Societe Generale Emerging Weekly

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11 December 2009

Emerging MarketsWeekly

Important Notice: The circumstances in which this publication has beenproduced are such that it is not appropriate to characterise it as independentinvestment research as referred to in European MIF directive and that it should betreated as a marketing material even if it contains a research recommendation www.sgresearch.socgen.comEmerging Weekly

CIS 2010 Outlook

Best Wishes for 2010!The next weekly will be published on 8 Jan 2010

Editorial

The oil price is a key driver for the RUB and KZT. Appreciation

prospects are however limited for both currencies. For the RUB,

carry compression and less favourable current account

developments will weigh in the medium term. The authorities in

Russia and Kazakhstan will also try to prevent a strong and fast

appreciation of their currencies to preserve the competitiveness of

the local industry. In Ukraine, financing issues persist despite the end

of the economic recession. We expect the UAH to weaken

substantially in 2010.

FX trade summary

We recommend going short CZK/HUF with a target of 10.25. We

recommended this trade a couple of times in the past couple of

month with success. We think the price looks attractive once again.

Moreover, we believe CZK will again underperform with the easing in

risk aversion. The quant team also sees value in this trade (see latest

FX Quantsight ). As a short-term trading idea, we also recommend

going short EUR/HUF, to position for an easing in risk aversion in the

coming sessions that will bring EUR/HUF back down to 265.

How to play 2010 themes in CEEMEA local rates

(1) Differentiation: Receive PLN 5y IRS vs RUB 5y CCS. (2) Different

monetary cycles: Receive ZAR vs Brazil DI short-rates. (3) Delayed

flattening: Enter a PLN 2s5s flattener around +80bp during H1 2010.

FX technical analysis

BRL/ILSshould break below the late October low of 2.13 and dip to

the 1.99/2.03 support area. EUR/CZK The MT declining resistance

line, which comes at 26.42 this week (-0.036/week), should cap the

upside and force EUR/CZK to return to the mid-September low of

24.95, with a step at 25.35.

Kazakh industrial production has reboundedthanks to oil output

2004 2005 2006 2007 2008 2009

-10

-5

0

5

10

15

20

25 % y/y 3ma oil productionTotal

Source: SG Cross Asset Research, Ecowin

Numerous risks w eigh on U kraines fiscal deficit

0

2

4

6

8

10

12

2008 2009 2010

general government deficit

inc. Naftogaz and banks recapitalisation costs

% of GDP

Source: SG Cross Asset Research, IMF

Contents View and Trade Summary EM Research TeamView and Trade Summary 2 03/12/09 10/12/09 Coming week Coming month Galle Blanchard (44) 20 7676 7439Weekly Calendar 4 EUR/PLN 4.0961 4.154 Murat Toprak (44) 20 7676 7491Central Bank Watch 7 EUR/HUF 269.82 273.63 Esther Law (44) 20 7676 7396Editorial 8 EUR/CZK 25.834 25.766 Jaroslaw Janecki (48) 2 2528 4162FX Strategy 12 USD/TRY 1.4866 1.5004 Jan Vejmelek (420) 2 2200 8568Technical Analysis 16 USD/RUB 29.1646 30.425 Anne-Francoise Blher (420) 2 2200 8524FX Quantsight 17 USD/BRL 1.7103 1.7707 Jiri Skop (420) 222 008 569Fixed Income Strategy 18 USD/MXN 12.639 12.9678 Maxim Oreshkin (7495) 725 5637Issuance Calendar 20 PLN 5Y 5.56 5.61 Patrick Bennett (852) 21 66 57 97Rates Quantsight 21 HUF 5Y 6.86 7.035 Greg Anderson +1 212 278 5715CNB watch 22 CZK 5Y 3.08 2.99 Economic Data Preview 23


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Emerging Markets Weekly

11 December 2009

FX Views and Recomm endationsTrade recommendations

Go short CZK/HUF. We recommend going short CZK/HUF with a target of 10.25, stop loss 10.76. We recommendedthis trade a couple of times in the past couple of month with success. We think the price looks attractive once again.Moreover, we believe CZK will again underperform with the easing in risk aversion. The quant team also sees value inthis trade (see latest FX Quantsight).

Go short EUR/HUF. The HUF has suffered during the past week with the escalating concerns on Greek debt, as thelevel of debt is also an issue in Hungary. As a short-term trading idea, we recommend going short EUR/HUF, to positionfor an easing in risk aversion in the coming sessions that will bring EUR/HUF back down to 265.

Asian trades. We keep our short EUR/KRW position but again tighten the stop (to 1,750 from 1,780). This tradecontinues to reflect our view that Asian currencies in general and the KRW in particular should correct some of the lastyears underperformance against G7 currencies (ex USD). Our defensive basket trade is long strong current account-surplus currencies against currencies where external balances are ether already negative or pressured; long SGD andTWD against short PHP and INR has moved sideways this week. The trade is currently losing 0.45%, target is a 2.5%profit, stop loss -1.0%.

FX spot strategies:C ross P os ition Date E ntry Targ et S top Current P /L w eek * P /L to ta lNew posit ions th is weekC Z K / H U F Long 11-Dec 10.59 10.25 10.76E U R / H U F Short 11-Dec 273 265 278Old posit ionsM X N / C L P Long 26-Nov 38.00 42.00 36.00 38.29 -3.41% 0.76%K R W / S G D Long 26-Nov 0.12 0.1290 0.1155 0.12 -0.33% -0.67%K R W / C L P Long 26-Nov 0.4257 0.4500 0.4135 0.4266 -1.95% 0.21%U S D / P E N Short 12-Nov 2.8725 2.7500 2.9310 2.8765 -0.09% -0.14%TRY/ZAR Long 11-Nov 4.98 5.30 4.82 5.03 1.03% 1.00%E U R / K R W Short 28-Oct 1760 1665 1850 1716 1.32% 2.50%EUR/PLN Short 9-Oct 4.24 4.00 4.36 4.15 -1.32% 2.12%USD/ ILS Short 25-Sep 3.77 3.62 3.84 3.77 -0.13% 0.00%Posit ions c losedTotal P/L 0.72%* since last publication

FX options strategies:Cross Position Structure Date Spot Entry ATM F VolEntry Expiry(close) Cost Valuation P/L week * P/L totalNew positions this weekOld positionsUSD/MXN Short

implied

vol swap 23-Oct 12.89 15.5 25-Jan-10 0.00% 1.98% -0.54% 1.98%

USD/TRY Long implied vol swap 23-Oct 1.4648 14.3 25-Jan-10 0.00% -2.53% -0.10% -2.53%USD/BRL ** Short vol double no

touch

19-Nov 1.7268 17.9 20-May-10 2.50% 2.61% -0.05% 0.11%

Positions closedUSD/BRL ** Short vol double no

touch

30-Oct 1.7248 19.2 19-Nov-09 3.33% 8.02% 1.95% 4.69%

USD/MXN Short riskreversal

9-Oct 13.26 14.7 9-Nov-09 0.00% 0.00% 0.09% 0.00%

Total P/L 4.14%* since last publication

** For P&L purposes, assume a notional that is 10% of a vanilla notional. A 33.3% price of a DNT is is therefore 3.33% and payoff is 10% instead of 100%.


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11 December 2009 3

FI Views and Recomm endationsTrade recommendations

Czech Republic: Take profit on CZK CZK 1y1y fwd receiver. On 13 November we recommended receiving CZK 1y1yat 2.70% with a target of 2.40% and a stop loss at 2.85%. CZK 1y1y declined and trades currently at 2.47%. In a surpriseto the market, at its last meeting on 5 November the CNB voted by 4:3 to keep rates unchanged. The short end of theyield curve jumped up significantly in response. CNB board member Zamrazilov, who voted for no change last time,admitted that the central bank may have room to lower interest rates if the inflation outlook remains benign and a cutwould help the economy recover from a recession. But, as she stressed, she was undecided. Unfortunately, theeconomic indicators out this week (GDP and CPI) were no help in figuring out whether or not the CNB will cut by another25bp next week. In addition, parliaments decision to approve additional spending for 2010, which made the budget lessrestrictive than previously expected, could be a new argument for the CNB board members who didnt cut the last timeto keep rates stable. To sum up, the CNBs decision remains a very tight call. The market is pricing in a 50% chance of a25bp cut. As a result, we prefer to take profit on current levels.

South Africa: Maintain 1y1y forward receiver. This trade has held up relatively well despite rand weakness. Wemaintain it as it plays well with our theme monetary cycles favour CEEMEA rates over Asia/LatAm peers (see FixedIncome Strategy page). We still think cuts are possible in South Africa and carry is attractive. Target: 7.75%.

Hungary: Hold 13/D. This position has returned some gains on recent currency weakness. Maintain this position astechnicals are still positive for Hungarian local bonds into early 2010.

Poland: Maintain PLN-EUR 5y5y forward. We do not expect any surprise on the convergence front for Poland (andalso other CE3) during H1 2010. However, we favour Poland from a fundamental perspective and see any widening ofthe PLN-EUR 5y5y forward spread above 130bp as an opportunity to increase the position (see CEEMEA local ratesstrategy in FI Outlook 2010)

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

P/L total(bp)

Est. 3mcarry (bp)

Existing positionsPLN - EUR 5y5y forward 30 Mar 160 bp 60 130 128 -1 32 -1Receive ZAR 1y1y forward 21 Jul 8.15 % 7.75 8.40 8.07 -10 8 20Receive ZAR 2s5s10s PCA barbell Ratio:0.62:2:0.47 15 Sep -50 bp -70 -40 -60 -4 10 3Pay HUF 3x6 FRA^ 18 Sep 6.35 % 7.00 6.10 6.30 -2 -5 --Switch TURKGB11 8/14 into R201 16 Oct -56 bp -180 -160 -172 0 116 --EUR 2s10s flattener vs PLN 2s10ssteepener box 17 Sep -99 bp -65 -85 -74 -1 25 7Buy HGB6.75 2/13 (13/D) 6 Nov 7.08 % 6.70 7.25 7.00 21 8 4Receive PLN 3s5s7s standard barbell 12 Nov 25 bp 10 30 26 0 -1 0Positions closed

Entry dateEntry Unit Target Stop Closed level Closed date P/L total

(bp)

Receive CZK 1y1y forward 23 Jul 2.81 % 2.65 2.90 2.90 17 Aug -9 22Sell PLN 2-5-10yr swap Barbell 16 Apr 35 bp 18 45 50 18 Aug -15 -2CZK 5s10s steepener 25 Jun 48 bp 60 40 40 18 Aug -8 --PLN rec 3x6 vs pay 6x9 15 May 0.0 bp -10 5 -10.0 25 Aug 10 --HUF 2s5s flattener 20 Mar -14 bp -40 -7 -7 31 Aug -8 8Buy POLGB5.75 3/10 vs Eonia 6 Apr 280 bp 50 300 45 16 Sep 235 --Buy: DS1019 vs Sell: DS1015 in ASW (riskneutral) 30 Jul 44.5 bp 20 54 34 22 Sep 11 0RUB 6m vs 3y NDF flattener 17 Sep 126 bp 50 170 62 8 Oct 64 30Receive CZK 3x6 FRA 2 Sep 2.03 % 1.75 2.15 1.78 8 Oct 25 --Pay CZK 5y versus PLN 5y IRS Ratio 1:0.55 9 Oct -20 bp -40 -10 -10 20 Oct -10 0Buy: PS0414 vs Sell DS1013 & DS1015(DV01 neutral)

21 Apr 7.2 bp -4 11 3.6 12-Nov 4 --

Receive CZK 1y1y forward 12 Nov 2.70 % 2.40 2.85 2.47 11-Dec 23 14* since last publication ** P/L calculated without carry ^ expires on 18 Dec 09

Source: SG Cross Asset Research, Bloomberg, Reuters


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11 December 2009

Events and dataEMEA

During the week Period Previous SG Forecast ConsensusUkraine Merchandise Trade Balance YTD OCT -4.09B na na

Industrial Production (YoY) NOV -6.2% na 7.4%Retail Trade YTD (YoY) NOV -16.3 na naRussia Industrial Production Real MoM NOV 0.8% na -1.1%Industrial Production (YoY) NOV -11.2% na -1.0%Producer Prices (YoY) NOV -1.8% na 5.6%Unemployment Rate (%) NOV 7.7% na 7.8%Real Wages (YoY) NOV -4.5% na -3.0%Investment In Productive Capac NOV -17.9% na -14.5%Retail Sales (Real) (YoY) NOV -8.5% na -6.3%Disposable Income NOV 3.9% na 5.2%Israel Inflation Forecast DEC 2.5% na naMoney Supply (YoY) NOV 55.0% na na

Monday 14-Dec-2009 (GMT) Period Previous SG Forecast ConsensusIsrael Current Account (USD) 3Q 2079M na na

8:00 Czech Republic Industrial Output (YoY) OCT F -7.30% -7.30% na8:00 Construction Output (YoY) OCT 3.60% 2.00% na8:00 Retail Sales (YoY) OCT -7.60% -6.20% -4.6%

13:00 Poland Money Supply - M3 (Level) NOV 710906 na 705368Tuesday 15-Dec-2009 (GMT) Period Previous SG Forecast ConsensusSouth Africa National Holiday na8:00 Czech Republic PPI (Industrial) (MoM) NOV -0.2% -0.3% 0.0%8:00 PPI (Industrial) (YoY) NOV -4.6% -3.0% -2.8%8:00 Export Price Index (YoY) OCT -4.3% na na8:00 Import Price Index (YoY) OCT -9.3% na na8:00 Hungary Industrial Output (YoY) OCT F -10.8% na na8:00 Industrial Output (MoM) OCT F 1.8% na na8:00 Turkey Unemployment Rate SEP 13.4% na na9:30 South Africa CPI (all items) (MoM) NOV 0.0% na 0.1%9:30 CPI (all items) (YoY) NOV 5.9% na 5.9%

13:00 Poland CPI (MoM) NOV 0.1% na 0.4%13:00 CPI (YoY) NOV 3.1% 3.2% 3.4%14:00 Budget Level (Monthly Total) NOV -2570.7 na na14:00 Budget Perf. (Year to date) NOV 88.4% na na14:00 Budget Level (Year to date) NOV -24041.M na na16:30 Israel Consumer Prices (MoM) NOV 0.2% na 0.2%16:30 Consumer Prices (YoY) NOV 2.9% na 3.8%

Wednesday 16-Dec-2009 (GMT) Period Previous SG Forecast ConsensusCzech Republic Repo Rate Announcement 1.25% 1.00% 1.25%

8:00 Hungary Avg Gross Wages (YoY) OCT 0.7% na 0.8%8:00 Unemployment Rate NOV 10.4% na 10.5%8:00 Turkey Consumer Confidence NOV 80.5 na na

13:00 Poland Avg Gross Wages (MoM) NOV 0.9% na 3.4%13:00 Avg Gross Wages (YoY) NOV 2.0% 1.5% 3.0%13:00 Employment (MoM) NOV 0.0% na -0.2%13:00 Employment (YoY) NOV -2.4% -2.3% -2.4%

Thursday 17-Dec-2009 (GMT) Period Previous SG Forecast ConsensusRussia Gold & Forex Reserve USD na na na

9:30 South Africa PPI (MoM) NOV -0.1% na 0.2%9:30 PPI (YoY) NOV -3.3% na -1.8%

13:00 Poland Producer Prices (MoM) NOV 0.3% na 0.2%13:00 Producer Prices (YoY) NOV 2.0% 2.0% 2.4%13:00 Sold Industrial Output (MoM) NOV 1.9% na -5.6%13:00 Sold Industrial Output (YoY) NOV -1.2% 7.4% 6.6%

Publication of minutes na17:00 Turkey Base Rate 6.50% 6.25% na


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11 December 2009 5

Latin AmericaDuring the week Period Previous SG Forecast ConsensusArgentina Budget Balance NOV 702.7M na naBrazil CAGED Formal Job Creation NOV 230956 na naMonday 14-Dec-2009 (GMT) Period Previous SG Forecast Consensus13:00 Brazil Trade Balance (FOB) - Weekly $376M na na20:30 Mexico Industrial Production (YoY) OCT -5.7% na -3.5%Tuesday 15-Dec-2009 (GMT) Period Previous SG Forecast Consensus11:00 Brazil Retail Sales (YoY) OCT 5.00% na na11:00 Retail Sales (MoM) OCT 0.30% na na11:30 Chile Copper Exports NOV $2,482.30 na naArgentina Consumer Confidence DEC 40.49 na na21:00 Chile Nominal Overnight Rate Target 0.50% 0.50% 0.50%Wednesday 16-Dec-2009 (GMT) Period Previous SG Forecast Consensus10:00 Brazil FGV CPI IPC-S 0.47% na naThursday 17-Dec-2009 (GMT) Period Previous SG Forecast Consensus7:00 Brazil FIPE CPI - Weekly 0.20% na na10:30 COPOM Monetary Policy Meeting Minutes na na na12:00 FGV Inflation IGP-10 (MoM) DEC 0.07% na na15:00 Long Term Rate - TJLP 6.00% na na19:00 Argentina Unemployment Rate Total 3Q F 9.10% na na22:00 Brazil Tax Collections NOV 68839M na naFriday 18-Dec-2009 (GMT) Period Previous SG Forecast ConsensusColombia Overnight Lending Rate 3.50% 3.50% 3.50%

Industrial Production (YoY) OCT -3.80% na -3.10%Retail Sales (YoY) OCT -7.30% na -5.00%Publication of Inflation Report

11:00 Brazil Unemployment Rate NOV 7.50% na na12:30 Current Account - Monthly NOV -$2911M na na12:30 Foreign Direct Investment NOV $1563M na na19:00 Argentina Quarterly GDP-Constant Total 3Q -0.80% na na19:00 Industrial Production YoY NSA NOV 1.50% na na19:00 Industrial Prod. s.a. (MoM) NOV 0.20% na na


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11 December 2009

ASIADuring the week Period Previous SG Forecast ConsensusChina New Yuan Loans NOV 253.0B na 250.0B

Money Supply - M0 (YoY) NOV 14.10% na na

Money Supply - M1 (YoY) NOV 32.00% na naMoney Supply - M2 (YoY) NOV 29.40% na 29.00% Actual FDI YTD YoY NOV -12.60% na -9.10%South Korea Export Price Index (YoY) NOV -16.50% na naExport Price Index (MoM) NOV -3.00% na naImport Price Index (YoY) NOV -15.30% na naImport Price Index (MoM) NOV -1.10% na naIndonesia Money Supply - M1 (YoY) OCT 2.20% na naWholesale Price Index (YoY) OCT na na naMoney Supply - M2 (YoY) OCT 12.20% na naTotal Local Auto Sales NOV 52241 na naTotal Motorcycle Sales NOV 613979 na naThailand Total Car Sales NOV 53271 na naSouth Korea Department Store Sales YoY NOV 11.40% na naDiscount Store Sales YoY NOV 4.50% na na

Monday 14-Dec-2009 (GMT) Period Previous SG Forecast ConsensusNo planned event

Tuesday 15-Dec-2009 (GMT) Period Previous SG Forecast Consensus5:00 Singapore Retail Sales (YoY) OCT -11.80% na na5:00 Retail Sales (MoM) sa OCT -7.90% na -1.4%

Wednesday 16-Dec-2009 (GMT) Period Previous SG Forecast Consensus4:30 South Korea Unemployment Rate (SA) NOV 3.40% na naThursday 17-Dec-2009 (GMT) Period Previous SG Forecast Consensus5:00 Singapore Electronic Exports (YoY) NOV -13.80% na na5:00 Non-oil Domestic Exports (YoY) NOV -6.10% na na5:00 Non-oil Domestic Exp SA (MoM) NOV -13.00% na naPhilippines MPC meeting 4.00% 4.00% 4.00%Friday 18-Dec-2009 (GMT) Period Previous SG Forecast Consensus

Indonesia National HolidayMalaysia National Holiday

7:30 Thailand Foreign Reserves na na na7:30 Forward Contracts na na na

Source: SG Cross Asset Research, Komercni banka, Bloomberg


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11 December 2009 7

Central bank watchRati ng^ Outl ook Country Next Mee ti ng Last move (bp) Current Rate (%) SG View

What is priced in (bp

over 3m)

A- Stable Poland 23 Dec 09 unchanged 3.50 No change in the coming months 2

BBB- Negative Hungary 21 Dec 09 -50 6.50 We expect 50bp of rate cuts by year end -95

A Stable Czech Rep. 16 Dec 09 unchanged 1.25 50% probability of a cut at next meeting -13

BB+ Negative Romania 05 Jan 10 unchanged 8.00 No rate cuts before next year NA

BBB Negative Russia NA -50 9.00 We expect there to be a total of 50bp cuts left NA

BB- Stable Turkey 17 Dec 09 -25 6.50 We expect a 25bp cut by year end 0

BBB+ Negative South Africa 26 Jan 10 unchanged 7.00Key rate bottoming at 6.50% in the next 3-6

months51

A Stable Israel 28 Dec 09 25 1.00 We expect a 100bp hike in H1 2010 -11

BBB- Stable Brazil 27 Jan 10 unchanged 8.75First hike of 25bp in June, will tighten by

150bp in 201050

A+ Stable Chile 15 Dec 09 unchanged 0.50First hike of 50bp in Sep-10; total tightening

of 125bp by end of 2010.NA

BBB- Stable Colombia 18 Dec 09 -50 3.50First hike of 25bp in June, we expect

25bp/mo thereafter througout 2010NA

BBB+ Negative Mexico 15 Jan 10 unchanged 4.50First hike of 25bp in August, we expect

5.75% base rate by end 201016

A+ Stable China NA -27 5.31Rates will remain on hold into 2010. A hike in

the RRR is likley to be the first tightening0

BB- Stable Indonesia NA unchanged 6.50

BI left rates on-hold on Dec3. The message

from the central bank is that a softer inflation

outlook (5.5% in 2010) will mean delaying

any tightening

0

A- Stable Malaysia 26 Jan 10 unchanged 2.00Rates expected on-hold until 2010, BNM says

price pressures are benign0

BB- Stable Philippines 17 Dec 09 unchanged 4.00

Rates remain on-hold. Comments from

Deputy Governor following latest meeting

were dovish saying BSP, "has a neutral

stance with an easing bias."

0

A Stable South Korea 08 Jan 10 unchanged 2.00

BoK left rates on-hold on Dec 10, but the

statement clearly laid the groundwork for

tightening in Q1. The January meeting will be

a close call.

35

AA- Negative Taiwan 24 Dec 09 unchanged 1.25CBC indicated that policy will depend on

consumer prices, which are expected to stay

subdued until at least year-end

0

BBB- Negative India 29 Jan 09 unchanged 4.75RBI statement was hawkish, first hike is

expected in Q1 201035

BBB+ Negative Thailand 13 Jan 09 unchanged 1.25Interest rates to remain on-hold until mid

201020

Source: SG Cross Asset Research, KB, Bloomberg, Reuters (as at 10 Dec 09 close.). ^S&P ratings are used

-120

-100

-80

-60

-40

-20

0

20

40

60

80

PLN HUF CZK ZAR ILS TRY

FRA

-premium(

bp)

0

1

2

3

4

5

6

7

8

KeyPolicyrates(%)

3m 1m fwd* (LHS) 3m 2m fwd* (LHS) 3m 3m fwd* (LHS) Current base rate (RHS)


8/27

Emerging Weekly

11 December 2009

CIS 2010 OutlookThe oil price is a key driver for the RUB and KZT.Appreciation prospects are however limited for bothcurrencies. For the RUB, carry compression and lessfavourable current account developments will weigh in themedium term. The authorities in Russia and Kazakhstanwill also try to prevent a strong and fast appreciation oftheir currencies to preserve the competitiveness of thelocal industry.In Ukraine, financing issues persist despite the end of theeconomic recession. Numerous risks weigh on the fiscaldeficit and the restoration of relationships with the IMF willtake some time. We expect the UAH to weakensubstantially in 2010.

RUB: limited room for appreciation Rising REER adds to m anufacturing sectors woes. Therebound in manufacturing activity since the summer -following the sharp downturn in Q408 and Q109 isalready running out of steam. The improvement in outputreversed in October, following the PMIs drop below 50.The sector is still suffering from the tight credit conditions,and the strengthening of the rouble (from close to 41 vsbasket in February to a low of 35.07 in November) isundermining its price competitiveness. Although the REERhas not yet recovered to its pre-crisis level, the economy isnot in good enough shape to absorb further significantincreases. There is a debate ongoing over whether theauthorities should fight the stronger currency to supportdomestic producers, or let it rise to force them to improvetheir competitiveness. In any case, the central bank is likelyto continue intervening to smooth the RUBs volatility (onthe upside as well as on the downside), before the switchto free float and inflation targeting scheduled for 2012.

Graph 1. Rising REER

100

105

110

115

120

125

130

135

Jan-

06

Jun-

06

Nov-

06

Apr-

07

Sep-

07

Feb-

08

Jul-

08

Dec-

08

May-

09

Oct-

09

2005=100

Sources: SG Cross Asset Research, Ecowin, BIS

Lower interest rates reduce RUBs attractiveness. Theunexpectedly fast slowdown in inflation has allowed thecentral bank to cut its refinancing rate by 400bp sinceDecember 2008 to support the economy. Themanufacturing sector remains weak however, and labour

market trends remain negative for household consumption(although real retail sales recently recorded monthlyincreases). In this context, we expect the bank to lower therefinancing rate by another 50bp to 8.50% before the endof Q109. The carry compression will thus continue toreduce the attractiveness of the RUB. However, thewindow of opportunity to cut is narrowing. Favourabletrends in food prices have already started to reverse andthe liquidity provided by budget spending has alreadytriggered a rebound in the money supply.

Graph 2. Manufacturing PMI and outputy/y, 3ma

-25

-20

-15

-10

-5

0

5

10

15

Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09

30

35

40

45

50

55

60

Manufacturing output

PMI

Sources: SG Cross Asset Research, Ecowin, Reuters

Graph 3. Stabilising capital outflows

-140

-110

-80

-50

-20

10

40

Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09

bn USD

Sources: SG Cross Asset Research, Central Bank of Russia

Less favourable current account developments ahead The RUB has been supported by the recovery in oil prices

in 2009 that has triggered a comfortable trade surplus.However, once the recovery in domestic demand gathersmomentum, this will translate into higher imports. Thestronger the recovery, the higher the oil price needed tobalance the current account. On the capital flows side, thesituation has started to reverse. Outflows reached $53bnbetween January and October, but there have been inflowsin November and the authorities have voiced concernabout the resumption of large hot money inflows, ashappened in 2007. Their potentially destabilising impact onthe domestic financial market and real economy has


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11 December 2009 9

triggered some discussion about capital controls. We donot expect such measures to be implemented. The Russianauthorities have outlined less crude measures such asincreasing reserve requirements, caps on banks foreigncurrency positions and taxes on profits generated byselected transactions. Meanwhile, FDI inflows are likely toremain low unless the business environment becomesfriendlier for foreign investors.

ForecastsMar 10 Jun 10 Sep 10 Dec 10

Basket/RUB 35.10 35.00 35.50 35.80USD/RUB 28.20 27.80 28.50 29.50EUR/RUB 43.50 43.80 44.00 43.50Source: SG Cross Asset Research

UAH : to weaken su bstantially in 2010 Very gradual economic recovery. Signs of an economicrecovery have emerged and GDP will grow again in 2010,in our view. Activity in the industrial sector is improvingthanks to higher steel prices and a rebound in externaldemand, while private consumption is set to recover in2010. The government will intensify its support tohouseholds with an increase in the minimum wage andhigher social transfers. The public sector will also supportinvestment through higher infrastructure spending linked toEuro 2012. Nevertheless, the recovery will be very slow asaccess to credit for the corporate sector and householdswill remain limited. Credit growth to the private sector isvery likely to remain on its downward path in the comingquarters. Consumer demand will also be restrained byrising unemployment and falling real wages as inflation

remains high (13.6% in November), albeit down from apeak at 26.4% in mid-2008. All in all, we expect GDP togrow 2.5% in 2010 after contracting by about 15% in 2009.

Graph 4. Credit growth one of the main obstacles to strongeconomic growth

10%

20%

30%

40%

50%

60%

70%

80%

Jan-02 Feb-03 Mar-04 Apr-05 May-06 Ju n-07 Jul-08 Aug-0 9

y/y, %


The financing issue persists. The massive contractionof the economy has allowed a very rapid reduction of thecurrent account deficit. After a deficit of 7.2% of GDP in2008, the current account will be balanced in 2009 andshould post a small deficit of 1.5% in 2010. This rapid

reduction has been pivotal in the stabilisation of the FXmarket and will clearly be a positive factor for UAH.However, the key variable for FX will be fiscal policy in thecoming months. Although Ukraines public debt level isrelatively low, any widening of the fiscal deficit would havevery negative implications for the UAH given the absenceof capital inflows. The IMF programme has been damagedby President Yushchenkos decision to increase theminimum wage by 33%. The Fund did not disburse thefourth tranche of $3.8bn in mid-November. The return ofIMF money is crucial but unlikely before the presidentialelection. The difficulties encountered by Naftogaz areanother potential source of risk for the fiscal deficit. Thegas company is experiencing difficulties being paid by itsclients and is struggling to pay Gazprom, which is fuellingtensions with Russia. Finally, further capital injection intothe banking sector may be needed given the magnitude ofNPLs, which represent 30% of total loans. The IMF expectsthe deficit to be contained at 3.0-4.0% of GDP in 2010 after6.0%, but the risk of a wide slippage persists. Moreover,

the temptation to monetise the fiscal deficit exists. Thematerialisation of such a risk would be very negative forthe currency.

Graph 5. Current account deficit narrowed sharply thanksto recession but capital inflows plummeted too

2002 2003 2004 2005 2006 2007 2008 2009

-3

0

3

5

8

10

13

15

18 current account deficitFDI + Portfolio flows

bn$


Graph 6. Num erous risks weigh on fiscal deficit

0

2

4

6

8

10

12

2008 2009 2010

general government deficit

inc. Naftogaz and banks recapi talisation cos ts

% of GDP

Source: SG Cross Asset Research, IMF


10/27

Emerging Weekly

11 December 20090

Presidential election on 17 January . The first round ofthe election will be held on 17 January with a second roundin February if needed (very likely). Two candidates areahead in the opinion polls: current prime ministerTymoshenko and Yanukovich. A Tymoshenko victorywould be a more market-friendly outcome given herrelationship with the IMF. She was firmly opposed to theminimum wage increase.


USD/UAH 8.50 9.00 9.20 9.20Source: SG Cross Asset Research

KZT: gradua l appreciation Recovery ahead after a mild recession. The Kazakheconomy managed to experience only a mild recessiondespite the extent of the financial crisis and thevulnerability of the domestic banking sector. We expectGDP growth of 2-3% in 2010 after -2.0% in 2009. Therecovery in oil demand and prices is the key driver of theeconomic rebound. Industrial production has recoveredsince spring mainly thanks to the sharp increase in oiloutput, which reached 17% yoy on average in Q3. Outsidethe extraction industry, the situation remains bleak.

Graph 7. Industrial production has rebounded thanks to oiloutput

2004 2005 2006 2007 2008 2009

-10

-5

0

5

10

15

20

25% y/y 3ma

Totaloil production

Sources: SG Cross Asset Research, Ecowin

Credit growth has slowed markedly, which affected mainly

non-mining companies and households. A strong recoveryof credit growth is unlikely despite the central banks400bp rate cuts to 7% since July 2008 - as the authoritiesare tightening legislation to prevent a resumption of credit-fuelled overheating in the construction and banking sector,as happened in 2004-07. Tight credit, the collapse in houseprices and the fall in real wages in 2008 led to much lowergrowth of household consumption (from 11% yoy in Q42007 to flat in Q3 2008). It is now gradually recoveringthanks to the drop in inflation, which is restoring somepurchasing power.

Graph 8. No revival of credit

2002 2003 2004 2005 2006 2007 2008 2009

-25

0

25

50

75

100

125

150 % y/y

loans to companiesloans to households


Banking sector situation remains fragile. The financialcrisis dried up Kazakh banks foreign funding, which hadbeen behind the fast credit growth of the mid-2000s. Thebanks difficulties were amplified by the economicdownturn and drop in house prices that led to a sharpincrease in non-performing loans (total overdue loansreached 29.2% of total loans at the beginning ofNovember). The government took measures to protectdepositors and used part of the oil revenues accumulatedin the National Oil Fund to provide some financial supportto the banking system. It refrained however from bailingout banks, leading three of them to default and negotiatedebt restructuring. As the economy recovers, non-performing loans will probably peak in Q1 or Q2, helping tostabilise the banking system.

Graph 9. Current account balance to return to surplus

2002 2003 2004 2005 2006 2007 2008 2009

-10.0

-5.0

0.0

5.0

10.0

Current account balanceFDICurrent account balanceFDI

bn USD, 12-m accumulation


Small strengthening bias for the KZT. The recovery inoil prices will improve government finances and restore thecurrent account surplus. After a budget deficit of less than4% of GDP in 2009, the government expects a deficit of4.1% in 2010 based on the oil price averaging $50/bl.Public finances are not an issue, as public debt is only10% of GDP. The current account balance should record asmall deficit in 2009, as domestic demand collapsed andoil prices started to rebound, and the surplus could reach


11/27


11 December 2009 11

4% of GDP next year. Oil price developments are key forthe KZT, and have been supportive in the past few months.The central bank will however prevent a significantappreciation to preserve competitiveness and rebuild FXreserves. The authorities have warned against foreignspeculation on the currency. After the devaluation inFebruary, the KZT trading band was fixed at 145-155 perUSD. USD/KZT will likely gradually trend towards 145 inthe coming months.


USD/KZT 147 145 145 145Source: SG Cross Asset Research

[email protected]@sgcib.com


12/27

Emerging Weekly

11 December 20092

FX StrategyEUR/PLN 1 week view 1 month view

Although risk aversionmade a comeback, we donot think the PLNsrecovery trend is over

The downward path in EUR/PLN was interrupted last week as risk aversion spiked higher andEUR/USD weakened. Rising fears about Greeces public finances particularly affected CEEcurrencies. Although this issue may weigh for some time, we do not think the CEE currenciesrecovery trend is over. We expect the PLN to eventually rebound and continue strengtheningon the back of relatively strong and improving economic fundamentals. The latest economicdata have confirmed the positive momentum, although tight credit conditions will lead tomoderate GDP growth compared to previous years. Data due in the coming week shouldsupport the PLN. November CPI is expected to rise to 3.4% yoy (consensus) from 3.1% inOctober and wage growth is also likely to improve. However, the labour market situationremains difficult and unemployment will continue to rise for some time, preventing asignificant rebound in wage growth. Meanwhile, industrial output should continue togradually improve in the wake of the rising PMI (which jumped to 52.4 in November from48.8).

EUR/CZK 1 week view 1 month view

Both Czech GDP andinflation have bottomedbut we do not expect astrong revival

Key event of next week isthe CNB meeting: weexpect a tight call. CZKwill react accordingly

GDP figures for Q309 showed the Czech economy has emerged from recession, recordinggrowth for the second quarter in a row. The result was in line with the flash estimate whichshowed growth of 0.8% qoq. This means that the contraction of -4.7% yoy in Q209 eased to-4.1% yoy in Q309. However, this was mainly due to fiscal stimuli from abroad that supportedCzech exporters and producers. Inventories also contributed significantly to growth, aftertheir unsustainable reduction in previous quarters. Recent foreign data, particularly from theGerman industrial sector, suggest that the end of fiscal stimuli will bring another wave ofeconomic slowdown; this could show up in the Czech economy in Q409. For Q110, wecannot rule out the risk of a qoq decline in GDP, as the economy will have to deal not onlywith weaker foreign demand but also with the restrictive fiscal package. Nevertheless, thispackage will be less constraining than the government wanted. The state budget draft wasapproved by parliament, but with the removal of some mooted cost-saving measures. Thiswill lead to a wider gap, of probably 5.7%/GDP, than the 5.3% the government had targeted.

While the GDP figures were in line with the central banks forecast, November inflation

surprised on the upside. However, the first increase in consumer prices of 0.2% mom sinceFebruary was due solely to higher fuel, food and non-alcoholic beverage prices. These arecomponents the central bank cannot influence through its monetary policy. According to ourcalculations, yoy adjusted inflation stayed marginally in the red in November; in a momcomparison no increase in adjusted inflation was recorded. It is true that headline inflation is40bp above the CNBs current inflation prognosis. However, this leaves room for furtherdecreases in interest rates; we think a 25bp cut would be consistent with the data and theCNBs inflation forecast.

Thus, the economic indicators released this week did not solve the puzzle of the outcome ofnext weeks monetary policy meeting. The bank voted by 4:3 to keep rates unchanged at thelast meeting. Board member Zamrazilov, who voted for no change last time, admitted thatthe central bank may have room to lower interest rates if the inflation outlook remains benignand a decrease would help the economy recover from a recession. But, as she stressed, shewas undecided.

Because of uncertainty surrounding next weeks CNB meeting, we would expect someEUR/CZK reaction to the decision; the market is pricing in a 50% chance of a 25bp cut.However, we would not expect any long-lasting impact as the interest rate differential doesnot play a significant role in the exchange rate determination. EUR/CZK will be driven mainlyby global sentiment towards emerging currencies over the upcoming weeks.

EUR/RON 1 week view 1 month view Persistent politicaluncertainties and riskaversion weigh on theRO N

EUR/RONs recent downward trend was interrupted this week by the spike in risk aversionand domestic political developments. The victory of outgoing Romanian president Basescuin the second round of the presidential election on 6 December was somewhat of a surprise.The opinion polls had suggested the Social-Democrat leader Geoana was leading, but onlyby a small margin. The very close outcome (50.37% of votes for Basescu and 49.63% for


13/27


11 December 2009 13

EUR/RON dow ntrend willresume once/if the IMFprogramme is back ontrack

Geoana) led the opposition to contest the result. The constitutional court will say in a fewdays whether it will overturn the result. In any case, political uncertainty is not over. IfBasescus victory is confirmed, Romania will be back in the pre-election situation, with themajority in parliament against the president. This will complicate the nomination of primeminister and the formation of a government. The longer the deadlock, the longer the IMFpayment will be delayed. Broad support for the economic programme is needed but thegovernment will most likely be a minority one and it will not be easy to pass the necessarymeasures.

In this context, we expect the central bank to keep its key rate unchanged again on 5January, as the fate of the IMF programme will probably still be uncertain at that time.

Although the weakness of the economy, tight credit conditions and the slowdown in inflationprovide room for further rate cuts, tensions on the money market and on the RON exchangerate will keep the NBR cautious. FX-wise, RONs upward move has been interrupted butdownside potential is limited to 4.29-4.30 by the central banks interventions. The EUR/RONdowntrend will resume once/if the IMF programme is back on track.

USD/TRY 1 week view 1 month view

CBRTs decision will be aclose call

Leading indicatorssuggest that the recoveryis slow and vulnerable

A no change decisionwould be TR Y-positive

The last key event of the year will be the central bank meeting on 17 December. This meeting

is important as it will seal the end of the rate cut cycle, in our view. We still see the possibilityof a final 25bp cut to 6.25% but the decision will be a close call. The minutes of the last MPCmeeting made a final rate cut less certain as the wording didnt directly mention further cuts.Moreover, market perception has also changed since the release of the October industrialproduction number, which showed an unexpected rise of 6.5%. It was the first positivereading since July 2008. GDP contraction also slowed to -3.3% yoy in Q3 after -7.9%,confirming that the Turkish economy has definitely left the recession phase.

However, leading indicators suggest that the recovery is slow and vulnerable. ManufacturingPMI fell for the fourth month in a row in November, while the central banks surveys signalledthat both business and household confidence are deteriorating after the improvement fromMarch-July. Moreover, the capacity utilisation rate in the manufacturing sector fell to 70.7%in November after 71.8%. This raised some doubts about the sustainability of the recentrebound seen in manufacturing production.

All in all, our scenario favours a last cut of 25bp. However, we would not be surprised if theMPC preferred to keep rates unchanged; this would in fact prove TRY-positive. We believe

the end of the carry compression will be a key parameter for the TRY in the coming months.For now, we stay long TRY/ZAR (directional view) and recommend selling USD/TRY above1.50 (tactical view).

USD/BRL 1 week view 1 month view

The 1.70 to 1.78 range isnow eight weeks old. Weexpect it to continue tohold and retain our DNT

Bacen has beenintervening at a pace ofabout $400m per dayover the past week.Reserves data suggestsBacen intervenesheaviest on days whenBRL rallies

USD-BRL first tested 1.7000 on 14 October. The Brazilian authorities then went on theoffensive the following week, mounting an aggressive verbal intervention campaign and re-imposing the IOF transaction tax. Since then, USD-BRL has traded inside a narrow rangebounded by 1.70 and 1.78. It has tested 1.70 on various occasions and met with substantialcentral bank intervention, according to daily reserves data. This week, the 1.78 level hasbeen tested on a couple of occasions and has held, apparently due to exporter sell ordersabove 1.77. We think 1.78 will continue to hold and retain our enthusiasm for the 6-monthdouble-no-touch (DNT) digital option we added to our model portfolio three weeks ago. Thatposition has slipped a touch in the past few days, but should gain it back if spot USD/BRL

moves back below 1.75 over the next few days, as we expect.As expected, the central bank of Brazil (Bacen) kept its base rate unchanged at 8.75% on 9December. The statement was identical to that of the 21 October. The decision wasunanimous and the committee gave no bias for the next rate move. The minutes will bereleased on 17 December and are likely to repeat the dovish tone of previous releases andrecent public comments by Bacen officials. The latter might become a bit more hawkish ifUSD/BRL were to move back above 1.90 because BRL appreciation has been an importantcontributor to bringing inflation below the 4.50% target. For now however, Bacen welcomesa low volatility environment in FX and probably hopes to be able to keep the base rateunchanged for three to six more months and thereby solidify economic recovery. Bacen hasbeen able to step away from the FX market in the past few days according to daily FXreserves data. After growing by an average of $400m per day in the first week of December,


14/27

Emerging Weekly

11 December 20094

reserves have been essentially unchanged, which suggests that Bacen retired to thesidelines as USD/BRL moved upwards from 1.70.

USD/MXN 1 week view 1 month view We remain constructiveon MXN and comm ittedto our two m odel portfoliotrades, despite acutevolatility this week

Some angst in marketover lesser status ofCordero, the replacementfor finance ministerCarstens (whosbecoming Banxicogovernor). We believe thiswill pass quickly

Our long MXN/CLP position has experienced a wild ride this week, principally due to volatilityin USD/MXN. That volatility has also had a negative impact on our USD/MXN vs USD/TRY volswap pairs trade. Despite these setbacks, we remain generally constructive on MXN andexpect USD/MXN to ease back below 12.80 in the coming week. As we noted last week, longMXN positions on the IMM had gotten too large, making them ripe for a run on stops, whichis what occurred in the past few days. Now that the run is complete, volatility in USD/MXN islikely to settle down, even if volatility in equities and other risk assets heats up.

The main event of the coming week in Mexico should be the confirmation of nominee Augustin Carstens as Banxico governor. Mexicos congress is scheduled to close for theyear after the 15th, so hearings are likely to be on that date, even though as we write theyhavent been scheduled yet. After his nomination, Carstens said on radio that Banxico wouldhave a relatively long period to revise its monetary policy stance. Although thatpronouncement was a bit more dovish than the Ortiz-led Banxico typically uttered, Carstensis a former research director at Banxico, in addition to having been well respected for his

conservative monetary and fiscal principles when he was finance minister. The bigger issuefor markets has been his announced replacement in that role: Ernesto Cordero. He does nothave the stature that Carstens had when he took up the FM role, which has led to somemarket angst about his ability to pass further energy and tax reforms and hammer throughfuture budgets. That concern is probably overdone and we think will recede when growthand oil prices pick up early next year.

USD/CLP 1 week view 1 month view CLP outperformed thisweek due to unwinding ofBRL/CLP and MXN/CLPcarry trades

BCCh and financeministry have threatenedintervention. There is achance the threat andstrong CLP will be inTuesdays BCChstatement

Finance ministry says ithas money forintervention, but in nextyears budget

First rounds ofpresidential andlegislative elections onSunday 13 December.Ruling party of past 20years could lose power -would be a big newsevent, but not a bigmarket event

The Chilean peso has rallied modestly over the past week, with USD-CLP falling back below500. The rally comes despite a 7% decline in copper prices and weak November CPIreadings of -0.5% mom and -2.3% yoy. The reason for CLPs weakness seems more centredin Brazil and Mexico. Both MXN and BRL have fallen against the USD over the past week.Widespread use of CLP as a funding leg for long positions in BRL and MXN has caused CLPto rally as MXN and BRL sell off.

The central bank (BCCh) and the finance ministry have already given very explicit warningsabout intervening if the CLP rises further. BCCh has also conducted monetary policy in a waythat is designed to stem CLP strength. We expect it to keep its base rate at 0.50% and issueanother dovish statement after its Tuesday (15 December) meeting. There was nothing out ofthe ordinary in the BCChs reference to FX in its November press release, but at that pointUSD/CLP had yet to break below 500. We believe there is a good chance that FX will bementioned more pointedly in this statement.

In its intervention threats, the finance ministry noted that it had built FX intervention costs intothe 2010 budget. But the fact that the budget is for next year, when there will be a newpresident and finance minister, creates some limited room for USD/CLP to trade below 500between now and the end of the year, but all the central bank needs to do is call to checkrates and it is able to push USD/CLP back above 500.

The first round of the presidential election is this Sunday (13 December). Polls suggest thatcentre-right candidate Sebastian Piera will capture the most votes but wont have the 50%+majority necessary to avoid a second round. Former president Frei of the ruling centre-left

Concertactin coalition is in a tight battle with centre-left independent Marco Enriquez-Ominami for second place and the right to advance to the second round of voting on 17January. A Frei loss would be politically upsetting for a country that has been ruled byConcertactin for 20 years, but it is unlikely to unsettle the markets. An outcome where Freifails to advance and Piera is the obvious winner for president in the second round, butConcertactin retains control of the legislature, would be particularly interesting. Such anoutcome would arguably lead to Mexico-like gridlock and potentially have a negative impacton the ability to pass economic reforms. However, there is no obvious need for reforms at themoment and therefore no likely market impact from the election.


15/27


11 December 2009 15

USD/IDR 1 week view 1 month view

Reassessment of globalrisk appetite will put IDRunder some pressure

Until recently, the IDR had been performing strongly in 2009. However, it has recentlyunderperformed and is set to weaken modestly in the near-term and be a middle-of-the-packperformer in 2010. Comments from the central bank following the 3 December policy meeting

suggested some concern over unchecked currency strength. This has prompted a review ofIDR expectations by investors who thought that a stronger IDR would not only be toleratedbut encouraged. Other risks for the currency are any renewed deterioration in trade andcurrent account positions, or a policy misstep by Bank Indonesia.

Heading into year-end, a clear reassessment of risk appetite is at play, with commodity priceslower and the USD firmer against most currencies. If USD gains reflect a more constructiveglobal demand outlook, the IDR as a pro-cyclical currency should perform well. Still, thecentral banks change in tone suggesting a heightened focus on export competitiveness willbe a counter-balancing influence, leaving little chance of a repetition of the 2009outperformance.

We target USD/IDR spot at 9,700 (last 9,435), but expect this level to provide a sellingopportunity. The current premium in USD/IDR NDFs is rich for entering IDR shorts (1M +69bpand 6M +244bp), so we will use the NDF premium on a spot rally towards 9,700 to establishlong IDR trades against a basket of G7 currencies.

USD/INR 1 week view 1 month view

Portfolio and FDI flowsprovide strong support tothe INR

We expect some consolidation in USD/INR over the next couple of weeks. But we ultimatelytarget resumption of INR strength, both on the impact of inflows and in tune with a generalmove towards Asian currency strength. INR gains will be underpinned by maintenance ofstrong portfolio and FDI inflows, in our view. The Reserve Bank of India has been one of themost interventionist of central banks in 2009. However, we believe resistance to moderatecurrency gains is waning at the same time as policymakers contemplate rate hikes, with thefirst 25bp looking set to be delivered in Q1.

The INR has posted modest performance ytd, up just 4.3% against the USD. But it hasoutperformed other Asian currencies during the past couple of months, gaining 5.2% againstthe dollar as markets reacted to a stronger-than-forecast pick-up in activity data. Industrialproduction has rebounded on a recovery in exports. However, the trade account remains in

deficit and will be a drag on what would otherwise be outperformance in 2010.The RBI next meets to decide on rates on 29 January. It will be a close call on whether or notto deliver a 25bp hike. At the last meeting the SLR was raised 100bp and inflation forecastswere revised higher. To position for rate tightening, which we expect will be aggressive onceunder way, we recommend 1yr 2yr OIS flatteners (entry 75bp, target 30bp, stop loss at 95bp).

[email protected][email protected]@[email protected]


16/27

Emerging Weekly

11 December 20096

Technical analysis BRL/ILS: ST bearish signal

BRL/ILS should breakbelow the late October low of2.13 and dip to the 1.99/2.03

support area.

Following the down-movestarted at 2.19 in mid-November, which revealed anLT declining resistance line,BRL/ILS broke below the lowerend of its MT rising channel.

This bearish signal is confirmedby the bearish configuration ofthe 14-week RSI.

So we expect BRL/ILS to breakbelow the late October low of2.13, which is in sight, and

extend the decline from 2.19 tothe 1.99/2.03 support area (*).

The cross should then attemptto reverse upwards.

(*) Pullback level and lows of Juneand August 2009.

3 rd support 2nd support 1st support Last 1st resistance 2nd resistance 3rd resistance1.99/2.03 2.09 2.13 2.15 2.19 2.25 2.29

EUR/CZK: ST corrective up-move before return to mid-September low of 24.95 EUR/CZK The MTdeclining resistance line,

which comes at 26.42 this

week (-0.036/week), should

cap the upside and force

EUR/CZK to return to the mid-

September low of 24.95, with a

step at 25.35.

EUR/CZK has recovered slightly

this weeks from 25.58,revealing an ST rising supportline drawn from the mid-September low of 24.95.

This up-move probably aims toconsolidate the recent sell-off.We expect the MT decliningresistance line, which comes at

26.42 this week (-0.036/week),to cap the upside and forceEUR/CZK to return to the 24.95low, with a step at 25.35.

Thereafter, EUR/CZK shouldbreak below 24.95 and targetthe July low of 22.89, with astep at 23.70.3 rd support 2nd support 1st support Last 1st resistance 2nd resistance 3rd resistance

24.95 25.37 25.58 25.77 25.83 26.23 26.42

[email protected] & [email protected]

WEEKLY CHART

14-week RSI

2.13

1.59

MT rising channel

LT resistance line

2.19

1.99/2.03

WEEKLY CHART

24.95

26.58/76

MT resistance line

22.89

23.70

29.67

ST support line


17/27


11 December 2009 17

FX QuantsightEM crosses (1y valuation) EM crosses (7y valuation)C r o s s r a t e

V a l u em arket

V a l u em odel z -sco re

A U D / T R Y 1 .3 7 1 .3 0 2 .2 8

C A D / T R Y 1 .4 2 1 .3 8 2 .1 1

C Z K / H U F 1 0 .6 3 1 0 .2 6 1 .8 1

E U R / T R Y 2 .2 2 2 .1 7 1 .5 7

P L N / H U F 6 6 .2 2 6 4 .1 9 1 .5 7

C H F / T R Y 1 .4 7 1 .4 3 1 .4 7

N Z D / T R Y 1 .0 7 1 .0 4 1 .4 4

M X N / H U F 1 4 .4 2 1 3 .9 6 1 .4 3

A U D / P L N 2 .5 5 2 .4 8 1 .1 2

B R L / M X N 7 .3 3 7 .1 8 0 .7 8

B R L / P L N 1 .6 0 1 .5 6 0 .7 2

B R L / C Z K 9 .9 5 9 .7 6 0 .6 9

B R L / Z A R 4 .2 9 4 .2 3 0 .5 7

J P Y / K R W 1 3 .2 2 1 3 .1 2 0 .3 5

C A D / P L N 2 .6 5 2 .6 3 0 .2 2

N Z D / P L N 1 .9 9 1 .9 9 0 .1 0C H F / P L N 2 .7 4 2 .7 4 -0 .0 3

P L N / M X N 4 .5 9 4 .6 0 -0 .0 7

Z A R / J P Y 1 1 .6 1 1 1 .6 4 -0 .1 0

M X N / C Z K 1 .3 6 1 .3 6 -0 .1 4

M X N / C A D 0 .0 8 0 .0 8 -0 .1 7

P L N / C Z K 6 .2 3 6 .2 5 -0 .2 0

C Z K / J P Y 5 .0 1 5 .0 4 -0 .3 2

G B P / P L N 4 .5 6 4 .6 1 -0 .3 9

M X N / J P Y 6 .8 0 6 .8 6 -0 .4 8

P L N / J P Y 3 1 .2 1 3 1 .5 4 -0 .5 0

G B P / C Z K 2 8 .4 1 2 8 .8 6 -0 .6 4

T R Y / Z A R 5 .0 1 5 .1 8 -0 .9 8

T R Y / B R L 1 .1 7 1 .2 3 -1 .3 6

T R Y / M X N 8 .5 5 8 .7 9 -1 .4 0

H U F / J P Y 0 .4 7 0 .4 9 -1 .7 4

T R Y / J P Y 5 8 .1 3 6 0 .3 3 -2 .0 1

C r o s s r a t eV a l u e

m arketV a l u e

m ode l z -sco re

A U D / T R Y 1 .3 7 1 .2 3 2 .3 2

A U D / P L N 2 .5 5 2 .2 3 2 .0 3

C A D / P L N 2 .6 5 2 .3 9 1 .8 0

N Z D / T R Y 1 .0 7 0 .9 8 1 .7 9

B R L / P L N 1 .6 0 1 .3 9 1 .7 4

B R L / C Z K 9 .9 5 9 .0 3 1 .6 1

B R L / M X N 7 .3 3 6 .4 3 1 .5 9

N Z D / P L N 1 .9 9 1 .7 8 1 .4 7

C H F / P L N 2 .7 4 2 .5 6 1 .4 7

C A D / T R Y 1 .4 2 1 .3 2 1 .4 5

J P Y / K R W 1 3 .2 2 1 2 .6 0 1 .2 5

C H F / T R Y 1 .4 7 1 .4 1 1 .2 3

E U R / T R Y 2 .2 2 2 .1 8 0 .5 8

C Z K / H U F 1 0 .6 3 1 0 .3 3 0 .5 1

Z A R / J P Y 1 1 .6 1 1 1 .1 0 0 .3 5

T R Y / M X N8 .5 5 8 .4 0 0 .3 4

M X N / H U F 1 4 .4 2 1 4 .4 9 -0 .1 2

G B P / P L N 4 .5 6 4 .6 0 -0 .1 3

B R L / Z A R 4 .2 9 4 .4 0 -0 .2 0

P L N / M X N 4 .5 9 4 .6 5 -0 .2 9

P L N / H U F 6 6 .2 2 6 7 .3 0 -0 .3 2

M X N / C Z K 1 .3 6 1 .4 0 -0 .3 8

G B P / C Z K 2 8 .4 1 2 9 .9 6 -0 .6 2

T R Y / B R L 1 .1 7 1 .3 1 -0 .8 5

M X N / C A D 0 .0 8 0 .0 9 -1 .0 6

P L N / C Z K 6 .2 3 6 .5 2 -1 .1 1

T R Y / Z A R 5 .0 1 5 .7 4 -1 .2 2

C Z K / J P Y 5 .0 1 5 .4 1 -1 .4 3

M X N / J P Y 6 .8 0 7 .5 9 -1 .5 3

H U F / J P Y 0 .4 7 0 .5 2 -1 .8 0

P L N / J P Y 3 1 .2 1 3 5 .2 4 -1 .8 8

T R Y / J P Y 5 8 .1 3 6 3 .7 2 -2 .0 7

PCA on EM vol (ATM, 3M, USD base) Risk premia for EM volatilitiesV o la t i l i ty z -s c o r e

V a lu e

m a r k e t ( % )

V a lu e

m o d e l ( % )

M X N 1 .3 5 1 5 .3 0 1 2 .4 3

IN R 1 .0 6 1 2 .1 5 1 0 .6 6

P L N 0 .9 3 1 9 .1 2 1 8 .0 1

B R L 0 .6 0 1 7 .8 0 1 6 .9 4

C Z K 0 .4 0 1 5 .3 0 1 4 .9 9

H U F 0 .1 9 1 8 .5 2 1 8 .3 4

ID R 0 .1 7 1 3 .9 6 1 3 .5 9

Z A R - 0 .4 0 1 9 .8 8 2 0 .3 7

K R W - 0 .6 2 1 3 .5 0 1 4 .9 5

S G D - 1 .6 7 6 .6 2 7 .3 3

T R Y - 1 .8 7 1 2 .9 9 1 6 .0 4

Currency

pair Expiry

Implied

vol (%)

Realised

vol (%)

Risk

premium

USD/KRW 2Y 15.0 24.2 0.6EUR/CZK 2Y 7.3 11.1 0.7EUR/PLN 1Y 12.9 17.1 0.8EUR/CZK 1Y 8.5 11.2 0.8EUR/PLN 2Y 12.0 15.4 0.8EUR/HUF 1Y 12.5 15.7 0.8

USD/KRW 6m 14.3 11.0 1.3USD/KRW 3m 13.5 10.1 1.3USD/BRL

3m 17.9 13.4 1.3USD/MXN 6m 16.0 11.5 1.4USD/KRW 1m 12.0 8.3 1.4USD/BRL 1m 17.4 11.9 1.5

Source: SG Cross Asset Research


18/27

Emerging Weekly

11 December 200918

Fixed Income StrategyHow to play 2010 themesFollowing on from our CEEMEA local strategy outlook (seeFixed Income Outlook 2010), we spell out the specifictrades which play well with the following three key themes:

1. Differentiation does matter receive PLN 5y IRS vs payRUB 5y CCS2. Monetary cycles favour CEEMEA rates over Asia/LatAm receive South Africa vs pay Brazil short rates3. Steepening has not necessarily faded yet Enter a PLN2s5s flattener around +80bp during H1 2010

Limited impact on EM bond funds from recent worriesBUT differentiation remains keyRecent concerns on Dubai and Greece do not seem tohave put investors off emerging market debt, as evident inthe latest fund flow data from EPFR Global, which stillshows inflows into EM bond funds (see Graph 1).

In CEEMEA, non-resident holdings of government debt forPoland, Czech Republic, Turkey and South Africa are alsoshowing an upward trend. However, non-resident holdingsof Hungarian local debt are clearly lagging (see Graph 2).This reiterates the importance of differentiation asdiscussed in our2010 Outlook. To recap, we favour localmarkets (1) with lower external debt and/or loan losses and(2) lower FX intervention risk, especially where local ratesare highly correlated with FX.

Strategy: Receive 5y Polish IRS vs pay Russia crosscurrency swaps (CCS) to express our preference forPoland over Russia based on the two considerationsabove.We choose 5y because it offers some duration andis less affected by monetary policy bias. We look to receivePLN 5y IRS from 5.60% (see Graph 3) and enter the Russialeg towards the first half of March as we expect inflation torebound and RUB to depreciate into H1 2010 (see FX

Outlook 2010 ), correcting the appreciation trend. Currentspread is -255bp. Target -460bp.

Estimated carry is +50bp a year (assuming equalweightings on both legs). Due to the higher beta status ofRussian rates, we recommend underweighting the RUBleg, which should improve the carry further.

Deferring monetary cycles favours CEEMEA rates overAsia/LatAm peersCEEMEA is likely to lag LatAm and Asia in reversing theeasing cycles. In fact, we think cuts are still possible in theCzech Republic, Hungary, Russia, Romania, South Africaand Turkey (see2010 Outlook). In LatAm, we expect Brazilto lead the hiking cycle as early as end-Q2 2010.

Strategy: Receive ZAR 1y1y forward vs pay Brazil DIfutures in mid 2011-2012 maturities (Graph 4). We alreadyhave a ZAR 1y1y receiver position in our portfolio from July2009. We maintain this position to play this theme and useany spike up towards 8.20% as an opportunity to increase

Graph 1. EM bo nd fund flows are still up

-1

3

7

11

15

19

Jan 04 Mar 05 May 06 Jul 07 Sep 08 Nov 09

All EM Funds Cummulative Flow US$ in bn

All EM Bond Funds 5y average

USDbn

Source: SG Cross Asset Research, EPFR Global

Graph 2. Non-resident debt holdings for CE3 and Turkey

8

13

18

23

28

33

38

43

Jan 04 Jul 05 Dec 06 May 08 Oct 09Non-residentholdingsoflocalgovt

debt*

Czech Poland Hungary Turkey

%

Source: SG Cross Asset Research, Bloomberg, Ministry of Finance. * includes external debt for

the Czech Republic

Graph 3. PLN 5y IRS and RUB 5y C CS

5

10

15

20

25

30

35

Dec 07 May 08 Sep 08 Feb 09 Jun 09 Nov 09

4

4.5

5

5.5

6

6.5

7

RUB 5y CCS (LHS) PLN 5y IRS (RHS)

% %

Source: SG Cross Asset Research, Bloomberg


19/27


11 December 2009 19

this position. Target: 7.75%. Carry is positive at +15bp overthree months.

We choose Brazil rates as we expect it to lead the hikingcycle in LatAm. Hikes are already priced in. Hence, we look

for a more hawkish stance from the Bacen or more robustinflation data to establish the payer position.

Varying curve dynamics suggest selective flattenersIt is premature to assume a flattening bias for the wholeregion at this juncture, as easing bias remains for somecountries in this region (see2010 Fixed Income Outlook).

Taking into consideration the monetary policy cycle,fundamentals and relationship with the euro curve (onwhich we expect further bull flattening in 2010), we advisepositioning for a flattener in Poland.

Strategy: Look to position for a PLN 2s5s flattener (seeGraph 5) around +80bp during H1 2010. Target +50bp.

[email protected]

Graph 4. ZAR 1y1y fwd and Brazil Jan 12 DI

7

8

9

10

12

13


12

13

15

16

18

ZAR 1y1y fwd (LHS) Brazil Jan 12 DI (RHS)

% %


Graph 5. PLN 2s5s IRS curve

-53

-29

-5

18

42

66


PLN 2s5s IRS Curve

bp



20/27


11 December 200920

Issuance CalendarDate Issuer Bond Planned Amount (Bn local ccy)* Bid-Cover

01-Dec-09 Hungary 3M T-Bill D100310 40.00 3.24

South Africa R203 1.30 4.38R208 0.80 5.21

02-Dec-09 Poland OK0712 1.44 3.80

PS0415 3.63 1.55

Czech 15Y 2009-2024, 5.70% Bond 3.03 2.60

03-Dec-09 Czech T-Bill 579 5.00 Cancelled

Hungary 2013/E 7.50% 25.00 1.72

2015/A 8.00% 20.00 2.40

2019/A 6.50% 10.00 2.89

04-Dec-09 South Africa T-Bill 364 day 0.30 1.68

T-Bill 273 day 0.70 2.01

T-Bill 182 day 0.90 2.08

T-Bill 91 day 3.65 1.35

R197 Inflation-linked bond 0.50 1.00

R202 Inflation-linked bond 0.10 1.16

07-Dec-09 Israel ILGOV 4% 03/2012 0.25 3.28

ILGOV 4.5% 01/2015 0.25 2.08

ILGOV 5% 01/2020 0.50 3.27

ILFRN 5/2020 0.25 10.15

08-Dec-09 Turkey 20m zero coupon 1.02 3.04

Hungary T-Bill D100317 40.00 3.69

South Africa R204 1.00 4.61

R207 1.10 5.15

09-Dec-09 Poland IDS1018 (BGK) 1.91 2.10

10-Dec-09 Hungary T-Bill D101215 40.00 1.87

11-Dec-09 South Africa T-Bill 364 day 0.30

T-Bill 273 day 0.70

T-Bill 182 day 0.90

T-Bill 91 day 3.65

R197 Inflation-linked bond Total I/L offer = 0.6

R210 Inflation-linked bond

R202 Inflation-linked bond

14-Dec-09 Israel ILGOV 4.5% 01/2015 0.25

ILGOV 5% 01/2020 0.25

ILCPI 1.5% 06/2014 0.25

ILCPI 3% 10/2019 0.25

ILTBIL0 08/2010 0.25

15-Dec-09 South Africa R209 0.90

R157 1.20

16-Dec-09 Poland T-bond switch auction

17-Dec-09 Hungary 2013/E 7.50% 25.00

2015/A 8.00% 15.00

2019/A 6.50% 10.00

18-Dec-09 South Africa Treasury Bills

21-Dec-09 Israel ILGOV 5% 01/2020 0.25

ILCPI 4% 5/2036 0.25

ILFRN 5/2020 0.25

ILTBIL0 08/2010 0.25

22-Dec-09

23-Dec-09


25-Dec-09

28-Dec-09

29-Dec-09

30-Dec-09


Source: SG Cross Asset Research, Ministry of Finance, Reuters, Bloomberg

*Past auctions show amount sold, Czech Republic,Israel Bid-Cover ratio is calculated from the competitive auction


21/27


11 December 2009 21

Rates QuantsightPCA Results across EM curves

PLN HUF CZK ZAR M XN10 Y 5.61% (0.0bp) 6.96% (+16.0bp) 3.48% (-1.0bp) 8.78% (+1.0bp) 8.26% (+10.2bp)10Y-2Y 68.0bp (+1.0bp) 34.9bp (+4.5bp) 117.0bp (+4.0bp) 117.5bp (-4.5bp) 193.5bp (-11.3bp)Level indicator 93.7% (-0.8%) 11.1% (+3.8%) 45.1% (-3.1%) 58.8% (-1.4%) 38.0% (+10.2%)Slope indicator 53.7% (+1.7%) 100.0% (+9.7%) 82.8% (+6.4%) 96.5% (+4.9%) 58.4% (+1.6%)Convexity indicator 32.2% (+1.6%) 20.6% (+2.5%) 34.1% (+7.4%) 16.6% (+4.9%) 43.0% (-2.4%)Level explanatory power 98.1% 99.6% 94.3% 83.0% 82.3%Slope explanatory power 1.7% 0.3% 4.8% 16.4% 14.9%Convexity explanatory power 0.2% 0.0% 0.6% 0.4% 1.8%Top driver 5Y 2Y 7Y 7Y 7Y Best flattener 7Y-10Y 5Y-7Y 5Y-10Y 2Y-5Y 2Y-7YInd. mid / spread to model 1.0bp (+1.5bp) 4.0bp (+2.4bp) 47.0bp (+2.7bp) 83.0bp (+0.4bp) 167.3bp (+12.6bp)z-score 0.90 0.99 2.45 0.48 2.16Total carry and rol l-down (3M) -1.1bp -1.7bp -0.2bp 18.4bp -6.4bpBest steepeners 5Y-7Y 2Y-5Y 5Y-7Y 5Y-7Y 7Y-10YInd. mid / spread to model 3.0bp (-1.0bp) 36.9bp (-1.5bp) 19.0bp (+0.6bp) 17.0bp (-0.8bp) 26.3bp ( -11.8bp)z-score -0.84 -0.90 0.40 -0.47 -2.14Total carry and rol l-down (3M) 3.9bp 10.3bp 0.7bp -0.8bp 4.6bpBest barbell payer (*) 5Y-7Y-10Y 3Y-5Y-7Y 3Y-5Y-7Y 5Y-7Y-10Y 3Y-5Y-7YInd. mid / spread to model 2.0bp (-2.5bp) 13.5bp (-2.9bp) 12.0bp (-5.9bp) 14.5bp (-1.5bp) 29.3bp (-0.8bp)z-score -0.95 -0.68 -2.06 -0.46 -0.10Total carry and rol l-down (3M) 2.7bp 2.8bp 4.2bp -1.5bp 3.8bpCorrelation with levels 77% 1% 11% 48% -41%Correlation with slope 22% 52% 92% 59% 43%Correlation with convexity -16% -44% -30% -3% 57%Best barbell rec (*) 2Y-5Y-8Y 5Y-7Y-10Y 2Y-5Y-8Y 2Y-5Y-8Y 2Y-5Y-8YInd. mid / spread to model 61.0bp (+1.6bp) 10.0bp (+4.3bp) 42.0bp (-0.9bp) 63.0bp (+1.4bp) 84.5bp (+16.2bp)z-score 0.83 0.90 -0.36 0.69 1.83Total carry and rol l-down (3M) -5.5bp -0.1bp -3.4bp 17.8bp 3.8bpCorrelation with levels 92% 64% 18% 50% -53%Correlation with slope 25% -28% 92% 82% 54%Correlation with convexity -29% -74% -35% -2% 41%* using standard 50-50 barbell weights

Cuvnicors

Besopeae

Bebabes

Source: SG Cross Asset Research


22/27


11 December 200922

CNB Watch CNB will have to decide on rates - the vote will betight againThe CNB will have its last monetary policy meeting for

this year on Wednesday. The previous meeting provokedsome misunderstanding of the CNBs decision to keeprates on hold at 1.25%. The confusion arose because theCNBs new forecast had indicated it would cut by 75bp.

Arguments to keep rates unchanged were not strongenough to justify this decision, in our view. In fact, not allmembers voted to keep rates on hold: three membersout of seven voted for a cut of 25bp (governor Tuma,vice-governor Singer and chief executive directorTomsik).

First, we take a look at the most important data releasesand the development of EUR/CZK during the pastmonth, which affect the bank boards decision.Consumer price inflation in November was 40bp abovethe new CNB forecast and this deviation was caused

mainly by fuel prices and to a lesser extent by theadjusted inflation. GDP qoq dynamics for Q309 wereslightly worse than expected (on the other hand, the yoyfigure was better due to CSO revisions). From astructural point of view, the dynamics of household andgovernment consumption were better than the CNBexpected. Exceptionally good wage data for Q309 werecaused by temporary factors and the fact that the layoffsaffected lower-paid employees to a larger extent (whichhad the statistical effect of improving the average). TheCNB considered the Czech crown as a pro-inflationaryrisk factor, which reflected the temporary weakening ofthe CZK against the EUR above 26.50 just ahead of thelast meeting. Meanwhile, the crown strengthened and sofar vs the euro in Q4 09 is almost in line with the latest

CNB forecast. Oil prices in EUR terms are only slightlyhigher. Overall, the data are rather pro-inflationary. Butthe CNB forecast did trail a cut of 75bp; the pro-inflationary data in our view merely reduces the size ofthe likely cut, not its probability. Thus, judging from thecentral banks forecast, we should see a cut of 25bp.

However, the bank boards last decision tells us it doesnot have to accept the recommendation from its forecast(e.g. due to financial stability or potential growthuncertainty).

Second, we look at the latest comments of thosemembers who did not vote for a cut (four out of seven) tosee if there is a chance of them changing their mind. Ifone of these members changes his/her view, or missesthe meeting, the chances of a cut are high. Hamplcommented to Reuters (8 December) that he does notsee any argument to change his view on interest rates.Rezabek told Dow Jones (7 December) that withoutpreempting my actual decision, I still ponder whetherstability remains a better option than another easing.We also have some indication from Zamrazilova whosaid If there are no inflation risks on the horizon, then Ithink another cut could be in play, but I am reallyundecided. From all the comments, we can concludethat there is a chance that one vote for a cut will emerge.

The voting at the upcoming meeting will for sure be verytight again and the chances are 50:50 of either a cut or nocut. Thus our prediction that the CNB will cut by 25bp isvery uncertain. The market is pricing in a 50% possibility ofa 25bp.

We think there are three main reasons why the CNB shouldcut rates further. First, adjusted inflation is still negativeand will remain so next year. Second, it is very probablethe economy will post a W-shape recovery, which meansthere will be another drop in GDP in H1 10 (currently thedata from Germany support this view as the effects fromthe foreign fiscal stimuli are fading; we also must take intoaccount domestic fiscal restriction in 2010). Thus, thepossibility of deflation in the Czech Republic cannot beexcluded and this is important for the monetary policydecision. Third, the CNB board members need to realisethat the banks inflation forecast may not materialise,simply because current market interest rates are morerestrictive than assumed in its forecasts, i.e. 3M Priborcurrently stands at 1.72%, while the CNB assumes anaverage of 1.1% for Q4 09 and 1.2% for Q1 10.

[email protected]

Graph 1. 2W repo rate and 3M Pribor forecast

0.75

1.25

1.75

2.25

2.75

3.25

3.75

4.25

Jan.09 May.09 Sep.09 Jan.10 May.10 Sep.10

3M PRIBOR- KB forecast (monthly averages)

2W Repo - KB forecast (monthly averages)

Source: Bloomberg, KB


23/27


11 December 2009 23

Economic Data PreviewCzech Retail Sales (Previous: -7.6 % yoy; KB Forecast: -6.2%) Retail sales still under pressureWe expect Czech retail sales to fall 0.2% mom in October(seasonally and working-day adjusted). Sales in theautomotive sector should decrease 0.9% mom (WDA, SA),according to our estimate, as indicated by new carregistrations. Sales ex-autos (+0.0% mom WDA, SA) willwe think be supported by improving consumer confidenceand also surprisingly high wage growth. On the otherhand, retail sales are still being pulled down by theworsening labour market (rising unemployment). Year-on-year, we expect a decrease in retail sales of 6.2% inOctober. Market consensus, according to Reuters is moreoptimistic, expecting a decline of 4.5% yoy.

[email protected]

-7%

-3%

1%

5%

9%

13%

Jan.01 Jan.03 Jan.05 Jan.07 Jan.09

70

75

80

85

90

95

100

105

110Retail sales ex cars (y/y, wda)

Consumer confidence (CSO)

Source: CSO, KB

Czech PPI (Previous: -4.6% yoy; K B Forecast: -3.0% yoy) PPIWe expect Czech producer prices to decrease 0.3% momin November, due to seasonality. While the food industryshould continue to push producer prices down, oil andmetal prices now have the opposite effect. Their declineshould decelerate from -4.6 yoy in October to -3.0% yoyrecorded in November. Market consensus, according toReuters, sees a decline of just 2.7% yoy.

[email protected]

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Jan.00 Jan.02 Jan.04 Jan.06 Jan.08 Jan.10

-19%

-13%

-7%

-1%

5%

11%

PPI y/y eur /czk y/y (+14M)

Source: CSO, KB


24/27


11 December 200924

EM cross asset performance and SG sentiment indicatorSG Sentiment indicator*

0

0.2

0.4

0.6

0.8

1

Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09

SGSentimentIndicato

Risk seeking

Risk averse

Source: SG Cross Asset Research, Bloomberg. *see FX QuantSight

EM rates performance (2Y IRS bp change YTD)

-2000 -1500 -1000 -500 0 500

RUB*

TRY*BRL^

MXN

HUFZAR

CZK

PLNKRW

ILS

CNYRON

Source: SG Cross Asset Research, Bloomberg, ^Jan 11 DI * XCCY

EM 3M FX implied volatility (% change YTD)

-100

-80

-60

-40

-20

0

CNY

RON

KRW

PLN

MXN

EUR

ILS

BRL

RUB

TRY

CZK

HUF

ZAR

0

5

10

15

20

25

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


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

(5)

0

5

10

15

20

25

30

RON

ILS

RUB

HUF

PLN

CNY

CZK

TRY

MXN

KRW

ZAR

BRL


EM Equities performance (% change YTD)

0

20

40

60

80

100

120

USD

ZAR

CZK

PLN

MXN

KRW

RON

HUF

ILS

CNY

KZT

BRL

TRY

UAH

RUB

EM equities Chg (%) since 01 Jan 09

MSCI EM


EM CDS performance (% change YTD)

-80-70

-60

-50

-40

-30

-20

-10

0

RUB

KRW

KZT

CNY

ZAR

UAH

BRL

RON

PLN

TRY

MXN

CZK

HUF

ILS

0200

400

600

800

1000

1200

1400

1600

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



25/27


11 December 2009 25

EM FX forecastsMar 10 Jun 10 Sep 10 Dec 10

EUR/PLN 4.00 3.80 3.70 3.70EUR/HUF 260 255 250 250EUR/CZK 25.00 25.20 24.80 24.50EUR/RON 4.20 4.10 4.00 4.00EUR/RUB 43.50 43.80 44.00 43.50EUR/TRY 2.20 2.10 2.00 1.95USD/RUB 28.20 27.80 28.50 29.50USD/TRY 1.40 1.35 1.35 1.40USD/ZAR 7.80 7.80 8.00 8.20USD/ILS 3.60 3.40 3.50 3.50USD/BRL 1.75 1.80 1.95 1.90USD/MXN 12.70 12.60 12.70 12.80USD/CLP 480 480 500 520USD/ARS 3.80 3.80 3.83 3.85USD/COP 1950 2000 2000 2000USD/CNY 6.75 6.70 6.65 6.60USD/HKD 7.80 7.80 7.80 7.80USD/INR 45.50 44.75 45.25 45.00USD/IDR 9400 9250 9200 9200USD/MYR 3.35 3.30 3.27 3.23USD/PHP 46.50 46.00 45.50 45.25USD/SGD 1.36 1.35 1.33 1.31USD/KRW 1125 1075 1060 1045USD/TWD 31.25 31.00 30.75 30.50USD/THB 32.75 32.50 32.25 32.25

EMU M onitorHICPInflation* Long-termGB yield*

GeneralGovernmentBalance,last Q4 avgGeneralGovernmentDebt

ERM IIentry LowerRate UpperRateMaximumupwarddeviation**

Maximumdownwarddeviation**period 10.2009 10.2009 06.2009 06.2009

Reference Value 1.8 5.8 -3.0 60Czech Republic 1.1 4.9 -3.9 34 No

Hungary 3.8 9.3 -4.3 77 No

Poland 3.9 6.1 -5.4 49 No

Romania 5.9 9.7 -7.8 17 No

Bulgaria 3.6 7.3 -2.9 14 No

Estonia 1.8 NA -6.3 6 Jun.04 13.300 15.647 17.994 0.0% 0.0%

Latvia 5.3 11.5 -8.2 24 May.05 0.597 0.703 0.808 1.0% -0.9%

Lithuania 5.4 13.5 -7.4 22 Jun.04 2.935 3.453 3.971 0.0% 0.0%

* 12-month average rate

CentralRate

Note: Red cell means not fulfilling the criteria

** Maximum percentage deviations from ERM II central rate over last two years, based on a ten-day moving average of daily data at business frequency. An upward/downward deviation

implies that the currency is on the weak/strong side of the band. Source: ECB, EcoWin, Komercni Banka, a.s., SG Cross Asset Research


26/27


11 December 200926

Interest rates forecastsMar 10 Jun 10 Sep 10 Dec 10

Poland3.50 3.50 3.50 3.50Hungary 6.00 5.00 5.00 5.00

Czech Rep. 1.00 1.00 1.25 1.50Romania 7.50 6.50 6.50 6.50Russia 8.50 8.50 8.50 8.50Turkey 6.25 6.25 6.25 6.25South Africa 6.50 6.50 6.50 6.50Israel 1.50 2.00 2.25 2.25Brazil 8.75 9.00 9.50 10.25Mexico 4.50 4.50 5.00 5.75Chile

0.50 0.50 1.00 1.75Colombia 3.50 3.75 4.50 5.25China 5.31 5.31 5.31 5.31Indonesia 6.50 6.75 7.00 7.25Malaysia 2.00 2.00 2.00 2.00Philippines 4.00 4.00 4.00 4.00South Korea 2.50 2.75 3.00 3.25Taiwan 1.25 1.50 1.75 2.00India 5.00 5.25 5.50 5.75Thailand 1.25 1.50 1.75 2.00

Macro forecasts2007 2008 2009 2010 2007 2008 2009 2010

Poland 6.7 4.9 1.5 2.0 2.5 4.2 3.4 2.5Czech Republic 6.1 2.6 -4.3 1.3 2.9 6.3 1.1 1.1Hungary 1.1 0.6 -6.7 -1.0 8.0 6.2 4.5 4.0Russia 8.1 5.7 -9.7 3.5 9.0 14.1 11.5 10.0

GDP Inflation (year average)

2007 2008 2009 2010 2007 2008 2009 2010Poland -3.5 -5.0 -1.0 -2.0 -1.9 -3.6 -5.8 -6.5Czech Republic -3.2 -3.1 -1.6 -2.4 -0.7 -2.1 -5.7 -5.5Hungary -6.2 -8.4 -3.0 -3.0 -5.0 -3.8 -4.0 -3.8Russia 6.1 4.3 2.5 1.5 6.1 3.1 -8.5 -6.0

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

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


27/27


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