DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, LEGAL ENTITY DISCLOSURE AND ANALYST CERTIFICATIONS. 15 December 2016 Global Fixed Income Research Emerging Markets Emerging Markets Quarterly Research Analysts Kasper Bartholdy 44 20 7883 4907 [email protected]Berna Bayazitoglu 44 20 7883 3431 [email protected]Alonso Cervera 52 55 5283 3845 [email protected]Ray Farris 65 6212 3412 [email protected]Nilson Teixeira 55 11 3701 6288 [email protected]Please see inside for contributors to each section Q1 2017 The performance of emerging markets asset prices in 2017 will hinge crucially on the path of US interest rates, China’s economic performance, commodity prices and the extent to which international trade flows will be inhibited by protectionism. These are the subjects that dominate both the lead article and many of the country notes in this publication. We think economic developments and asset prices in many emerging market countries will be hurt in the coming months by rising US rates and the risk of US protectionism; but we think some of them will at the same time benefit from global risk-on sentiment and buoyancy in global commodity prices.
Transcript
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, LEGAL ENTITY DISCLOSURE AND ANALYST CERTIFICATIONS.
Singapore: MAS easing still on the cards for 2017 .............................................. 111
Taiwan: Growth is peaking ................................................................................... 114
Thailand: Steady and resilient .............................................................................. 119
Vietnam: Better growth, but higher risks .............................................................. 122
15 December 2016
Emerging Markets Quarterly 4
Long-term sovereign FX debt ratings 125
Key websites 127
Previous publications 133
Key dates 137
Gross financing needs for 2017 141
Balance of payments financing needs 142
Government funding needs 153
Quarterly and annual forecasts 162
Summary macroeconomics data for EM countries 163
All the estimates and projections in this publication are based on information available
through 12 December 2016.
We would like to acknowledge the contribution made by Pawel Chmielniak, an employee
of CRISIL Global Research and Analytics, a business division of CRISIL Limited, a third-
party provider of research services to Credit Suisse, in compiling the information and data
tables presented at the end of this report..
15 December 2016
Emerging Markets Quarterly 5
Echoes of 2013 Summary: EM investors remain hostage to Trump, commodity prices and US rates ■ EM real GDP growth has been largely stable since the first quarter of 2015 after falling
sharply in the preceding years. We think it will rise from 4.1% in 2016 to 4.8% in 2017
as growth increases marginally in China while output begins to rise in level terms in
Russia and stops falling in Brazil. We recognize, however, that the latest high-
frequency growth data out of Brazil and South Korea have been particularly weak.
■ The pace of price increases has fallen for months in many high-inflation EM countries.
However, inflation will probably rise in the coming months in those countries where
sizable currency depreciation has been among the results of the US presidential
election, notably Turkey and Mexico.
■ We think policy interest rates will rise next year in Turkey and Mexico, while we think
they will fall in Brazil and Korea.
■ We believe that EM asset prices will in general be driven in the coming quarters by the
path of US rates, the performance of the Chinese economy, the behavior of global
commodity prices, and by Trump’s approach to US trade with the rest of the world.
■ From the perspective of EM investors there are important parallels between the current
climate and the state of play in the aftermath of the US presidential election towards
the end of 2012. The subsequent year, 2013, was kind to US equity investors but
unkind to holders of EM assets.
■ We see reasons to think that EM assets will keep up better with comparable US assets
this time around than they did in 2013 if the theme of protectionism remains on the
back burner:
− EM asset valuations are less demanding now than in 2013;
− many EM countries have narrowed their current account deficits since 2013;
− commodity prices are better supported this time around, and the EM/DM growth
differential is likely to rise rather than fall.
■ However, Trump’s protectionist stance is a very important wildcard. Since he won the
presidential election, his protectionist rhetoric has been relatively imprecise, and he
does not appear to have focused as much on trade policy as on tax policy until now.
Nevertheless, EM investors will be forced to follow the Trump camp’s rhetoric closely in
the months to come.
Figure 1: A widening of the EM-G3 growth differential
during the past year has been one of the factors that
have supported EM asset prices in 2016…
Figure 2: …but this reflects mainly notable weakening
of G3 growth in 2016; EM growth is likely to bounce a
bit in 2017 as Russia and Brazil pull out of recession
*GDP-weighted average for China, India, Indonesia, Korea, Brazil, Mexico, Russia, Turkey and Poland
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
Source: Data for 2000-2013 are from the IMF’s World Economic Outlook Database; estimates and forecasts for 2015-2017 come from Credit Suisse’s economics team
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Real GDP growth differentialbetween EM* and G3 (based on yoy rates,
EM growth: not much to write home about outside of China
The most positive aspect of recent high-frequency growth-indicators for the EM world is
that they point to continued buoyancy specifically for the largest EM economy, China. The
official industrial output data for China continue to show a picture of implausibly stable
output growth, but the recent substantial strengthening of global prices for iron ore and
copper (mainly in the fourth quarter of 2016) appears consistent with an increase in
underlying Chinese economic growth in H2 2016. China’s growth in output and domestic
demand remains reliant on stimulatory credit policy that is currently being fine-tuned, but
our base case expectation is that it will hold up well in 2017.
Figure 3: Though the EM-G3 growth differential
widened during the first three quarters of 2016, the
pick-up in EM growth in that period was modest
Figure 4: Sequential industrial output growth in the
EM world outside of China weakened sharply from
August 2016 onwards
*GDP-weighted average for China, India, Indonesia, Korea, Brazil, Mexico, Russia, Turkey and Poland
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
*GDP-weighted average for Korea, Brazil, Mexico and Russia
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
The key question for anyone forecasting China’s growth rates remains unchanged: is the
country approaching a breaking point beyond which it can no longer rely on rapid credit growth,
and continuously rising leverage in the economy, to keep output growth steady? Our view is
that the country will not reach that breaking point in 2017. However, given the country’s very
high and ever-rising ratios of outstanding credit to GDP there is no very comfortable way to
draw that conclusion beyond relying on the observation that substantially higher ratios prevail
in Japan without (at present) bringing the house down there.
Beyond China, the growth picture in the EM world appeared to be improving earlier in
2016, but it has deteriorated in the second half of the year.
In Q2 and Q3 of 2016, the year-on-year rate of “ex-China global EM real GDP growth”
seemed to be on a moderately rising path. This was mainly because deep recessions in
Russia and Brazil began to peter out. At the same time, output growth fell in the US. The
result was a notable widening of the EM-DM growth differential.
However, more recent data suggest that while sequential growth in industrial production (IP) in
Russia is “holding up” at a stable rate of about zero, IP growth in Brazil, which became
encouragingly high and positive in the middle of the year, has subsequently once again
tumbled deep into negative territory. It is not entirely clear why Brazil’s output growth has fallen
so sharply once again, but among the possible sources are sharp declines in bank credit
growth, selective tightening of the federal government’s outlays, and exchange rate strength.
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China still stands out in EM when it comes to
the resilience and level of output growth
While it remains unclear how long
China’s leaders can keep growth steady by
allowing leverage in the economy to escalate, we think they will be able to do so in 2017
Recent high-frequency growth data in Brazil
and South Korea have been very poor
15 December 2016
Emerging Markets Quarterly 7
Figure 5: Korea’s sequential IP growth has fallen
sharply… Figure 6: …as has Brazil’s
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
South Korea’s very volatile sequential IP growth has also dipped far into negative territory
in recent months, on account of sector-specific negative shocks (inter alia in shipping,
production of mobile phones and car manufacturing) alongside a deep political crisis.
India’s IP data are implausibly volatile and hard to interpret, but it seems very likely that
the country’s currency reform in the fourth quarter of the year has at least temporarily
abruptly dampened that country’s growth in domestic demand and output.
All in all, if we look beyond China, the most recent output growth trends are not generally a
strong advertisement for EM assets.
Better news on EM inflation
Those that are searching for good EM-specific news will find inflation data more rewarding
than growth data. Year-on-year rates of consumer price inflation have for many months
been falling nicely in many high-inflation EM countries because the adverse inflation
impact of sharp currency depreciation in 2015 and early 2016 has been replaced by
greater currency stability. To illustrate this pattern, Figure 7 below shows large declines in
inflation in Russia, Brazil and Turkey.
That said, the renewed bout of EM currency weakening that unfolded in the aftermath of the
US presidential election on 8 November is likely to translate into a bump in inflation in the
coming months in some countries, especially in Turkey where currency weakness in this
period has been particularly pronounced.
Mixed prospects for inflation in different EM economies are reflected in mixed prospects
for policy rates in the EM countries, as suggested in Figure 8 below. In particular, the
Turkish central bank may have to raise its policy interest rates to stem depreciation
pressure on the lira if US Treasury yields continue to rise. In our base case forecasting
scenario, the central banks in most other EM countries will be able to either cut their policy
rates or keep them stable, but we recognize the potential for shocks (such as a sharp
slowdown in China that would trigger a selloff in commodities) that could make this
untenable in some countries.
India is currently suffering from the first-
round impact of the government’s current
reform
Inflation has fallen nicely for many months
in high-inflation EM countries, but some
will see a rebound due to currency
depreciation since the US presidential election
15 December 2016
Emerging Markets Quarterly 8
Figure 7: Inflation has been falling for many months
in EM countries that recorded sharp currency
depreciation in 2015 and currency stabilization in
H1 2016
Figure 8: …but recent currency performance
divergence has led to divergent expectations for
policy interest rate changes
Current
policy
interest rate
Credit Suisse
policy rate
forecast for
end-2017
Market-implied
policy rate
forecast for
end-2017**
(in %) (in %) (in %)
Brazil 13.75 11.75 10.88
Mexico 5.25 6.50 6.51
Russia 10.00 8.75 9.30
South Africa 7.00 7.00 7.18
Turkey* 8.50 9.50 11.02
Korea 1.25 1.25 1.25
US 0.50-0.75 1.00-1.25 1.12
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service *The central bank’s overnight lending rate.
**As of close of business on 12 December 2016
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
Trump and commodity prices are setting the tone for EM asset prices
Though country-specific factors continue to exert a large influence on the asset price
performance ranking within the EM world, the dollar-value of broad EM asset classes (EM
FX, EM local-currency government bonds, EM sovereign dollar bonds, EM corporate dollar
bonds and EM equities) is currently driven primarily by a combination of political
developments in the United States and price gyrations in the commodities markets.
The most market-influential themes that have emerged from Donald Trump’s election as
president on 8 November are (1) the president-elect’s plans for aggressive tax cuts and
(2) his protectionist agenda. Financial markets have reacted strongly to news stories that
shed light on Trump’s tax plans and his protectionism. The trading pattern suggests that
most investors find the plans for tax cuts (in the context of sturdy commodity prices) a solid
rationale for an increase in US equity prices and a fall in US corporate credit spreads
Many investors have publicly expressed the view that protectionist steps would help justify
lower US equity prices and higher US corporate credit spreads, but the US risk markets
have until now assigned far more weight to the tax cuts than to protectionism. This is in
part because Trump and his associates have talked more about tax cuts than about
protectionism since the day of the election. The newly anointed treasury secretary, Steve
Mnuchin, confirmed right after his nomination last week that tax cuts would top the new
administration’s list of priorities. In response to Trump’s plans for large tax cuts, many
investors have opted to raise their forecasts for US real GDP growth and US inflation
substantially. As a result, both US rates and US equity prices have risen sharply.
The fact that US corporate credit spreads have continuously tightened since 14 November
suggests that most investors at this stage think that the positive influence on the US
economy from tax cuts and rising oil prices will outweigh the negative influence of Trump’s
protectionism. This is presumably in part because the US is a relatively closed economy,
with a low ratio of external trade to GDP. It probably also reflects the appearance of a
softening, since the election, of the Trump camp’s tone on protectionism.
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EM CPI inflation
Turkey
Brazil
Russia
US risk markets and UST yields have, since
the election, been driven primarily by the
expectation of large tax cuts…
…whereas EM asset prices have been more
substantially influenced by the
potential for a significant protectionist shift in US trade policy
15 December 2016
Emerging Markets Quarterly 9
Figure 9: US corporate credit spreads have been
tightening since oil prices began to rise on 15
November; EM spreads have been underperforming
Figure 10: Rapid EM currency depreciation against
the USD right after the US election petered out (at
least temporarily) in the middle of November
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
Meanwhile, the fact that EM credit spreads have tightened less than comparable US credit
spreads in the same period suggests that most investors think that from the perspective of
the EM world, the damage of US protectionism (even in a form that is less aggressive than
Trump’s pre-election rhetoric suggested) outweighs the benefit that comes from the
recent/current rise in commodity prices and from the likelihood of buoyancy in US
domestic demand and international risk markets on the back of Trump’s plans for US tax
cuts.
Any tightening of spreads for EM sovereign dollar debt should (if behavioral patterns of the
past can be trusted) lead to a fall in EM local-currency debt yields if US Treasury yields
remain stable.
Figure 11: Yields on EM 10yr local-currency bonds
have risen a bit less than UST yields since the US
election…
Figure 12: …and EM local-currency-duration risk
has done better than EM dollar-duration risk
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
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EMBI Global Diversified (yield spread for EMsovereigns over USTs, left hand scale, bps)
US average for high-yield (liquid) and high-gradedebt (yield spread over USTs, left hand scale, bps)
Price of a barrel of WTI crude oil (US$, inversescale, right hand scale)
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EUR exchange rate (euros per dollar, left hand scale)
EM currency strength against USD (using GBI-EMweights, right hand scale)
A downmove in the chart signals dollar strength
15 December 2016
Emerging Markets Quarterly 10
Parallels with 2013, a year of EM underperformance
Since Trump won the US presidential election on 8 November, the combination of his
plans for large-scale tax cuts and his protectionism has led to a combination of substantial
increases in US equity prices, tightening of US corporate credit spreads, sharp increases
in US rates across the curve, appreciation of the US dollar, and underperformance of EM
assets against comparable US assets.
As we noted in the introductory comments above, equivalent financial market patterns
evolved towards the end of 2012, soon after that year’s US presidential election. Then, as
right after this year’s US presidential election, good G3 news coincided with bad EM news.
Back then, G3 credit and equity markets responded positively to (1) the elimination of
“fiscal cliff” risk in the US and (2) the initiation of Abenomics in Japan. They also benefited
from the fact that Draghi had taken over the leadership of the ECB a few months earlier.
Meanwhile, the mood of EM-investors was gloomy. They were losing faith in the ability of
policy makers in China to stabilize growth in domestic demand. China’s domestic demand
growth had fallen for years already and still seemed to be heading downwards. Investor
concerns about China had been reflected in falls in commodity prices since September
2012, and began to weigh heavily on EM assets as 2013 began. In May of 2013,
Bernanke’s taper talk pushed up US rates as sharply. Rapid increases in US rates inspired
talk in some circles about a funding crisis for EM borrowers.
In sum, 2013 was a year in which good G3 news, sharply rising UST yields and bad EM
news co-existed – just as they do now, a few weeks before we enter 2017. For this
reason we find it sensible to start an analysis of the outlook for EM asset prices with a look
at the trading patterns that prevailed in 2013.
Figures 13 and 14 below help illustrate the performance of US and EM assets in 2013. For
dollar-based holders of EM assets, 2013 was a “pretty bad” year in terms of absolute
performance and a “very bad” year in terms of relative performance. The dollar-value of
global benchmark indices for EM debt and equity fell by 5%-9% in 2013. Meanwhile the
S&P and US high yield debt generated total returns of, respectively, +25% and +8%.
Figure 13: Just after the US election in 2012, “fiscal
cliff risk” vanished while “China risk” prevailed; the
S&P did well, and EM assets underperformed…
Figure 14…EM underperformance was as evident in
credit as in equities
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
At the outset of 2017 there is a case for expecting US risk
markets to be strong, but also a case for
expecting EM assets to underperform US
assets….
…much the same was the case at the outset
of 2013
Back then, EM assets performed moderately
badly in absolute terms and very badly relative
to US assets
15 December 2016
Emerging Markets Quarterly 11
Will that experience be repeated in 2017? The current combination of tax cut expectations
in the US, rapidly rising US rates, and global counter-globalization threats suggests that it
could be. We do, however, see a number of reasons to think that EM assets will keep up
better with comparable US assets this time around than they did in 2013 unless Trump
opts to pursue a very aggressive protectionism agenda and/or a sharp dip in China’s
domestic demand growth materializes and pulls down commodity prices.
First, EM valuations are less challenging now than they were at the end of 2012. EM
currencies are in most cases cheaper in real-effective-exchange-rate terms, even after
adjusting for the fact that commodity prices have fallen sharply in recent years. EM
sovereign credit spreads are substantially wider than they were when 2013 ended, and
much wider than they were when 2013 began. The gap between EM sovereign spreads
and US corporate spreads is also wider than it was at the start of 2013. In the early
months of 2013 EM local-currency-debt was in a bubble that was eventually pricked by
Bernanke’s taper talk in May of that year. In the preceding months, valuation dislocations
(pointing to EM local debt expensiveness) were clearly visible in charts that compared EM
sovereign dollar-debt spreads with the spread between EM local currency debt yields and
yields on US Treasuries (USTs). No similarly-sized dislocation is visible at present.
Second, there is arguably less reason for near-term concern about China and downside
commodity price risk now than there was at the end of 2012. Broadly speaking, 2016 has
been a year in which the resilience of China’s economy has surprised on the upside,
Reuter’s commodity price index rose (in dollar terms) throughout the first half of 2016 and
has stayed largely flat until now in the second half of the year. There is clearly still a risk
that China’s commodity demand weakens in 2017, but there is little sign that this is already
happening, and the Chinese government appears to be gearing up its infrastructure
spending to make up for a likely fall in housing construction growth.
Meanwhile, the OPEC countries have lent the commodity markets a helping hand by
striking a deal to constrain their output and by obtaining a commitment to output
containment from Russia as well.
Third, the “EM-funding-shortage idea” that plagued the EM asset markets in 2013 has lost
some of its bite. Back then, many analysts and investors reasoned (though there is little
supportive evidence of this hypothesis) that a sharp increase in US Treasury yields would
shut the EM world out of access to funding from abroad. They went in search of those EM
countries that needed such funding most urgently and decided collectively (rightly or
wrongly) to use the ratio of the current account balance to GDP as a useful indicator of
vulnerability to UST yield increases.
At the time of the “taper tantrum” in 2013, standout asset price underperformance was
concentrated in five economies that had large current account deficits. Those five
economies were colloquially known at the time as the “fragile five”: Brazil, South Africa,
Turkey, India and Indonesia.
At present, only two of those five still run large current account deficits that are only to a
limited extent financed via FDI inflows, namely South Africa and Turkey, and even the
current account deficits of those two countries are smaller than they were in 2013.
To be sure, we do think US rates are more likely to rise than to fall next year. Our house
view is that US 10-year rates will rise substantially further during the first half of next year,
to 2.8% by mid-2017. Indeed on current trends there is a very real risk that this level could
be met much earlier than mid-2017. Judging from recent market behavior, further
increases in UST yields would be likely to spell additional weakness for currencies of
those EM countries that have large external funding needs, especially Turkey.
However, we think it is possible that the climb in rates will be very gradual in the early
months of the new year, as investors await clarity on Trump’s tax plans and wait for clear
evidence that data for US domestic demand and output are strengthening in response to
the prospect of tax cuts and loosening of sector-regulations. We see some risk that the US
macro-data will for a while be restrained by the impact of recent increases mortgage costs
and the strength of the dollar, factors that could make the path towards higher UST yield
levels rocky in the first half of 2017.
EM assets likely to hold up better in 2017 than
they did in 2013
Less challenging valuations
Commodity prices are better supported now
than in late 2012
Many EM countries have seen a narrowing
of their current account deficits in the years
since 2013
US 10-year rates are likely to rise further in
2017
15 December 2016
Emerging Markets Quarterly 12
We do not think the 2013 experience is the best available guide to the likely behavior of
EM currencies if US rates do indeed rise further. An important reason why it was possible
for asset prices in the fragile five countries, and in other EM countries, to underperform
comparable US assets sharply in response to the UST yield spike in 2013 was that the
particular UST yield spike in 2013 had an “unusual” source. Most UST yield spikes in the
last many years have occurred in response to fundamentally credit-positive developments.
They have in most cases occurred in response to upside surprise in growth or employment
data in the US. At present, US yields are once again moving up in response to a credit-
positive factor, namely the expectation of fiscal stimulus and rising growth in the US.
Specifically in 2013, however, UST yields rose for credit-negative reasons – they rose
because the Fed was telling the world that in response to the already known set of data for
growth, employment and inflation, it would be more hawkish in its approach than investors
collectively had anticipated.
Figure 15: In most “UST yield spike periods” in the
past, yields have risen less sharply for EM debt than
for USTs (i.e., spreads have tightened)
Figure 16: The long-term norm for “UST yield spike
periods” has been that EM FX weakens (vs the USD)
if spreads widen but appreciates if spreads tighten
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
*The chart covers all periods since 2003 in which 10yr UST yields have risen by more than 65bps in six months or less. Each period starts at a local trough for yields and ends at a local peak.
**Spread between the EM local currency 10yr bond yield and the 10yr UST yield (the EM bond yield used here was the average yield for Mexico, Poland and South Africa).
***Measured by changes in Reuters’ CCI commodity price index. A move to the left in the chart represents a price increase whereas a move to the right represents a price decline.
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
*The chart covers all periods since 2003 in which 10yr UST yields have risen by more than 65bps in six months or less. Each period starts at a local trough for yields and ends at a local peak.
**The EM currency index used in this chart is based on eight equal-weighted EM currencies (those with the largest weight in the GBI-EM index in 2013). For each currency, the level as of 28 August 2013 was set equal to 100, before the percentage changes to the index were calculated for the purpose of the chart.
Figures 15 and 16 show the result of an analysis of all episodes in the past 13 years in which ten-year UST yields rose by more than 65bps in less than six months. The analysis shows that UST yield spikes usually happen alongside a tightening of credit spreads, both in the US and in the EM countries, because the credit-helpful impact of the upside growth surprise (which raises prospective corporate profits and government tax receipts) tends to outweigh the credit-negative influence that comes from increases in UST yields and debtors’ borrowing costs.
15 December 2016
Emerging Markets Quarterly 13
The experience in 2013, when UST yields rose for credit-negative reasons, is an exception.
By comparison, this time around UST yields are rising mainly for credit-positive reasons,
although credit-negative taper talk in Japan and Europe has played some role as well since
UST yields began to climb in July of the current year. The dominant reasons for the increase
in UST yields since then have been stronger US growth data, Yellen’s talk about the
desirability of creating a high-pressure economy, and Trump’s plans for large tax cuts.
What all of this shows is that if there had been no theme of US protectionism, EM assets
would probably have been destined to compete well against comparable US assets in 2017.
Our historical evidence suggests that they should be perfectly able to keep pace with US
assets in a world in which commodity prices and US yields would be rising in tandem.
However, whether we like it or not, the theme of US protectionism is with us, and that is
the theme we explore in the next section.
Counter-globalization trends across the world
Trump confirmed soon after being elected that the US will pull out of the recently
negotiated Trans-Pacific Partnership (TPP), a move that was unsurprising and of only
moderate practical consequence, as that agreement, which had not as yet been
implemented, was considered by many observers to be only of limited importance, except
as a standard-setter for trade agreements.
A “White Paper” on Trump’s website sets out some of the Trump camp’s pre -
election views on trade policy. The paper was written by Peter Navarro and Wilbur
Ross (the paper, dated 29 September 2016, can be found here:
https://assets.donaldjtrump.com/Trump_Economic_Plan.pdf). This is an important
observation because Wilbur Ross will be the commerce secretary from 20 January, and
Trump is reportedly poised to ask Ross to design the trade policy of the new US
administration. The white paper is highly critical of NAFTA, the US-Korea bilateral trade
agreement, and China’s approach to international trade (ironically, it does not comment on
the TPP). It claims that the UK-Korea agreement “led to the loss of 95,000 [US] jobs and
roughly doubled America’s trade deficit with South Korea”. It also claims that NAFTA has
cost the US “over 850,000 jobs” and that it has driven the US deficit in trade with Mexico
from “virtually zero to $60bn”. It calls China “the biggest trade cheater in the world” and casts
China’s WTO entry in 2001 as “a critical catalyst for America’s slow growth plunge”.
Figure 17: Trump and his advisors are not keen to
see other countries run large and rising current
account surpluses while the US deficit widens
Figure 18: Most EM countries that suffered badly in
FX space in 2013 on the back of sizable current
account deficits have seen those deficits shrink
*GDP-weighted average for China, India, Indonesia, Korea, Brazil, Mexico, Russia, Turkey and Poland
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
*GDP-weighted average for Korea, Brazil, Mexico and Russia
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
UST yields rose in 2013 for credit-negative
reasons, whereas they have risen in recent
months for credit-positive reasons
The Trump camp’s pre-election trade policy
document spends much energy on
attacking current modalities for US trade
with China, South Korea and Mexico
15 December 2016
Emerging Markets Quarterly 14
Navarro and Ross argue in their paper that US companies should be incentivized to invest
within the US and abstain from investing abroad. They also argue that bilateral trade
imbalances are a problem that needs to be quashed. They note specifically that the US is
running large deficits in bilateral trade with Canada, China, Germany, Japan, Mexico and
South Korea, and they seem certain that these deficits are a negative influence on growth
and employment in the US.
The underperformance of EM assets (against comparable US assets) in the initial weeks
after the US presidential election probably reflects not only isolationist signals from Trump,
Navarro and Ross, but also investor concerns about broader protectionist, anti-immigration
and isolationist tides across the world. Importantly, a range of right-wing and left-wing
politicians across Europe are currently trying hard to convert Trump’s election victory, the
UK’s Brexit vote, and the no-vote in Italy’s referendum into a broad counter-globalization
trend. Looming elections in some of Europe’s largest economies during the coming year,
including the two rounds of the French presidential elections in April and May, will test the
viability of this potential counter-globalization tide.
Ironically, the government of China, one of the possible victims of the budding counter-
globalization trend, has itself taken an important counter-globalization step during the past
month. It has done so by encouraging Chinese companies to stop investing abroad. While
much of China’s outgoing foreign direct investment (FDI) would have been headed for G10
countries, some of the flow would have been destined for other EM countries. The FDI figures
in some of those other EM countries may now be adversely affected by the new and restrictive
change in China’s policy towards outgoing FDI. To be sure, China’s policy-makers have taken
this step to protect their FX reserves and to limit the risk of Chinese involvement in politically
controversial investment projects abroad. Nevertheless, whatever the motivation, the move fits
with the broad counter-globalization theme that Trump and his advisers have been pushing.
Conventional trade theory suggests that counter-globalization policies will harm those
countries that implement them as well as a bunch of other countries. However, possible new
US import restrictions would be unlikely to harm the US as much as it would harm some of
the country’s trading partners. The harm of a quick-fire spread of protectionism across the
globe is likely to be felt most acutely in those economies that are either particularly open to
trade or particularly dependent on international trade and investment as a development tool.
New US import barriers would impose efficiency costs on the US economy but those costs
would be moderate in size relative to US GDP. This is because the ratio of external trade to
GDP is lower in the US than in most other countries, and because the US depends only to a
small extent on trade and incoming FDI as a source of technological progress. Counter-
globalization policies appear much more likely to create major damage to growth in those
emerging markets countries that rely on low labor costs to compete internationally, and those
that rely on vibrant FDI as a source of technological inspiration.
There can be little doubt that globalization has been highly beneficial for export-orientated
emerging markets countries, including Mexico and most of the countries in Asia and the
EEMEA area. Correspondingly, a pullback in globalization would probably be
disproportionately harmful for exactly those countries. The harm might arise not only from
rich-country imposition of import tariffs for the purpose of protecting “their” companies
against competition from countries with lower wage costs. It might also arrive in the form of
restrictions on immigration into high-income countries – restrictions that would reduce the
flow of remittances to the EM world. Additionally it might arrive in the form of incentives
granted to US (and perhaps EU) companies to “stay at home” – incentives that would
weaken the flow of technology transfers to the EM countries.
Thus, even if the Trump camp had spoken in favor of trade restrictions in general, instead
of picking on selected EM countries, financial markets would have been likely to see the
EM world as the likely most-affected victim of a broad counter-globalization trend. As it is,
the Trump camp’s protectionist rhetoric has until now been heavily focused on US trade
specifically with three EM countries, namely Mexico, China and Korea.
Trump’s advisers strongly dislike
bilateral trade imbalances and
outgoing foreign direct investment
Counter-globalization rhetoric is likely to
have been the main driver of EM asset price
underperformance since the US
presidential election
China’s new restrictions on
outgoing FDI also represent a counter-
globalization step
Counter-globalization will hurt countries that
rely heavily on external trade and FDI as
development tools – mostly countries in the
EM world
15 December 2016
Emerging Markets Quarterly 15
Prior to the election on 8 November, Trump spoke of the case for imposing a 35% tax on
imports from Mexico and a 45% tax on imports from China. Wilbur Ross has, both in the
paper he wrote jointly with Peter Navarro and after he was appointed the prospective
commerce secretary, made it clear that the new administration does not intend to impose
such taxes unconditionally ‒ it intends instead to use the possibility of new import taxes as a
weapon in trade negotiations with other countries, including Mexico and China.
In a similar vein, Anthony Scaramucci, senior adviser to Trump, said the following on 5
December: “I don’t think we’re looking to rip up NAFTA as much as we are looking to right-size
it and make it fairer”. He added that Trump speaks regularly with Mexico’s president, Enrique
Pena Nieto, and has a great relationship with him. Scaramucci even went as far as to say that
Trump is a free-trader and that Trump’s team recognizes the dangers of protectionism.
Nevertheless, EM investors will be forced to follow the Trump camp’s rhetoric closely in
the months to come. EM asset prices may be weighed down by suggestions from Trump
in mid-December that Wilbur Ross will be the main architect of the new US
administration’s trade policy. They may also be weighed down by Trump’s decision in the
most recent weeks to repeat his pre-election claim that China will soon have to “play by
the rules” and by uncertainty about Trump’s commitment to the US’s “One-China policy”.
The tone on protectionism from Trump and his staff
seems to have softened somewhat since the
election, but could quickly harden again
15 December 2016
Emerging Markets Quarterly 16
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15 December 2016
Emerging Markets Quarterly 17
Latin America
15 December 2016
Emerging Markets Quarterly 18
Latin America: Living on a prayer We project a modest improvement in regional growth prospects for 2017 relative to
2016. Nevertheless, Latin America should continue to be one of the regions with weakest
growth, at approximately 1.0% in real terms in 2017. We project a slightly stronger
performance in Chile, Colombia and Peru versus 2016. We think that three of the four
economies we cover that saw a contraction in real GDP in 2016 will post zero or positive
growth next year (Argentina, Brazil and Ecuador), while the contraction in Venezuela in
2017 should be less pronounced than in 2016. The only Latin American country that we
cover that will most likely see lower growth in 2017 than in 2016 is Mexico, partly as a
result of the shock to business confidence from the results from the US elections and
despite expectations of stronger growth in the US. Meanwhile, we project that inflation will
remain largely in check in most countries under our coverage, with Venezuela and
Argentina remaining notable exceptions.
Figure 19. Latin America: Credit Suisse 2016-2017 real GDP growth and
inflation forecasts
2016 real GDP growth 2017 real GDP growth 2016 inflation 2017 inflation
Foreign debt (% of exports of goods and services) 164.0 147.5 153.1 156.0 176.0 215.5 255.4 275.4 294.2
Central bank gross FX reserves ($bn) 52.2 46.4 43.3 30.6 31.4 26.5 36.9 41.6 47.1
Central bank net FX reserves ($bn) (6) 41.1 35.3 30.5 17.7 17.1 1.9 13.3 20.5 28.5
Central bank gross non-gold FX reserves ($bn) 49.7 43.2 40.0 28.2 29.1 24.4 34.6 39.3 44.7
(1) Increase indicates appreciation. (2) Weighted average of wages in the formal and informal private sector and the public sector. (3) Central bank's 7-day repo rate until 2014, 35-day Lebac rate for 2015 and 2016, 7-day interbank rate starting in 2017. (4) Includes compensatory interest and residual value of GDP warrants starting in 2015. (5) Net of intra-public sector debt holdings. (6) Net of borrowing from the BIS and other bilateral lenders and reserve requirements on dollar deposits. Source: INDEC, Central Bank, Ministry of Economy, Credit Suisse
15 December 2016
Emerging Markets Quarterly 26
Brazil: GDP to post no growth in 2017
■ After a sharp GDP contraction in 2015-2016, domestic demand is expected to
perform slightly better next year. However, the negative carryover and the very
gradual pace of economic recovery will likely prevent positive annual growth in GDP in
2017. We expect real GDP to decline -3.5% in 2016 and to grow 0.0% in 2017 and
1.5% in 2018. Investments are expected to show limited recovery, on the back of the
less unfavorable economic conditions that Brazil should face and improved business
confidence next year. Weakness in credit conditions, global uncertainties, and very
high idle capacity in the economy should hinder a resumption of investments at the
same pace as in previous recessions. Household consumption will likely decline once
again in 2017 due mainly to further deterioration in labor market conditions and the
additional decline in bank lending. The external sector's contribution to growth in 2017
will likely drop as a result of a dismal surge in exports and some increase in imports.
Government consumption will likely decline once again, as a result of the ongoing fiscal
tightening.
■ Economy's feeble performance is associated with several sources of
uncertainty. For instance, uncertainty regarding fiscal solvency and the impacts of
possible changes in the global scenario will likely remain high throughout 2017. Such
instability would lead to uncertainty in bank lending, lower public investments, low
expansion of exports, and still-weak domestic demand. The likelihood of renewed
recession in 2017 is significant. An unfavorable decision by Congress on the fiscal
adjustment, especially social security reform, would raise such risk significantly. This
would weaken fundamentals and reverse the recovery in activity.
■ The unemployment rate should increase further throughout the first quarters of
2017, reaching 13.0% in 2017 on average, much higher than the 11.4% of 2015.
The increase will likely be driven mainly by the lower pace of payroll job creation. An
additional contraction in the real wage bill in 2017, of -1.8%, should be driven by a
further reduction in the number of payroll jobs as well as lower real wages, despite the
decline in inflation.
■ The federal government's decision to promote a gradual fiscal tightening is
expected to prevent the primary deficit from declining in 2017. We expect the
primary deficit to increase from 2.3% of GDP in 2016 to 2.9% of GDP in 2017. The
higher primary deficit next year will likely be driven by falling revenues and relatively
stable expenditures in real terms. Given the high interest rate burden, the nominal
fiscal deficit would increase from 9.0% of GDP in 2016 to 10.5% of GDP in 2017.
■ We expect the gross public debt to keep its upward trend over the next several
years. The expected spike in the fiscal deficit is also due to the absence of high
financial gains from the FX swaps positions held by the central bank in 2016, which are
not expected to repeat in 2017. The gross public debt should increase from 73% of
GDP in 2016 to 79% of GDP in 2017.
■ Brazil needs to carry out a substantial fiscal consolidation program over the next
several years. The legislative agenda will most probably focus on the discussion of the
Bill for Constitutional Amendment related to the social security reform. We assume that
the Congress will approve a thorough social security reform. However, the terms of the
reform to be approved will depend on the government's ability to maintain solid support
in Congress in a scenario of zero real GDP growth and higher unemployment.
Although necessary, the approval of a thorough social security reform is not sufficient
to guarantee resumption of GDP growth, as it does not change the short-term
Foreign debt (% of exports of goods and services) 151.7 142.1 162.0 174.1 212.2 241.4 258.0 268.2 263.6
Central bank gross FX reserves ($bn) 288.6 352.0 378.6 375.8 374.1 368.7 376.7 386.7 396.7
Central bank gross FX reserves, including forward FX transactions ($bn) 288.6 353.6 376.5 300.7 264.5 260.6 350.7 336.7 346.7
Central bank gross non-gold FX reserves ($bn) 287.1 350.4 375.0 373.2 371.5 366.4 374.7 384.7 394.7
(1) Average annual growth in nominal wages. (2) Real effective exchange rate. Deflator: CPIs. Increase indicates appreciation. (3) Total government expenditures; includes interest payments. (4) Figures related to the Central Bank's new methodology. (5) Net of international reserves, Worker's Fund (FAT) assets, Central Bank holdings of government securities, social security system holdings of government securities. (6) Includes bank lending to individuals and private corporate debt (debentures and bank loans to the sector). (7) Net FDI inflow minus Brazilian investments abroad. (8) Net inflow of foreign-owned companies. (9) Scheduled amortizations for public and private sectors. (10) Included intercompany loans.
Source: IBGE, Central Bank of Brazil, Credit Suisse
15 December 2016
Emerging Markets Quarterly 31
Chile: Still struggling
■ GDP growth in Chile will likely accelerate somewhat in 2017, but remain low
given the country's standards. We project that annual consumer price inflation will
remain near the 3.0% target next year, allowing the central bank to cut the policy rate
by about 50bps; meanwhile external and fiscal imbalances will be modest. The low
participation of foreign investors in the local fixed income market should limit the
market's vulnerability to potential portfolio rebalances in favor of developed markets,
should yields abroad continue to increase. Barring major surprises from abroad that
would affect Chile's outlook, we think that investor attention towards Chile will center
on the November 2017 presidential elections.
■ We project that real GDP growth will average 2.2% in 2017, up from an estimated
1.8% in 2016. Some of the factors supporting growth include stronger (or less weak)
regional growth, higher copper prices, higher real wage gains and additional monetary
stimulus from the central bank. Meanwhile, some of the factors that will likely prevent
growth from accelerating further include the low levels of business and consumer
confidence, as well at the low pace of job growth. We remain frustrated with the
volatility in monthly and quarterly GDP data (seasonally adjusted) and urge our readers
not to draw unnecessarily strong conclusions from a couple of prints. In our view, the
main risks to Chile's growth are still external and are particularly concentrated on
regional growth, China's expansion and copper prices. We think risks are tilted to the
downside.
■ We have been positively surprised about the quick pace of disinflation in recent
months. We project that inflation will hover around the central bank's target of 3.0%
most of next year. The main risk to inflation comes from the exchange rate, given the
relatively high pass-through coefficient from currency swings to inflation in recent
quarters. At current levels, however, the real effective exchange rate appears to be in
line with its historical averages, while the current account deficit is small. This reduces,
in our view, the likelihood of a sharp sell-off in the Chilean peso. The benign inflation
outlook should allow the central bank to lower the monetary policy rate by
approximately 50bps in early 2017 from the current level of 3.5%, which could spur
faster growth in bank lending. We think additional interest rate cuts could materialize in
a context of even lower-than-expected growth and inflation.
■ Chile's external and fiscal imbalances will likely remain modest in 2017, making
Chile a bit of an outlier in the region. We project a modest widening of the current
account deficit to 2.0% of GDP in 2017 from a deficit of 1.6% in 2016. In dollar terms,
next year's external gap would be equivalent to $5.0bn, which should be financed by
net foreign direct investment flows. Meanwhile, we project a modest narrowing of the
fiscal deficit to 2.5% of GDP in 2017 from a deficit of 2.7% in 2016. The strong net
public asset position (external assets equivalent to 14% of this year's estimated GDP)
should allow the government to continue to narrow the fiscal deficit in a gradual way.
We continue to think that Chile's long-term foreign-currency debt ratings will remain
unchanged in 2017 at AA- for S&P and Moody's, and at A+ for Fitch Ratings.
■ Foreign investor interest towards Chile will likely increase as we approach the 19
November 2017 presidential elections (a run-off vote would take place on 17
December, if needed). Recent polls show that former president Sebastián Piñera
leads in vote intentions, ahead of former president Ricardo Lagos and senator (and
journalist) Alejandro Guillier (who is from Lagos' same coalition). The official list of
candidates who will participate will not be known, however, until approximately four
months before the elections take place. We think that prospects for political change
after the elections will help improve confidence among households and businesses,
which should be another positive factor underpinning growth in 2017.
Foreign debt (% of exports of goods and services) 103.3 105.0 133.6 151.6 174.1 216.2 241.5 237.2 229.2
Central bank gross non-gold FX reserves ($bn) 27.9 42.0 41.7 41.1 40.4 38.6 40.0 40.7 41.5
(1) Adjusted for seasonality (2) Real effective exchange rate, increase indicates appreciation (3) General compensation index (includes fringe benefits) (4) Excludes debt of the central bank (5) Scheduled amortizations for public and private sectors
Source: Central Bank, INE, Budget Office, Ministry of Finance, Credit Suisse
15 December 2016
Emerging Markets Quarterly 35
Colombia: Photo finish ■ The bulk of the economic adjustment of the Colombian economy to the oil price
shock seems to be behind us. The contribution of oil revenues to the fiscal budget is
at zero, the currency has stabilized, inflation is declining, and the current account
deficit continues to narrow. Meanwhile, the government reached a new peace deal with
the FARC guerrillas which was swiftly ratified by Congress. The one pending policy
issue which needs to be solved by the end of the year is the approval of a non-diluted
fiscal reform by Congress. Doing so before the end of 2016 should allow the
government to converge to its structural fiscal targets and stabilize public debt ratios at
levels that would help it avoid a sovereign debt rating downgrade. Thus, Colombia is
close to crossing the finish line, having successfully tackled a series of economic
challenges that looked daunting just a few months ago.
■ Our baseline scenario is that Congress will approve the fiscal reform without
major dilutions. This should allow the government to raise over 2.0% of GDP in new
revenues by 2022, which we think should be enough to avoid a sovereign debt rating
downgrade. Ordinary congressional sessions end on 16 December, so we expect the
reform to be passed in extraordinary sessions likely before Christmas. The impact of
the reform on growth is ambiguous, in our view, as the negative impact from higher
VAT taxes could be offset by the positive impact from lower corporate taxes. Its impact
on inflation, on the other hand, is likely to be more straightforward, pushing prices up at
the beginning of 2017. This temporary shock should be insufficient to derail the
declining trend in inflation or the expected monetary policy easing cycle, in our view.
■ We project the economy will expand at an average annual rate of 2.7% of GDP in
2017. The preliminary version of the tax reform approved in the economic chambers of
both houses of congress removed the widening of the tax base for households and the
revision of marginal income tax rates. This should mitigate the downward impact on
private consumption that the original reform could have created. Still, our estimate is
lower than our previous 3.0% forecast to take into consideration weaker momentum at
the end of 2016 than we expected in our previously quarterly report.
■ Investment should be a key driver of economic growth next year. The negative
marginal contribution of lower oil investment should stabilize in 2017, while the
investment phase of the 4G infrastructure projects starts to slowly gain speed. We
estimate that investment could grow at an average annual rate of 3.7% next year, while
private and public consumption expand near 2.0%. We do not expect a sharp
underperformance of public consumption as we work with the baseline scenario that
the fiscal reform will be approved, which means the government will have an extra
0.8% of GDP in tax collections to spend next year. Resources from regional
governments may also be deployed and prevent a significant fiscal drag.
■ Meanwhile, we are revising our 2017 year-end annual headline inflation forecast
to 4.2% from 3.8%. Our forecast change looks to reflect both the upward impact of
higher VAT taxes plus the downward pressures that the reigning disinflation process
was creating in our old forecast. We think the risks to this forecast are balanced.
Higher indexation and wage negotiations are the main risks to higher inflation, while a
negative output gap and lower tradeable goods inflation could lead to a lower result.
We remain convinced that the disinflationary trend will remain in place until the third
quarter before stabilizing. The path of inflation will likely dictate the speed and
magnitude of the upcoming monetary easing cycle.
■ Surprisingly to us, the central bank turned more dovish than we expected
earlier than we thought. Our long-standing view has been that the bank will lower
the policy rate 225bps in 2017, starting in February, delivering consecutive 25bps
cuts. Yet, the technical team and board members we met with during a recent
research trip sounded more hawkish than we expected, even suggesting that the
Foreign debt (% of exports of goods and services) 141.1 118.3 115.7 137.0 158.8 245.7 287.6 268.8 258.3
Central bank gross FX reserves ($bn) 28.5 32.3 37.5 43.6 47.3 46.5 46.4 46.7 46.9
Central bank gross non-gold FX reserves ($bn) 28.3 31.9 36.9 43.1 46.7 45.9 45.8 46.1 46.3
(1) Average for the year (2) Increase indicates appreciation (3) Minimum wage (4) Non-financial public sector debt net of intergovernmental loans and holdings of public sector bonds by public sector entities (5) Net FDI measured on an accrued basis (flows reported on a cash-basis may be significantly different; for example, in 2010, net FDI on a cash basis was $9.1bn) (6) Scheduled amortizations for public sector
Source: DANE, Central Bank, Ministry of Finance and Public Credit, Credit Suisse
15 December 2016
Emerging Markets Quarterly 40
Ecuador: With a little help from its friends ■ The government has managed to navigate a very complex 2016 thanks to the
confluence of key actors that supplied it with immense liquidity. The central bank,
China, international financial markets, and OPEC allowed the government to shy away
from orthodox fiscal adjustment strategies while avoiding a sharper recession and the
triggering of systemic financial or monetary problems. At this juncture, the worst part of
the economic crisis is likely over. The speed of the recovery, however, and the fixing of
important vulnerabilities will likely depend on the outcome of the February 2017
general elections.
■ The government’s strategy to overcome liquidity constraints in 2016 was very
complex and comprehensive, in our view. The intensive use of central bank balance
sheet led, at times, to a depletion of central bank liquidity to precarious levels,
according to our calculations. Timing mismatches led on several occasions to an
insufficient coverage ratio of private sector deposits, which was only overcome thanks
to a glut of external liquidity provided by China and international financial markets in
the second half of the year. However, the government successfully managed to
replenish the liquidity lost by the financial system during 2015 by wiping out arrears
created with the private sector in both 2015 and 2016. These two were, in our view, the
main culprits behind Ecuador’s economic crisis which the government needed to
address in order to generate the basic necessary conditions for the economy to
recuperate.
■ This strategy came with the associated cost of the deterioration of the central
bank’s balance sheet and the creation of balance of payments pressures. It also
led to a glut of domestic liquidity which the contracting economy could not fully absorb,
and consequently to higher private deposits at the central bank which removed
degrees of freedom for balance of payments adjustment. Policymakers tackled this
issue with new regulations on reserve requirements and funds held abroad by private
and public sector entities, and a new international bond issuance made possible by oil
market conditions created by OPEC’s output-reduction agreement. In the end,
Ecuador’s year-end picture could show higher reserves, an adequate reserve-to-
deposits coverage ratio, recovered financial system deposits, cleansed private sector
balance sheets, positive sequential real GDP growth, deteriorated labor markets, and
low inflation.
■ Thus, 2017 should have better growth prospects than 2016, as long as no other
external shock hits the balance of payments. We forecast a timid real average
growth rate of 0.8% for the year, which would be an improvement from this year’s
estimated 2.2% contraction. In our view, reversing the decline in financial system
deposits and cleansing arrears with the private sector were necessary conditions to
stabilize the economy, yet insufficient for the economy to take off. The economy, we
believe, could remain stuck in a sort of non-traditional liquidity trap if the lack of
resources is no longer the main drag to growth, but rather the unwillingness of the
private sector to put these resources to work as well as the inability of the public sector
to do so.
■ Higher oil prices could help the economy grow faster. We are working with a WTI
oil price assumption of $56 for 2017, which is based on market-based future prices
following the decision by OPEC and non-OPEC members to reduce oil output. Yet
these resources may still fail to reach the budget in full. At these prices, the
government should stop accumulating contingent debt with private sector oil
companies, which we have estimated at $1bn for the end of 2016. As we have
explained in the past, additional oil revenues must first address these payments before
flowing to the budget. We forecast that the central government’s fiscal deficit next year
will remain at 3.4% of GDP, near this year’s 3.5% of GDP.
Foreign debt (% of exports of goods and services) 49.6 49.2 53.4 64.5 84.1 130.2 169.2 173.5 184.1
Central bank gross FX reserves ($bn) 2.6 3.0 2.5 4.4 3.9 2.5 3.8 2.8 2.9
Central bank gross non-gold FX reserves ($bn) 1.4 1.7 1.1 3.3 3.0 1.9 3.2 2.2 2.3
(1) Average for the year (2) Real effective exchange rate, increase indicates appreciation (3) Minimum wage (4) Reference rate for corporate loan operations (5) Scheduled amortizations for public sector only
Source: Central Bank, INEC, Ministry of Finance, Credit Suisse
15 December 2016
Emerging Markets Quarterly 45
Mexico: Uncertain times
■ The outlook for the Mexican economy for 2017 is highly uncertain and quite
contingent on the domestic and external policies that US President-elect Donald
Trump will undertake. As we wrote in our previous Quarterly report, risks to the
Mexican economy and financial markets from a Trump presidency are biased to the
downside, even if growth in the US accelerates in the near-term. Our concerns are
centered on, but not limited to: The future of the North American Free Trade
Agreement (NAFTA); the potential taxation of workers' remittances; the potential
building of a wall along the US-Mexico border; potential massive deportations of
Mexicans in the US; and, the nature of fiscal stimulus that the US may implement to
discourage US firms from investing abroad.
■ We do not anticipate getting much clarity on any of these issues in the near-
term. We are more than one month away from Trump's inauguration as US President
and probably several months before he, his team and the US Congress make up their
minds on many of these issues. From Mexico's standpoint, this will be a long a tense
wait, and one that will likely hurt growth prospects in the near-term, particularly via the
business confidence channel. In general terms, we envision President-elect Trump's
starting negotiation stance on these topics to be extreme and anti-Mexico, and to get
somewhat softer along the way. Where Trump eventually settles remains to be seen.
■ Our central scenario is the following: We think Mexico, the US and Canada will
slightly revise NAFTA, a process that may last several months in 2017. Fortunately, the
Mexican government appears to be working hard to prepare its defense, allegedly with
the help from the original and quite experienced NAFTA negotiators. Topics in which
the negotiations may be adverse to Mexico include stiffer labor and environmental
legislation. Meanwhile, on worker remittances, we think that the imposition of taxes are
likely, as it could be a quick way for President-elect Trump to penalize immigrants living
in the US, regardless of their place of origin. Meanwhile, sudden massive deportations
of Mexicans in the US seem far less likely to occur, given the limited resources in the
US judicial system (for example, it takes an average of 637 days to rule on an
immigration/deportation case). On the wall along the US-Mexico border, recent
statements from some of Trump's closest advisor suggest there is less appetite to go
forward with his original campaign threats.
■ Our real GDP growth forecast for Mexico in 2017 is 1.7%, down from our estimate
of 2.1% for 2016. This forecast is the probability-weighted average of: a trend
scenario, in which the economy continues to grow near 2.2% (50% probability); a
scenario of a modest adverse shock to the economy with growth falling to 1.7% (35%
probability); and, a more extreme scenario in which Trump's anti-Mexico measures are
tougher, resulting in a small contraction in real GDP (15% probability). Under this
blended scenario, year-over-year real GDP growth would average 2.0% in the first half
of 2017 and 1.3% in the second half. From the supply-side perspective, real GDP
growth would be fueled by the services sector (0.5% quarterly growth, on average,
seasonally-adjusted and non-annualized), followed by the primary sector (0.3%
average quarterly growth), while industrial GDP would be unchanged. From the
demand-side, we project that private consumption will continue to expand at a faster
pace than overall GDP, and investment and exports will constrain growth.
■ Another variable for which we have adopted this probability-weighted approach
is the nominal exchange rate. We think that while in an extremely adverse scenario
the peso could sell-off to levels near 25.00 pesos per dollar and that under a more
constructive scenario the sell-off would be more limited. Under this approach, our year-
end 2017 estimate stands at 21.6, which implies a nominal depreciation of 6.1% from
current levels, on top of the cumulative depreciation of 27.2% in the past two years.
Foreign debt (% of exports of goods and services) 61.8 57.4 58.3 64.7 68.2 73.7 83.1 81.8 79.0
Central government gross FX reserves ($bn) 113.6 142.5 163.5 176.5 193.2 175.4 176.0 180.0 185.0
Central bank gross non-gold FX reserves ($bn) 113.3 137.3 156.9 171.8 188.5 171.1 171.0 175.0 180.0
(1) Real effective exchange rate, increase indicates appreciation. (2) Contractual wage increases at a national level in the public and private sectors (excludes fringe benefits). (3) Narrow definition that excludes off-balance expenditures. (4) Includes all contingent liabilities associated with IPAB, Pidiregas, FARAC, financial intermediation and other debtor support programs. (5) Scheduled short- and long-term market and non-market amortizations for public and private sectors. (6) Includes the total stock of Pidiregas debt. (*) Probability-weighted estimates resulting from three macro scenarios outlined in the Mexico report; these are not the official CS forecasts
Source: INEGI (Government's statistics agency), Banco de Mexico, Ministry of Finance, Credit Suisse
15 December 2016
Emerging Markets Quarterly 50
Peru: Setting the stage ■ Peru’s economic fortunes for upcoming quarters continue to be dependent on
the success or failure of new measures taken by the government to boost private
and public investment. Congress granted the government special powers to
implement a series of economic reforms, which the government has rushed to present
over the past few weeks. The key changes have been aimed at expediting procedures
for investment projects to materialize, enhancing the role of the government’s
investment agency Proinversion, and simplifying existing investment regimes. The
government has also changed its tax code introducing an amnesty law, increasing
corporate taxes, and is expected to lower the VAT tax by 1%.
■ With these measures the government is seeking to boost infrastructure
investment and find a new growth engine for the upcoming years. In the short
term, however, primary sector growth will likely continue to be the main growth driver in
Peru. Copper production increased a little under 45% yoy over the 12-month period
ending in October 2016, leading to a similar increase in copper export volumes. Thus,
we recently revised our 2017 real GDP growth forecast to 4.5% from 5.1% as the peak
of copper production may happen earlier than we expected. Domestic demand, on the
other hand, will likely recover in 2017 after growing less than 1.0% in 2016. We expect
investment to finally break with three consecutive years of contraction and grow a
modest 3.7% in 2017. Consumption will likely remain stable and slightly stronger than
in 2016, at 3.8%.
■ The surge in copper production has now been matched by a recent increase in
copper prices. Together, they have driven our 2017 current account deficit forecast
down to 2.7% of GDP from a deficit of 3.5% of GDP before. Higher copper prices
should help offset the negative impact of the recent decline in gold prices. A lower
current account deficit will bode well with lower inflows into Peru as global interest
rates increase. Yet, as the basic balance improves on the margin we expect support for
the Peruvian sol. We see space for a slight currency appreciation during 2017 as the
above forces balance each other out: we expect the Peruvian currency to close 2017 at
3.35 soles per dollar.
■ On the monetary policy front, the central bank will likely have to keep a hiking
bias next year. Accelerating economic activity and higher-than-expected inflation may
lead the central bank to fine tune its policy stance and increase the policy rate 50bps in
2017 to 4.75%. We expect inflation to remain around the upper end of the central
bank’s target range (1% to 3%) through the second half of the year, before making a
clearer descent to 2.6% by December.
■ The central bank’s main focus, however, may remain FX policy. We also expect
the bank to continue intervening in the currency market as it sees fit, particularly to fight
pressures that they deem non-fundamental. Lower dollarization levels should allow the
bank to let the currency float more than in the past. However, they have not reached
the point at which the bank will be comfortable allowing a completely free float. We
expect the bank to continue to implement de-dollarization strategies either by
implementing targets on dollar lending or by promoting sol-denominated credit.
■ Finally, higher tax collections from the mining sector could help the government
meet its fiscal targets with more ease. We expect the general government’s deficit to
narrow to 2.4% of GDP from levels closer to 3.0% of GDP this year, in line with the
Finance Ministry’s guidelines. We are unsure whether the government will try to justify
larger VAT cuts in coming years if revenue targets are met with the help of higher
mining related revenues, as such revenues could be taken as transitory and take
longer to materialize. We expect public debt levels to increase in the short term, but
Peru should remain a largely unlevered country, with net public debt levels below 15%
of GDP. We think that Moody’s could eventually lower Peru’s sovereign debt rating one
notch to Baa1, which would be in line with Fitch’s and S&P’s rating.
Foreign debt (% of exports of goods and services) 110.6 95.0 113.5 125.0 141.8 168.7 166.7 159.5 156.4
Central bank gross FX reserves ($bn) 44.2 48.9 64.0 65.7 62.4 61.5 61.7 62.4 62.0
Central bank gross non-gold FX reserves ($bn) 42.6 47.1 62.2 64.4 61.0 60.4 60.2 60.8 60.5
(1) Average for the year (2) Real effective exchange rate, increase indicates appreciation (3) Minimum wage (4) Public sector debt net of public sector deposits in the financial system
(5) Scheduled amortizations for public sector only
Source: Central Bank, INEI, Ministry of Finance, Credit Suisse
15 December 2016
Emerging Markets Quarterly 54
Venezuela: No clear way out
■ We expect Venezuela’s economic, political and humanitarian crises to persist in
2017, unfortunately. Prospects for regime change and an improvement in economic
policy in the near-term are bleak, in our view. Thus, the country will likely continue to
suffer through one of the world’s largest economic contractions, triple-digit inflation and
massive goods shortages. The probability of a credit event within the next twelve
months has declined, though, mainly owing to higher oil price projections and apparent
continued financial support from China.
■ Social and political pressures will likely remain intense next year. President
Nicolas Maduro’s popularity reached a new low in October when fewer than 20% of
participants in a Datanalisis poll evaluated him positively. Public opinion surveys
consistently identify scarcity of food, medicine and other basic goods, the cost of living,
long lines and violent crime as being among the country’s biggest problems. We do not
expect much improvement on these fronts in 2017 as the slight pickup we project in
imports is driven by higher costs for the oil sector rather than more goods entering
Venezuela. Maduro’s recent decision to abruptly remove the most widely held
banknote from circulation also risks adverse economic and social fallout in the near
term, in our view.
■ Still, our base case is that President Maduro will stay in office until his term ends
in early 2019. Chavismo has effectively suppressed the institutional channels for
bringing about political change any sooner. Furthermore, we are not optimistic that
talks between the Maduro administration and the opposition will bear fruit, because we
would not expect the former to fulfill any commitments that could weaken its control of
domestic institutions. Organizing massive street protests seems to be the opposition’s
most viable remaining strategy for curtailing Maduro’s tenure at this point. However, its
leadership appears to be weaker and more divided since the Vatican-led talks began,
and could struggle to regain lost momentum unless there is another highly disruptive
political or economic event. Opposition leaders may also shift their focus to
gubernatorial and mayoral elections, which the electoral authority has said will be held
by June 2017 and December 2017, respectively.
■ We now project a 6.1% contraction in real GDP in 2017, compared to -5.0%
previously. This would follow an estimated 10.0% retrenchment in 2016, and
Venezuela would remain the worst performing economy in our Emerging Markets
coverage universe.1 Real wage losses and political and economic uncertainly will
probably continue constraining private consumption and investment, while falling oil
production and foreign exchange restrictions further reduce economic activity on the
production side. Our initial 2018 forecast calls for the pace of GDP decline to
decelerate to 2.8% in real terms as public spending rises ahead of the next presidential
election, which the constitution stipulates should take place at some point that year.
■ Annual inflation should remain above 500% for the majority of 2017, according to
our projections. Venezuela fares far worse than any other country we cover on this
metric as well. We estimate that 12-month inflation reached 395% in October.2 Monthly
prints will probably spike in the near term due to a significant increase in domestic
liquidity during the second half of 2016 and a massive depreciation of the unofficial
exchange rate in the fourth quarter. Monetary financing of the overall public sector
deficit, which we project will remain substantial at 12.4% of GDP in 2017, continues to
be the primary underlying culprit, and recent decisions to raise the minimum wage and
reduce banks’ reserve requirements have exacerbated associated pressures. Goods
scarcity and administered price increases will also likely remain inflation drivers.
1 The central bank has not published national accounts data since the third quarter of 2015.
2 The last official inflation figure published was 181% as of December 2015.
Foreign debt (% of exports of goods and services) 151.4 124.9 131.4 145.5 177.3 356.7 491.9 378.1 398.4
Central bank gross FX reserves ($bn) 29.5 29.9 29.9 21.5 22.1 16.4 11.7 4.9 1.0
Central bank gross non-gold FX reserves ($bn) 13.1 9.9 9.9 6.0 7.3 6.3 4.2 2.3 0.8
Gap between public sector's external assets and liabilities ($bn, end-year) 17.0 27.2 10.2 10.3 12.4 1.4 -13.8 -29.1 -30.3
Gap between public sector's external assets and liabilities (% of GDP, end-year) 7.2 8.6 2.7 3.7 8.5 1.4 -17.8 -34.8 -33.9
(1) Forecast based on a projected weighted average exchange rate across official and unofficial foreign exchange markets. (2) Public and private sector wages. (3) Expressed in strong bolivares for all years; 2014-2018 estimates and forecasts represent a weighted average exchange rate across official and unofficial foreign exchange markets. (4) Increase indicates appreciation. (5) Preliminary consolidation of central government and PDVSA 2010-2011. (6) Central government, regional governments, PDVSA; does not include liabilities of other public institutions such as the Central bank, National Development Bank, Foreign Trade Bank, Industrial Bank of Venezuela and Andean Region Development Bank.
Source: Central Bank, INE, Ministry of Finance, PDVSA, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
15 December 2016
Emerging Markets Quarterly 59
Emerging Europe, Middle East and Africa
15 December 2016
Emerging Markets Quarterly 60
Emerging Europe, Middle East and Africa: No changes in the lackluster growth picture As we head into 2017, we are maintaining the broadly lackluster picture for real GDP
growth in Russia, South Africa and Turkey which we had presented in the
September issue of the Emerging Markets Quarterly.
■ In Russia, economic activity seems to have bottomed out in 2Q, consistent with our
earlier projections. On our seasonally adjusted estimates, sequential real GDP growth
was positive (at 0.2% qoq) in 3Q for the first time in almost two years. Although the
demand-side breakdown of 3Q real GDP growth is not available yet, we believe it was
mainly driven by investment rather than consumer demand or net exports. We expect
consumer and investment demand to improve on the back of higher oil prices in 2017,
but only marginally if fiscal policy is implemented broadly consistent with the budget
law. Accordingly, we keep our real GDP growth forecasts unchanged for now: we
expect real GDP to decline 0.4% in 2016, followed by 1.5% growth in 2017.
■ In South Africa, we expect real GDP growth to pick up to 1.1% in 2017 from a
projected 0.4% in 2016. The main driver of this improvement is stable fixed investment
spending, which in 2016 looks likely to have declined by close to 3.5%. Furthermore,
household spending should benefit from expected stable short-term interest rates.
Finally, we expect that the growth rate of export volumes will improve.
■ In Turkey, the year-on-year real GDP growth rate for the first three quarters of this
year was 2.2%, down from 6.1% in 2015, as the mid-July coup attempt and the terror
incidents took their toll on economic activity in 3Q through their negative impact on
consumer sentiment and tourism sector. We think that some (but not all) of the adverse
shocks which slowed real GDP growth in 2016 will dissipate in 2017. This, combined
with the countercyclical fiscal policy and government’s incentives to stimulate
household and corporate spending, will lead to a modestly stronger growth
performance in 2017, in our view, despite the rising global interest rates and the
possibility that the country’s continuing security issues might constrain both household
and corporate spending. We are maintaining our full-year real GDP growth forecast of
2.3% for 2016 and 3.1% for 2017 which we published on 9 November, following the
release of the September industrial output data.
Figure 116: EEMEA: Real GDP growth rates
%, annual
September 2016 Quarterly December 2016 Quarterly
2016E 2017F 2016E 2017F 2018F
Russia -0.4 1.5 -0.4 1.5 1.7
South Africa 0.3 1.1 0.4 1.1 2.0
Turkey 3.0 3.2 2.3 3.1 3.0
Source: Credit Suisse estimates
We revised our end-2017 inflation forecast for Turkey higher because of the
expected pass-through from the lira’s recent depreciation and the unsupportive
global environment for Turkey, while we kept the inflation outlook broadly
unchanged for Russia and South Africa.
■ In Russia, inflation is slowing in line with the central bank’s (CBR) and our
expectations, mainly due to the strong rouble and subdued consumer demand.
Headline inflation fell to 5.8% yoy in November, extending the downward trend since
2Q, when headline inflation was above 7.0% yoy. We think the CBR’s policy is on track
to attain the 4% inflation target in 2017 and to keep inflation close to the target in 2018.
The residual decline in headline inflation from an expected 5.6% yoy at end-2016 to
Dollar value of exports index (100=October 2012) Year-on-year (%)
Source: Central Bureau of Statistics, Haver Analytics®, Credit Suisse Source: Central Bureau of Statistics, Haver Analytics®, Credit Suisse
Unfavorable base effects
and a rise in core inflation
pushed headline inflation
higher between April and
October.
Importantly, core inflation
rose to a 13-month high of
0.3% yoy in October.
Figure 123: Contributions to year-on-
year CPI inflation
Figure 124: Headline and core
inflation
pps, with the exception of CPI Doted lines represent the central bank’s inflation target band (yoy, %)
Source: Central Bureau of Statistics, Credit Suisse Source: Central Bureau of Statistics, Credit Suisse
2.6
1.7
6.2
2.4
-0.2
2.1
4.1
3.2
4.9
3.2
-1
0
1
2
3
4
5
6
7
-8
-6
-4
-2
0
2
4
6
8
2011 2012 2013 2014 2015 2016 -3Q
Net exportsStatistical discrepancyInvestment spendingGovernment consumptionHousehold spendingReal GDP growth
80
90
100
110
120
130
140
Oct-
20
12
Oct-
201
4
Oct-
20
15
Oct-
20
16
High tech industries
Medium-high tech industries
Low-medium tech industries
Services
-5
0
5
10
15
20
Sep-12 Sep-14 Sep-16
Business sector
Households (for housing)
Households (non-housing)
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Oct-15 Jan-16 Apr-16 Jul-16 Oct-16
Food Housing
Energy Other
CPI
-2
-1
0
1
2
3
4
Oct-12 Oct-13 Oct-14 Oct-15 Oct-16
Headline
Core
15 December 2016
Emerging Markets Quarterly 66
After a multi-year rise, we
think that housing price
inflation is likely to moderate
in 2017 as tighter financial
conditions in the mortgage
sector and government
initiatives on the supply side
will eventually feed into
weaker demand.
We expect the MC to shift to
a hawkish stance in 2H
2017 and to deliver a 15bp
policy rate hike in 4Q 2017.
Figure 125: The Housing Price Index
(HPI) and mortgage rates
Figure 126: BoI policy rate and CPI
inflation
% % %
*We calculate the run-rate of housing price inflation as the annualized three-month moving average of the month-on-month change in the de-seasonalized HPI.
Source: Bank of Israel, Central Bureau of Statistics, Credit Suisse
Source: Central Bureau of Statistics, Bank of Israel, Credit Suisse
We project the full-year
current account surplus to
narrow to 3.2% of GDP in
2017 from 3.7% of GDP in
2016 as foreign trade
balance continues to
deteriorate.
We maintain our 2017 end-
year forecast of 3.95 for the
USDILS.
Figure 127: Current account items Figure 128: Financial account items
Four-quarter rolling (% of GDP) Four-quarter rolling (% of GDP)
Source: Central Bureau of Statistics, Bank of Israel, Credit Suisse Source: Central Bureau of Statistics, Bank of Israel, Credit Suisse
The nominal effective
exchange rate fell to multi-
year lows largely driven by
sharp appreciation of the
shekel against the euro in
November.
We expect government
revenues to continue to
surprise on the upside and
pencil in a fiscal deficit of
2.5% of GDP for 2017 –
lower than the 2.9% of GDP
in the budget draft.
Figure 129: Effective exchange rates
Figure 130: Central government fiscal
balance
100=December 2009 12-month rolling (% of GDP)
Note: Effective exchange rates are a weighted average index composed of 28 currencies reflecting 38 of Israel’s trade partners.
Source: Bank of Israel, Credit Suisse
Note: The definition of fiscal balance excludes net credit.
Foreign debt (% of exports of goods and services) 131.2 111.7 109.6 103.4 96.7 97.2 96.2 91.9 88.4
Central bank gross non-gold FX reserves ($bn) 70.9 74.9 75.9 81.8 86.1 90.6 100.0 106.0 110.0
(1) Net of central bank FX reserves. (2) Not including credit to households. (3) Principal repayments of public and private sector. (4) Based on the location of the creditor (i.e. including local currency liabilities held by non-residents).
Source: Central Statistical Bureau, Bank of Israel, Ministry of Finance, Credit Suisse
15 December 2016
Emerging Markets Quarterly 68
Russia: What to do with windfall oil revenues? ■ The conduct of fiscal policy in an environment of higher oil prices will shape
Russia’s economic outlook, in our view. The recovery in oil prices, after the agreement
on 30 November between OPEC and non-OPEC countries to cut oil output, may have
positive implications for medium-term economic growth in Russia. However, in the longer
run, higher oil prices may jeopardize planned fiscal consolidation. The parliament approved
a conservative budget for 2017-2019, but the government failed to agree on a fiscal rule
and delayed the discussion to 2018. The latter represents an essential element of prudent
fiscal policy, in our view, as it limits spending increases relative to oil prices. Given the
upcoming presidential elections in early 2018, we think budget spending might increase
further than what is penciled in the 2017-2019 budget if oil prices exceed the government’s
assumption of $40/bbl.
■ That said, the market is likely to focus in 1H 2017 on the medium-term positive
impact of higher oil prices on major economic indicators and potential improvement
of relations between Russia and the West, while the focus might shift to the above-
mentioned risks in 2H 2017. Having said that, in our forecasts, we still assume that the
sanctions regime will remain unchanged in 2017-2018. Our new average oil price
assumptions are $44/bbl for 2016 and $58/bbl for 2017, compared to $43/bbl and $50/bbl,
respectively, in the September issue of the Emerging Markets Quarterly and compared to
the average Urals oil price assumption of $40/bbl in 2017-2019 of the government and the
central bank (CBR). Our average Brent oil price assumption for 2018 is also $58/bbl.
■ Economic activity seems to have bottomed out in 2Q 2016, consistent with our
earlier projections. According to Rosstat’s preliminary estimates, the pace of contraction
in real GDP slowed to 0.4% yoy in 3Q from 0.6% yoy in 2Q. On our seasonally adjusted
estimates, sequential real GDP growth was positive (at 0.2% qoq) in 3Q for the first time in
almost two years. Although the demand-side breakdown of 3Q GDP is not available yet, we
believe that real GDP growth was mainly driven by investment rather than consumer
demand or net exports. According to monthly indicators, both industrial output and retail
sales growth momentum were subdued in 3Q. We expect consumer and investment
demand to improve on the back of higher oil prices, but only marginally if fiscal policy is
implemented broadly consistent with the budget law. Accordingly, we still keep our real
GDP growth forecasts unchanged for now: we expect real GDP to decline 0.4% in 2016,
followed by 1.5% growth in 2017. We expect real GDP to grow 1.7% in 2018, which is
either at or slightly above the potential real GDP growth rate.
■ We see a risk that the CBR may stick to tight monetary policy for an extended period
of time, despite higher oil prices. We expect the CBR to cut the policy rate by 125bps, to
8.75%, in 2017. Our expectations are relatively more hawkish than the consensus forecast.
This is driven by our view on the banking sector’s transition from a shortage to a surplus of
rouble liquidity. We expect short-term market interest rates to settle below the policy rate,
closer to the lower edge of the interest rate corridor (100bps below the policy rate). We also
think that the CBR has a cautious view of fiscal discipline in the absence of a fiscal rule,
and that it will be sensitive to a potential deviation of the non-oil federal budget deficit from
the initial target approved in the federal budget law. We think risks of a more
accommodative fiscal policy may start materializing in 2H 2017, closer to the presidential
elections in early 2018, when we expect the CBR to be more cautious about policy rate
cuts (we expect only 25bps-50bps cut in 2H 2017). Until then, in 1H 2017, we believe the
CBR will cut the policy rate by 75bps-100bps, especially if the rouble strengthens in
response to higher oil prices. We project the CBR to cut the policy rate by a further 125bps
to 7.50% in 2018, following an expected stabilization in inflation and inflation expectations.
■ Inflation is slowing in line with the CBR’s and our expectations, mainly due to the
strong rouble and subdued consumer demand. Headline inflation fell to 5.8% yoy in
November, extending the downward trend since 2Q, when headline inflation was above
7.0% yoy. Official core inflation fell from above 7.0% yoy in 2Q-3Q to 6.2% yoy in
Foreign debt (% of exports of goods and services) 109.9 102.5 105.6 128.5 155.7 -3,607 146.6 129.7 123.0
Central bank gross non-gold FX reserves ($bn) 443.6 453.9 486.6 469.6 339.4 319.8 344.8 359.8 380.0
(1) Real effective exchange rate (deflator: CPI), increase indicates appreciation. (2) Net of bank recapitalization costs. (3) Net of official fiscal reserves (Stabilization Fund assets through 2007, thereafter the sum of the Reserve Fund and the National Welfare Fund). (4) Long-term and medium-term amortization of both the private and public sectors. (5) Based on the location of the creditor (6) Liabilities of the central and regional governments and the central bank.
Source: Rosstat, Central Bank of Russia, Finance Ministry of the Russian Federation, Credit Suisse
15 December 2016
Emerging Markets Quarterly 73
South Africa: Macro stability in 2017 vulnerable to politics
■ The real economy could in 2017 produce a moderately stronger and more stable
performance than in 2016, which turned out to be the weakest year since 2009.
For 2016: real GDP growth looks likely to have declined below 0.5% yoy; consumer
price inflation likely accelerated to an average 6.3% yoy; the unemployment rate likely
increased to an average 27%; the rand, on average, depreciated for a fifth consecutive
year, forcing the Reserve Bank to raise interest rates by 75bps; the National Treasury’s
budget deficit targets for the next three fiscal years were adjusted higher; and the
sovereign ended the year with ‘negative’ outlooks from three credit rating agencies.
■ For 2017 we foresee an improvement or stabilization in a number of macro
indicators:
■ First, for real GDP growth, our demand-side model produces a growth rate of
1.1%. The main driver of this improvement is stable fixed investment spending, which
in 2016 looks likely to have declined by close to 3.5% yoy. Furthermore, household
consumption expenditure should benefit from expected stable short-term interest rates.
Finally, we expect that the growth rate of export volumes will improve. Underlying the
forecast of 1.1% for real GDP growth, is a quarter-on-quarter annualized growth rate
of, on average, 1.2% in each quarter in 2017. This forecast path also results in a
stabilization in trend (potential) real GDP growth of 1.2%, the same as in 2016, but
lower than in 2015 (1.4%) and in 2014 (1.6%). In fact, the 1.2% trend growth rate is the
lowest since 1994.
■ According to our analysis, the main driver of the decline in potential GDP growth
from an estimated high of 4.5% in 2006 has been a lower contribution from ‘total
factor productivity’ (TFP). In our view, this is a clear reflection of the lack of progress
in reforms in the past few years. For 2016, it looks likely that TFP shaved an estimated
1.5pps off headline real GDP growth. TFP was last a detractor from economic growth
in 2009 at 2.0pps and in the international isolation period of 1985-1993. Weak growth
in TFP does not bode well for real GDP growth, with which it has a high correlation,
higher than that between GDP and labor or between GDP and fixed capital stock,
according to our analysis. The contribution from 'labor' in 2016, at an estimated 0.4pp,
also remains well down on the contribution of 0.9pp in the period 2002-2008. There
was also a low contribution in the years 2010-2015, a period during which there were
widespread long-lasting strikes. The contribution from 'fixed capital stock' has held up
relatively well in recent years (for 2016 an estimated 1.2pps), but has declined from the
high of 1.9pps in 2009. Policy uncertainty and political instability have led to low levels
of business confidence, in our view (see South Africa: Credit ratings undermined by
weak GDP growth prospects, 23 November 2016).
■ Second, for CPI inflation we expect the average for 2017 to be broadly similar to
that of 2016, which looks likely to be 6.3%. Inflation looks likely to start the year at a
high of 6.8% and decline to 6.0% by December 2017, according to our estimates. The
inflation rate looks likely to be near 6.0% through most of the year, declining below that
rate in June, July and November, based on our current assumptions. Unfortunately an
expected decline in food price inflation in 2017 has been somewhat negated by a
significantly higher assumption for the price of Brent crude oil, at an average $58/bbl,
which is 16% higher than our assumption in the Emerging Markets Quarterly
publication of 29 September 2016.
■ Third, for the current account deficit we estimate a marginal widening in 2017 to
4.5% of GDP. The dominant assumption in our calculation for the current account is
higher import volumes, following a likely contraction in 2016. So despite our
expectations of a stronger growth rate for export volumes and higher terms of trade,
the current account deficit widens. Nevertheless, overall balance of payments funding
Foreign debt (% of exports of goods and services) 103.6 93.2 120.3 120.5 132.4 128.5 145.5 142.0 128.8
Central bank gross FX reserves, including forward FX transactions ($bn) 43.8 48.9 50.7 49.6 49.1 45.8 47.0 45.4 45.6
Central bank gross non-gold FX reserves ($bn) 38.2 42.6 44.0 44.8 44.3 41.5 42.6 41.1 41.3
Central bank net FX reserves ($bn) 43.4 47.9 47.9 45.5 42.7 40.7 41.1 39.4 39.6
(1) Based on remuneration per worker, index 2000=100. (2) Real effective exchange rate, increase indicates appreciation. (3) Data for fiscal years starting 1 April. Selected data refer to the government’s consolidated fiscal balances from 2009. (4) Of medium- and long-term debt only. (5) Including rand-denominated debt held by non-residents.
Source: South African Reserve Bank, Statistics South Africa, National Treasury, Credit Suisse
15 December 2016
Emerging Markets Quarterly 78
Turkey: The lira’s rough ride ■ As the global environment turned unsupportive for Turkey with the rise in US
Treasury yields and oil prices, Turkey’s policymakers have been faced with a
trade-off between supporting growth and stabilizing the lira. Against the backdrop
of weak economic activity and an upcoming referendum on an executive presidency
(likely to take place in 2Q 2017), policymakers are likely to continue to focus on growth
and not on inflation, in our view, leading to a further erosion in the central bank’s
Note: The energy component of CPI is not released officially. We simulate it using the officially released core indicator excluding energy. Source: Statistics Office, Central Bank, Credit Suisse
*Core index I excludes food, energy, tobacco products, alcoholic beverages and gold from the CPI basket. ** Calculated as the annualized three-month moving average of the month-on-month changes in the seasonally adjusted core index I. Source: Statistics Office, Credit Suisse
The non-bank corporate
sector’s short FX position
remains a key vulnerability,
but we think this is a
manageable risk for now.
The sector’s FX liabilities
that are due to mature in the
next 12 months seem to be
broadly hedged with its
short-term FX assets. In
case isolated credit events
occur, we think the banking
sector and the government’s
balance sheets are healthy
enough to absorb such
losses.
Figure 165: Non-bank corporate
sector’s short-term short FX position*
Figure 166: Fiscal performance (based
on national methodology)
$bn 3mma, % yoy 12-month rolling, % of GDP
*Difference between the non-bank corporate sector’s FX liabilities that are due to mature in the next 12 months and its short-term FX assets, not including financial or natural hedges. Source: Central Bank
Source: Ministry of Finance, Statistics Office, Credit Suisse
6.0
7.0
8.0
Nov-13 Nov-14 Nov-15 Nov-16
12-month forward
24-month forward6.0
8.0
10.0
12.0
Dec-15 Mar-16 Jun-16 Sep-16 Dec-16
One-week repo rate
Central bank's effective funding rate
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Nov-15 May-16 Nov-16
Core items Tobacco
Energy Food
CPI (% yoy)
-2
0
2
4
6
8
10
12
14
Nov-13 Nov-14 Nov-15 Nov-16
Core index I*
Run-rate of core index I**
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
Sep-10 Sep-12 Sep-14 Sep-16-2.0
0.0
2.0
-25.0
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
Apr-15 Oct-15 Apr-16 Oct-16
Budget balance (right)
Revenues
Non-interest spending
15 December 2016
Emerging Markets Quarterly 82
Turkey: Selected economic indicators
2010 2011 2012 2013 2014 2015 2016E 2017F 2018F
National accounts, population and unemployment
Real GDP growth (%) 8.5 11.1 4.8 8.5 5.2 6.1 2.3 3.1 3.0
Growth in real private consumption (%) 10.9 12.2 3.2 8.0 2.9 5.4 1.5 2.5 2.5
Growth in real fixed investment (%) 22.5 23.8 2.7 13.8 5.1 9.2 4.0 3.0 5.0
Foreign debt (% of exports of goods and services) 185.6 165.8 165.6 186.3 182.4 200.7 220.1 219.2 219.9
Central bank gross FX reserves ($bn) 86.0 88.3 119.2 131.0 127.3 110.5 115.0 115.0 115.0
Central bank gross non-gold FX reserves ($bn) 80.7 78.5 99.9 110.9 106.9 92.9 100.0 100.0 100.0
(1) Based on the hourly labor cost index (2010=100) for the overall economy. (2) The basket exchange rate is the average of USDTRY and EURTRY exchange rates. Our forecasts for USDTRY are derived from our basket exchange rate forecasts and the previous month's EURUSD average. (3) Real effective exchange rate, increase indicates appreciation. (4) One-week repo rate has been the central bank's policy rate since 18 May 2010 but it has lost relevance since late 2010. (5) The central government's budget balance data are calculated using the IMF-defined primary balance and net interest spending data. The general government's budget balance data are from the IMF for the period before 2014 and are based on the IMF's definition of the non-financial public sector. The government releases consolidated public sector data using its own definition on an annual basis. The data for government spending and gross debt are for the central government. (6) Based on the EU definition. (7) Central bank’s old definition of M2 is used for both 2004 and 2005 due to lack of data on the new definition. (8) Of medium- and long-term debt, including repayments to the IMF. (9) Based on the location of debt issuance, not the location of creditor.
Source: Statistics Office, Central Bank, Treasury, IMF, Credit Suisse
15 December 2016
Emerging Markets Quarterly 83
Non-Japan Asia
15 December 2016
Emerging Markets Quarterly 84
China: Supportive growth into the political transition
■ Politics should be dominant in 2017. The Chinese Communist Party will host the
19th Party Congress in late 2017, which goes a long way in deciding the top leadership
around President Xi Jingping and how far he could consolidate his power, and
potentially creates conditions for him to extend his rule in China beyond 2022 (his
scheduled retirement date). This meeting could decide China’s political landscape
during the next decade. Also, the new Trump administration in the US could add more
uncertainty to Chinese external politics. The president-elect’s direct phone call with the
Taiwan president broke an 'unwritten rule' in the US since 1979, and indicates to us
that the new president may not follow the bipartisan consensus in last few decades in
dealing with China. This means that apart from internal politics, the Chinese leadership
will likely also need to deal with a highly uncertain external political environment in
2017. Therefore, the Chinese leadership will likely face significant political uncertainty
both internally and externally, and in response they will likely place social and
economic stability as a top priority throughout 2017.
■ We believe the government will adopt pro-growth measures to boost economic
growth ahead of the political transition. We expect China's GDP growth to
accelerate to 6.8% in 2017; our projection is higher than the current consensus
forecast of 6.4%.
■ Many local governments in China have tightened housing policy after the
politburo listed "tightening asset price bubble" as one of its policy priorities.
However, housing policy remains less restrictive in most of the lower-tier cities, in
which housing prices have been rather stable, and lower-tier cities form a much larger
proportion of housing market sales and construction volume. Therefore, our analysis
suggests that moderation is more likely than a collapse in the housing market in the
coming quarters (report). We expect housing construction activity to contract 2.3% yoy
in 2017, which should lead to a slowdown in real estate fixed asset investment (FAI)
growth to around 2.0% yoy.
■ We expect overall FAI growth to remain largely stable. The recovery of industrial
profit is likely to support industrial FAI growth. We expect industrial FAI growth to
stabilize in the coming quarters after decelerating for five consecutive years. We
expect the government to be active in pushing for more infrastructure investment
projects if the slowdown of real estate FAI drags down overall investment growth.
■ The short fall from real estate investment can be covered by infrastructure
investment, in our view. Assuming real estate investment growth moderates to 2%
yoy, our calculation suggests that overall FAI can maintain its run-rate growth at
around 8% if infrastructure investment growth is pulled up by the government to 20%
from the current growth of 18%. China's National Development and Reform
Commission (NDRC) accelerated its project approvals in recent months. The increase
in project approvals likely means that bigger pending project packages will available
when growth support is needed. We believe the NDRC is adopting a forward-looking
approach to set the stage for steady growth in 2017.
■ We believe China’s export growth has bottomed and may surprise to the upside.
On a real effective basis, the Chinese currency has depreciated by 7% for the past ten
months in 2016. Our analysis suggests that this trend is likely to help China’s exports
recover from contraction in 2016 to an 8% growth in 2017, assuming other factors are
*All the projections are based on the central case scenario assumption that there is no credit default event in China.
(1) & (2) Calculated based on annual GDP data released by the NBS. (3) Real effective exchange rate: increase indicates appreciation. (4) The National Audit Office (NAO) for the first time released gross government debt data on 30 Dec 2013. The data point released by the NAO is 2012. Historical data and forecasts are based on the NAO's measures which include debt that government holds a repayment obligation and the contingent liabilities. (5) Domestic credit follows the IMF consolidated monetary survey definition. (6) & (7) Export and import growth figures are based on SAFE's BoP data. (8) Scheduled and estimated amortizations for public and private sectors.
Source: National Bureau of Statistics, People’s Bank of China, CEIC, Credit Suisse
15 December 2016
Emerging Markets Quarterly 89
Hong Kong: Trump poses risk on trade and property
■ We have revised down our 2017 GDP growth forecast to 1.7% from 1.9%
previously. Growth is still expected to improve from 1.3% in 2016, but we have turned
more cautious on the extent of the improvement. On the one hand, better Chinese
growth is expected to help support Hong Kong’s merchandise and service exports, but,
on the other hand, US President-elect Trump represents a key risk on US-China’s
trade, while continued US interest rate normalization under Trump’s economic plan
would re-exert pressure on the domestic property market. We remain cautious on Hong
Kong’s medium-term growth trend under the dual pressures from HKD appreciation
and continued interest rate normalization (please see Hong Kong: A long winter,
27 November 2015).
■ We are concerned that a Trump presidency could create conflicts in US-China
trade, disrupting the flows of goods through the Pearl River Delta region. As an
entrepot, Hong Kong’s merchandise trade sector is highly dependent on the flows of
goods between China and the rest of the world. There is risk that Trump may
unilaterally impose tariffs and anti-dumping measures on China, triggering retaliatory
measures which could further depress trade. Such a scenario would be negative for
Hong Kong’s economy given its high reliance on external trade.
■ We think the property sector will continue to face strong headwinds from higher
interest rates, increasing new supply, and a policy overhang in 2017. Continued
rate hikes by the Fed would drive up Hong Kong’s interest rates, even though they lag
USD LIBOR because of the excessive liquidity conditions in Hong Kong. We also think
that the government’s surprise property sector tightening measures in November have
demonstrated its strong determination to stem any further increase in home prices.
Potential new housing supply is expected to rise to 28k units in 2017, versus 25k
potential and 17k actual sales in 2016. We expect these three factors to suppress
property demand next year, countering the support from Chinese capital outflows.
■ We think a stronger HKD would continue pressuring the tourism and retail
sector. We expect the HKD to continue appreciating against the RMB and the
currencies of its main competitors such as Japan and Korea. Pressure on tourist
visitations is likely to persist, though better Chinese growth and resilience in the
domestic equity market are likely to help cushion retail sales. We believe that the
contraction in mainland Chinese tourist arrivals has started to narrow, while sales of
jewellery, watches and clocks have flattened from a year ago. This could have
reflected the reduced impact of weak tourism on the retail sector.
■ We think the government’s broad economic policy directions will remain
unchanged when current Chief Executive Leung Chun-ying finishes his term in
June 2017. Leung made a surprise announcement on 9 December that he will not
seek re-election after his current term ends on 30 June 2017. A 1,200-member Election
Committee will be formed to nominate and elect the next chief executive by the end of
March next year. Despite the change, we believe the government’s broad economic
policy directions such as maintaining the USDHKD peg, upholding a free-market
economy, low taxation and managing property sector risk will remain unchanged.
■ The outlook for Hong Kong’s ratings appears stable. An adjustment remains
unlikely over the next six months, in our view. Hong Kong is rated Aa1 (Moody’s), AAA
Foreign debt (% of exports of goods and services) 20.1 22.5 24.8 27.4 33.6 42.0 51.8 60.4 69.6
Central bank gross FX reserves ($bn) 268.7 285.4 317.3 324.8 342.6 367.1 393.7 424.2 461.6
Central bank gross non-gold FX reserves ($bn) 268.7 285.4 317.3 324.8 342.6 367.1 393.7 424.2 461.6
(1) Real effective exchange rate, increase indicates appreciation. (2) Also includes debt issued under the Government Bond Program. Excludes debt guaranteed by the government. (3) Scheduled and estimated amortizations for total medium- and long-term public and private sector debt. (4) Non-bank foreign debt to Hong Kong entities.
Source: Census and Statistics Department, Hong Kong Monetary Authority, CEIC, Credit Suisse
15 December 2016
Emerging Markets Quarterly 92
India: The J-curve impact of demonetization ■ We expect growth to disappoint consensus over next four months. We recently
cut our FY2016-17 GDP growth forecast to 6.9% (consensus 7.0%) from 7.8% earlier
on demonetization-led supply-side disruptions in 3Q and 4Q of the current fiscal year.
Demonetization of 86% of currency in circulation will result in a big squeeze in cash-in-
hand for the next few months as the government has set limits on the daily exchange
of old notes for new ones, and as the new currency printing falls short of demand.
■ We have also lowered our consumption growth forecast to 6.5% in FY17 from our
estimate of 8.2% earlier as consumers postpone discretionary spending. Businesses,
especially small and medium-sized enterprises, and sectors like autos and non-bank
finance companies that are cash driven will probably see temporary disruptions as well.
■ Lasting impact on real estate likely. In theory, the impact of currency demonetization
should be temporary as eventually all old currency gets exchanged for new. But, we
expect the impact to last further. Beyond six months, we believe there will be a lasting
impact from wealth destruction. This will likely have the greatest impact on the real
estate sector, which accounts for 90% of household wealth. We have also lowered our
growth forecast for FY2017-18 to 7.4% yoy from 8.0% on the view that there will be a
longer-term economic impact from the destruction of wealth for the higher income
segment of the population.
■ But growth should rebound in FY2017-18. We think the likely expansionary
monetary and fiscal policy should provide a lift to GDP in 2H of next year, allowing
growth to accelerate despite the likely implementation of the GST.
■ Easier liquidity and credit conditions should support growth in 2. We estimate
that bank deposits, on a durable basis, can go up by 2% of GDP, which should result in
improved transmission. As a result, lending rates could fall by 30bps-60bps. We
estimate this could add 20bps-25bps to GDP in 2H FY2017-18.
■ Better credit growth, but only to certain sectors. We expect credit growth to
improve as banks try to lend out some of the extra deposits gained from
demonetization, though a sharp surge is unlikely given asset quality issues on bank
balance sheets. We think incremental credit growth could benefit certain sectors like
residential housing via lower mortgage rates and hence partly offset the shock to
consumption.
■ Potential lift from fiscal policy. Recorded GDP could be higher as people declare
greater parts of their income, which in turn should improve tax collections. We estimate
a 5% shift of the informal economy to the formal economy could result in revenue gains
of 0.3% of GDP next year for the government. The increase in spending could be even
bigger if the central government moves to a point target for the fiscal deficit, and the tax
collections from demonetization are high.
■ Higher recorded GDP could improve tax collections. India has a dual economy
structure with the informal economy accounting for about 40%-50% of GDP. With the
demonetization move, producer behaviour will likely change and more of the cash
based-part of the economy will likely get subsumed in the formal sector. Thus, reported
GDP could look higher as more entities in the informal sector likely start declaring
higher income. This would be particularly relevant for small and medium-sized informal
enterprises, which account for about 8% of GDP.
■ Downside to inflation from demonetisation should be more than offset by upside
risks. We expect CPI inflation to accelerate to an average of 5.2% yoy next year
(consensus 5.0%) and core inflation to remain sticky around 5%. Moreover, we
estimate that a 5% increase in global Brent prices should add 25bps to Indian CPI
inflation, more than offsetting the downside in inflation from demonetization. The RBI
Foreign debt (% of exports of goods and services) 93.9 83.2 80.0 90.5 94.9 100.2 115.4 118.9 122.2 121.9
Central bank gross FX reserves ($bn) 279.1 304.8 294.4 292.0 304.2 341.6 360.2 380.0 400.0 415.0
Central bank gross non-gold FX reserves ($bn) 261.1 281.8 267.4 266.4 282.7 322.6 340.1 358.0 380.0 395.0
(1) The years above are fiscal years beginning in April and ending in March, i.e., 2010 refers to the period of April 2010-March 2011, also written as FY2010/11. (2) New GDP series with base 2011-12. All historical ratios expressed as % of GDP may appear smaller since the revised GDP values in the new series (with base year of 2004) are higher. (3) Real effective exchange rate: an increase indicates appreciation. (4) The RBI uses a mix of instruments such as the repo rate, reverse repo rate, CRR (Cash Reserve Ratio), etc. (5) Note, effective from 2010, the central government includes proceeds from disinvestments as revenue in calculating the fiscal deficit.
Source: Ministry of Finance, Reserve Bank of India, CSO, CEIC, Credit Suisse
15 December 2016
Emerging Markets Quarterly 97
Indonesia: More boon for the banks ■ On track for recovery. We maintain our view that real GDP will improve after hitting a
fiscal speed bump in 3Q, reflecting more favorable rural incomes, the lagged impact of
lower interest rates, and the J-curve effects of the tax amnesty. Fiscal policy should
also provide some moderate support but we do not see this as the main GDP driver
next year. Although we are trimming our GDP forecasts for 2016 and 2017 by 0.1% to
5.1% and 5.3% respectively to account for the slowdown in the past quarter, our
projections remain 0.1% above consensus for both years.
■ Three key reasons for stronger growth. First, the rebound in the terms of trade,
thanks to the significant surge in coal, palm oil, and rubber prices, should bode well for
rural incomes and consumption. Second, the lagged impact of lower interest rates
should start to boost domestic demand more materially. Although BI has cut rates by
150bps, the average lending rates have come down only by 60bps-70bps and our
statistical model suggests that this will start to have a substantial real economic impact
from 4Q 2016/1Q 2017 onwards. Third, we think that the tax amnesty program will
have a J-curve impact on growth – it disrupts economic activities while people are busy
declaring and paying taxes, but afterwards these individuals are more likely to use the
declared wealth to purchase big ticket items including properties.
■ Fiscal policy – focus on quality of spending. We think fiscal policy will become
more supportive for growth after the squeeze in 3Q. The tax amnesty program so far
has raised tax revenue more than we had anticipated, to the tune of 0.8% of GDP,
alleviating the pressure to cut government spending in 4Q. While the announced 2017
budget implies a meagre 8% growth in fiscal spending, the government seems to place
greater focus on increasing the allocation to infrastructure. We expect public
infrastructure spending to increase 25%-30% yoy in 2017, with momentum stronger in
1H. We also project that the government will in the end be willing to widen the budget
deficit to 2.7% of GDP from its current estimate of 2.4% in 2017 and versus our
projected 2.9% this year, to support growth.
■ Higher inflation, end of rate cut cycle approaching. We think BI's rate cutting cycle
is coming close to the end, with only a 25bps reduction to go in 1Q 2017. We have
revised up our 2017 average inflation forecast to 4.3% from 4% earlier to account for
higher global crude oil prices and the likely move by the government to trim electricity
subsidies more than we had thought in 1H. The expected improvement in GDP and
credit growth should add to inflation pressure. Even under the revised outlook;
however, inflation should remain manageable and within the central bank's 3%-5%
band, providing it with room to cut rates one last time in 1Q 2017.
■ IDR depreciation manageable. We expect the rupiah to depreciate against the USD
by 3%-5% by the end of next year, partly reflecting our view that the dollar and US
yields will continue to move higher. Without sharp spikes in US yields; however, the
IDR's depreciation will likely be manageable given that Indonesia has a much better
'buffer' than back during the so-called 2013 Taper Tantrum period. We are revising our
current account deficit forecasts narrower to 2.0% of GDP from 2.1% for 2016 and to
2.1% from 2.3% for 2017. This is mainly due to more favorable than expected terms of
trade. High bond yields and potential inflows from the tax amnesty should help contain
some potential short-term outflows next year. Lastly, its foreign reserve position
remains healthy, at 200% of external debt maturing within one year.
■ Nominal GDP recovery, better macro backdrops for banks. We expect nominal
GDP growth to rebound to 9.7% from the multi-year low rate of 7.7% in 2016, reflecting
real GDP recovery as well as a pick-up in inflation from a low base. We think the macro
backdrops should turn more favorable for Indonesian banks next year, with nominal
GDP recovery helping credit growth, a commodity price rebound easing asset quality
issues in commodity related sectors, and the end of the rate cutting cycle supporting
margins. Our equity research bank analysts also have constructive views on the
banking sector for 2017 (see Asia Financials Strategy 2017).
Foreign debt (% of exports of goods and services) 123.4 111.7 124.8 129.8 147.8 182.5 205.0 211.0 199.0
Central bank gross FX reserves ($bn) 96.2 110.1 112.8 99.4 111.9 105.9 108.0 100.0 98.5
Central bank net non-gold FX reserves ($bn) 92.9 106.5 108.8 96.4 108.8 103.3 105.0 97.0 95.5
(1) Real effective exchange rate, increase indicates appreciation. (2) Nominal wage: manufacturing. (3) BI changed its policy target from 1m SBI rate to overnight rate in 2008. (4) Refers to central government. The government assumed an oil price of $61 per barrel for 2009 in its revised budget announced in June 2009. (5) Excludes SOE and BI debt. (6) BoP numbers from 2004 onwards have been revised; exports & imports include credits & debits on net income, respectively, in 2000-03.
Source: Bank Indonesia, Ministry of Finance, Central Bureau Statistics, CEIC, World Bank, Credit Suisse
15 December 2016
Emerging Markets Quarterly 100
Korea: Weaker growth, higher inflation
■ We have revised down our 2017 GDP growth forecast to 2.5% (from 2.7%) and
revised up our CPI inflation forecast on higher oil prices in 2017. We have turned
more cautious on Korea’s growth in 2017, given increased uncertainty on politics,
domestic demand and external trade conditions. We think the ongoing political
uncertainty could weigh on sentiment and hamper the effectiveness of government
economic policy delivery. Construction investment is likely to moderate, while
consumption demand is not expected to improve much. The 2017 budget will not be
helpful either, in our view, as it will pose a negative fiscal impulse on the economy.
Although exports may recover in the near term as the drags from labor strikes and
product recalls dissipate, Trump’s presidency in the US may heighten the risk of trade
conflict between the US and China and Korea. Amidst increased uncertainty over
growth, inflation is expected to rise on the back of higher global oil prices. We now
expect the BoK to keep the policy base rate unchanged in 2017 and 2018 in view of
the resumption of price pressure and concern over rising household debt.
■ We think the recovery cycle in the property market is nearing its end, suggesting
a slowdown in new building construction in coming quarters. According to our
equity research property analyst, the deterioration in affordability (due to home price
appreciation and interest rate increase) and the surge in new apartment completions
over 2017-2018 will depress the market sooner or later. We estimate that new
apartment completions in Korea will surge to 368k units per annum in 2017 and 2018,
substantially higher than the rate of new household formation (around 240k per year).
We think such a trend will depress the supply-demand dynamics in the domestic
property market, causing a slowdown in new housing projects. The negative impact on
GDP growth could be significant as construction investment contributed almost half
(1.4pp) of Korea’s GDP growth (2.9%) over the past four quarters.
■ Private consumption is likely to remain stagnant, as weak growth and political
uncertainty depress consumer sentiment. The consumer sentiment index took a
sharp fall in November, to 95.8 from 101.9 before the Choi Soon-sil scandal surfaced.
We think the uncertainty over Korea’s political situation and pessimistic outlook on the
domestic economy will continue to pressure sentiment and non-discretionary spending
by the general public. The slowdown in property sales is expected to weigh on
housing-related consumption of goods such as household electronics and furniture.
■ Fiscal policy remains very conservative, with the 2017 budget estimated to be
contractionary for the economy. The 2017 budget was finally passed in early
December, following compromises on child-care contributions, corporate tax rates and
income tax for high-income earners. Total expenditure for the budget is set at
KRW400.5trn, 3.6% more than the 2016 budget, with the consolidated deficit (before
social security) budgeted at 1.7% of GDP. We estimate that the 2017 budget will have
a negative 0.7% of GDP fiscal impulse on the economy. In view of a more upbeat 2017
growth forecast from the MoSF (3%), we think the government may have a good
chance to launch supplementary budgets again to cushion growth. The measures are
likely to be aimed at promoting consumption, similar to the car consumption tax
discount last year, though we think the impact is likely to be limited.
■ Trump has raised the uncertainty in global trade, which is negative for Korea
given its high reliance on the external sector. With Trump elected as the next US
president we think there is a risk that the process of global trade liberalization may stall
or even reverse. During his campaign, Trump claimed that the KORUS FTA was a bad
deal for the US. There is a risk that Trump may call for a review of or even threaten to
withdraw from the KORUS FTA. While Korea could seek a rebuttal through the WTO or
court proceedings, the process may take time, during which the executive order on
Foreign debt (% of exports of goods and services) 65.8 58.8 57.8 58.7 58.7 61.3 65.6 65.5 64.9
Central bank gross FX reserves ($bn) 291.6 306.4 327.0 346.5 363.6 368.0 377.7 380.1 368.6
Central bank gross non-gold FX reserves ($bn) (7) 291.5 304.2 323.2 341.7 358.8 363.2 372.9 375.3 363.8
(1) Real effective exchange rate (CPI-deflated); increase indicates appreciation. (2) Managed fiscal balance (exclude social security contribution). (3) Includes Grain Securities, Seoul Metro bonds, National Housing Bonds, Seoul Metro Subway Bonds, and Industrial Finance Debentures. (4) Scheduled amortizations of medium- and long-term external debt of both the public and private sectors. (5) Liabilities vis-à-vis non-residents (i.e., includes FX-denominated and local-currency debt). (6) Includes government and central bank. (7) Central bank forex reserves minus monetary authorities’ other liabilities.
Source: Bank of Korea, National Statistical Office, Ministry of Strategy and Finance, CEIC, Credit Suisse
15 December 2016
Emerging Markets Quarterly 105
Malaysia: Macro recovery amidst concerns over currency
■ We are expecting some improvement in the macro outlook, including to growth
and the current account, due to the turn in the commodity price cycle. However,
concerns remain around potential MYR volatility that could persist.
■ We continue to see growth improving to 4.5% in 2017 from 4.1% in 2016. This
compares with the current consensus of 4.2% for 2017. Driving this is our expectation
that broader public infrastructure projects such as MRT2 (RM27bn), LRT3 (RM9bn),
and the Pan Borneo Highway (RM29bn) will pick up. In addition, the biggest drag from
lower commodity prices is likely behind us, given the rise in both oil and palm prices
that we have already seen. This should help boost rural incomes, while also helping
commodity-related investments and producers over time. The rise in oil prices should
also help boost the central government's revenues. We note that the government's
current oil price assumption of $48 for 2017 looks relatively conservative, and as such
the recent rise in oil prices should give the government more space to increase
spending in 2017.
■ BNM's FX measures lead us to remain cautious on Malaysia's outlook.
Nonetheless, concerns remain around potential MYR volatility that could persist. The
central bank has implemented a range of measures to help arrest the volatility in the
ringgit recently. These include restrictions on non-deliverable forward (NDF) trading,
which have reduced FX market liquidity leading to continued concerns among offshore
bond investors. The central bank also now require exporters to convert a minimum of
75% of new export proceeds into ringgit, with BNM offering a higher than market rate of
3.25% for these ringgit proceeds as an incentive for exporters to keep the proceeds
onshore (see Bank Negara's FX measures). Public comments by the Federation of
Malaysian Manufacturers and various industry representatives indicate that the 75%
requirement could be binding for exporters, and especially for smaller ones. These
measures should be positive for the ringgit in the short term, but the longer-term impact
is unclear to us. Exporters could be incentivised to find loopholes around the rules or
mis-invoice exports to land more FX offshore, if expectations of ringgit depreciation rise
further. Over the longer term, it is also unclear to us how manufacturing FDI investors
will view these changes in FX regulations.
■ We have also raised our 2017 current account surplus forecast to 2.3% of GDP,
from 1.5% of GDP, and up from 1.9% of GDP in 2016: The reflects the rise in oil
prices due to the recent OPEC deal, and the higher palm and rubber prices seen so far
this year. However, import requirements from the rollout of broader public infrastructure
spending will probably help cap the potential extent of current account improvement.
■ ASEAN and Malaysia's pivot to China: As we have noted in our recent report, we
think foreign policy uncertainty under President-elect Trump could further accelerate
ASEAN and Malaysia's economic policy pivot towards China, which has in any case
picked up pace recently. For Malaysia, rising FDI from China could help fund some of
the bigger ticket infrastructure spending, such as the East Coast Railway, although we
have not built this into our base case forecast for 2017 (see ASEAN's pivot to China –
shifting to a fast track).
■ We raise our 2017 CPI forecast slightly to 2.6%, from 2.5%; BNM expected to
keep rates on hold: We have built in some increase in domestic fuel prices given the
rise in oil prices and the removal of cooking oil subsidies. Nonetheless, we expect
weak domestic demand and slow credit growth to dominate and help cap upside
pressures to CPI in 2017. While inflation is expected to remain manageable in 2017,
we expect BNM to maintain its policy rate for the rest of 2017 given the volatile ringgit.
Foreign debt (% of exports of goods and services) 62.6 66.9 79.1 87.7 86.2 96.1 95.0 91.1 88.1
Central bank gross FX reserves ($bn) 106.5 133.6 139.7 134.9 115.9 95.3 98.0 98.0 98.0
Central bank gross FX reserves, including forward FX transactions ($bn) 114.3 140.2 147.0 138.1 115.9 95.3 98.0 98.0 98.0
Central bank gross non-gold FX reserves ($bn) (6) 104.9 131.8 137.8 133.5 114.6 94.0 96.7 96.7 96.7
(1) Real GDP from 2015 has been rebased to 2010 = 100. (2) Real effective exchange rate, increase indicates appreciation. (3) Salaries and wages in the manufacturing sector. (4) BNM changed the policy rate from the intervention rate to the overnight rate in May 2004. (5) Refers to the federal government’s financial position. The government assumed an oil price of $70 per barrel for 2009 in its revised budget announced in November 2008. (6) Not including forward FX purchases.
Source: Bank Negara Malaysia, CEIC, Credit Suisse
15 December 2016
Emerging Markets Quarterly 108
Philippines: Fiscal push, monetary brake
■ We continue to expect GDP to surprise on the upside at 6.4% in 2017: We note
that consensus for growth has been rising gradually from 6.1% three months ago to
6.3% currently. In particular, we see private consumption remaining robust at 6.5% (vs.
consensus of 6.3%), while we continue to see investment growing at around 10.5%.
Our constructive view on domestic demand is driven by expansionary fiscal policy,
robust labor market and consumer confidence, together with hikes to government
worker salaries. We note that the unemployment rate has fallen to a historical low of
5%, while employment growth in 2016 has picked up to its strongest since 2011.
■ Headline inflation to rise next year to 3.2% (consensus: 2.9%): We continue to
expect headline inflation to accelerate next year to 3.2%yoy from 1.8% this year.
However, we now think the main driver will be higher energy prices, rather than
changes in administered prices due to tax reforms. We now expect tax reform to pass
in 2H 2017 and for implementation starting 2018. We are, however, not too concerned
about the recent tick-up in food prices because some of the recent increase has been
due to temporary factors such as weather-related disruptions and changes in import
permit processes by the Department of Agriculture. The proposed removal in rice
import quotas starting July 2017 should also help lower domestic rice prices, although
we have not built this into our base-case forecast.
■ We continue to expect BSP to hike rates by 25bps in 2017: While we do not think
the Philippines is overheating, it is starting to warm up given its strong GDP profile and
rising domestic credit. We continue to expect the BSP to be the first central bank in
Asia ex China to raise interest rates, with a 25bps rate hike likely happening in 1H
2017. We also have another 25bps hike penciled in for 2018.
■ The central bank is already implicitly tightening on monetary policy: BSP
continues to mop up liquidity, with short-term term deposit facility rates rising slightly
above 3% in the latest auction. More than half of the liquidity from the overnight deposit
facility has been transferred to the term deposit facility. We also forecast the BSP to cut
the RRR by 1pp in 2017, from current 20%, but we expect this to be done in a liquidity-
neutral way. For banks, this will help shift the composition from unremunerated
deposits to remunerated ones with the BSP, which should help improve profitability.
■ We continue to see the current account narrowing in 2017 to 0.8% of GDP, from
1.4% of GDP in 2016: We expect rising infrastructure needs to more than offset the
improvement in exports we forecast. Nonetheless, some of this infrastructure spending
will likely funded by an improvement in investment from China (see below).
■ Pivot to China reinforces our positive view on GDP: We think the Philippines' pivot
towards China is likely to bring in more FDI and tourists as gains in both flows from
China outweigh the potential decline in flows from the US (see our report Philippines:
Pivot towards China impact and implications). The Philippines should also benefit more
from the boom in outbound Chinese tourism with political drags removed, which
currently accounts for around 11% of total visitor arrivals in the country. Tourism also
has knock-on indirect positive impact to private consumption, given that it is more
employment intensive.
■ Market concerns on the risks from President-Elect Trump are likely overdone:
We believe market concerns surrounding risks from President-Elect Trump's policies to
the Philippines are likely overdone. First, the vast bulk of the overseas Filipino workers
in the US are permanent rather than temporary and irregular workers. Second, while
the President has authority to raise tariffs on manufacturing and goods imports, he has
to go through Congress if he wants to raise taxes on companies that offshore jobs as
Foreign debt (% of exports of goods and services) 134.9 132.2 119.6 115.7 103.1 105.0 104.6 100.1 95.4
Central bank gross FX reserves ($bn) 62.4 75.3 83.8 83.2 80.0 80.7 81.0 82.0 80.0
Central bank gross FX reserves, including forward FX purchases ($bn) 80.1 81.3 87.8 87.2 82.0 82.7 83.0 84.0 82.0
Central bank gross non-gold FX reserves ($bn) (4) 55.4 67.3 73.5 76.2 73.0 73.7 74.0 75.0 73.0
(1) Nominal minimum wage in non-agricultural sector. Figures from 2005 onwards also include cost of living allowance and daily equivalent of 13th month pay. (2) Real effective exchange rate, increase indicates appreciation. (3) 2007 number includes a large direct investment abroad in the amount of $2.7bn. (4) Not including forward FX purchases.
Source: CEIC, Bangko Sentral Ng Pilipinas, Ministry of Finance, Credit Suisse
15 December 2016
Emerging Markets Quarterly 111
Singapore: MAS easing still on the cards for 2017 ■ We continue to expect real GDP growth to slow further to 1.1% in 2017, from 1.4%
in 2016: We note consensus GDP for 2017 has been declining from 2.1% as of June,
down to 1.5% currently. While global growth is expected to improve as we move into
2017, we expect domestic demand weakness to dominate. Our forecasts for both private
consumption and investment remain below consensus for 2017. In addition, while
potential protectionist measures by the new US administration are unlikely to be directed
specifically at Singapore, SG will still be affected indirectly by a trade slowdown amidst
policy uncertainty or if a trade war between China and US breaks out.
■ Offshore and marine sector measures by government help put a floor on growth:
The government has recently announced measures to help the offshore and marine
sector. These are aimed at easing the current liquidity crunch in the sector, with the
government taking on a higher risk share on these bridging loans. Our equity strategist
notes that these measures should benefit some of the smaller O&M players, while also
limiting any potential spike in NPLs (see Singapore Offshore and Marine: Government
help could limit downside risks and Government support positive). These, on top of the
rising oil prices, should help put a floor on GDP growth in 2017, but should not be seen
as materially changing our growth outlook per se for next year.
■ Fiscal policy could turn less expansionary as we move into 2017: The government
has already ramped up fiscal policy significantly in 2016, with expenditure to GDP
projected to rise to 18% in 2016, from 17% in 2015. Moving forward, the pace of
increase in government spending will likely slow. Barring a recession and an
associated response from the government, we expect government spending to rise by
around 0.2pp to 18.2% in 2017 from 18% in 2016.
■ We continue to expect Sibor to rise to 1.75% by end-2017: The rise in global
interest rates post Trump will also crimp private consumption spending, on top of a
weaker labor market (see What President Trump means for Asian economies). Our US
team continues to call for a total of 50bps of rate hikes in 2017. We see Sibor rising to
1.75% by end 2017, up from 1.25% as of end 2016.
■ We have raised our 2017 inflation forecasts to 0.3% from -0.1%: Our higher
headline inflation forecasts reflect the rise in oil prices that we have already seen,
which should lead to some increases in electricity tariffs with some lag. We
nonetheless remain well below the consensus CPI forecast of +0.8%. We expect weak
domestic demand to put a lid on inflation pressures in 2017. We also raise our MAS
core inflation forecast to +0.8% from +0.5%. Nonetheless, this remains well below the
central bank's 2017 core inflation forecast of 1%-2%.
■ We expect SG labor market to remain weak in 2017: The data out so far suggest
that the labor market continues to deteriorate as per our expectations. Resignation
rates continue to decline, job vacancy to unemployed ratio fell, while employment
growth contracted, with retrenchments also inching up further. The forward-looking
surveys such as Manpower Group's net employment index continue to point to a
lackluster hiring season starting in 1Q 2017. These affirm our view that the
unemployment rate will rise to around 2.5% by end-2017.
■ We continue to see the MAS easing exchange rate policy further in April 2017:
This will likely happen through a downward re-centering of the exchange rate band. As
we first fleshed out earlier in the year, we continue to see a need for the central bank to
weaken the currency, given evidence that the Real Effective Exchange Rate (REER) is
overvalued, coupled with weaker labor productivity differentials relative to its trading
partners. In addition, nominal wages and labor costs have also been rising far ahead of
real productivity growth (see Singapore: Structural problems intensifying).
Central bank gross FX reserves ($bn) 225.8 237.7 259.3 273.1 256.9 247.7 245.0 245.0 245.0
Central bank gross FX reserves, including forward FX transactions ($bn) 306.0 356.5 365.9 341.3 298.6 273.3 285.0 285.0 285.0
Central bank gross non-gold FX reserves ($bn) (4) 225.5 237.5 259.1 272.9 256.6 247.5 244.8 245.0 245.0
(1) Real effective exchange rate, increase indicates appreciation. (2) Operating revenue minus total expenditure. (3) Current account data were revised in early 2008, leading to a downward revision of around 6pp of GDP in the 2007 current account balance. The adjustment mostly reflected revisions to the income balance. (4) Not including forward FX purchases.
Source: Monetary Authority of Singapore, CEIC, Credit Suisse
15 December 2016
Emerging Markets Quarterly 114
Taiwan: Growth is peaking
■ We expect Taiwan’s GDP growth to plateau at above 2.0% in 4Q16/1Q17 then
moderate to 1.6% in 2Q/3Q17 on a quarterly year-on-year basis. Despite the
moderating quarterly growth profile, annual growth is forecast to recover to 1.8% in
2017. On external demand, we expect tech export growth to stay over 10% yoy in
1Q17, but it is likely to soften to low single-digit levels in 2H17. Non-tech export growth
is likely to remain resilient, driven by steady growth in Chinese demand. On domestic
demand, investment growth should be supported by the expansion of semiconductor
production facilities. But that said, construction and consumption are likely to stay
weak, pressured by falling home prices, stagnant real wage growth and weak
consumer sentiment. We expect the CBC to keep the policy rediscount rate steady in
2017 and 2018. Modest growth, slightly higher inflation and expected hikes in US rates
argue that Taiwan’s rate easing cycle is likely to be over.
■ We are concerned about the policy risk from Trump, as his stance on tougher
trade sanctions against China would negatively impact Taiwan’s economy. While
Trump’s plan for tax cuts may help stimulate US domestic demand, we are concerned
that Taiwan could be impacted if the US were to take broader- and stronger-than-
expected measures against China and global trade. This stems from the high trade
reliance of Taiwan on mainland China on a value-added basis (9.3% of GDP) and also
on a gross basis (26% of merchandise exports, 40% when including Hong Kong) as a
major supplier of intermediate goods. The risk is present, in our view, even though
Taiwan has no existing FTA with the US and was not highlighted by Trump during his
campaign as a potential target of trade sanctions.
■ We are also concerned about the political risk from Trump, as tension across the
Taiwan Strait would intensity if China, Taiwan or the US makes any
miscalculated move. The congratulatory phone call made by President Tsai to Trump
and Trump’s view that the US is not necessarily bound by the “One-China” policy have
invoked a rapid response from Beijing. While we think the current cross-strait impasse
will not have much of a negative impact on the economy (given the limited size of
Chinese tourism and investments in Taiwan), further hostile rhetoric and direct contacts
between Taiwanese officials and the new US administration would increase cross-strait
tension with unforeseen consequences, in our view.
■ On trade, we expect tech export growth to moderate from over 10% yoy in 1Q17
to low single-digit levels through the year. Electronic part exports, which include
semiconductors produced by TSMC, are likely to see the strongest year-on-year
growth in 1Q17, similar to the pace in 4Q16, in our view. The slowdown is attributed to
a rising statistical base, despite a sequential up-tick in 2Q17 and 3Q17’s momentum in
preparation for the launch of the iPhone 8.
■ We expect non-tech export growth to remain supported by better Chinese
demand and the recovery in raw commodity prices. Excluding information,
communication and technology (ICT) products, Taiwan’s exports have been correlated
to the yearly growth in the CRB Metal Index. We expect Taiwan’s non-tech export
products such as chemicals, basic metals, plastics and machinery to maintain single-
digit level growth in 2017.
■ On investments, we expect Taiwan’s tech capital investments to record double-
digit growth in 1Q17, driven by the capital investments made in the
semiconductor sector. There is a high correlation between capex growth in the
semiconductor sector and Taiwan’s machinery and equipment investment growth. Our
equity research tech analyst forecasts TSMC will make a year-on-year increase in
capital expenditure to expand its 10nm and 7nm facilities and some 5nm R&D
development tools next year to stay at the leading edge of technology development.
Foreign debt (% of exports of goods and services) 32.3 34.8 37.0 47.2 47.5 51.0 52.5 50.8 48.3
Central bank gross FX reserves ($bn) 382.0 385.5 403.2 416.8 419.0 426.0 438.3 444.1 444.0
Central bank gross non-gold FX reserves ($bn) (6) 376.8 380.5 397.9 411.6 413.7 420.8 433.1 438.9 438.8
(1) Real effective exchange rate (CPI-deflated), increase indicates appreciation. (2) General government statistics as interpreted by the Taiwan government. (3) Scheduled amortizations of medium- and long-term external debt of both the public and private sectors. (4) Liabilities vis-à-vis non-residents (i.e., includes FX-denominated and local-currency debt). (5) Includes government and central bank. (6) Central bank forex reserves minus monetary authorities’ other liabilities.
Source: Directorate-general of Budget, Accounting and Statistics, Central Bank of China, Ministry of Finance, CEIC, Credit Suisse
15 December 2016
Emerging Markets Quarterly 119
Thailand: Steady and resilient
■ Above consensus GDP forecasts. We maintain our above consensus real GDP projections for Thailand for both 2016 and 2017 at 3.2% (vs 3.1%) and 3.3% (vs 3.1%) respectively. We expect recovery in rural income, pro-growth fiscal policy, and some improvement in exports to support GDP, offsetting weaker contribution to growth from tourism. We also see Thailand as one of the most resilient economies in the region in the environment of US rates increases and stronger dollar given its strong external position and foreign reserves.
■ Constructive on domestic consumption. We see three factors supporting household consumption in 2017. First, rural income has turned from being a major drag on growth in the past two years to a positive driver, with rubber price rebounding, shrimp disease easing, and rice production volume improving though prices still low. Second, car sales should see some pick-up as the government first car scheme's lock-up period has expired, allowing people to sell old cars and buy newer models. Third, the government has launched several stimulus packages, and we see most of them benefiting consumer spending more than private investment (see below). These factors should help offset the negative impact from the likely slowdown in tourism sector. The crack-down on low cost tourist operators should continue to weigh down on Chinese tourist arrivals, resulting in single-digit tourism growth, from double-digit rate this year.
■ Three-pronged approach to pro-growth fiscal policy. The government's recent
policy actions have been consistent with our long standing view that it will actively use fiscal policy to support private consumption. We view the government policy strategy as a three-pronged approach. The first leg is the household income support schemes ranging from cash handouts to low-income households, cash support for farmers according to the size of their farmland, and rice subsidy scheme which should add around 0.5% of GDP, by our calculations. In addition, the government is also launching tax incentives for domestic spending and traveling for the upcoming holiday season to offset potential weakness in domestic spending during the mourning period. Lastly, the government is also front loading its infrastructure investment plan by aiming to disburse funds to provincial governments and village funds early next year. We continue to project government infrastructure investment to increase by around 30% in 2017, taking into account off-budget spending.
■ Private investment should improve but still the weak link. With exports likely to see
some improvements and Chinese investment supporting FDI, private investment should see some pick-up from the sub-1% growth this year. The government also plans to increase funding for investment by village funds, which will likely be counted as private rather than state investment, according to our understanding. However, we continue to expect this component to be the weak spot in the economy partly reflecting structural factors including shortages of unskilled and skilled labor. We also expect the direct investment outflows to continue as more domestic corporations invest overseas seeking cheaper labor and market expansion.
■ Policy rate to stay flat in 2017. We have revised up average headline inflation forecast to 1.8% from 1.5% for 2017, mainly reflecting higher energy prices. With inflation back within the BoT's 1-4% target band, growth supported by fiscal policy, and our view of stronger dollar in 2017, we do not expect the BoT to cut rate. At the same time, economic growth will also likely be proved too weak for the central bank to raise rates, while weaker currency is likely to be welcomed by the authority. Bond yields should rise with higher US rates, domestic inflation, and pro-active use of fiscal policy.
■ Strong external position. Thailand has one of the strongest external positions to withstand potential shocks from US Fed rate hike in Asia, in our view. We expect current account surplus to remain above 10% of GDP next year, though narrowing from above 11% this year due to higher oil prices, and likely softer inbound tourist arrivals. Thailand has a foreign reserve position, at around 300% of short-term external debt, and relatively low foreign holdings of government bonds at around 15% versus 48% in Malaysia.
Foreign debt (% of exports of goods and services) 42.6 39.8 48.4 50.0 51.4 54.7 57.8 58.5 58.6
Central bank gross FX reserves ($bn) 172.1 175.1 181.6 167.2 157.1 158.0 180.0 175.0 180.0
Central bank gross FX reserves, including forward FX transactions ($bn) 191.7 194.7 201.2 190.2 180.2 181.1 203.1 198.1 203.1
Central bank gross non-gold FX reserves ($bn) (6) 167.5 167.4 173.3 161.3 151.3 152.2 174.2 169.2 174.2
(1) Real effective exchange rate, increase indicates appreciation. (2) From Labor Force Survey: Average Monthly Wage in the private sector. (3) Through 2006, the policy rate was the 14-day repo rate. (4) Data for central government, based on cash basis prior to 2004, based on fiscal year ending September. (5) Includes central government, non-financial SOEs and financial institution development fund. (6) Not including forward FX purchases.
Source: Bank of Thailand, National Economic & Social Development Board, CEIC, Credit Suisse
15 December 2016
Emerging Markets Quarterly 122
Vietnam: Better growth, but higher risks
■ We expect GDP growth to accelerate by 20bps to 6.2% in 2017. Robust export
growth and an acceleration in private consumption due to a recovery in farm incomes
should offset the lackluster government spending and likely slowdown in credit growth.
■ The TPP may be over, but export growth should remain strong. Vietnam was expected
to be one of the key beneficiaries of the Trans-Pacific-Partnership (TPP), but US President-
elect Trump has committed to withdrawing the US from the TPP. While the additional
benefits to Vietnam associated with greater access to markets will thus probably not
materialize, continuation of existing ties together with structurally strong exports and better
global demand should still mean higher export growth for Vietnam in 2017.
■ Competitiveness gains should result in export outperformance. Our study earlier
(see report) suggested that Vietnam's year-on-year export growth outpaced global
trade growth by 12%-14% on average over 2000-2016. Vietnam's improvement in
global market share came largely from gains in competitiveness and having the right
product mix. Export growth at 7.5% yoy for the first eleven months of 2016 continued to
outperform the region and we expect it to remain robust at 8% in 2017.
■ Boost to manufacturing should continue. Vietnam continues to receive significant
investment from Korea that has helped boost its capabilities in the labor intensive part
of the electronics and telecommunication manufacturing sector. At the same time, we
believe it has also attracted labor intensive activities including textile and footwear
manufacturing that have left China due to rising labor costs. Recent announcements by
LG Electronics about relocating production plants in Asia including from China and
Indonesia to Vietnam for price competitiveness further support the shift.
■ Private consumption expected to support growth, but fiscal constraints likely to
remain. Farm incomes should get a boost in 2017 with higher rice production following
good rainfalls and a sharp increase in rubber prices. However, fiscal spending should
remain constrained in CY2017 as the public debt approaches the legislated limit and
SOE privatization remains slow.
■ CPI inflation forecast to accelerate in 2017, rates likely to stay flat. The likely rise
in inflation should prevent rate cuts, while growth is unlikely to be strong enough to
warrant rate hikes. SBV may choose to adopt macro prudential measures targeting
property sector lending rather than tightening overall credit conditions. We expect
credit growth to slow down, but only mildly, to 16.5% yoy from around 17.5% this year.
We see three risks from the potential shift in US policies:
■ Depreciation in VND likely. We expect VND to depreciate by 4%-5% by end-2017. We
expect the basic balance to remain positive at USD15bn, but our expectation of a stronger
USD should result in a weaker VND. Any sharp pick-up in resident outflows, as was evident
in 2015, plus low reserve adequacy of 2.6 months of imports despite the recent pick-up
could risk higher VND depreciation if USD rises sharply. Given manageable inflation, we do
not expect SBV to intervene aggressively to support the currency.
■ Slower trade growth. Uncertainty regarding US trade policy could result in a
slowdown in global investment and trade which would probably hurt Vietnam.
■ Risk of reforms being pushed out further. Certain amendments to existing domestic
laws were put on the agenda of the National Assembly to fulfill the requirements of the
TPP. For example, revision of the Labor Code and the enterprise law, new laws on
promoting small and medium-sized enterprises, and other regulations on business
conditions, and an acceleration of SOE reforms. The likely demise of the TPP could
Net portfolio investments 73.3 49.0 46.3 28.0 18.0 14.0
Medium- and long-term borrowing 8.5 6.0 8.0 8.0 8.8 10.0
Short-term loans 10.4 6.2 4.4 5.0 5.0 15.0
Other -13.9 -14.3 -4.1 -10.0 -3.4 3.6
Error and omissions -20.2 -20.6 -18.5 -17.4 -8.0 -8.0
Change in net international reserves (- indicates increase) -21.0 -13.0 -16.7 17.9 -0.6 -4.0
Memo items:
Nominal GDP ($ bn) 1,191 1,262 1,297 1,149 1,029 979
(1) Reflects credit lines from suppliers, commercial bank loans and external trade loans. We do not have data on the exact original maturity of these loans, but we assume that they were typically less than one year, so that it fits with the “short-term” debt definition.
Source: Central Bank, Ministry of Finance, Credit Suisse
Medium- and long-term borrowing by public sector (2) 17.8 -2.0 0.8 -11.8 7.9 4.2
Medium- and long-term borrowing by private sector (2) -1.6 -2.6 1.0 -4.2 0.7 1.0
Short-term loans 27.9 27.2 34.0 29.1 29.8 30.5
Other (3) -8.0 24.2 14.7 36.5 1.4 0.4
Change in net reserves owing to BOPs (- indicates increase) -0.5 0.0 -1.6 0.8 1.5 8.2
Roll-over ratios:
Medium- and long-term debt 2.4 -0.9 0.3 -3.8 1.3 1.4
Short-term debt 1.4 1.0 1.2 0.9 1.0 1.0
(1) Includes non-residents' deposits. (2) Estimates based on stock data. (3) Includes residents' portfolio and other investments, transfers and net errors and omissions. Repatriation of $8.6bn from abroad and net errors and omissions of $10.6bn are behind the unusually large figure in 2008.
(1) Short-term debt amortizations are based on the debt stock figures from a year ago; they include the non-residents' deposits. (2) All flows that are not specified above, including residents' portfolio and other investments abroad, and net errors/omissions.
(1) 1998-2003 BOP data were based on old classification. Short-term debt figures came from IMF 2008 Article IV Consultation report published September 2008 on Indonesia.
(1)Non-financial public sector. (2) Includes $0.9bn payment to Occidental Petroleum Corp in 2016. (3) Includes net financing with Central Bank. (4) Central bank publishes accrued data that must be consistent above and below the line. Arrears with private sector are likely included in discrepancies.
Source: Central Bank, Credit Suisse
15 December 2016
Emerging Markets Quarterly 155
Government funding needs MEXICO 2014 2015 2016E 2017F
$ bn % of GDP $ bn % of GDP $ bn % of GDP $ bn % of GDP
(1) Including repayment of loans to National Insurance Institute. (2) Positive/negative number indicates a decline/increase in the government’s cash reserves.
Source: IMF, Central Bank, Credit Suisse
RUSSIA 2014 2015 2016E 2017F
$ bn % of GDP $ bn % of GDP $ bn % of GDP $ bn % of GDP
*(1) The difference between the overall fiscal deficit figures here and the central government budget deficit figures presented in the Selected Economic Indicators table for Turkey is due to interest revenues. The government's interest revenues are included in other financing in this presentation.
Source: IMF, Central Bank, Credit Suisse
15 December 2016
Emerging Markets Quarterly 158
Government funding needs NON-JAPAN ASIA
CHINA 2014 2015 2016E 2017F
$ bn % of GDP $ bn % of GDP $ bn % of GDP $ bn % of GDP
(1) Fiscal year beginning April. For instance, 2010 is April 2010 to March 2011. (2) 'Others' includes small savings, state provident funds and changes in cash. (3) Foreign borrowings are net of repayments. (4) The central government has decided to include proceeds from disinvestments as revenue in calculating the fiscal deficit. Proceeds are to be used to fund certain social sector schemes that lead to capital formation. This is effective from 2009.
Source: IMF, Central Bank, Credit Suisse
15 December 2016
Emerging Markets Quarterly 159
Government funding needs INDONESIA 2014 2015 2016E 2017F
$ bn % of GDP $ bn % of GDP $ bn % of GDP $ bn % of GDP
EM nominal GDP according to the IMF ($bn) (3) 24,022.8 28,182.7 29,690.4 31,421.4 32,461.6 30,648.2 30,889.1 33,260.7 35,748.7
EM nominal GDP as a share of global nominal GDP (%)(3) 36.6 38.7 40.1 41.3 41.6 41.6 41.1 41.8 42.7
EM PPP GDP according to the IMF ($bn) (3) 47,804.8 51,745.6 55,229.5 58,857.4 62,586.4 65,698.5 69,254.1 73,951.0 79,279.3
EM PPP GDP as a share of global PPP GDP (%)(3) 53.7 54.8 55.6 56.5 57.1 57.6 58.1 58.8 59.5
Aggregates for regions and total emerging markets are weighted by IMF’s nominal GDP figures in US dollars. The data for India are for fiscal years.
(1) Revised GDP series with base 2004-05. All historical ratios expressed as % of GDP may appear smaller since the revised GDP values in the new series (with base year of 2004) are higher. (2) Real GDP from 2001 has been rebased to 2000 = 100. (3) Based on GDP data (historical and forecast) from the IMF’s latest World Economic Outlook. We have amended the group of countries that the IMF classifies as emerging markets to include the Czech Republic, Hong Kong, Israel, Korea, Singapore and Taiwan; note that the IMF’s group of emerging markets countries includes many (typically small) economies that are not included in the table above.
Source: the BLOOMBERG PROFESSIONAL™ service, National Statistical Offices, IMF World Economic Outlook, IHS Global Insight, Credit Suisse
EM ex-China and India 11,332.9 12,013.6 12,203.5 1.1 0.3 0.7 1.1 1.3 2.5 2.0 1.8 2.8
Aggregates for regions and total emerging markets are weighted by IMF’s nominal GDP figures in US dollars.
(1) The Statistics Office released a new GDP series on 12 December 2016, but did not provide the seasonally adjusted data. The regional aggregate excludes Turkey.
Source: the BLOOMBERG PROFESSIONAL™ service, National Statistical Offices, Credit Suisse
15 December 2016
Emerging Markets Quarterly 165
Summary macroeconomic data: Inflation
2010 2011 2012 2013 2014 2015 2016E 2017F 2018F
CPI inflation (%, December to December)
LATIN AMERICA 6.6 7.1 6.3 8.0 8.9 12.7 18.3 16.0 14.0
Argentina 10.9 9.5 10.8 10.9 23.9 20.6 37.1 20.1 14.9
Aggregates for regions and total emerging markets are weighted by IMF’s nominal GDP figures in US dollars. The data for India are for fiscal years.
(1) Weighted average of wages in the formal and informal private sector and the public sector. (2) Average annual growth in nominal wages. (3) Measured by the National Household Sample Survey (PNADC). (4) General compensation index (includes fringe benefits). (5) Minimum wage. (6) Contractual wage increases at a national level in the public and private sectors (excludes fringe benefits). (7) Public and private sector wages. (8) Annual average of monthly average wages in the economy. (9) Based on remuneration per worker, index 2000=100. (10) Based on the hourly labor cost index (2010=100) for the overall economy. (11) Data are from the official average wage index published by the NBS which include the basic wages of government civil servants and staffs and workers of large SOEs, but exclude their allowances and the wages of township and village enterprises and private enterprises. We do not think the series accurately reflects the extent of wage increases in China. (12) For the manufacturing sector. (13) Salaries and wages in the manufacturing sector. (14) Nominal minimum wage in the non-agricultural sector. Figures from 2005 onwards also include cost of living allowance and daily equivalent of 13th month pay. (15) From Labor Force Survey: Average Monthly Wage in the private sector. (16) Real effective exchange rate (CPI-deflated); increase indicates appreciation.
Source: the BLOOMBERG PROFESSIONAL™ service, National Statistical Offices, IMF World Economic Outlook, IHS Global Insight, Credit Suisse
15 December 2016
Emerging Markets Quarterly 167
Summary macroeconomic data: Current account balance
2010 2011 2012 2013 2014 2015 2016E 2017F 2018F
Current account balance (% of GDP)
LATIN AMERICA -1.8 -1.6 -1.9 -2.6 -3.1 -3.6 -2.2 -2.5 -2.9
Argentina -0.4 -0.8 -0.2 -2.0 -1.4 -2.5 -2.5 -2.8 -2.9
Brazil -3.4 -2.9 -3.0 -3.0 -4.2 -3.3 -1.1 -1.8 -2.5
Aggregates for regions and total emerging markets are weighted by IMF’s nominal GDP figures in US dollars. The data for India are for fiscal years.
(1) Balance of payments numbers from 2004 onwards have been revised; exports & imports include credits & debits on net income, respectively, in 2000-03.
Source: the BLOOMBERG PROFESSIONAL™ service, National Statistical Offices, IHS Global Insight, Credit Suisse
15 December 2016
Emerging Markets Quarterly 168
Summary macroeconomic data: Exports
2010 2011 2012 2013 2014 2015 2016E 2017F 2018F
Exports of goods and services (% of GDP)
LATIN AMERICA 19.0 19.9 19.9 19.7 19.8 20.4 20.8 21.7 22.3
Argentina 19.2 18.7 16.4 14.8 14.6 11.2 13.1 12.1 11.8
Brazil 10.5 11.2 11.4 11.4 10.8 12.5 12.4 12.7 13.2
Aggregates for regions and total emerging markets are weighted by IMF’s nominal GDP figures in US dollars. The data for India are for fiscal years.
(1) Balance of payments numbers from 2004 onwards have been revised; exports & imports include credits & debits on net income, respectively, in 2000-03.
Source: the BLOOMBERG PROFESSIONAL™ service, National Statistical Offices, IHS Global Insight, Credit Suisse
15 December 2016
Emerging Markets Quarterly 169
Summary macroeconomic data: Fiscal balance
2010 2011 2012 2013 2014 2015 2016E 2017F 2018F
General government fiscal balance (% of GDP)
LATIN AMERICA -3.1 -2.7 -3.0 -3.4 -4.9 -7.0 -6.2 -6.8 -6.3
Argentina -1.7 -3.0 -4.0 -4.7 -6.3 -8.0 -7.6 -7.3 -6.3
Brazil -3.2 -2.5 -2.3 -3.0 -6.0 -10.4 -9.0 -10.5 -10.1
Euro area -6.1 -4.1 -3.7 -3.0 -2.6 -2.1 -1.8 -1.5 na
Japan -8.4 -8.4 -8.6 -7.6 -5.2 -4.1 -4.2 -4.4 -4.8
Aggregates for regions and total emerging markets are weighted by IMF’s nominal GDP figures in US dollars. The data for India are for fiscal years.
(1) Narrow definition that excludes off-balance expenditures. (2) Preliminary consolidation of central government and PDVSA 2010-2011. (3) Consists of the state budget and the National Oil Fund. (4) Net of bank recapitalization costs. (5) Data for fiscal years starting 1 April. Selected data refer to the government’s consolidated fiscal balances from 2009. (6) The central government's budget balance data are calculated using the IMF-defined primary balance and net interest spending data. The general government's budget balance data are from the IMF for the period before 2014 and are based on the IMF's definition of the non-financial public sector. The government releases consolidated public sector data using its own definition on an annual basis. The data for government spending and gross debt are for the central government. (7) Excluding impact of bank recapitalization and transfers to Naftogaz. Estimate for 2011 expenditure includes 0.8% of GDP of additional allocations for settlement of VAT arrears accumulated in 2010. (8) Prior to 2006 and again effective from 2009, these estimates include revenue from disinvestments (in line with government methodology). (9) Refers to central government. (10) Includes Grain Securities, Seoul Metro bonds, National Housing Bonds, Seoul Metro Subway Bonds, and Industrial Finance Debentures. (11) General government statistics as interpreted by the Taiwan government. (12) Data for central government, based on cash basis prior to 2004, based on fiscal year ending September. (13) General government statistics as interpreted by the Vietnam government.
Source: the BLOOMBERG PROFESSIONAL™ service, National Statistical Offices, IHS Global Insight, Credit Suisse
15 December 2016
Emerging Markets Quarterly 170
Summary macroeconomic data: Government expenditure
2010 2011 2012 2013 2014 2015 2016E 2017F 2018F
General government expenditure (% of GDP)
LATIN AMERICA 31.7 32.4 32.4 33.0 34.4 36.1 35.5 36.0 35.7
Argentina 33.8 35.5 37.6 37.9 39.3 40.8 42.9 43.4 42.4
Aggregates for regions and total emerging markets are weighted by IMF’s nominal GDP figures in US dollars. The data for India are for fiscal years.
(1) Total government expenditures; includes interest payments. (2) Preliminary consolidation of central government and PDVSA 2010-2011. (3) Consists of the state budget and the National Oil Fund. (4) Net of bank recapitalization costs. (5) Data for fiscal years starting 1 April. Selected data refer to the government’s consolidated fiscal balances from 2009. (6) The central government's budget balance data are calculated using the IMF-defined primary balance and net interest spending data. The general government's budget balance data are from the IMF for the period before 2014 and are based on the IMF's definition of the non-financial public sector. The government releases consolidated public sector data using its own definition on an annual basis. The data for government spending and gross debt are for the central government. (7) Refers to central government. (8) General government statistics as interpreted by the Taiwan government. (9) Data for central government, based on cash basis prior to 2004, based on fiscal year ending September. (10) General government statistics as interpreted by the Vietnam government.
Source: the BLOOMBERG PROFESSIONAL™ service, National Statistical Offices, IHS Global Insight, Credit Suisse
15 December 2016
Emerging Markets Quarterly 171
Summary macroeconomic data: Government debt
2010 2011 2012 2013 2014 2015 2016E 2017F 2018F
Consolidated gross government debt (% of GDP)
LATIN AMERICA 42.9 42.4 43.0 43.2 48.4 52.9 58.3 60.5 62.0
Euro area 83.9 86.5 91.3 93.4 94.4 92.6 91.6 90.6 na
Japan 216.4 231.3 231.1 231.2 236.6 234.3 237.7 241.4 247.3
Aggregates for regions and total emerging markets are weighted by IMF’s nominal GDP figures in US dollars. The data for India are for fiscal years.
(1) Includes compensatory interest and residual value of GDP warrants from 2015. (2) Figures related to the Central Bank's new methodology. (3) Excludes debt of the central bank (4) Starting in 2015, debt stock includes arrears with private sector and debt held at the central bank (5) Includes all contingent liabilities associated with IPAB, Pidiregas, FARAC, financial intermediation and other debtor support programs. (6) Central government, regional governments, PDVSA; does not include liabilities of other public institutions such as the Central bank, National Development Bank, Foreign Trade Bank, Industrial Bank of Venezuela and Andean Region Development Bank. (7) Data for fiscal years starting 1 April. Selected data refer to the government’s consolidated fiscal balances from 2009. (8) Includes Treasury bonds, foreign state debt owed by the State Council, and local government bonds. (9) Also includes debt issued under the Government Bond Program. Excludes debt guaranteed by the government. (10) Refers to central government. (11) Includes social security funds. (12) General government statistics as interpreted by the Taiwan government. (13) Includes central government, non-financial SOEs and financial institution development fund. (14) Data for central government, based on cash basis prior to 2004, based on fiscal year ending September. (15) General government statistics as interpreted by the Vietnam government.
Source: the BLOOMBERG PROFESSIONAL™ service, National Statistical Offices, IHS Global Insight, Credit Suisse
15 December 2016
Emerging Markets Quarterly 172
Summary macroeconomic data: Foreign debt
2010 2011 2012 2013 2014 2015 2016E 2017F 2018F
Total foreign debt (% of GDP)
LATIN AMERICA 21.3 20.6 22.3 23.8 27.1 33.2 37.7 39.1 39.7
Argentina 31.6 27.5 25.1 23.2 25.7 24.2 33.5 33.4 34.8
Aggregates for regions and total emerging markets are weighted by IMF’s nominal GDP figures in US dollars. The data for India are for fiscal years.
(1) Included intercompany loans. (2) Based on the location of the creditor (i.e., including local currency liabilities held by non-residents). (3) Including rand-denominated debt held by non-residents. (4) Based on the location of debt issuance, not the location of creditor.
Source: the BLOOMBERG PROFESSIONAL™ service, National Statistical Offices, IHS Global Insight, Credit Suisse
(1) Expressed in strong bolivares for all years; 2014-2018 estimates and forecasts represent a weighted average exchange rate across official and unofficial foreign exchange markets. (2) The basket exchange rate is the average of USDTRY and EURTRY exchange rates. Our forecasts for USDTRY are derived from our basket exchange rate forecasts and the previous month's EURUSD average (*) Probability-weighted estimates resulting from three macro scenarios outlined in the Mexico report; these are not the official CS forecasts.
Source: the BLOOMBERG PROFESSIONAL™ service, National Statistical Offices, IHS Global Insight, Credit Suisse
15 December 2016
Emerging Markets Quarterly 174
Summary macroeconomic data: Interest rates
2010 2011 2012 2013 2014 2015 2016E 2017F 2018F
Interest rate (end-year, %)
LATIN AMERICA 8.51 8.96 7.21 7.95 8.97 12.39 11.56 10.39 9.76
Aggregates for regions and total emerging markets are weighted by IMF’s nominal GDP figures in US dollars. The data for India are for fiscal years.
(1) Central bank's 7-day repo rate until 2014, 35-day Lebac rate for 2015 and 2016, 7-day interbank rate starting in 2017. (2) Reference rate for corporate loan operations. (3) The central bank 1-month deposit rate equals half of the refinancing rate and until the banking crisis in the summer of 2007 represented a more effective policy instrument. (4) One-week repo rate has been the central bank's policy rate since 18 May 2010 but it has lost relevance since late 2010. (5) The RBI uses a mix of instruments, such as the repo rate, reverse repo rate, CRR (cash reserve ratio), etc. (6) BI changed its policy target from 1m SBI rate to overnight rate in 2008. (7) BNM changed the policy rate from the intervention rate to the overnight rate in May 2004. (8) Through 2006, the policy rate was the 14-day repo rate.
Source: the BLOOMBERG PROFESSIONAL™ service, National Statistical Offices, IHS Global Insight, Credit Suisse
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