Important notice: The circumstances in which this publication has been produced are such that it is not appropriate to characterise it as independent investment research as referred to in European MIF directive and that it should be treated as a marketing material even if it contains a research recommendation (« recommandation d’investissement à caractère promotionnel »).

EMERGING WEEKLY 29 May 2009

Are we really approaching the end of the rate cycle in EM?

Editorial

There is wide consensus that the rate cut cycle in EM space is

coming to an end. Admittedly, EM central banks have slashed rates

aggressively to counter the recessionary forces, bringing them to

very low levels. Yet, the global economy still faces big challenges. If

the �green shoots� do not blossom because of the global de-

leveraging process, EM central banks could resume a rate cut cycle

after a pause. Steeper local yield curves could remain a market

theme and the currencies weaken again.

FX Trade Summary

Our trade positions continued to perform relatively well with the

major exception of our short ZAR trades. The rand has risen strongly

as stock markets continued to hedge higher. Although we keep our

long USD/ZAR trade as we still believe that the rand strength is not

justified and a swing in stock markets could impact it negatively, we

closed the long TRY/ZAR as the delay in the IMF deal makes the TRY

vulnerable. We stay short TRY vs. EUR and BRL as part of our view

that LatAm will outperform EMEA. We are also long MXN/HUF.

CEEMEA local rates outlook for H2 09

From the macro perspective, we prefer Polish, South African and

Czech bonds to Hungarian peers in this region. Curve-wise, the

steepening bias remains intact except for Hungary. On bond-swap

spreads, we expect government bonds to continue to underperform

swaps over the medium term, especially in the long-end.

FX Technical Analysis:

EUR/PLN � should rise to 4.5785/4.5985, or even to the March high

of 4.7460.EUR/CZK � We may see a rise back to 27.28, or even to

the 27.60/72 resistance area, before EUR/CZK returns to 26.30/32

and moves down to 25.48/64.

Amount of rate cuts since rates peaked in 2008 (in bp)

0

100

200

300

400

500

600

700

800

RON HUF PLN CZK IDR THB MXN KRW BRL COP INR ZAR CLP TRY

Source: SG EM Research, Bloomberg

The level of real rates in EM still offers margins for central banks…

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

CLP KRW MXN ZAR CZK PLN IDR THB COP RON TRY INR BRL HUF

Source : SG EM Research, Bloomberg

Contents View & Trade Summary EM Research Team View and Trade Summary 2 21/05/09 28/05/09 Coming week Coming month Gaëlle Blanchard (44) 20 7676 7439 Weekly Calendar 3 EUR/PLN 4.3968 4.5237 Murat Toprak (44) 20 7676 7491 Central Bank Watch 4 EUR/HUF 277.57 285.42 Esther Law (44) 20 7676 7396 Editorial 5 EUR/CZK 26.651 26.914 Jaroslaw Janecki (48) 2 2528 4162 FX Strategy 7 USD/TRY 1.5375 1.5609 Jan Vejmelek (420) 2 2200 8568 Fixed Income Strategy 12 USD/RUB 31.3242 31.3292 Anne-Francoise Blüher (420) 2 2200 8524 Issuance Calendar 14 PLN 5Y 5.3 5.43 Jiri Skop

(420) 222 008 569

Technical Analysis 15 HUF 5Y 8.4 8.5625 Maxim Oreshkin

(7495) 725 5637 Macro focus 16 CZK 5Y

3.23 3.36 Patrick Bennett (852) 21 66 57 97

Emerging Weekly

29 May 2009 2

FX & FI Views and Recommendations Trade recommendations (FX)

Our trade positions continued to perform relatively well with the major exception of our short ZAR trades. The rand has risen strongly over the past week as stock markets continued to hedge higher. Although we keep our long USD/ZAR trade as we still believe that the rand strength is not justified and a swing in stock markets could impact it negatively, we closed the long TRY/ZAR as the delay in the IMF deal makes the TRY vulnerable. We stay short TRY vs. EUR and BRL as part of our view that LatAm will outperform EMEA. We are also long MXN/HUF.

Cross Position Date Entry Target Stop Current P/L week * P/L total

New positions this week

Old positions

CZK/HUF Long 21-May 10.41 11.10 10.06 10.60 1.83% 1.83%

USD/ZAR Long 21-May 8.31 9.30 7.80 8.03 -3.43% -3.43%

PLN/HUF Long 21-May 63.18 68.00 60.80 63.12 -0.09% -0.09%

MXN/HUF Long 21-May 15.24 17.00 14.36 15.48 1.57% 1.57%

TWD/MYR Long 21-May 0.1083 0.1120 0.1064 0.1082 -0.09% -0.09%

TRY/BRL Short 17-Apr 1.3460 1.2500 1.3565 1.2848 2.74% 4.55%

EUR/TRY Long 9-Apr 2.08 2.25 2.00 2.1770 1.81% 4.66%

Positions closed

TRY/ZAR Long 6-May 5.33 5.75 5.10 5.14 -4.81% -3.56%

KRW/SGD Long 25-Mar 0.1105 0.1200 0.1140 0.1148 -1.46% 3.89%

Total P/L 1.04%

* since last Thursday ** P/L calculated without carry

Trade recommendations (Fixed Income)

Hungary: Increase 2s5s IRS flattener. We see recent disinversion of the local curve as an opportunity to increase this flattener position which offers an estimated positive carry of +9bp over 3M (target -40bp).

Poland: (1) Increase 2s5s10s barbell (receive 5s vs 2s and 10s). This barbell has suffered from the recent steepening of the 2s5s. With the end of the easing cycle approaching, we see further steepening in 2s5s as limited. Technically, the barbell is also attractive at a 5-year high of 44bp. Maintain: (1) POLGB 2013-14-15 barbell and (2) long 0310 in Eonia positions, which have both performed in our favour. (3) Maintain our 3x6 vs 6x9 FRA steepener with a target of +10bp.

Czech Republic: (1) Revise target for 2s10s IRS steepener to +145bp from +123bp (See EM Fixed Income Special- CZK 2-10Y IRS steepener still in place, 22 May). (2) Maintain long CZGB4.7 9/22 in ASW with a target of +145bp.

South Africa: Maintain 1y1y forward receiver. Further cuts are still likely. Risk reward favours receiving 1y1y forward to a steepener at this level.

Position Date Entry Unit Target Stop Current P/L week (bp)*

P/L total (bp)

Existing positions

HUF 2s5s flattener 20 Mar -14 bp -40 -7 -12 -1 -2

PLN - EUR 5y5y forward 30 Mar 160 bp 60 120 111 -9 49

Buy POLGB5.75 3/10 vs Eonia 06 Apr 280 bp 100 300 104 61 176Sell PLN 2-5-10yr swap Barbell 16 Apr 35 bp 18 45 42 -4 -7Buy: PS0414 vs Sell DS1013 & DS1015 (DV01 neutral)

21 Apr 7.2 bp -4 11 0.0-2

7.2

CZK 2s10s steepener 29 Apr 93 bp 123 78 125 1 32Buy CZGB4.7 9/22 versus swaps 30 Apr 155 bp 145 115 141 14 14

PLN rec 3x6 vs pay 6x9 15 May 0.0 bp 10 -5 0.0 0 0

ZAR 1y1y forward 11 May 7.93 % 7 8.2 7.95 -8 -2

* since last Thursday ** P/L calculated without carry

Source: SG EM Research, Bloomberg, Reuters

Emerging Weekly

29 May 2009 3

Events and data During the week Period Previous SG Forecast Consensus

South Africa SACCI Business Confidence MAY 81.9 na na Ukraine Consumer Prices (MoM) MAY 0.9% na na Consumer Prices (YoY) MAY 15.6% na na Producer Prices (MoM) MAY 0.4% na na Producer Prices (YoY) MAY 6.3% na na Official Reserve Assets MAY 24494.7M na na Hungary Budget Balance (YtD) MAY -604.1B na na

Monday 01-Jun-2009 (GMT) Period Previous SG Forecast Consensus

Hungary National Holiday 4:30 Russia Manufacturing PMI MAY na na na

Reserve Fund MAY $106.8B na na Wellbeing Fund MAY $86.3B na na

7:00 Turkey Manufacturing PMI (Table) MAY na na na 9:00 South Africa Kagiso PMI MAY 35.6 na na

Romania International Reserves (Total) MAY 27.1 na na Czech Republic Budget Balance (Koruna) MAY -55.7B na na

Tuesday 02-Jun-2009 (GMT) Period Previous SG Forecast Consensus

7:00 Romania Producer Prices (MoM) APR -0.6% na na 7:00 Producer Prices (YoY) APR 3.9% na na 9:00 South Africa Naamsa Vehicle Sales (YoY) MAY -43.1% na na

Hungary PMI (SA) MAY 40.4 na na

Wednesday 03-Jun-2009 (GMT) Period Previous SG Forecast Consensus

4:30 Russia Services PMI MAY na na na Weekly CPI (WoW) 0.2% na na Weekly CPI (YtD) 6.8% na na

14:00 Turkey Consumer Prices (MoM) MAY 0.0% na na 14:00 Consumer Prices (YoY) MAY 6.1% na na 14:00 Producer Prices (MoM) MAY 0.7% na na 14:00 Producer Prices (YoY) MAY -0.4% na na

Thursday 04-Jun-2009 (GMT) Period Previous SG Forecast Consensus

7:00 Hungary Trade Balance (Mln Euros) MAR F 492.8M na 7:00 Romania Net Wages (YoY) APR 17.6% na na 7:00 Industrial Sales (MoM) APR 19.6% na na 7:00 Industrial Sales (YoY) APR -10.6% na na

Russia Gold & Forex Reserve (USD) na na na

Friday 05-Jun-2009 (GMT) Period Previous SG Forecast Consensus

6:00 South Africa Gross Reserves MAY $34.1B na na 6:00 Net Reserves MAY $33.4B na na 7:00 Hungary Industrial Output (YoY) APR P -19.6% -19.6% na 7:00 Industrial Output (MoM) APR P 4.3% 4.3% na 7:00 Czech Republic Avg Real Wage (YoY) 1Q 3.4% na na

8:00 International Reserves (USD) MAY 37.0B na na

Russia Consumer Prices (MoM) MAY 0.7% na na Russia Consumer Prices (YoY) MAY 13.2% na na Russia Consumer Prices (YtD) MAY 6.2% na na Russia Core Inflation (MoM) MAY 0.8% na na Russia Core Inflation (YtD) MAY 5.2% na na Russia Money Supply Narrow Def. na na na Russia Official Reserve Assets MAY 383.9B na na

Source: SG EM Research, Komercni banka, Bloomberg

Emerging Weekly

29 May 2009 4

Central bank watch

Rating^ Outlook Country Next Meeting Last move (bp) Current Rate (%) SG View What is priced in (bp over 3m)

A- Stable Poland 24 Jun 09 unchanged 3.75 Another -25bp by Q2 09 -40

BBB- Negative Hungary 22 Jun 09 unchanged 9.50 steady near-term -55

A Stable Czech Rep. 25 Jun 09 -25 1.50 No change this year 0

BB+ Negative Romania 30 Jun 09 -50 9.50 Cautious 50bp cuts in Q2 NA

BBB Negative Russia NA -50 12.00 We expect another 50bp cut in the end of May NA

BB- Negative Turkey 16 Jun 09 -50 9.25 key rate at 8.75% in the next 3 months 0

BBB+ Negative South Africa 25 Jun 09 -100 7.50 key rate bottoming at 7.00% in the next 3-6 months -28

BBB- Stable Brazil 10 Jun 09 -100 10.25 key rate bottoming at 8.75% in the next 6 months -90

BBB+ Negative Mexico 19 Jun 09 -75 5.25 key rate bottoming at 4.25% by Q3 09 -30

A+ Stable China * -27 5.31 further easing is now unlikely NA

BB- Stable Indonesia 03 Jun 09 -25 7.25 One more 25bps cut in May or June -25

A- Stable Malaysia 29 Jul 09 unchanged 2.00 BNM surprised with no cut on 29 April, but further easing still expected 0

BB- Stable Philippines 09 Jul 09 -25 4.25 BSP eased again in May. We expect the easing cycle to continue at the next meeting -15

A Stable South Korea 11 Jun 09 unchanged 2.00 BoK left rates unchanged in May, pricing for further easing has been trimmed -5

AA- Negative Taiwan NA unchanged 1.25 Rates were unexpectedly left on-hold in March, further easing is still priced -25

BBB- Negative India NA -25 4.75India recently surprised with a further 25bp

cut. RBI's goal is to get commercial banks to pass on easing.

0

BBB+ Negative Thailand 15 Jul 09 unchanged 1.25 We expect a further 25bp cut, potentially at the July meeting -10

Source: SG EM Research, KB, Bloomberg, Reuters (as at 28 May 09 close.). ^S&P ratings are used

Emerging Weekly

29 May 2009 5

Are we really approaching the end of the rate cycle in EM?

There is wide consensus that the rate cut cycle in EM space is coming to an end. Admittedly, EM central banks have slashed rates aggressively to counter the recessionary forces, bringing them to very low levels. Yet, the global economy still faces big challenges. If the “green shoots” do not blossom because of the global de-leveraging process, EM central banks could resume a rate cut cycle after a pause. Steeper local yield curves could remain a market theme and the currencies weaken again.

EM central banks have slashed rates aggressively since mid-2008

The central banks of emerging economies were slow to cut rates at the beginning of the cycle. The high level of inflation up to mid-2008 due to rising energy and food prices was limiting the room to manoeuvre. After a cautious start, central banks have accelerated the pace of rate cuts in the face of an extremely rapid deterioration of the economy. Most EM countries have slashed between 200-300bp off rates since their peak. Chile and Turkey have been the most aggressive with 700-750bp cuts, while Romania and Hungary have been much more cautious. Generally speaking, the key rates are currently at a multiple year low and in certain cases at record levels. The market currently believes that the catch-up process of EM central banks relative to those of the G10 is ending. In all areas, markets expect a small rate reduction in the coming 3-6 months, depending on individual cases. This is particularly true for CEE and Asian regions.

Graph 1. The very high level of inflation in 2008 delayed the start of the rate cut cycle in EM

5

5.5

6

6.5

7

7.5

8

8.5

9

9.5

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

%

Source: SG EM Research, IMF

Graph 2. Amount of rate cuts since rates peaked in 2008 (in bp)

0

100

200

300

400

500

600

700

800

RON HUF PLN CZK IDR THB MXN KRW BRL COP INR ZAR CLP TRY

Source: SG EM Research, Bloomberg

The “green shoots” underlie the belief that the rate cuts are coming to an end

The reasons behind the view that the rate cut cycle in emerging economies is reaching an end are numerous: the already low level of rates (in absolute terms or from an historical perspective), the stickiness of inflation in some countries, the weakness in currencies or the widening of fiscal deficits. But, the primary reason is the emergence of signs that the global economy has reached a bottom and has now entered a recovery phase. The so-called “green shoots” has been the markets’ theme in the past few months. However, this merely reflects a slowdown in the pace of deterioration rather than an upturn. This improvement follows an astounding collapse in the global economy in Q4 2008 and Q1 2009, as the credit crunch and inventory adjustment combined to undermine global demand. Although we may conclude that the worst-case scenario has been avoided, the challenges ahead remain daunting. We have only seen an improvement in the second derivative of global GDP up until now, but not in the first derivative. In other words, the OECD Leading Indicator has continued to decline, but at a slower pace.

What if the global economic recovery does not materialise?

In spring 2008, the markets lived with the “decoupling illusion”. The rest of the world was supposed to stand up and resist in the face of the tough US economic adjustment. They are now perhaps confronted with a “V-shaped recovery illusion” as the “green shoots” might just turn into “autumn leaves”. Indeed, companies clearing out their inventories, monetary easing and fiscal stimulus have begun to support growth of the economy but the medium-term outlook remains challenging with the need for global deleveraging. That will imply persistently tight credit conditions, weak business investment, increased household saving but also higher taxation in the future.

A further slump of the global economy, or even a halt in the improvement, would deeply modify the perspectives for rates. Despite past rate cuts, many EM central banks still have room to cut rates. Putting aside certain exceptions, both the absolute levels and the real level of rates still offer

Emerging Weekly

29 May 2009 6

margins, particularly as inflation will continue to fall. The global economy is in “unknown territory”, the same could be true for EM key rates. The central banks’ action may not even be limited to the key policy rate. As in Poland or Romania, central banks may continue to reduce the reserve requirement rates to ease lending conditions. The extension of the maturity of repo-funding and even direct purchases of government securities might be seen.

Graph 3. The level of key rates in EM still offers margins for central banks…

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

THB CLP CZK KRW PLN INR MXN COP IDR ZAR TRY RON HUF BRL

Source: SG EM Research, Ecowin

Graph 4. …as do the level of real rates

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

CLP KRW MXN ZAR CZK PLN IDR THB COP RON TRY INR BRL HUF

Source: SG EM Research, Bloomberg

Steeper yield curves but not necessarily weaker currencies

In our view, it is premature to conclude that the rate cut cycle will end soon. After a pause during the summer period, central banks could resume rate reductions before the end of the year or at the beginning of 2010. If the potential impacts on yield curves are pretty obvious, the outcome is not so straightforward for currencies. The current directional trend in local yield curves would remain intact, i.e. the curves would continue to steepen because of the combination of lower key rates and the continuous widening of the budget deficits.

Graph 5. Interest differentials are not a driver for FX performances

-38

-28

-18

-8

2

12

22

32

42

-500 0 500 1000 1500 2000

HUFTRY

ZAR

CZK

CHF

JPY

1Y interest rate spread vs.USD (bp)

Total return vs. USD, (%)

PLN

BRL

Performances since October 08

Source: SG EM Research, Bloomberg

On currencies, such a scenario would not lead to weaker exchange rates because of the decline in interest rates. Rates no longer matter for FX which has been the case since the eruption of the financial crisis. If in 2007, and even part of 2008, the absolute level of interest differentials was an important driver of FX performances, this correlation has evaporated since autumn last year. Assuming that EM interest rates will be reduced further because of weak economic perspectives, EMFX would weaken for reasons other than “the rate factor”. Weak global growth would indeed mean weak export performances and capital inflows, difficulties to repay external debt and, for some countries, potential financial system instability due to an increase in non-performing loans.

murat.toprak@sgcib.com

Emerging Weekly

29 May 2009 7

FX strategy TRY – with or without the IMF?

Turkish government counting on a continuous improvement in global markets - brave but risky

The chance of a quick conclusion of an agreement between Turkey and the IMF has fallen to zero. The government remains reluctant to implement a tight fiscal policy as the rise in the unemployment rate increases the political risk. The disappointing results of the latest local elections seem to have powerfully affected the AKP. The lack of consensus within the government over the IMF loan has postponed the resumption of the talks to the end of the summer. The PM, R.T. Erdogan, is deliberately postponing the agreement, hoping that global markets will continue to improve in the coming months, enabling Turkey to refinance itself directly in international capital markets. It is a brave stance but also a risky one. The global economy faces significant challenges and a renewed deterioration in risk appetite cannot be ruled out.

The government probably also feels more comfortable as the financing needs measured by the current account deficit have decreased. The gap between the CA deficit and capital flows has narrowed significantly as a result. Nevertheless, it remained substantial at $23bn on a 12-month accumulated basis at the end of March. The narrowing is largely due to the decrease in the CA deficit. The dynamic of capital flows is still adverse. More importantly, the reduction is due to the economic contraction, i.e. it is cyclical. The problem is that now the financing requirements of the public sector are surging. We estimate that the deficit could reach 5.0% of GDP compared with the 1.5% initially forecast by the government. Turkey is replacing one deficit with another. The overall financing requirements of the country will remain wide as a result.

Monetary policy and FX implications

In the Minutes of its last MPC meeting, the central bank emphasised that the current fiscal policy might be counterproductive: “the increase in financing requirement of the government might weaken the favourable impact of monetary policy decisions on economic activity”. Beyond the short-term relaxation due to recession, the fiscal discipline should be restored in a medium-term perspective, the CBRT says. In other words, if in the near-term the widening of the fiscal deficit does not impact the easing bias of the central bank, a rapid correction is needed to avoid a change in the monetary policy stance in the medium-term. Either way, Turkey will have to adjust its fiscal policy. An austerity package would be put in preparation but its size and implementation are not a done deal.

From an FX standpoint, the delay in the IMF deal is a risk factor for the TRY. A sudden deterioration of the risk environment would create strong pressures for the TRY in the absence of the IMF’s assistance. We continue to keep a negative bias on TRY, expressed by our long EUR/TRY position.

Graph 1. Current account deficit narrows…

-10

0

10

20

30

40

50

60

Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

USD bn, 12-mth cumulated

Source: SG EM Research, CBRT

Graph 2. …but fiscal deficit widens

-40

-35

-30

-25

-20

-15

-10

-5

0Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

12-mth accumulated, TRY

Source: SG EM Research, Bloomberg

Graph 3. government expenditures on the rise

0%

5%

10%

15%

20%

25%

30%

35%

40%

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

Revenues

Expenditure

y/y change, 12-mth

Source: SG EM Research, Bloomberg

murat.toprak@sgcib.com

Emerging Weekly

29 May 2009 8

RUB - strength persists; economy still falling

Improving external conditions have led to RUB strengthening

According to the Ministry of Economic Development, Russian GDP fell 10.5% in April. At the same time unemployment reached double digits, climbing to 10.2%. Weak domestic demand and tight credit conditions resulted in a further slide in imports, while rising commodities’ prices marginally improved exports. The seasonally adjusted trade balance surplus widened to USD 7.0bn in April and URALS at USD60/bbl will lead to further widening in the summer months. This will result in a positive CA in Q2. Meanwhile,domestic banks continued to reduce their net foreign assets. The balances on their foreign currency accounts held within the CBR have fallen below USD15bn in May from USD40bn in February. This combination led to a significant strengthening of RUB on the FX market. If RUB continues to strengthen in the coming months, excess supply of foreign currency may also come from individuals and corporates which have accumulated up to USD85bn of foreign currency assets since October of last year.

Budget deficit continued to boost rouble liquidity

At the same time, the budget deficit continued to grow. This reached RUB 320bn in April alone, while the MinFin said the budget deficit could swell to 9% of GDP this year. The fiscal gap is funded through direct money creation, so liquidity is no longer a problem for the banking system; interbank rates are near their lowest levels since October of last year. Flushed with excess liquidity, banks continue to pay off their debt owed to the authorities. Total net debt reached RUB1.7trn. this week, down from RUB3.3trn at the end of January. The combination of a fiscal deficit and the CBR’s interventions on the FX market may lead to a spike in monetary growth in H2.

Capital issues will continue to depress private banks’ balance sheets.

The level of NPLs has continued to surge in recent months. It is hard to get adequate statistics of NPLs in the Russian banking system, but the rule of thumb is that you need to multiply provisions under RAS by 1.5 to get the real NPL figure. Our estimate of the level of NPLs in the Russian banking system reached 7.0% by the end of Q1. As the deterioration in economic activity continues we will certainly see near double-digit figures by the end of the summer. The state-owned banks are already going through a recapitalisation process and their capital adequacy remains at a solid level. At the same time, RUB liquidity is also concentrated within a small number of state-owned banks. As privately-owned banks will continue to battle with NPLs on their balance sheets, credit growth in the coming months will be concentrated in state-owned banks. They will continue to increase loans primarily to large corporates and loans that can be refinanced within the CBR, while credit growth to SMEs will remain limited. This may result in an ineffective allocation of credit resources and no productivity growth in the economy. Monetary growth in this case will lead mainly to inflation, which will make a comeback in H2. Moreover, in terms of REER, we expect RUB will almost reach its pre-crisis level by the end of May, further depressing the domestic economy and leading to higher import levels.

Thus a weak economy and an abysmal fiscal balance will push RUB in H2 2009-2010 to weaken more than other CEE currencies.

Graph 2. Estimate of NPLs/Total Assets

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Source: CBR, Rosbank estimate

oreshkin@mx.rosbank.ru

Graph 1. Foreign currency-denominated individual accounts

20

25

30

35

40

45

50

55

60

65

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

bn. USD

Source: CBR

Emerging Weekly

9 29 May 2009

EUR/PLN 1 week trend 1 month trend

We don’t think the easing cycle is over and see at least another 25bp rate

cut on 24 June

Short term, a deterioration of the

situation in Baltic countries would weigh on

the PLN and all regional currencies

EUR/PLN was pushed back up this week, reaching 4.55 on Thursday before recovering towards 4.45 again. The move up from the 4.40 level seen at the start of the year was triggered by some renewed risk aversion following the rise in US bond yields. The weakening move affected other CEE currencies and was exacerbated by bad economic news in the Baltic countries, which led to fresh speculation of devaluation. External factors will remain key drivers for the PLN in the current financial market context, especially next week as the economic agenda in Poland is empty.

There was no impact from the central bank’s decision to leave its key rate unchanged at 3.75% on Wednesday as this was widely expected. Future monetary policy moves will be determined by coming economic data and by the central bank’s new inflation projections to be released at the end of June. Q1 GDP growth of 0.8% y/y is weak, although better than in neighbouring countries, and it is unlikely to recover quickly given persistent tight credit conditions and the deteriorating environment for households, which will weigh on private consumption. So we don’t deem the easing cycle to be over. We see another 25bp rate cut on 24 June and possibly further moves after the summer.

This is not especially negative for the PLN though, as the interest rate factor is no longer a key determinant for FX. We expect the PLN is more likely to suffer a comeback of risk aversion in coming months, as the market could be disappointed by global economic developments.

EUR/CZK 1 week trend 1 month trend

It seems that the wave of optimism on global

markets is losing steam

EUR/CZK could head higher in the month

ahead towards our end of June estimate set at

27.50

The EUR/CZK exchange rate traded in a relatively tight range this week, lacking any impulse from the domestic scene. Our outlook remains unchanged. Global risk aversion should continue to be the key determinant of the EUR/CZK exchange rate and it seems that the wave of optimism on global markets is losing steam.

The flash estimate for April industrial production disappointed with a 23.2% y/y decline. Adjusted for the difference in working days (shift in timing of the Easter holiday) industrial production declined at the same pace as it did in March i.e. around -21% y/y (according to our calculations). The market is likely to take this outcome as an indication that the Czech economy is failing to recover.

Next week the only item in the calendar is wages for Q1 09, but we doubt that this data release will impact on the EUR/CZK. All in all, we think that EUR/CZK could head higher in the quarter ahead, towards our end of September estimate set at 27.00 (we cannot rule out an even bigger move in the case of a more significant increase in risk aversion).

EUR/HUF 1 week trend 1 month trend

The NBH opens the door for a rate cut

We stay cautious on the HUF

The HUF remains on the defensive and continues to trend hand in hand with the PLN. Investors’ appetite for CEE-3 currencies remains weak as the economic readings are still pretty mixed. The currency is still vulnerable and highly dependant on the risk appetite of global markets. Some signs of hesitation on that side pushed EUR/HUF higher over the past few sessions. From a domestic standpoint, the situation has hardly changed. The economic recession looms and a return to positive growth is not expected before 2011. However, the NBH has opened the door for a rate cut if the HUF stabilises. Indeed, in its inflation report the central bank emphasises that “inflation may remain subdued over the entire forecast period, net of the first-round effects of the tax measures”. The need for a rate cut is all the more evident in light of the latest Senior Loan Officer survey which showed that lending conditions were still very tight in Q1. Banks have marginally eased their lending conditions to households but further tightened those for the corporate sector. The scope for rate cuts does exist but the timing is very uncertain. In our view, the maximum that the NBH may deliver is 50bp in the coming 3 months.

Trading-wise, we sit on the sidelines on EUR/HUF but stay long CZK/HUF as that is a safer way to express our cautious view on the HUF and the current high level of risk appetite.

USD/ZAR 1 week trend 1 month trend

SARB retains its front loading strategy but the

The South African central bank has cut the repo rate by 100bp for the third consecutive month. Although two options were discussed during the meeting, the MPC has decided to keep a front loading strategy by opting for 100bp instead of 50bp. The macroeconomic panorama fully justifies this strategy. The Q1 GDP data released this week were particularly

Emerging Weekly

10 29 May 2009

end of the cycle is near

The ZAR is still correlated to the stock markets

ugly. The GDP contracted by a massive -6.4% (q/q annualised) vs. -3.9% expected and 1.8% in Q4 08. The rise of the construction component (+9.4%) has not offset the strong contraction in all other sectors of the economy. Unsurprisingly, the manufacturing and mining sectors have contracted the most, by -22.1% and -32.8% respectively. The resilience of inflation to the downside remains a concern as regulated prices are likely to increase. However, the inflation outlook has improved as domestic demand remains constrained by negative wealth effects and tight lending conditions. The SARB sees the economy continuing to contract in Q2, though at a slower pace as a result. The governor, Mboweni, was quite clear that the rate cut cycle had reached the end of the road. If we believe that another rate cut of 50bp at the next meeting is probable, the SARB is very likely to make a long pause, keeping the repo at 7.00%. The future direction of the monetary policy will depend on the materialisation or not of the global economic recovery.

From an FX standpoint, the monetary policy doesn’t carry much weight, although the market has rewarded the SARB because of its attempt to support the economy. USD/ZAR fell below 8.00 as risk appetite is still strong despite the swings in US bond yields. The ZAR remains strongly correlated to the stock markets. We still believe the rand’s rise is excessive and not fundamentally justified. We continue to see a rebound of USD/ZAR in the upcoming period.

USD/CNY 1 week trend 1 month trend

Sell the USD/CNY 6-month NDF at current

market of 6.7725

US Treasury Secretary Geithner is visiting China to meet with his Chinese counterparts early next week. A US Treasury official release details that Geithner will “discuss a range of issues of importance to both countries, including strengthening US-China economic ties to promote stable, balanced and sustained economic growth in the two nations and further global economic recovery.”

While surely still wishing it, we do not expect Geithner to make much noise on China’s exchange rate policy and the US’s desire for further CNY appreciation. China’s policy very clearly moves at a pace it decides and based on any rational measure, China’s drive to introduce greater flexibility and promote further modest appreciation of the CNY is clear.

Of more pressing concern for Geithner will be reassuring China that US policy is sound and that risks to China’s huge holding of US debt are over-stated. In March, Chinese Premier Wen Jiabao said China was “worried” about its $770bn of investment and sought assurances the value would be protected. China has recently been buying more short-dated than long dated maturity US debt. It bought $5.6bn in bills and sold $964m in bonds in February.

We expect China to continue edging the daily fixings for USD/CNY lower and to re-engage modest appreciation of the CNY later in the year. The 1-year NDF is currently indicated at 6.6975, the 6-month is 6.7725. We recommend selling the 6-month at the current level, with a stop-loss placed above 6.8050.

USD/HKD 1 week trend 1 month trend

Sustainability of the USD/HKD peg is not in

question

After spending the best part of the last two months trading just above 7.7500, USD/HKD has rallied modestly and during the last week has been trading around 7.7530-40. Each time USD/HKD trades near 7.75 there are questions raised on the sustainability of the HKD peg. We do not believe there are any risks to the sustainability of the peg or its operation.

The HKD is pegged at 7.80 and the monetary authority (HKMA) operates convertibility undertakings on both the strong and weak side of 7.80. Under the strong-side convertibility undertaking, the HKMA undertakes to buy USD from licensed banks at 7.75. Under the weak-side convertibility undertaking, the HKMA undertakes to sell USD at 7.85. The sustainability of the peg is due to the fact that the linked exchange rate system is in essence a currency board system, which requires both the stock and the flow of the monetary base to be fully backed by foreign reserves. As at the latest report date, foreign assets amounted to HK$1,397.6bn. The monetary base comprising the aggregate balance of the banking system and exchange fund bills and notes issued, amounted to HK$618.8bn.

As Hong Kong is a small open economy where trade is many times the size of its GDP, the pegged exchange rate offers stability and certainty for businesses. Though the price of greater asset volatility and lack of control over interest rate policy (that is set by the US Fed) need to be considered, there are no compelling reasons for the peg to be abolished or a different system adopted. The HKMA can buy USD at 7.75 ad-infinitum - simply printing or creating the HKD to exchange for each USD they are sold.

Buying USD/HKD at 7.7500 (or below) in the forward market is thus a low-risk strategy as long

Emerging Weekly

11 29 May 2009

as investors believe the peg will remain in place. The 6-month USD/HKD forward is currently trading at 7.7425, up from a low of 7.7387 on 20 May.

USD/KRW 1 week trend 1 month trend

Long KRW/SGD closed following North Korea’s

nuclear test

Reports of North Korea’s nuclear test and missile firings sparked sharp weakness in South Korean markets, though somewhat surprisingly, the losses were not sustained. There have been previous occasions when we have been confident to call the activities of North Korea as primarily sabre-rattling in order to gain concessions on food aid and the like. This time there is a different feel that is particularly associated with the lack of warning and the number and frequency of actions. History shows that South Korean consumer and business confidence can be undermined by uncertainty surrounding North Korea and we caution to take a very watchful stance. We closed our long KRW/SGD position on stop-profit at 0.1140 and we will consider re-establishing the trade in coming weeks. The rationale for north Asia outperformance over south Asia is intact, but in the near term is best expressed through long TWD/MYR.

murat.toprak@sgcib.com gaelle.blanchard@sgcib.com

patrick.bennett@sgcib.com anne_bluher@kb.cz

Emerging Weekly

12 29 May 2009

Fixed Income strategy CEEMEA local rates outlook for H2 09

From the macro perspective, we differentiate between countries which have or could be eligible for the Flexible Credit Limits (FCL) to standby countries or countries with high non-performing loans (NPL) concerns.

Curve-wise, steepening bias remains generally intact.

On bond-swap spread, we expect government bonds to continue to underperform swaps, especially in the long-end.

Prefer FCL to standby loans and countries with high NPL exposure

We remain cautious about emerging market risk over H2 2009. That said, it is important to differentiate countries which have lower risks stemming from external imbalances from those which are still vulnerable to a return of risk aversion.

This leads us to prefer countries which have obtained or could be eligible for FCLs (Poland, Czech, South Africa) to countries with standby loans (Hungary, Romania, Ukraine) or those with a relatively high ratio of non-performing loans (Hungary, Kazakhstan, Lithuania).

Given our bearish outlook on Hungary, we recommend keeping an underweight position in Hungarian debt versus overweight Poland, Czech and South Africa local debt.

We also see increasing risks related to NPLs in Russia (see Forex Strategy Outlook, H2 2009). We think paying short-dated RUB NDF implied rates below 10% is attractive. Fiscal and inflation concerns, particularly rising non-performing loans may put pressure on the Russian risk premium, justifying higher rates. We see short-dated RUB rates as bouncing back to 11%.

CEEMEA to underperform Latin America

On a regional basis, we expect the CEEMEA region to underperform Latin American peers. This will be driven by lower external debt levels and LatAm’s better macro-economic fundamentals. In turn, this justifies some interesting relative value strategies between CEEMEA and LatAm.

To exploit this, we recommend receiving short-end Mexican (or Brazilian) rates versus Hungary rates. This trade is especially attractive as both legs provide a positive carry (estimated at +45bp over 3 months).

- On the Mexican leg, we see 2Y TIIE to push towards 4.7% given our monetary policy view of rates bottoming at 4.25% by September this year.

- In Hungary, as mentioned below, we think cuts priced in are premature. Hence, paying 2Y HUF is consistent with our relatively bearish rates view in Hungary.

Steepening remains generally intact except for Hungary

Further steepening in Turkey. We find it interesting to regress the 2y benchmark compound yield on overnight interbank

rates. (The 6M correlation comes out at +0.94). Such a model implies a level of 11.30% for the compound yield. We assume here that the overnight rate lowers to our forecast of 8.50% (see Graph 1).

Graph 1: Turkey 2y compound yield and overnight rate

8

12

16

20

24

Apr07

Jul07

Sep07

Dec07

Mar08

Jun08

Sep08

Nov08

Feb09

May09

9

11

13

15

17

19

2Y compound yield (LHS)TRLIBON Index (RHS)

Source: SG EM Research, CBRT, Bloomberg

Our estimate is 95bp below the current level. While the short-end is supported by further cuts, the long-end is likely to remain under pressure due to fiscal concerns. This is especially worrying for Turkey as the latest non-resident holdings of local government debt data still shows no signs of improvement, while foreign holdings of local Czech, Polish and even Hungarian government debt are stabilising. This means that there is still potential for further unwinding of local debt positions by foreigners, especially in the long-end coupon bond. These factors all point to further steepening in the local curve.

South Africa - value in receiving 1y1y forward. Prospects for more cuts should keep the short-end of the ZAR curve supported. Cuts of 25bp are priced in, following the 100bp cut in May. But there is still potential for short rates to fall even further. The shock waves from the larger-than-expected contraction in the latest GDP data and the global economic contraction are still to be fully felt.

Graph 2: South Africa 1y1y forward

6.06.57.07.58.08.59.0

0 2 4 6 8 10

Tenor (year)Curve as of 29 MayProjected curve (3m JIBAR = 7.5%)Projected curve (3m JIBAR = 7.25%)

Source: SG EM Research, Bloomberg

We see more value just now in receiving 1y1y forward in South Africa than in a steepener. The risk reward

Emerging Weekly

13 29 May 2009

perspective certainly favours the forward trade. We see potential for the 1y1y forward to push down to 7% (from 7.9% now).

Further steepening in CZK too. We expect the Czech curve to steepen further. Concerns regarding the budget deficit later this year leave us bearish on the long end of the curve. In addition, from a statistical perspective, we find a strong correlation (+0.95) between the difference of the 3M 2Y forward and the 3M 1Y forward against the 2s10s IRS. Regressing the 2s10s IRS on the spread between 3m 2Y fwd and 3m 1Y fwd suggests a theoretical 2s10s spread of +163bp, given the current spread in the 3m forward rates of +78bp. So we maintain our 2s10s steepener with a revised target of +145bp (versus +93bp initiated on 29 April).

Graph 3: Czech curve to steepen further

-200

20406080

100120140160180200

05.03 05.04 05.05 05.06 05.07 05.08 05.09

CZK 2-10Y IRS estimate using 2Yx3M - 1Yx3M

Source: SG EM Research,KB

A PLN 2s5s10s barbell looks attractive. In Poland, a pause in rate cuts may limit further steepening of the local curve, especially between 2s and 5s. A 25bp cut is priced in over 2 months, in line with our expectations. However, over the medium term, the government deficit remains a problem and is expected to weigh on the long-end. This supports receiving a 2s5s10s IRS barbell, which is currently at a 5-year high of 44bp (see Graph 4).

Graph 4: Poland 2s5s10s barbell

-80-60

-40-20

020

4060

Apr 08 Jul 08 Nov 08 Feb 09 May 09

PLN bell1 sw aps curve Target

Source: SG EM Research

Flattener still makes sense in Hungary. Hungary is the exception. Here we expect some flattening in the local curve.

We consider the 130bp cuts priced in over a 6M horizon as premature, especially with the VAT hikes in July, the recent stickiness in the CPI and the still looming risk of an unwanted rising FX volatility. We favour a 2s5s flattener which offers a positive carry (+9bp over 3 months).

Graph 5: CEEMEA rate expectations

-200-150-100-50

050

100150200250

PLN HUF CZK ZAR ILS TRY

FRA

- pre

miu

m* (

bp)

0

2

4

6

8

10 Key Policy rates (%)

3m 1m fw d* (LHS) 3m 3m fw d* (LHS)3m 6m fw d* (LHS) Current base rate (RHS)

Source: SG EM Research, Bloomberg, Reuters

Recent bond-swap tightening likely to be temporary

Bond-swap spreads have tightened across CE3 and South Africa recently, thanks to the improved risk appetite. However, issuance pressure should weigh on government debt over the medium term, especially in the long end.

In Czech Republic we think there is potential for government bonds to outperform swaps near term, due to the low CZGB issuance in H2 09.

However, over a longer-term, we believe that CZGBs should cheapen again later this year. We fear heavier domestic and global government bond issuance. Also, the run-up to the early elections in October could lead to an additional fiscal package.

Our first projections for 2010 (based on a rather moderate 2010 state budget deficit assumption) points towards another rise in CZGB issuance in 2010.

In Poland we expect the longer-dated government debt to remain more vulnerable to risk appetite. Hence we prefer to short asset-swaps in the long end of the government curve. The shorter-dated bonds may get some support from further cuts, which is what we predict. Hence a possible strategy is to go long asset-swaps at the short-end of the curve versus short asset-swaps in the long-end (i.e. the ASW term structure is set to steepen). Note that repo conditions can be restrictive on a short asset-swap position on less liquid issues.

We are cautious on Hungary debt asset-swaps, as AKK’s buybacks will add volatility to the ASW. Potential buybacks by the AKK will continue to compress the short-dated Hungarian debt asset-swaps. Indeed, the AKK has stated that the issuance for local debt outlook remains flexible and buybacks will continue to support the market. This means that the asset-swap term structure will be distorted artificially. We see a further steepening of the ASW curve.

esther.law@sgcib.com, anne_bluher@kb.cz

Emerging Weekly

14 29 May 2009

Issuance Calendar

Issuer Bond Planned Amount (Bn local ccy)* Bid-Cover Monday 25-May-2009 Poland T-Bill 52 week 2.52 3.33 Tuesday 26-May-2009 Hungary 3m T-Bill D090902 50.00 2.73 T Bill 2 Week 1350.25 Israel ILGOV 4% 3/12 0.50 3.76 Shahar 2682 0.25 4.14 ILGOV 6% 2/19 0.50 2.57 Turkey 5Y CPI Indexed Bond 0.59 2.96 South Africa R207 - Reopening 0.90 2.55 R186 - Reopening 0.40 1.91 Thursday 28-May-2009 Hungary 12m T-Bill D100505 40.00 2.47 Czech Republic T-Bill 566 28/05/2010 7.00 2.15 Friday 29-May-2009 South Africa R197 Inflation-linked 0.30 1.10 T Bill 364 day 0.20 1.50 T Bill 273 day 0.50 1.00 T Bill 182 day 0.80 1.08 T Bill 91 day 3.65 1.57 Hungary D090715 40.00 3.23 Monday 1-Jun-2009 Poland T-Bill 25 week 1.29 Israel ILGOV 4% 3/12 0.25 ILGOV 6.25% 02/2019 0.25 ILCPI 1.5% 6/2014 0.50 Tuesday 2-Jun-2009 Hungary 3M T Bill D090909 40.00 South Africa R204 0.85 R209 0.50 Wednesday 3-Jun-2009 Czech T-Bond 5.00% 11/04/2019 8.00 Poland OK and/or PS0414 Thursday 4-Jun-2009 Hungary 2013/D 6.75% 5.00 2015/A 8.00% 5.00 2019/A 6.50% 5.00 Friday 5-Jun-2009 South Africa Inflation linked Bond T-Bill (SATB) 4.95 Monday 8-Jun-2009 Poland T-Bill Israel ILGOV 4.5% 01/2015 0.50 ILCPI 1.5% 6/2014 0.25 ILTBIL0 03/2010 0.50 Tuesday 9-Jun-2009 South Africa SAGB Hungary 3m T-Bill D090923 Wednesday 10-Jun-2009 Poland DS and/or WS Source: SG EM Research, Ministry of Finance, Reuters, Bloomberg,*Past auction show amount sold, Czech Bid-Cover ratio calculated from competitive auction.

Emerging Weekly

15 29 May 2009

Technical Analysis

EUR/PLN to gain further ground EUR/PLN should rise to

4.5785/4.5985, or even to the March high of 4.7460. Given the break above the MT declining resistance line - now pullback line - confirmed by the bullish signal on the 13-week RSI, we expect EUR/PLN to extend the recovery initiated at 4.3230 last week. So today’s setback is corrective. The MT pullback line, which comes at 4.4345 this week (-0.0390/week), or even the ST support line which comes at 4.3885 this week (+0.0650/week), should limit the downside and force EUR/PLN to head north again. The 4.5785/4.5985 region (*) is the minimum upside target. A break above this resistance area would call for a further advance to the March high of 4.7460, with a step at 4.6615. (*) Late April high and MT Fibonacci retracement.

3rd support 2nd support 1st support Last 1st resistance 2nd resistance 3rd resistance

4.3230 4.3885 4.4345 4.4800 4.5550 4.5785/4.5985 4.6615

EUR/CZK: ST upside risk, but MT outlook bearish EUR/CZK - We may see a

rise back to 27.28, or even to the 27.60/72 resistance area, before EUR/CZK returns to 26.30/32 and moves down to 25.48/64. EUR/CZK has stabilised, but the upward consolidation which started at 26.30/32 in early March may not be over yet. So we cannot rule out a rise back to 27.28, or even to the 27.60/72 resistance area (*), before EUR/CZK heads south again. EUR/CZK should then break below 26.30/32 and extend its decline to the 25.48/64 region (MT Fibonacci retracement and early January low). (*) ST Fibonacci retracement and late March high.

Written at 07:15 am GMT.

3rd support 2nd support 1st support Last 1st resistance 2nd resistance 3rd resistance

25.48/64 26.30/32 26.58 26.84 27.08 27.28 27.60/72

hugues.naka@sgcib.com & fabien.manach@sgcib.com

DAILY CHART 4.3230

MT declining resistance line

13-week RSI

4.7460

4.5785/4.5985

MT resistance line

WEEKLY CHART

26.30/32

29.67

MT pullback line

29.87

22.89

25.48/64

27.60/72

ST rising support line

Emerging Weekly

16 29 May 2009

Czech economy will shrink by 3.0-4.0% this year Since our last forecast in April, a new flash estimate for Q1 09 GDP has been released. This pointed to a drop in the economy of a significant 3.4% y/y. At the same time, our colleagues from SG revised their GDP outlook for the eurozone for this year from the previous -3.3% to -4.1%. These significant developments led us to revise our outlook for the Czech economy for this year from the previous -2.0% to -3.6% (the sensitivity of Czech GDP to the eurozone is greater than one, thus the SG revision prompts the 1pp change in our revision). However, this estimate is clouded by a great deal of uncertainty given the CSO’s statement that the flash estimate was based on a limited level of information. The GDP structure and specification will be released on June 9 and the CSO has already announced that there could be some significant revisions. Therefore, our forecast of a fall of the Czech economy of 3.6% this year should be taken as an indication only; the final estimate will be published during the course of June. Currently we expect the Czech economy to drop by between 3.0% and 4.0% this year.

The GDP flash estimate confirms the view that the Czech economy has been in recession since Q4 08 (a GDP decrease in Q4 08 of 0.9% q/q and 3.5% q/q in Q1 09), which was imported from abroad and reflected firstly in industry and the tourism sector. It seems though that the worst is behind us with confidence indicators improving (industrial PMI, the CSO confidence indicator, similar indicators worldwide). In the second and third quarters, the Czech economy should profit from the car-scrappage scheme being implemented abroad, which will, however, lead to a decrease in demand for Czech cars from Q4 09 onwards. Yet, by then we should a see more stable recovery of foreign demand not limited to one sector alone and the domestic fiscal stimulus should be feeding through as well. A relaxed exchange rate and interest rates should also help boost the recovery.

Graph 1. Czech GDP outlook

-7.0

-5.0

-3.0

-1.0

1.0

3.0

5.0

7.0

2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3-7.0

-5.0

-3.0

-1.0

1.0

3.0

5.0

7.0

Contribution of hous. consumption Contribution of fixed investments Contribution of net exportsOthers (government, inventories)

Source: CSO, KB

From a growth structure point of view, we expect a drop in fixed investment of up to 6.0% y/y, which is mainly due to an increase in free capacities. The decrease of profit margins and credit tightening play an important role as well. Foreign trade should not deteriorate to such a large extent, which is a consequence of implementation of the

temporary car scrappage scheme abroad and lower commodity prices on world markets. The trade balance should worsen by just CZK 4.5bn to 64.3bn and this should contribute to GDP by a negative 1.4pp this year.

Graph 2. Foreign trade outlook

-30 000

-10 000

10 000

30 000

50 000

2008Q2 2008Q4 2009Q2 2009Q4 2010Q20

10 000

20 000

30 000

40 000

50 000

60 000

70 000

80 000

90 000

Trade balance (CZK mio)

Balance ex commodities (CZK mio, SA, right

Source: CSO, KB

Household consumption should accelerate only 1.3% this year. This component is negatively affected by the rapidly increasing rate of unemployment which should increase up to 10.2% at the beginning of 2010, according to the MLSA methodology, from only 6.0% in December 2008. This also had an impact on the weakened consumer confidence. Secondly, a decrease in employment of 2.7% will not be compensated by real wages growth of a marginal 1.2% (with nominal growth of 2.9%). Consumer credit tightening is the final factor in the mix lowering consumer spending.

Graph 3. Labour market outlook

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

2008Q2 2008Q4 2009Q2 2009Q4 2010Q2

Nominal wages growth (y/y, %)Unemployment rate (ILO)Unemployment rate (MLSA)

Source: CSO, KB

The downward revision of the GDP growth outlook led us to redraw the expected path of inflation in the same direction. This year, we expect inflation at 1.7%, falling to 1.4% in 2010. The CNB inflation target at 2.0% should not be in danger. Going forward, inflation should decrease further to 0.8% y/y in July. Nevertheless, deflation will likely be avoided due to the weaker crown that will lead to a renewed acceleration of growth of consumer goods prices in the remainder of the year. Yet, price increases should be held in check to a great extent by weak demand-pulled pressures and by the secondary impacts of low commodity prices.

Emerging Weekly

17 29 May 2009

Graph 4. Inflation outlook

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Jan.07 Jul.07 Jan.08 Jul.08 Jan.09 Jul.09 Jan.10 Jul.10

CPI Inflation (y/y)Monetary policy inflation (y/y)

CNB Target

Source: CSO, KB

Jiri_Skop@kb.cz

Emerging Weekly

18 29 May 2009

EM performance and rates expectations charts

EM FX performance (long EM FX 180d return %)

(10)

(5)

0

5

10

15

20

25

PLN

HU

F

CZK

TRY

ZAR

RU

B

ILS

RO

N

MXN BR

L

KRW

CN

Y

Source: EM Research, Bloomberg

EM Equities performance (% change YTD)

01020304050607080

PLN

HU

F

CZK

TRY

ZAR

RU

B

ILS

RO

N

MXN BR

L

KRW

CN

Y

USD

EM equities Chg (%) since 01 Jan 09 MSCI EM

Source: SG EM Research, Bloomberg

EM CDS performance (% change YTD)

-70-60-50-40-30-20-10

0

PLN

HU

F

CZK

TRY

ZAR

RU

B

ILS

RO

N

MXN BR

L

KRW

CN

Y

050100150200250300350400

CDS Chg (%) since 01 Jan 09 (LHS) Last price (RHS)

Source: SG EM Research, Bloomberg, Reuters

EM rates performance (Rec EM 2Y IRS bp change YTD)

-1500 -1000 -500 0 500

RUB*RONTRY*BRL^MXNZARCZKKRW

ILSHUFPLNCNY

Source: EM Research, Bloomberg. ^Jan 11 DI * XCCY

EM 3M FX implied volatility (% change YTD)

-80-70-60-50-40-30-20-10

0PL

N

HU

F

CZK

TRY

ZAR

RU

B

ILS

RO

N

MXN BR

L

KRW

CN

Y

EUR

0

5

10

15

20

25

EMFX 3m implied vol Chg (%) since 01 Jan 09 (LHS)Last price (RHS)

Source: SG EM Research, Bloomberg

EMEA Rates expectations

-200-150-100-50

050

100150200250

PLN HUF CZK ZAR ILS TRY

FRA

- pre

miu

m* (

bp)

0

2

4

6

8

10 Key Policy rates (%)

3m 1m fw d* (LHS) 3m 3m fw d* (LHS)3m 6m fw d* (LHS) Current base rate (RHS)

Source: SG EM Research, Reuters. * interbank premium

Emerging Weekly

19 29 May 2009

EM FX forecasts Sep 09 Dec 09 Mar 10 Jun 10

EUR/PLN 4.60 4.30 4.00 4.00

EUR/HUF 290 280 275 270

EUR/CZK 27.00 26.00 25.70 25.50

EUR/RON 4.30 4.20 4.10 4.00

EUR/RUB 43.75 43.90 43.60 43.40

EUR/TRY 2.25 2.10 2.00 2.00

USD/RUB 32.40 31.80 30.70 29.95

USD/TRY 1.65 1.50 1.45 1.45

USD/ZAR 9.30 8.90 8.50 8.00

USD/BRL 2.20 2.00 1.90 1.75

USD/MXN 13.40 12.50 11.70 11.40

USD/CNY 6.75 6.60 6.50 6.40

USD/HKD 7.8 7.8 7.8 7.80

USD/INR 49.00 48.00 47.50 47.00

USD/IDR 10850 10500 10250 10000

USD/MYR 3.65 3.58 3.50 3.45

USD/PHP 48.50 47.50 47.00 46.00

USD/SGD 1.54 1.50 1.48 1.45

USD/KRW 1250 1220 1180 1150

USD/TWD 32.50 32.10 31.70 31.50

USD/THB 35.00 35.00 34.75 34.00

USD/VND 17750 17725 17700 17500

EMU Monitor HICP

Inflation*Long-term GB yield*

General Government

Balance

General Government

Debt

ERM II entry

LowerRate

UpperRate

Maximum upward

deviation**

Maximum downward deviation**

period 04.2009 04.2009 2008 2008Reference Value 3.3 6.2 -3.0 60

Czech Republic 4.2 4.7 -1.5 29.8 No

Hungary 4.7 9.1 -3.4 73.0 No

Poland 4.0 6.1 -3.9 47.1 No

Romania 7.4 8.3 -5.4 13.6 No

Bulgaria 9.2 6.1 1.5 14.1 No

Estonia 7.7 NA -3.0 4.8 Jun.04 13.300 15.647 17.994 0.0% 0.0%

Latvia 12.4 8.3 -4.0 19.5 May.05 0.597 0.703 0.808 1.0% -0.9%

Lithuania 10.0 8.9 -3.2 15.6 Jun.04 2.935 3.453 3.971 0.0% 0.0%

* 12-month average rate

CentralRate

Note: Red cell means not fulfilling the criteria

** Maximum percentage deviations from ERM II central rate over last two years, based on a ten-day moving average of daily data at business frequency. An upward/downward deviation implies that the currency is on the weak/strong side of the band.

Source: ECB, EcoWin, Komercni Banka, a.s., Economic & Strategy Research

Emerging Weekly

20 29 May 2009

Interest rates forecasts Sep 09 Dec 09 Mar 10 Jun 10

Poland 3.25 3.25 3.25 3.00

Hungary 9.00 8.50 8.00 7.50

Czech Rep. 1.50 1.50 1.50 1.50

Romania 8.50 7.75 7.00 7.00

Russia 10.0 12.0 11.0 10.0

Turkey 8.50 8.50 8.50 9.00

South Africa 7.00 7.00 7.00 7.00

Brazil 8.75 8.75 8.75 8.75

Mexico 4.25 4.25 4.25 4.25

China 5.04 5.04 5.04 5.04

Indonesia 7.25 7.25 7.25 7.25

Malaysia 1.50 1.50 1.50 1.50

Philippines 4.00 4.00 4.00 4.00

South Korea 1.50 1.50 1.50 1.50

Taiwan 0.75 0.75 0.75 0.75

India 3.00 3.00 3.00 3.00

Thailand 1.00 1.00 1.00 1.00

Macro forecasts

2007 2008 2009 2010 2007 2008 2009 2010

Poland 6.7 4.9 1.5 1.0 2.5 4.2 2.3 2.5Czech Republic 6.0 3.1 -3.6 2.0 2.9 6.3 1.7 1.4Hungary 1.6 1.3 -3.0 -1.0 8.0 6.2 2.6 2.5Russia 8.1 5.7 -4.9 2.0 9.0 14.1 13.5 10.0

GDP Inflation (year average)

2007 2008 2009 2010 2007 2008 2009 2010

Poland -3.5 -5.0 -6.0 -6.5 -1.9 -3.9 -4.8 -3.6Czech Republic -3.2 -3.1 -3.1 -3.1 -0.6 -1.5 -5.7 -5.2Hungary -4.9 -6.8 -5.5 -5.1 -4.9 -3.4 -3.2 -3.0Russia 6.1 4.3 1.0 1.0 6.1 3.1 -8.0 -2.5

Current account balance (% of GDP) Fiscal balance (% of GDP)

Source: SG FX Research, SG Economic research, KB economic & strategy research, SG Poland, BRD Economic Research

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