Friday, December 17, 2010

Emerging Markets Briefer ( Turkey , South Africa , Brazil )

Turkey Macro outlook 
• The Turkish economy has experienced quite a dramatic rebound in economic growth.
In Q2 10 the economy expanded 10.3% y/y – an impressive rate that represents the
top of the emerging markets’ universe. However, with the base effect fading the
growth rate has moderated to 5.5% y/y in Q3. With this drop, we also moderate our
2010 estimate from 9.4% to 8.5%. We maintain a 5.8% y/y growth estimate for 2011.
• While the overall expansion has moderated, on the manufacturing side the PMI
figures show continued improvement with the index value jumping to 56.4 in
November from 54.3 in September. The current account deficit continues to pose a
serious challenge, however, and this challenge has now been publicly acknowledged
by, among others, the Turkish central bank. October passed with a deficit number of
USD3.7bn, taking the 12-month rolling deficit to USD40.8bn, which now represents
about 5.6% of the GDP.

Monetary policy outlook 
• The consumer price inflation provided another downside surprise in the past month,
with the November y/y figure coming out at 7.3% – the lowest reading so far this
year. The drop was assisted by falling food prices, while the core prices remained
steady. We have also moderated our own estimate for average 2011 inflation to 6.5%
y/y, from that of 7.6%.
• On December 16th , the Turkish central bank effected rate cut of 50bp, taking the
policy 1 week repo down to 6.50%. At the same, the overnight borrowing and lending
spread was further widened. Concurrently, the bank will be raising the reserve
requirements but in such a fashion as to differentiate the ratios in accordance to
deposit terms to still encourage longer term lira-deposits. The stated aim of these
measures is to address growing current account imbalance by cooling down the
portfolio inflows while encouraging long term deposits and FDI activity. Following
this rather unorthodox monetary action, the central bank will be on a watch and see
mode to gauge the market implications. Our monetary model continues to indicate a
moderate need for monetary tightening of 25bp during 2011, but given the unique
actions taken by the central bank, this monetary environment makes it rather difficult
to make long term policy rate forecasts.

FX outlook 
• Although the long term overvaluation of lira with respect to its fair value estimation
has been reduced considerably over the past two months with lira gains against dollar
stalling, the problem of overvaluation continues to exert a pressure on the lira,
especially in the context of ballooning current account deficit.
• Our forecasts continue to point to a gradual depreciation of lira over the course of the
next year. However, it is worth noting our estimates show narrower divergence from
the corresponding forward prices in comparison to our last publication, as the spot
moves in USD/TRY have seen lira advances persistently rejected since early
November. This, in fact, has allowed the longer lira overvaluation to moderate

South Africa Macro Outlook 
• The South African economy grew less than expected in Q3, advancing 2.6% y/y,
down from revised 3.1% y/y in Q2. The manufacturing sector was the main reason for
lower-than-expected growth in Q3. We continue to expect the South African economy
to expand at an average rate of 2.8% y/y in 2010 and strengthen to 3.5% y/y in 2011.
The main risk to our forecast is the uncertain global growth picture.  
• October’s manufacturing output was slightly stronger than expected, showing growth
of 2.5% y/y – up from a downward revised 1.3% y/y in September. Despite a betterthan-expected outcome, manufacturing production remains weak partly due to weaker
foreign demand from the main trading partners and partly due to an excessively strong
rand. We expect manufacturing production to remain weak going forward. On the
other hand, retail sales remain strong (6.1% y/y in November), confirming that
consumer spending continues to pick up.
• South African inflation accelerated slightly more than expected in November to 3.6%
y/y, up from 3.4% y/y in October. Higher inflation was driven by petrol and food
prices. This is something the South African central bank will be watching closely in
the coming months as both food and petrol prices are seen as the main cost-pushed
inflationary risks to South African inflation. Increasing pressure from rising food and
petrol prices could discourage the South African central bank from easing monetary
policy further.

Monetary Policy Outlook  
• At the latest monetary policy setting meeting in November, the South African central
bank delivered yet another 50bp rate cut. That brought the key policy rate to 5.50%.
In the same time, the SARB left the door open for further monetary easing in light of
the fragile recovery of the economy. Looking ahead, we cannot rule out further
monetary easing if the macroeconomic situation in South Africa warrants it.

FX Outlook  
• Following a fairly short-lived correction, the rand has rebounded recently and again
continues to outperform other EMEA currencies as the global environment again
favours risk-taking and speculative buying. But looking at the valuation, the rand
remains strongly overvalued from a fundamental perspective. Given the marked
overvaluation, both our short- and long-term outlooks for the rand are bearish.

Brazil Macro Outlook 
• The major component of growth in Brazil in 2010 has been the rapid growth in
domestic demand. Although the third quarter has seen a moderation in growth, with
the y/y at 6.7%, down from revised Q2 of 9.2% y/y, the Brazilian economy is still
firmly on an expansionary tract. With the release of third quarter and upward revision
of second quarter numbers, we are revising our GDP forecasts for 2010 to around 8%
up from 7.2%. Our 2011 and 2012 growth estimates are around 5.7% and 4.5%,
• The latest release in Brazil’s benchmark IPCA rolling 12-month inflation shows
clearly the increasing price pressures: The month of November passed with a y/y
growth rate of 5.63%, a forth monthly increase on a row. Although still within the
inflation target range, which is 4.5% +/- 2%, the continued upward move in the pace
of price appreciation is becoming a source of concern for the Brazilian central bank

Monetary Policy Outlook  
• BCB began the tightening cycle in April this year, hiking Brazil’s benchmark Selic
interest rate from a record-low 8.75% to 10.75% currently. As stated above, the
inflationary pressures are becoming ever  more acute. In part to address these
pressures and in part to deal with the rapid expansion in consumer credit, BCB raised
the reserve requirements from 15% to 20% and took a host of other relevant
alternative measures at its last round of rate decision meeting on December 8. For
now, BCB has adopted a “wait-and-see” policy approach ahead of the next policy
meeting in late-January 2011, whereby it looks to evaluate the impact created by these
alternative policy actions, before deciding on the actual rates.

FX Outlook & Risk Factors 
• Brazilian real maintains a close valuation levels to its longer term fair value. Assisted
by buoyant commodity prices, strong carry pick-up, decent technical picture and
steady macro numbers, however, the short term horizon looks to be BRL-supportive.
Up to a one-year time horizon, our estimates point for stronger real levels and we also
remain on the stronger side of forwards in terms of bullish outlook on BRL against
the US dollar.
Full report: Emerging Markets Briefer ( Turkey , South Africa , Brazil )

No comments: