicates changes in view. Source: Barclays Capital
26 January 2012
21
CREDIT PORTFOLIO
OAS (bp) 30-Dec11 EM Portfolio Arg, Ven, Ukr Other EM Asia Philippines Indonesia Sri Lanka Vietnam EMEA Turkey Russia Qatar Poland Lebanon Ukraine Hungary South Africa Lithuania Croatia Egypt Latin America Brazil Mexico Venezuela Argentina Colombia Peru Panama Uruguay El Salvador Dominican Republic Additional Countries Abu Dhabi Bulgaria Gabon Pakistan Ghana 377 1031 272 244 212 237 475 522 383 369 327 224 314 370 926 657 222 448 601 622 412 168 167 1175 827 184 207 198 191 447 583 427 166 366 419 1377 556 25-Jan12 358 935 267 238 199 240 455 512 378 384 304 227 289 372 923 610 239 464 601 534 378 150 169 1071 703 184 213 189 184 452 551 432 180 340 414 1422 529 3mF 338 897 249 213 179 210 430 492 369 373 281 203 285 387 972 635 227 431 616 539 350 128 146 1011 663 169 188 171 169 462 544 423 177 349 382 1422 490 7.2 5.6 7.5 8.0 8.5 7.8 5.9 4.9 6.2 7.2 5.8 6.7 5.8 4.4 4.3 6.3 7.3 5.3 6.5 7.8 8.0 8.2 8.8 5.6 6.1 8.9 10.7 9.2 10.3 8.5 5.3 3.9 4.1 2.7 4.7 3.7 4.4 OAD Weights (%) Benchmark Model 100 13.6 86.4 15 7.4 6.7 0.6 0.5 38 9.3 9.1 4.6 2.9 2.8 2.0 1.8 2.3 1.5 1.0 0.3 45 11.6 9.7 7.4 4.2 4.1 2.7 2.4 1.6 1.0 0.5 1.9 0.9 0.3 0.2 0.2 0.2 100.0 12.9 87.1 16 6.3 8.7 0.7 0.3 37 10.2 11.7 5.0 3.0 1.4 1.3 0.7 0.8 2.2 0.5 0.0 46 15.8 11.4 8.0 3.6 2.4 2.9 0.4 1.0 0.0 0.5 1.2 0.0 0.0 0.5 0.3 0.4 under neutral over under over neutral under under neutral over over neutral under under under under over under under over over over over neutral under neutral under under under neutral under under under over neutral over Long Short Long Long Long Long Long Short Neutral Neutral Long Long Long Neutral Short Short Neutral Neutral Neutral Short Long Long Long Short Short Short Long Short Short Short Short Neutral Long Neutral Neutral Short Neutral Duration Bias Adj. Duration 8.0 4.3 8.6 9.9 8.7 12.0 7.6 2.6 6.6 7.8 9.0 8.8 7.0 2.2 2.3 1.9 2.5 7.7 3.2 0.0 8.8 13.4 12.4 4.9 4.2 4.2 13.7 1.2 5.1 0.0 3.9 2.8 0.0 0.0 11.2 3.5 8.8 Total Returns (%) 1w 1.0 4.1 0.5 0.7 0.7 0.7 1.1 -0.1 0.9 0.2 0.3 0.4 1.3 0.3 4.7 3.6 0.6 0.2 1.4 5.8 1.2 0.7 0.1 4.2 3.8 0.5 -1.1 -0.2 -0.7 0.4 2.7 0.4 0.7 0.8 0.6 0.7 0.8 2012 QTD 0.8 6.1 0.0 0.1 0.3 -0.2 0.5 0.8 0.2 -1.3 1.4 -0.5 1.0 0.5 1.0 2.8 -1.5 -0.8 0.1 6.1 1.6 0.6 -0.8 6.3 8.1 -0.4 -2.2 -0.2 -0.9 -0.6 1.8 0.5 -0.7 1.1 1.3 -0.4 1.7 2012 YTD 0.8 6.1 0.0 0.1 0.3 -0.2 0.5 0.8 0.2 -1.3 1.4 -0.5 1.0 0.5 1.0 2.8 -1.5 -0.8 0.1 6.1 1.6 0.6 -0.8 6.3 8.1 -0.4 -2.2 -0.2 -0.9 -0.6 1.8 0.5 -0.7 1.1 1.3 -0.4 1.7 3m F 2.4 5.9 1.8 2.9 2.2 3.7 2.9 2.3 0.9 1.1 2.3 2.4 0.1 -1.3 -2.7 -2.9 0.9 3.7 -1.7 -0.9 3.5 2.4 2.5 8.5 5.5 1.3 3.7 1.8 1.5 -2.1 1.1 1.1 -0.1 -0.2 3.1 2.8 3.9 Bonds we recommend Buying Selling
Philip '24s, '25s, '34s, '37s Philip '13s, '14s, '15s, '16s, '17s Indo 14s, 15s, 16s, 17s, 18s sukuk, 21s Sri Lanka 20, 21s Vietnam 20s Turkey 15s, 16s, 17s, 18s Russia 28s, Russia 30s Qatar 40s,42s Poland 21s, 22s Ukr 12s, 13s
Russia 15s
Ukr 20s, 21s Hungary 20s, 21s, 41s
Lithuania 17s, 20s, 21s Egypt 20s, 40s BR41 MX22N, MX 40, MX 100yr PD 17N, PD 15 Boden 15 CO 27, CO 33, CO 41 PE33, PE50
DR21
PE37 PA 36 UY25 EL Salv 35 DR27 ADGB14s Bulgaria 15s
Gabon 17s Ghana 17s
Note: *Benchmark forecast. Benchmark is a variant of the Barclays Capital Global EM Sovereigns index, featuring USD only bonds. Changes in view denoted in bold. Additional Countries was previously known as Off-Index Allocations. Source: Barclays Capital
26 January 2012
22
EM LOCAL BOND PORTFOLIO

1/25/2012 Yield to Worst 5.93 8.37 10.33 4.37 6.42 5.86 6.09 6.53 2.74 8.68 3.48 5.01 7.56 7.65 10.06 3.92 8.35 5.96 3.28 5.32 3.62 3.23 Weights Current Market 100.00 28.45 15.58 0.36 3.92 7.84 0.74 29.08 3.04 2.22 3.01 6.60 4.70 5.15 4.38 42.47 0.54 4.00 5.43 2.57 25.24 4.69 Total Returns FX Unhedged (%) Past Week 1.63 over over under over over under under under under under neutral under over neutral neutral over neutral neutral neutral over neutral 1.25 0.93 1.49 0.82 2.18 0.29 2.13 2.81 6.72 0.49 2.69 2.95 0.07 1.19 1.54 0.77 4.58 1.31 0.47 1.35 0.91 3m Forecast 3.53 4.24 4.30 1.74 5.61 3.90 0.61 0.55 -0.94 -0.80 -0.34 -3.46 5.68 2.16 1.50 5.09 7.55 4.55 2.68 4.86 5.53 5.80 3-5y bonds LB176A IGB GS 18, GS 15 INDOGB Apr 17 (FR60) MGS Sep 18 R157s Jan 16s, Jan 21s Sept 13s Apr 16s May 25s 13E, 14D Feb 19s Oct 20s Local TES Jul 24 Jun 27, Nov 36, Nov 38 May 15 Jan 17 NTNF, Jan21 NTNF, Global BRL Jan 22 May 18 BCP Bonds we recommend
Duration EM Local Latin America Brazil Chile Colombia Mexico Peru EEMEA Czech Republic Hungary Israel Poland Russia South Africa Turkey EM Asia India Indonesia Malaysia Philippines South Korea Thailand 4.52 3.90 2.59 4.14 4.44 5.83 8.12 4.32 5.86 3.44 4.39 4.18 4.22 5.92 2.12 5.09 6.83 7.27 4.84 7.83 4.28 6.15
Mkt val 1,448,857 388,169 195,289 5,922 63,049 112,994 10,915 424,001 46,202 28,452 45,510 96,524 64,926 76,846 65,541 636,687 8,869 62,383 83,145 37,731 374,713 69,846
Model 100.00 33.18 20.11 0.09 4.40 8.48 0.10 23.20 0.00 1.01 2.77 5.74 2.20 7.20 4.28 43.61 0.75 4.00 5.50 2.44 26.42 4.50
QTD -2.45 -1.08 -1.90 3.55 2.82 -2.82 11.78 -10.26 -10.26 -22.07 -3.84 -13.82 -6.99 -9.36 -7.91 1.95 -5.86 14.95 1.61 14.52 -1.32 2.77
YTD 5.55 9.61 9.88 4.66 16.40 5.68 12.05 -3.61 2.29 -5.65 0.04 -4.25 4.83 -9.63 -10.18 8.99 -4.09 29.47 5.75 19.01 7.06 1.62
Buying
Selling
Note: Bolding indicates change in bias. Source: Barclays Capital
26 January 2012
23
DATA REVIEW & PREVIEW: ASIA

Rahul Bajoria, Jian Chang Review of last weeks data releases
Main indicators India: Repo rate (%) India: Cash reserve ratio (%) Singapore: CPI (% y/y) Thailand: BoT policy rate (%) Korea: GDP (% y/y) Period Previous BarCap Actual Comments Jan Jan Dec Q4 8.50 6.00 5.7 3.25 3.5 8.50 6.00 5.6 3.00 3.9 8.50 5.50 5.5 3.00 3.4 Elevated core inflation prevents cut in repo rate Policy gearing moving towards supporting growth Core inflation expected to remain sticky in Singapore We do not expect any further rate cuts from Bank of Thailand We see potential for upside revisions in the second estimate next month
Preview of week ahead

Monday 30 January 07:00 10:00 16:00 Korea: Current account balance (USD bn) Philippines: GDP (% y/y) Taiwan: Unemployment rate (sa) Period Dec Q4 Dec Prev 2 2.83 4.6 4.3 Prev 1 4.13 3.1 4.3 Latest 5.05 3.2 4.3 Forecast 4.0 3.8 4.3 3.7 4.3 Consensus
Korea: We expect the current account surplus to narrow as year-end outbound travelling typically opens up a wide services trade deficit. The goods trade balance on a customs basis was USD4bn in December. Philippines: Growth is likely to remain soft given weak export performance and continued government under-spending. However, consumption should remain strong given holiday-related spending. Taiwan: Employment in non-agricultural sectors started to decline in November, with a slight increase in the number of workers on unpaid leave.
Tuesday 31 January 07:00 10:00 16:00 18:00 Korea: IP (% y/y) Singapore: Unemployment rate (%) Taiwan: GDP (% y/y) Malaysia: BNM policy rate Period Dec Q4 Q4 Prev 2 6.9 1.9 6.6 3.00 Prev 1 6.3 2.1 4.5 3.00 Latest 5.6 2.0 3.4 3.00 Forecast 4.0 2.1 3.3 3.00 2.8 3.00 Consensus 6.1
Korea: We expect manufacturing output to increase 1.7% m/m sa in December, which will more than offset the small declines in the previous two months. Exports in December were unusually resilient. Singapore: We expect net job creation to slow, as suggested by various hiring surveys. But restrictions on foreign workers will keep the labour market tight. Taiwan: We expect investment to become a smaller drag on GDP in Q4 than in Q3, as suggested by the stabilisation in imports of capital goods. Consumption is likely to remain robust, supported in part by tourism, and will mitigate weakness in the external sector. We forecast a 0.5% q/q sa expansion in Q4 GDP, following a 0.1% contraction last quarter. We expect 4.4% GDP growth for 2011. Malaysia: With growth moderating only gradually, our base case is for the policy rate to be unchanged in H1.
Wednesday 1 February 07:00 09:00 09:00 12:00 12:00 12:00 12:00 12:00 21:30 Korea: CPI (% y/y) Korea: Exports (% y/y) China: PMI Manufacturing Indonesia: CPI (% y/y) Indonesia: CPI core (% y/y) Indonesia: Exports (% y/y) Thailand: CPI (% y/y) Thailand: Core CPI (% y/y) Singapore: Electronics PMI Period Jan Jan Jan Jan Jan Dec Jan Jan Jan Prev 2 3.6 7.6 50.4 4.4 4.4 44.0 4.2 2.9 52.1 Prev 1 4.2 11.6 49.0 4.2 4.4 17.8 4.2 2.9 50.9 Latest 4.2 10.8 50.3 3.8 4.3 8.3 3.5 2.7 49.7 Forecast 3.7 6.5 49.5 3.9 4.4 10.0 3.4 2.6 3.3 2.7 49.9 24 49.6 Consensus 3.6
26 January 2012
Korea: Lunar New Year demand and electricity tariff hikes for businesses last December should keep the cost of food, energy and services high. Nonetheless, inflation is expected to moderate on base effects. We expect exports to rise 6% m/m sa, extending Decembers 8.4% increase, due to last-minute festive shipments in the early part of the month. Lunar New Year holidays should exert a dampening effect on trade and manufacturing data in January, and we expect a temporary trade deficit in January, given high energy imports. China: We look for a post-Chinese New Year m/m decline and expect the PMI to hover around 50 in Q1. Indonesia: Inflation to remain contained at 3.9%; however, we should see a m/m pick-up driven by food prices and health costs. We expect inflation to rise gradually in 2012 and end the year at 5.3%; core inflation is likely to hold steady at about 4.4%. We look for soft export growth, given the uncertain external environment. Thailand: Higher fuel prices coupled with a seasonal uptick in food prices should translate into only a modest decline in inflation.
Friday 3 February 09:00 China: Non-manufacturing PMI Period Jan Prev 2 57.7 Prev 1 49.7 Latest 56.0 Forecast Consensus
26 January 2012
25
DATA REVIEW & PREVIEW: EMERGING EUROPE, MIDDLE EAST AND AFRICA
Eldar Vakhitov, Daniel Hewitt, Christian Keller, Vladimir Pantyushin, Jeffrey Schultz, Alia Moubayed, Piotr Chwiejczak Review of last weeks data releases
Main indicators Israel: Base rate announcement (%) Turkey: Benchmark repo rate (%) Hungary: Base rate announcement (%) Israel: Unemployment rate (%) Russia: Industrial production (% y/y) Hungary: Retail trade (% y/y) Turkey: Industrial confidence index Turkey: Capacity utilization (%) South Africa: PPI (% y/y) Russia: Disposable income (% y/y) Russia: Real wages (% y/y) Russia: Retail sales real (% y/y) Russia: Unemployment rate (%) Period Previous Barclays Actual Comments Jan Jan Jan Nov Dec Nov Jan Jan Dec Dec Dec Dec Dec 2.75 5.75 7.00 5.4 3.9 0.6 97.2 75.5 10.1 0.2 7.1 8.6 6.3 7.7 2.50 5.75 7.25 9.9 2.50 5.75 7.00 5.4 2.5 1.1 74.7 9.8 6.3 4.9 9.5 6.1 8.9 Rate cut due to rapid deceleration of inflation Rate on hold, but revisions in FX auction, more ad hoc Rates on hold because of HUF strength and high real rate Unemployment rate remains low, but could rise later Expected slowing in line with the global trend Apparent slight improvement in domestic demand Second consecutive monthly decline, still a high level Lower on the back of softer commodity prices; food prices, however, continue to gain momentum Consistent growth underpins consumer sector expansion Consistent growth underpins consumer sector expansion Consumer sector outperforms yet again A welcome decline, adding power to consumer demand Strong investment provides support to mid-term growth
101.8 Turkish economy rolling, buoyed by domestic demand
Russia: Investment in productive capacity (% y/y) Dec
Preview of week ahead

Friday 27 January 09:00 Poland: Real GDP growth (%) 09:00 Poland: Unemployment rate (%) 09:00 Poland: Retail sales (% y/y) 10:00 Croatia: Industrial output (% y/y) Period 2011 Dec Dec Dec Prev 2 5.1 11.8 11.4 -2.3 Prev 1 1.7 11.8 11.2 0.6 Latest 3.8 12.1 12.6 -0.3 Forecast 4.1 12.5 11.0 Consensus 4.2 12.5 10.0 -
Poland: Growth print is likely to be strong again despite softening PMIs; hard data remained strong in Q4 11, therefore a positive surprise is possible; however, in Q1 12 we expect growth to slow down gradually. Government officials have already hinted that unemployment in December has increased driven by seasonal factors and cyclical elements, as well as overall weakening demand. Croatia: Despite the oil refinery fire no longer weighing on IP, we still expect only marginally positive growth in December.
Monday 30 January 09:00 Lithuania : Real GDP (% y/y) Poland: Budget level YTD (PLN bn) Serbia: Real GDP (% y/y) Ukraine: Current account (USD bn) Ukraine: GDP constant prices (% y/y) Period Q4 P Dec Q4 P Q4 Q4 P Prev 2 5.9 -21.9 3.7 -1.3 5.3 Prev 1 6.5 -22.5 2.5 -1.7 3.8 Latest 6.7 -21.6 0.5 -2.7 6.6 Forecast -22.3 0.2 4.0 Consensus -
Lithuania: Lithuania (together with Serbia) will be among the first CEE country to report Q4 GDP growth and it will be interesting to see to what extent the weaker external demand environment will be reflected in Lithuanias Q4 GDP print. After the very strong growth in 2011 of likely close to 6% y/y (annual), we expect it to slow to 2.5% in 2012 still a comparatively robust number in the regional context, however. Poland: Overall we expect the central budget deficit gap to come in at around PLN22bn. Stronger economic activity, particularly strong retail sales, should contribute to tax income, while spending has been kept under control. Local government deficit may also come in below projected numbers. Serbia: We expect growth to be only slightly positive as export growth declined considerably in Q4. Ukraine: The economy has likely already entered a softer patch, while the external account gap continues to widen.
26 January 2012 26
Barclays Capital | The Emerging Markets Weekly Tuesday 31 January 06:00 South Africa: Private sector credit (% y/y) 08:00 Hungary: Unemployment rate (%) 08:00 Turkey: Trade balance (USD bn) 12:00 South Africa: Trade balance (rand bn) Russia: Annual real GDP (%y/y) Serbia: Industrial output (% y/y) Serbia: Retail trade (% y/y) Period Dec Dec Dec Dec 2011 Dec Dec Prev 2 5.4 10.7 -10.4 2.5 5.2 -1.8 -18.3 Prev 1 5.5 10.8 -8.0 -9.6 -7.8 -1.0 -16.2 Latest 6.2 10.6 -7.5 -8.1 4.0 2.2 -16.4 Forecast 5.8 -8.5 4.2 Consensus 10.8 -7.35 -
South Africa: Although we expect a moderation in headline PSCE growth, consumer spending into the festive season through other smaller, unsecured components of household credit should see the m/m growth in PSCE tick up further in December. Hungary: We expect to see a slight weakening of domestic labour in Hungary. Turkey: We look for a small m/m widening of the trade deficit as signalled by stronger customs duties collections in December that implies a pick-up in imports. Russia: The growth emphasis shifts to domestic drivers, with investment and consumer demand performing well recently.
Wednesday 1 February 05:00 Russia: Manufacturing PMI 08:00 Poland: Manufacturing PMI 08:00 Turkey: Manufacturing PMI 08:30 Czech: Manufacturing PMI 09:00 South Africa: Kagiso PMI Czech: Budget balance (CZK bn) Hungary: PMI Kazakhstan: CPI (% y/y) Romania: International reserves (USD bn) South Africa: Unemployment (%) Period Jan Jan Jan Jan Jan Jan Jan Jan Jan Q4 Prev 2 50.4 51.7 53.3 51.7 50.2 -91.5 48.2 8.0 36.3 25.0 Prev 1 52.6 49.5 52.3 48.6 50.5 -125.9 47.8 7.8 36.0 25.7 Latest 51.6 48.8 52.0 49.2 51.6 -142.8 48.5 7.4 37.3 25.0 Forecast 7.0 Consensus -
Russia: Despite recent slowing, Russias IP performance remains well within positive territory. Domestic demand sectors show improving dynamics. This will likely be reflected in manager expectations. Poland: Amid a general U-turn in optimism in Europe, Polish entrepreneurs are also likely to adopt a more positive approach, which is likely to be reflected in the survey. Also, mild winter weather conditions should work in favour of a higher PMI. Still, we expect slower industrial production in months to come. Turkey: Domestic growth indicators that are still holding up well could be reflected in a stronger PMI reading. Czech Republic: Further indications of recession likely with the PMI remaining below 50 in January. South Africa: Still-significant global risks and uncertainty, along with a still-struggling domestic manufacturing sector, are likely to leave the PMI hovering around its neutral level of 50 in January. Hungary: Growth indicators have been mixed, indicating a modest recession is in process. Kazakhstan: We expect disinflation to continue running its course. Romania: Stable currency markets have made it possible for the NBR to limit FX intervention, helping it maintain its extremely high levels of reserves.
Thursday 2 February 08:00 Romania: Retail sales (% y/y) 10:00 South Africa: Naamsa vehicle sales (% y/y) 12:00 Czech: Repo rate announcement (%) Romania: Interest rate announcement (%) Egypt: Deposit rate (%) 26 January 2012 Period Dec Jan Feb Feb Feb Prev 2 -5.2 18.9 0.75 6.25 8.25 Prev 1 2.0 11.7 0.75 6.00 8.25 Latest 1.9 11.0 0.75 5.75 9.25 Forecast 0.75 5.50 10.25 Consensus 0.75 5.50 27
Romania: The NBR is in the middle of a rate cutting cycle. Having reduced rates in each of the past two meetings by 25bp, we expect another 25bp reduction to 5.50%. Moreover, we expect two more rate cuts in the next two meetings, bringing the rate to 5.0%. South Africa: Vehicle sales growth should continue to reflect the relatively positive consumer dynamics in the economy provided by low interest rates and high nominal incomes. Czech Republic: The CNB is on hold. On one hand, it will not raise rates even though inflation (adjusted for taxes) is in the middle of the 1-3% target range because the economy is very weak. On the other, it will not lower rates because at 0.75% it is at a record low and a rate decrease is unlikely to spur increased lending. Egypt: Mounting inflationary pressure and a weakening currency may push the CBE to continue raising rates.
Friday 3 February 08:00 Czech: Retail sales (% y/y) 08:00 Turkey: CPI (% y/y) 10:00 Croatia: Retail trade real (% y/y) Kazakhstan: International reserves (USD bn) Russia: CPI (% y/y) Russia: Overnight deposit rate (%) Russia: Refinancing rate (%) Period Dec Jan Dec P Jan Jan Feb Feb Prev 2 0.0 7.7 1.0 32.6 7.2 3.75 8.25 Prev 1 1.5 9.5 1.8 32.2 6.8 3.75 8.25 Latest 0.5 10.5 1.0 29.3 6.1 4.00 8.00 Forecast 10.65% 28.5 4.3 4.00 8.00 Consensus 10.45% -
Czech Republic: Domestic demand remains muted. Turkey: The trade weighted fall in the lira last year still has some room to pass through to headline CPI as capacity utilisation rates in the country remain high. There are some signs of a slowdown but companies in Turkey are probably still able to pass on the bulk of their cost increases. Kazakhstan: The NBK continues to defend the currency. Russia: Inflation drops amid the delay in regulated tariff hikes to 1 July. The CBR will likely wait until after the 4 March presidential elections before resuming rate cuts.
26 January 2012
28
DATA REVIEW & PREVIEW: LATIN AMERICA

Alejandro Arreaza, Alejandro Grisanti, Bruno Rovai, Guilherme Loureiro, Marcelo Salomon, Sebastian Vargas Review of the weeks data releases
Main indicators Brazil: IPCA-15 inflation, % m/m Brazil: Current account, USD bn Mexico: Econ. activity index, % y/y Mexico: Bi-weekly CPI, % 2w/2w Mexico: Bi-weekly CPI core, % 2w/2w Mexico: Trade balance, USD mn Colombia: Trade balance, USD mn Brazil: COPOM meeting minutes Brazil: Unemployment rate, % Mexico: Retail sales, % y/y Period Jan Dec Nov Jan Jan Dec Nov Jan Dec Nov Previous BarCap 0.56 -6.8 3.7 0.51 0.35 -232 103 5.2 3.0 0.55 -5.0 4.0 0.43 0.26 5.0 3.6 Actual 0.65 -6.0 3.75 0.32 0.20 0.8 71.1 4.7 7.5 Comments The surprise was in large part driven by a higher-thanexpected increase in transportation costs (air and bus fares) The CA deficit reached USD52.6 bn (2.1% of GDP), but financing was not an issue as FDI reached USD66.6bn Growing at a moderate pace at the margin (0.2% m/m sa); on track for a sharp deceleration in Q4 GDP, to 0.6% q/q saar Lower-than-expected perishable inflation marked the January CPI release A 11.5% 2w/2w drop in airfares helped contain core services inflation Exports and imports are moving further down (8.1% and 7.4%, respectively) High oil prices compensate for strong increase in imports demand Very dovish minutes, with the BCB giving guidance that the Selic rate should fall to single-digit levels In seasonally adjusted terms, the unemployment rate was flat at 5.6%. Strong gain of 2.2% m/m sa, probably reflecting the introduction of a local version of Black Friday in November
Preview of the week ahead

Monday 30 January 5:00 7:00 7:00 15:30 Brazil: Central government budget, BRL bn Colombia: Overnight lending rate, % Brazil: IGP-M inflation, % m/m Chile: Industrial production, % y/y Chile: Retail sales, % y/y Mexico: Budget balance, MXN bn Period Dec Jan Jan Dec Dec Dec YTD Prev 2 5.4 4.50 0.53 5.2 9.6 -179.0 Prev 1 11.2 4.75 0.50 -0.8 8.6 -179.39 Latest 4.6 4.75 -0.12 2.0 8.5 -213.1 Forecast 4.75 0.30 0.2 8.0 Consensus 4.75 0.30 1.0 7.9 -
Colombia overnight lending rate: With still moderate inflation, we expected Banrep to remain on hold at its meeting this month. However, the persistence of fast growth that is expected to offset the uncertainty coming from the European sovereign debt crisis and the slowdown of the global economy will likely drive it to reassume its tightening cycle before the end of Q1. Chile industrial production and retail sales: At the margin, we expect industrial production to drop 0.2% m/m sa, leaving growth for Q4 11 at -2.3% 3m/3m saar. This shows that global developments continue to take their toll in the Chilean economy. Retail sales are still benefiting from tight labor market conditions, but we expect them to soften gradually.
Tuesday 31 January 6:00 7:00 7:30 11:00 Brazil: Industrial production, % y/y Chile: Unemployment rate, % Brazil: Primary budget balance, BRL bn Colombia: Unemployment rate, % Period Dec Dec Dec Dec Prev 2 -1.6 7.4 8.1 10.2 Prev 1 -2.2 7.2 13.9 10.2 Latest -2.5 7.1 8.2 10.3 Forecast 0.1 7.1 Consensus -0.8 7.1 10.4
Brazil industrial production: Our forecast is consistent with a strong 1.4% m/m sa print at the margin, pushed mainly by the evolution of the auto sector (+9.4% m/m sa). The December IBC-Br should also benefit from this gain, leaving a high GDP carryover for Q1 12. Chile unemployment rate: We expect some deterioration of the unemployment rate in seasonally adjusted terms, to 7.5% from 7.3%. The labor market data flow is already showing signs of contagion from global developments.
26 January 2012 29
Barclays Capital | The Emerging Markets Weekly Wednesday 01 February 10:00 12:00 Peru: CPI, % m/m Peru: WPI, % m/m Mexico: Remittances, USD mn Brazil: Trade balance, USD mn Period Jan Jan Dec Jan Prev 2 0.31 0.21 2084.7 2355 Prev 1 0.43 0.42 1911.5 582 Latest 0.27 0.03 1773.6 3817 Forecast 0.41 -1800 Consensus -
Brazil trade balance: The contraction in the trade balance in January should be led by weak exports of iron ore. We expect exports to increase only 1.6% y/y, while imports are likely to grow 16.9% y/y.
Thursday 02 February 11:00 Uruguay: CPI, % m/m Period Jan Prev 2 0.70 Prev 1 0.40 Latest 0.70 Forecast Consensus -
Friday 03 February 9:00 11:00 16:00 Mexico: Consumer confidence, index Uruguay: Unemployment rate, % Colombia: PPI inflation, % m/m
Period Jan Dec Jan
Prev 2 90.6 6.0 0.9
Prev 1 89.5 5.7 0.1
Latest 90.8 5.5 0.1
Forecast -
Consensus -
Week 30-04 February 19:00 Argentina: Govern. tax revenue, ARS bn Colombia: CPI inflation, % m/m
Period Jan Jan
Prev 2 47.6 0.19
Prev 1 47.3 0.14
Latest 48.9 0.42
Forecast 0.84
Consensus 0.76
Colombia CPI inflation: Considering a seasonal increase in food prices and an acceleration of core prices, we expect a fast increase in prices in January, with an inflation rate of 0.84%.
26 January 2012
30
FX FORECASTS AND FORWARDS

FX forecasts Spot G7 countries EUR JPY GBP CHF CAD AUD NZD Emerging Asia CNY HKD INR IDR KRW MYR PHP SGD THB TWD Latin America ARS BRL CLP MXN COP PEN EEMEA EUR/CZK EUR/HUF EUR/PLN EUR/RON USD/RUB BSK/RUB USD/TRY USD/ZAR USD/ILS USD/EGP USD/UAH 25.14 295 4.24 4.34 30.23 34.52 1.79 7.82 3.76 6.04 8.04 25.50 310 4.30 4.36 30.30 35.07 1.82 8.15 3.75 6.00 8.03 25.75 315 4.50 4.45 30.00 34.05 1.85 8.20 3.70 6.20 8.10 25.50 310 4.40 4.40 30.00 33.38 1.82 7.80 3.65 6.50 8.15 25.25 300 4.35 4.35 30.50 33.25 1.80 7.70 3.60 7.00 8.20 1.4% 4.8% 1.2% 0.2% -0.6% 1.0% 0.7% 3.8% -0.3% -2.9% -1.5% 2.4% 5.8% 5.2% 1.9% -2.4% -2.8% 1.1% 3.5% -1.8% -4.4% -3.6% 1.4% 3.0% 2.0% 0.0% -3.6% -6.0% -2.4% -2.8% -3.4% -1.9% -7.1% 0.4% -2.3% -0.8% -3.8% -4.5% -8.8% -6.8% -6.5% -5.0% 2.5% -16.2% 4.34 1.75 487 12.98 1,811 2.69 4.35 1.74 485 12.85 1,795 2.68 4.45 1.73 480 12.70 1,780 2.67 4.60 1.74 475 12.65 1,775 2.66 5.40 1.70 475 12.60 1,770 2.64 -0.6% -1.0% -0.7% -1.3% -1.0% -0.4% -0.9% -2.8% -2.3% -2.9% -2.1% -1.2% -1.2% -3.8% -4.0% -4.1% -3.1% -1.9% 6.4% -8.7% -5.4% -6.0% -4.4% -3.4% 6.31 7.76 50.11 8979 1122 3.04 42.89 1.26 31.38 29.86 6.28 7.78 50.00 8850 1100 3.02 42.60 1.24 31.00 29.70 6.24 7.78 50.00 8800 1075 3.00 42.20 1.23 30.60 29.50 6.17 7.78 49.00 8800 1050 2.95 42.50 1.23 29.75 28.75 6.08 7.78 48.00 8500 1025 2.84 42.00 1.22 28.50 27.50 -0.3% 0.2% -0.6% -1.2% -2.1% -0.8% -0.8% -1.7% -2.0% -0.7% -0.7% 0.2% -2.0% -2.1% -4.7% -1.8% -1.9% -2.5% -3.5% -0.9% -1.7% 0.3% -5.4% -2.9% -7.4% -3.7% -1.4% -2.4% -6.7% -3.0% -3.1% 0.3% -9.4% -8.3% -10.0% -7.9% -2.8% -2.9% -11.2% -6.6% 1.31 77.4 1.57 0.92 1.00 1.06 0.82 1.35 75.0 1.57 0.92 1.03 0.97 0.77 1.30 75.0 1.55 0.96 1.05 0.98 0.79 1.25 78.0 1.52 1.04 1.05 1.01 0.82 1.20 80.0 1.50 1.08 1.02 1.02 0.83 3.0% -3.1% 0.1% -0.1% 2.8% -8.3% -5.8% -0.8% -3.1% -1.1% 4.4% 4.6% -6.8% -2.9% -4.7% 0.9% -2.9% 13.3% 4.4% -3.0% 1.4% -8.6% 3.9% -4.0% 18.1% 1.0% -0.4% 3.9% 1m 3m 6m 1y 1m Forecast vs outright forward 3m 6m 1y
26 January 2012
31
OFFICIAL INTEREST RATES

Start of cycle Official rate % per annum (unless stated) Advanced Fed funds rate BoJ overnight rate ECB repo rate Emerging Asia China: Working capital rate Hong Kong: Base rate India: Repo rate Indonesia: O/N policy rate Korea: Base rate Sri Lanka: Reverse repo Malaysia: O/N policy rate Philippines: O/N lending Taiwan: Rediscount rate Thailand: O/N repo rate Vietnam: Reverse repo rate 6.56 0.50 8.50 6.00 3.25 8.50 3.00 4.25 1.875 3.00 14.00 Tightening: 19 Oct 10 Easing: 19 Sep 07 Tightening: 19 Mar 10 Easing: 11 Oct 11 Tightening: 9 Jul 10 Easing: 20 Feb 09 Tightening: 4 Mar 10 Easing: 19 Jan 12 Tightening: 24 Jun 10 Easing: 30 Nov 11 Easing: Jul 11 5.31 6.75 4.75 6.75 2.25 12.00 2.00 4.50 1.375 3.50 15.00 Jul 11 (+25) Dec 08 (-100) Oct 11 (+25) Nov 11 (-50) Jun 11(+25) Jan 11 (-50) May 11 (+25) Jan 12 (-25) Jun 11 (+12.5) Jan 12 (-25) Jul 11 (-100) Beyond Q4 12 Beyond Q4 12 Q2 12 (-25) Beyond Q4 12 Beyond Q4 12 Q2 12 (-50) Beyond Q4 12 Q2 12 (-25) Beyond Q4 12 Q3 12 (+25) Q1 12 (-200) 6.56 0.50 8.50 6.00 3.25 8.50 3.00 4.25 1.875 3.00 12.00 6.56 0.50 8.25 6.00 3.25 8.00 3.00 4.00 1.875 3.00 11.00 6.56 0.50 8.00 6.00 3.25 8.00 3.00 4.00 1.875 3.25 10.00 6.56 0.50 7.75 6.00 3.25 8.00 3.00 4.00 1.875 3.50 10.00 0-0.25 0.10 1.00 Easing: 17 Sep 07 Easing: 30 Oct 08 Easing: 03 Nov 11 5.25 0.50 1.50 Dec 08 (-75-100) Oct 10 (0-10) Dec 11 (-25) Beyond 2013 Q1 14 (+20) Mar 12 (-50) 0-0.25 0-0.10 0.50 0-0.25 0-0.10 0.50 0-0.25 0-0.10 0.50 0-0.25 0-0.10 0.50 Current Date Level Last move Next move expected Q1 12 Forecasts as at end of Q2 12 Q3 12 Q4 12
Emerging Europe, Middle East & Africa Czech Republic: 2w repo rate Hungary: 2w deposit rate Poland: 2w repo rate Romania: Key policy rate Russia: Refi rate South Africa: Repo rate Turkey: 1wk repo rate Egypt: Deposit rate Israel: Discount rate Latin America Brazil: SELIC rate Chile: Monetary policy rate Colombia: Repo rate Mexico: Overnight rate Peru: Reference rate
Note: Changes denoted in bold. Source: Barclays Capital
0.75 7.00 4.50 5.75 8.00 5.50 5.75 9.25 2.50
Easing: 8 Aug 08 Tightening: 29 Nov 10 Tightening: 19 Jan 11 Easing: 4 Feb 08 Easing: 23 Dec 11 Easing: 11 Dec 08 Easing: 20 Nov 08 Tightening: 24 Nov 11 Easing: 26 Sep 11
3.75 5.25 3.50 10.25 8.25 12.00 16.75 8.25 3.25
Apr 10 (-25) Dec 11 (+50) Jun 11 (+25) Jan 12 (-25) Dec 11 (-25) Nov 10 (-50) Aug 11 (-50) Nov 11 (+100) Jan 12 (-25)
Beyond Q4 12 Q2 12 (+25) Mar 12 (-25) Feb 12 (-25) Mar 12 (-25) Nov 12 (+50) Beyond Q4 12 Feb 12 (+100) Q2 12 (-25)
0.75 7.00 4.25 5.25 7.75 5.50 5.75 11.25 2.50
0.75 7.25 3.75 5.00 7.50 5.50 5.75 11.25 2.25
0.75 7.25 3.75 5.00 7.50 5.50 5.75 11.25 2.25
0.75 7.25 3.75 5.00 7.50 6.00 5.75 11.25 2.25
10.50 5.00 4.75 4.50 4.25
Easing: 31 Aug 11 Easing: 12 January 12 Tightening: 25 Feb 11 Easing: 16 Jan 09 Tightening: 6 May 10
12.50 5.25 3.00 8.25 1.25
Jan 12 (-50) Jan 12 (-25) Nov 11 (+25) Jul 09 (-25) May 11 (+25)
Mar 12 (-50) Feb 12 (-25) Mar 12 (+25) Q1 12 (-25) Beyond 2012
10.00 4.50 5.00 4.25 4.25
9.50 4.25 5.50 4.00 4.25
9.50 4.25 5.50 4.00 4.25
9.50 4.25 5.50 4.00 4.25
26 January 2012
32
EMERGING MARKETS RESEARCH

Piero Ghezzi Head of Global Economics, Emerging Markets and FX Research +44 (0)20 3134 2190 piero.ghezzi@barcap.com EM Global Michael Gavin Head of Global Macro Strategy and Head of EM Strategy +1 212 412 5915 michael.gavin@barcap.com Latin America Alejandro Arreaza Economist Latin America +1 212 412 3021 alejandro.arreaza@barcap.com Guilherme Loureiro Economist Brazil +55 11 3757 7372 guilherme.loureiro@barcap.com Sebastian Vargas Economist - Argentina, Uruguay +1 212 412 6823 sebastian.vargas@barcap.com Asia Pacific Jon Scoffin Head of Credit Research and Head of Research, Asia-Pacific +65 6308 3217 jon.scoffin@barcap.com Joey Chew Regional Economist - Singapore +65 6308 3211 joey.chew@barcap.com Hamish Pepper FX Strategist, Asia-Pacific ex-Japan +65 6308 2220 hamish.pepper@barcap.com Nick Verdi FX Strategist, Asia-Pacific ex-Japan +65 6308 3093 nick.verdi@barcap.com Krishna Hegde, CFA Asia Credit Strategist and Senior Financial Institutions +65 6308 2979 krishna.hegde@barcap.com Emerging EMEA Christian Keller Head of Emerging EMEA Research +44 (0)20 7773 2031 christian.keller@barcap.com Daniel Hewitt Senior Emerging EMEA Economist +44 (0)20 3134 3522 daniel.hewitt@barcap.com Vladimir Pantyushin Chief Economist Russia and CIS +7 495 7868450 vladimir.pantyushin@barcap.com Alia Moubayed Senior Economist Middle East & North Africa +44 (0)20 313 41120 alia.moubayed@barcap.com EM Corporate Credit Juan C. Cruz Head of Latin America & EEMEA Corporate Credit Research +1 212 412 3424 juan.cruz@barcap.com Ivan Fernandes +1 212 412 3428 ivan.fernandes@barcap.com Aziz Sunderji +1 212 412 2218 aziz.sunderji@barcap.com Rohit Arora FI Strategist, Emerging Asia +65 6308 2092 rohit.arora3@barcap.com Olivier Desbarres Head of FX Strategy, Asia-Pacific exJapan +65 6308 2073 olivier.desbarres@barcap.com Kumar Rachapudi FI Strategist, Emerging Asia +65 6308 3383 kumar.rachapudi@barcap.com Ju Wang FI Strategist, Emerging Asia +65 6308 2801 ju.wang@barcap.com Avanti Save Credit Strategy +65 6308 3116 avanti.save@barcap.com Rahul Bajoria Regional Economist India, Malaysia, Thailand +65 6308 3511 rahul.bajoria@barcap.com Yiping Huang Chief Economist, Emerging Asia +852 2903 3291 yiping.huang@barcap.com Siddhartha Sanyal Chief Economist, India +91 22 6719 6177 siddhartha.sanyal@barcap.com Lingxiu (Steven) Yang Regional Economist China, Hong Kong +852 2903 2653 lingxiu.yang@barcap.com Jian Chang Regional Economist China, Hong Kong +852 2903 2654 jian.chang@barcap.com Wai Ho Leong Senior Regional Economist Korea, Malaysia, Singapore, Taiwan +65 6308 3292 waiho.leong@barcap.com Prakriti Sofat Regional Economist Indonesia, Philippines, Sri Lanka, Vietnam +65 6308 3201 prakriti.sofat@barcap.com Alanna Gregory EM Strategist +1 212 412 5938 alanna.gregory@barcap.com
Sebastian Brown Strategist/Economist +1 212 412 6721 sebastian.brown@barcap.com Roberto Melzi Senior Strategist +1 212 412 5963 roberto.melzi@barcap.com
Alejandro Grisanti Chief Economist Latin America Ex-Brazil, Mexico +1 212 412 5982 alejandro.grisanti@barcap.com Bruno Rovai Economist +55 11 3757 7392 bruno.rovai@barcap.com
Donato Guarino Senior Strategist +1 212 412 5564 donato.guarino@barcap.com Marcelo Salomon Chief Economist Brazil, Chile, Mexico +1 212 412 5717 marcelo.salomon@barcap.com
Koon Chow Head of Emerging EMEA Strategy +44 (0)20 777 37572 koon.chow@barcap.com Piotr Chwiejczak Rates Strategist +44 (0)20 3134 4606 piotr.chwiejczak @barcap.com Andreas Kolbe Credit Strategist +44 (0)20 313 43134 andreas.kolbe@barcap.com Dumisani Ngwenya Strategist Africa +27 (0)11 895 5346 dumisani.ngwenya@absacapital.com
Jeff Gable Head of ABSA Capital Research +27 11 895 5368 jeff.gable@absacapital.com Ridle Markus Economist Sub-Saharan Africa +27 11 895 5374 ridle.markus@absacapital.com Jeffrey Schultz Economist South Africa +27 (0)11 895 5349 jeffrey.schultz@absacapital.com Michael Keenan Sub-Saharan FX and Rates Strategist +27 (0) 11 895 5513 mike.keenan@absacapital.com
Gina Schoeman Economist South Africa +27 (0)11 895 5403 gina.schoeman@absacapital.com Fahad Al Turki Economist Saudi Arabia +966 1880 6577 fahad.alturki@barcap.com Eldar Vakhitov Emerging EMEA Economist +44 (0)20 777 32192 eldar.vakhitov@barcap.com
Christopher Buck +1 212 412 3418 christopher.buck@barcap.com Autumn Graham +1 212 412 2839 autumn.graham@barcap.com Antoine Yacoub + 44 207 7731727 antoine.yacoub@barcap.com
Stella Cridge +44 (0)20 313 49618 stella.cridge@barcap.com Milena Ianeva +44 (0)20 7773 8536 milena.ianeva@barcap.com Golib Zohidov +44 (0)20 777 31513 golib.zohidov@barcap.com
Miguel Crivelli +1 212 412 5231 miguel.crivelli@barcap.com Stanislav Ponomarenko +7 495 786 8451 stanislav.ponomarenko@barcap.com
26 January 2012
33
Analyst Certification(s) We, Nick Verdi, Olivier Desbarres, Rahul Bajoria, Wai Ho Leong, Daniel Hewitt, Vladimir Pantyushin, Marcelo Salomon, Krishna Hegde, CFA, Avanti Save, Prakriti Sofat, Koon Chow, Alanna Gregory, Jian Chang, Piotr Chwiejczak, Christian Keller, Alia Moubayed, Jeffrey Schultz, Eldar Vakhitov, Alejandro Arreaza, Alejandro Grisanti, Guilherme Loureiro, Bruno Rovai, Sebastian Vargas, Roberto Melzi and Kumar Rachapudi, 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 report. To the extent that any of the conclusions are based on a quantitative model, Barclays Capital hereby certifies (1) that the views expressed in this research report accurately reflect the firm's quantitative research model and (2) no part of the firm's compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. Important Disclosures For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barcap.com or call 212-526-1072. Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Barclays Capital may have a conflict of interest that could affect the objectivity of this report. Any reference to Barclays Capital includes its affiliates. Barclays Capital and/or an affiliate thereof (the "firm") regularly trades, generally deals as principal and generally provides liquidity (as market maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives thereof). The firm's proprietary trading accounts may have either a long and / or short position in such securities and / or derivative instruments, which may pose a conflict with the interests of investing customers. Where permitted and subject to appropriate information barrier restrictions, the firm's fixed income research analysts regularly interact with its trading desk personnel to determine current prices of fixed income securities. The firm's fixed income research analyst(s) receive compensation based on various factors including, but not limited to, the quality of their work, the overall performance of the firm (including the profitability of the investment banking department), the profitability and revenues of the Fixed Income Division and the outstanding principal amount and trading value of, the profitability of, and the potential interest of the firms investing clients in research with respect to, the asset class covered by the analyst. To the extent that any historical pricing information was obtained from Barclays Capital trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads are historical and do not represent current market levels, prices or spreads, some or all of which may have changed since the publication of this document. Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise. In order to access Barclays Capital's Statement regarding Research Dissemination Policies and Procedures, please refer to https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html.
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EMERGING MARKETS RESEARCH

THE EMERGING MARKETS WEEKLY What happens at the crossroads?

Weekly EM Asset Performance

Barclays Capital | The Emerging Markets Weekly

Rates SGD 1y forward 3s10s IRS steepener

Credit Long Argentina USD Discount

Figure 1: Global equity market fund positioning, endNovember 2011

Overweight relative to MSCI EM benchmark index

Underweight relative to MSCI EM benchmark index

1 0 -1 EM EM Asia Latam EMEA

Source: EPFR, Barclays Capital

Barclays Capital | The Emerging Markets Weekly

EMERGING MARKETS OUTLOOK

What happens at the crossroads?

Surge in risk appetite leading to EM currency outperformance

Tail risks from eurozone and sluggish global growth

More than just about high beta, high carry

Barclays Capital | The Emerging Markets Weekly

What now for EM central banks?

But wholesale change in FX policy unlikely

Central bank FX intervention was asymmetric last year

Source: Barclays Capital

Barclays Capital | The Emerging Markets Weekly

Figure 3: Change in Nominal Effective Exchange Rates (NEERs)

Jan-Aug 2011 Sept-Dec 2011

Barclays Capital | The Emerging Markets Weekly

Barclays Capital | The Emerging Markets Weekly

Receive Mexico 1y TIIE, shortend rates in EEMEA (FX-hedged)

Barclays Capital | The Emerging Markets Weekly

MACRO OUTLOOK: EMERGING ASIA

Selective and calibrated easing

Korea: GDP growth likely bottomed out in Q4

Growth most likely bottomed out in Q4 11 in Korea

No sign of stress on domestic front, we expect BoK to keep rates on hold

India: Calibrated move towards supporting growth

Figure 1: Korea: We look for a pick-up in Q1 GDP

Figure 2: Korea: Resilient services demand

KR: Exports (% 3m/3m saar) US ISM New Orders (LHS)

Source: CEIC, Barclays Capital

Barclays Capital | The Emerging Markets Weekly

Thailand: Policy accommodation appears to be over

Figure 3: India: Core prices remain sticky

Figure 4: Thailand: Early signs of improvement

72 70 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

-3 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11

TH: Consumer confidence (point estimate)

Barclays Capital | The Emerging Markets Weekly

MACRO OUTLOOK: EMERGING EUROPE, MIDDLE EAST AND AFRICA

Rate decisions amid growth concerns

First Q4 growth figures from Poland, Lithuania and Ukraine

Figure 1: Growth decelerating across EEMEA

Real GDP (% y/y)

14% 12% 10% 8% 6% 4% Jan-08

Jan-10 Core CPI (% y/y)

Jan-11 Refinancing rate

Source: National sources, Haver Analytics, Barclays Capital

Source: Rosstat, CBR, Haver Analytics, Barclays Capital

Barclays Capital | The Emerging Markets Weekly

Czech: CNB likely stays on hold throughout 2012

Romania: NBR likely to hold amid ongoing street demonstrations

We expect Egypt to raise rates further to stem currency pressures

This week Israel cut while Turkey remained on hold

Barclays Capital | The Emerging Markets Weekly