Emerging Markets Research J.P. Morgan Securities Inc. January 5, 2010 The certifying analyst(s) is indicated by the notation “AC.” See last page of the report for analyst certification and important legal and regulatory disclosures. www.morganmarkets.com Joyce Chang AC (1-212) 834-4203 [email protected]J.P. Morgan Securities Inc. Emerging Markets Outlook and Strategy Review of 2009 for Emerging Markets fixed income investors • EM debt returns were the highest registered since 1996, solidly outperforming US credit and equities • December-January effect apparent as EMBIG and CEMBI Broad spreads close inside our 2009 targets, boasting 28.2% and 37.5% total returns, respectively, in 2009 • Higher beta sovereigns lead the rally with Pakistan, Argentina and Ukraine each reaching total returns well over 100%, with spreads collapsing by over 1,000bp • Although EM corporates suffered from a bout of volatility in the final stages of the year, driven by events in Dubai which prompted UAE quasi- sovereigns to lose -1.5% in December, overall corporate valuations remain supported by expectations for the EM high yield corporate default rate to fall to only 1.9% in 2010 compared to 11.1% in 2009 • EM local currency caught up with the credit rally in 2H09, with the GBI-EM Global Diversified returning 22% for the full year, led by Latin America’s strong performance (+34.3%) • Record level of EM debt issuance reached in 2009 US$210 billion, surpassing the new record level for US high yield issuance, which ended 2009 at US$178 billion; we forecast US$196 billion of EM debt issuance for 2010 • EM local currency to outperform in 2010 and we forecast 12% returns (USD unhedged) for the GBI-EM Global Diversified compared to projected total returns of 3.0-6.5% for the EMBIG and 4.0-7.0% for the CEMBI Broad • Strategic inflows into EM fixed income reached US$22.9 billion in 2009 and should rise to US$30-35 billion in 2010 • This report contains charts and tables that provide an overview of key events in 2009, as well as our top trade recommendations for 2010 EM fixed income outperformed other asset classes in both 2008 and 2009 returns (%) -38.5 -54.5 -35.0 22.0 -26.6 -1.9 -10.9 -16.8 -5.2 -3.8 23.5 20.5 -18.0 58.2 16.7 28.2 37.5 22.0 11.7 4.8 6.9 74.5 S&P 500 EM equities Commodities UST US High Yield US High Grade EMBIG CEMBI Broad GBI-EM Global div ELMI+ Global Agg 2008 2009 1 2 1. J.P. Morgan commodity total return index 2. Barclays Capital Global Aggregate Source: J.P. Morgan Spreads and yields—actual and forecast Year Forecast Current ago End-Dec 10 EMBIG 295 685 250 GBI-EM Global Div 7.32 7.40 7.90 CEMBI Broad 354 959 300 Fed funds 0.125 0.25 0.125 10-year bond 3.75 2.49 4.50 Source: J.P. Morgan EMBI Global, GBI-EM, JPMHY, S&P 500 Return index, Nov 28, 2008 = 100 70 80 90 100 110 120 130 140 150 160 170 Nov 08 Feb 09 May 09 Aug 09 Nov 09 EMBIG S&P US HY GBI-EM Global Div. (USD unhedged) Source: J.P. Morgan
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Emerging Markets Research
J.P. Morgan Securities Inc.
January 5, 2010
The certifying analyst(s) is indicated by the notation “AC.” See last page of the report for analyst
certification and important legal and regulatory disclosures.www.morganmarkets.com
Chart 3: EM Debt Strategic and Retail Flows yearly, cumulativeUS$ billion
23.4
31.934.1
-11.9
20.9
-20
-10
0
10
20
30
40
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2005 2006 20072008 2009
Source: J.P. Morgan
4 January 5, 2010
2010 Top Trade Recommendations
Top Emerging Asia trade recommendationsEM Asia external debt
Indonesia:Move to neutral
Philippines: Remain neutral
Pakistan: Sell Pakistan bonds vs. buy SriLanka bonds
Vietnam: Buy 5-year CDS
EM Asia FXChina: Short 12-month USD/CNY NDF
Indonesia: Short 6-month USD/IDR NDF
Asia: Be long KRW, INR, and SGDagainst USD
EM Asia ratesChina: 2s/5s steepenersPay 5-year repo IRS
India: Pay 5-year (partially hedged byreceiving 1-year to neutralizenegative carry)
Taiwan: Open 3s/10s steepeners
We still like Indonesia's fundamental story, but positioning has become crowded and supply concerns have risengiven expected issuance this year of up to US$4 billion. Bonds are trading near record levels and tension betweentechnocrats and vested political interests has not been resolved. Thus, we do not see much more upside in the nearterm and reduce our position.
The Philippines underperformed the EMBIG last year. Although remittances should remain strong in 2010 andmarket positioning and entry levels look attractive, we are hesitant to move to overweight given concern over publicfinances and upcoming elections in May. However, if political noise remains low, a move to overweight via the '19Nsor '34s once this month's issuance has been completed could be in the offing.
Pakistan was the best performer in the EMBIG in 2009 (+147.4%) but political uncertainty is increasing rapidly. SriLanka on the other hand is on a much more positive track now that the civil war is over and a peaceful election isexpected later this month. We recommend taking profit by selling PK '17s and buying Sri Lankan '15s.
The CDS spread has narrowed about 30bp since the government devalued VND at end of November. Though muchof the recent deterioration in economic fundamentals is now priced in, we expect data in coming months to get worseas inflation tends to rise around Tet New Year and as stronger domestic demand lifts the import bill. Despite ourbearish economic views, we do note that the yield on VN '16s is attractive relative to similarly rated and maturityequivalent Indonesia and Philippines bonds.
Entry: 6.7960; stop: 6.9150; last: 6.7373. Robust macro data are underlining our view for eventual monetary tighteningvia rates and FX this year. While policy inaction remains likely near-term, the data are tracking our longer-term tighteningview. Position via longer-dated NDFs. Our 12-month NDF position entered August 21 is currently up 84bp and we remainin this trade.
Entry 10,230; stop 9,900; last 9,339. USD/IDR should remain under pressure in view of conducive risk appetites andattractive carry. USD strength is a risk to this trade, but the central bank, having intervened to cap USD/IDR upside,appears to show little appetite for a weaker IDR. Our NDF position entered August 13 is currently up 953bp. Weremain biased to sell into short-term market rallies.
Stop: -200bp; last: +358bp. We were long KRW, TWD, and SGD against USD as a core exposure to recovery tradesin EM Asia. The position expired at a 358bps profit in December. We see further scope for gains in this trade butawait the passage of key data risks this week (US payrolls could turn positive) before re-entering.
We expect the IRS curve to rise in 2010, in a bear steepening move in 1Q. The short end of the IRS curve will remainanchored by an unchanged monetary policy in 1Q, until PBoC lets its 1-year bill yield rise (sometime in 2Q). The longend of the IRS curve (5-year) should face upward pressure all year, as a climbing CPI and bond supply take their toll.Hence, we stay with our 1s/5s IRS curve steepener, which is currently trading at 163bp, and target 190bp. Also, wesuggest a new trade where we pay 5-year IRS outright at 3.70% (target 4.20%).
In 2010, we expect India's OIS curve to rise by a further 50bp. This will happen when liquidity drops, RBI's tighteningpicks up pace, and when bond supply takes its toll (on the long end). However, significant liquidity withdrawal is notimminent, and the call rate might continue to hug the bottom of the corridor even if RBI hikes CRR by 50bp inJanuary. Hence we pay 5y swap, but we hedge the costly negative carry on the position by receiving 1/3rd of theDV01 with a received position in 1y swap. For the technical details of the trade, see our research piece.
Finally, we keep the 3s/10s steepener in Taiwan swaps at 83bp. We do not see that much upside to the curve itself,perhaps 10bp on a three-month horizon. But this is one of our favorite carry trades in the region. The CBC will only hikewhen the Fed does, i.e., in 2011, and even then it will only do so symbolically in very tiny steps, just as it has done in thepast. Meanwhile, the back end of the swap curve will be supported by payers from both onshore and offshore.
Source: J.P. Morgan
Emerging Markets Outlook and Strategy
JPMorgan Chase Bank N.A., Singapore Branch
David FernandezAC (65) 6882-24613 Claudio PironAC (65) 6882-2218
Top CEEMEA trade recommendations CEEMEA external debt
Russia: We increase overweight
CEEMEA FXTurkey: Sell 6-month USD/TRY
Russia: Sell 6-month USD/RUB
Hungary: Sell 2-month USD/HUF
Poland: Sell 12-month EUR/PLN
Nigeria: Sell USD/NGN
CEEMEA RatesSouth Africa: Long R186
Russia: long 3-year OFZ
Turkey: 2-year/5-year steepener,one year forward
Ghana: Long Ghanaian cedithrough FX forwards
We have been running this trade for a month and a half, and it has remained stable but produced positive carry asexpected.We increase our overweight in Russian Eurobonds in our EMBIG model portfolio from 0.4 to 1.1 by selling7 million of the Russia ’30s and buying 3.4 million of the ’28s. We expect Russia’s 2010 issuance of new Eurobonds(predicting US$9 billion of issuance in 1H10) to be SEC-registered, which may be followed by an exchange of theexisting non-SEC-registered Russia ’18s, ’28s, and ’30s for SEC-registered bonds. These developments will mostlikely trigger inclusion of these bonds in the Barclays Capital US Aggregate Index, and attract a new client pool topurchase Russian SEC-registered issues. The '28s are even more likely than the ’30s to be included in an exchangefor SEC-registered debt. Also, the Russian ’30s have outperformed the Russian '28s by 42bp between the closes onNovember 3 and January 5. In addition, the Russian '28s are trading 68bp and 55bp wide of their Brazilian andMexican counterparts, respectively.
Target 1.40; stop 1.55; last 1.52. Retail buying of USD, which kept USD/TRY rangebound in 2H09, should slow asthe economy recovers from recession.
Target 25.5; stop 31.2; last 30.63. USD weakness and rising commodity prices are expected to support RUB. Whilethere is a near-term risk that measures are taken to curb FX borrowing, we believe that the CBR will accept fasterappreciation as growth recovers.
Target 172; stop: 195; last: 193.90. Hungary is alone in CEEMEA in reporting improving current account and budgetdeficits. In our view, investor positions in HUF do not reflect the improving economic fundamentals or the high yield.
Target 3.80; stop 4.40; last 4.30. PLN is the CEEMEA region’s most undervalued currency, in our view, and fear overrising public debt levels should diminish as growth rebounds more strongly than expected.
Buy naira based on our confidence that buoyant oil prices and rising oil production will support the Nigerian currency.We see value in selling USD/NGN on temporary spikes above 150 (currently at 149.25) with a 6% yield pickup. Wealso recommend owning NGN-denominated AAA supranational Eurobonds at yields of around 8%.
Target: 8.3%; stop: 9.5%; current 9.11%. The market is very underweight both outright and relative to the high levelof yields. Local issuance remains a concern, but the yield pickup more than reflects this. With the SARB on hold forthe medium term and inflation falling, the long end should perform best.
Target: 7.25, stop: 10, current: 8.43. The CBR continues to provide liquidity to the local market, both directly and throughcontinued rate reductions, while also emphasizing a need for banks to improve balance sheet quality. With investorsalso underweight Russia, this combination of carry and active support should continue to move bond yields lower.
Stop: -25bp; target: +90bp. The 2-year/5-year slope is only 22bp positively sloped one year forward currently and yetis at 131bp in the spot market. As we believe the CBRT has now paused and potentially ended its easing cycle, weexpect the curve to earn significant slide as it remains relatively static (3-month slide on this trade is 44bp).
The combination of local yields above 20% and good prospects for cedi appreciation support our recommendation tohold a long GHC position through FX forwards (with an expected return of 30%).Current spread: -7bp; 3-year low: -103bp; 3-year high: +13bp. Almost carry; defensive trade. The skew of this pair isfor a tighter (more negative) spread. Local specifics were a major drag for the Mexican economy in 2009, whileglobal drivers may dominate in 2010. For Colombia, the conflict with Venezuela, sub-par growth, and a heavypolitical calendar point to higher risks next year.
Source: J.P. Morgan
Emerging Markets Outlook and Strategy
J.P. Morgan Securities Inc. J.P. Morgan Securities Ltd.
Michael MarreseAC (1-212) 834-4876 William OswaldAC (44-20) 7777-3020
Top Latin America trade recommendationsLatin America external debt
Mexico/Colombia: Sell Mexico 5-year CDS vs. buyColombia 5-year CDS
Colombia: Sell 2-year CDS vs. buy 5-yearCDS (2x1)
Argentina: We remain overweight
Mexico: Increase overweight, extendingduration into '19Ns to takeadvantage of front-endsteepness
Dominican Republic: We remain overweight
Jamaica: We remain overweight
Belize: We remain overweight
Latin America FX:Brazil: Buy 6-month 1.74/1.62RKI 1.56 USD put/BRL call(indicative cost 272.4bp)
Mexico: Sell USD/MXN
Latin America ratesArgentina: Buy Bonar ’14
Brazil Linkers: Buy May’11inflation Breakeven (Buy NTN-BMay’11 vs. Pay Apr’11 DI + buy1-month USD/BRL NDF).Target: 6%, Stop 4.5%, last5.18%. 3-month carry: +0.78% a.r.
Brazil DI futures: ReceiveJan’13 (12.32%) vs. pay Jan’15(12.74%)—steepener
Chile: Receive 2-year UF swaps
Current spread -7bp; 3-year low: -103bp; 3-year high: +13bp. Almost flat carry; defensive trade. The skew of this pairis for a tighter (more negative) spread. Local specifics were a major drag for the Mexican economy in 2009, whileglobal drivers may dominate in 2010. For Colombia, the conflict with Venezuela, sub-par growth, and a heavypolitical calendar point to higher risks next year.
Current spread 50bp; 3-year low: 15bp; 3-year high: +134bp; 6-month carry = 6bp of spread (breakeven = 43bp) andpositive slide. Caveat is liquidity. We believe the 2s5s steepeners in Colombia offer the best risk-rewards amongpositive carry and roll, defensive trade in Latin America. The spread is near the bottom of the historical range, and inline with higher-rated countries like Mexico and Peru.
We remain overweight Argentina ahead of the debt swap, which we believe will generate a high participation rate.However, in October the spread difference between Boden ’12s and Boden ’15s widened 240bp. Thus, werecommend reducing all remaining exposure to Boden ’12, in favor of increasing exposure to Boden ’15s.
External debt underperformed in 2009 amid Mexico's numerous and well known challenges. With ratings actionsbehind, and many of these drags now fading or no longer existent, we see further room for spread compression. Westay overweight Mexico external debt in our EMBIG model portfolio but swap out of '13s and '14s into '19Ns in orderto take advantage of the relative steepness of the mid-part of the curve and extend duration. The move increasesour Mexico overweight, taking the beta to 1.0 from 0.4.
We believe the Dominican Republic’s proven resilience to external shocks (GDP grew an estimated 3.5% in 2009),improving fundamental prospects, ample multilateral support, and, despite its year-to-date rally, the still relativelyhigh yield of its global bonds, make it an attractive diversification play.
Despite further delays in negotiations with the IMF for a Stand-By Arrangement worth US$1.3 billion and lingeringinvestor concerns regarding a possible debt restructuring, Jamaica outperformed the broader market rally inDecember. Our base case is that an IMF agreement will indeed be reached and a near-term debt reprofiling, if any,would most likely be restricted to domestic debt.
Even after a 60%ytd rally, the BZ’29s with a low dollar price of US$55 have the widest spread in the EMBIG(1,200bp). The ongoing US recovery and high oil prices along with multilateral and bilateral loans should support adomestic recovery in 2010.
J.P. Morgan’s new forecast pencils in a BRL peak in 2Q10, but intervention risks warrant strategies with definedmaximum loss in our view. In the structure above, the maximum profit if knocked in is 740.7bp (2.72x leverage). Ifnot knocked in the maximum profit is 1,153.8bp (4.24x leverage). RKI cost 9.75bp more than vanilla spread but give413.1bp of more potential profit.
Target 12.25; stop: 13.50. The private sector flow of funds surplus should reach more than US$17 billion this yearfollowing a US$3 billion deficit in 2009. Mexico is emerging from its deepest multi-year recession, and the pesoseems undervalued and under-owned.
Badlar-linked paper offers the best carry trade among Argentina local instruments. We do not expect ARS to weakenfurther than 4% through midyear due to the favorable terms of trade and strong performance of its main tradingpartners. The 18% yield is in line with CER bonds (total yield) but does not carry the index stigma, and comparesfavorably to 12% (implied yield) in 1-year NDF.
The balance of risks have been shifting fast towards inflation, as the government's fiscal expansion drive continuesdespite the fact that we are past the worst of the economic slump and are fast approaching pre-crisis levels for aslew of activity indicators. While inflation expectations are just below the mid-point of target, we believe the skew ison the upside, and on today's communiqué, the CB seems to be willing to take that risk. From mid-2007 to 3Q of2008 the IPCA moved from 3% to 6%. The 2s5s slope of the DI curve anticipated a great part of that move, and iscurrently suggesting that the inflation risks are not negligible (chart below). We reckon that trying to predict turningpoints using yield curves is tricky for developed markets, let alone for EM countries, but the current 2s5s slope is toohigh to be ignored, in our view.
DV01 neutral. Current spread: +43bp; carry and roll in 6-month = 43bp. Breakeven spread + 0bp in 6-month. Besidespositive carry and slide, this spread offers potential for capital gain, as the Jan’13 continues to look cheap in the curve.
The 2-year inflation breakeven is below 2% versus the 3% central target. Near-term inflation carry is a drag for UFswaps (-7bp per month) as the market is pricing in deflation through February, but we think the level implied in the2-year tenor is overdone, as it extrapolates the deflation into a medium-term base scenario.
Source: J.P. Morgan
Emerging Markets Outlook and Strategy
J.P. Morgan Securities Inc. J.P. Morgan Securities Inc.
Felipe PianettiAC (1-212) 834-4043 Vladimir WerningAC (1-212) 834-4144
Total Emerging Markets 140,620 61,603 202,223* Estimates external borrowings issued in foreign currencies.Source: Bloomberg, Dealogic, Bond Radar, and J.P.Morgan.
We forecast US$128 billion of newissuance from EM corporates for 2010
Quasi-sovereign issuance shoulddecline this year to less than 50% oftotal corporate issuance vs. 65% in 2009
Issuance will continue to beconcentrated in investment-gradecorporates, accounting for nearly 80%of our full year forecast
Heaviest refinancing needsconcentrated in the CEEMEA region,with Russia and UAE standing out
Article Title
J.P. Morgan Securities Inc., New York J.P. Morgan Securities Inc., New York
Joyce ChangAC (1-212) 834-4203 Luis OganesAC (1-212) 834-4326
Table 4: High level of current and potential official creditor support to EM sovereignsCountry US$ billion % of GDP DetailsCurrent official support for the Latin America regionArgentina 3.3 1.2 New 3.5-year World Bank commitment, which implies net US$0.17 billion per
annum inflow versus net US$0.90 billion per annum outflows in past three years.Colombia 2.4 1.0 The bulk of the multilateral lending in government’s financing plan is from the
World Bank and IADB, and to a lesser degree CAF.Ecuador 1.0 1.8 Through October the government had received about half of the US$1.5 billion
it was targeting from regional multilaterals IADB, CAF, and FLAR, but this was supplemented with a US$1 billion oil-linked loan from PetroChina and the IMF SDR allocation (US$350 million).
Mexico 77.0 8.6 US$30 billion US Fed swap line and US$47 billion flexible credit line from IMF.Peru 0.6 0.4 World Bank lending is the largest component.Potential official support for the Latin America regionBrazil 30.0 2.1 US$30 billion US Fed swap line.Colombia 10.4 4.25 IMF FCL; the government has called this precautionary and it is not intended
for use.Peru n/a n/a The government does not rule out the IMFFCL as a possibility, but no formal
request has been made.Venezuela n/a n/a Multilaterals (mainly IADB and CAF) increased by US$300 million in 2009 to
US$3.2 billion, and this trend could increase in 2010.Current official support for the CEEMEA regionBelarus 2.9 4.2 US$2.5 billion from IMF, plus World Bank, EBRD, EIB, and IFC.Ghana 1.8 12.7 US$615 million from IMF, US$1.2 billion from World Bank.Hungary 25.8 19.0 EUR12.5 billion from IMF, EUR6.5 from EU, EUR1 billion from World Bank.Latvia 9.6 34.0 EUR1.7 billion from IMF, EUR3.1 billion from the EU + a total of EUR2.7 billion
from neighboring countries, EBRD, WB.Nigeria 0.5 0.3 US$500 million in budget support from the World Bank, within a portfolio of
around US$4 billion in total lending.Poland 21.8 5.5 Flexible Credit Line from the IMF (being treated as precautionary).Romania 26.0 15.5 EUR12.9 billion from IMF, EUR5.0 billion from EU, EUR1 billion from EBRD,
and EUR1 billion from World Bank.Serbia 3.2 10.0 US$2.0 billion from IMF, US$325 million from EU, and US$900 million from the
World Bank.Sub-Saharan 44.5 5.4 Loans outstanding include US$31 billion from the World Bank, US$10.3 billion Africa from the AfDB, and US$3.2 billion from the IMF.Ukraine 19.0 17.0 US$16.4 billion from IMF, plus World Bank, EBRD, EIB and IFC (about US$2.5
billion over the next two years).Potential official support for the CEEMEA regionTurkey 45.0 7.3 US$45 billion from multilateral institutions (IMF, World Bank, and EBRD).Bulgaria 7.6 15.0 EUR6 billion from IMF, the EU, EBRD, and World Bank.Lithuania 7.6 15.0 EUR6 billion from IMF, the EU, EBRD, and World Bank.Sub-Saharan 10+ 1.2+ The World Bank provided US$7.8 billion in interest-free credits and grants in Africa FY2009 and expects to match this in the current fiscal year. The AfDB has set
up a US$1.5 billion Emergency Liquidity Facility and US$1 billion Trade Finance Initiative, and stands ready to provide budget support too.
Current official support for the EM AsiaChina 7.0 0.2 US$7 billion Chiang Mai Initiative Bilateral Swap Agreement.Hong Kong 29.0 13.5 RMB200 billion PBoC swap line (US$29 billion).Indonesia 34.0 6.6 US$5.5 billion World Bank Public Expenditure Support Facility funded by WB
(US$2 billion), ADB (US$1 billion), Australia (US$1 billion), and Japan (US$1.5 billion); RMB100 billion PBoC swap line (US$15 billion); US$14 billion Chiang Mai Initiative Bilateral Swap Agreement.
Korea 74.0 8.0 US$30 billion Fed swap line; RMB180 billion PBoC swap line (US$ 26 billion); US$20 billion BoJ swap line; US$23 billion Chiang Mai Initiative Bilateral Swap Agreement.
Malaysia 18.0 8.1 RMB80 billion PBoC swap line (US$12 billion); US$6 billion Chiang Mai Initiative Bilateral Swap Agreement.
Agreement.Thailand 11.0 4.1 US$11 billion Chiang Mai Initiative Bilateral Swap Agreement.Note: PBoC swap lines are intended for trade financing; the agreed swap line currency is Yuan, but the possibility to drawfinancing in reserve currencies is under consideration. Source: J.P. Morgan
Current and potential official support to EM sovereigns exceedsUS$500 billion
Total of 32 new IMF agreementsapproved for EM countries since 2008
IMF agreements mainly concluded inEM Europe and Latin America
January 5, 2010 11
Emerging Markets Outlook and Strategy
J.P. Morgan Securities Inc. J.P. Morgan Securities Inc.
Joyce ChangAC (1-212) 834-4203 Luis OganesAC (1-212) 834-4326
Chart 5: REER valuations for global currencies not back to the previous peak for most EM countriesREER: Percent deviation of current versus 30-year average (except for CEE3 - 12-year average)
Source: J.P. Morgan
EM FX currency appreciation has beenconcentrated in commodity currencies
Valuations have not reached their previouspeak
Mexico is the main underperformer in LatinAmerica, while TWD and KRW stand out inEM Asia
CLP
PENCHF
GBP
JPY
NZD
SEK
KRW
THB
TWD
CZKBRL
COP
MXN
AUD
CAD
EUR
NOK
IDR
MYR
PHPTRY
HUF PLN
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
-40% -30% -20% -10% 0% 10% 20% 30% 40%Peak / Avg
Curre
nt / A
vg
Source: J.P.Morgan
January 5, 2010 13
Emerging Markets Outlook and Strategy
J.P. Morgan Securities Inc. J.P. Morgan Securities Inc.
Joyce ChangAC (1-212) 834-4203 Luis OganesAC (1-212) 834-4326
EM policymakers will not tighten fiscalpolicy too much and have the resourcesto sustain counter-cyclical measures.
EM countries will run an averagedeficit equivalent to 3% of GDP, downfrom 4.0% of GDP in 2009, and sharplybelow the 8.5% of GDP deficit that J.P. Morgan is forecasting fordeveloped market countries
There will be fiscal consolidationacross all CEEMEA countries in 2010due in part to the constraints of IMFprograms or a desire to enter the Euro area
Table 7: Developed country fiscal deficits now more than double the level of EM countries% of GDP 2008 2009 2010Developed markets -3.3 -8.6 -8.5
United States -3.1 -9.9 -9.5Japan -6.6 -11.3 -10.4Euro area -2.0 -6.1 -7.1United Kingdom -6.2 -12.1 -11.2
Emerging Economies -0.9 -4.1 -3.2Latin America -0.8 -3.1 -2.8
Nearly 40% of the countries in theEMBIG by market capitalization areclassified as oil exporters and another24% are characterized as softcommodity or metals exporters
The majority of countries arebudgeting the price of oilconservatively at US$45-65/bbl, wellbelow J.P. Morgan’s 2010 forecast forWTI to average US$78.25/bbl
Table 8: Many EM Countries will benefit from an oil windfall at current 2010 oil priceassumptions
Impact of Impact of Oil Oil $1 change in $1 change 2010 Implicit WTI
exports1 imports fiscal accounts in exports oil price assumption inCountry % of total % of total (%GDP) %GDP US$ million budget 2010 budgetLatin AmericaColombia 28.4 3.3 0.02 0.05 140 75.2 88.2Ecuador 66.8 19.0 0.13 0.25 140 65.0 71.2Mexico2 13.5 8.2 0.10 0.23 500 59.0 61.2Venezuela 93.7 10.4 0.15 0.33 1,000 40.0 46.2CEEMEAAlgeria 98.1 0.0 0.70 0.84 1,130 37.0 37.0Angola 97.7 0.0 0.45 0.67 517 58.0 58.0Egypt 47.1 16.4 0.00 0.04 41 44.7 50.0Gabon 85.9 0.5 0.19 0.73 85 n/a n/aIraq 97.7 0.0 1.05 1.15 228 60.0 60.0Kazakhstan 65.5 0.0 0.14 0.36 420 50.0 52.0Nigeria 96.5 2.0 0.29 0.40 674 57.0 57.0Qatar 89.5 0.0 0.49 1.00 562 40.0 40.0Russia 61.0 0.0 0.15 0.18 3,250 58.0 60.0EM AsiaChina 1.1 10.2 0.00 0.00 236 n/a n/aIndia 17.0 30.0 0.15 0.03 300 70.0 –Indonesia 21.3 23.7 -0.01 0.06 307 70.0 –Korea 0.0 19.7 0.02 – – 63.0 –Malaysia 18.1 10.7 0.00 0.17 379 75.0 –Philippines 2.5 15.7 0.00 0.01 13 n/a n/aSingapore 24.2 28.6 0.00 0.50 859 n/a n/aTaiwan 5.6 15.5 0.00 0.06 196 n/a n/aThailand 5.4 21.7 0.00 0.04 101 80.0 –1. Including oil derivatives and in some cases natural gas.2. The impact of $1 change in fiscal accounts represents an estimate of how much goes to the stabilization fund for every $1above the oil price budget assumption. If the price is below the budget assumption, the price is offset by the oil hedge.Source: J.P. Morgan
Number sovereign upgrades to exceed downgrades in 2010, whileratings in DM countries will remainunder pressure
EMBIG average rating is expected tomove to investment grade in 2010 with60% of the index in the investmentgrade bucket
Chart 7: EM sovereign rating upgrades are expected to exceed downgrades once again in 2010
Assets under management for theexternal debt EMBI series increased toUS$217 billion at end-2009 compared toUS$200 billion at end-2008
GBI-EM assets managed against theindex series increased to US$55 billionfrom US$35.8 billion during the sametime period
Assets under management for the EMcorporate market have attracted a smallfollowing at US$6.4 billion
Table 9: AUM benchmarked against EM indices increased to US$280 billion during 2009AUM ($mm)EM Indices December 2008 December 2009Local Market DebtGBI-EM Global Diversified 14,120 29,626GBI-EM 9,045 11,913GBI-EM Diversified 4,775 8,193GBI-EM Broad Diversified 6,455 5,070GBI-EM Broad 50 105GBI-EM Global 1,420 150Total 35,865 55,056
External DebtEMBI Global Diversified 120,152 144,274EMBI Global 54,094 52,646EMBI+ 24,750 20,639Total 198,996 217,559
TOTAL AUM managed against EM indices 234,861 279,007Source: J.P. Morgan
29 elections scheduled in EMcountries between now and end-2011
Key elections to monitor in LatinAmerica: Colombia and Brazil
Key elections to monitor in CEEMEAregion: Ukraine and Latvia
Table 10: Heavy election calendar over the next two years in EMCountry Presidential Legislative/Parliamentary/MunicipalLatin America
Argentina October 2011Brazil First round: October 3, 2010 October 3, 2010
Second round: October 31, 2010Colombia First round: May 30, 2010 March 14, 2010
Second round: June 20, 2011Costa Rica February 07, 2010 February 07, 2010Dominican Republic May 16, 2010Guatemala August 2011 August 2011Mexico July 04, 2010Peru April 2011 October 03, 2010
April 2011Venezuela September 26, 2010
CEEMEABahrain November 2010Bulgaria October 2011Central African Republic First round: March 2010 First round: March 2010Croatia November 2011Czech Republic June 2010Egypt September 2011 May 2010
November 2010Gabon December 2011Hungary June 2010 April or May 2010Iraq January 16, 2010Latvia May 2011 October 02, 2010Nigeria April 2011 April 2011Poland First round: October 2010 Spring 2011 or October 2011Russia December 2011Turkey July 2011Ukraine First round: January 17, 2010
Second round: February 2010Emerging Asia
Philippines May 10, 2010 May 10, 2010Singapore May 2011Sri Lanka March 2010 March 2010
November 2011Thailand 2H10Vietnam June 2011
Source: www.electionguide.org
January 5, 2010 19
Emerging Markets Outlook and Strategy
J.P. Morgan Securities Inc. J.P. Morgan Securities Inc.
Joyce ChangAC (1-212) 834-4203 Luis OganesAC (1-212) 834-4326
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