Emerging Markets Outlook Emerging markets analysis — Jul 9, 2015 Political risks dominate the headlines Emerging market currencies face many challenges right now. Political uncertainty has also increased in countries such as Turkey and Poland . In Turkey the governing AKP party lost Economic growth is low and worries run high about the future of the eurozone. The political situation in Greece has been turbulent, its majority for the fjrst time and the leftist Kurdish party HDP and at the time of writing tough negotiations are underway cleared the 10% threshold. It now remains to be seen whether a with the EU. Uncertainty whether Greece can keep the euro as new election will be called or if a coalition government is formed. its currency is very high. The outcome of the negotiations also The parties are far apart. Regardless of the outcome, the political affects expectations about the eurozone in general. We see little map has been rewritten, creating considerable uncertainty risk that economic turmoil will spread to emerging markets. In about economic policy. As a result, the risk that Turkey enters the short term, however, there is a strong risk that negative a period of political turbulence and a further weakening of its sentiment will apply downward pressure to emerging market currency is high. Even in otherwise stable Poland, political currencies. In the longer term the currencies could fjnd support if uncertainty has increased after the latest presidential election, the central banks, led by the ECB and perhaps the Fed , are forced which was won by opposition candidate Andrzej Duda. There is to act and increase liquidity. a stronger likelihood therefore of a change in government after parliamentary elections this fall. His Law and Justice Party has Macroeconomic development in China is of much greater promised to spend more on families and repeal the decisions to importance to several of the currencies we follow. Right now the raise the retirement age and increase taxes on banks. Though Chinese markets are plunging. While the real economic impact this will put pressure on the zloty, it will be partly offset by shouldn’t be overstated, it’s still a factor in an environment with Poland’s strong economic development. weak growth in China and uncertainty in Europe. The Chinese central bank will continue to stimulate to ease the impact of the Another risk is that the US central bank, the Federal Reserve, will tumbling stock market and support the economy. We expect begin to normalize its monetary policy this fall. Higher interest these measures to reduce the risk of an overly negative outcome. rates in the US and a stronger dollar are negative for countries with large dollar loans such as Brazil , Turkey , Indonesia and On the other hand, demand from China will remain low, which is negative for the currencies in Asia and Brazil . Mexico . Emerging markets outlook Emerging Markets FX Is published four times a year and is forecasting Provides advice, analysis and foreign exchange products to currency developments for selected emerging market clients within emerging markets. countries with a time horizon of 3 months. For further information, call +46 8 700 90 20 Analyst: Hans Gustafson +46 8 700 91 47
Emerging markets outlook Russia Poland Political unwillingness to strengthen the ruble High growth and strong public fjnances Weak growth and global isolation Political uncertainty Currency forecast vs. the euro Currency forecast vs. the euro The Russian ruble turned lower and was the weakest Political uncertainty has increased in Poland after the emerging market currency in the second quarter. This is only recent presidential election, which was won by opposition natural against the backdrop of continued fjghting in Ukraine candidate Andrzej Duda. The election outcome has increased and weak economic development. After Russian GDP fell by the likelihood of a change in government after parliamentary an annual rate of 2.2% in the fjrst quarter, the Ministry of elections this fall. The market is concerned that a new Finance estimates that the slowdown accelerated in April with government led by the president’s party, Law and Justice, will GDP down 4.2% compared with the same period in 2014. The implement more expansive, populist and less market-friendly decline in industrial production also accelerated in May and policies. Law and Justice has promised to spend more on fell by 5.5% on an annual basis. The EU extended sanctions families, repeal the decision to raise the retirement age and against Russia at the end of June when the confmict in eastern return to a defjned-benefjt pension system. The latter two Ukraine escalated and Russia violated the Minsk ceasefjre. promises would be very negative, since Polish demographics Russia countered by extending its import restrictions. This are among the most challenging in the world given its rapidly means that demand from abroad will remain weak and high growing old-age dependency ratio. The banking sector also infmation pressure will continue. Consumer prices rose 15.3% potentially faces the cost of having to convert loans in Swiss on an annual basis in June. The high infmation rate is putting franc to zloty. The risk of deteriorating public fjnances and a stranglehold on domestic spending. Real wages are down a lower credit rating shouldn’t be blown out of proportion, about 7% and retail sales about 10% at annual rates. The however. Economic conditions are strong. The current account central bank cut the benchmark rate by 100 basis points to defjcit has been reduced, the government budget has been 11.5% at its June meeting. The political signals clearly suggest strengthened and infmation pressure is very low. In addition, that the Russian leadership is uncomfortable with a stronger fjscal rules domestically and in the EU place a cap on the ruble. In fact, the fjnance minister took part in the April 30 government debt. Growth prospects for Poland are good. GDP policy rate meeting, which is highly unusual. rose by 3.4% on an annual basis in the fjrst quarter and the June PMI indicates continued strength going forward. The biggest risk for growth is a turbulent Grexit. Forecast EUR/RUB in 3 months 67.58 (today 63.59) Forecast EUR/PLN in 3 months 4.30 (today 4.23) We remain negative to the ruble. Economic growth is weak The zloty is supported by relatively high growth and strong and there is a political distaste for a stronger ruble. Future public fjnances. However, political uncertainties before the refjnancing of foreign currency loans will require a high autumn parliamentary elections and political risks in the euro risk premium in the form of a low ruble as long as the global zone linked to developments in Greece are negative factors. fjnancial markets are closed to Russia. We are therefore moderately negative to the zloty in the coming months. FX/FI research — Swedbank Large Corporates & Institutions Page 2 of 8
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