Professional Documents
Culture Documents
Ahmet Akarli
+44(20)7051-1875 ahmet.akarli@gs.com
Goldman Sachs International
Clemens Grafe
+7(495)645-4198 clemens.grafe@gs.com
OOO Goldman Sachs Bank
Magdalena Polan
+44(20)7552-5244 magdalena.polan@gs.com
Goldman Sachs International
JF Ruhashyankiko
+44(20)7552-1224 jf.ruhashyankiko@gs.com
Goldman Sachs International
Kasper Lund-Jensen
+44(20)7552-0159 kasper.lund-jensen@gs.com
Goldman Sachs International
Andrew Matheny
+7(495)645-4253 andrew.matheny@gs.com
OOO Goldman Sachs Bank
Mark Ozerov
+44(20)7774-1137 mark.ozerov@gs.com
Goldman Sachs International
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Exhibit 1: The global economy has slowed but a recovery is now underway
Global real GDP growth, yoy
5
4
3
2
1
0
-1
GS Forecast
-2
Jul-17
Jan-17
Jul-16
Jan-16
Jul-15
Jan-15
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
-3
10.5
5.5
DM
EM
4.5
8.5
EM
DM
3.5
6.5
2.5
4.5
1.5
2.5
0.5
0.5
-0.5
-1.5
GS Forecast
-1.5
GS Forecast
-3.5
-2.5
08
09
10
11
12
13
14
15
16
17
08
09
10
11
12
13
14
15
16
17
The resulting market pressures may not be as acute as in mid-2013, when the Feds
tapering signal took the market by surprise a factor that likely amplified subsequent
market volatility. With the US term premium now fairly priced (in our view), any re-pricing
of the US yield curve is likely to be more gradual and more immediately dependent on the
US growth outlook. Thus, the potential pressures generated by rising yields should be
somehow better mitigated by a parallel improvement in the global growth outlook (The
anatomy of the EM rates sell-off, Emerging Markets Macro Daily, August 29, 2013). In
addition, EM economies with stronger balance sheet structures and more robust, credible
institutional and policy frameworks would probably be able to absorb the likely pressures
better. However, as the experience of 2013 has amply demonstrated, EM economies that
have accumulated large domestic and external imbalances are likely to be susceptible to
resulting BoP pressures and face stronger headwinds over the next couple of years.
Exhibit 4: Leveraged EM will be more sensitive to rising global interest rates
US yield pass-through effect on EM bond yields
50%
45%
40%
35%
30%
25%
Taiwan
Malaysia
South Korea
Thailand
India
Indonesia
Mexico
Brazil
Colombia
Russia
Israel
Czech Rep
South Africa
Turkey
Poland
Hungary
20%
In sum, the DM-led recovery will likely generate strong push (demand) and pull (financial)
forces that could result in an increasingly more differentiated medium- and longer-term
outlook within the broader EM complex. Key differentiation themes here could be BoP
strength and policy anchors. Looking out to 2014 and beyond, we believe these
differentiation themes will also define the outlook for the CEEMEA region.
Russia
CEEMEA EX Russia
5
4
3
2
1
GS Forecast
Oct-17
Apr-17
Oct-16
Apr-16
Oct-15
Apr-15
Oct-14
Apr-14
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Apr-10
Oct-10
The inflation-less recovery theme applied particularly well to the Euro area-exposed CE
economies. The CE-3 and Romania were ideally positioned to benefit from a likely
normalisation in Euro area demand and financial conditions. The output gaps set a solid
foundation for recovery and were able to absorb potential inflation pressures, allowing
local central banks to continue to provide strong monetary accommodation. In Turkey, we
also saw scope for a fairly strong economic recovery and thought that the (moderate)
output gap could provide a disinflationary buffer in early stages of the cyclical recovery.
However, we also believed that the Turkish recovery would prove ultimately unsustainable,
aggravating external imbalances and generating strong inflation pressures. This would
prompt the CBRT to tighten domestic monetary conditions, which had eased significantly
through 2012H2. On the other hand, Russia and Israel did hold up reasonably well through
the Euro area crisis, thanks to the resilience of domestic demand. We expected both
economies to continue to perform well, growing close to trend, while keeping inflation
pressures in check. Finally, we expected idiosyncratic political headwinds and economic
imbalances to continue to hold back growth in South Africa and Ukraine.
Exhibit 6: while inflation pressures remained relatively subdued, except in Turkey and
Russia
15
Russia
Poland
Hungary
South Africa
13
11
Turkey
Czech Republic
Israel
9
7
5
3
1
-1
-3
2006
2007
2008
2009
2010
2011
2012
2013
In retrospect, the inflation-less recovery theme in the CE-3 and Romania unfolded broadly
in line with our expectations, except in that the recovery came a little later than we had
initially anticipated and on the back of more aggressive domestic monetary easing. In
Turkey, the initial recovery was quite strong and was largely underpinned by the strong
monetary stimulus provided by the CBRT, which eased rates more than we had initially
expected. In Israel, South Africa and Ukraine, our forecasts were also broadly in line,
although in all three actual growth rates turned out to be slightly weaker than we had
forecast. Finally, the most significant downside growth surprise came in Russia, with
underlying GDP growth falling sharply to 1.5% in 2013 from 3.4% in 2012, due both to
external and domestic factors. Growth in China in particular turned later than expected,
fiscal and quasi-fiscal spending was lower and the structural reforms being undertaken
proved more disruptive than we had anticipated. The downside surprise in Russian growth
dragged down the CEEMEA growth average significantly, to 2.3% in 2013, below the 2.7%
posted in 2012. That, however, disguises somewhat the improvement in the CEEMEA (exRussia) growth average towards 2.7% in 2013, from 2.3% in 2012.
Exhibit 7: EM sell-off put pressure on currencies undermined by high leverage and inflation
Trade Weighted CEEMEA Exchange Rates, 14 May 2013=100
103
101
99
97
95
93
91
89
87
May-13
TRY
HUF
PLN
CZK
ZAR
Jun-13
RUB
ILS
Jul-13
Aug-13
What we did not fully account for was the sell-off in US rates. We noted that the
normalisation of the US economy and of US monetary policy could create strong
headwinds for the leveraged economies in our region (particularly for Turkey, South Africa
and Ukraine). However, we thought this could become a more dominant market force later
in 2014 and 2015, when we expected US growth rates to return to 3%-3.5% on a more
sustainable basis, prompting the Fed to start gradually withdrawing excess policy stimulus.
Again in retrospect, the market was quicker and more aggressive in re-pricing the US curve,
which was in fact driven by a (surprise) hawkish shift in the Feds tone rather than by a repricing of the US growth outlook. This led to serious market volatility. But pressures did
emerge in places where we thought the macro imbalances were more concerning.
2014
1.7
2015
2.4
2016
2.6
2017
2.4
Hungary
1.1
1.8
1.9
2.2
1.9
Israel
3.4
3.7
4.0
3.6
3.2
Nigeria
6.5
7.0
6.2
5.8
5.5
Poland
1.4
2.9
3.2
3.4
3.2
Romania
2.4
2.7
3.1
3.2
3.5
Russia
1.5
3.0
3.6
3.6
3.7
South Africa
2.2
2.8
3.4
3.6
3.5
Turkey
4.5
2.0
1.8
5.8
5.0
Ukraine
-1.2
0.4
5.0
3.7
4.2
CEEMEA
CEEMEA Ex-Russia
2.3
2.7
2.9
2.9
3.4
3.3
3.9
4.0
3.8
3.8
NJA
6.1
6.4
6.7
6.7
6.7
LATAM
2.7
2.8
3.4
3.6
4.0
EM
5.2
5.3
5.8
6.0
6.0
DM
1.2
2.2
2.5
2.5
2.5
Czech Republic
However, this is somewhat misleading, as the bulk of the forecast CEEMEA acceleration
comes from Russia and the CE-3/Romania, where we expect GDP growth to pick up
towards 3% and 2.5% in 2014 respectively, and then further to 3.6% and 2.8% in 2015.
Excluding Russia, CEEMEA growth becomes more comparable with the forecast trends in
NJA and LatAm. In this context, it is important to note that Turkey drags down the regional
average, as growth slows sharply from 4.5% in 2013 to 2.0% in 2014 and further to 1.8% in
2015, while Israel and South Africa see moderate growth acceleration, from a low 2013
base (Exhibit 8).
gdp%
18.0
US final demand
EZ final demand
UK, Denmark and Sweden final demands
China final demand
Japan final demand
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Source: OECD-WTO, IMF, Goldman Sachs Global Investment Research * Gross exports as a share of GDP for Ukraine and
Nigeria
5
4
yoy
improvement
in CA (ppt)
Poland
Ukraine
Korea
Taiwan
Czech Republic
Israel
Colombia
South Africa
Hungary
Chile
Argentina
Indonesia
India Brazil
Mexico
Peru
-1
-2
Turkey
-3
Philippines
China
Malaysia
Russia
Thailand
-4
-10
-5
10
15
The rest of the region will also be affected by the headwinds created by an increase in core
rates (particularly in the US, but perhaps more importantly in Germany) and will also have
to through an adjustment. But we expect the resulting pressures to be more manageable
and, importantly, to come through later in 2015 and 2016, when we expect core central
banks and especially the ECB to start withdrawing stimulus. In this context, the CE-3,
particularly Hungary, may face stronger headwinds, given continuing balance sheet
vulnerabilities and the low level of short-end policy rates.
% of potential GDP
0
1
2
3
4
5
Israel
Turkey Russia
South
Africa
In contrast, Israel has little excess capacity and may therefore quickly start generating
stronger inflationary pressures, as aggregate demand conditions improve. Accordingly, we
expect the BoI to start tightening monetary policy from 2014Q4 onwards, ahead of its peers
in the region.
In Russia, core inflation remains sticky, inflation expectations elevated and the labour
market tight, which inhibits the economys ability to expand beyond the potential growth
rate. However, with Russias export sector concentrated in relatively capital-intensive
commodity industries, an export expansion arguably only affects the economy-wide output
gap more indirectly through wealth effects and the potential for looser budget policies on
the back of higher tax revenues. Yet, we expect the CBR to deliver moderate monetary
tightening in 2014, mainly in an effort to anchor inflation expectations and establish its
inflation targeting credentials.
Goldman Sachs Global Investment Research
Finally, in Turkey, the output gap is very small (if it exists at all). But we expect this to
change quickly through 2014 and 2015, as the economy slows down. However, exchange
rate pass-through to domestic prices will continue to generate inflation pressures in due
course. Only in 2015H2 do we expect to see a more tangible improvement in underlying
inflation dynamics, as the necessary exchange rate adjustment comes through and a
sizeable output gap starts to generate strong disinflationary pressures. We therefore expect
a switch in monetary policy around mid-2015, with the CBRT starting to ease rates.
2014
0.6
2015
1.9
2016
2.1
2017
2.0
2014
0.05
2015
0.50
2016
1.25
2017
1.25
Hungary
1.3
3.0
3.3
3.3
3.25
4.25
4.50
4.50
Israel
2.5
3.0
2.5
2.1
1.50
2.50
3.00
4.00
Nigeria
7.0
6.2
5.8
5.5
11.50
10.50
10.50
9.00
Poland
2.0
2.0
2.3
2.4
2.75
3.50
3.50
3.50
Romania
2.0
2.3
2.2
2.4
3.75
3.75
4.00
4.25
Russia
5.5
5.1
4.7
4.4
5.75
6.00
6.50
6.50
South Africa
5.9
5.8
5.6
5.7
5.00
6.50
8.50
8.50
Turkey
7.7
7.2
6.1
6.5
5.50
9.00
9.50
9.50
Ukraine
4.3
5.9
5.6
5.7
Czech Republic
Ukraine probably has one of the largest output gaps in the region and, not surprisingly,
record low inflation. However, with the country operating under a peg, which is under
pressure from the market, this exchange constraint needs to be relaxed before the country
can benefit from a loosening of financial conditions.
Varying fiscal impulses will also determine the pace of recovery. In 2013, the fiscal
drag eased quite significantly across the CE-3 and Romania a key factor that has helped
support the nascent recovery. In contrast, in Russia fiscal policy tightened significantly,
reinforcing the slowdown. In 2014, we expect fiscal policy to become increasingly growthfriendly in a number of places. The CE-3 and Romania should benefit further from easing
fiscal drag. Importantly, the drag will become less severe in Russia and contribute to the
(forecast) recovery in growth. Likewise in Turkey, we expect fiscal policy to loosen
moderately through the two-year election cycle. But fiscal policy will be constrained by
external imbalances and its net contribution to GDP growth is likely to be neither material
nor sustainable. In contrast, South Africa will likely undertake some moderate fiscal
consolidation, which would help check external imbalances, on the margin.
10
3-Month Horizon
6-Month Horizon
Forecast
Czech Republic
EUR/CZK
27.20
27.00
27.18
27.00
27.14
27.00
25.50
25.00
24.50
Hungary
EUR/HUF
299.74
300.00
301.41
305.00
305.06
310.00
315.00
315.00
315.00
Israel
USD/ILS
3.57
3.55
3.57
3.55
3.58
3.45
3.45
3.45
3.45
USD/NGN
162.65
160.00
171.22
165.00
185.93
185.00
205.00
225.00
245.00
Poland
EUR/PLN
4.22
4.25
4.24
4.20
4.29
4.10
4.10
3.90
3.90
Romania
EUR/RON
8.25
4.40
8.26
4.40
8.32
4.40
4.27
4.14
4.02
Russia
USD/RUB
33.52
31.60
34.00
31.40
35.03
32.20
33.70
36.10
38.00
South Africa
USD/ZAR
10.28
10.40
10.42
10.60
10.72
10.90
11.25
11.50
11.50
Turkey
USD/TRY
2.06
2.10
2.09
2.20
2.18
2.40
2.50
2.30
2.20
Ukraine
UAH/USD
8.58
9.20
8.96
10.30
9.68
10.30
9.80
9.60
8.90
Nigeria
Policy credibility to play a crucial role. Countries like South Africa, the Czech Republic
and Poland, with a history of a fairly predictable and stable policy framework, and
countries like Romania that operate inside an IMF program, will probably be able to cope
with financial shocks better. Turkey, Hungary and Ukraine may be running varying degrees
of credibility risk, given the less orthodox and less predictable policy frameworks they have
adopted in recent years.
The most interesting case in CEEMEA is Russia, in our view. Policy credibility has not been
one of Russias strongest points in recent years. However, this is slowly changing, with the
overall policy frameworks of the CBR and the Russian Ministry of Finance becoming far
better organized. This has already had a positive impact on domestic fixed income markets,
which have held up relatively well during the recent EM sell-off. Russias current reform
program, which is arguably the most ambitious in recent history and within the broader
EM complex, could help further governance systems and transparency both in the public
and in the corporate sector, and thus bolster investor confidence. Of course, the pace, exact
content and subsequent implementation of actual reforms will hold the key to realising this
potential. Yet, the governments close focus on reforms is encouraging, and this underpins
our more constructive view on Russias equity market (see below).
11
Turkey-Russia differential
Russia
Turkey
7
5
3
20
10
10
-10
-5
-20
-10
-30
-15
-40
-20
1
-1
-50
-3
-60
Russia: NIIP
Turkey: NIIP
Russia: CAD
Turkey: CAD
08
09
10
11
-25
-30
12
Still bearish on the TRY: This has been one of our top Conviction Views over
the past year and we believe it is still valid. The TRY has depreciated significantly
(by about 12% in trade-weighted terms) since April 2013 an adjustment that will
contribute to a rebalancing of the economy through 2014. However, the
imbalances were large to start with, and further TRY weakness is required to help
ensure long-term external sustainability. The CBRT has been tightening monetary
policy and will probably do more through 2014. But persistent (if moderating)
current account imbalances, wide inflation differentials, weak productivity growth
and a rapidly deteriorating growth outlook will continue to weigh on the TRY in the
coming months. We continue to forecast the TRY at 2.40 on a 12-month horizon,
although the pace of depreciation will depend largely on the robustness of the
CBRTs policy response, as well as potential shifts in EM risk sentiment.
2.50
USD/TRY
Market
GS Forecast
2.40
2.30
2.20
2.10
2.00
Current
3m
6m
12m
12
6%
4%
5%
3%
4%
2%
3%
1%
2%
0%
1%
-1%
0%
-2%
Average productivity
growth per worker
(1996Q1-2013Q2)
11%
Unemployment rate
10%
9%
8%
7%
-1%
-2%
-3%
-4%
07
08
09
10
11
12
13
14
15
6%
08
09
10
11
12
5%
4%
13
Inflation-less recovery in CE-3 and Romania Part II: This is also last years
theme but it is still highly relevant. The Inflation-less recovery has played out to a
large extent in 2013, with CE-3 equity markets performing strongly and local rates
markets continuing to steepen, in response to central bank easing. However, it still
can define the improving outlook for the CE-3, as recovery gains further
momentum, against the backdrop of subdued inflation pressures and generally
accommodative monetary policy. However, we are more inclined to think of this as
an equity theme, given the extent of the rate market moves across CEEMEA and in
line with our more constructive views on EM equities in general. Stronger growth
and improved financial metrics could also be supportive of the CE-3 currencies,
particularly the PLN, although this is likely to be more of a theme for 2014H2, when
we expect the NBP to move to a tightening bias.
Inflationary recovery in Israel: Israel has weathered the Euro area crisis
reasonably well and continued to grow steadily over the past 12 months. The
slowdown in net exports was compensated largely by domestic demand growth,
reinforced also by natural gas production. There is currently no excess capacity in
the economy (we estimate a moderately positive output gap) and, as external
demand conditions improve and the economy changes gear through 2014, we
expect inflation pressures to become increasingly more apparent ultimately
prompting the BoI to withdraw the excess monetary stimulus it provided over the
past two years, which was also motivated by intensifying appreciation pressures
on the ILS. Our current rate forecasts are slightly above the forwards, but the
market can re-price the curve aggressively as inflation pressures become more
visible. We also maintain our long-held constructive ILS views, although we see
scope for increasingly aggressive BoI interventions.
13
Index
(1/1/2013=100)
130
GS forecast
(Trend of USDZAR depreciation)
125
120
USDZAR
Equity return
115
110
105
100
95
90
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Ukraine and the bail-out: Ukraine has successfully muddled through the past
two years without macroeconomic adjustment, as the current account deficit has
widened to 8% of GDP and FX debt repayments have been a drag on reserves,
which have fallen by nearly 50% to US$21bn and close to 2.5 months of import
cover. However, with a very considerable external financing gap for 2014 a
current account deficit of some 7% of GDP and public FX debt repayments of 5%,
amounting to around US$20bn and likely without market access in a world of
rising UST yields, we think Ukraine is fairly unlikely be able to continue with the
same strategy until presidential elections in March 2015. Our view remains that
lower reserves will eventually generate pressure on the Hryvnia, which in turn will
ultimately lead the authorities to re-engage with the IMF, agree to a loan
agreement and devalue the UAH by around 30%. However, long-standing strong
opposition in the government to policy conditionality will likely imply a rocky road
to an IMF deal. Hence, we maintain a cautious outlook on Ukrainian sovereign debt
and believe that the NDF market may be under-pricing devaluation risks.
14
15
Czech Republic
Hungary
Israel
Nigeria
Poland
Romania
Russia
South Africa
Turkey
Ukraine
2012
2013
-1.2
-1.7
3.4
6.5
2.1
0.7
3.4
2.5
2.2
02
-1.5
1.1
3.4
6.5
1.4
2.4
1.5
2.2
4.5
12
GDP (%yoy)
2014
2015
1.7
1.8
3.7
7.0
2.9
2.7
3.0
2.8
2.0
04
2016
2017
2012
2.6
2.2
3.6
5.8
3.4
3.2
3.6
3.6
5.8
37
2.4
1.9
3.2
5.5
3.2
3.5
3.7
3.5
5.0
42
3.3
5.7
1.7
6.5
3.7
3.3
5.1
5.7
8.9
06
2.4
1.9
4.0
6.2
3.2
3.1
3.6
3.4
1.8
50
0.6
1.3
2.5
7.0
2.0
2.0
5.5
5.9
7.7
43
1.9
3.0
3.0
6.2
2.0
2.3
5.1
5.8
7.2
59
2.1
3.3
2.5
5.8
2.3
2.2
4.7
5.6
6.1
56
2017
2.0
3.3
2.1
5.5
2.4
2.4
4.4
5.7
6.5
57
Q4 13
Q1 14
Q2 14
Q3 14
2015
2016
2017
0.05
3.40
0.05
3.00
0.05
3.00
0.05
3.00
0.05
3.00
0.50
4.25
1.25
4.50
1.25
4.50
Czech Republic
Hungary
Israel
Repo rate
1.00
1.00
1.00
1.00
1.25
2.50
3.00
4.00
Nigeria
12.00
12.00
12.00
11.50
11.50
10.50
10.50
9.00
Poland
2.50
2.50
2.50
2.50
2.50
3.50
3.50
3.50
4.00
5.50
4.00
5.50
3.75
5.50
3.75
5.50
3.75
5.50
3.75
6.00
4.00
6.50
4.25
6.50
Repo rate
5.00
5.00
5.00
5.00
5.00
6.50
8.50
8.50
Romania
Russia
South Africa
3-Month Horizon
Current*
Forward*
Forecast
Forward*
Forecast
12-Month Horizon
Forward*
Forecast
Czech Republic
EUR/CZK
27.23
27.20
27.00
27.18
27.00
27.14
27.00
Hungary
EUR/HUF
297.98
299.74
300.00
301.41
305.00
305.06
310.00
Israel
Nigeria
USD/ILS
3.56
3.57
3.55
3.57
3.55
3.58
3.45
USD/NGN
158.65
162.65
160.00
171.22
165.00
185.93
185.00
4.10
Poland
EUR/PLN
4.19
4.22
4.25
4.24
4.20
4.29
Romania
EUR/RON
4.45
8.25
4.40
8.26
4.40
8.32
4.40
Russia
USD/RUB
32.99
33.52
31.60
34.00
31.40
35.03
32.20
South Africa
USD/ZAR
10.14
10.28
10.40
10.42
10.60
10.72
10.90
Turkey
USD/TRY
2.02
2.06
2.10
2.09
2.20
2.18
2.40
Ukraine
UAH/USD
8.22
8.58
9.20
8.96
10.30
9.68
10.30
* Close 21 November 13
3M
10Y
3M
10Y
6-Month Horizon
12-Month Horizon
Current*
Forward*
Forecast
Forward*
Forecast
Forward*
Forecast
0.17
1.77
0.24
2.79
0.23
2.14
0.25
2.99
0.20
2.30
0.30
3.00
0.25
2.22
0.27
3.11
0.20
2.40
0.30
3.15
0.31
2.38
0.36
3.35
0.20
2.55
0.30
3.40
1.35
136.09
1.23
0.83
1.35
136.02
1.23
0.83
1.38
135.24
1.25
0.82
1.35
135.97
1.23
0.83
1.40
144.20
1.28
0.83
1.35
135.84
1.23
0.84
1.40
149.80
1.28
0.85
Exchange Rates
EUR/$
EUR/
EUR/CHF
EUR/
*Close at 22 Nov 2013. We are currently using Mar 2014, Jun 2014, and Dec 2014 contracts for 3-month forward rates.
Source for all tables: Goldman Sachs Global Investment Research, Bloomberg.
16
2.05
USD/TRY
1.95
1.85
1.75
1.65
1.55
1.45
1.35
1.25
09
10
11
12
13
Source: Bloomberg.
Israel: USD/ILS
4.40
ILS/USD
4.20
4.00
3.80
3.60
3.40
3.20
3.00
07
08
09
10
11
12
13
Source: Bloomberg.
17
60
UAH 3m NDF
Implied Yield
50
40
30
20
10
0
10
11
12
13
Source: Bloomberg.
320.00
HUF/EUR
300.00
280.00
260.00
240.00
220.00
200.00
07
08
09
10
11
12
13
Source: Bloomberg.
18
Nigeria: Structurally bearish on the Naira, but shortterm constructive on carry and neutral on
sovereign credit
11
12
13
Source: Bloomberg.
250
5y CDS Spread
Trade-weighted
real exchange rate
(Jan-95 = 100)
200
150
100
Naira real
appreciation
50
95
97
99
01
03
05
07
09
11
13
Source: Bruegel.
19
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