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Analysis and market intelligence on fixed income, forex and equities in Asia, EMEA and Latin America

SSN 1359-0006

Emerging MarketsMonitorEmerging MarketsMonitorPublished by Business Monitor International Ltd

29 OCTOBER 2012 | VOL 18 | N

At www riskwatchdog com you can readBMI's At www businessmonitor com you can upgra At www emergingmarketsmonitorcom you can

Dow Nearing Key SupportThe cautious view we adopted towards the

Dow Jones a few weeks ago on our online

service has played out. The break below

trendline support around the 13,320 mark

triggered a swift move lower. While a short-

term unwind of the recent summer rally is to

be expected, the Dow is homing in on major

support at 12,975. An end-week close below

this level would presage further weakness to-

wards the 12,500 mark. Long-term trendline

support for the Dow exists at 11,500.With US equities under pressure, the

dollar is strengthening versus the euro.Although we see good euro support atUS$1.2875/EUR, if the Dow continues toweaken, this level could well give way,setting up losses to US$1.2500/EUR.Conversely, on the upside, we see key euroresistance at US$1.3135/EUR. The recentdeterioration in risk appetite is good newsfor our 2012 average Brent crude forecastof US$110.00/bbl. The rapid price dropover the past two weeks to a current level ofUS$108.10/bbl has brought the year-to-dateaverage to around US$112.00/bbl. Supportfor the front contract exists at US$106.75/bbl. Given the oversold nature of the RSI,a period of stability is likely. Any fur-ther weakness will nd strong support at

US$102.50/bbl.

continued on pag

Weak frameworks to slow expansion...

Islamic Finance: A Crisis Of Condence?BMI View: The recent decision by HSBC to

scale back its Islamic banking retail op-

erations around the world is a potentially

ominous sign for the future advancement of an

industry, which is still in the embryonic stages

of development. That said, we still see sig-

nicant potential for growth over the coming

years, although we caution that weak regula-

tory frameworks in some key markets will

slow the sector's rapid expansion.

Following several years of robust growth, webelieve the global Islamic nance industry

has suffered one of its most signicant set-backs since Dubai-based property developerNakheel nearly defaulted on its US$3.5bn sukuk in 2009. In early October 2012, HSannounced that it would be scaling back its Islamic banking operations around the woNotwithstanding wholesale banking operations, HSBC said that it would no longer be

GLOBAL

MARKET LEADER .....................................................1-4

COMMODITIES (WHEAT) ..........................................4-6

ASIA ............................................................................7-9

LATIN AMERICA ....................................................10-13

EUROPE .................................................................14-17

MIDDLE EAST ........................................................18-19

AFRICA ...................................................................20-22

FX FORECASTS JPY, PLN ...................................8,16

ASSET CLASS STRATEGIES ................................23-24

JPY: Appreciatory Trend Is EntrenchedWhile the Japanese yen will average a slightly weaker JPY79.00/US$ in 2012, it will reto an appreciatory trend as long-term fundamentals outweigh short-term bearish sentim

see pag

Russia: Kremlin Helps Rosneft Take ControlThe Russian Kremlin has tightened its grip on the oil industry after BP agreed to spinits 50% holding in the lucrative TNK-BP joint venture.

see page

EUROPE

see pag

LATIN AMERICA

ASIA

Banking Sector Outlook: Picking The WinnerBMI picks out the winners and losers in Latin America's banking sector, in the face osignicant external macroeconomic headwinds and shifting regional growth dynamic

Kenya: Shilling Stable As Elections ApproachWe believe the monetary authorities will have sufcient tools at their disposal to defe

the shilling against depreciatory pressure arising from any foreign investor jitters.

see page

AFRICA

Tech

7%

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Sovereigns And Banks Still DominaIslamic Finance 2012 Sukuk Issuance By Secto

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...continued from previous page

offering Islamic nancial products in the UAE, Bahrain, Brit-ain, Mauritius, Bangladesh and Singapore; although they wouldmaintain a presence in Saudi Arabia, Malaysia and Indonesia.HSBC has been a global leader in pushing the development of

shari'a-compliant nancing around the world the bank's Islamicbusiness is known as HSBC Amanah and was the rst Westernbank to issue sukuk when its Middle East unit previously raisedUS$500mn in an Islamic bond. According to latest data, HSBChas hitherto been by far the biggest player in the sukuk market in2012, underwriting US$10.2bn in Islamic bonds through mid-October (holding 26.2% market share), compared to US$5.0bnfor the nearest competitor, Malaysia's Maybank.

HSBC's sudden decision to scale back operations in an industrywhich is seen by many as having considerable growth potentialover the coming years thus raises signicant questions surround-ing the sector's long-term outlook, and the future willingness ofother Western nancial institutions to enter what is still a relative-ly niche market. We note that HSBC is not alone in this regard,with Barclays and Deutsche Bank also shrinking their Islamicbanking teams in Dubai. Although estimates vary, the size of theIslamic nance industry is now estimated to top US$1.2trn, com-pared to US$800bn in 2010. Despite such strong growth however,protability has not kept pace with the higher costs associatedwith legal overheads, complex structuring, repeated taxation, andeven perhaps staff training all undermining bottom lines.

Sticking With The Names They Trust?The real test in relation to HSBC's pullback may come over the

coming months in our view. This will be when clients of HSBC

Amanah are forced to choose between either nding a new Is-

lamic bank with which to do business, or stick with HSBC's con-

ventional offerings. Although the Islamic nance industry is well

developed in markets across the Gulf and South East Asia, it re-

mains to be seen if customers seeking shari'a-compliant nancial

products in other regions will be willing to transfer their funds to

relatively less well-known Islamic banks. Broadly speaking, it is

assumed that even in the largest markets for Islamic nance, only

a small share of the bankable population feels so strongly towards

accessing shari'a-compliant products that they would never do busi-

ness with conventional banks. At the moment, we believe the vast

majority of customers fall into the 'oating mass' category, who do

not have an inherent preference for accessing Islamic nancing.

Recent experience from Qatar would seem to suggest that ratherthan switch to an Islamic nancial institution with which theyare unfamiliar, many customers will simply choose to stick withtheir current banks, where they have a long relationship. Indeed,in 2011 Qatar's central bank suddenly announced that commercialbanks were no longer able to operate Islamic nance windows,and instead would have to remove all Islamic assets off theirbalance sheets. This raised signicant concerns in Qatar's conven-tional banking sector that they could potentially lose a large shareof their customer base as people sought out shari'a-compliantnancial products the immediate reaction also saw a sharp

jump in share prices of Islamic lenders. The reality has been quitedifferent however, as such a large-scale migration of customers

and deposits never occurred, with many who were previouslybanking through Islamic nance windows simply deciding to staywith their conventional banks. As a result, at this stage it appears

th h i th t il t t l t th j it f t ti l

their decision on a bank's shari'a compliance.This experience should go some way towards alleviat-

ing fears throughout Oman's commercial banking sectorover what impact the introduction of Islamic nance willhave on their client base over the coming quarters. In2011, Oman became the last Gulf Cooperation Coun-cil (GCC) state to introduce Islamic banking into thenancial industry, granting licenses to two banks in theprocess (Bank Nizwa and Alizz Islamic Bank). Accord-ing to an executive at the central bank, legislation willbe nalised by the end of 2012 to allow conventionalbanks to open up Islamic windows, as they compete fora relatively small depositor base (Oman has a populationof only 3mn). BMI recently visited Oman for a seriesof meetings with conventional commercial banks, inwhich these fears over the potential loss of deposits werefrequently highlighted.

While every client we spoke to mentioned their inten-tion of opening up Islamic windows, this was being donenot out of an inherent belief in the industry's long-termgrowth potential, but was simply a strategy to helpmitigate a potential loss in customers. As the experienceof Qatar highlights however, such a strategy may not benecessary given the general reluctance within the GCCto switch banks. According to a recent report by ratingsagency Fitch, Oman's new Islamic banks will initiallystruggle to compete with their conventional counterparts,as the latter benet from their brand reputation, servicequality and cost-efciency savings. The ratings agencywent on to say: 'Evidence from Qatar shows the advan-tage that established banks have. When rule changesbarred conventional banks from offering Islamic nancialservices, Islamic banks had expected an inux of custom-ers as people with shari'a-compliant accounts switchedbanks. In practice the impact was small and many cus-tomers decided to switch back to conventional accountswith their existing banks instead.'

Don't Call The End Of The Game Just Yet

Although HSBC's decision to drastically scale back itsoperations is a major setback for the Islamic nance

industry, we do not believe it signals a death blow for the

t Sh tl ft HSBC d it d i i th

Source: BMI, Bloomberg

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No. Of Deals

Another Record YearIslamic Finance Global Sukuk Issuance

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industry, and was aiming to triple the contribution of its shari'a-

compliant operations over the coming eight years. Currently,

Islamic banking accounts for 3% of NBAD's operating income,

with the goal to increase this to 10% by 2020. Michael Tomalin,

the chief executive of NBAD, said that the bank would attempt to

achieve these targets by introducing shari'a-compliant services inEgypt, Oman and Malaysia.

Moreover, while HSBC is set to scale back its retail Islamicbanking operations in several countries, it is not withdrawingfrom the sector completely. Indeed, the bank stated that it wouldlikely retain approximately 83% of its Islamic banking revenue,and that it would continue with its shari'a-compliant wholesalebanking operations. As previously mentioned, HSBC is the globalleader in arranging sukuk issues, and we do not see this endinganytime soon. As a result, while the bank's decision may be alarge setback for the retail side of Islamic banking, it is apparentthat signicant growth opportunities in other segments still exist.

The sukuk market in particular has shown few signs of slow-ing down in 2012, with issuance hitting all-time highs throughthe rst three quarters of the year. According to data compiled

by Bloomberg, there has been a total of 300 sukuk deals year-to-date, worth approximately US$39.1bn. This compares to only281 deals in all of 2011, worth approximately US$36.6bn. As wehave highlighted on previous occasions, strong demand out of theoil-rich GCC continues to drive yields lower, and has effectivelyeliminated the 'sukuk premium', or the extra yield that investorshad previously demanded to hold Islamic bonds. As the accompa-nying chart highlights, the Dow Jones Sukuk Price Return Index,which is designed to measure the performance of global Islamicxed income securities, continues to trend higher, hitting record

highs in the process.Looking at the breakdown of sukuk issuance by sector, it is

clear that nancials and sovereigns continue to be the two main

drivers of new issuance. Data from Bloomberg shows nancial

rms and governments accounting for 52% of new issuance in

2012, while oil & gas entities accounted for an additional 16%.Although we certainly see scope for further growth in this regard,particularly given the ongoing infrastructure investment plans ofGCC states, a key trend to watch out for will be new issuance outof the non-hydrocarbon private sector, such as the US$400mnsukuk from the conglomerate Majid Al Futtaim that was placed inearly 2012. The increased use of Islamic debt markets by enti-ties such as Al Futtaim will be crucial in helping to push Islamicnance into the mainstream, in our view.

Broadening The FrontierMuch of the Islamic nance industry's longer-term growth out-

look will depend on its ability to continue tapping into new mar-

kets outside the GCC and South East Asia. To this end, we have

seen a urry of recent developments across the globe over the past

quarter, as governments attempt to broaden their access

to a massive pool of investment funds from the Gulf.Some of the more notable developments have included:

Libya: In early October Libya's central bank governor,Saddek Omar Elkaber, said that the country hoped tobegin implementing a new Islamic banking law by theend of 2012. Having previously approved the law back inMay, authorities are still debating many important details,including whether conventional banks will be allowed tooperate Islamic nance windows, or if conventional banks

should simply be allowed to become Islamic.

Turkey: A maiden US$1.5bn sukuk was issued in Sep-tember, with the ve-and-a-half year bond attracting an

order book of nearly ve times the issue size. The sukuk

was priced to yield 2.8%, which was basically on par withTurkey's sovereign eurobond due in 2018. This marks asignicant development for the Islamic nance industry

in the country, as previous governments often shied awayfrom developing the sector due to political concerns.However, the moderately Islamist AKP government ledby Prime Minister Tayyip Erdogan looks set to push forgreater development of the industry (shari'a-compliantinstitutions account for less than 5% of the country's bank-ing assets at the moment), which could reect the growing

importance of trade ties with the Middle East.

Jordan: In mid-September 2012 both houses of parlia-ment passed a law (which had been in development since2010) allowing the government to issue sukuk. Althoughthe government is eager to tap markets given the dire

continued on page 4...

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web: www.businessmonitor.com

Managing Editor: Terry Alexander Tel: +44 (0)20 7246 5158

Editor: Yoel Sano Tel: +44 (0)20 7246 5122

Global Strategists & Data: Timothy Cooper, Lyndsey Anderson, Bruce Jeffery, David Snowdon

Commodities: John Davies, Cole Martin, Sarah Wong, Ed Coughlan, Ophelie Buchet

Asia: Rahul Ghosh, Stuart Allsopp, Andy Wang, Miguel Chanco, Beng Hui Chew,

Andrew Wood, Esther Ye

Latin America: Cedric Chehab, Mark Schaltuper, Julie Beckenstein, Katherine Weber,

Elijah Oliveros-RosenEurope: Richard Hamilton, Christopher Graham, Victoria Melvin, Thaddeus Best,

James Howat

Middle East & North Africa: Jean-Paul Pigat, Mick Larkin, Leo Herzenstein, Mickael Gondrand

f

2012 BUSINESS MONITOR INTERNATIONAL LTD.All rights reserved. No part of this publication

may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic,

photocopying, recording or otherwise, without prior permission of Business Monitor International Ltd.Emerging Markets Monitor is a general circulation newsweekly. No statement in this issue is to be

construed as a recommendation to buy or sell assets or to provide investment advice.All content, includingforecasts, analysis and opinion, has been based on information and sources believed to be accurate andreliable at the time of publishing Business Monitor International Ltd makes no representation of warranty

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Source: Bloomberg, BMI

Hitting All-Time HighsIslamic Finance Dow Jones Sukuk Price Return Index

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state of its public nances, some hurdles nevertheless remain,including the choice of an asset pool and arranging for the centralbank to make payments on the note.

Pakistan: The country's regulator issued draft rules for the is-suance of sukuk in early October, which will force any Islamicbonds to be structured in a way that complies with the Bahrain-based Accounting and Auditing Organization for Islamic Finan-cial Institutions. In addition, the rules would require disclosurefor information about the issuers and for the issuers to appointIslamic scholars who vet the sukuk structures.

Ireland: It was announced in September that the country's Elec-tricity Supply Board was considering becoming the rst large

non-nancial European rm to issue sukuk in Malaysia. Reports

indicated that the rm had applied to regulators for permission to

issue an Islamic bond, and was hoping to raise US$1.3bn. Thiswas not Ireland's rst exposure to Islamic nance, as Dubai'sJebel Ali Free Zone had listed a US$650mn seven-year sukuk onthe Irish stock exchange in June.

As many of these recent developments clearly highlight, muchof the Islamic nance industry's growth potential depends not

simply in convincing the public of the merits of shari'a-com-pliant banking, but rather in individual governments pushingthrough necessary legislation in order to allow such banking inthe rst place.

Indonesia is a case in point. Despite possessing the world'slargest Muslim population and massive infrastructure develop-

ment plans (which is a sector that is a natural t for

Islamic banking given the need to have a xed assetunderpinning sukuk), policy paralysis has slowed thedevelopment of the industry. Indeed, the country hasyet to pass a necessary law which would make a dis-

tinction between benecial and legal ownership theformer is crucial to helping Islamic bonds become aviable project nancing tool, and involves a person or

entity having the same benets of property ownership

with holding legal title to the property. As a result,regardless of how strong demand is for Islamic bank-ing products in certain countries, the ongoing need tohave governments push through legislation which

has often proved controversial is likely to slow the

expansion of the industry going forward.A recent report by ratings agency Standard & Poor's

(S&P) highlighted these challenges for the industry overthe coming years, even in markets which should providerelatively strong growth opportunities.

As we have previously highlighted, some of thenewest markets for Islamic banking are in North Africafollowing the rise of political Islam in this region, par-ticularly in Egypt where the Muslim Brotherhood hasrapidly consolidated executive and legislative power.According to S&P, however, in a view we share, thedevelopment of shari'a-compliant banking will be aprotracted process, with an unstable political environ-ment, weak supervisory frameworks, and ght-back

from existing conventional banks in the region alllikely to ensure that progress will be gradual.

Global Commodities: Temporary Tarnish On Precious MetalsThere is room for a greater near-term pullback in gold and silver

prices. For instance, we expect spot gold to move down towardssupport to around US$1,650/oz in the coming weeks. Sincewe turned bullish in early August, we have highlighted that theUS$1,800/oz level would present a signicant hurdle for goldand this is playing out (see our online service, August 2, 'Gold& Silver Setting Up For A Rally').

Following the announcement of additional quantitative easing(QE3) by the US Federal Reserve in September, sentiment hasturned excessively bullish towards gold in a short space of time.Therefore, both gold and silver prices will be susceptible to ad-ditional losses.

While our near-term bias is to the downside, we retain a bull-ish outlook for 2013. We expect any further losses for both goldand silver to remain within the connes of a broader medium-term uptrend and we expect a retest of record highs for goldat around US$1,921/oz at some stage next year. Indeed, goldremains one of the few commodities for which we anticipatehigher average prices in 2013 than in 2012 and we will be revis-ing up our 2013 average price forecast of US$1,650/oz in thecoming weeks.

Our bullish medium-term views on both gold and silver areunderpinned by our expectation that developed market mon-etary policy will remain exceptionally loose over the coming

E i th i j i h th US

policy, central banks in developed states will keepmonetary policy exceptionally accommodative in orderto support growth.

We also expect monetary policy to loosen somewhat

in emerging markets, although sticky ination will lim-it the degree to which this trend plays out. Loose globalmonetary policy will continue to encourage demand for

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Uptrend IntactSpot Gold, US$/oz, Weekly

...continued from previous page

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Commodities Outlook, November 2012

Looking beyond the October pullback, we remain modestlypositive towards the broad commodity index in Q412. This isunderpinned by our expectations that QE3 will keep the US

dollar on the back foot, and for a temporary upswing in Chi-nese economic activity.

Our medium-term outlook remains bearish across energy, met-als and agriculture and our average price forecasts are gener-ally below consensus for 2013 and 2014.

While industrial metals could outperform over the next threemonths, the medium-term outlook for metals is weak. Goldshould outperform over the next 12 months.

We retain a bearish bias towards grain prices over the nextthree-six months and expect food price ination pressure to be

less pronounced in the coming months than it was in H111. We highlight strong policy-related downside risks to com-

modity prices in the coming months, as any major policy errorwould be enough to tip the global economy back into recession.

Dollar Resilience Won't LastThe October pullback looks to have further to run, and we have a

bearish short-term bias across virtually all commodity markets. Akey reason for commodity market weakness over recent weeks has

been US dollar resilience after a weak September. This is illustratedby a move by the US dollar index through three-month downtrendresistance around 79.50.

However, we expect additional quantitative easing by the US Fed-eral Reserve to prevent a sustained recovery in the dollar over thecoming months. QE3 has yet to begin in earnest and the US FederalReserve's balance sheet has thus far shown only a minor uptick sinceSeptember. We expect general emerging market currency strengthversus the US dollar rather than a sustained euro recovery.

With the US dollar set to remain fairly stable, we believe thiswill sustain the positive environment for commodity prices thathas broadly persisted since mid-year. Of particular relevance toindustrial commodities, we expect Chinese infrastructure stimulusplans to temporarily boost both investment and end-user demandfor commodities.

Our relatively benign outlook on commodity prices in Q412chimes with our Asia team's tactically positive view on Chineseequities over the same period (see our online service, October 19,'Refation Trade Has Legs'). Just as consensus expectations appear

to be catching up with our hard landing view, China's economylooks ripe for a temporary bounce. Such a scenario bodes well forour conviction call of sizeable bear market rallies across a host ofassets with China exposure. We stress that such a scenario will bevery much transient in nature, and in no way negates our call for astructural Chinese slowdown.

Looking beyond Q412, we remain generally bearish towardscommodity prices and more so than consensus estimates pub-lished by Bloomberg. Weakness will be particularly acute forindustrial metals as recovery hopes will be dashed by a renewedslowdown in the Chinese economy. The below-consensus indus-trial commodity price forecasts that we laid out at the start of theyear have generally played out very well and we expect consen-

sus to continue moving our way over 2013.Only gold will sustain strength into 2013 and average higherover the year as a whole. The US$1,800/oz area will continue to

i i h dl f ld b h

ination will pick up in the Q412-Q113 period as a result

of the Q312 spike in global grain prices. This should havethe greatest impact on consumer price ination readings

in low income emerging markets where food represents ahigh proportion of the consumer basket. However, moregenerally we see limited commodity-related upside risksto global ination in 2013 for two main reasons. First, we

expect grain prices to trend lower over the coming months,which should prevent year-on-year (y-o-y) rises in food

prices reaching the levels seen in 2008 or 2011. Second,we remain bearish towards energy prices and we forecastBrent to average US$102/bbl in 2013, compared withUS$110/bbl in 2012 and US$111/bbl in 2011.

Equities To OutperformWe expect developed market equities to continue out-

performing commodities. While both equities andcommodities will benet from QE3, most commodities

will be kept in check by the further slowing of Chineseeconomic growth. As a result, we expect the S&P 500

to CRB Commodity Index ratio to continue grindinghigher over the coming months. The picture for emergingmarket equities versus commodities is more mixed givenh hi h d f l i b h


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Dollar To Remain On The Back FootUS Dollar Index (inverted) & CRB Commodity Index

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Wheat To Average USc780/bushel In 2013

Short-Term OutlookWheat prices have failed to break support at USc860/bushel and we

expect prices to stay supported until uncertainty over the Australian

crop lessens. Eventually, we see prices breaking current support as

the relative strength index and record non-speculative net long posi-

tions both indicate some room for prices to move lower.

Core ViewWe have revised our wheat price forecasts upward for 2012 and

2013 to USc760/bushel and 780/bushel respectively because of a

recent deterioration in supply, especially for the Southern Hemi-

sphere crop. We have revised down our forecast for Australian

wheat production in 2012/13 and we see more downside risks to

our forecast because of severe droughts in the country. Thus, we

forecast a global wheat decit of 23.8mn tonnes in 2012/13, com-

pared with a 25.6mn tonne surplus in 2011/12. However, because

the wheat market is so fragmented, we expect smaller or alternative

producers to ll in the gap left by traditional ones. As we expect

the global market to move back to surplus in 2013/14, we forecast

prices to average still lower at USc750/bushel in 2014.

More Disruptions In The SouthWe have revised down our Australian wheat production forecast

for 2012/13 following several revisions to our Northern Hemi-

sphere estimates, and now see the global market in a 23.8mn tonne

decit, compared with a 25.6mn-tonne surplus in 2011/12. We

believe most of the downward revisions to supply are behind us,

which should provide some relief to prices. However, prices will

only start coming down signicantly when the prospect of a strong

2013/14 harvest is more assured

We have seen more downward revisions to our European wheat

forecast in line with ofcial estimates. In fact, we revised down

the EU-27 again to 130.0mn tonnes in 2012/13 as France and the

UK announced lower harvests than expected earlier because of

droughts during plantings. The Black Sea region has seen a signi-

cant collapse in output in 2012/13 because of adverse weather con-

ditions. We now forecast Russia's wheat production to fall 23.8%

y-o-y to 42.0mn tonnes in 2012/13, while Ukraine and Kazakhstan

will see output fall respectively by 40.9% to 13.0mn tonnes and by

51.5% to 11.0mn tonnes that year.

We had expected wheat output from Argentina and Australia to

be insufcient to compensate for scarce supply from the Europe.

Both countries' harvests start in November and historically cover

importers' needs for the rst half of the year, when supply from

the Northern Hemisphere dries up. For Australia, we revised downour forecast to 22.0mn tonnes in 2012/13 (from 24.1mn tonnes

previously) and we see some downside risks to our forecast linked

t f th i ld d f d ht i th t t f th

BMI WHEAT FORECAST

Spot Short-Term 2012 2013 2014

USc/bushel, ave 878 - 760 780 750

Bloomberg Consensus Estimates - - 757 760 658Source: BMI, Bloomberg, October 25 2012

We expect global wheat consumption growth to be weak

in 2011/12 and 2012/13 and to recover by less than corn

and soybean in 2013/14 as demand growth for wheat has

been historically more subdued than for other grains owing

to its almost exclusive use for food. China and Russia's

wheat consumption is set to moderate in 2012/13 compared

with 2011/12 because of tight domestic supply and high

global prices. Price-sensitive importers from the Middle

East could also moderate their import demand because of

high prices. On the contrary, countries where local harvest

has been better than expected, such as the US and India,

will have positive growth in wheat demand in 2012/13.

In 2013/14, we expect demand growth for all major

wheat consumers to turn positive, especially driven by

Middle Eastern and Asian importers. Both regions areset to stay net wheat importers over the medium term

as higher income boost food consumption per capita on

the back of limited production potential in these regions.

Demand growth from mature markets, such as the US and

Europe will stay subdued and could even turn negative.

Risks To OutlookThe risks to our price outlook are mainly to the downside.

Only more damage to the Australian wheat crop could

keep prices elevated for longer than we expect. However,

the 2013/14 crop should start being priced in the coming

months. A sudden turn in investor sentiment could take

prices sharply lower as non-commercial net long specula-tive positions on wheat are near record highs.

Weakness in corn and soybean prices could precipitate

f f ll i h i i h i h h

Source: Bloomberg

400

500

600

700

800

900

1,000

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

On The EdgeFront-Month CBOT Wheat (USc/bushel)

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Indian Rupee: On The Verge Of The Next Appreciatory WaveThe decision to close out our bullish INR position on October 8(with total returns of 6.5%) appears to have been a timely move,with the spot rate giving back 2.7% to trade at INR53.74/US$.

Still, as we maintained at the time, there is scope for further INRappreciation over the medium term, as the macro backdrop stabi-lises and bearish sentiment continues to unwind. Moreover, thecurrency remains one of the cheapest across the emerging marketuniverse, in our view. As such, we continue to look for an attrac-tive technical entry point to revisit our bullish view.

That point may well be upon us. As the accompanying chartshows, the INR appears to be in the latter stages of a three-wavecorrection and has entered the 50.0-61.8% retracement 'box'.With momentum indicators also exhibiting a healthy unwind,and our global team sticking with the theme of dollar weakness,we believe that the INR is on the cusp of the next appreciatorywave, which would suggest a re-testing of the October high of

INR51.86/US$.

Chinese Equites: Staying BullishSince adopting a tactically bullish stance towards Chinese equi-ties (see our online service, October 1, 'Can Equities Buck The

Bearish Macro Trend?'), the H-Shares Index has been on a tear,surging 7.9% in the month so far. Despite our view that theeconomy will ultimately disappoint in 2013, we see no reason tochange our view on equities just yet. Firstly, the technicals appearwell placed. As the accompanying chart shows, the H-SharesIndex has broken rmly above its multi-month downtrend.

While we could see some retracement from overbought levels,the lack of divergence suggests that the market will remain inrally mode. Secondly, we continue to see much bearish sentimenttowards China, despite the possibility of a near-term pick up inthe economy. While still in contractionary territory, the HSBCFlash Purchasing Managers Index (PMI) came in at 49.1 in Octo-ber, suggesting a more moderate pace of contraction. Of course,this remains a negative print, but a six-month high should help totemper bearish sentiment in the near term. With this in mind, amove in the H-Shares Index to 11,000 appears likely.

Australian Rates: Reversal LikelyWe believe there is potential for a signicant back-up in Austral-ian rates. The country's quarterly headline ination rate acceler-ated to 2.6% y-o-y in Q312, respecting the trend observed inmonthly data provided by private sources. With ination moving

higher, house prices picking up once more, and Chinese invest-ment activity likely to enjoy a temporary revival in Q412-Q113,there is a good chance that Aussie rate cut expectations will bepared back in the coming weeks. The 6x9 Forward Rate Agree-ment (FRA) is currently pricing in 82bps of cuts in the next sixmonths a little too aggressive in the near term.

The technicals on the 6x9 FRA appear to be carving out adouble bottom formation, and we would look for a clean break

of support at 2.80% as a sign that rates could head signicantlyhigher in the coming weeks. Of course, any major correction inthe market could provide a renewed entry point given our belief

Source: BMI

42

44

46

48

50

52

54

56

58

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Dec-12

1

2

3

a

b

c61.8

Correction Almost OverIndia Exchange Rate, INR/US$

Source: BMI

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

Nov-12

Next Stop 11,000Hong Kong H-Shares Index

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

un-10

ug-10

Oct-10

ec-10

eb-11

Apr-11

un-11

ug-11

Oct-11

ec-11

eb-12

Apr-12

un-12

ug-12

Oct-12

Paring Back Rate Cut ExpectationsAustralia 6x9 FRA, %

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JPY: Appreciatory Trend Is Entrenched

Short-Term OutlookThe technicals on the Japanese yen suggest that the unit willcontinue to exhibit temporary weakness, returning to long-termsupport at JPY81.00/US$. On the back of this short-term depreci-ation, we have revised down our forecast for the unit to average aslightly weaker JPY79.00/US$ in 2012 (from JPY76.00/US$ pre-

viously). However, we expect the yen to return to an appreciatorytrend soon after, as longer-term fundamental factors outweighshort-term bearish sentiment. This is reected in our projection of

an average of JPY75.00/US$ for 2013.

Core ViewDespite strong nominal gains in recent years, the Japanese yenremains relatively attractive. On a real effective exchange ratebasis, JPY continues to trade at early 2009 levels, suggestingthat while the yen has strengthened nominally, it is not particu-larly expensive in real terms. In comparison, the Swiss franc andNorwegian krone (two countries that share Japan's strong externalcreditor status) have appreciated much more in real terms, makingthe yen appear cheap.

Japan's external performance is likely to remain supportive ofcurrency strength. We believe a stabilisation of the trade decitat projected 2012 levels of 0.9% of GDP could occur in 2013.Firstly, we expect export growth to stage a gradual recovery. Inpart, we expect to see a slight bounce in the Chinese economywhich could mean exports enjoy a brief reprieve. Import growthis also expected to slow in 2013 if voters opt to restart nuclearpower plants to ensure electricity rates do not rise.

In any case, the income account will provide a steady apprecia-tory thrust for the Japanese yen. Net returns on the country's largestock of direct and portfolio investment have averaged 3.0% ofGDP for the last four years (more than three times the forecasttrade decit for 2012), and we believe that income inows will

remain the dominant driver of current account performance.Moreover, the impact on the income account from the disputeover Senkaku/Diaoyu islands will be less signicant compared

to the impact on the trade account, as China only received 8.6%of all outward Japanese FDI in 2011, compared with 28.6% forthe US. Beyond 2013, we do expect heightened spending from anageing Japanese population to drain the stock of portfolio invest-ment. Meanwhile, the relative resilience of the income account(at least versus the trade account) means we maintain our outlookfor appreciation, as implied by our targets of JPY77.50/US$ andJPY75.00/US$ for 2012 and 2013, respectively.

Risks To OutlookCurrent Bank of Japan (BoJ) governor and monetary conserva-ti M ki Shi k ill hi t d i A il 2013 d

the BoJ's board and politicians are keen to ramp up thecentral bank's balance sheet. While we expect to see theUS Fed and ECB indulge in more aggressive measuresthan the BoJ, should Japanese politicians make good ontheir pledge for inationist policies, this could have a

depreciatory effect on the yen.

The arrival of a scal crisis at home would also have a

major impact. Political gridlock has left the Japanese gov-ernment cash-strapped and could deal a blow to investorcondence surrounding the government's ability to meet

its obligations. A scal crisis would alter the yen's long-term trajectory, forcing a sharp transitory appreciation asbusinesses and households are forced to repatriate their

i d t Thi ld b f ll d b

Source: BMI

70

80

90

100

110

120

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Room For Further StrengthJapan Exchange Rate JPY/US$, Weekly

Source: BMI, JPMorgan

60

70

80

90

100

110

120

130

140

150

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

JPY Index NOK Index CHF Index

Time To Catch Up?Japan Real Effective Exchange Rate Indices For JPY, CHF & NOK

BMI JAPAN CURRENCY FORECAST

Spot Short-Term 2012 2013

JPY/US$, ave 79.86 81.00 79.00 75.00

JPY/EUR, ave 104.28 - 100.33 91.50Target Rate, % eop 0.10 - 0.10 0.10

Source: BMI, October 23 2012

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Sri Lanka: Growth To Take Centre Stage In 2013BMI View: Having largely achieved the goals it set out when

it rst hiked interest rates in February, the Central Bank of Sri

Lanka kept its policy rates on hold for the sixth straight month in

its October meeting. Looking ahead, with price concerns gradu-

ally coming off the table, we believe that the primary focus of

the central bank's policies over the coming twelve months will

be xed on economic growth. We are projecting 75 basis points

worth of easing in 2013, taking the reverse repo rate to 9.00% by

the end of the year.

In its October meeting, the Central Bank of Sri Lanka (CBSL)decided to hold its policy rates steady for the sixth straight month,as we expected. As such, the central bank's reverse repo and reporates still stand at 9.75% and 7.75% respectively. Meanwhile, itsstatutory reserve ratio remains at 8.00%.

Hawkish Goals AchievedReiterating our core view, we believe that the CBSL will be onpause for the remainder of the year. Crucially, we do not seeany possibility that the monetary authorities could surprise withanother round of hikes in the nal months of 2012, or until wellinto next year. The two explicit objectives it set out in its Febru-ary meeting when it rst decided to hike interest rates to reduce

the trade decit and to ensure that ination remains at mid-single

digit levels in H212 have largely been met. Indeed, according

to the most recent data, Sri Lanka's trade decit had narrowed

to a seventeen-month-low shortfall of US$534.7mn as of July,while consumer price ination (CPI) had eased to 9.1%y-o-y as

of September, from its 9.8% peak in July. Consequently, we seeminimal risk of the CBSL reigniting its tightening cycle.

Given the country's cooling monetary environment, we expectthis current spate of consumer price disination to persist heading

into 2013. Year-on-year broad money supply (M2b) and privatesector credit growth have continued to slow from their respectivepeaks in April and March, at 22.9% and 35.0% respectively. Theformer stood at 19.8% y-o-y as of July, while the latter was at28.7% as of August. Our end-year projections see CPI falling to8.5% y-o-y.

Central Bank To Focus On GrowthWith price concerns gradually being swept off the table, we

believe that the primary focus of the CBSL's policies over thecoming twelve months will be rmly xed on providing somesupport to the economy. In Q212, real GDP growth slowed to anine-quarter low of 6.4% y-o-y, marking a sharp decline fromthe 7.9% expansion registered in the preceding quarter. In ourview, consensus expectations that suggest a recovery is im-minent remain overly optimistic. From our perspective, and asimplied by our full-year real GDP growth forecast of 5.4% forthis year, economic activity has yet to bottom out. The recentlyreleased industrial production (IP) numbers for August haveonly vindicated our view. In August, IP growth entered nega-tive territory for the rst time since May 2009, coming in at-6.1% y-o-y.

With economic growth likely to disappoint and come in belowconsensus (and below the Sri Lankan authorities' own expecta-tions), loose monetary policy will likely be a key theme in 2013.A h illi i 75b h f li

end-2013. Even though it decided to hold in October,we highlight that the central bank's most recent ofcial

monetary policy statement contained more dovish over-tones than hawkish ones. Indeed, the Bank stated that itexpects ination to be contained over the medium term.Furthermore, it voiced its concerns regarding the healthof the global economy and the resultant sluggishness ofSri Lankan exports.

Strengthening our overall view on ination and interestrates in the country as we look to the future, we note thatyields on sovereign debt have come down from theirSeptember highs. Since we called off our view for furtherhikes in the near term on September 3 (see 'Disina-tion Now Taking Hold, Additional Policy Tightening

Unlikely', September 3), the yield on two-year notes hasfallen by 113bps to 12.66% from their September 6 peakof 13.79%. To be sure, there has been some retracementsince yields hit a low of 11.74% on October 9, largelydue to the fact that the initial plunge was technically

overextended based on the daily relative strength index(RSI). Nonetheless, taking our outlook on Sri Lanka'smonetary environment into consideration, there is still

f i i ld t h d l i th

Source: BMI, Central Bank of Sri Lanka

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Aggressive AccomplishmentsSri Lanka CBSL Reverse Repo Rate, %

Source: BMI

6

7

8

9

10

11

12

13

14

15

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Yields Have PeakedSri Lanka 2-Year Sovereign Bond Yield, %

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Latin America Banking Sector Outlook: Picking The WinnersBMI View:We maintain a favourable long-term outlook on Latin

American banking sectors, and continue to single out Mexico

and Colombia as the most likely to experience robust sustain-

able growth over the next few years. Although, we continue to see

potential for further asset growth in Brazil, near-term economic

headwinds and government efforts to lower lending rates could

eventually hurt bank protability. Meanwhile, Argentine and

Venezuelan banks will suffer at the hands of sizeable devaluations

in 2013.

Commercial banking sectors across Latin America continue to

hold signicant value over the next ve years. While we dif-

ferentiate among regional banking sectors on the grounds of

shifting growth dynamics in Latin America, and various degrees

of exposure to falling external demand for industrial metals

and a high degree of government intervention, we believe that

global rebalancing pressures will steadily push Latin Ameri-

can consumers into the economic spotlight. This will underpin

a gradual convergence process with developed markets, as

household and mortgage loans begin to grow as a share of total

banking sector assets.

Brazilian Banks To Remain A Dominant ForceAlthough Brazil's banking sector has seen the most robust asset

expansion over the past decade, and is currently braced for a pe-

riod of weaker economic growth, we do not believe that the Bra-

zilian growth story is over. By extension, we believe that banks

continue to hold major potential as the Brazilian economy will

gradually recalibrate towards domestic demand at the expense of

weaker external demand.

For the time being, however, we maintain our more cautious

stance towards Brazilian banks, on the grounds that government

efforts to force down average lending rates, coupled with a central

bank policy mix designed to lower structural interest rates in the

economy, will hurt banks' prot margins.

But Better Catch-Up Potential ElsewhereInstead, we continue to ag up the enormous catch-up potential

among Mexican lenders, who have not enjoyed the banking sector

boom of the previous 10 years seen in the commodity export-ori-

ented economies of South America. Indeed, Mexico saw banking

sector assets rise to just 41.0% of GDP in 2011, from 37.7% ofGDP in 2002.

As outlined in our latest 10-year economic outlook for Mexico

(see our online service, October 11, 'Stronger Growth Ahead, But

Reforms Still Needed'), a booming manufacturing industry and an

increasingly attractive household sector underpin our very upbeat

view on the Mexican economy. This increasingly opens the door

for a surge in asset growth across Mexican banks, as a relocation

of global manufacturing from China will then strongly benet the

Mexican economy due to its skilled, low-cost labour force, a cur-

rent demographic 'sweet spot', and close proximity to the United

States market.

What is more, we maintain a favourable outlook on Colombian

banks. Here too, our view is based on a favourable fundamentaloutlook for the economy. In addition to a promising consumer

play over the next decade, we share a highly constructive outlook

h ' l i h Oil & G

So Who Is In BMI's Good Books?The short answer to this question is 'everyone except Ar-

gentina and Venezuela'. The reasoning: even with a sharp

deceleration in economic activity in China a key export

market for Latin American commodity majors we see

stronger growth over the coming years and believe that

regional banks are relatively well insulated from system-

ic risks and possible contagion out of Europe.

Most banking sectors have enjoyed sizeable upgrades

in our proprietary commercial banking business environ-

ment ratings over the past few years, with the exception

of Argentina and Venezuela.

Looking at the latest risk-reward scores compared

with 2011, the picture becomes more mixed. Only Chile,

which enjoys sound macroeconomic fundamentals and

well-capitalised banks, and Mexico, where we also see

room for asset growth, have seen upgrades in the 'limits

to potential return' and the 'risks to realisation' ratings.

This echoes our view that while systemic risks are argu-

ably more sanguine currently, growth in these commer-cial banking sectors will be more muted in the near term,

except for Chile and Mexico. Argentina and Venezuela,

hil f l i di l ti d hi h

Source: BMI

Argentina

Brazil

Chile

Colombia

Mexico

Peru

Venezuela

40

45

50

55

60

65

70

75

80

30 40 50 60 70

Risks

ToRealisation

OfPotentialReturn

Chile And Mexico Take Top SpotsLatin America Evolution Of Commercial Banking Business Environment

Rating Since 2011

Note: f = BMI forecast. Source: BMI, respective central banks

20

30

40

50

60

70

80

90

100

110

120

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012f

2013f

Argentina Brazil ChileColombia Mexico Peru

The Stellar Rise Of Brazilian BanksLatin America Total Banking Sector Assets, % Of GDP

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Jamaica: Rising IMF Uncertainty Threatens Economic StabilityBMI View: The failure of the Jamaican government to reach

a new Stand-By Arrangement with the International Monetary

Fund in recent weeks suggests that negotiations are likely to drag

on. We believe this presents a substantial risk to the country's

sovereign credentials.

The failure of the Jamaican government and International Mon-etary Fund (IMF) to agree on the terms of a new Stand-By Ar-rangement (SBA) has seen a rapid deterioration in investor con-dence in the country's sovereign credentials, and we see potentialfor this situation to escalate further in the coming months. IMFfunding is crucial for Jamaica, acting not only as a vital sourceof external nancing, but also serving to reassure foreign inves-tors that the government remains committed to sustainable scalpolicy. Indeed, the IMF's recent visit to Jamaica, which endedon October 5 with the parties failing to come to a new deal, hasalready seen the yield on Jamaica's US$2019 global bond spikefrom 7.69% to 7.92% a reection of rising investor concern. If

the Jamaican government and IMF are not able to come to a newagreement in short order, something we believe is increasinglylikely given IMF indications that it intends to maintain a hardlinestance in negotiations, we believe that Jamaica's macroeconomicposition could deteriorate substantially.

At the very least, we believe that the country's reluctance toagree to the terms offered by the multilateral body is likely to de-ter foreign investment, weighing on growth. At present we fore-cast real GDP growth of 0.6% in 2012, improving only slightly to1.0% in 2013. We note though, that Jamaica's continued failure toreach a new SBA with the IMF will likely encourage us to revisedown our already tepid forecasts in coming months.

Moreover, given the country's weak macroeconomic buffers wedo not discount the possibility that the failure to sign a new SBAin conjunction with another bout of risk off in the current volatileglobal markets could trigger a debt crisis for the country. First, wehighlight that rising borrowing costs present a substantial risk tothe country as debt-to-GDP is well over 100%.

Chilean Peso Through Support, Will Trade LowerThe Chilean peso recently broke through short-term support atCLP476.03/US$, in line with our view for the unit to weakenslightly throughout the coming months and end the year atCLP485.00/US$.

The peso has averaged CLP488.03/US$ this year, and weforecast that the average will appreciate slightly by the end of thisyear in 2012.

The recent break through support coincided with a weaken-ing in copper prices, a correlation we have long highlighted andexpected to see in the nal months of this year (see our online

service, September 18, 'CLP: Weakening Ahead On Lower Cop-

per Prices').Bearish technical indicators on the daily chart, combined with

a deteriorating picture on the weekly chart, underpin our beliefthat the currency will continue to slide against the dollar over theshort-term.

L ki h d b li th t ft t it th

We also note the potential for substantial downwardpressure on the currency, with negative ramications for

both ination and Jamaica's external account stability.

The Jamaican dollar has already depreciated notice-ably since the start of the year, from JMD86.38/US$ toJMD90.13/US$, on the back of the country's poor tradedynamics (see our online service, June 7, 'JMD: Down-trend To Continue'). This has seen monetary authori-ties attempt to bolster the currency by selling foreignreserves, such that we believe the central bank has littleroom to continue defending the currency. Indeed, if theJamaican dollar begins to sell off more aggressivelydue to continued capital ight, this could see ination

rise dramatically, and if the state continues to stem thesell-off, it could destabilise the country's already precari-ous external account position. Ultimately, we believe itis crucial for Jamaica's macroeconomic stability that itcomes to a new agreement with the IMF, noting the sub-stantial downside risks to its economy if it does not.


460

470

480

490

500

510

520

530

540

Nov-1

1

Dec-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-1

2

Mar-1

2

Apr-1

2

May-1

2

May-1

2

Jun-1

2

Jul-1

2

Jul-1

2

Aug-1

2

Sep-1

2

Sep-1

2

Oct-1

2

Nov-1

2

Nov-1

2

CLP To Weaken Through End-2012Chile Exchange Rate, CLP/US$


7.2

7.4

7.6

7.8

8.0

8.2

8.4

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

October 5- IMF

Leaves Jamaica

SpikingJamaica Global US$ 2019 Bond, % Yield

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Colombia: Ecopetrol's Rally Still Has FuelColombian majority state-owned oil company Ecopetrol hasseen its share price rally in recent months, and given robustfundamentals, a bullish technical picture, and attractive valu-

ations, we believe the stock still has room to go. Ecopetrolis trading at COP5,720.00 at the time of writing, implying a14.6% gain since we rst adopted a bullish stance towards oilstocks in Colombia this summer (see our online service, July9, 'Asset Class Strategy: Turning Bullish On Equities'), anda 7.3% gain since we last highlighted further upside for Eco-petrol's share price (see 'Ecopetrol Positioned For FurtherGains', October 3). Following a key break to resistance aroundCOP5,500.00 on October 16, we now see Ecopetrol's shareprice heading towards its all time high around COP5,900.00over the coming weeks.

Indeed, our Oil & Gas team holds a bullish stance towardsEcopetrol on the grounds of large unexplored oil and gaspotential in Colombia, favourable licensing terms, as well asgovernment initiatives to expand the rening and productive

capacity in the country, which will ensure Ecopetrol remains anattractive investment opportunity over the long term. As such,Colombia rank's second best in Latin America in our Oil & GasRisk/Reward Ratings. Moreover, an ongoing auction of reserveblocks by Colombia's national hydrocarbons agency, in whichEcopetrol placed the highest bids for 12 units, will further bol-ster interest in Ecopetrol's share over the coming weeks.

Ecopetrol's share price has come a long way very quickly andwe believe that some consolidation in the very near term is due.However, with long-term momentum indicators looking bullish,

and relatively cheap valuations we see further gains forthe stock over a multi-month horizon.

Indeed, both the moving average divergence-conver-gence (MACD) and the relative strength (RSI) indiceson the weekly still have room to go and point to furthergains. As well as this, Ecopetrol's share estimatedprice to earnings (P/E) ratio is at 14.1x, at a relativelycheap level compared to its 10-year average of 16.7x.As such, we believe Ecopetrol's share is likely to headtowards its all time high of around COP15,900.00 overthe coming weeks.


1,000

2,000

3,000

4,000

5,000

6,000

7,000

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Eyeing COP5,900.00Colombia Ecopetrol Share Price, COP, Weekly

Colombia: A Period Of Weakness Ahead For The PesoWe believe the Colombian peso will continue to weaken overthe coming weeks as a key technical break of support, combinedwith rising prospects for greater central bank interventionpoint to further downside potential for the unit. Since we lastagged potential for peso weakness (see our online, Septem-

ber 24, 'Central Bank Intervention Will Result In A Weaker

Peso'), the unit has depreciated 0.87% from COP1,798.78/US$to COP1,814.50/US$ as of October 23. Following a break ofshort-term support around COP1,802.00/US$ on October 22, wenow see the peso falling towards its next level of support aroundCOP1,825.00/US$ over the coming days.

Momentum indicators on the daily chart point to furtherweakness for the peso. Indeed, the moving average conver-gence-divergence index (MACD) recently crossed to the upside,suggesting building depreciatory momentum. In addition, therelative strength index (RSI) still has room to go before it entersoversold territory also suggesting further downside potential

for the unit.Moreover, we believe that the Banco Central de la Repblica

de Colombia (BanRep) will intervene to weaken the peso dur-ing its next monetary policy meeting on October 26. BanRep

authorities have expressed concerns over a strong peso, whichhas weighed on the competitiveness of the country's agriculturaland manufacturing exports at a time when the unemployment

t h i d b 10 0%

in an effort to reduce the peso's carry appeal and stemsome of the appreciatory pressures the unit is facing.Furthermore, we anticipate that BanRep will increasethe amount of its minimum daily FX purchases, which

is currently at US$20mn, as another step to offset theupside pressure that large foreign capital inows haveput on the peso. The unit has averaged COP1,794.50i th t d t d i li ith i f f


1,700

1,750

1,800

1,850

1,900

1,950

2,000

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

Nov-12

A Period of Weakness AheadColombia Exchange Rate, COP/US$

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www.emergingmarketsmonitor.com LATIN AMERICA

Barbados: Yield Compression In Line With Sovereign Debt ViewAfter steadily climbing 30 basis points (bps) since Standard &Poor's downgraded its external debt to 'junk' status in mid-July,yields on Barbados' US$ 2022 government bond have reversedcourse, falling 13bps to 6.7% in two days.

The government has recently reiterated its commitment to im-prove its business environment and attract new investment, and therecent move in yields is broadly in line with our view that, whilethe country remains in a very weak scal position, Barbados' ex-ternal debt remains sustainable for the time being. We believe thebond is fairly valued and nominal yields will remain near currentlevels, barring the realisation of downside growth risks.

We expect real GDP growth to increase from 0.4% in 2012 to0.7% in 2013 and 1.3% in 2014, leading to an increase in tax-able economic activity and therefore higher revenues. A gradualimprovement in the government's primary scal picture will help to

lower its borrowing costs, which, according to Bloomberg, are setto total US$48mn next year, or roughly 0.9% of our nominal GDPforecast. Additionally, the central bank has US$521.7mn in foreignreserves on hand, enough to help out if the government were to nd

itself with a serious debt maintenance problem.While slight widening in yields is certainly possible, Barba-

dos lies along the fair-value line in our proprietary risk-rewardratings, indicating that we believe their debt is fairly priced, andexpect nominal yields to remain in their current range (see ourli i O b 17 'Gl b l H d i d F h E d

Barbados' structural decit and foreign debt picture: the

country fared relatively poorly in our recently updatedsovereign risk ratings, as it has for some time.

The country's economy, particularly the nancial and

tourism sectors, is highly susceptible to external develop-ments, and another shock to global nancial markets orabrupt economic slowing in the US or UK economies

ld k h B b d ' l i t I h


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Closer To Fair ValueBarbados US$ 2022 Government Bond Yield, %

Brazil: More Downside Ahead For Bank StocksThe most recent set of earnings out of some of Brazil's largestlenders reinforces our cautious view on the country's bankingsector. Indeed, we have long highlighted that the current policy

mix, including aggressive monetary easing and governmentpressure on banks to reduce their lending rates, combined withelevated non-performing loans and high debt servicing costs, dueto continued real weakness, would weigh on commercial banks'balance sheets (see our online service, October 15, 'No Return ToRobust Banking Sector Growth'). Moreover, given disappointingQ312 earnings for Banco Ita and Banco Bradesco, as well as apoor technical picture for several bank stocks, we see potential forfurther downside ahead.

Although Banco Ita's Q312 results, announced in lateOctober, broadly matched analysts' estimates, the 11.4% y-o-ydecline in net income, lower return on equity, relatively slowloan growth and higher loan-loss provisions were not receivedfavourably by nancial markets, causing the stock and several

other Brazilian nancials to sell off in recent trading.In addition, despite narrowly beating analysts' earnings

estimates, declining return on equity and a very modest 1.7%y-o-y increase in net interest income for Banco Bradesco, havereinforced investors' concerns over bank protability, sending

its share price lower in recent days.The technical picture for several bank stocks reects weakness as

well. Indeed, the MSCI nancials index for Brazil is testing short-term support on the weekly chart around 653, a sustained break ofwhich could see the index head back towards long-term trendlinesupport of around the 600 level. Potential for further weakness

ahead is also supported by momentum indicators, as theMACD looks poised to cross the line to the downside.

Banco Bradesco and Banco do Brasil have been hitparticularly hard in recent days, and daily and weeklymomentum indicators continue to presage further weak-ness. Moreover, both stocks have broken through trendlinesupport in recent weeks and we believe that any additionalbad news could see them fall back down towards key lev-els of long-term support, which would further support ourview that there are more downside risks ahead for Brazil'sbanking sector over the coming months.


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Next Stop 600?Brazil MSCI Financials Index

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Ukraine: Kernel A Play On CIS AgribusinessFrom a global macro perspective, shifting diets, rising income

levels and rapid population growth have all increased pressure on

agricultural resources, as food security shapes up to be one of the

dominant issues of the next decade. We have been increasinglybullish towards Commonwealth of Independent States agribusiness

equities this year and believe the region could once again become a

major player in agriculture due to large swathes of arable land, ris-

ing level of state and international nancing and their proximity to

high growth markets (see our online service, October 8, 'Attractive

Opportunities In Emerging Europe Agribusiness').

One company we regard as well positioned to benet from

these dynamics is Ukraine-based Kernel. The company is

diversied across the agribusiness value chain (farming, sourc-

ing, processing, logistics and distribution), providing a solid base

for long-term growth prospects. From a fundamental perspec-

tive, Kernel's multiples are attractive, with a trailing price-to-

earnings ratio of 7.91, solid historical EBITDA margins ranging

between 15 and 17%, and impressive revenue diversication. The

company's Warsaw Stock Exchange (WSE) listing (as opposed to

the Kiev PFTS exchange) is also positive, providing greater ease

of access for international investors, who also benet from better

regulatory frameworks and potentially superior liquidity condi-

tions (see 'Emerging Europe Equity Strategy', October 19).

While we retain a positive assessment of Kernel, we high-

light the company's exposure to Ukraine presents several major

downside risks. Our long-held expectations for the government to

devalue the hryvnia following the October parliamentary elec-

tion remains the most immediate downside risk. The potential for

short-term discounting of the stock due to cashow and FX-de-

Latvia: Minimal Systemic Risks From Norvik BankaBMI View: Our negative stance towards Latvia's domestic bank-

ing sector is bolstered by recent reports that its eighth largest

lender,Norvik Banka, is in urgent need of capital. However, we

have little reason at this juncture to believe that Norvik's nancial

difculties are indicative of an impending banking sector crisis,

or that the bank poses a systemic risk to the system if it collapses.

Recent reports that Norvik Banka is in urgent need of capital

afrm our negative assessment of the Latvian banking sector,

which we have previously warned remains prone to deposit ight

and suffers from a systemic lack of public condence, follow-

ing several disastrous bank collapses in recent years. Following

reports in local news sources saying that an ofcial from the

Financial and Capital Market Commission (FKTK) had admitted

the bank was suffering from funding problems, Norvik coun-

tered the claims by saying its paid-in capital had increased due

to investment of EUR11.6mn from Granit Bank owner Sandor

Demajn, though ofcial statements from FKTK put this amount at

EUR5.0mn.

While Norvik claims its unpublished pre-tax operating prot for

9M12 reached LVL8mn, Q212 lings suggest the current eco-

nomic climate has been challenging for the bank

Reports that the bank has effectively stopped lending since

June tally with our observations of Norvik's recent balance sheet

li hi h d d th th ( ) th i

nominated debt concerns remains a possibility, although

with a net debt to EBITDA ratio of 1.9x in Q412 and a

current ratio of 2.6x, we believe Kernel's balance sheet

is sufciently strong to weather a moderate devaluation.

In the medium-to-long term, the company may benet

from a weaker hryvnia boosting the competitiveness of

its exports.

We also argue that food policy and external trade have

been used to manipulate domestic ination in Ukraine

instead of promoting open trade. These unpredictable

trade policies potentially damage Ukraine's reputation as

an exporter.

m-o-m terms in August and September, by 8.2% and

2.3% respectively. As we have previously highlighted,

domestic depositors have increasingly shifted to more

liquid deposits over the last 12 months, raising the risk of

deposit ight.

While the news is likely to further weaken public con-

dence in Latvia's banking sector, we have few reasons

at this juncture to believe that Norvik Banka's nancial

Source: Bloomberg

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Direct Way To Play CIS AgribusinessKernel's WSE Share Price (PLN) With Volume (LHS)

Source: Norvik Banka

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Loan Growth FrozenNorvik Banka's Customer Loans & Deposits, % chg m-o-m

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Turkey: Cautious Towards Slowing MomentumWhile our bullish view on Turkey's XU100 equity index has per-formed strongly, posting gains of 10.9% since entry in our Emerg-ing Europe equity strategy table on August 3, slowing momentum

is prompting us to adopt a more cautious outlook towards theindex. While we maintain our raised target of 75,000, we wouldlook to close out the view if it fall to our initial target of 70,000.

The index has performed impressively since January, gaining37% year-to-date, and approaching its October 2010 historical highof 71,776. Investor sentiment turned increasingly positive fol-lowing signs that Turkey's external imbalances were beginning tounwind in tandem with more controlled domestic growth.

However, we highlight that this performance has been focusedprimarily in nancial, industrial and consumer discretionary sec-tors, which are looking increasingly pricey. With momentum on theindex slowing, we are more cautious towards it. While we remainpositive towards Turkish equities overall, with a more positiveeconomic outlook increasingly priced in, investors are likely to bemore selective over the coming months.

Serbia: Macro-Industry View Continues To Play OutWe maintain a positive outlook for the Serbian industrial con-glomerate Energoprojekt on the back of its involvement inenergy infrastructure, not only in the Balkans but globally. Thecompany has continued to outperform the Serbian BELEX15 bluechip equity index and is the best performing stock on the index,returning 30.1% in total US dollar terms in the year so far.

Moreover, with the company winning contracts in attractivemarkets, we see scope for its stock price to surpass its February2011 high of 600, potentially in Q113, from its current level of525. Energoprojekt has signed contracts with Russia and Peruworth an estimated US$103mn. Our Infrastructure team is par-ticularly positive towards Russia, forecasting the market's valuegrowth to 3.5% in 2012. Strong historical ties between Russia andSerbia will also benet Energoprojekt in future tenders and help

mitigate political risk. We highlight Energoprojekt's internationaldiversication as another factor in our positive view of the com-pany, as it is active across the infrastructure value chain in Asia,Europe, the Middle East, Latin America and Africa.

RON: Sell Off May Be Over...For NowThe technical picture for the Romanian leu suggests the recentsell-off may be coming to an end, prompting us to take a closerlook at our bearish RON/EUR view. On August 22, we put abearish view on the leu in our FX strategy table, with a short-term target of RON4.6000/EUR, as we believed the rally follow-ing President Basescu's return would prove short-lived. This viewplayed out, with the cross rate falling to RON4.5905 on October8, representing 3.3% of implied gains and just shy of our target.

For now, the leu looks like it may pare some if its recent losses.If it makes a clean break through resistance at RON4.5700/

EUR, we may consider removing it from our table. Neverthe-less, polls reinforce our view that Prime Minister Victor Ponta iswell placed to win the December 9 legislative election. Since this

ld lik l t il ti EU d IMF h t i f ll i th


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Closing In On Historic HighsTurkey XU100 Equity Index, Daily


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Set To Head HigherSerbia Energoprojekt Share Price (RSD)

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Break Or HoldRomania Exchange Rate, RON/EUR

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BMI POLAND CURRENCY FORECAST

Spot Short-Term 2012 2013

PLN/EUR, ave 4.14 4.12 4.17 4.00

PLN/US$, ave 3.20 3.17 3.28 3.28Policy Rate, % eop 4.75 4.50 4.50 4.00

Source: BMI, Bloomberg, October 25 2012

PLN: Sticking To Long-Term Appreciation View

Short-Term OutlookOur short-term caution towards the zloty has proved wise as the

unit has sold off 1.2% since October 10 on the back of weak data

releases from Poland and the eurozone (see our online service, Oc-

tober 10, 'Long-Term Bullish Zloty View Playing Out'). We remain

cautious about the short term, particularly if the zloty ends the

week below PLN4.12/EUR, as this would signal a break through a

multi-month appreciatory trend on the weekly chart. We have re-

vised our end-2012 forecast from PLN4.0400/EUR to PLN4.1000/

EUR, with the unit currently trading at PLN4.1443/EUR.

Core ViewWe believe the zloty's fundamentals point towards moderate

appreciation in 2013 given Poland's underlying macroeconomic

credentials and historical cheapness. We forecast the currency

will appreciate to PLN3.9600/EUR by the end of 2013.

Although the news out of Poland is likely to point to decelerat-

ing economic growth over the coming months, it will remain a

regional economic outperformer. We forecast real GDP growth of

2.3% in 2012 and 2.7% in 2013, with economic activity picking

up especially in H213 as demand from the eurozone recovers.

Poland's balance of payments outlook is likely to be supportive

of this appreciation. Exports grew by 4.3% y-o-y in August, while

imports fell by 3.0%, narrowing the current account decit byEUR1bn from the previous year to EUR633mn. We expect this

trend to remain as eurozone demand recovers and scal austerity,

plus weak household balance sheets, constrains domestic demand.

The nancial account is also likely to contribute to zloty ap-

preciation. Although yields on Polish domestic debt have already

compressed signicantly since the beginning of 2012, as foreign

investors piled in, we see some scope for further gains over the

long term. We also expect Polish equities to perform strongly

once the eurozone returns to growth in H113, as stock prices are

currently weighed down by uncertainty in the bloc.

The currency traded on the strong side of PLN4.0000/EUR

for most of the period between mid-2010 and mid-2011 despite

concerns about the scal decit and political risk surrounding the

November 2011 general election, neither of which now weigh on

investor sentiment. Prime Minister Donald Tusk's government was

re-elected and has implemented an austerity programme that we

expect to reduce the budget decit to under 3.0% of GDP in 2013.

However, monetary easing by the National Bank of Poland

(NBP) will limit the zloty's appreciation over the next year. We

forecast 75 basis points (bps) of cuts before the end of 2013, which

is in line with the Forward Rate Agreement Market. The easingcycle, which will almost certainly begin at the NBP's November

meeting, will reduce the currency's carry appeal to investors. How-

t P li h t ill i i i tl b th

zloty's relative attractiveness to investors.

Risks To OutlookThe zloty is highly correlated with global risk sentiment

and the unit is particularly responsive to the twists and

turns of the eurozone crisis. Our core scenario is for a

choppy recovery in the currency bloc as it undergoes a

painful rebalancing process and slowly builds the institu-

tions required for a sustainable currency union. This

presents both upside and downside risks to the zloty. On

the one hand, a continued stalemate or even backtracking

from eurozone policymakers will hurt risk-on assets like

th l t hil th th f t th t d


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Weekly Close Will Be ImportantPoland Exchange Rate, PLN/EUR, Weekly


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Hit By Weak Data ReleasesPoland Exchange Rate, PLN/EUR, Daily

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Russia: Kremlin Helps Rosneft Take ControlThe balance of power in the Russian oil industry is shifting.British oil major BP has agreed to spin off its 50% holding inthe lucrative TNK-BP joint venture, which was established in

2003, to Russian state-owned oil rm Rosneft. Under the termsof the agreement, BP will receive US$12.3bn in cash and afurther 18.5% shareholding in Rosneft, raising its overall staketo 19.75%. Completion of the deal will mean BP receives ahealthy return on the stake it acquired for US$7bn back in 2003,and from which it has already posted prots in the region of

US$7bn.

Rosneft In ControlWe believe the deal between BP and Rosneft is something ofa game changer for the Russian oil industry. Before the dealwas announced, Rosneft was already the largest player in theworld's leading oil-producing nation. Following the completionof the deal, the Kremlin-backed rm is set to tighten its grip on

the market. While this is undoubtedly good news for the com-pany, BMI's Oil & Gas team believes this will have a broaderdetrimental impact on the domestic market as it reects the

deterioration in the competitiveness of the all-important Russianenergy sector.

The deal stands to increases Rosneft's oil output by as muchas 1.7mn barrels of oil equivalent per day (boe/d). This wouldbring its total to nearly 4.4mn boe/d, eclipsing rival domesticproducers such as Lukoil, Surgutneftegaz , Tatneft and Bash-neft. Away from the well, it will also give Rosneft extra cashow to nance exploration of Russia's vast reserves to replace

ageing and depleting elds. Although unlikely to falter, the ac-quisition still remains subject to Russian government approval.Quite simply, Rosneft is now rmly in the driving seat of the

nation's prize industry. In sharp contrast, AAR (or Alfa, Access/Renova Group, as it is also known), BP's 50/50 partner in theTNK-BP venture, is now left with weakened negotiating powerin the partnership.

Privatisation Push Still In PlayThe purchase of BP's share in the TNK-BP partnership meansa signicant part of the Russian oil industry will return to state

ownership. This ies in the face of Russia's broader privatisa-tion push, which has been taking place for the past few years,as Russia works to eliminate its budget decit. In Q310 Russia

announced plans to raise US$50bn from privatisations over thecoming decade, after having its coffers depleted by the onset ofthe global nancial crisis. The country endured an unceremoni-ous fall from grace when it recorded a 7.9% contraction in GDPin 2009, after enjoying growth of 5.6% a year earlier. L

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EM Monitor Oct 29 2012