Israel: No respite for the BoI · Israel: No respite for the BoI David Beker Preview The key event driving Asian trading today was a subdued appetite for risk following S&P's downgrade

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GEMs Daily - London Edition

Israel: No respite for the BoI

Preview The key event driving Asian trading today was a subdued appetite for risk following S&P's downgrade on US rating outlook overnight. Consequently, Asian equities were down strongly. The Shanghai Composite index was biggest loser (-1.9%); SET was the smallest loser (-0.2%). In Asia FX, the INR was the biggest loser (-0.4%) while the THB was smallest loser vs the USD at -0.03%. In local rates, China 1Y was the biggest gainer (-2bp), along with mild flattening across the other curves while the THB was the biggest loser, up 3bp in the 1Y. In EXD, long bonds underperformed the curve with the short end mostly unchanged X and overall most were 3-5bp wider on Z-spread. Overall, trading flows were weak with FX receiving the greatest investor attention due to caution over further risk unwinding ahead of the long weekend.

Israel in Focus: No respite for the BoI We argue that the BoI will hike by 25bp (consensus: pause) in its April meeting given inflation dynamics and still elevated inflation expectations amid robust growth. This is a close call, and while headline inflation was softer than expected in March and ILS was strong, core inflation is deteriorating, output gap is closing and the housing boom remains to be addressed, in our view. (J.Saliba; page 2)

News and Views In Hungary, the NBH kept the policy rate steady at 6.0% in a unanimous decision. In Poland, corporate wages grew 4% yoy in March and employment rose 4.1% yoy, but fell modestly on the month. According to the Brazilian Central Bank’s weekly survey, consumer inflation reached 6.29% yoy. In Argentina, the economic activity index rose 8.7% yoy in Feb, below consensus and our own expectations. The People’s Bank of China commented that China needs to reduce its FX reserves and improve and diversify its FX management. Singapore’s non-oil domestic exports expanded a stronger than expected 10% in March. (page 4)

Asia and LatAm in Focus In Asia, property prices continue to rise in some major cities of China though there were some early signs of price stabilization. In LatAm, we look at ways to hedge against deterioration in market sentiment ahead of the 5 June presidential elections in Peru. (page 8, page 10)

Today’s Market Movers The highlight is Poland’s IP reading for March. We expect the base effect to bring down the yoy rate, but growth should remain in the high single digit territory. Data releases, key events EST Country Data/Event For BofAMLe Cons. Previous 8:00 Brazil Unemployment Rate Mar 6.7% 6.7% 6.4% 8:00 Poland Industrial production (yoy) Mar 8.0% 9.6% 10.7% 17:00 Colombia Industrial Production (yoy) Feb n.a. 5.8% 6.2% 17:00 Colombia Retail Sales (yoy) Feb n.a. 10.8% 12.3%

Source: BofA Merrill Lynch Global Research, Bloomberg

Emerging Markets

GEMs | Fixed Income Strategy & Economics | Global 19 April 2011

David Hauner, CFA +44 20 7996 1241 EEMEA FI Strategist MLI (UK) David Beker +1 646 855 9512 LatAm FI Strategist MLPF&S TJ Bond +852 2161 7152 Emerging Asia Economist Merrill Lynch (Hong Kong) Claudio Piron +65 6591 0401 Emerging Asia FI Strategist Merrill Lynch (Singapore) Alberto Ades +1 646 855 4044 GEM FI Strategist & Economist MLPF&S Daniel Tenengauzer +1 646 855 5337 GEM Fixed Income Strategist MLPF&S GEMs FI Strategy & Economics MLPF&S

See Team Page for Full List of Contributors

GEMs Daily – Asia Edition China: the stalemate in the property market GEMs Daily – US Edition Peru: hedging political risk GEMs Monthly Shocked, but not shaken Analytics Sovereign external debt Corporate bonds

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GEMs Da i ly - London Ed i t ion 19 Apr i l 2011

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In Focus Israel: No respite for the BoI The Bank of Israel (BoI) is meeting on Sunday April 24 to set the policy rate. We think that the BoI will most likely hike by 25bp (consensus: pause) given inflation dynamics and to continue to put in check still elevated inflation expectations amid robust growth. This is a close call, and while headline inflation was softer than expected in March and ILS was strong, core inflation is deteriorating, output gap is closing and the housing boom remains to be addressed decisively in our view.

Growth continues to surprise to the upside Robust GDP expansion seems likely to carry over going forward, given the momentum of the economy in Q410 and the strength seen in leading indicators in Q111. The CBS revised its estimates for 2010 real GDP growth, marking the figure up successively from 4.5%yoy to 4.7%yoy. Q410 growth was upped by 0.1ppt to 7.8%qoq saar and revisions also showed Israel grew faster than previously thought in H110. Upside strength in private consumption and gross fixed capital formation accounted for the bulk of the full-year growth revision.

While some Q111 data had mixed implications, the growth momentum most likely continues to be solid. The leading S-index rose 0.5%mom (sa) in March on robust domestic demand, while the January and February figures were revised upwards by 0.1ppt to 0.6% and 0.5%mom respectively. This contrasts with the continued lingering for the second month in a row of the overall PMI in a contractionary mode (48.0 in February) on the back of a drop in the domestic new-orders sub-index. This would perhaps be due to expectations of a curtailment of demand on higher commodity prices and increased regional geopolitical risks, in line with somewhat stagnant consumer confidence. Still, CBS reports that manufacturing production rose by 5.8%yoy sa in February, led by the high-tech sector. This moderates the message of the PMI report, especially as the trade deficit widened in March due to higher imports of investment goods and raw materials.

Inflation is firmly above target While March headline inflation came slightly lower than projected, it continued to climb for the third consecutive month above the upper limit of the target range. Price increases remain broad across a range of categories, boosted by fuel and food, and housing inflation remained strong at 0.5%mom. Seasonal weakness in clothing and fruits and vegetables moderated the headline figure, leading the CPI excluding housing to be flat mom. However, all measures of core CPI are now above 3%, though the increase was more moderate than that of last month.

Jean-Michel Saliba +44 20 7995 8568

Chart 1: Higher oil prices filtering their way into headline CPI

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fuel prices at the station (%y oy )transport prices in CPI (%y oy )v ehicle fuel and lubricants (%y oy )

Source: Haver, Ministry of National Infrastructure, BofA Merrill Lynch Global Research

Chart 2: De-dollarization of rental contracts decreases Fx passthrough

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CPI - housing (%y oy )

ILS (av g, %y oy , -v e = appreciation)

Source: Haver, BofA Merrill Lynch Global Research

GEMs Da i ly - London Ed i t ion 19 Apr i l 2011

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March 50bp hike, less unanimous than it appears The minutes of the March interest rate setting meeting where the BoI hiked by a firm 50bp show the decision was more divisive than it appears. The unanimous decision to hike by 50bp came after it was settled not to introduce macro-prudential measures this month and two narrow-forum participants changed their recommendations accordingly. These two members had initially recommended a 25bp hike coupled with immediate prudential regulations, on concerns about resultant ILS strength.

That being said, BoI did also sound more concerned on the inflation front, and while issues related to growth in the international scene were noted, the impression was that these would not be immediate pressing issues. BoI reiterated its new forecasts: it is bullish on growth (4.5% in 2011 and 4% in 2012), wary on inflation (above target for 2011, declining towards upper limit of target range in 2012) while the policy rate expectation now stand at 3.9% in a year's time, bringing the latter in line with our own expectations.

Fx intervention – how much, how soon? The BoI appears to be modestly more tolerant of Fx strength as it mulls a gradual end to its Fx intervention policy. The BoI Head of market operations and a future MPC voter, Barry Topf, said the change in policy also depends on normalization of G3 interest rate policy and is unlikely to be an abrupt process. In our view, the emphasis on G3 policy highlights that the process is unlikely to yield undue pressure on exporters for now while the BoI carries forward with hiking rates. A slowdown or end to intervention, given the large sterilization costs would perhaps be replaced by more regulatory macro-prudential tools such as those put forward in the Fx derivatives market in January, or the phasing out of tax exemptions in the makam market as per the Ministry of Finance.

BoI likely to hike by 25bp this week We think BoI will likely increase its policy rate by 25bp when it meets on April 24. This is a close call, and the recent strength in the ILS and likely easing in inflation expectations may entice BoI to pause, perhaps introducing further, stringent, macro-prudential measures on housing. Nonetheless, in our view, with inflation largely above target, a hike may help anchor a retreat in inflation expectations amid robust economic growth and a buoyant labor market. Furthermore, the average mortgage rate remains close to its historic lows and both housing prices and mortgage loans are rising by c15%yoy despite the prudential regulations introduced so far. We continue to see the 2011 year-end policy rate at 4%.

Chart 3: Banking sector credit growth has picked up markedly

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Source: Haver, BofA Merrill Lynch Global Research

Chart 4: Housing prices get detached from underlying rental prices

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Source: Haver, CBS, BofA Merrill Lynch Global Research. January 2002 = 100.

GEMs Da i ly - London Ed i t ion 19 Apr i l 2011

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News and Views

EEMEA Egypt: ruling NDP party dissolved The former ruling National Democratic Party (NDP) party has been dissolved in a landmark ruling by the Supreme Administrative Court. Its assets, estimated to be EGP70-80bn, are to be seized and nationalized.

Positive: This is an important event and reduces the probability of having an NDP grip during the forthcoming parliamentary elections. Some of the NDP members are preparing to launch a new party, the New National Party, to contest in the legislative elections. As the Muslim Brotherhood still cannot contest the polls as an official party, a number of smaller parties could do well in the elections and patch together a coalition afterward.

Hungary: NBH kept rate steady, no change in tone The NBH kept the policy rate steady at 6.0% in a unanimous decision. The statement was largely unchanged from the previous month. The inflation outlook warrants steady policy rates, according to the MPC assessment. The central bank also sees risks to the forecasts from both sides, with external shock leading to further tightening. Weak domestic demand could lead to lower policy rates.

Expected: The decision and the statement is in line with expectations, supporting our call that the policy rate will remain steady for the rest of this year. With a gradual improvement in the economy and ECB rate hikes, the next move by the NBH will likely be a hike in 2012, in our view.

Israel: S-index rises 0.5% mom in March The leading S-index rose 0.5% mom in March, while the January and February figures were increased 0.1ppt. Separately, 2010 growth was increased to 4.7% yoy from 4.6% yoy previously.

Hawkish: While the S-index contrasts with the continued lingering for the second month in a row of the overall PMI in a contractionary mode, the solid S-index figures and upward revision to GDP growth underscore the robust growth momentum. This will likely keep the pressure on BoI to continue adjusting policy rates.

Poland: labor data give voice to the dovish camp Corporate wages grew 4% yoy in March, a touch below consensus expectations of 4.2% yoy and down from 4.1% yoy in February. Employment rose 4.1% yoy, but fell modestly on the month.

Dovish: These releases add to case of the more cautious wing of the MPC, which has been highlighting that inflation is temporarily accelerating and there is no need to take rushed steps yet. Before the labor data release, two dovish voters (Ms Chojna Duch and Mr Glapinski) signaled they would favor keeping rates unchanged in May. These developments are in line with our view that a 50bp of monetary tightening at the May meeting is highly unlikely, though the board is likely to discuss the motion. We maintain the expectation of a further 50bp of monetary tightening for the year, most likely materializing in the next 5-6 months.

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GEMs Da i ly - London Ed i t ion 19 Apr i l 2011

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Latin America Argentina: Growth decelerates slightly in February The economic activity index (EMAE) rose 8.7% yoy in February, according to INDEC, below consensus and our own expectations. On a seasonally adjusted basis, EMAE increased 0.4% mom. The figure serves as a proxy for GDP growth.

Neutral: We expected some moderation in activity following the deceleration in the industrial production figure (9.0% yoy in February after three months of a two-digit growth) and also in alternative estimates of activity (7.0% yoy, according to OJF). While we expect private estimates to show a GDP expansion near 5% this year, we expect official GDP near 7%.

Argentina: Article IV revision taken into consideration According to the newspaper Ámbito Financiero on 18 April, the government is pondering when to allow an economic review. Finance Minister Amado Boudou said that "the possibility of authorizing the revision of the Article IV is a presidential decision" (our translation) and hinted it could be anytime, reported the same source. It also transcended that new CPI will replace the old one for CER estimate purposes. According to a report in La Nación, both the new CPI and the negotiations with Paris Club will be ready before yearend. This report also mentions that government officials expect growth to be 6.6% this year, without citing any specific source. Government officials have not denied nor ratified these reports.

Positive: All theses signals towards a normalization of the relationship between the government and the IMF are positive, but we remain cautious. A more credible INDEC and an eventual Article IV revision will serve the purpose of a Paris Club agreement. However, we do not expect any advance with the IMF or an overhaul of CPI measurement this year.

Brazil: expectations on hold before the Copom meeting According to the Brazilian Central Bank’s weekly survey of market expectations released on Monday, the market consensus for 2011 consumer inflation reached 6.29% yoy, virtually unchanged from the previous reading and close to the target’s ceiling at 6.5% yoy. Consensus for 2012 stood at 5.0% yoy, unchanged from the previous week. The median selic forecast for 2011 stood at 12.25% yoy, while consensus for 2012 gained 25bp for the second consecutive week and reached 11.75% yoy.

Neutral: The market is clearly questioning the BCB's ability/willingness to bring inflation to the target by the end of next year. We expect the board to hike the selic rate by 50bp to 12.25% yoy on Wednesday.

Brazil: IPC-S decelerates slightly The weekly consumer price index from the FGV (IPC-S) released on Monday gained 0.83% mom in the second reading of the month, down slightly from 0.89% mom in the previous reading. Food was the only group to post a deceleration in the week, down 40bp to 1.10% mom. On the other hand, transportation costs gained 1.71% mom, as gasoline prices surged by 3.76% mom.

Expected: Transportation costs have been pushing consumer inflation since the beginning of the year. We expect this movement to ease over the next few weeks, as seasonal pressures should have lower impact on the group and the ethanol supply is expected to normalize due to the sugar cane

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GEMs Da i ly - London Ed i t ion 19 Apr i l 2011

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harvesting.

Mexico: monthly options auction scheme unchanged Interviewed over the weekend in Washington, central bank governor Carstens emphasized that Mexican policy makers have no plans to make any changes to the monthly options auction scheme.

Neutral: Following the recent MXN appreciation – trading below 11.70 last week – resulting from continued capital inflows, Carstens’ comments further reaffirm Mexican authorities’ commitment to a free floating regime. The approach followed by Mexico distinguished the country from other LatAm economies already applying different intervention and capital control mechanisms to limit currency appreciation.

Peru: ex candidates staying away from alliances Pedro Pablo Kuczynski and Castañeda indicated that they are unlikely to endorse Humala or Fujimori. Also, President Toledo stated that he is not supporting either candidate. Still, some of Toledo’s key advisors will reportedly take part in developing a new more moderate government plan for Humala.

Uncertain: Given the lack of strength of political parties in Peru, an official backing is not likely to play a major role. The race is turning out to be anti-Fujimori against anti-Humala.

Asia PBoC governor: China needs to reduce its FX reserves PBoC governor Zhou Xiaochuan said China’s FX exceeded US$3tn at end-March, above necessary levels. Rising FX reserves add big pressures on PBoC’s sterilization. China needs to reduce its FX reserves, and improve and diversify its FX management. China could consider diversifying FX reserves through sovereign wealth fund like the CIC.

Mixed: Governor Zhou made some casual and interesting comments why delivering a speech in Qinghua University in Beijing. We surely agree that 3.0tn is just way too much, however, it’s worth pointing out that part of the FX reserves might be from hot money which could be volatile. According to our estimates, among the US$198bn increase of FX reserves in 1Q11, “unexplained” flow could be as high as US$139bn. Then how to reduce China’s FX reserves? If we forget about all those tricky definitions, the SAFE (under the PBoC) now is the monopoly of FX manager in China, so reducing FX reserves means that the PBoC needs to scrap its monopoly power in the first place. A couple of years ago after fights by the Ministry of Finance, US$200bn was carved out to found the state-owned CIC, and over years China also developed some QDII funds. The next step, as is widely wished, is to allow individuals (or private companies) to get some quota (or freely) to make overseas investments.

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GEMs Da i ly - London Ed i t ion 19 Apr i l 2011

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PBoC senior official: Yuan trade settlement amounted RMB 360.3bn in 1Q Bo Li, director general of PBoC’s No.2 monetary policy department (in charge of currency issues), said yuan trade settlement surged to RMB360.3bn in 1Q, equivalent to 70% yuan trade settlement in 2010. Yuan trade settlement has significantly reduced FX conversion costs, which accounted for 4% of total costs at Chinese corporates, as USD fluctuates, said senior official at Ministry of Commerce Wang Shouwen.

Mixed: The growth of yuan trade settlement is phenomenal (19 times YoY in 1Q11). One driver of yuan trade settlement is the strong yuan and the development of off-shore RMB capital market, as a majority (80%) of yuan trade settlement is imports (meaning outflow of RMB). Most of those outflows of RMB end up in HK, the only center so far for RMB offshore.

PBoC advisor: Expect more policy tightening all year China's monetary policy tightening is likely to continue through the end of the year, Xia Bin said. The latest RRR hike showed China's "prudent" monetary policy stance for the year hasn't changed, and he believes it will go on until the end of the year.

Hawkish: The current debate on whether monetary policy tightening will be continued is rather “behavioral” and “linguistic”. Most equity strategists have been jumping on the wagon calling for an end of monetary tightening and start of bull markets, but policymakers are warning us that tightening will be continued. Why should you trust? We have discussed this issue several times in the past couple of weeks. Surely the PBoC will continue tightening measures, but for different tools, the rhythm and method could be quite different. For administrative control of lending growth, the PBoC just needs to carry out its 16% annual M2 growth target (or an implicit annual new loans cap at RMB7.0-7.5tn). For interest rate hikes, perhaps the most intensive period is already the past. Rate hikes were intensive because the PBoC needed to front-load those rate hikes to tame inflation expectations. It’s simply impossible for the PBoC to hikes rates every two months in the remainder of this year. For RRR, however, the PBoC might need to continue the hiking because of massive inflow of FX money. See our comments on Premier Wen’s talk at (http://research1.ml.com/C?q=iH3pHo39KmtUcVCdYscCDA__&s=luti), and also our twin-peak inflation view (plus uncertainty in forecasting) at (http://research1.ml.com/C?q=K-BpPE0LeSqdjARQSsPDjg__&s=zhixi).

Singapore: exports up on Chemicals, tech exports contract Non-oil domestic exports expanded a stronger than expected 10% in March, led by non-electronic products (24.5%). However, electronic exports contracted for a second consecutive month – 13.8% in March and 12.8% in February. Better were petrochemicals (8.6%), while pharmaceuticals grew 4.4%. On a mom seasonally adjusted basis, NODX fell 2.9% from February.

Positive: The MAS remains positive on the economic outlook for 2011, stating that economic activity is likely to be "sustained at a high level for the rest of the year”. We remain more cautious about the economic outlook, maintaining our full year GDP forecast at +5.3% given the downside risks from higher oil prices, supply chain disruptions from Japan's disaster, and fiscal austerity in US and Europe.

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GEMs Da i ly - London Ed i t ion 19 Apr i l 2011

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Asia in Focus China: the stalemate in the property market China has released its official property sector data in March. Overall, the data suggest that home prices were still rising (in both mom and yoy terms) in the majority of China’s large and medium sized cities, though there were some early signs of price stabilization. Home transaction growth has accelerated a bit in March from January-February and Q410. Property investment and construction activities have held up well so far this year.

Policy implication: strengthened enforcement of tightening This set of data supports the government’s toughened tone on fighting property speculation. We do not expect many new property tightening measures, but enforcement will likely be strengthened until the government sees a clear sign of falling home prices in top-tier cities and prices stabilize in other cities.

On 13 April Premier Wen prodded local government to step up enforcement of existing tightening measures to bring home prices under control. Wen said that home prices are still too far above the government’s goal and people’s expectations; home prices in some cities are too high and are rising too fast despite falling transaction volume. Wen’s solutions are to (1) curb speculative demand and (2) add supply of both social housing and private homes. He urged local governments to take more responsibility in funding social housing.

Home prices still climbing in the majority of big cities Prices of newly built homes in the majority of the 70 large and medium sized cities continued climbing in March from February, though there were some early signs of price stabilization, especially in top tiered cities (eg, Beijing and Shanghai).

From February to March, prices of newly built commercial homes increased in 50 cities, stayed flat in eight cites and declined in 12 cities. This is a slight improvement from the previous two months, as new home prices rose in 56 cities in February and 60 cities in January. In yoy terms, new home prices rose in 67 cities in March (vs 68 cities in February), declined in two cities (vs one city in February). Forty-six cities had a smaller yoy price increase in

Ting Lu +852 2536 3718 Xiaojia Zhi +852 2161 7815 TJ Bond +852 2161 7152 This piece was originally published in the latest GEMs Daily – Asia Edition.

Click here for our comments and more details on Wen’s speech.

Chart 5: Mom price changes of new homes in tier 1 cities

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Source: CEIC, NBS, BofA Merrill Lynch Global Research

Chart 6: Yoy price changes of new homes in tier 1 cities

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GEMs Da i ly - London Ed i t ion 19 Apr i l 2011

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March compared to the prior month, vs 30 cities in February.

Prices seemed to stabilize in tier 1 cities. In March, new commercial home prices stayed flat in mom terms in Beijing and Shenzhen, and rose 0.2% in Shanghai, down from the mom increases of 0.5%, 1.0% and 1.1%, respectively, in February. In yoy terms, March prices rose 6.2%, 3.1% and 2.0% in Beijing, Shenzhen and Shanghai, respectively, slowed from 8.4%, 3.3% and 2.8% yoy increases in February.

Home transaction growth edged up in March Home transaction (in floor space) rose 14.3% yoy in Q1, up from 13.2% in

January-February and 11.6% in Q410. In March alone, home transaction rose 135% in March from the monthly average of January-February, even stronger than the 131% increase during the same time last year when sales were very strong.

The strong transaction growth could be driven by momentum in relatively small cities, while transaction growth may have started to slide in big cities. According to the China Real Estate Index System, March home transaction volume increased in mom terms in 70% of the 30 cities it monitors, but declined in yoy terms in 80% of the 30 cities. It dropped 48% yoy in Beijing.

Property investment and construction stayed resilient Investors surely pay a lot of attention to property investment, which accounts for 25% of China’s total FAI and is the swing factor for growth. So far, property investment grew 34.1% yoy in Q111, up from 32.6% in January-February and 33.5% in 2010. A moderate slowdown of property FAI is likely, driven by the weakness in the private sector, though the construction of 10 million units of social housing (costing RMB1.3-1.4tn) could ensure a soft-landing.

More details on construction activities and sources of funding:

Newly started property construction (in floor space) rose 23.4% yoy in Q1, down from 27.9% in January-February but up from 5.2% in Q4. Property under construction rose 35.2% yoy in Q1, down from 39.0% in January-February but up from 18.7% in Q410.

Total funding to the property sector rose 18.6% yoy in Q1, up from 16.3% in January-February and 15.7% in Q410. In particular, loans to developers (17% of total funding in 2010) rose 4.4% yoy in Q1, down from 7.7% in January-February but up from-19.5% in Q410; buyers’ deposits and advance payments (26% of total funding) rose 28.7% yoy in Q1, vs 28.9% in January-February and 21.1% in Q410.

Chart 7: Property investment and newly started construction

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Source: CEIC, NBS, BofA Merrill Lynch Global Research

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LatAm in Focus

Peru: hedging political risk We look at ways to hedge against deterioration in market sentiment ahead of the 5 June presidential elections. Markets are also likely to pay close attention to polls to be released on 24 April (from Ipsos) and 29 April (from Datum). For our views on the election please see GEMs Daily - US Edition, 12 April 2011. Below we focus on market positioning and potential price action.

FX: BCRP has the firepower and intent to control volatility USD-PEN volatility is likely to be significantly lower than other asset classes due to the central bank’s stated intent to maintain a stable exchange rate. Peru remains a highly dollarized economy with over 40% of credits and deposits in USD. Less than half of the sovereign’s debt is in local currency, which also provides an incentive to limit USD-PEN upside.

Peru has plenty of reserves with which to temper currency volatility (USD47bn as of 6 April). Relative to the size of its economy, Peru has the largest FX reserves in the EM world with the ratio of reserves to GDP at 30% compared to 14% for Brazil and 11% for Mexico (Chart 9). Peru’s reserve adequacy ratios are also well in excess of the recommended levels in the literature1. Reserves are 0.9x of the monetary base, 5.1x short-term debt and 18.5x months of import cover. This compares to recommended levels of 0.2x, 1x and 3x, respectively.

Average daily trading volume in USD-PEN spot is approximately USD500mn, with the central bank often accounting for more than 50% of that volume. The bank is generally a net buyer of USD, accumulating USD9.0bn in 2010 alone. The bank can also issue sol-indexed certificates of deposit, which allow investors to gain long USD exposure without having to transact in the spot market. Given central bank intervention, FX spot is not an efficient way to hedge against political risk. Although USD-PEN options are quoted, they trade in small sizes with bid-ask spreads of 1.5-2.5 vols wide.

Soberanos: very heavy foreign positioning a major risk The Soberano market concerns us due to very heavy foreign investor positioning. Foreigners hold 43% (PEN11bn) of Soberanos outstanding, compared to roughly 35% in Mexico and 11% in Brazil. This is also higher than foreign participation in local markets in EEMEA and Asia, where the share ranges from 35% to 10% (for data see “GEMS Weekly Bond Monitor”). Potential election noise warrants some position reduction, but trying to profit from higher rates might be difficult given the lack of a liquid interest rate swap market.

Positioning risk is further magnified by the limited liquidity in the market. Monthly trading volume for Soberanos has averaged PEN2.8bn, ranging from PEN4.1bn in March 2010 (ahead of BCRP tightening cycle) to PEN1.1bn in February 2011. Positioning risk is heaviest in the front end (less than two years) where foreigners hold 90% of bonds, but they hold bonds throughout the curve (Chart 10). Peru has also been the recipient of retail money via global depository notes, which facilitate local currency investments. The Aug20 and Aug31 Soberanos are those most at risk from GDN outflows (Chart 11).

1 http://www.imf.org/external/np/pp/eng/2011/021411b.pdf

Alberto Boquin +1 646 855 5062 This piece was originally published in the latest GEMs Daily – US Edition.

Chart 9: High Peru reserves to GDP ratio

0

5

10

15

20

25

30

35

Peru

Urug

uay

Arge

ntina

Chile

Bras

il

Mex

ico

Colom

bia

Source: BofA Merrill Lynch Global Research

GEMs Da i ly - London Ed i t ion 19 Apr i l 2011

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Assuming a positive election outcome, macroeconomic fundamentals suggest eventual upside for Soberanos (see “PEN adds to Soberano upside”). Politics is likely to remain the main driver of price action near term.

CDS: not the best hedge, but probably the only hedge The lack of hedging options in currency and local rates markets means that credit default swaps (5y: 158bp) are likely to serve as the hedging instrument of choice for those with existing bond positions, as well as those expecting a deterioration in market sentiment. Shorting USD bonds could also be an alternative, but many of these bonds have begun to trade special in the repo markets.

Election rhetoric is likely to heat up in coming weeks as both candidates vie for votes. It is worth noting, however, that neither candidate has expressed an intent to default on Peru’s debt obligations. Humala’s economic advisor has actually expressed an interest in increasing debt issuance (with an emphasis on local currency debt) in order to fund infrastructure and social spending programs.

CDS may be an effective near-term hedge, but credit ratios in Peru make a default highly unlikely in the near term. The total stock of debt is less than the amount of FX reserves held by the central bank (USD47bn). Responsible debt management continues to boost Peru’s credit profile, with average debt maturity of 17.1 years and a rising share of local currency debt. Debt to GDP of 25% is lower than most of its EM peers. The total stock of debt in Peru is USD34bn, of which USD9.4bn is external bonds, USD10.1bn is local Soberanos and USD14.3bn in multilateral loans, compared to USD42b in FX reserves. The cost of servicing the debt is also low, with interest payments only expected to account for 6.2% of government revenues in 2011.

Moody’s placed the sovereign’s rating on positive outlook and does not expect either candidate to shift policy enough to seriously challenge the country’s very strong credit fundamentals. Note that credit fundamentals would take a hit on a large USD-PEN move higher given that less than half of the debt is in local currency.

Chart 10: Foreigners heavily positioned in Soberanos (% of total)

0

20

40

60

80

100

Aug1

1

May

15

Aug1

7

Aug2

0

Aug2

6

Aug3

1

Aug3

7

Feb4

2

Source: BofA Merrill Lynch Global Research

Chart 11: Retail money in Soberanos via GDNs (% of total)

0%

10%

20%

30%

40%

50%

Aug1

1

Jan1

2

May

15

Aug1

7

Aug2

0

Aug2

6

Aug3

1

Aug3

7

Feb4

2

Source: BofA Merrill Lynch Global Research

GEMs Da i ly - London Ed i t ion 19 Apr i l 2011

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Data Preview Sunday-Friday, 17 April to 29 April NYT Country Data/Event For BofAMLe Cons.† Previous Comments

– Indonesia Auto sales Mar n.a. n.a. 73849 – Philippines Balance of payment (US$) Mar n.a. n.a. -113mn – Venezuela Unemployment Rate Mar n.a. n.a. n.a. – Russia Real wages (yoy) Mar 2.5% 2.1% 2.4% Inflation is eating away at real wage growth and we see wages

staying broadly on par with last month's print. – Russia Retail sales volume (yoy) Mar 3.5% 3.6% 3.3% Consequently, we see little scope for real retail sales to

accelerate. – Russia Unemployment rate Mar 7.0% 7.4% 7.4% We see unemployment marginally lower. – Russia Fixed capital investment (yoy) Mar 5.0% 2.4% -0.4% Fixed investment has struggled so far this year, but we expect the

trend to be reversed as pent-up demand picks up on higher oil prices.

– Thailand Exports (yoy) Mar n.a. 17.3% 31.0% – Philippines Budget balance (US$) Mar n.a. n.a. -21.5B – Korea Real GDP (yoy) Q1 n.a. n.a. 4.7% – Argentina Budget Balance Mar $1750mn n.a. $1442.7mn With tax revenues increasing 32% yoy, we point our forecast to a

primary surplus of ARS1,750mn in March.

Tuesday, 19 April NYT Country Data/Event For BofAMLe Cons.† Previous Comments

4:30 Hong Kong Unemployment rate (sa) Mar n.a. 3.5% 3.6% 8:00 Brazil Unemployment Rate Mar 6.7% 6.7% 6.4% We expect the unemployment rate to rise to 6.7%, showing some

accommodation at the margin in the seasonally adjusted figures but remaining at historically low levels.

8:00 Poland Industrial production (yoy) Mar 8.0% 9.6% 10.7% Industrial output growth will slow on base effects. 17:00 Colombia Industrial Production (yoy) Feb n.a. 5.9% 6.2% 17:00 Colombia Retail Sales (yoy) Feb n.a. 12.6% 12.3%

Wednesday, 20 April NYT Country Data/Event For BofAMLe Cons.† Previous Comments

3:30 Thailand BoT rate Apr 2.8% 2.75% 2.5% We expect policy rate to rise by 25bps to 2.75%. Despite comment of Deputy BoT governor Atchana that "BoT will be mindful not to let the interest rate increase deter economic growth and are ready to change policy direction to support it", she then added "But we haven’t witnessed a local economic slowdown".

4:00 Taiwan Export orders (yoy) Mar 4.5% 4.7% 5.3% The March data point provides the first clean read after the Lunar New year distortions. This will also reflect the orders made after the earthquake. Due to high base effect and the short-term supply chain disruption, we expect the March export orders to expand at a slower pace, at 4.5% yoy.

4:00 South Africa CPI (yoy) Mar 3.9% 4.0% 3.7% Headline inflation should push modestly higher on the back of a 43c/l increase in petrol. We expect a more notable acceleration through the middle of the year to 6.0% by Q4

5:00 Malaysia CPI (yoy) Mar 3.2% 3.1% 2.9% Malaysia's CPI inflation probably continued climbing to +3.2% in March (from +2.9% in Feb) on the back of rising food and fuel prices. Bank Negara may also be watching more closely for demand-side inflation drivers.

7:00 South Africa Retail sales volume (yoy) Feb 7.3% 7.1% 6.4% Base effects should push the year-over-year rate higher in February. Also the underlying trend remains robust. Our February forecast implies the average level of spending in Jan/Feb is 2.5% higher than Q4 after a 1.5% qoq gain in the final quarter of 2010.

8:00 Brazil IBGE CPI IPCA-15 (mom) Apr 0.78% 0.6% 0.60% We expect the April IPCA-15 to gain 0.78% mom, with transportation costs adding over 30bp to headline result. This should bring yearly inflation to 6.45% yoy, close to the target’s ceiling at 6.5% yoy. Ethanol prices surged by over 15% mom and are expected to have lower impact on the monthly result.

8:00 Poland Core CPI (yoy) Mar 2.0% 1.8% 1.7% Following the upward surprise in CPI, core inflation is likely to pick up to 2%.

9:00 Mexico Unemployment Rate Mar 5.1% 5.0% 5.38% 10:00 Mexico Bi-Weekly CPI 15-Apr -0.03% -0.06% 0.05% We expect H1 April CPI to post a slightly deflationary figure of -

0.03%, core at 0.16%. We continue to believe inflation will keep showing positive results on the back of the gradual recovery of domestic demand, the usual seasonal downswing in agricultural

GEMs Da i ly - London Ed i t ion 19 Apr i l 2011

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product prices, and lower summertime electricity rates. 10:00 Mexico Bi-Weekly Core CPI 15-Apr 0.16% 0.10% 0.24% 15:00 Argentina Industrial Production (yoy; nsa) Mar 9.5% n.a. 9.0% We expect some recovery given the upside in automobile

production (34% yoy, after a 4.8% increase in February). However, risks are biased downward as March 2011 had three more holidays compared to March 2010, which may have weighed in other industrial sectors.

– Brazil SELIC Target - Central Bank 20-Apr 12.25% 12.25% 11.75% We expect the Brazilian Central Bank (BCB) to keep the interest tightening pace unchanged at 50bp, hiking the selic rate to 12.25% yoy. We believe this should be the preferred strategy given the ongoing deterioration in inflation expectations.

Thursday, 21 April NYT Country Data/Event For BofAMLe Cons.† Previous Comments

4:30 Hong Kong CPI (yoy) Mar 4.4% 4.2% 3.7% On the back of an overall robust economy, continuation of pass-through from higher private rental, global food and commodities, we expect the March CPI to further pick up to 4.4% yoy.

7:00 Turkey CBT rates decision – 6.25% 6.25% 6.25% CBT is likely to remain on hold but a first hike could come in July as core inflation reaches the 5% mark in the summer.

– Poland Central Bank's minutes Apr – – – We expect to see a broad consensus backing the April rate increase on the back of growing commodities price increases.

Friday, 22 April NYT Country Data/Event For BofAMLe Cons.† Previous Comments

3:30 Thailand Foreign reserves (US$) Apr n.a. n.a. 184.6 bn 4:00 Taiwan Unemployment rate (sa) Mar n.a. 4.5% 4.6% 5:30 Malaysia Foreign reserves (US$)) Apr n.a. n.a. 113.84 bn

Notes: †Bloomberg consensus; = level of importance; A = advanced; F = final; P = preliminary; sa = seasonally adjusted; saar = seasonally adjusted annualized rate; nsa = not seasonally adjusted; wda = working-day adjusted; n.a. = not available; mom = month-on-month; qoq = quarter-on-quarter; yoy = year-on-year. Source: BofA Merrill Lynch Global Research, Bloomberg, Central banks * denotes previous month

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Data Review Monday, 18 April NYT Country Data/Event For Actual BofAMLe Cons.† Previous Comments

1:00 Singapore Non-oil Domestic Exports (yoy) Mar 10% 3.0% 5.0% 7.8% Non-oil domestic exports expanded at a stronger than expected+10% in March, led by non-electronic products (+24.5%). Electronic exports however continued to contract by 13.8% in March.

8:00 Hungary NBH rates decision – 6.00% 6.00% 6.00% 6.00% 8:00 Poland Average gross wages (yoy) Mar 4.0% 4.0% 4.2% 4.1% 15:00 Argentina Economic Activity Indx (yoy; nsa) Feb 8.7% 9.2% n.a. 9.5% On a seasonally adjusted basis, EMAE increased 0.4%

mom. The figure serves as a proxy for GDP growth 21:41 China Actual FDI (yoy) Mar 32.9% n.a. 32.2%

Notes: †Bloomberg consensus; = level of importance; A = advanced; F = final; P = preliminary; sa = seasonally adjusted; saar = seasonally adjusted annualized rate; nsa = not seasonally adjusted; wda = working-day adjusted; n.a. = not available; mom = month-on-month; qoq = quarter-on-quarter; yoy = year-on-year. Source: BofA Merrill Lynch Global Research, Bloomberg, Central banks * denotes previous month

Friday, 15 April NYT Country Data/Event For Actual BofAMLe Cons.† Previous Comments

1:00 Singapore Retail sales (yoy) Mar -12.1% n.a. -1.5 3.2% 3:00 Turkey Unemployment rate Jan 11.9% 11.2% n.a. 11.4% The nsa unemployment rate edged higher on

seasonality, with the bulk of job losses in construction and agriculture. The sa unemployment rate edged down further however.

7:00 Israel CPI (yoy) Mar 4.3% 4.5% 4.4% 4.2% CPI came softer than expected but all measures of core CPI are now above 3%yoy

7:00 Brazil FGV Inflation IGP-10 (mom) Apr 0.56% 0.58% 0.60% 0.84% 10:00 Mexico Overnight Rate 15-Apr 4.50% 4.50% 4.50% 4.50% The CB's statement came in with a less cautious tone

than its previous communiqué. For instance, it did not show explicit concern over public prices as before.

15:00 Argentina Consumer Price Index (mom) Mar 0.8% 0.8% n.a. 0.7% Private inflation estimates such as FIEL recorded an acceleration of inflation (2.3%mom in March, compared to the previous figure of 1.2%), with an accumulated increase of 5.6% in Q1

17:00 Colombia Trade Balance Feb $362.6 n.a. n.a. $209.9 – Peru GDP (yoy; nsa) Feb 8.5% 9.3% 9.5% 10.0% Despite the weaker than expected print economic

activity is still expanding at a robust pace leading the BCRP to continue tightening. Still, uncertainty over the final electoral outcome is likely to weigh on investment projects and overall activity. Nonetheless, we continue to expect GDP growth of 6.5% in 2011.

– Russia Industrial production (yoy) Mar 5.3% 6.0% 5.5% 5.8% The IP data is overall in line with our relatively benign view of a continued moderate recovery

– Ukraine Industrial production (yoy) Mar 8.0% 8.9% 7.6% 11.5% – Peru Unemployment Mar 9.4% n.a. 9.2% 9.1%

Notes: †Bloomberg consensus; = level of importance; A = advanced; F = final; P = preliminary; sa = seasonally adjusted; saar = seasonally adjusted annualized rate; nsa = not seasonally adjusted; wda = working-day adjusted; n.a. = not available; mom = month-on-month; qoq = quarter-on-quarter; yoy = year-on-year. Source: BofA Merrill Lynch Global Research, Bloomberg, Central banks * denotes previous month

Thursday, 14 April NYT Country Data/Event For Actual BofAMLe Cons.† Previous Comments

– China M2 money supply (yoy) Mar 16.6% 15.8% 15.4% 15.7% M2 growth was at 16.6% in March, up from 15.7% in Feb. The sharp decline of M2 growth in Feb and a rebound in March is mainly driven by a new definition of M2, so we think there is no need to focus on too much the monthly volatility and we should avoid over-interpretation.

– China Loan growth (yoy) Mar 22.07 17.7% n.a. 17.4% New loans in March were at RMB679.4bn, up from RMB535.6bn in Feb.

2:30 India WPI (yoy) Mar 9.0% 8.4% 8.36% 8.3% In our view March inflation coming in at 9%, makes a 25bp RBI rate hike on May 3 almost inevitable. In addition, the RBI will likely also need to hike 25bp again in June. We thus now expect 100bp (from 75bp earlier) of rate hikes by Oct.

13:00 Uruguay Unemployment Rate Feb 6.3% n.a. n.a. 6.1%

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Thursday, 14 April NYT Country Data/Event For Actual BofAMLe Cons.† Previous Comments

22:00 China Real GDP ( yoy) Q1 9.7% 9.60% 9.4% 9.8% 22:00 China CPI (yoy) Mar 5.4% 5.5% 5.2% 4.9% 22:00 China Industrial production (yoy) Mar 14.8% 14.0% 14% 14.9% 22:00 China Retail sales (yoy) Mar 17.4% 16.2% 16.5% 11.6% Retail sales growth accelerated to 17.4% YoY in March

from 15.8% in Jan-Feb. Rising CPI inflation (by 0.5ppt) could partially contributed to this small rise.

22:00 China PPI (yoy) Mar 7.3% 7.80% 7.2% 7.2% 22:00 China Fixed asset investment (yoy) Mar 25.1% 24.2% 24.8% 24.9%

– Singapore MAS policy meeting Mar – – – We do not expect the Monetary Authority of Singapore (MAS) to tighten further, and expect MAS to maintain the current "slightly steeper" appreciation bias.

Notes: †Bloomberg consensus; = level of importance; A = advanced; F = final; P = preliminary; sa = seasonally adjusted; saar = seasonally adjusted annualized rate; nsa = not seasonally adjusted; wda = working-day adjusted; n.a. = not available; mom = month-on-month; qoq = quarter-on-quarter; yoy = year-on-year. Source: BofA Merrill Lynch Global Research, Bloomberg, Central banks * denotes previous month

GEMs Da i ly - London Ed i t ion 19 Apr i l 2011

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Portfolios Update Trade

Expiry date

Entry date Entry price Target Stop

Equity (US$ mn)

Notional (US$ mn) Leverage

Current level

FX discretionary portfolio Long 6m USD-call CZK-put at 20 29-May-11 29-Nov-10 2.73% 0.137 5.00 Long worst of 6M INR put, IDR put vs USD call 29-May-11 29-Nov-10 0.92% 0.092 10.00 Long 3m EUR put TRY call at 2.02/1.96 4-Jul-11 4-Jan-11 0.26% 0.086 33.25 Long 6m USD call INR put at 46.56 with 3m UAO window at 47.20

11-Jul-11 11-Jan-11 0.83% 0.083 10.00

Long EUR put ILS call spread at 4.75/4.65 24-Jul-11 24-Jan-11 0.31% 0.031 10.00 Buy 2M JPY put, KRW call at 13.00 11-Apr-11 11-Feb-11 0.89% 0.089 10.00 Long 3m USD call TWD put spread 22-Jun-11 22-Mar-11 0.54% 0.054 10.00 Short 3m MYR NDFs vs Long 3m THB Fwds 27-Apr-11 27-Jan-11 10.10 9.68 10.30 4.00 10.00 2.5 9.96 Short 9m USD–KZT NDFs 10-Nov-11 10-Feb-11 146.40 140.00 148.00 2.00 8.00 4.0 145.63 Short PLN-HUF Spot 14-Dec-11 14-Mar-11 67.60 64.20 69.30 2.00 4.60 2.3 67.11 Short 12m USD-PHP NDFs 22-Dec-11 22-Mar-11 43.34 42.00 43.80 3.00 12.00 4.0 43.30 Short 1m USD-COP 22-Dec-11 22-Mar-11 1865 1770 1835 1.00 4.80 4.8 1798 Short 3m SGD-IDR NDFs 23-Dec-11 23-Mar-11 6896 6600 7000 2.34 8.64 3.7 6949 Long TRY-CZK Spot 24-Mar-11 11.10 11.75 10.80 1.50 9.00 6.0 11.01 Buy USD/ZAR Spot 6-Apr-11 6.70 7.20 6.70 2.33 10.00 4.3 6.87 LDM discretionary portfolio Brazil: receive Jan-14 DI (pay DI), pay Jan-17 DI (receive CDI)

2-Jan-14 29-Nov-10 -17 50.00 -20.00 2.00 16.0 x 10.0 8.00 -15

Buy S. Africa 2023s Linker, FX hedged 7-Dec-23 29-Nov-10 2.62% 2.20% 2.80% 2.60 10.0 3.80 2.64% Buy Argentina BOCAN '15s 10-Sep-15 29-Nov-10 $26.00 $33.00 $21.00 4.00 10.0 2.50 $28.18 Malaysia 2s10s Steepener 22-Jun-11 22-Mar-11 115.00 150.00 100.00 2.00 25.94 x 6.10 12.97 103.00 China 1s5s Steepener 22-Jun-11 22-Mar-11 70.00 95.00 58.00 2.00 50.83 x 10.84 25.42 70.00 Korea 2s10s Steepener 22-Jun-11 22-Mar-11 49.00 70.00 36.00 2.00 25.99 x 6.12 12.99 47.50 Pay Turkey 5y CCS 6-Apr-11 8.34 9.35 7.70 2.00 10.00 5.00 8.38 Receive S.Africa vs Pay US 5y5y IRS 6-Apr-11 414.00 340.00 462.00 2.00 4.60 x 4.20 2.30 412.40 Receive 2s5s10s TIIE butterfly (receive 5y, pay 2y, pay 10y)

6-Apr-11 44.00 15.00 60.00 2.00 26.7 x 23.7 x 7 28.7 32.00

EXD discretionary portfolio Colombia 5s10s CDS steepener 29-Nov-10 27 50 32 4.00 50.0 x 29.08 12.5 42 Buy CDS basket in Poland, Mexico, Indonesia 29-Nov-10 134.00 180.00 100.00 5.00 10.0 x 10.00 6.0 132.38 Buy Malaysia Sukuk '15s 29-Nov-10 104.63 110.00 101.00 2.50 10.00 4.3 104.90 Buy Brazil '18s vs Sell Brazil '40s 20-Jan-11 5.00 (15.00) 25.00 1.55 20.0 x 15.16 11.9 11.10 Buy Venz '22s vs Sell Arg '17s 2-Mar-11 715 635 765 1.00 5.0 x 4.56 5.0 717 Buy Hungary ‘20s vs Sell Poland ‘19s 15-Mar-11 121 60 165 1.27 10.0 x 9.48 7.87 97 Buy Indon '14Ns vs 3y CDS 22-Mar-11 (62) (20) (90) 1.50 10.0 x 11.71 8.4 (92) LDM long-only portfolio Overweight Korea, Malaysia, Philippines, Poland, South Africa Market Weight Brazil, Hungary, Indonesia, Mexico, Turkey Underweight Thailand EXD long-only portfolio Overweight Argentina, Qatar, Russia, South Africa, Venezuela Market Weight Brazil, Colombia, Hungary, Indonesia, Mexico, Panama, Peru, Philippines, Turkey, Ukraine, Uruguay Underweight Lebanon Note: The equity allocation is set such that a 6-sigma movement in the trade against our recommendation (ie, six times the standard deviation of the total returns of the trade) would not wipe out more than 20% of the equity. The correlation between our trades is assumed to collapse to zero under stress condition. This assumption makes the value-at-risk (VAR) of the portfolio more conservative. The total VAR amounts to 20% of the equity allocated to trade recommendations. The leverage is calculated by the ratio between notional and equity. All quotes in the Asian time zone are at close on the open day, for the other time zones the quotes are at 11am NY Time (4pm London). For portfolio methodology and details of the calculations refer to EXD discretionary portfolio: year two report, 01 April 2010, "LDM portfolio is four", EM Spotlight, 02 November 2009, EM FX discretionary portfolio returns 12.9% in first year, 01 October 2010 and Introducing BAML LDM long-only portfolio, 28 April 2010. A complete EXD portfolio and LDM portfolio performance record is available upon request. The performance does not reflect tax withholdings and investors should note that their costs may vary. Past performance does not guarantee future returns. Source: Bloomberg, BofA Merrill Lynch Global Research

GEMs Da i ly - London Ed i t ion 19 Apr i l 2011

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Selected Market Indicators EM DEBT (TRR) 1D% 1W% MTD% 1M% YTD% 1Y% EM 0.1 0.0 0.2 1.1 1.3 7.5 LATAM 0.1 0.2 0.2 1.2 1.8 8.1 Argentina 0.7 -0.1 -0.6 7.4 -0.7 24.3 Brazil 0.2 0.5 0.0 0.4 1.1 7.0 Colombia 0.3 0.6 0.3 0.4 2.1 8.7 Mexico 0.2 0.6 0.2 0.0 1.7 7.1 Panama 0.1 0.8 0.6 1.2 2.0 9.9 Peru -0.7 -2.2 -2.1 -3.8 -2.4 3.7 Venezuela 0.2 -0.3 1.1 5.1 5.7 5.0 EMEA 0.1 -0.1 0.5 1.5 1.5 7.1 Lebanon 0.0 0.1 0.4 0.7 -0.1 5.7 Russia 0.1 0.0 -0.1 1.1 2.7 6.0 South Africa 0.1 0.3 -0.1 1.1 0.7 6.9 Turkey 0.4 0.0 0.9 1.7 0.1 9.4 Ukraine -0.2 -0.8 0.4 2.8 3.7 9.5 ASIA 0.1 -0.5 -0.4 -0.5 -0.9 6.7 Indonesia 0.0 -0.4 -0.2 -0.1 -0.9 6.3 Philippines 0.1 -0.8 -1.0 -1.4 -1.5 7.2 EM DEBT (IGOV Sprds) Last 1D∆ 1W∆ MTD∆ 1M∆ YTD∆ 1Y EM 262 7 17 4 -17 -1 46 LATAM 294 6 12 2 -19 -6 47 Argentina 538 3 20 12 -79 126 54 Brazil 115 5 8 5 -13 -12 11 Colombia 154 4 10 3 -8 -24 -4 Mexico 126 5 10 6 -1 -9 18 Panama 140 7 8 -1 -18 -21 -9 Peru 193 17 43 30 40 34 70 Venezuela 1022 5 15 -28 -103 -80 215 EMEA 245 7 20 2 -21 -3 56 Lebanon 339 8 14 4 -18 41 68 Russia 169 7 18 11 -18 -26 44 South Africa 142 6 11 7 -20 0 15 Turkey 189 3 18 -5 -26 13 -5 Ukraine 396 13 36 3 -58 -50 -6 ASIA 210 7 24 10 1 24 27 Indonesia 200 8 23 12 -3 29 34 Philippines 174 5 25 16 11 24 14 EM 5y CDS (Sprd) Last 1D∆ 1W∆ MTD∆ 1M∆ YTD∆ 1Y CDX.EM 200 0 6 -5 -16 0 -9 Argentina 557 -1 7 -35 -85 -45 -284 Brazil 107 -1 2 -4 -10 -4 -7 Mexico 100 -1 2 -6 -11 -14 -4 Venezuela 980 -8 20 -35 -138 -36 132 Russia 129 1 6 0 -4 -17 -3 Turkey 150 0 5 -8 -12 10 -19 Philippines 134 1 5 1 3 7 -34 Indonesia 141 -4 5 -3 -1 13 -16 EM Debt by Rating (Sprd) Last 1D∆ 1W∆ MTD∆ 1M∆ YTD∆ 1Y EM BBB 158 6 14 5 -3 -6 38 EM BB 204 6 20 7 -17 11 26 EM B 629 7 18 -12 -54 -25 65 EM vs HY Sprd Diff. Last 1D 1W MTD 1M YTD 1Y EM BBB - US Corps BBB -28 -33 -40 -35 -36 -47 -75 EM BB - US Corps BB -140 -139 -147 -151 -159 -215 -223 EM B - US Corps B 156 158 154 163 174 109 28 US Corps (TRR) 1D% 1W% MTD% 1M% YTD% 1Y% US High Yield (H0A0 TRR) 0.1 0.2 0.7 1.7 4.8 13.4 US High Grade (C0A0 TRR) 0.4 1.0 0.7 0.4 1.8 7.8 US Treasury Master (G0Q0) 0.4 0.9 0.4 0.4 4.9 4.9 US Corps (Sprd) Last 1D∆ 1W∆ MTD∆ 1M∆ YTD∆ 1Y US High Yield (H0A0 Sprd) 468 8 15 -4 -41 -73 -84 US High Grade (C0A0 Sprd) 146 0 1 -4 -9 -20 -6 Commodities Last 1D% 1W% MTD% 1M% YTD% 1Y% Crude Oil ($/Bbl) 107.2 -2.2 -2.4 0.5 6.1 17.4 28.8 Copper 420.5 -1.1 -5.6 -2.2 -2.9 -5.3 19.7 UST Yields Last 1D 1W MTD 1M YTD 1Y 10Y 3.37 3.41 3.58 3.47 3.27 3.29 3.76 2Y 0.65 0.69 0.82 0.82 0.58 0.59 0.95 10Y - 2Y 2.72 2.71 2.76 2.65 2.68 2.70 2.81 Global Yields Last 1D 1W MTD 1M YTD 1Y Japan Global '10 1.26 1.29 1.33 1.26 1.22 1.13 1.35 Germany Bund '10 3.25 3.38 3.49 3.35 3.19 2.96 3.08 Risk Aversion (Levels) Last 1D 1W MTD 1M YTD 1Y Risk Aversion S&P (VIX) 17.26 15.32 16.59 17.74 24.44 17.75 18.36 Source: BofA Merrill Lynch Global Research

EM FX Last 1D% 1W% MTD% 1M% YTD% 1Y% EUR ($) 1.423 -1.4 -1.4 0.5 0.3 6.3 5.5 Japanese Yen USDJPY 82.61 0.6 2.4 0.6 -2.5 -1.8 10.6 Argentinean Peso USDARS 4.073 -0.1 -0.6 -0.5 -0.8 -2.4 -5.4 Brazilian Real USDBRL 1.589 -0.8 -0.4 2.6 4.6 4.3 9.4 Chilean Peso USDCLP 475 -0.9 -0.7 0.4 1.2 -1.6 9.6 China Renminbi USDCNY 6.529 0.0 0.1 0.3 0.6 1.2 4.4 Colombian Peso USDCOP 1,799 0.0 1.0 3.8 4.0 5.7 7.8 Czech Koruna EURCZK 24.18 0.2 0.9 1.5 1.0 3.4 4.6 Egyptian Pound USDEGP 5.956 0.0 0.1 0.0 -0.4 -2.6 -7.8 Hungarian Forint EURHUF 268 -0.3 -1.1 -0.9 1.5 3.8 -1.0 Indian Rupee USDINR 44.46 -0.3 -0.1 0.3 1.5 0.6 0.6 Indonesian Rupiah USDIDR 8,678 -0.1 -0.3 0.3 1.1 3.5 4.0 Korean Won USDKRW 1,088 0.1 -0.4 0.8 3.4 3.3 2.6 Mexican Peso USDMXN 11.74 -0.6 0.1 1.4 2.6 4.9 4.1 Polish Zloty EURPLN 3.991 -1.0 -0.6 0.8 1.9 -0.7 -2.5 Russian Ruble USDRUB 28.33 -0.7 -1.1 0.3 0.4 7.2 2.9 S. African Rand USDZAR 6.850 -0.8 -2.4 -1.1 2.1 -3.3 8.0 Taiwanese Dollar USDTWD 29.09 -0.2 -0.5 1.1 1.7 0.7 7.5 Thai Baht USDTHB 30.11 0.1 -0.1 0.6 0.6 -0.2 6.4 Turkish Lira USDTRY 1.540 -1.8 -1.5 0.4 2.5 0.3 -3.3 EM 2y Rates (∆ in bp) Last% 1D∆ 1W∆ MTD∆ 1M∆ YTD∆ 1Y∆ Brazil (DI Futures) 12.74 3 -10 -4 -9 48 54 Chile 5.76 -6 -7 -10 18 104 261 China (onshore) 3.65 -1 1 2 16 29 103 Czech 2.20 -7 -13 -6 -4 17 46 Hong Kong 0.80 -5 -9 -4 7 6 -9 Hungary 6.46 4 6 1 -4 -12 109 India (onshore) 7.84 4 20 35 30 63 206 Israel 4.14 -6 -9 -8 18 106 127 Korea (onshore0 3.85 0 -4 -4 9 33 37 Malaysia (onshore) 3.56 -2 -6 -4 12 18 39 Mexico (TIIE) 5.67 -2 -10 -25 -22 21 -31 Poland 5.34 -1 5 12 16 47 89 Russia 5.50 -10 5 -25 -31 -70 -25 Singapore 0.44 1 -2 -8 2 -15 -24 South Africa 6.67 1 -3 -8 -4 77 -12 Taiwan (onshore) 1.02 -1 -1 3 5 3 -5 Turkey 7.79 5 -9 -21 5 156 -106 EM EQUITY (USD) P/E 1D% 1W% MTD% 1M% YTD% 1Y% EM 13.2 0.0 -2.0 0.9 7.6 2.6 14.5 LATAM 12.8 0.9 -2.4 -0.6 5.5 -0.2 9.6 Argentina 11.3 -0.2 -4.0 -0.4 1.4 -12.4 34.9 Brazil 11.1 1.1 -2.8 -0.8 5.4 1.2 5.2 Chile 18.5 0.2 -1.2 2.4 10.1 -6.1 31.8 Mexico 20.1 0.5 -0.9 0.2 7.2 0.7 15.5 EMEA 9.8 0.3 -3.1 1.9 5.7 13.8 19.9 Russia 8.3 0.2 -4.9 -5.2 -1.5 10.2 15.9 South Africa 16.5 -0.8 -5.7 -2.5 7.2 -5.3 15.9 Turkey NA 1.1 -0.1 8.8 10.5 2.8 8.3 ASIA 14.0 -0.4 -1.1 1.8 9.0 3.1 15.8 China NA 0.3 -0.9 2.3 9.4 5.2 7.5 India 17.0 -1.4 -1.4 -1.9 7.6 -7.0 4.0 Korea 12.2 -0.4 0.1 1.7 10.9 8.3 25.7 Taiwan NA -1.2 -2.7 0.9 5.0 -3.4 15.1 Thailand 14.2 0.0 -0.6 5.0 10.3 8.6 56.3 EM EQUITY (Sectors) P/E 1D% 1W% MTD% 1M% YTD% 1Y% Energy 9.6 0.7 -4.2 -0.9 4.8 10.7 17.9 Material 13.9 0.1 -2.3 0.5 6.6 3.0 14.4 Industrials 15.5 -0.2 -0.6 3.5 10.8 0.1 19.8 Consumer Discretionary 15.1 -0.1 0.2 3.4 12.8 4.9 32.5 Consumer Staples 21.4 0.2 -0.2 2.4 8.6 0.3 22.4 Health Care 13.7 0.6 -0.8 1.2 8.6 -4.0 9.4 Financials 13.8 0.0 -2.0 0.7 8.3 1.1 11.6 Information Technology 12.6 -1.5 -2.2 0.4 5.5 -1.5 8.3 Telecom Services 12.8 0.2 -1.0 1.0 7.6 2.1 8.7 Utilities 14.5 0.0 -1.4 0.4 7.5 2.5 4.1 Global Equities Last 1D% 1W% MTD% 1M% YTD% 1Y% Dow Jones (INDU) 12,202 0.5 -0.3 -1.0 2.9 5.4 10.7 Nasdaq (CCMP) 2,735 0.2 -0.6 -1.7 3.5 3.1 10.2 S&P 500 (SPX) 1,305 0.4 -0.6 -1.5 2.1 3.8 9.5 Small Cap (RTY) 822 0.9 -0.7 -2.6 3.4 4.9 15.0 DJ Stoxx € 50 (SX5P) 2,562 0.3 -1.3 1.2 4.2 1.9 0.2 Nikkei 225 (NKY) 9,557 -0.4 -1.7 -2.0 4.7 -5.7 -12.3 Deutsche Borse AG (DAX) 7,027 0.4 -0.5 1.9 8.0 3.8 14.1

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Recent Research Date Publication Headline Authors 18-Apr-11 GEMs Daily - US Edition Peru: hedging political risk GEMs FI Strategy & Economics

18-Apr-11 GEMs Daily - London Edition Nigeria: smooth elections positive for markets GEMs FI Strategy & Economics 18-Apr-11 GEMs Daily - Asia Edition Singapore: line in the sand GEMs FI Strategy & Economics 15-Apr-11 GEMs Trade Note Close Qat. vs AbuD. CDS trade Sen, Arko; Saliba, Jean-Michel; GEMs FI Strategy & Economics 15-Apr-11 LatAm Macro Weekly LatAm: inflation yet to peak, but upside is limited LatAm FI Strategy & Economics; Beker, David; Boquin, Alberto; Buscaglia, Marcos; Camargo,

Edgar; Munoz, Oscar; Rivera, Alejandro; GEMs FI Strategy & Economics 15-Apr-11 CEE Macro Viewpoint Convergence is dead, long live convergence! Tenconi, Raffaella; Hauner, David; EEMEA FI Strategy & Economics 15-Apr-11 EEMEA Macro Weekly EEMEA FX: diverging BOP flows Hauner, David; Doan, Mai; Hamzaoglu, Turker; Saliba, Jean-Michel; Sen, Arko; Sharratt, Matthew;

Tchakarov, Ivan; Tenconi, Raffaella; Suseeva, Natalia; EEMEA FI Strategy & Economics; GEMs FI Strategy & Economics

15-Apr-11 Asia Macro Weekly China: 1yr anniversary of property tightening Bond, TJ; Chow, Marcella; Chua, Hak Bin; Lu, Ting; Sen Gupta, Indranil; Zhi, Xiaojia; Piron, Claudio; Bhundia, Ashok; Tan, Christy

14-Apr-11 GEMs Weekly Bond Monitor Brazil liability management creates opportunities Bastani, Ali; Brauer, Jane; Tenengauzer, Daniel; GEMs FI Strategy & Economics 14-Apr-11 GEMs Daily - US Edition Mexico: PRI has the upper hand for 2012 GEMs FI Strategy & Economics 14-Apr-11 GEMs Daily - London Edition Poland: No panic GEMs FI Strategy & Economics 14-Apr-11 GEMs Daily - Asia Edition Vietnam: banking stress set to rise GEMs FI Strategy & Economics 13-Apr-11 GEMs Daily - US Edition Brazil: BCB keeping the pace GEMs FI Strategy & Economics 13-Apr-11 GEMs Weekly FX Monitor CNY vols jump up on appreciation talks Bastani, Ali; GEMs FI Strategy & Economics 13-Apr-11 GEMs Daily - London Edition EEMEA: withdrawal symptoms? GEMs FI Strategy & Economics 12-Apr-11 GEMs Daily - Asia Edition Thailand: Does politics matter? GEMs FI Strategy & Economics 12-Apr-11 GEMs Daily - US Edition Peru: least attractive candidates advance GEMs FI Strategy & Economics 12-Apr-11 GEMs Weekly CDS Monitor Swap out of bonds into CDS in Peru, Russia and Vietnam Bastani, Ali; Tenengauzer, Daniel; GEMs FI Strategy & Economics 12-Apr-11 GEMs Daily - London Edition Lebanon: Sweet 2010, more challenging 2011 GEMs FI Strategy & Economics 12-Apr-11 GEMs Daily - Asia Edition CNY appreciation talks GEMs FI Strategy & Economics 11-Apr-11 GEMs Daily - US Edition Opportunities in funky LatAm forwards GEMs FI Strategy & Economics 11-Apr-11 GEMs Daily - London Edition Russia: RUB Eurobonds in demand GEMs FI Strategy & Economics 11-Apr-11 GEMs Daily - Asia Edition Hong Kong: hey, big spender! GEMs FI Strategy & Economics 08-Apr-11 LatAm Macro Weekly LatAm: credit cycle heats up LatAm FI Strategy & Economics; Beker, David; Boquin, Alberto; Buscaglia, Marcos; Camargo,

Edgar; Munoz, Oscar; Rivera, Alejandro; GEMs FI Strategy & Economics 08-Apr-11 EEMEA Macro Weekly South Africa: keeping the lights on EEMEA FI Strategy & Economics; Hauner, David; Doan, Mai; Hamzaoglu, Turker; Saliba, Jean-

Michel; Sen, Arko; Sharratt, Matthew; Tchakarov, Ivan; Tenconi, Raffaella; Tenengauzer, Daniel; GEMs FI Strategy & Economics

08-Apr-11 Asia Macro Weekly Asia: Three Central Bank Meetings Bond, TJ; Chow, Marcella; Chua, Hak Bin; Lu, Ting; Sen Gupta, Indranil; Zhi, Xiaojia; Piron, Claudio; Bhundia, Ashok; Tan, Christy

07-Apr-11 GEMs Weekly Bond Monitor Ambivalent Appetite Bastani, Ali; Brauer, Jane; Tenengauzer, Daniel; GEMs FI Strategy & Economics 07-Apr-11 GEMs Daily - US Edition Peru: CDS to tighten after first round GEMs FI Strategy & Economics 07-Apr-11 GEMs Daily - London Edition EEMEA: mind the issuance GEMs FI Strategy & Economics 07-Apr-11 MENA Quarterly Back to basics Hamzaoglu, Turker; Saliba, Jean-Michel; Pettyfer, Stephen; Shahin, Munir; Khalil, Karim; El Jattari,

Abdelrali; Menhem, Wael; Harris, Michael; Blanch, Francisco; Sen, Arko; Alamutu, Tolu; EEMEA FI Strategy & Economics

07-Apr-11 GEMs Daily - Asia Edition India credit: on 20% track GEMs FI Strategy & Economics 06-Apr-11 GEMs Trade Note Extend in Brazil, Shorten in Turkey Bastani, Ali; Brauer, Jane; GEMs FI Strategy & Economics 06-Apr-11 GEMs Trade Note Mexico: butterflies Boquin, Alberto; Beker, David; GEMs FI Strategy & Economics 06-Apr-11 GEMs Trade Note EEMEA: trading the end of QE2 Hauner, David; Sen, Arko; GEMs FI Strategy & Economics 06-Apr-11 GEMs Daily - US Edition Argentina: a tactical opportunity with CER-indexed bonds GEMs FI Strategy & Economics 06-Apr-11 GEMs Weekly FX Monitor COP rallies as investors bet on more inflows, rate hikes Bastani, Ali; GEMs FI Strategy & Economics 06-Apr-11 Russia Macro Viewpoint Russia: Inflation genie still bottled Tchakarov, Ivan; Suseeva, Natalia; EEMEA FI Strategy & Economics; Hauner, David 06-Apr-11 GEMs Daily - London Edition Poland: 25bp down, 50bp to go GEMs FI Strategy & Economics 06-Apr-11 GEMs Daily - Asia Edition Asia NEER revisited (I) GEMs FI Strategy & Economics 05-Apr-11 GEMs Trade Note Close COMPASS basket Ades, Alberto; GEMs FI Strategy & Economics 05-Apr-11 GEMs Trade Note Exit long SGD-JET and long PHP-IDR Piron, Claudio; Tan, Christy; Bhundia, Ashok; GEMs FI Strategy & Economics 05-Apr-11 GEMs Daily - US Edition Brazil: limited aid to Portugal GEMs FI Strategy & Economics 05-Apr-11 GEMs Daily - London Edition Nigeria: election delays prolong uncertainty GEMs FI Strategy & Economics 05-Apr-11 GEMs Weekly CDS Monitor The laggards of recent steepening Bastani, Ali; Tenengauzer, Daniel; GEMs FI Strategy & Economics

GEMs Da i ly - London Ed i t ion 19 Apr i l 2011

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GEMs Da i ly - London Ed i t ion 19 Apr i l 2011

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Link to Definitions Macro Click here for definitions of commonly used terms.

Analyst Certification We, Alberto Ades and David Hauner, CFA, hereby certify that the views each of us has expressed in this research report accurately reflect each of our respective personal views about the subject securities and issuers. We also certify that no part of our respective compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

GEMs Da i ly - London Ed i t ion 19 Apr i l 2011

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GEMs Da i ly - London Ed i t ion 19 Apr i l 2011

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Team Page Global Emerging Markets Fixed Income Strategy and Economics Alberto Ades +1 646 855 4044 GEM FI Strategist & Economist MLPF&S Daniel Tenengauzer +1 646 855 5337 GEM Fixed Income Strategist MLPF&S Ali Bastani +1 646 855 7158 Quantitative FI Strategist MLPF&S Jane Brauer +1 646 855 9388 Quantitative FI Strategist MLPF&S Rudy Loo-Kung +1 646 855 3386 GEM Economist MLPF&S Isidore Smart +1 646 855 8083 GEM Economist MLPF&S Global Emerging Markets Corporate Credit Anne Milne +1 646 855 4096 Research Analyst MLPF&S Emerging Asia FX and Rates Strategy Claudio Piron +65 6591 0401 Emerging Asia FI Strategist Merrill Lynch (Singapore) Christy Tan +65 6591 0427 Emerging Asia FX Strategist Merrill Lynch (Singapore) Ashok Bhundia +852 2536 3965 Emerging Asia Rates Strategist Merrill Lynch (Hong Kong) Asia Economics Regional, China, Korea TJ Bond +852 2161 7152 Emerging Asia Economist Merrill Lynch (Hong Kong) Marcella Chow +852 2161 7236 Emerging Asia Economist Merrill Lynch (Hong Kong) Indonesia, Malaysia, Singapore Hak Bin Chua +65 6591 0409 Emerging Asia Economist Merrill Lynch (Singapore) China Ting Lu +852 2536 3718 Emerging Asia Economist Merrill Lynch (Hong Kong) Xiaojia Zhi +852 2161 7815 Emerging Asia Economist Merrill Lynch (Hong Kong) India Indranil Sen Gupta +91 22 6632 8653 Emerging Asia Economist DSP Merrill Lynch (India)

EEMEA Fixed Income Strategy and Economics EEMEA FI Strategy & Economics David Hauner, CFA +44 20 7996 1241 EEMEA FI Strategist MLI (UK) Arko Sen +44 20 7995 1576 EEMEA FI Strategist MLI (UK) CEE Mai Doan +44 20 7995 9597 EEMEA Economist MLI (UK) Turkey, Israel, MENA Turker Hamzaoglu +44 20 7996 2417 EEMEA Economist MLI (UK) Jean-Michel Saliba +44 20 7995 8568 EEMEA Economist MLI (UK) South Africa, Nigeria Matthew Sharratt +27 21 683 4089 EEMEA Economist Merrill Lynch (South Africa) Russia, Kazakhstan, Ukraine, Belarus Ivan Tchakarov +7 495 662 6225 EEMEA Economist Merrill Lynch (Russia) Natalia Suseeva +7 495 662 6011 EEMEA Economist Merrill Lynch (Russia) CEE, EEMEA Raffaella Tenconi +44 20 7995 9173 EEMEA Economist MLI (UK) Latin America Fixed Income Strategy and Economics LatAm FI Strategy & Economics, Brazil David Beker +1 646 855 9512 LatAm FI Strategist MLPF&S Alberto Boquin +1 646 855 5062 LatAm FI Strategist MLPF&S Latin America, Argentina, Chile, Uruguay Marcos Buscaglia +1 646 855 2582 LatAm Economist MLPF&S Oscar Munoz +1 646 855 2308 LatAm Economist MLPF&S Mexico Edgar Camargo +52 55 5201 3350 LatAm Economist Merrill Lynch (Mexico) Colombia, Peru, Venezuela Alejandro Rivera +1 646 855 9496 LatAm Economist MLPF&S