DB EMMonthly 2015-10-08 0900b8c08a44f18d

Deutsche Bank
Markets Research
Emerging Markets
Economics
Foreign Exchange
Rates
Credit
Date
08 October 2015
Emerging Markets Monthly

Broken Transmission
Taimur Baig
Robert Burgess
Gustavo Caonero
Drausio Giacomelli
Hongtao Jiang
Sameer Goel
(+65) 64 23-8681
(+44) 20 754-71930
(+1) 212 250-7530
(+1) 212 250-7355
(+1)-212-250-2524
(+65) 64 23 6973
Special Reports
Testing the Sustainability of EM Government Debt
The End of Chinas Fiscal Slide
Rising External Financing Risks in Asia
EM Election Preview - Argentina, Poland and Turkey
India: the Negatives of the Commodity Bust
Ukraine: Pricing GDP Warrants, Part II - Discounting the Cash Flows
Deutsche Bank Securities Inc.

Note to U.S. investors: US regulators have not approved most foreign listed stock index futures and options for US
investors. Eligible investors may be able to get exposure through over-the-counter products. DISCLOSURES AND
ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.
8 October 2015
EM Monthly: Broken Transmission
Key Economic Forecasts

Real GDP (%)
2014
2015F
2016F
Consumer prices (% pavg)

2014
2015F
2016F
Current account (% GDP)

2014
2015F
2016F
Fiscal balance (% GDP)

2014
2015F
2016F
Global
3.3
3.1
3.4
3.6
3.5
4.2
0.7
0.5
0.3
-2.7
-3.5
-3.0
US
2.4
2.4
2.5
1.6
0.4
2.2
-2.6
-3.2
-4.0
-2.8
-2.7
-2.4
Japan
-0.1
0.6
1.1
2.7
0.8
0.8
0.5
3.4
3.3
-5.9
-5.3
-4.5
Euroland
Germany
France
Italy
Spain
Netherlands
Belgium
Austria
Finland
Greece
Portugal
Ireland
0.9
1.6
0.2
-0.4
1.4
1.0
1.1
0.5
-0.4
0.7
0.9
5.2
1.5
1.7
1.1
0.8
3.2
1.9
1.3
0.8
0.2
-0.5
1.7
5.2
1.6
1.9
1.4
1.5
2.8
1.4
1.4
1.4
0.9
-0.8
1.7
3.5
0.4
0.8
0.6
0.2
-0.2
0.3
0.5
1.5
1.2
-1.4
-0.2
0.3
0.1
0.2
0.1
0.1
-0.6
0.3
0.6
0.9
-0.1
-0.8
0.5
0.1
1.0
1.3
0.8
0.9
0.9
1.1
1.6
1.7
1.1
1.3
1.2
1.6
2.1
7.4
-0.9
1.9
1.0
10.6
0.1
2.0
-0.9
-2.3
0.6
3.6
2.8
8.3
-0.3
2.2
1.3
11.0
1.5
1.7
1.0
-1.0
0.8
5.0
2.5
8.0
-0.7
2.7
1.2
11.1
1.5
2.3
0.8
-1.5
0.7
4.5
-2.4
0.7
-4.0
-3.0
-5.8
-2.3
-3.2
-2.4
-3.2
-3.5
-4.5
-4.1
-2.1
0.7
-3.8
-2.7
-4.6
-2.0
-2.7
-1.8
-3.2
-3.3
-3.1
-2.1
-1.9
0.5
-3.5
-2.4
-3.5
-1.9
-2.6
-1.7
-3.1
-2.2
-2.6
-1.8
Other Industrial Countries

United Kingdom
Sweden
Denmark
Norway
Switzerland
Canada
Australia
New Zealand
2.6
2.9
2.4
1.1
2.3
1.9
2.4
2.7
3.3
2.2
2.6
3.2
1.7
1.3
1.0
1.8
2.2
2.2
2.4
2.5
2.7
1.9
1.5
1.3
2.7
2.6
1.9
1.5
1.5
-0.2
0.6
2.0
0.0
1.9
2.5
1.2
0.7
0.1
0.2
0.6
2.1
-1.0
1.4
1.7
0.3
1.7
1.3
1.5
1.5
2.5
-0.3
2.0
2.5
1.9
-0.6
-3.2
6.2
6.3
9.4
7.3
-2.2
-3.0
-3.3
-1.5
-4.5
6.5
6.5
7.5
7.0
-2.6
-4.1
-4.7
-1.1
-4.0
6.0
6.0
7.0
6.5
-1.2
-3.5
-5.3
-2.0
-4.5
-1.9
-1.0
9.1
0.2
-0.8
-2.8
-0.7
-1.5
-3.7
-1.0
-1.5
7.5
0.0
0.0
-2.4
-0.1
-0.8
-2.1
-0.5
-2.0
7.0
-0.5
0.3
-2.2
0.2
Emerging Europe, Middle East & Africa

Czech Republic
Egypt
Hungary
Israel
Kazakhstan
Nigeria
Poland
Romania
Russia
Saudi Arabia
South Africa
Turkey
Ukraine
United Arab Emirates
2.4
2.0
2.2
3.6
2.6
4.3
6.2
3.4
2.9
0.6
3.5
1.5
2.9
-6.9
4.6
0.9
4.2
4.2
2.7
2.8
1.5
3.9
3.4
3.7
-4.0
3.2
1.2
3.0
-10.1
2.7
1.8
3.0
4.0
2.4
3.2
2.0
5.0
3.5
3.0
-1.2
1.4
1.1
3.0
1.5
2.8
6.0
0.4
10.1
-0.2
0.5
6.7
8.1
0.0
1.1
7.8
2.7
6.1
8.9
12.1
2.3
8.8
0.5
11.0
0.1
-0.6
6.1
10.0
-0.7
-0.7
15.6
2.2
4.7
7.7
47.9
3.6
6.6
1.5
10.0
2.2
0.8
10.7
10.0
1.4
0.1
9.1
2.5
5.9
8.0
16.3
2.1
1.8
0.6
-0.8
4.0
3.7
2.2
0.2
-1.4
-0.4
3.1
10.9
-5.4
-5.8
-3.5
13.7
-0.5
0.3
-3.9
3.1
4.1
-1.9
-2.5
-1.7
-0.5
5.8
-5.4
-3.8
-4.9
-2.5
2.1
-0.5
0.0
-3.3
3.3
4.7
0.8
-1.8
-1.8
-0.9
5.0
-4.7
-3.3
-5.5
-2.0
3.0
-2.1
-1.9
-12.8
-2.6
-2.7
1.9
-1.9
-3.2
-1.5
-0.5
-2.0
-3.5
-1.3
-4.6
5.0
-5.7
-1.8
-11.7
-2.7
-3.4
-2.0
-2.8
-2.9
-1.7
-3.4
-19.7
-3.9
-1.6
-4.5
-4.7
-4.3
-1.6
-10.5
-2.4
-3.2
-0.7
-2.4
-2.7
-2.5
-1.9
-13.2
-2.7
-2.3
-3.0
-2.9
Asia (ex-Japan)
China
Hong Kong
India
Indonesia
Korea
Malaysia
Philippines
Singapore
Sri Lanka
Taiwan
Thailand
Vietnam
6.4
7.3
2.5
7.1
5.0
3.3
6.0
6.1
2.9
4.5
3.8
0.9
6.0
6.2
7.0
2.5
7.5
4.5
2.4
4.6
6.0
2.5
5.5
1.5
2.5
6.5
6.2
6.7
3.0
7.5
4.5
2.9
4.2
6.5
3.0
6.0
2.6
3.0
6.5
3.4
2.0
4.4
6.7
6.4
1.3
3.1
4.2
1.0
3.3
1.2
1.9
4.1
2.5
1.7
3.0
4.8
6.5
0.7
2.0
1.5
-0.4
0.9
-0.3
-0.8
0.8
3.3
2.7
3.8
5.1
4.7
1.6
2.6
3.0
1.2
4.2
0.9
1.1
4.6
2.4
3.1
1.9
-1.4
-2.9
6.3
4.3
4.4
18.9
-2.6
12.3
3.4
5.9
2.6
3.4
2.4
-1.5
-2.0
7.5
2.2
3.8
19.6
-1.6
14.7
3.7
-1.5
2.3
3.3
2.6
-1.9
-1.6
6.9
2.1
3.5
18.2
-1.4
12.3
2.5
-2.9
-2.2
-2.1
3.6
-4.0
-2.0
0.6
-3.4
-0.6
6.9
-5.7
-0.8
-1.9
-5.8
-3.2
-3.7
2.4
-3.9
-2.3
-0.3
-3.2
-2.2
6.8
-6.0
-1.6
-2.0
-5.5
-2.8
-3.0
2.3
-3.8
-2.3
-0.1
-3.0
-2.4
6.6
-5.5
-1.6
-2.8
-5.3
Latin America
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Venezuela
0.8
-1.5
0.1
1.9
4.6
2.1
2.4
-3.4
-0.6
0.3
-2.9
2.1
3.0
2.1
2.8
-9.7
0.5
0.1
-1.1
2.8
3.2
2.9
3.7
-7.6
12.5
38.6
6.3
4.4
2.9
4.0
3.4
62.0
15.3
28.1
8.9
4.6
4.6
2.8
3.3
120.0
17.9
32.1
7.6
3.1
3.8
3.1
3.2
175.0
-2.9
-1.7
-4.4
-1.2
-5.2
-2.3
-4.0
4.6
-3.0
-2.3
-3.7
-0.7
-5.8
-2.5
-3.5
-0.3
-2.6
-1.8
-2.8
-1.2
-4.2
-2.7
-3.1
-0.9
-5.2
-5.3
-6.2
-1.6
-1.8
-4.2
-0.4
-13.0
-6.7
-7.6
-8.5
-2.0
-2.6
-3.8
-2.4
-19.5
-5.6
-5.6
-7.0
-2.4
-3.0
-3.3
-3.1
-15.8
Memorandum Lines: 1/
G7
Industrial Countries
Emerging Markets
BRICs
1.7
1.7
4.6
5.8
1.9
1.9
4.0
5.0
2.1
2.1
4.4
5.4
1.5
1.3
5.4
4.2
0.4
0.4
5.8
4.6
1.7
1.6
6.0
4.3
-0.7
-0.4
1.5
1.3
-0.6
-0.3
1.1
1.8
-1.0
-0.7
1.0
1.6
-3.0
-2.9
-2.6
-2.8
-2.7
-2.6
-4.3
-4.2
-2.3
-2.2
-3.5
-3.5
1/ Aggregates are PPP-weighted within the aggregate indicated. For instance, EM growth is calculated by taking the sum of each EM country's individual growth rate
multiplied it by its share in global PPP divided by the sum of EM PPP weights.
For Egypt numbers are reported for financial year ending June.
Source: Deutsche Bank
Page 2
8 October 2015
Table of Contents
Emerging Markets and the Global Economy in the Month Ahead
Whereas the Feds decision to keep rates on hold last month created uncertainty for EM, the ensuing weak activity and
inflation data have been more definitive. Expectations of Fed lift off have receded and fresh support from the ECB is now
widely expected, prompting investors to focus on the relief that this might provide for embattled EM economies. Stronger
incoming growth from China could yet add fuel to this fire. Past experience, however, suggests that these reprieves have
done little to boost the prospects for growth in EM, without which a more durable rally in their asset markets is likely to
prove elusive. This is especially true for EMFX. Local rates markets might fare better on deflation concerns, though
support is likely to be undermined by rising credit risk in some cases (especially in Latin America) or stretched valuations
where these risks are absent................................................................................................................................................. 04
This Months Special Reports

Testing the sustainability of EM government debt
Moderate government debt levels in EM have been a key point of difference with DM in recent years. This strength is
now being tested as growth slows and currencies weaken. Lower commodity prices and earlier expansionary policies
represent particular sources of stress in Latin America, especially in Brazil where these risks are compounded by political
difficulties. The outlook is better in Asia and most of EMEA. Even where debt dynamics are favorable, however, problems
in the private sector could potentially translate into sovereign risk.. ................................................................................... 13
The end of China's fiscal slide
China's slowdown so far this year has been largely driven by a collapse of land sales and the ensuing sharp drop in
government revenue growth. The fiscal slide is now coming to its end, led by the recovery of land sales. Recovery in
government revenue growth, together with the shift of fiscal stance from tightening to stimulus, will help to boost
government spending and support the economic recovery. ................................................................................................ 18
Rising external financing risks in Asia
Among Asian economies, Indonesia and Malaysia would face 2016 external financing risks most acutely, in our view.
Economies that are exposed to weakening Chinese demand will face difficulties in general, but commodity exporters in
Indonesia and Malaysia will find the situation particularly challenging, with earnings down by 40-50%yoy on one hand
and external debt service costs spiking due to sharp currency depreciation on the other hand ..................................... 24
EM election preview Argentina, Poland and Turkey
We preview the elections in Argentina and Poland (both October 25th) and Turkey (November 1st). In Argentina we
acknowledge the lead of official candidate, Daniel Scioli, in the presidential race but anticipate a close outcome and the
possibility of a run-off on November 22nd. Polands general election is expected to see a change of government with a
PiS-led coalition the most likely outcome but there is a small change that PO could hang on to power. In Turkey we
expect the general election to produce another hung parliament as was the case in June but the possibility of an outright
AKP majority cannot be fully ruled out. ................................................................................................................................ 26
India: The negatives of the commodity bust
The commodity bust has not been all good for India. Contrary to conventional wisdom, several offsets to the favorable
current account/fiscal position/disinflation dynamic are taking place. We look at these factors, focusing particularly on the
impact of weak commodity prices on exports ...................................................................................................................... 35
Ukraine: Pricing GDP Warrants, Part II - Discounting the Cash Flows
This is a follow-up note to our recent report Ukraine Pricing GDP Warrants. The explicit cross-default languages in the
Exchange Offer Memorandum justify the use of the same default probability structure as bonds (but still with a zero
recovery), while the Holder Put adds value in the form of a fraction of bond recovery, contingent on default during the
EFF period. The value of the Warrants is further enhanced vis--vis our previous estimates through these creditor
protection mechanisms now revealed. ................................................................................................................................. 41
Asia Strategy .......................................................................................................................................................................... 45
EMEA Strategy ....................................................................................................................................................................... 52
LatAm Strategy ....................................................................................................................................................................... 63
Asia Economics ...................................................................................................................................................................... 70
EMEA Economics ................................................................................................................................................................... 98
Latam Economics ................................................................................................................................................................. 118
Theme Pieces ................................................................................................................................................... 137

Page 3
8 October 2015
Emerging Markets and the Global Economy in the Month Ahead
Whereas the Feds decision to keep rates on hold

last month created uncertainty for EM, the ensuing
weak activity and inflation data have been more
definitive. Expectations of Fed lift off have receded
and fresh support from the ECB is now expected.
Investors have once more begun to focus on the

relief that additional accommodation might provide
for embattled EM economies. Stronger incoming
growth from China could yet add fuel to this fire.
Past experience, however, suggests that such

reprieves have done little to boost growth
prospects in EM, without which a more durable
rally in their asset markets is likely to prove elusive.
EM remains an unappealing destination for capital

on fundamentals and valuation grounds
especially in light of increased volatility. We doubt
capital flows will turn before growth does.
We maintain receivers where credit and FX risks

are lowest as in the front-ends of CNY, THB, and
SGD, but recommend moving further down the
curve in Hungary and Israel, while favoring shortend flatteners in Poland, Chile, and Colombia.
On duration, stay overweight India, (modestly)

Poland, and Hungary keeping longs vs. EUs
periphery and a flattening bias and Israel. But
reduce overall exposure, and underweight
Indonesia and Malaysia. We expect the long ends
of Peru, Mexico and Chile to outperform the US.
While we see some value in the short ends of
South Africa, Turkey, and Russia, we are
underweight these curves. On high vol and no
trend, we would underweight Brazil.
On persistent outflows, we are most bearish

currencies facing large CA deficits and diminished
growth expectations. These include BRL (also on
policy concerns), COP and ZAR. Their relative vols,
market betas, and valuations also bode for selling
USD downside to finance TRY and RUB upside.
On the low yielders, we remain constructive PLN

and HUF on superior growth outlook and see MXN
outperforming CLP and PEN. We also hold long
INR/TWD as politics and monetary policy could
weigh on TWD.
In credit, mixed technicals, low premium (after

recent rally), and a chronic deterioration in
fundamentals balance, in our view, positive carry
and subsiding China risk. We cover underweight in
South Africa, but stay underweight in Brazil, and
hold overweight in Hungary.
In relative value, we favor 10s30s cash curve

flatteners in a number of curves, especially in
Mexico, South Africa and Russia. We also favor
short basis in Brazil and Russia, long basis in
Turkey, and switching from Mexico 25s to Peru 25s.
Page 4
The limits to accommodation

The sharp swings across global markets and more
markedly so across EM markets have again
highlighted how dependent on the US and Chinese
economies global activity and investor sentiment are.
These risks are structural and unlikely to dissipate soon.
While extended accommodation has repeatedly
assuaged risky assets over the past five years, we
believe that the transmission to EM has weakened over
the years. During EMs credit boom and easy policies
of the first few years post-crisis, superior growth and
overall supportive initial fiscal and BoP conditions
invited massive inflows and acted counter-cyclically
during moments of stress in major economies. These
inflows were heavily biased towards the larger EMs
that now face not only worsened initial conditions, but
also downturns in their credit cycles. Rather than
attracting capital, most of EM is now repatriating what
was received in their boom years. Lower rates at the
core have eased funding dynamics across the regions,
but EM real rates are low, while FX and credit risks
have risen. In several important economies these
reduced benefits of low-for-long at the core have
been more than offset by lower growth prospects
adversely affecting debt dynamics. It seems that at
least for EM accommodation has reached its limits.
US: Another cold shower
There was nothing positive to highlight in Septembers
report. Not only did it come out 58k below DBs 200k
forecast, but also revisions amounted to -69k over the
past two months and private sector hiring was
particularly soft at 118k. The latter has averaged just
138k over the past quarter, the slowest pace since the
months just before QE3 was announced. In addition,
private payrolls diffusion index at 53% points to broadbased softening a marked drop from the 75% of
November 2014 and close to the 2010 low of 47%.
The unemployment rate remained low, but due to
declining participation. The Household Survey revealed
a drop of 350k in the labor force. The U-6
unemployment fell slightly to 10%, but also on lower
participation. Although the share of long-term
unemployed dropped slightly to 27%, it also remains
elevated in line with the still-high share of part-time
employed (chart). It is not surprising that wage inflation
remains subdued. Average hourly earnings were
unchanged and growth is running at only 2.2% oya.
Aggregate hours growth is still consistent with 3% Q3
real growth, but most of this growth was concentrated
in the early part of the quarter thus boding poorly for
Q4. Net exports have also deteriorated, justifying a
8 October 2015
reduction in growth forecasts (from 3.0% to 1.7% and

2.3% in Q3 and Q4, and from 2.6% to 2.1% for 2015).
Altogether, the likelihood of a hike this year dropped
significantly. The next two labor reports before
December will be monitored closely, but a better
understanding of what drives current volatility and
some loosening in financial conditions also seem preconditions for a lift-off then..
Altogether, this points to some QE extension. As it is

unclear how persistent the recent slowdown in the US
and China will be, it is natural to expect the ECB to
resort to dovish rhetoric to buy time. With Fed
tightening less likely over the next quarter and
uncertainty unlikely to be resolved in weeks, DB
expects the ECB to announce a six-month extension of
QE in December.
Part-time employed still a high share
QE provides support
6
4
5
4
Credit impulse - 3m rolling, lhs

Private domestic demand, rhs
2
0
-2
DB fcst
-4
-6
-8
pp of GDP, yoy
-10
2003
2005
2007
% yoy
2009
2011
2013
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
2015
Source: Deutsche Bank, Eurostat, ECB
Source: BLS, Haver Analytics & DB Global Markets Research
EU Extended QE in store
EU growth seems on track, but downside risks have
increased. Slowing global growth and tighter financial
conditions have so far been offset by lower oil and
signs that ECBs easing is permeating the economy
(chart). Accordingly, DBs surprise indicator points to
GDP growth holding up at 1.5%. Thus, DB expects
growth to drop marginally in Q4 to 0.3% and still
recover to 1.6% in 2016. But this requires that China
and US growth concerns wane and that financial
conditions ease into 2016. After all, the sources of
growth remain feeble and based on domestic
consumption (but without the support of strong labor
markets), there have been no meaningful structural
reforms, and growth has been concentrated in the
periphery.
Under these conditions, euro strength
seems to have very short legs.
Global conditions have tamed already-low inflation
risks. Energy remains the main drag and it is unlikely to
add to inflation before end-2016. Food pressures also
remain subdued, according to selling price intentions
and global trends. Core goods inflation has been the
main counterbalance to downward pressures, rising
from 0.1% in Q1 to 0.4% in Q3 on stronger consumer
demand and a weaker euro. But this component may
lose steam on further falls in commodity prices and
recent euro appreciation. As services inflation has
stabilized, these all point to a modest increase in
inflation into 2016 and the following year at best.
EM: Little relief

If the Feds decision to keep rates on hold last month
resulted in more rather than less uncertainty about the
backdrop facing EM, the ensuing data has been more
definitive. Labour market and activity data in the US
have disappointed, while in Europe inflation is
normalizing more slowly than anticipated. With Fed lift
off seemingly receding into the distance and additional
QE by the ECB looking more likely, investors have once
more begun to focus on the relief that this might
provide for embattled EM economies and asset
markets. We think they might be disappointed. Past
experience suggests that, beyond affording EM central
banks a little more room for manoeuvre, such reprieves
have done little to boost the prospects for growth in
EM, without which we think a more durable rally in
their asset markets is likely to prove elusive.
Despite some uninspiring recent activity data, we
continue to think that the short-term outlook in China is
better than many investors seem to expect. As we
discuss later in this EM Monthly (see The end of
Chinas fiscal slide), the slowdown earlier this year
was to a large extent driven by a collapse in land sales,
which reduced government revenues and weighed on
investment. This process is now starting to reverse
(chart). Property prices have also begun to turn a
corner, which bodes well for investment in real estate.
This should support a moderate rebound in growth to
7.2% in Q4 and this stronger momentum is likely to be
sustained into the first quarter of next year.
Page 5
8 October 2015
China: recovery in land sales bodes well for investment

%
Land sales, value, 3mma, yoy
90
FAI, 3mma, yoy, rhs
28
60
24
30
20
16
anticipating a recession in South Africa, despite the fall

in output in Q2. But the pace of recovery has certainly
faltered as a range of factors, from ongoing power
shortages to policy tightening, have seen confidence
plummet. Growth is likely to be barely 1% this year and
we think next year will be no better.
South Africa: confidence never fully recovered
Average of BER business and consumer confidence indices (0=neutral) **
30
Aug-15
Feb-15
May-15
Aug-14
Nov-14
Feb-14
May-14
Aug-13
Nov-13
Feb-13
May-13
Aug-12
Nov-12
Feb-12
May-12
Aug-11
8
Nov-11
-60
Feb-11
12
May-11
-30
20
10
Source: WIND, CREIS, Deutsche Bank
Beyond that, the outlook for growth in China is more

uncertain. The growth of land sales will eventually
settle at a slower, albeit more sustainable pace,
resulting in persistent pressure on government
revenues. The property and infrastructure investment
that have propelled the economy for more than a
decade will slow. Unfavourable demographics and the
high level of leverage in the economy represent further
headwinds. Growth is thus likely to slow next year and
beyond, with the pace dependent on progress on
structural reforms. This months Communist Party
Plenum, when the official growth target for 20162020
will be announced, will shed some light on how the
government intends to manage this transition.
Perhaps one of the bigger surprises in EM over the past
month was the decision by the Reserve Bank of India
(RBI) to cut its policy rate by 50bps. We had expected a
25bps cut but, in the event, the RBI decided to front
load its easing to provide support to the economy
against a very challenging global backdrop. Indeed,
while India is generally perceived as a beneficiary of
lower commodity prices, around one-third of its
exports are commodity-related products, such as
refined petroleum, gold jewellery, and iron and steel
(see India: the negatives of the commodity bust, later
in this EM Monthly). Domestic demand rather than
exports is thus likely to play the key role in supporting
growth. Irrespective of the seemingly healthy headline
GDP growth rate of 7% in Q2, other indicators suggest
momentum is weak, justifying the RBI decision to buy
some insurance on this front.
In EMEA, the pace of contraction in Russia is beginning
to slow, though it will likely be the middle of next year
before the economy emerges (slowly) from a two-year
recession. Fiscal policy looks set to turn contractionary
next year as the government will be unable to sustain its
recent spending growth in the face of continued low oil
prices. The weakness of the rouble and associated slow
pace of disinflation are also likely to limit the scope for
monetary support for the next several months. Were not
Page 6
-10
-20
05
06
07
08
09
10
11
12
13
14
15
Business confidence rescaled to 50/+50 from 0/100 such that 0 represents a neutral reading.
Source: Haver Analytics, Deutsche Bank
In Latin America, investors remain focused on Brazil

where President Rousseff reshuffled her cabinet earlier
this month in an effort to avoid impeachment, ceding
more influence to her PMDB coalition allies and to
former President Lula. This probably buys her some
time. We have our doubts, however, as to whether it
will be enough to allow the government to pass
difficult fiscal measures and keep the PMDB onboard
until elections in 2018. In the meantime, currency
weakness is adding to pressure on inflation, which we
now expect to reach 9.7% by the end of this year. We
think the BCB will avoid another rate hike, preferring
instead to keep rates on hold at 14.25% for the next
year and tolerating a slow pace of disinflation.
Governor Tombini has suggested that the BCB could
support the real by selling reserves. While these are
substantial at USD 370bn, we think the BCB will refrain
from this for as long as possible given the negative
signal it would send.
One manifestation of the problems in Brazil is the rising
level of government debt. A gradual and timid fiscal
adjustment could easily see the government debt ratio
approaching 80% of GDP by the end of the decade. As
we highlight later in this monthly (see Testing the
sustainability of EM debt), Brazils debt dynamics
stand out as among the most worrisome in EM. By
contrast, sovereign balance sheets appear less likely to
cause major problems in Asia and most of EMEA. Even
where government debt dynamics are favourable,
however, problems in the private sector, for example
due to lower commodity prices or excessive dollar
borrowing, could still translate into sovereign risk.
8 October 2015
Simulated changes in government debt by 2020

Government debt level (% GDP)
100
90
short ends of South Africa, Turkey, and Russia, we are

underweight these curves. On high vol and no trend,
we would underweight Brazil.
2015 performance: Driven by recent month
80
70
Returns of various asset classes
60
UST (10-15Y)
50
EM Corp Credit
40
EMBI-G
30
IG
20
HY
DB-EMLIN (hedged)
10
Shows the change in debt between 2015 and 2020 under our base case scenario
ARG
VEN
BRA
COL
PER
ISR
MEX
KAZ
ROU
CHL
TAI
THA
RUS
CZE
POL
ZAF
IDN
TUR
CHN
MYS
IND
HUN
KOR
PHL
EGY
UKR
YTD 2015
The past month
EU Eq
S&P
EMFX (Total Return)
DB-EMLIN
EMFX Spot
Finally, we also have a number of important elections

in EM in the coming weeks. We provide a more
detailed preview of them later in this monthly, but in
brief, we expect the following:
Com'dty
EM Eq
-20%
-15%
-10%
-5%
0%
5%
Source: Deutsche Bank, Bloomberg Finance LP
Argentina (October 25): a tight race might require a

run off on November 22. Were optimistic that
policy making will improve under a new President
irrespective of who wins.
Poland (October 25): polls point to a win for the

opposition Law and Justice (PiS) party, which
would likely result in a change of government.
Turkey (November 1): polls suggest that the

outcome will be similar to the last elections that
took place in June, which would result in another
hung parliament and difficult coalition negotiations.
Strategy: From critical to chronic

EM remains an unappealing destination for capital on
fundamentals and valuation grounds especially in
light of increased volatility. As funding rates seem near
rock-bottom already, EMs improved debt dynamics
now hinge critically on growth and we doubt capital
flows will turn before growth does. This should
continue to weigh on performance for the remainder of
the year (chart).
We maintain receivers where credit and FX risks are
lowest as in the front ends of CNY, THB, and SGD
curves, and recommend moving further down the
curves in Hungary and Israel, while favoring short-end
flatteners in Poland, Chile, and Colombia. On duration,
stay overweight India, (modestly) Poland, and Hungary
keeping longs vs. EUs periphery and a flattening bias
and Israel. But reduce overall exposure. We also
expect the long ends of Peru, Mexico and Chile to
outperform the US. While we see some value in the
On persistent outflows, we are most bearish currencies

facing large CA deficits and diminished growth
expectations. These include BRL (also on policy
concerns), COP and ZAR. Their relative vols, market
betas, and valuations also bode for selling USD
downside to finance TRY and RUB upside. On the low
yielders, we remain constructive PLN and HUF on
superior growth outlooks and see MXN outperforming
CLP and PEN. We also hold long INR/TWD as politics
and monetary policy could weigh on TWD.
In credit, we see a balance between mixed technicals,
low premium (after recent rally), and chronic
deterioration in fundamentals balance vs. positive carry
and subsiding China risk. We cover underweight in
South Africa, but stay underweight in Brazil, and hold
overweight in Hungary. In relative value, we favor
10s30s cash curve flatteners in a number of curves,
especially in Mexico, South Africa and Russia. We also
favor short basis in Brazil and Russia, long basis in
Turkey, and switching from Mexico 25s to Peru 25s.
EMFX: The growth proxy
We find it unlikely that the recent rebound across
EMFX extends beyond an adjustment in positions
before global growth and commodities find firmer
footing. Facing little opposition from policymakers, EM
currencies remain at the mercy of external shocks and
country specifics. Differentiation across currencies
remains high and the importance of these factors has
varied accordingly. But, our decomposition suggests
that the share of external factors has increased again,
and in cases such as the MXN and other large
Page 7
8 October 2015
EMFX: Tracking growth proxies

SPX
Extended accommodation has not boosted EMFX
104
QE2 (Nov/10)
QE3 (Sep/12)
Twist (Sep/11)
Latest (Sep/15)
102
EMFX Spot Index
exporters they have accounted for over 80% of recent

price action. Valuations while near historical lows in
LatAm and (less so) in EMEA have proved insufficient
backstops, since growth in these regions has also
approached historical lows. Facing such little
resistance, EMFX has followed US equities closely over
the past month (chart), as global growth topped
investors concerns.
100
98
EMFX
2015
96
68
1995
94
1975
68
-1
19
39
Business days from economic event
59
1955
Source: DB Global Markets Research.
67
1935
1915
67
1895
past 30 days
1875
66
01
07
13
19
25
Source: DB Global Markets Research; Bloomberg.Finance LP
We see two important and related questions in

assessing growth risks to EMFX. First, how persistent
is this growth slowdown? Second, how beneficial
could policy response be? DB sees early indications
that the Chinese economy is responding to stimulus,
but downside risks remain. DB has also downgraded
US growth forecasts to near 2.0% in 2015 with a mild
acceleration in 2016. DB now expects the Fed to
tighten in March, and many investors will likely argue
that further accommodation is needed.
We favor selling USD downside where CA imbalances

are higher and growth prospects weaker. Even under
protracted accommodation, EM pull factors are a lot
weaker now than in previous rounds of easing
especially where fundamentals are worse. The chart
below shows changes in real, trade-weighted EMFX vs.
CAs and growth revisions. Although valuations seem
supportive in RUB, BRL, COP, and MYR, they have
largely offset adverse terms of trade shocks. Within
those, the combination of CA, foreign positioning, and
political risks still favors RUB, in our view, which we
recommend vs. COP and MYR to hedge oil exposure.
EMFX valuation vs. CAs and growth expectations
REER chg
growth revisions; CA deficit (%GDP)

3.0
15%
2.0
1.0
5%
0.0
In gauging how beneficial a more aggressive response

could be, we show EMFX performance post-QE1. As
the following chart shows, increased and extended
liquidity provisions have at best temporarily boosted
EM currencies. In other words, the causes that
triggered QE have prevailed.
-5%
-1.0
-2.0
-15%
-25%
2015 growth fcast: revision since 7/14
-3.0
CA balance (2015f)
-4.0
REER change since 7/14 (lhs)
-5.0
-35%
-6.0
RUB
Since EM growth is now weaker (thus attracting less

capital) and policy response may be even less effective
after so many rounds of easing, we maintain a bearish
bias on EMFX. EM monetary policy response has been
timid and we doubt CBs will turn more proactive. In
addition, as adverse conditions may persist, we expect
them to be cautious in the use of reserves.
Although we believe such a response would be quite extreme, QE times

were associated with heightened growth concerns and they may provide a
useful reference.
Page 8
BRL
COP
MXN
MYR
TRY
PLN
CLP
ZAR
HUF
KRW
CZK
INR
ILS
IDR
PEN
Source: DB Global Markets Research.
On ZAR, growth and BoP dynamics bode for continued

underperformance vs. the USD and also vs. TRY, in our
view. Given upcoming elections in Turkey, carry
differentials, and higher ZAR vols, we favor selling
USD/ZAR downside vs. TRY upside in options. In Brazil,
with the likely changes in the economic team and
possibly even more populist policies, we prefer to buy
USD on strength. Timid CB response and a challenging
CA deficit (and that oil may stay low for long) also
favors long USD/COP, in our view.
8 October 2015
In Asia, we would see retracement in USD/MYR as an

opportunity to scale back into long USD positions. We
also expect BNM and BI to use FX strength to rebuild
reserves. We retain a more bearish view on TWD,
where further rate cuts are still likely, and politics could
be a concern. We remain long INR/TWD. We have
turned tactically neutral on USD/SGD ahead of the
MAS meeting, and on USD/THB as the focus shifts
from monetary to fiscal policy, but we remain
constructive India.
Asia: Short TWD/INR (Target: 1.90); long 1M

USD/MYR (target 4.50 spot); long 6M USD/KRW
(target 1250 spot), long 6M JPY/KRW (target 10.70
spot); : long 6M USD/TWD (target 33.50 spot).
EMEA: Sell 3m USDZAR put (strike 12.75) to fund

a 3m USDTRY put (strike 2.86), zero cost structure;
Short MYRRUB ( target 14.30); Buy USDILS 3m
call
strike 3.95, indicative price 95bps; Long
HUFCZK ( target 8.90 ); Long PLN and HUF (equally
weighted) vs. EUR spot 97.6 ( target 102.8 ); Short
EURHUF (target 300)
LatAm: Long MXN/CLP (target 43); Long RUB/COP

(target 50) ; Finance a 3M USD/BRL call @4.00
with KO @4.75 by selling a 3M USD/COP put
@2800; Finance a 3M USD/COP call @3000 with
KO @3330 by selling a 3M USD/BRL put @3.60.
Local rates: Reduced benefits

In contrast with FX, EM local rates have naturally fared
better under extended accommodation except after
the large UST repricing post-QE2 (see chart below).
While a rise in US rates seems unlikely anytime soon
and recent global economic shocks have been
deflationary, EM specifics have also deteriorated. As
discussed above, EM is losing rather than attracting
capital and as we explore in a separate piece in this
Monthly credit dynamics have deteriorated in several
countries, particularly in LatAm. Accordingly, pent-up
FX and credit risks have raised the local rates floor
across many curves. In addition, where these risks are
low, valuation has turned unappealing after the latest
rally.
EM local rates: The benefits of extra accommodation
104
QE2 (Nov/10)
QE3 (Sep/12)
Twist (Sep/11)
Latest (Sep/15)
102
DB-EMLIN
We maintain a bullish view on PLN and HUF as the

latest IP releases reaffirm strong growth prospects and
CEE BoP dynamics also remain benign, as the
preceeding chart shows. We have seen a high degree
of co-movement across low-beta LatAm, but valuation
in combination with betas to global risk favor some
MXN outperformance vs. PEN and CLP even if
Banxicos tightening is delayed to 2016. PENs
growth/CA prospects vs. valuation stands out as one of
the worst in the region.
100
98
-1
19
39
59
Business days from economic event
79
Source:. DB Global Markets Research; Bloomberg.Finance LP
In Asia, stay received in the front-ends of CNY, THB,

and SGD curves. We also favor receiving in Hungary
and Israel, but further down their curves. We
recommend flatteners in Poland (paying short-end
swap vs. receiving cash in 5y), and also in Chile and
Colombias front-ends, where inflation is high despite
fragile economies. Although the latter two CBs
indicated that they would hike, their policy rates paths
remain dovish and roughly in line with what is priced in
the US curve (see chart below).
Too little priced where FX risk is low
150 3M pricing vs Fed, 1Y ahead (bp)
BRL
100
50
ZAR
0
-50
MXN
CLP
MYR
KRW
ILS
THB
-100
COP
HUF
PLN
SGD
TRY
CZK
INR
-150
-200
RUB
corr (EM front-end, FX), 1Y hist
-250
-100%
-50%
0%
50%
100%
When compared with the US priced cycle, only BRL,

MXN, and ZAR price more tightening. But these are
also among the curves with highest sensitivity to FX
and these currencies have been particularly volatile.
Limited pass-through and looming recession risks
support our receivers in the short end of South Africa.
However, we refrain from receivers in Brazil while there
is no fiscal anchor in sight. Risks seem balanced in
Mexico though biased to an earlier hike, in our view.
Page 9
8 October 2015
Despite being very sensitive to FX, Turkeys short-end

now stands out as too inverted. Although this
sensitivity is lower in Russia, pricing also stands out as
too dovish. As these CBs will likely tolerate inflation,
our receivers may still undershoot (with a steeping bias
in Russia), but we believe that stronger policy action
will be needed further ahead.
We favor duration extension where credit risks are
lower and valuations more appealing. We continue to
find developments in India compelling with RBIs
surprise 50bps rate cut validating our bias. We remain
overweight duration. While we are also overweight
(modestly) Poland and Hungary keeping longs vs.
EUs periphery and a flattening bias we have reduced
their weights in our model portfolio. We also keep a
modest overweight in Israel on carry and low vols
despite tight valuation.
In LatAm low betas, Peru stands out vs. credit (chart),
while less appealing valuation in Chile suggests
tightening stops in flatteners and keeping long-end
exposure only vs. UST. Mexican rates are still wide vs.
US, especially in the 5-10Y sector. As the chart below
shows, Colombian rates are relatively attractive vs.
credit, but currency risks require a more forceful
response from BanRep.
Duration extension faces credit and FX risks
5Y real yield, %
BR
7.0
6.0
5.0
PE
4.0
3.0
ID
1.0
ZA
MX
2.0
RU
CO TR
Index
PL
US
CL
HU
0.0
IL
-1.0
15
MY
5Y CDS, bp
PH
115
215
315
415
Brazilian rates remain the outliers, but so is the

countrys debt dynamic. We expect them to remain
trendless (on lack of proper policies) and very volatile.
We are underweight South Africa, Turkey and Russia in
EMEA on valuation and credit risks. Although the worst
is possibly behind us in Indonesia and Malaysia, we are
also underweight duration. Overall, as we have
highlighted in our recent Monthly publications and the
following charts stress, EM local rates seem rich vs.
credit (with few exceptions).
Asia: In China, receive 5Y ND-IRS (target 2.25%);

long 5Y IGBs (Target: 7.5%); receive 2Y SGD vs
USD IRS (target +70bp); receive 3Y THB ND-IRS
(target 1.60%).
Page 10
EMEA: Enter CZK 12x15 FRAs (target: 35bp),

favour CZK 1Y-2Y2Y IRS flatteners (new target:
15bp); enter HUF 2Y2Y IRS receiver (target: 1.60%);
enter PLN 3x6 FRA receiver (target: 1.50%, position
short end flatteners by being long POLGB Oct-19
and pay 12x15 FRAs (target: 25bp); , keep ZAR
12x15 FRAs receivers (target: 6.70%), receive ZAR
1Y1Y IRS (target 6.90), enter steepeners long ZAR
Jan-20 / short Dec-26 (target: 125bp); switch from
a ILS 1Y-2Y fwd 1y rate to a 1Y 2Y fwd 2Y rate
(target: 75bp), remain positioned in ILS 2s10s
flatteners (target: 150bp);
enter RUB XCCY
receivers in 9m FX implied yields (target: 10.75%);
Enter TRY 1Y XCCY receiver (target: 10.75%),
Reenter TRY I/L Apr-25 (B/E target: 7.50%)
LatAm: Stay neutral in Brazil. In Chile keep 1s3s

flatteners (target 20bp), receive 10Y CLP/CAM vs.
US (target 220bp), underweight cash (Jan22) vs.
swaps in the 5Y sector (target 20bp). In Colombia
pay IBR2s vs. COLTES 19s (target 110bp). In
Mexico receive 5s10s TIIE vs. US (target 10bp),
favor long end linkers in UDIs40s vs. TIPs42s
(target 200bp), underweight M17s vs. swaps in the
2Y sector (target 10bp). In Peru buy the 42s vs. US
(target 500bp)
Credit: extended accommodation is unlikely to lift

fundamentals
We expressed the view last week that we were in the
middle of a technical bounce from an oversold situation,
but the perception of extended accommodation after
NPF last Friday has further stretched the recent market
rally beyond our expectations. In the IG sovereign
space, the October short-covering has erased almost all
the widening incurred during the second half of
September. We have long held the view that EM
credits should trade with a risk premium over core
market counterparts to compensate for their
weakening fundamentals, but this risk premium has
been almost completely removed (chart).
While extended accommodation likely offers some
relief for EM, it will not help much in lifting overall
fundamentals, which in our view will remain on a down
trend until growth picks up. Based on current ratings
dynamics and assigned Outlooks by ratings agencies,
we can easily see a negative ratings drift of about 0.2
notches on average by the end of 2016, as shown in
the chart toward the bottom of this column 2 . This
would bring the weighted average credit rating in our
DB-EMSI index back to 2010 levels.
Note that this is quite substantial a 0.33-notch lower rating would be

equivalent to a one-notch downgrade by one out of three agencies on
every credit in EM. This brings the weighted average credit rating in our
DB-EMSI index back to 2010 levels. Also, we note that these are not our
projections, but rather a rough gauge.
8 October 2015
Risk premium was added and removed quickly

from - EM IG sovereigns vs. the core markets
have significantly outperformed core markets (both IG

and HY) in terms of the extent of tightening during the
recent rally.
The technicals picture is mixed. As we point out in the
latest Technicals Monitor, one of the main sources of
weakness has been persistent outflows. EM hard
currency funds lost another 3.5% of AUM in September
and the first week of October, although the pace of
outflows has slowed in recent weeks. Year-to-date, EM
hard currency funds have lost 8% of AUM and more
than USD20bn, or about 20% AUM since May/June of
2013 (taper tantrum), based on EPFR reports. In our
view, we are still in the downtrend in EMD funds flows
that started during taper tantrum. This trend will likely
not reverse until EM growth turns around and EM gains
a more solid footing in terms of fundamentals.
This credit migration dynamic is consistent with the

paths of major macro variables from 2014 to 2015 as
forecast by our economists. On average, growth, fiscal
balance, inflation and the current account balance for
most countries still seem set to worsen, with the most
notable deterioration so far observed in Brazil,
Colombia, Venezuela, Kazakhstan, and Russia.
In terms of positioning, our mutual fund beta measure

has backed up to above 1 (from a level of 0.85 seen in
August), suggesting that on average funds have mostly
covered their underweights recently.
We are still in a downtrend in terms of EMD funds
flows that started during taper tantrum3
Funds flow Index (% AUM, Dec 2008 = 100)
Negative ratings drift continues

240
EM average rating (weighted average based on DB-EMSI index)
220
12.5
200
12.0
180
11.5
160
11.0
140
120
10.5
100
10.0
06
07
08
09
10
11
12
13
14
80
15
60
Dec-08
A = 6, BBB+ = 8, BBB- = 10, BB = 12, B+ = 14, B- = 14

In terms of government debt dynamics, as we analyze

in one of the special reports in the Monthly (see Testing
the sustainability of EM government debt), the strength
of sovereign balance sheets is facing pressures due to
weakening growth, depreciating currencies, and lower
commodity prices. The pressures will likely be
amplified as/when the Fed and others begin to
normalize their monetary policies. Even where
sovereign balance sheets may be able to comfortably
withstand these sources of stress, problems in private
sector can represent a further contingent risk.
While EM current credit spreads are quite close to the
widest levels post GFC, they face additional pressure
from US credit markets, which have been adjusting to
re-leveraging and, more recently, significant stress in
the energy sector. It is worth noting that EM credits
Dec-09
Dec-10
EM HC Bonds
Dec-11
Dec-12
EM LC Bonds
Dec-13
US IG
Dec-14
US HY
Therefore, the more accommodative external backdrop

notwithstanding, we do not see a compelling case to
be overweight at this point after the recent tightening
given the weak fundamentals and a mixed at best
technicals picture amid persistent outflows. We think
an overall Marketweight position is appropriate (with
consideration of carry) and we continue to focus on
country-level stories.
For simplicity, we assume the weekly flows in %AUM included in the

EPFR report can be linearly extrapolated to the entire asset class.
Page 11
8 October 2015
In terms of country views, we cover underweight in

South Africa, after having covered underweight in
Indonesia last month. Turkey is also undergoing a relief
rally, but political and geo-political risks bode for a
neutral stance, in our view. We have recently reduced
underweight in Brazil on improved news flow and
some positive measures by Petrobras, but still have
kept it underweight as overshooting has reversed in the
recent recovery. We remain overweight Hungary (and
generally more constructive on CEE) despite very rich
valuation as a defensive play. CEE not only carries
strong growth momentum but also benefits from broad
insulation from China risks, commodities, and US rates.
We are neutral on Mexico but stay underweight in
Pemex on the expected impact of a persistent oil shock
and its recent outperformance vs. other quasisovereigns in the region. In the high-yield space, we
stay neutral on Ukraine but see upside in GDP
Warrants (also see our follow-up piece on Warrants
valuation in this Monthly). In Venezuela, we do not see
any meaningful change to its financing picture while
political tensions is on the rise due to proximity to
parliamentary elections; we remain defensively
positioned in the long-end, low-priced bonds. Finally, in
Argentina, recent market correction brought valuation
to a more balanced level again; we focus on relative
value on the curve and favor EUR Pars vs. USD Pars.
On relative value, we favor cash curve flatteners in
general given the current lower range of UST yields
and recent steepening of the curves, especially in
Mexico, Russia, Hungary and South Africa. We favor
short basis in Brazil and Russia, long basis in Turkey.
Summary of key recommendations
Overweights: Hungary
Underweights: Brazil, Philippines
Cross-credit RV: Peru 25s vs. Mexico 25s (re-enter),

Hungary 24s vs. Romania 24s (keep).
CDS/bond Basis: Sell Russia 5Y CDS vs. 19s, Sell

Brazil 5Y CDS vs. 21s.
Curve trades: South Africa 41s vs. 22s, Hungary

41s vs. 21s, Mexico 45s vs. 25s
Intra-credit cash switches: Venezuela 25s vs. 31s,

Argentina EUR Pars vs. USD Pars.
Drausio Giacomelli, New York, +1 212 250 7355
Robert Burgess, London, +44 20 7547 1930
Hongtao Jiang, New York, +1 212 250 2524
Page 12
8 October 2015
Testing the sustainability of EM government debt
The low level of government debt in emerging

markets has been a key point of difference with
many developed markets and a source of comfort
for investors. With some exceptions, although debt
levels have risen in recent years, they generally
remain moderate.
The strength of EM sovereign balance sheets is
now being tested by slower growth, weaker
currencies and lower commodity prices in some
cases. Investors are demanding bigger premiums
to lend to emerging market governments. These
pressures may yet be amplified by the
normalization of monetary policy in the US other
core markets.
We therefore test the sustainability of EM
government debt, considering how it might evolve
over the next five years in this challenging
environment.
The biggest problems are likely to be in Latin
America, where much lower commodity prices and
the expansionary policies of the recent past
represent sources of stress. Most worrisome of all
is Brazil, where the governments ability to address
these issues is hamstrung by political problems,
and the debt ratio could easily approach 80% of
GDP by the end of this decade.
By contrast, sovereign balance sheets appear
unlikely to cause major problems in Asia and most
of EMEA, though this assumes that governments in
Central Europe and South Africa, for example, are
able to lock in or sustain recent progress on fiscal
consolidation.
This is partly a reflection of the progress that has
been made in recent years in switching to local
currency funding. While there are some exceptions,
such as Argentina, Venezuela, and Ukraine, foreign
currency borrowing now accounts for a smaller
share of government debt. Recent exchange rate
weakness has thus had a much smaller impact on
sovereign balance sheets than would have been
the case a decade or so ago. The increasing depth
of local capital markets should also provide a buffer,
including in some of the more difficult cases like
Brazil.
Even where government debt dynamics are
intrinsically favorable, however, problems in the
private sector can still translate into sovereign risk.
While difficult to predict, such contingent liability
shocks could arise from the impact of lower
commodity prices on the finances of state-owned
energy companies and/or if excessive dollar
borrowing by some companies results in difficulties
in banking sectors.
Introduction
Sovereign balance sheets have been a source of
strength for EM in recent years. Notwithstanding an
increase since the global financial crisis, government
debt levels are generally moderate and around 45% of
GDP on average. This is a marked contrast with major
developed markets, where debt levels have begun to
stabilize but at roughly double this level (chart).
DM and EM government debt levels
Gross general government debt (% GDP)
100
DM
80
60
EM
40
20
EM inter-quartile range
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Medians for 21 and 30 major DM and EM countries, respectively.
Source: IMF Fiscal Monitor, Deutsche Bank
Historically in EM, currency weakness and rising

interest rates used to translate quickly into ballooning
debt levels and liquidity problems. In recent years,
however, rather than ramp up their borrowing in
response to the cheap cost of dollar funding, many EM
governments have taken advantage of the favorable
financing environment to reduce their exposure to
interest rate and currency risk by funding themselves
increasingly in local currency and lengthening the
maturity of their debt.
There are some exceptions to this. For example, socalled original sin was alive and well in Ukraine, where
the government had borrowed extensively in hard
currency, despite an overvalued exchange rate, a major
cause of its recent difficulties.
However, though the moderate level and improved
structure of debt remains one of the more reassuring
aspects about EM, the strength of sovereign balance
sheets is now being tested on several fronts. Growth is
weakening, currencies are depreciating, commodity
producers are facing declining revenues from lower
prices, and investors are demanding bigger premiums
to lend to emerging market governments. These
pressures will likely be amplified as and when the Fed
Page 13
8 October 2015
and others begin to begin to normalize their monetary

policies, pushing up global benchmark rates.
Baseline assumptions
GDP growth
Primary balance
Real rate
Even where sovereign balance sheets may be able to

comfortably withstand these sources of stress,
problems in private sector can represent a further
contingent risk. Some of the recent sovereign debt
crises in developed markets, including Ireland and
Spain, had their origins in excessive borrowing in the
private sector that ultimately had to be absorbed on the
sovereign balance sheet.
(%)
(% GDP)
(%)
In the rest of this note, we therefore take another look

at the current level of sovereign debt across EM and
consider how it might evolve through to the end of this
decade in this challenging environment. After outlining
our base case, we also consider how this would be
affected under various alternative downside scenarios.
Base case
We do this using standard debt dynamics in which
changes in the government debt ratio from one period
to the next are determined by primary budget balances,
economic growth, and interest rates. We also
incorporate valuation changes due to exchange rate
moves. Our assumptions for these parameters are
summarized in the table below:
With the exceptions of Central Europe, which is

emerging from a period of deleveraging, and
turnaround stories such as Ukraine and Egypt,
growth and primary balances are generally
expected to be either similar or somewhat weaker
over the next five years compared to the previous
five years.
Real interest rates, however, are set to increase,

significantly so in Latin America and CIS countries.
Central Europe is again a bit of an exception as real
rates are expected to remain low reflecting a
combination of spillovers from extended ECB
accommodation and a gradual pickup in inflation.
Much higher inflation is also set to drive real rates
in Venezuela deeper into negative territory.
Coming up with a five year view on exchange rate

movements is the most difficult of all. But weve
assumed further substantial weakening in some
cases (e.g. those maintaining overvalued pegs) or
where fundamentals point in this direction, with
rates elsewhere mostly stable.
Page 14
FX change
(%)
'11-15
'16-20
'11-15
'16-20
'11-15
'16-20
'11-15
'16-20
As ia
CHN
IND
IDN
KOR
MYS
PHL
TAI
THA
7.8
6.6
5.5
2.9
5.2
5.9
2.7
2.9
6.5
7.7
5.0
2.8
4.4
6.5
2.8
3.2
-0.4
-3.1
-0.5
1.9
-1.8
1.1
-0.7
0.2
-1.8
-2.2
-0.5
1.1
-0.5
0.3
-0.5
-1.2
-1.4
-1.4
-0.7
1.1
0.8
2.7
1.4
-0.3
-1.6
1.4
-0.5
1.1
0.6
2.6
1.4
0.2
3.0
-32.0
-35.9
-4.1
-25.9
-5.6
-9.3
-16.2
-4.5
1.0
9.2
-12.5
-5.1
-0.3
-14.5
-2.0
E ME A
CZE
EGY
HUN
ISR
KAZ
POL
ROU
RUS
ZAF
TUR
UKR
1.3
2.5
1.7
3.3
4.9
3.0
2.3
1.1
2.1
4.2
-2.0
2.3
4.7
2.2
3.0
3.9
3.6
3.4
0.9
2.4
3.4
3.5
-1.2
-5.4
0.8
-0.5
1.7
-1.4
-1.0
1.0
-1.0
1.6
-1.1
-0.1
0.0
1.2
-0.3
-1.5
-0.7
-1.0
0.6
0.4
0.5
1.6
1.1
-1.4
2.6
3.8
-9.6
2.6
1.5
-5.3
1.8
-0.8
-4.7
0.3
0.2
1.6
3.0
-1.3
1.1
2.5
2.6
1.3
0.4
-1.2
-17.0
-27.4
-19.4
-9.9
-41.0
-14.7
-13.0
-51.2
-49.0
-50.8
-68.6
-8.4
-22.6
-0.7
-10.7
-4.9
5.0
5.2
-8.7
-15.4
-11.6
-13.7
La t Am
ARG
BRA
CHL
COL
MEX
PER
VEN
2.2
1.2
3.9
4.6
2.7
4.7
-0.4
2.4
1.1
3.3
3.2
3.3
4.1
-2.5
-2.2
1.2
-0.2
0.5
-1.3
1.5
-11.3
-1.1
1.2
-0.8
0.9
-0.6
-1.3
-10.7
-1.7
3.6
-2.2
3.4
2.0
1.1
-29.1
4.3
6.0
0.7
5.2
3.3
1.9
-63.4
-59.2
-59.4
-25.4
-29.0
-24.5
-12.3
-82.7
-60.1
-10.7
-0.9
-23.4
0.2
-8.6
-95.6
FX changes are measured relative to the dollar, except in Central Europe where they are calculated
as changes relative to an equally weighted basket of dollars and euros.
The impact of these assumptions on government debt

levels is shown in the table and chart below. The
results are described in more detail, region by region,
below. In summary, however, debt levels look set to
rise across the board in Latin America, albeit only
moderately and/or from a comfortable starting point in
Chile, Colombia, Mexico, and Peru. The increases are
larger in Argentina, Brazil, and Venezuela, with Brazil
the most worrisome given the high starting level of
debt. At the other end of the spectrum, debt levels are
mostly set to fall moderately across Asia and EMEA.
The only major (double-digit) improvements are in the
turnaround cases of Egypt and Ukraine, where debt
would still remain elevated and subject to high risks.
8 October 2015
Nevertheless, the ease with which debt ratios have

been either stable or declining in recent years may well
be a thing of the past. Indeed, nominal GDP growth
rate has been slowing for a while in the regions key
economies (see chart below), reflecting both a decline
in inflation and economic growth rates. A corollary of
falling inflation is rising real interest rates, which in turn
makes debt sustainability more challenging.
Government debt (2015-2020) under our base case

Government debt level (% GDP)
100
90
80
70
60
50
Steady decline in nominal GDP growth rate
40
%yoy, 3 yr mov ave
30
20
2009
2011
2013
2015F
Shows the change in debt between 2015 and 2020 under our base case scenario
ARG
VEN
BRA
COL
PER
ISR
MEX
KAZ
ROU
CHL
TAI
THA
RUS
CZE
POL
ZAF
IDN
TUR
CHN
MYS
IND
HUN
KOR
PHL
EGY
UKR
2007
20.0
10
16.0
12.0
Government Debt
(% GDP)
Contributon to changes from:
2015
2030
As ia
CHN
IND
IDN
KOR
MYS
PHL
TAI
THA
PB
FX
43.2
65.3
26.5
38.9
54.2
47.1
39.3
43.5
36.7
58.1
21.9
30.5
47.2
37.5
39.0
43.1
-6.5
-7.1
-4.6
-8.4
-7.0
-9.6
-0.3
-0.4
9.2
11.1
2.7
-5.5
2.5
-1.7
2.3
6.0
-12.6
-22.2
-5.9
-4.9
-10.9
-13.2
-5.3
-6.9
-3.1
4.0
-0.6
1.9
1.3
5.3
2.7
0.4
0.0
0.0
-0.9
0.1
0.0
0.0
0.0
0.0
E ME A
CZE
EGY
HUN
ISR
KAZ
POL
ROU
RUS
ZAF
TUR
UKR
40.6
90.0
75.3
67.2
18.1
51.1
40.9
20.4
48.4
36.5
94.4
37.9
74.6
67.1
70.3
20.9
47.6
43.3
19.1
44.6
30.7
75.0
-2.7
-15.4
-8.1
3.1
2.8
-3.5
2.4
-1.3
-3.7
-5.8
-19.4
0.5
0.2
-6.0
1.7
7.7
3.4
5.2
-3.1
-2.1
-2.5
-7.8
-4.5
-18.6
-7.9
-10.0
-3.7
-8.7
-6.9
-0.7
-5.6
-5.7
-14.5
0.7
0.6
5.6
10.0
-1.3
2.6
5.1
2.2
3.1
0.7
-5.6
0.6
2.4
0.2
1.5
0.1
-0.8
-1.0
0.3
0.8
1.7
8.5
La t Am
ARG
BRA
CHL
COL
MEX
PER
VEN
16.2
67.0
17.7
46.6
47.8
22.8
40.8
33.8
79.1
19.4
51.6
50.9
27.8
54.8
17.6
12.1
1.7
5.0
3.1
5.0
14.0
5.4
-6.0
4.1
-4.5
3.1
6.7
53.3
-3.3
-4.2
-3.0
-7.9
-7.8
-5.1
6.1
5.4
21.8
0.6
12.9
7.8
2.4
-170.4
10.0
0.6
0.0
4.4
0.0
1.0
125.1
Countries in the chart are ordered from left to right by the change in debt from largest to smallest.
The table shows contributions to the change in debt from primary balances (PB), real GDP growth
(G), real interest rates (R), and exchange rate changes (FX).
Asia
By and large, public debt is not considered a problem
in Asia, as seen in our baseline projections. Even India,
the only economy in the region where public debt
exceeds 60% of GDP, benefits from having virtually no
debt in foreign currency and a very favorable real
growth-interest differential (5-7% in the past decade).
While many Asian economies are expected to slow in
the coming years due to factors such as convergence
and aging, we dont foresee a pernicious mix of
deflation, slow growth, and debt overhang, creating a
Japan-like ballooning of sovereign obligations.
8.0
4.0
0.0
China
India
Indonesia
Malaysia
Japans experience with aging shows that just as

potential GDP growth declines with rise in the
dependency ratio (population below the age of 15 and
above 64 divided by the 15-64 population), public
finances also deteriorate on the back of lower tax
collection (due to a decline in the labor force and by
extension, employment) and higher transfers (public
health and pension transfers rise with aging). Hence
economies like China, Hong Kong, Singapore, South
Korea, Taiwan, and Thailand could well have a more
challenging path of public debt ahead than considered
in our baseline projections.
A key risk to Asias commodity producers is a large
contingent liability shock. If the ongoing commodity
bust lasts for several more years, it may well be the
case that the governments of Indonesia and Malaysia
will have to cover the losses of state owned energy
producers and banks through large scale capital
injection. While such shocks will not lead public debt
burdens to become overwhelming, there will certainly
be consequences for sovereign ratings and external
borrowing costs.
EMEA
Central European economies are still working off the
excess debt built up during their unsustainable booms
prior to the global financial crisis. Sovereigns are part
of this process, with earlier increases in debt ratios
amplified in some cases by high shares of funding in
foreign currency. Government debt ratios have mostly
stabilized in the last couple of years following fiscal
Page 15
8 October 2015
consolidation and as growth in the region has picked

up. We would expect debt ratios to fall a little further
over the rest of this decade provided governments lock
in recent improvements in their fiscal positions. The
region should additionally benefit from ongoing asset
purchases by the ECB to the extent that this keeps a lid
on funding costs across Europe more broadly. Our
simulations suggest that the biggest improvement will
be in Hungary, which is also seeking to reduce its
exposure to currency risk by increasing the local
component of funding, though the overall debt ratio
would remain high at 67% of GDP by 2020. Romania is
the main exception among this group insofar as its
debt ratio is set to rise a little further to 43% of GDP,
partly reflecting a weaker fiscal position.
Turkeys debt dynamics are among the most favorable
in EMEA. Even allowing for somewhat slower growth
rates, a reduction in the primary surplus, an increase in
real rats, and modest further currency weakness, the
government debt ratio would continue to decline
gradually towards about 30% of GDP by the end of this
decade. The main risks may rather lie below the line
should large increases in dollar borrowing by the
corporate sector translate into contingent liabilities for
the sovereign.
The debt ratio in South Africa has risen quite sharply in
recent years to a little below 50% of GDP as the
government allowed its fiscal position to weaken in
response to lower growth. Having reached the limits of
this accommodation, the government has begun to
tighten policy, and this should facilitate a modest
reduction in the debt ratio over the next few years,
provided growth does actually pick up a little along the
lines we expect.
Finally, debt in Russia remains among the lowest in EM
although it has risen quite sharply in the last two years
to about 20% of GDP as lower oil prices have driven
the government budget into the red and the weaker
rouble has pushed up the value of foreign currency
liabilities. Debt should stabilize at around this level but
only if oil prices (and revenues) recover moderately
along the lines we expect and the rouble stabilizes.
Latin America
After enjoying the commodity bonanza of the last
decade, Latin American governments are facing a
drastic adjustment in their incomes, simultaneously
with a deceleration in growth, currency depreciation,
and rising risk premia. The development of deep local
markets in some major countries in the last few years
provide important buffers and contrast with the
currency mismatches of the past. However, the size of
the commodity shock, together with the expansionary
policies of the past, is creating some vulnerability.
Colombia best represents the average Latin American
story. Oil exports accounted for 43% of exports and oil
related revenues represented 20% of public sector
revenues. Only gradual fiscal adjustment in the face of
Page 16
lower oil prices is pushing the fiscal deficit to a trend

close to 4% of GDP. Absent a more determined fiscal
effort, difficult in the current political situation with a
focus on a peace agreement with existing guerrilla
movements, public sector debt is set to reach 50-52%
of GDP by 2020 from 35% in 2013. This
notwithstanding, debt stabilizes in the 50% range of
GDP based on our fiscal outlook, but the pickup in
indebtedness is quite significant.
Despite having the largest domestic debt market in the
region and very little hard currency debt (6.5% of total
debt), Brazils debt dynamics are the worst. The
reasons for this are partly idiosyncratic, including: (i) a
high starting level of debt; (ii) a marked deterioration in
the fiscal position with the primary surplus moving
from almost 4% of GDP few years ago to a deficit of
almost 1% of GDP in 2014; (iii) historically high real
rates that remain high despite recession due to
currency and credit risk premia; and (iv) a deep
economic recession. This difficult economic situation is
further complicated by a delicate political equilibrium
where the government does not have enough power to
introduce the necessary fiscal correction. In the face of
these political constraints, a gradual and timid fiscal
adjustment would push the debt ratio to close to 80%
of GDP from 67% of GDP this year. The one positive
aspect in Brazil is the deepness of the local capital
markets, which will help to accommodate this increase,
though not without some stress.
The other critical regional case is Venezuela, where
debt dynamics do not looking terrible simply because
rising inflation (above 100% this year) is financing a
huge fiscal deficit. Venezuelas binding problem,
however, is the lack of hard currency resources to pay
its external debt. The oil shock implied a loss of some
15% of GDP and hard currency assets could last until
early 2017 at best. Therefore, with limited external
resources and a current account deficit to finance,
Venezuela is likely to face a debt restructuring at some
point next year.
Argentina is another interesting regional story where,
exceptionally, we use net debt in our analysis because
assets are mostly debt held by the social security
system that now is public and runs as a pay as you go.
The very low level of net debt currently, less than 16%
of GDP, is likely to increase rapidly in the next few
years as a new administration solves the holdouts
situation and starts using external financing to plug the
fiscal gap and refresh depleted international reserves.
Thus, in our simulation, net debt goes from 16.2% in
2015 to 33% in 2020 to stabilize around that mark.
Mexico, Chile and Peru face some of the same issues
but with either less fiscal sensitivity to the commodity
shock (Mexico) or very solid fiscal positions to start
with (Chile and Peru). Within this group, Mexicos debt
ratio is the highest at around 50% of GDP though, for
now at least, this seems to be accepted by the market,
partly supported by another deep local capital market.
8 October 2015
Sensitivity to shocks
Government debt in 2020 under shock scenarios

Government debt in 2020 (% GDP)
A cyclical growth shock based on country-specific

two standard deviation reduction in growth over
the next two years.
A longer term shock in which potential growth is

1 percentage point lower than in the baseline.
A fiscal shock based on country-specific one

standard deviation reduction in the primary balance
for the next two years that is then gradually
corrected over the following three years.
An across the board increase in real interest rates

to the tune of 200bps, which could of course
represent either a deflationary problem or a shock
to nominal interest rates, or some combination
thereof.
A currency shock in the form of a one-off

depreciation of 20% next year, over and above the
assumptions in our base case.
Finally, we also consider a couple of combined

shocks in which all of the above headwinds blow
together, either in part, assuming half the value of
the individual shocks, or in full.
The results are summarized in the table below. By and

large, the debt dynamics in Asia remain quite robust
even in the fact of these downside scenarios. It is only
under our full combined shock that debt ratios increase
by more than 10% of GDP relative to our base case.
However, this represents a relatively harsh scenario. To
put this into context, in India, for example, it would
imply that recent progress in cutting the primary deficit
was reversed, the economy would grow by 200bps less
than its recent average, and the government would pay
a real rate of over 3% on its debt.
The dynamics in the other regions are more sensitive to
these shocks, largely reflecting their less favorable
differentials between their growth rate and the interest
rates they pay on their debt. This sensitivity is amplified
in cases where: (i) a large share of debt is in foreign
currency; and (ii) where growth and fiscal balances
have tended to be quite volatile, suggesting the scope
for large moves in these parameters during periods of
stress. This applies in particular to Argentina,
Venezuela, and Ukraine; but also, to a lesser extent in
Chile and Russia, where fiscal positions have typically
been quite volatile in response to swings in commodity
prices. In the latter two cases, however, the low level
of debt provides some comfort.
Growth
Combined
Baseline Cyclical Potential
Fiscal
Rates
FX
Partial
Full
As ia
CHN
IND
IDN
KOR
MYS
PHL
TAI
THA
36.7
58.1
21.9
30.5
47.2
37.5
39.0
43.1
39.4
62.2
22.5
32.9
51.7
40.6
44.5
47.7
37.7
59.6
22.5
31.5
48.6
38.6
40.2
44.3
38.7
62.2
25.2
33.6
50.3
41.0
41.3
47.4
40.1
63.4
24.1
34.0
52.0
41.4
42.9
47.2
36.7
58.7
23.8
30.7
47.4
39.1
39.0
43.2
41.3
66.1
26.2
35.7
54.3
44.1
45.5
50.4
46.4
75.0
31.1
41.4
62.3
51.7
52.8
58.7
E ME A
CZE
EGY
HUN
ISR
KAZ
POL
ROU
RUS
ZAF
TUR
UKR
37.9
74.6
67.1
70.3
20.9
47.6
43.3
19.1
44.6
30.7
75.0
43.8
81.3
77.0
74.8
22.8
50.9
51.4
23.8
48.8
36.9
101.8
39.0
76.8
69.2
72.4
21.4
49.0
44.5
19.7
46.0
31.7
77.3
42.1
77.9
74.3
75.8
27.6
52.5
49.6
35.2
51.7
35.8
78.9
41.8
82.4
74.4
77.3
22.7
52.4
47.4
21.1
49.3
34.0
83.3
39.8
77.2
74.2
73.8
21.1
51.3
47.7
20.4
45.9
34.5
90.7
46.5
86.0
84.0
81.7
26.6
56.7
55.5
31.8
54.1
40.4
102.8
56.7
99.2
104.4
94.7
33.1
67.1
70.4
46.6
64.8
52.4
140.7
La t Am
ARG
BRA
CHL
COL
MEX
PER
VEN
33.8
79.1
19.4
51.6
50.9
27.8
54.8
55.5
88.2
21.0
55.2
56.7
30.2
56.9
50.9
81.6
19.9
53.2
52.3
28.5
55.3
57.3
83.5
30.6
55.8
55.9
32.2
65.6
53.6
87.4
21.2
56.9
55.8
30.2
58.6
65.0
80.5
20.0
58.2
55.7
30.6
75.0
66.3
92.0
27.6
62.2
62.0
34.3
71.2
88.6
106.7
36.8
75.0
75.2
42.0
97.5
Exposure to currency risk

FX debt as share of total government debt (%)
100
80
60
40
20
0
ARG
UKR
VEN
ROU
PER
IDN
MEX
HUN
TUR
POL
COL
RUS
CZE
ISR
CHL
PHL
EGY
ZAF
BRA
KAZ
IND
MYS
KOR
THA
CHN
TAI
We now consider the sensitivity of this baseline to

changes in some of the parameters, specifically:
Exposure to currency risk is of course a reflection of the

share of foreign currency denominated (or linked) debt
in total government debt. As noted, this has fallen
significantly in a number of countries and is now below
20% in over half the countries we cover here. In a few
cases, however, it continues to account for more than
half of government debt (Argentina, Ukraine, and
Venezuela) and it remains significant (30-50%) in a
number of other cases (chart above).
Robert Burgess, London, (44) 20 7547 1930
Taimur Baig, Singapore, (65) 64 23 8681
Gustavo Caonero, New York (1) 212 250 7530
Page 17
8 October 2015
The end of Chinas fiscal slide
We believe the slowdown of China's economy so

far in 2015 was to a large extent driven by a
collapse of land sales and the ensuing sharp drop
in government revenue growth (-3.6% in 2015H1).
We called it a "fiscal slide" in the January thematic
report. It severely affected economic growth so far
this year by dragging down investment growth.
The fiscal slide is now coming to its end, led by the

recovery of land sales. Land sale accounted for
22% of general government revenues in 2014. The
growth of land sales value, at -33% in Q1 and -23%
in Q2 this year, turned to +30% in Q3. We therefore
forecast general government revenues to grow by
1.1% and 7.7% in Q3 and Q4, respectively,
improving from -6.2% in Q1 and -1.3% in Q2.
We reiterate our view that growth may rebound in

Q4. We expect the official manufacturing PMI to
rise above 50, and GDP growth to strengthen
moderately in Q4 from 7.0% in Q3 and Q2 to 7.2%,
with support from accelerated government
spending and an investment recovery. Headline
activity indicators such as industrial production and
power generation may rebound as well.
The momentum will likely carry on to 2016Q1, but

growth beyond that remains uncertain. Our
baseline case is that growth returns to a downward
trend, with the full year GDP growth dropping
modestly to 6.7% in 2016 from 7% in 2015. The
key underlying assumption is that the government
will be willing to tolerate the slowdown and refrain
from further fiscal and monetary stimulus once
growth rebounds in Q4. The Communist Party
Plenum in October and the Central Economic
Working Conference in December will likely shed
more light on policy stance in 2016.
Figure 1: Land sales and fixed asset investment

%
Land sales, value, 3mma, yoy
90
FAI, 3mma, yoy, rhs
28
Aug-15
Feb-15
May-15
Aug-14
Nov-14
Feb-14
May-14
Aug-13
May-12
Nov-13
Feb-13
-60
May-13
12
Aug-12
-30
Nov-12
16
Feb-12
Aug-11
20
Nov-11
30
Feb-11
24
May-11
60
A land-driven fiscal slide in 2015H1

Land sales fell drastically in 2014 (Figure 1). In 2013H2
land sales had a positive yoy growth in value terms at
44%, but it turned to -6% in 2014H1 and then dived to 50% 2014H2. With a moderate pickup to -33%, the
worst episode of the collapse passed in 2015Q1.
Figure 3: Collapse of land sales in 2014
Source: Deutsche Bank, WIND and CREIS
Figure 2: Government finance

General government revenues, yoy
General government expenditure, yoy
25
DB projections
20
15
Land sales, value, rhs
Land sales, value, 3mma, yoy%
RMB bn
80
700
60
600
40
500
20
400
Mar-15
Jan-15
Feb-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Mar-14
2015Q4
2015Q3
2015Q2
2015Q1
2014Q4
2014Q3
2014Q2
2014Q1
Jan-14
Feb-14
-60
Dec-13
-5
-10
Oct-13
100
Nov-13
Sep-13
200
-40
Jul-13
300
Aug-13
0
-20
10
Source: Deutsche Bank, CREIS

Source: Deutsche Bank, WIND
The ending of the fiscal slide will in our view lead

to a cyclical rebound in investment. Improved
revenues along with loosened fiscal stance will
help to boost government spending, in particular
on infrastructure investment. Moreover, the
recovery of land sales, and the upturn of the
property market, also indicates a likely pickup of
property investment in the near future.
Page 18
As a result, growth of government revenues dropped

sharply in late 2014 and early 2015 (Figure 4). For
instance, local government land sales income plunged
36% and 40% in 2015Q1 and Q2, respectively.
Consequently general government revenues declined
3.6% in 2015H1, worst since the early 1980s. We
called the difficult challenge a fiscal slide in our
January report (see Chinas unexpected fiscal slide on
January 5).
8 October 2015
Figure 4: Growth of land sales revenues

Local government land sale revenue, yoy%
General government revenue, yoy%, rhs
50
30
25
20
10
2015Q2
2015Q1
2014Q1
2014Q4
-10
2014Q3
-50
2014Q2
2013Q4
-25
Notably there exists a time lag, about two quarters,

between land sales and their actual impact on
government revenues. This is because bidders who win
the land auctions usually are only required to make the
full payment within 6 months after the auctions.
In 2015H1 GDP growth weakened from 7.3% yoy in
2014H1 to 7.0%. The slowdown is even more
pronounced in industrial production, with ytd growth
for Jan-Aug dropping from 8.5% in 2014 to 6.3%. We
believe such sluggish performance of the economy
was largely connected to the fiscal slide and its
underlying driving factor the collapse of land sales.
Deceleration of investment played a significant role in
the slowdown. In Jan-Aug total FAI grew only 10.9%,
one third lower than the 16.5% for the same period of
2014 (Figure 5). Around 45 percent of the deceleration
can be attributed to the slowdown in property and
infrastructure investment, two components that are
directly linked to land sales and government spending.
Total FAI
Manufacturing
Property
Infrastructure
20
15
10
5
0
2014M1-8
Figure 6: FAI and land sales: a panel regression with

provincial level data
Dependent variable: FAI (3mma) growth, monthly, %
Regressors (%):
Land sales (3mma) growth, t-1
0.012 ***
0.006 *
0.011 ***
Sample period:
Mar 2013 - Aug 2015
Number of observations:
1029
*** significant at 1% level; * significant at 10% level.

The fiscal slide not only affected public spending, but

also had a negative spillover to private consumption.
For instance, historically over 50 percent of the
expenditure by local government land funds was
compensation to relocatees. In 2015H1 such
expenditure declined 25 percent, or some RMB460
billion. It should not be surprising for such a sizable
income shock to have some negative impact on
consumption.
Recovery of land sales
Figure 5: FAI growth, 2014 versus 2015

%
25
pp slowdown/pickup in land sales will likely lead to a

total of 0.3 pp drop/increase in FAI growth in coming
months. Even based on such seemingly small
coefficients, the slowdown of land sales growth in
2014 (from +44% yoy in 2013H1 to -50% in 2014H2)
would have translated into a significant drag on
investment.
2015M1-8
We believe the fiscal slide is now coming to its end,

because the recovery of land sales seems to have
firmed up and gathered momentum in recent months.
While growth of land sales had hit the bottom in
2014Q4, the recovery did not show much momentum
until May/June 2015. For instance, the yoy growth in
value terms was still at -36% in April, but it turned
positive in July to 3% (Figure 7). The preliminary data
of September now shows a yoy growth of 30%, which
could be even higher due to the lag in land sales
reporting.
Empirically the linkage between land sales and FAI can

also be seen from a panel regression based on
provincial level data (Figure 6), which shows that a 10
Page 19
8 October 2015
Figure 7: Land sales in value terms, Jul 2013 Sep

2015
%
Land sales, value, rhs
Land sales, value, 3mma, yoy%
RMB bn
80
700
60
600
40
500
20
400
Jul-15
Sep-15
May-15
Jan-15
Mar-15
Nov-14
Jul-14
Sep-14
May-14
-60
Jan-14
100
Mar-14
-40
Nov-13
200
Jul-13
300
Sep-13
0
-20
The development in volume terms is dominated by

what happened in tier-3 and tier-4 cities, which
accounted for about of the total sales. Their growth
turned positive in July and was up almost 40% in
September (Figure 10). Notably, despite a long
recovery, the growth of tier-2 cities was still negative in
September (-4.6%). They accounted for about 25% of
the total sales volume in 2015.
Figure 9: Growth of land sales by city tiers, in value
terms
Tier-1
Tier-2
Other tiers
120
120
80
80
40
40
Figure 8: Land sales in volume terms, Jul 2013- Sep

2015
Sep-15
Jul-15
Aug-15
Jun-15
Apr-15
May-15
Mar-15
Jan-15
Feb-15
Dec-14
Oct-14
Nov-14
Sep-14
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15
-80
Dec-14
-60
-80
Nov-14
-60
Oct-14
-40
Sep-14
-40
Aug-14
-20
Jul-14
-20
Jun-14
Sep-15
Jul-15
May-15
Mar-15
0
Jan-15
Jul-14
-80
Nov-14
Aug-14
20
100
Sep-14
Jun-14
20
-60
Jul-14
Apr-14
500
200
May-14
May-14
40
-40
Mar-14
Mar-14
40
300
Jan-14
Other tiers
600
-20
Nov-13
Tier-2
60
400
Jul-13
Jan-14
Tier-1
60
m2
Sep-13
Figure 10: Growth of land sales by city tiers, in volume

terms
May-14
20
Apr-14
Land sales, volume, 3mma, yoy%
-80
Mar-14
40
-80
Jan-14
Mil.
Land sales, volume, rhs
-40
Feb-14
-40
Feb-14
The pattern in volume terms is quite similar (Figure 8).

Note that we exclude lands for industrial development
here to reflect an economically more meaningful trend.
Such lands, while often large in volume terms, are less
relevant from the perspectives of both fiscal revenues
and property investment. For instance, while
contributing less than 10% of the total sales value in
2015 so far, they accounted for nearly 40% of the total
sales in volume terms.

Note: Land sales for industrial development are excluded.

The broad trends of recovery are similar across city

tiers, but there are also some notable differences. In
value terms, tier-1 cities accounted for about 17% of
the total sales in 2015 so far. Their recent recovery
started with a surge in June when growth jumped from
-54% yoy in May to +58%, but the momentum came
down quite a bit in September, partly because of the
base effect due to a temporary rebound in 2014 (Figure
9). Other cities, on the other hand, have staged a
slower but more steady recovery, with latest growth
now in the range of 30-40%.
Page 20
Policy easing in our view is the most important driver

of the current land sales recovery. On monetary front,
with 5 interest rate cuts (1.25 pp in total) and 4 general
RRR cuts (2.5 pp in total) within 12 months time,
corporate financing costs have come down
significantly. For instance, the RMB5 billion bonds
issued by China Vanke in Sep 2015 carried a face
interest of only 3.5%, while a year ago the rates on
such corporate bonds were mostly in the range of 5%
to 10%. The recent surge of bond issuance, especially
by property developers, shows that the corporates are
indeed trying to take advantage of current low cost
environment (Figure 11). On fiscal policies, the shift
8 October 2015
from tightening to stimulus, in particular the loosening

of financing restrictions on LGFVs, also played a role.
We will have more detailed discussions in the next
section.
Figure 12: Jiangsu: who bought the lands

100%
8%
19%
80%
Figure 11: Corporate bond issuance surge

RMB bn
54%
37%
60%
Property
Decomposition by
Other sectors
400
Others
Developers
LGFVs
40%
320
43%
20%
37%
240
0%
160
2014
80
Jun-15
2015Q3
2015Q2
2015Q1
2014Q4
2014Q3
2014Q2
2014Q1
Implications on government finance
The poor equity market performance is perhaps

another contributing factor. Shanghai and Shenzhen
stock markets experienced one of their worst quarters
in 2015Q3 by dropping 28.6% and 30.3%, respectively.
This has made property investment a more attractive
alternative, which in turn helped to restore property
developers interest in purchasing lands.
Given the recent development in land sales, and

bearing in mind the lag between land auctions and
actual payments to the government, we now project
government revenues from land sales to grow -25%
and 0% in Q3 and Q4, respectively, as against 36% in
Q1 and -41% in Q2 (Figure 13).
Figure 13: Land sales and government revenues from
land sales
75
DB projections
50
25
0
-25
-50
2015Q4
2015Q3
2015Q2
2015Q1
2014Q4
2014Q3
2014Q2
-75
2014Q1
People may wonder how significant a role the LGFVs

have played in the land sales reversal. To shed light on
this, we did a case study comparing the composition of
land buyers for Jiangsu province in June 2015 to that in
2014. The comparison shows that, in Jiangsu, around
37% of the lands sold in June were purchased by
LGFVs. This ratio is actually lower than the 2014
average of 43% (Figure 12).
Local gov. land sales revenues, yoy%

Land sales, value, yoy%
2013Q4
The rebound in land sales also has a cyclical aspect.

Growth stayed in negative territory for 14 consecutive
months between May 2014 and June 2015, averaging 38% and -42% in value and volume terms, respectively.
After such a long span of weakening, land sales
already dropped to a very low level and require some
technical rebound. A few months ahead of land sales,
the property marketone of its main drivers
experienced a similar turnaround, after 15 months of
consecutive negative sales growth between February
2014 and April 2015.
This will help total government revenues to recover

(Figure 14). For the local government, we now expect
its total revenues to grow -3.4% and 6.6% in Q3 and
Q4, respectively, with whole-year growth of -3.4%. For
the general government, we now expect its total
revenues to grow 1.1% in Q3 and 7.7% in Q4, leading
to an almost flat year of 2015 with growth at 0.3%.
Page 21
8 October 2015
Figure 14: Growth of government revenues

Local government revenues
Total government revenues
25
DB projections
20
15
10
5
0
-5
2015Q4
2015Q3
2015Q2
2015Q1
2014Q4
2014Q3
2014Q2
2014Q1
-10
To illustrate the significance of the land sales recovery

to government expenditure, along with that of the
fiscal stance shift in May (see our reports: China:
Another significant signal of fiscal policy easing on
May 15, and China: The most significant policy easing
so far in 2015 on May 19), Figure 15 calculates how
much the government can spend in 2015H2 under
three different scenarios.
Figure 15: Government spending growth in 2015H2
As s um p tio ns
Scenarios
Scenario 1
Scenario 2
Scenario 3
Revenue growth Deficit target as %

in 2015H2, %
of GDP, 2015
-3.6
-2.3
4.5
-2.3
4.5
-3.2
I m p lied s p end ing

g ro wth
In 2015H2
%
1.6
7.0
11.9
In 2015
%
0.1
5.4
8.1
Under scenario 1 government revenues would remain

subdued in 2015H2, growing at the same rate as in H1,
that is, -3.6%. In the meanwhile, the government would
manage to achieve its deficit target, -2.3% of GDP, by
strict control on its expenditure. Under these
assumptions, government expenditure would only
grow 1.6% yoy in 2015H2, even lower than the 3.4% in
H1.
Scenario 2 also assumes that the government would
find ways to meet its deficit target. But unlike scenario
1, government revenues in 2015H2 would recover as
we project, growing by 4.5% yoy (1.1% in Q3 and 7.7%
in Q4). In this case, growth of government expenditure
in 2015H2 could reach 7.0%, giving a full-year growth
of 5.4%. From the perspective of boosting growth, this
would indeed be a fiscal expansion relative to 2015H1.
Nonetheless, given that the government expenditure
already grew at 11.9% in July and August (more details
below), it would still imply a fiscal deceleration in the
remaining months of 2015.
Page 22
In both scenarios 1 and 2, the governments hands are

tied by its deficit target. This is part of the reason why
we believe the shift of fiscal stance in May was a very
significant change, because it indicates that the
government may be willing to accept a higher deficit
than its original target (-2.3% of GDP), to help stabilize
the growth in 2015.
Along this thought, scenario 3 adopts a different
approach, asking what level of deficit the government
would have to tolerate, if it would like to maintain the
accelerated spending pace as in July and August. The
calculation suggests that, even with land sales
recovering as we project, a deficit of 3.2% of GDP
would still be needed to allow an 11.9% yoy
expenditure growth in 2015H2.
Growth outlook
Near- and medium-term out look
Recovery of land sales and loosened fiscal stance will
help to boost government spending in 2015H2. For
instance, there have been clear indications of fiscal
expansion following the policy u-turn in May. Growth
of budgetary expenditure averaged 25% yoy in July
and August, more than doubling the 11.8% in 2015H1
(Figure 16). Total government expenditure, including
that by government funds, also accelerated. The
extrapolated yoy growth for Q3 based on July and
August data is 11.9%, much faster than the 3.4% in H1
(-0.2% in Q1 and 6.2% in Q2). Another indication of
fiscal expansion is the spike of funds available for
investment from the state budget, whose yoy growth
was only 9% in May, but then jumped to 17%, 29%
and 34% in June, July and August, respectively
(Figure 17).
Figure16: Government expenditure
32
Fiscal expenditure, yoy%
32
Government spending, yoy%

24
24
16
16
-8
-8
-16
-16
2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3

Note: 2015Q3 is extrapolated based on July and August data.
8 October 2015
Figure17: Funds available for FAI

Total funds available
Funds available from state budget, rhs
%
20
%
40
16
30
12
20
Au
Jul
Ju
Ap
Ja
Fe
De
Se
Oc
Au
Jul
Ju
Ap
10
Fe
In light of these challenges, as well as other structural

obstacles such as an unfavorable demographic trend
and the already very high leverage ratio, we believe
China in 2016-20 will most likely see slower growth.
The pace of the slowdown will depend on the progress
of structural reform such as SOE reforms.
Zhiwei Zhang, Hong Kong (852) 2203 8308

Li Zeng, Hong Kong (852) 2203 6139
There are other indications of a likely pickup in

investment as well, such as the strong recovery of
property sales and the pickup of investment amounts
for both projects under constructions and newly started
projects (see our report: China: Growth stabilized as
fiscal easing kicks in on September 13). In addition, the
official PMIs are also showing signs of a possible
rebound (see our report: Where the market is wrong
about China, Part II on October 2015).
Together these indications have reinforced our view
that, led by accelerated government spending and an
investment recovery, there will be a moderate growth
rebound in Q4 from 7.0% yoy in Q3 and Q2 to 7.2%,
with 7.0% full-year growth for 2015.
The momentum will likely carry on to 2016Q1, but
growth beyond that remains uncertain. Our baseline
case is that growth returns to a downward trend, with
the full year GDP growth dropping modestly to 6.7% in
2016 from 7% in 2015. The key underlying assumption
is that the government will be willing to tolerate the
slowdown and refrain from further fiscal and monetary
stimulus once growth rebounds in Q4. The Communist
Party Plenum in October and the Central Economic
Working Conference in December will likely shed more
light on policy stance in 2016.
Long-term outlook
The roller-coaster ride in 2014-15, in our view, marks
the end of the heydays of land-financing. While
current rebound will likely extend to the first quarters
of 2016, land sales growth will eventually settle down
at a slower, albeit more sustainable pace. As a result,
government revenues will likely face persistent
pressure in the foreseeable future. Meanwhile, property
and infrastructure investment, the two wheels that
have been propelling the Chinese high speed train
forward for more than a decade, will also slow down.
Page 23
8 October 2015
Rising external financing risks in Asia

Weak currency, declining revenues, and
higher yields will make external debt
refinancing challenging
Malaysias considerable external debt burden

Total external debt/GDP
80%
Performance of economies with exposure to China and

commodity exports has been poor through the course
of this year. Faced with weak price and demand,
commodity exporters have been under acute pressure
lately. Energy and metals exporting economies like
Malaysia, Chile, and South Africa are at the top of the
list in terms of exports reliance vis--vis China, although
South Korea and Thailand are highly exposed too given
their prominent role in the regional electronics supply
chain.
EM asset markets have sold off sharply this year; we
think the selloff, if not reversed materially, could well be
the first of a three-round event. In the second round, as
we step into 2016 with sustained currency and revenue
weakness, firms with mismatched balance sheets could
begin to experience external debt service and
refinancing difficulties. In the third round, financial
institutions (bank and non-bank) would see their loans
to the firms in distress begin to underperform.
The two major commodity exporters in the region,
Indonesia and Malaysia, would face such event risks
most acutely. Economies that are exposed to
weakening Chinese demand will face difficulties in
general, but commodity exporters in Indonesia and
Malaysia will find the situation most challenging, with
earnings down by 40-50%yoy while external debt
service costs have soared due to sharp currency
depreciation. The fact that there have been only a few
cases of debt default or restructuring so far this year
should not provide room for comfort. Balance sheet
distress can appear with a lag, especially for
commodity companies that have enjoyed a long
commodity boom and are likely have a comfortable
cash position. Such cushion however is only temporary;
if the commodity bust continues for a couple of more
quarters, debt service problems are likely to surface, in
our view. In order to assess which economies could
have the greatest degree of external debt distress, we
look at the external debt burdens of a few Asian
economies.
60%
40%
20%
0%
Malaysia
Indonesia
India
Thailand
Beyond the stock of the external debt burden, what is

needed is to assess the near term risk is to go deeper
into debt that is due in the next year. As financing risks
rise, country specific debt metrics come under scrutiny.
There are several ways to examine reserves adequacy,
but in this context the simplest one is short-term debt
external debt divided by the present stock of reserves.
Examining this ratio for the four Asian economies with
external debt related concerns, we find Malaysia, once
again, is well ahead of the rest in terms of debt burden.
Malaysias short-term debt cover is poor
ST debt/reserves
100%
80%
60%
40%
20%
0%
Malaysia
Indonesia
India
Thailand
Source: CEIC, national authorities, Deutsche Bank
We begin by looking at the total external debt burden of

India, Indonesia, Malaysia, and Thailand. We exclude
China, Hong Kong, Singapore, S Korea, Taiwan, and the
Philippines from this analysis as those economies are
characterized by strong net external asset positions.
The chart below shows that Malaysias external debt
burden is much higher than any economy in the sample
(true also for all of Asia).
Page 24
Malaysia also does not score well in other measures of

reserves adequacy, e.g. in months of imports (under 6
months of imports, lowest in the region) or as a ratio to
gross external financing needs (see chart in the
following page). Although the economy runs a current
account surplus and the government has external
assets beyond reserves (through its sovereign wealth
8 October 2015
fund and pension fund), capital outflows have picked

up and the pressure on the currency has risen. Couple
this with concerns about the political situation,
Malaysias fragility is striking.
Indonesia
Gross reserves divided by gross external financing
Total
External debt breakdown, USD bn

Short term debt
(due in less
than 1 year)
Long term
Total
56.3
247.4
303.7
6.6
122.9
129.5
of which
Government
Philippines
China
Central bank
2.1
2.9
5.0
Private sector
47.6
121.6
169.2
88.0
124.4
212.4
53.0
South Korea
Malaysia
Taiwan
Total
Thailand
of which
India
Government
0.9
52.1
Indonesia
Central bank
2.1
4.9
7.0
Private sector
85.0
67.4
152.4
56.2
80.5
136.7
Government
0.6
20.7
21.3
Central bank
0.6
1.8
2.4
Private sector
55.0
58.0
113.0
185.4
290.4
475.8
Government
9.9
79.7
89.6
Central bank
0.2
1.8
1.9
175.3
208.9
384.2
Malaysia
0
10 11 12
Source: CEIC, Deutsche Bank. Gross reserves include FX assets, SDR, IMF reserves, and gold. Gross
external financing is short term external debt (due over the next 12 months) plus projected current
account balance for 2016.
Thailand
Total
of which
The external debt burden and year-to-date currency

performance have moved hand-in-hand this year. The
chart below shows that Malaysias ongoing currency
stress can be readily justified on the basis of this metric.
What is however striking is that India, despite its recent
buildup of reserves, still has a rather onerous debt
burden. The fact that the rupee has not corrected more
so far is perhaps a testament to the RBIs credibility in
not just fighting inflation, but in maintaining overall
financial stability.
India
Total
of which
Private sector
Source: CEIC, government sources, Deutsche Bank. Indonesia and Indias short term debt are on
residual maturity basis while Malaysia and Thailands short term debt are in original maturity terms
External debt exposure and currency weakness go

together
100
Malaysia
60
India
Indonesia
40
Thailand
20
ST ext debt/reserves
Taimur Baig, Singapore, (+65) 6423 8681

80
0
-20
-15
-10
-5
% change of currency against USD, ytd

Source: CEIC, government databases, Deutsche Bank. Short term debt is payment falling due in less
than 1 year. Reserves exclude gold, SDR, and IMF reserves
Page 25
8 October 2015
EM Election Preview - Argentina, Poland and Turkey
We preview the forthcoming presidential election in

Argentina (to be held on October 25th), the general
election in Poland (also on October 25th) and the
general election in Turkey (on November 1st).
In Argentina we acknowledge the official candidate

lead but anticipate a tight election outcome and the
possibility of a run-off on November 22.
Independently of the winner, we see an important
change in policy making, including a resolution to
the holdout litigation, a more open capital market,
and a more business-friendly atmosphere. The ruling
party candidate, if elected, might try to correct the
currency misalignment gradually and could well
fail in that attempt. A rapid exchange rate
adjustment and more open capital movements seem
more likely with the victory of any opposition
candidate.
A change of government is expected in Poland with

all polls pointing to a PiS win by around 10pp.
Whether or not PiS manage an outright majority
depends on the performance of the smaller parties,
which is difficult to determine accurately from the
opinion polls. There looks to be a small chance that
PO can hang on to power, particularly if Kukiz fails
to meet the 5% threshold needed to enter
parliament.
Turkeys fourth election within two years appears

poised to yield repeat results from June though the
possibility of an outright AKP majority cannot be
fully ruled out.
Argentina: A critical presidential election

Waiting for the election but expecting a run-off
Recent opinion polls have not helped clarify the next
October 25 election picture. According to the
Observatory of Electoral Surveys of the online
newspaper, La Politica Online, which incorporates the
most important polls available by the end of September,
there is a decent chance that Argentineans will need to
go for a run-off election in November. The chart below
illustrates the average voter support and its 95%
confidence range emerging from all the surveys
analyzed by the Observatory. All candidates seem to
have been facing difficulties in improving their PASO
(universal open primaries) performance, while
undecided voters have doubled since then.
minimum 40% of votes that could trigger a first-round

victory if the second-most-voted formula remains
10ppt behind. Governor Sciolis main challenge, it
appears, is to increase his electoral support while
maintaining President Cristina Fernandez de Kirchners
(CFK) blessing. CFKs backing gave Scioli a solid floor
of some 30% of votes, but at the same time marred
Sciolis implicit image of a moderate advocating for
gradual policy renovation and change. This could
embody a major handicap for Scioli, as 60% of the
population (according to existing opinion polls) is
demanding improved policies on a number of issues,
particularly the economy and personal security.
Major flooding in the Province of Buenos Aires during
the days surrounding the PASO elections did not help
Scioli either. This contrasted with a more normal
situation in the City of Buenos Aires, despite also
suffering heavy rains during the same week,
suggesting the importance of effective infrastructure
investment and administration. Furthermore, fraud
allegations in the elections for governor in the Province
of Tucuman also exacted a heavy political toll for Scioli,
as the province has been ruled by Peronist
governments since the return to democracy more than
three decades ago. In addition, Scioli was the only
candidate to refuse to participate in the first debate
among all candidates last weekend, which could have
negatively affected his support, with all candidates
criticizing Sciolis policies and lack of conviction in
outlining his prospective governmental agenda.
The economy and the exchange rate market, in
particular, denote added potential risks for Sciolis
candidacy in the weeks to come. As analyzed below,
the government has continued with expansionary
policies, despite running out of international reserves.
A major stress situation has been contained by
rationing hard currency, but also by the election that
could mean corrections in existing macro imbalances.
The government has also been using its holdings of
dollar debt to provide some additional supply to the
market, while the Central Bank has been selling
increasingly forward FX contracts. Notwithstanding,
peso rigidity in recent weeks has been surrounded by
sell-offs in regional currencies, exacerbating ARS peso
misalignment, almost guaranteeing a significant
correction in the exchange rate market early next year
independently of the winning presidential candidate.
The official candidate, Daniel Scioli, Governor of

Buenos Aires Province, remains the leading presidential
candidate, but has failed to increase the 38.7% of the
votes collected in the PASO last August. More
importantly, it is unclear whether Scioli will achieve the
Page 26
8 October 2015
Argentina: Opinion polls as of September second half
Source: Observatorio de Encuestas, La Politica Online, Deutsche Bank
Mauricio Macri, Mayor of Buenos Aires City,

representing
the
opposition
alliance
CAMBIEMOS, remains the second-most-supported
candidate. Yet, Mr. Macri has also failed to increase his
30.1% of the votes collected during the PASO. The
disappointing PASO results in those districts where
Macris party is stronger remain a puzzle. Likewise, the
lack of strong party machinery to audit the elections
has become another heavy burden, given the
numerous irregularities reported in the PASO as well as
in the provincial elections. Similarly, a recent allegation
of irregular campaign financing resulted in the
resignation of his main candidate for the Congress of
the Province of Buenos Aires, Fernando Niembro, after
denting Macris anti-corruption credentials. Finally,
Macri still seems to carry a right-wing business
candidate stigma that might prevent him from being a
natural choice for a broad spectrum of the population,
which is now particularly bombarded by the official
electoral campaign.
Coming in a distant third in the PASO election, former
Chief of Cabinet Sergio Massa has been the only
candidate to gain some voter support in the last few
weeks. Massa, who is leading the dissident Peronist
alliance UNA, with 20.6% of the votes in the PASO, has
not only managed to prevent polarization, but also has
succeeded in taking voters from Scioli and Macri. This
notwithstanding, it seems that Massa has not yet
reached the point of becoming a likely contender in a
possible run-off election. Opinion polls and focus group
evidence have highlighted a higher degree of volatility
in Massas voters than in those of the other candidates,
partly reflecting the unstable position of remaining the
third-most-voted formula competing.
A similarly tight scenario seems likely in the Province of
Buenos Aires, with the difference simply being that the
most-voted candidate will win this election. Chief of
Cabinet Anibal Fernandez, the winner of the official
ticket for the Frente Para La Victoria (FPV) in the
province, has been struggling to gather all the votes
that went to his opposition in the primaries. Thus, in

current projections, as also reported by La Politica
Online, Mr. Fernandez is barely ahead of CAMBIEMOS
candidate for Governor of the Buenos Aires Province,
Maria Eugenia Vidal, who was the most-voted single
candidate in the PASO with 32% of the votes. The third
candidate in the province is former Governor Felipe
Sola, from UNA, with 19.3% of the votes in the PASO
but unchanged support since then. In the Province of
Buenos Aires, however, there could be as much as
25% of undecided voters turning the balance in favor of
any candidate, but most likely Fernandez or Vidal,
based on poll results. Indeed, the high rejection rate
that Mr. Fernandez faces is making the provincial
election very competitive. Election records suggest that
historically, the presidential candidate drives the
provincial candidate, but Fernandezs low popularity
might end up being a stress test to that scenario.
Although there have not been updates on voter
preference for the Congressional election, extrapolating
the PASO results implies that the official party could
lose its majority in the Lower House, going from 54%
of the seats currently to 44% in 2015-2017, while it
could maintain the majority in the Senate, likely
increasing it from 56% of the seats to 58%.
Likely post-election scenarios
As discussed before, in our view, policy changes will
likely be imposed sooner or later by the economic
reality, independent of the winner of the coming
elections. The extreme path of policy continuity would
likely require increasing limits to economic freedom
beyond what Argentinas society seems willing to
accept, with a large and educated middle class
weighing on that decision. This notwithstanding, the
path toward change might not be free of market and
economic volatility and stress. An official government
led by Governor Scioli might avoid leading through a
difficult transition if Scioli were to separate from the
policies followed by the Kirchner administration of the
last 12 years: state capitalism with increasing
economic restrictions. Indeed, this would be consistent
with Sciolis track record of a businessman turned
moderate politician.
The strong presidential system of Argentina certainly
provides the political framework for an elected
president to execute his/her own agenda, with some
degree of independence from his/her party backing.
Ironically, Scioli, if elected, could also have a good deal
of support from opposition forces favoring improving
macroeconomic policies. Nevertheless, whether Scioli
would decide to set the stage for changes from the
very beginning, or confront the Kirchnerist leg of his
government only after macroeconomic imbalances are
exacerbated, possibly triggering a financial crisis,
remains a question mark.
Page 27
8 October 2015
The political backing of President CFK is also imposing

a somewhat constrained electoral mandate on Scioli,
as he is implicitly calling for some degree of continuity.
However,
understanding
that
this
has
also
handicapped him from attracting more independent
voters, Scioli has tried to be vague regarding economic
policies. This notwithstanding, Scioli has re-confirmed
that the leading economist, Miguel Bein, would be part
of his eventual government. Economic Minister Kicillof
had openly and repeatedly criticized Bein for his past
policy decisions during the De La Rua government, as
well as his more contemporaneous ideas. In contrast,
Mr. Bein has been direct, signaling that economic
policy must be changed.
In an effort to bridge the need for change with the idea
of political continuity, Scioli and his economic advisors
have explicitly been favoring gradualism. This
particularly relates to the exchange rate market, stating
the need to establish priorities to allocate scarce
international reserves. This policy recipe includes
negotiation with holdouts seeking normalization of
financial markets as well. Such a gradual approach
would demand the maintenance of capital controls as
well as heavy intervention in the exchange rate market.
A gradual exchange rate adjustment is favored in
order to minimize the income cost that a large
devaluation could represent for the society. However,
gradualism also involves economic costs, in
particular, the difficult task of supporting a currency
that is projected to continue depreciating in real terms.
The latter delays most of the benefits of a weaker
currency, while complicating exchange rate dynamics.
Similarly, gradualism on the fiscal front demands great
credibility in order to reap the benefits at the early
stages of the adjustment process, something that the
Sciolis administration is unlikely to enjoy, conditioned
by key officials of the CFK government in Congress.
In the opposition camp, a government of Mauricio
Macri would likely have a well-defined mandate to
undo part of the policies of the Kirchnerist
governments. In particular, Macri has already promised
to remove all restrictions during the first day of his
government, although not all of his advisors agree.
Most local economists are concerned about the
challenging task of seeking new equilibrium for ARS
parity with few international reserves while adjusting
other nominal prices, like utilities and some exportable
food items. Such a challenge seems exacerbated by
the accumulation of corporate profits and debt services
retained over the last four years and the apparent
financing constraints facing Argentina, as international
debt issuance appears to be blocked, excluding a
definite resolution of the holdout legal claim. That is
why getting hard currency financing as soon as
possible would likely be key for a Macri government,
creating the incentive for a rapid resolution of the
holdout issue. A potential US Court decision to not
affect local law bonds in the pari passu claim might be
Page 28
a stroke of luck for any future government in Argentina,

adding a degree of freedom for the new administration,
which would otherwise be forced to seek an immediate
holdout agreement.
Macris preference for a quick removal of all controls is
a response to economic and political factors. As a
businessman, he is fond of swift and clear changes.
Politically, Macri might fear confronting a divided
Congress, understanding that he might need to
generate economic benefits as soon as possible to
extend his political mandate. Such difficulties with
Congress might be less an issue for Scioli, who has
more experience negotiating with the traditional
Peronist party on official lines and who, paradoxically,
could enjoy a more collaborationist opposition as well.
Scioli and Macris potential economic goals also seem
different from a more fundamental perspective,
including the role of the government and its size, the
institutional strength of the Judiciary and the need for
structural reforms, with Macri holding a more
mainstream position than Scioli.
Poland: PO rule expected to come to an

end
Poland will hold a general election on Sunday October
25th. This is the countrys second election this year
after the May presidential election. The surprise win by
Law and Justice (PiS) candidate Andrzej Duda in the
presidential election has boosted support for PiS in the
upcoming parliamentary elections, and all opinion polls
point to a PiS-led government. This would end 8 years
of a Civic Platform (PO)-led coalition and leave
heightened policy uncertainty while the PiS prioritizes
spending plans and takes a more realistic approach on
revenue generation. The implications for monetary
policy are also significant, with the lower and upper
chambers of Parliament appointing six new MPC
members in early 2016 (and President Duda another
two followed by a new NBP President later in 2016). All
460 seats in the lower house (Sejm) are being voted on,
as are the 100 seats in the mainly advisory upper house
(Senate). Voting will take place between 7am and 9pm
local time. Around 30mn Poles are eligible to vote.
All opinion polls point to a PiS win
All main opinion polls point to a PiS win on October
25th with most giving PiS a lead of around 10pp over
incumbent PO. The outcome is made particularly
uncertain, however, by the large number of swing
voters in Poland and the lack of track record for
support of the Kukiz 15 party (Kukiz won a surprising
20.8% of the vote in the first round of the presidential
election and has formed a party only very recently). An
IBRiS poll from October 6th puts PiS at 33%, PO at
24%, ZL at 10%, Nowoczesna at 9%, Kukiz at 6%, PSL
8 October 2015
at 7% and KORWiN at 3%. An earlier IBRiS poll from

October 3rd is similar, with PiS at 34% versus 24% for
PO, while a Millward Brown poll from October 1st has
a similar 32% and 22% for PiS and PO, respectively. An
Ipsos poll from September 24th has the highest
support for PiS at 38% versus 26% for PO. Broadly
similar results are seen by CBOS, which puts PiS at
34% versus 30% for PO. To win outright PiS needs at
least 231 seats in the 460-member Parliament. Some
opinion polls have suggested this is possible given the
limited support for the smaller parties, with some polls
suggesting only one or two of them will reach the 5%
threshold to make it into parliament. As the SLD and
Your Move (TR) are running under a coalition called the
United Left (ZL), this requires 8% to enter parliament.
The bottom line is that the fewer the parties that enter
parliament, the more seats will be allocated to the big
parties.
PiS have a double-digit lead in the opinion polls
45%
40%
PO
PSL
PiS
Kukiz
SLD
NowoPL
35%
30%
25%
20%
15%
10%
5%
0%
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Source: CEEMarketWatch (TNS)
Law and Justice (PiS). The main policy pledges from

PiS are i) a PLN500 monthly per-child benefit for poor
families and for the second child in those families with
somewhat higher income, ii) lowering the retirement
age to 60 for women and 65 for men and iii) raising the
tax-free allowance to PLN8,000 from PLN3,000
currently. PiS PM candidate Beata Szydlo has also
mentioned a PLN12/hour minimum wage, health
benefits for those over 75, higher defense spending
and lower taxes for small firms (15% corporate tax rate
versus the current 19%). The cost of the proposals is
around PLN39bn (or approximately 2% of GDP). The
most expensive component is the child benefit, with a
cost of PLN22bn, followed by lowering the retirement
age, at PLN10bn, and a PLN7bn cost from raising the
tax-free allowance. The main revenue generator is to be
a tightening of tax collection, which the PiS have said
will bring in a substantial PLN52bn. Other proposals
include the introduction of a bank tax at 0.39% of
assets, which is expected to raise around PLN5bn a
year. PiS recently mentioned a 0.14% financial
transactions tax and 0.07% tax on derivatives as an
alternative to the bank levy, but we do not know
whether this is being discussed as a real alternative.

Other planned revenue measures are higher income
from VAT and PLN3bn from a retail tax covering large
(mainly foreign-owned) stores. In terms of assistance
for CHF mortgage holders, conversion at historic
exchange rates was one of President Duda pre-election
pledges, but PiS have been pretty silent on the issue
recently. With PiS voters less likely to be those with
CHF mortgages, we expect that any eventual mortgage
relief would benefit both PLN and CHF borrowers and,
moreover not be in conflict with the proposed bank tax.
Finally a PiS government, if elected, would probably be
less pro-EU than the incumbent PO government
although is unlikely to jeopardize Polands substantial
EU funds allocation. More generally, the party is
socially conservative compared with PO, but much
depends on whether Beata Szydlo remains as the face
of PiS of if party leader and former PM Jaroslaw
Kaczynski moves back into the limelight.
Civic Platform (PO). While Polands economic record
under the eight years of PO rule is pretty solid (Poland
was the only EU country to avoid recession in 2009,
and the once-large fiscal deficit has been corrected and
external imbalances remain contained), most political
commentators attribute the poor showing in the polls
to a combination of voter fatigue given fairly moderate
reforms, the 2014 tapes scandal and the absence of
former PO party leader and PM Donald Tusk. PO
announced recently that it would overhaul the tax
system with one new tax to cover income, social
security contributions and the national health fund. The
tax range would be set between 10% and 39.5% versus
the current top tax contribution of 43.5%. According to
FM Szczurek, this is intended to simplify the tax system
and help low-income families. It is expected to cost the
budget PLN10.2bn and go into effect in 2017 or 2018.
The PO has also announced plans to set a minimum
wage of at least PLN12/hour and to eliminate junk
employment contracts, which do not require
employers to pay social security contributions or
healthcare. Otherwise the plan is for a continuation of
the current policies with the spending rule to remain in
place and VAT to drop by the scheduled 2017 date.
Kukiz 15. Pawel Kukiz produced a surprise in the May
Presidential election, winning almost 21% in the first
round of voting. He is a former rock star with no
previous political experience and ran largely on an antiestablishment platform in the May election. He has
since formed his Kukiz 15 party and said that he does
not believe in the idea of a party manifesto. From the
little we do know about his politics, he supports the
idea of a (very high) bank tax, radical reform of the tax
system and increased domestic ownership of banks
and media. Support for the Kukiz party has dropped
significantly since the May Presidential election, and
with no track record it is difficult to know with certainty
the likely level of support on October 25th. In any event,
Kukiz could make a noisy coalition partner.
Page 29
8 October 2015
Polish Peasants Party (PSL). The PSL have been the

junior coalition partner under the past two PO-led
governments. Several recent opinion polls have put
them under the 5% threshold needed to enter
parliament, but most political experts point to an
underestimated level of support due to the mainly rural
voting base. Barring the recent conflict over the CHF
mortgage bill, where the PSL voted in favour of an
opposition amendment, their time in coalition has been
reasonably smooth. However, the PSLs traditional
voter base is much more aligned with PiS, which leaves
them as a potential coalition partner.
NowoczensaPL. This is a new party (also known as
modernPL) founded a few months ago under local
economist Ryszard Petru. The party is a pro-market
liberal group trying to attract former PO voters who
have been disappointed by the slow reform process.
They have advocated a flat personal, VAT and income
tax rate at 15% and greater deregulation but have not
provided much detail on proposed social welfare
reform. Petru has said he would not form a coalition
with the PSL or the SLD and has reservations about the
possibility of coalition with ZL. A coalition with the PO
would be easiest in terms of policy continuity, but we
do not expect this would be made explicit ahead of the
election given the two parties are courting the same
voters. The party has been polling close to the 5%
threshold but in contrast to Kukiz has seen support rise
in recent weeks.
United Left (ZL). The United Left is a coalition between
the Democratic Left Alliance (SLD) and Janusz Palikots
Your Move (TR) in addition to several other small
parties. The rationale for running as a coalition is to
prevent splitting the vote from the left, but this brings
with it a higher threshold to enter parliament (8%). The
SLD did very poorly in the Presidential race with their
candidate winning just 2.4% of the vote in the first
round and ZL has been very close to the 8% threshold
in several opinion polls. A failure to make it into
parliament would be the first time in the countrys
recent history that the SLD has not been in parliament.
It would be less an issue for TR as the party was
established only in the run up to the 2011 election. ZL
policy proposals include substantially raising the tax
free allowance to PLN21,000, a minimum wage of
PLN15/hour and subsidized medicines for pensioners.
KORWiN. This is the other anti-establishment party
under Janusz Korwin-Mikke. Opinion polls show his
support hovering around the 5% threshold, making it
difficult to know whether the party will make it into
parliament. He also did poorly in the presidential
election, winning just 3.3% of the vote. Korowin is
expected to benefit in a scenario where Kukiz does
poorly and may therefore be a potential coalition
partner for PiS. His views are somewhat mixed but
broadly right wing, economically liberal and anti EU.
Page 30
Likely post-election outcomes

In general, political commentators see the most likely
election outcome as a PiS-Kukiz coalition. The
uncertainty here is Kukizs performance in the election,
particularly given the sharp decline in support for him
during the past several months. Kukiz seems unlikely to
play a significant role in any future government,
however, due both to the lack of political experience
and the incoherent policy platform. Another possibility
for a PiS-led coalition is the current junior coalition
partner, the PSL. The two parties have similar rural
voter bases but the PSLs history with the PO could
make this difficult. The other option for a PiS coalition
partner could be KORWiN. A scenario where the PO
manage to hold onto power is not impossible but
would probably only be likely in a situation where Kukiz
does not meet the 5% threshold to enter parliament.
Nowoczensa could be seen as a natural coalition
partner but this would most likely also need PSL and /
or ZL, i.e an anti-PiS coalition. Such a coalition is
unlikely to be stable given the differences in policies.
Possible coalition scenarios
PiS - Kukiz
PiS - PSL
PiS - KORWiN
anti- PiS coalition (PO-Nowoczensa-PSL-ZL)
Source: DB Global Markets Research
2011 results were broadly in line with opinion polls.

Polands last general election was in 2011 and saw the
PO become the first party in recent history to win reelection. The final results gave 39.2% to the PO, 29.9%
to PiS, 8.4% to the PSL, 8.2% to the SLD and 10.0% to
the Palikot Movement (RP). This translated into 207 +
28 = 235 seats for the PO-PSL coalition with PiS on 157
seats. Turnout was reported at 48.9%. The results were
broadly in line with the opinion polls in the run up to
the election, with the most likely scenario seen as a
continuation of the PO-PSL coalition. The opinion polls
in the run up to the May presidential election proved
less useful, however, with none to our knowledge
predicting Duda winning the first round of voting. Even
the polls for the second-round run-off did not
overwhelmingly point to a Duda win.
Once the official results are published, President Duda
(PiS) will nominate a PM to form a government. The
PM designate will then have 14 days to form a
government and win a vote with an absolute majority
(>231) in parliament. Three attempts are permitted at
forming a government. The Constitution does not
explicitly say that the President must nominate a PM
designate from the party winning the most votes but
this has generally been the case.
8 October 2015
Implications for the economic outlook

We discussed after Dudas victory in the May
Presidential election that a PiS-led government would
increase policy uncertainty in Poland but it would not
necessarily derail the decent macro outlook4. A PiS win
would raise concerns over a return to the expansionary
fiscal stance seen under the last PiS government (20052007) where the structural deficit widened by around
1% of GDP. At least some of the pre-election promises
should materialize but the consensus view in Poland is
that spending plans will be scaled back via a watering
down / delaying on various policies. It is also important
to remember that any future government in Poland will
be constrained by the permanent (and counter cyclical)
stabilizing expenditure rule (SER) that officially came
into effect this year. The rule has debt thresholds at
43% of GDP and 48% of GDP and corrects expenditure
growth depending on the debt and deficit dynamics.
The 60% of GDP Constitutional debt limit also remains
in place and requires a budget surplus if breached
while the Public Finance Act also contains a 55%
threshold, which requires unspecified consolidation
measures if breached. A future government could
change the law and remove the SER and associated
debt thresholds, but a change to the Constitutional
threshold would need a 2/3rds majority in parliament
which seems unlikely. Moreover, with Poland achieving
EDP exit in June this year, we do not expect that any
new government would run a >3% deficit and put
Poland back under EU monitoring. On the monetary
policy side the PiS appointees to the current MPC
(Glapinski, Kazmierczak and previously Gilowska) were
clear hawks, but this was under a PO-led government.
New PiS appointees under a PiS government are more
likely to be dovish, particularly in the current low
inflation environment.
Overall, a more inward-looking and less EU-friendly
policy stance is likely under a PiS government but
relative to a situation where the country was decidedly
pro-EU and generally business-friendly. On the macro
front, the solid starting point leaves room for slippage
without derailing the decent outlook. In terms of the
rating Moodys said in September that the election was
already factored into the A2 (stable) rating with the
economy strong enough to neutralize political volatility.
But S&P warned in August that Poland could lose the
positive outlook on its A- rating if a new government
breaks the spending rules or significantly penalises
foreign investors (through, for example, CHF mortgage
conversion, or the bank / retail tax). Even if PiS win the
election, any outlook downgrade is unlikely to be
immediate as S&P have said they would wait until
policies are implemented before making any changes.
See Special Report Poland: The implications of a Duda Presidency (1 June 2015)
Turkey: Repeat elections, repeat result?

Turkey will hold a repeat general election on Sunday,
November 1st. This will be the countrys fourth election
within two years. The June 2015 election resulted in a
hung parliament as the Justice and Development Party,
or AKP, lost its single-party government status for the
first time since 2002. A pro-Kurdish party, i.e. HDP
(Peoples Democratic Party), exceeded the national
10% threshold for the first time in Turkish political
history, winning most of the seats in Eastern Anatolia,
a region where the AKP had claimed dominance since
the early 2000s. Support for the main opposition CHP,
Republican Peoples Party, remained unchanged
around 25% while the Nationalist Movement Party (or
MHP) emerged as the second winner - after HDP - with
an additional 27 seats.
AKP lost its majority in the June elections
400
350
# of MPs
367: Constitutional
majority (outright)
330: Constitutional
majority (via referendum)
300
276: Absolute
majority
250
258
200
150
132
100
80
50
0
0
2002
2007
AKP
CHP
2011
MHP
HDP*
2015
Others**
Note: (*) HDP has been established in 2012. Hence, figures for 2007 and 2011 represent former
pro-Kurdish parties, i.e. DTP and BDP. In 2002, HEDAP entered as a single party, but remained at
6.2%. (**) Others include smaller political parties and independent candidates.
Source: YSK, TurkStat, and Deutsche Bank
Following the elections, formal steps, i.e. election of

House Speaker and constitution of the Bureau of
Assembly, took 32 days, in line with the preceding
post-election timelines. President Erdogan, however,
assigned AKP Chair Davutoglu as the PM-designate
only after the formation of the Bureau while his
predecessors had made the same nomination one or
two days later following the inaugural session in the
Parliament, a move that had effectively provided
additional time (15 days on average) to form a
government. Consequently, formal coalition talks were
kicked off only on July 13, i.e. 36 days after the election.
As MHP officially ruled any cooperation with proKurdish HDP, a grand opposition coalition (CHP-MHPHDP, commanding 292 seats in total) fell out of the
equation from the start. And given that AKP declared a
low likelihood of a partnership with HDP, only two
options were on the table: AKP-CHP or AKP-MHP
coalition government. With the MHP also having
distanced itself from AKP due to the latters
accommodative stance in the Kurdish Resolution
Page 31
8 October 2015
Process, the only remaining alternative was AKP-CHP.

While there was indeed genuine progress in talks
between the parties, as reflected in short-lived rallies in
the FX and local markets at the time, it became official
on August 13 that negotiations failed to yield a
government due to differences in views on education
and foreign policies, among other issues.
On August 18, PM-designate Davutoglu returned the
mandate to President Erdogan. Citing absence of
compromise between political parties, Erdogan did not
opt to nominate a new PM-designate and rather
triggered a clause in the Constitution that gives the
President the right to initiate snap elections if no
government is formed in 45 days following the
constitution of Bureau.
Later, a care-taker government was formed by
independents and AKP and HDP deputies, as CHP and
MHP decided not to partake in the cabinet, though
HDP ministers quit their posts in mid-September.
Accordingly, the High Election Board (YSK) announced
November 1st as the date of repeat elections. Domestic
voting will run from 08:00am to 17:00pm (or 07:00am
to 16:00pm in some Eastern provinces) on the day. The
voting process for Turkish citizens living abroad will
start on October 8th. Expats will still be able to cast
their votes at custom gates until 17:00pm on
November 01. According to the latest data from the
YSK, the total number of eligible voters in Turkey and
abroad stands at ~57mn. 16 political parties and 21
independent candidates are officially in the race. 13
parties field candidates in each electoral district5. The
main contenders are again the AKP, CHP, MHP and the
HDP.
Polls point to another hung parliament
While this is a repeat election with the same
contenders and the same set-up, the underlying
conditions are not the same. One striking difference is
the heightened security risks. The Kurdish Peace
Process, which has been under underway for more
than two years, has come to a halt. Consequently,
widespread terrorist attacks have taken place across
the country, claiming the lives of scores of security
personnel and also triggering transitory curfews in
some Eastern provinces. As a result, a raft of local
election committees filed petitions to relocate ballot
boxes to safer boroughs or combine voting in certain
areas, a request that was later rejected by the YSK on
the grounds of lack of authorization.
The economic backdrop has also become complicated.
Despite some resilience in the period running up to the
June elections, retail sales have shown a marked
5 For details of the electoral system in Turkey, please see our report Your Guide to Turkish elections.
Page 32
deceleration into August. Similarly, consumer

confidence plunged in September and reached levels
only seen during the Great Recession. The lira, the
economic barometer for the layman, also reached its
all-time low in September. Consumers also faced more
than a 2pp increase in average loan rates since early
June. Turkish voters normally react to the economic
backdrop and will likely take note of the recent
worsening.
The latest opinion polls still do not point to a major
change in results from June. Based on the average of 8
different pollster results (Andy-AR, Metropoll, Konda,
MAK, ORC, Gezici, Sonar and ANAR-Denge-GENARPollmark), AKP appears to have gained some marginal
ground, albeit not enough to claim an outright majority.
The main opposition, CHP, is also on the rise, hovering
close to 27%. Security concerns have probably affected
pro-Kurdish HDP votes negatively, as manifested by
the slight decline in votes, though the party still
comfortably fares above the 10% threshold. Nationalist
MHP is the other party having lost some steam, which according to local political commentators - could be
related to their non-comprising stance during the
coalition talks.
From one hung parliament to another?
50
16.45226795
45
40
15.8
AKP
12.95856437 42.2
40.7
% of the national vote
MHP
15.4
15.34285714 15.31875
42.9
42.4
41.9
11.6
12.54285714 12.34375
HDP [rhs]
12.3
18
16
14
12
10
35
30
10% election
threshold
Others
[rhs]
4.797364678
6
26.2
25
3.5
25.12906796
CHP
26.65
26.42857143 26.92125
4
3.45
3.2428571433.445
20
2
0
June '15
elections
Jun [2]
Jul [2]
Aug [7]
Sep [8]
Note: Results for June 15 elections refer to only domestic votes. Figures in parenthesis denote
number of pollsters available in respective month. The sample size is based on top-10 pollsters
(measured as accuracy in June 15 elections) which consistently release results.
Source: MAK, Konda, Gezici, ORC, SONAR, Metropoll, Andy-AR, A&G, Denge, GENAR, and
Deutsche Bank
That said, the distribution of pollster results suggests a

repeat result is not a done deal. Some polls (3 out of 8
in September) put AKP close to 44%, pointing to the
possibility of a single party ruling at the margin (i.e. just
with 276-277 seats) even if HDP again qualifies for the
parliament. A more nuanced analysis based on the
latest results from the top 5 polling companies (A&G,
Metropoll, Konda, Andy-Ar, and Gezici; ranked
according to accuracy rate in the June elections) shows
that the AKP fared at around 42.8% at best in
September.
8 October 2015
What are the possible election outcomes?

Based on the latest opinion polls, the technical details
discussed above, and the turn of events since June, we
see three possible outcomes, mostly depending on
how the AKP and the HDP fare at the ballot box and on
President Erdogans stance in the aftermath of
elections.
An AKP majority still cannot be ruled out

50
45
% of the national vote

41.915
40
Average of Sept-15
poll results
Performance in the
June elections
35
30
26.92125
Range of support
based on Sept-15
poll results
10% election
15.31875
threshold
12.34375
25
20
15
10
5
0
AKP
CHP
MHP
HDP
Others
Note: Results for June 15 elections refer to only domestic votes. Figures in parenthesis denote
number of pollsters available in respective month. The sample size is based on top-10 pollsters
(measured as accuracy in June 15 elections) which consistently release results.
Source: MAK, Konda, Gezici, ORC, SONAR, Metropoll, Andy-AR, A&G, Denge, GENAR, and
Deutsche Bank
Turnout ratio and marginal votes will again be crucial

Such a close call means the turnout ratio could again
be crucial, as well as marginal votes. According to daily
Haberturk, AKP lost a total of 18 seats (i.e. single
majority) in 15 different cities by only 90k votes in June,
underlining the importance of marginal votes in some
districts. Turnout also increased by an average 6% in
Eastern Anatolia from 2011 to 2015, which probably
played a role behind the HDPs emerging dominance in
the region. On the other hand, the turnout ratio in nondomestic votes, where the AKP holds ground having
claimed half of the votes, remained below 40% in June.
Turnout in the November elections could prove crucial
30
# of national votes (mlns)
27.3
24.3
25
21.8 (57.9%)
20
21.5
15.9
15
11.3
10
18.9 (40.9%)
20.5 (45.5%)
AKP
Non-AKP (including HDP)
HDP
19.5
12.1
# of registered
voters who
did not vote
Domestic voters
6.5
21.0 (51.8%)
21.4 (49.8%)
Non-domestic voters
6.1
4.0
2.8
2.7
2.4
2.4
5.6
2.3
1.8
2010 Const.
Referendum
[73.3%]
2011 General
elections
[83.2%]
2014 Local
elections
[89.3%]
2014 Presidential
elections
[74.2%]
2015 General
elections
[83.9%]
The most likely outcome, based on polling results, is

another hung parliament with all four political parties
hovering around their respective performance in June.
Such a scenario would entail a coalition government.
As MHP leader Bahceli has again ruled out any
partnership with the HDP following the elections, a
grand opposition coalition is not likely. This would
again reduce the options to two: AKP-CHP and AKPMHP - as AKP-HDP appears even more unlikely than in
June given the recent suspension of the Kurdish
Resolution Process. According to local political analysts,
the former is more likely than the latter, particularly
given the extensive negotiations held between parties
in July-August. Yet, some experts argue that AKP-MHP
could also be viable as the parties stances on the
Kurdish issue have markedly converged of late.
The second possibility is an outright AKP majority albeit only with a narrow margin. The third alternative
(or tail risk) is another repeat election again triggered
by President Erdogan using his Constitutional power if
the political stalemate continues.
The implications for economic outlook
Turkey is no stranger to coalitions and minority
governments. The 1991-2002 episode is a case in point.
The Turkish public had to endure nine different
governments during those 11 years, in just about any
possible combination including a coalition minority
government. The average life of a government was 17
months. Two devastating financial crises (in 1994 and
2001) took place during this period. Growth was 3.2%
per annum on average but was very volatile, fluctuating
between booms and busts. Although Turkey then and
now are different, such a precedent insinuates that the
growth outlook could remain under pressure in the
absence of robust economic management and policies
under any coalition, particularly if external headwinds
become stronger.
7.3
Note: (*) HDP has been established in 2012. Hence, figures for 2010 and 2011 represent former
pro-Kurdish parties, i.e. DTP and BDP. Non-AKP votes include CHP, MHP, HDP, other smaller
political parties and independent candidates.
Source: YSK, TurkStat, and Deutsche Bank
This backdrop hints at a slightly lower (higher) turnout

in the East (abroad) and marginal voters could
potentially change the outcome even if Turkey is
destined for another 4-party parliament.
Page 33
8 October 2015
Coalitions associated with sub-par and volatile growth

1.4
DYP-SHP
coalition #1
MMI
1.2
1.0
DYP-SHP (then CHP)

coalition # 2
2
RP-DYP
coalition
4
1991 general
elections
ANAP-DSP-DTP
minority coalition
6
1.4
1.2
2002 general
elections
1999 general
elections
0.8
DSP-MHP-ANAP
coalition
1.0
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0.0
0.0
-0.2
-0.2
-0.4
-0.4
1995 general
elections
-0.6
-0.6
-0.8
-0.8
-1.0
3 DYP-CHP coalition
-1.2
4 ANAP-DYP minority coalition
-1.4
7 DSP minority government
-1.6
Jan-90
-1.0
1991-2002
Avr. GDP growth: 3.2%YoY
Volatility: 5.9%
-1.2
-1.4
-1.6
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Note: MMI refers to Macro momentum index which is calculated for 1990-2002 period as a
weighted average of normalized changes in non-oil imports, industrial production and credit
extended to the private sector. Shift in color of shaded regions represents a change in the
government. There was an additional minority government not shown on the chart, which was
formed by DYP during October 1995 but failed to receive vote of confidence in the Parliament.
Source: The Grand National Assembly of Turkey, TurkStat YSK, Haver Analytics, and Deutsche Bank
A common point in all four parties election manifestos

is economic promises, including hikes in the minimum
wage (by 50% in CHPs case), bonuses to pensioners,
and subsidies to farmers among others. Budgetary
spending could hence be larger in 2016 (for instance,
by c0.9% of GDP based on AKPs pledges) under any
scenario. That said, all parties to varying degrees
remain committed to fiscal discipline, the only
remaining nominal anchor keeping the countrys
investment grade status in check. Hence, a marked
deterioration in fiscal balances is not likely, in our view.
A third election is the last thing the Turkish economy
needs right now. It could dent consumer and
investment confidence further with dire consequences
for the growth outlook and for inflation dynamics due
to possible bouts of renewed TRY weakness coming
from continued political uncertainty.
Gustavo Canonero, Buenos Aires, (212)250-7530

Caroline Grady, London, +44(20)754-59913
Kubilay Ozturk, London, +44(20)754-58774
Page 34
8 October 2015
India: The negatives of the commodity bust
The commodity bust has not been all good for India.
Contrary to conventional wisdom, several offsets to
the favorable current account/ fiscal position/
disinflation dynamic are taking place. We look at
these factors, focusing particularly on the impact of
weak commodity prices on exports.
Indias non-trivial commodity

dependence
As global commodity prices began to correct last year,
the immediate response of the markets was to treat
large
commodity
importers
as
unambiguous
beneficiaries of the phenomenon. India, having run a
5% of GDP current account deficit in 2012 on the back
of high cost of importing fuel and gold, as well as
soaring inflation due to high food and fuel prices,
experienced relief as prices of food, fuel, and metals
first stabilized and then began to fall.
Today, the economy appears to be on a fairly sound
footing owing to the commodity windfall. The current
account deficit has eased to 1.5% of GDP, inflation has
halved, from around 10% to below 5%, and the
favorable environment has allowed the government to
at once liberalize fuel prices and cut fiscal subsidies
without any impact on inflation. Consumers and
businesses, aided by lower costs, should see an
improvement in purchasing capacity and profit margins,
respectively.
Global commodity prices falling at the same pace as
seen during the 2008/09 financial crisis
%yoy
100
80
60
40
20
0
-20
-40
-60
2007
All commodities
Food
Metals
Fuel
2009
2011
Source: IMF, Deutsche Bank. Index value set at 100 in 2005
2013
2015
But the commodity bust has not been all good for India.
Indeed, several offsets to the favorable current
account/fiscal position/disinflation dynamic are taking
place. We look at such factors in the following
discussion:
Commodity exports are contracting sharply
Indias exports have suffered greatly owing to its
commodity-linked products experiencing sharp decline
in demand and price. At least 35% of Indias exports
come from commodity linked products such as refined
petroleum, gold jewelry, gems, iron, steel, and so on.
Of these, the export value of refined fuels, which make
up nearly a fifth of Indias total exports, are down
51%yoy this fiscal year. Similarly, gold jewelry exports
are down 20%yoy while iron/steel exports are down
30%. With Indias non-commodity exports also running
into subdued demand, total exports were down
16%yoy
through
January-August,
the
worst
performance in Asia.
The commodity-producing economy is struggling
Indias miners are seeing sharp contraction in their
earnings (mining constitutes 3% of GDP), agriculture
commodity producers are seeing their earnings
affected due to the weak price of agriculture products,
and the gems/jewelry sector is undergoing a major
downturn.
Falling prices have hurt the metals and mining sectors
debt service capacity
Indias banks have sizeable legacy exposure to stressed
sectors such as steel, mining, and infrastructure; their
recent loan growth has also been largely toward these
sectors. The commodity headwind is pushing up
likelihood of further NPLs, casting a shadow on the
banking system.
Commodity price correction is overstating disinflation
With the WPI contracting by 5%yoy through August
and CPI easing to +3.7%yoy, there was considerable
pressure on the RBI to ease policy interest rates and
indeed the central bank surprised markets by cutting
the repo rate by 50bps in last months meeting. Noncommodity prices, however, are hardly in benign
territory. Education costs were up 6%yoy through
August and the same was with clothing. Thus the issue
of how much room is available for the central bank to
cut rates with a view to its medium term inflation
objective of around 4% is being made complicated by
commodity price driven disinflation.
Page 35
8 October 2015
Some key CPI components are still rising by 5-6%

%yoy
15
Food
Housing
Education
Clothing
Health
Transport/Comm
Among Asian exporters, Indias performance is the

worst
ytd. %yoy
2%
-2%
10
-6%
-10%
-14%
-18%
-5
Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15
Source: CEIC, Deutsche Bank
Source: CEIC, Deutsche Bank. Data for January-August 2015yoy for all countries except Malaysia
and Philippines, where the range is January-July. For South Korea, the data is for Jan-Sep.
The above discussion highlights that the ongoing

commodity bust is at once helping and hurting India.
While on a net basis, India would rather live with low
commodity price inflation, a sharp decline in
commodity prices has adverse implications for the
economy as well.
Analyzing Indias exports slowdown

Indias export sector continues to be under pressure,
with merchandise exports contracting yet again in
August by 20.7%yoy. This was the ninth consecutive
month of decline and our forecasts indicate that
exports would contract through the rest of the year,
after which there could be some respite due to a
favorable base effect. To put the magnitude of
slowdown in perspective, the last time exports
contracted for twelve months in a row was between
October 2008 and September 2009 post the global
financial crisis.
A sharp correction in global crude oil prices and
commodities, along with restriction on gold imports
and slowdown in domestic demand have helped
reduce Indias import bill appreciably, but much of it
has been offset by a similar slowdown in exports,
resulting in lower net exports contribution to growth in
the last fiscal year. In FY15, imports were down
0.6%yoy but exports also contracted by 1.3%yoy,
resulting in net exports contribution to growth falling
to just 0.4%, from 4.4% in FY14.
The weakness in Indias exports is striking, not only in
terms of past trend, but also from a cross country
perspective. Indeed, Indias exports performance has
been the weakest in the region thus far in 2015. On a
cumulative basis, Indian exports have fallen by
15.9%yoy in Jan-August, with the rate of decline being
higher than most other export oriented countries in the
region.
Page 36
What explains such weak performance?

The main reason for such a weak Indian export
performance can be attributed to the sharp decline in
oil exports (down 49.7%yoy between Jan-Aug), which
constitute 18% of total exports. But even excluding oil
exports, we note that non-oil exports are down
7.6%yoy in Jan-Aug of 2015, indicating a broad based
slowdown of Indian exports. Within exports, drugs &
pharmaceuticals is the only key sector which seems to
be performing well, with some amount of recovery
seen lately in gems & jewellery segment; barring these
sectors, overall exports momentum remain undeniably
weak.
Broad based slowdown in exports

% yoy, 3mma
60
Exports
Non Oil Exports
40
20
0
-20
-40
2007
2009
2011
2013
2015
8 October 2015
Drugs & pharma is the only sector which is doing well

Exports
Drugs & Pharma
Gems and Jewellery
Petro Products
% yoy, 3mma
120
90
Net exports contribution to growth has reduced in

FY15
% contribution
4
60
3
2
30
-30
-1
-60
2007
Net Exports
-2
2009
2011
2013
2015
-3
FY07
FY09
FY11
FY13
FY15
Source: CEIC, Deutsche Bank.

Source: CEIC, Deutsche Bank.
Performance of 10 key items of exports (% yoy)

Key items of exports
% share in Indias
FY15,
Apr-Aug
total exports
% yoy
2015,% yoy
Petroleum products
18.3
-10.1
-47.7
Pearls, precious and semiprecious stones
8.0
-8.8
-6.2
Gold and other precious

metal jewelry
4.3
22.0
-17.5
Drug formulations and

biologicals
3.6
5.1
11.5
RMG Cotton incl

accessories
3.0
1.9
-3.3
Iron and steel
2.8
-5.8
-28.6
Products of iron and steel
2.4
11.5
Motor vehicles/cars
2.2
Aircraft, spacecraft and

parts
2.0
Cotton fabrics, madeups

etc
1.8
7.8
-4.4
Total Exports
48.4
-1.2
-16.4
Performance of 10 key items of exports (% contribution

to growth)
FY14, %
FY15, %
Apr-Aug 2015, %
contribution
contribution
contribution
Petroleum products
0.8
-2.0
-9.9
Pearls, precious and semiprecious stones
1.0
-0.8
-0.5
Gold and other precious

metal jewelry
-1.0
0.8
-0.7
Drug formulations and

biologicals
0.4
0.2
0.4
-9.8
RMG Cotton incl

accessories
0.2
0.1
-0.1
8.7
-0.7
Iron and steel
0.4
-0.2
-0.8
34.3
-10.7
Products of iron and steel
-0.2
0.2
-0.2
Motor vehicles/cars
0.1
0.2
0.0
Aircraft, spacecraft and

parts
0.8
0.5
-0.2
Cotton fabrics, madeups

etc
0.1
0.1
-0.1
Source: Ministry of Commerce, Deutsche Bank
Key items of exports
Another factor that could likely explain the weak

performance of exports is the probable overvaluation of
the rupee. As per RBIs 36-country trade based real
effective exchange rate, rupee remains overvalued at
this juncture and this could be impacting exports to
some extent, in our view. However, this cannot fully
explain the extent of slowdown in exports that is
witnessed in this cycle.
Currency competitiveness is an important factor in
influencing exports performance, but global demand is
even more important, in our view, to support exports
momentum. Global demand remains soft at this stage
which continues to be a key hurdle for exports
momentum to gain traction. While it is clear that global
demand remains unsupportive at this juncture for
exports to thrive, we think it is instructive to break
down Indias exports data according to key
destinations to get a better understanding of where
exactly the slowdown is more pronounced.
Rupee is overvalued as per RBIs REER

REER (36 currency, trade based, lhs)
120
INR/USD (inverted), rhs
42
46
115
50
110
54
105
58
100
62
95
90
2009
66
70
2010
2011
2012
2013
2014
2015
Source: RBI, Deutsche Bank
Page 37
8 October 2015
As far as export classification by region is concerned,

we note the following:
Indias key export destinations

The top five destinations of Indian exports are USA,
UAE, Hong Kong, China and Saudi Arabia as per the
latest trade data. Over the last decade, Indias exports
share to USA has reduced from 18% in FY04 to about
10% in FY11, thereafter rising to 14% by the end of
FY15. Indian exports to UAE have also risen from 8% in
FY04 to about 11% in FY15, though the share has fallen
compared to the outturn in FY11 (13.5%). Indias
exports share with Hong Kong (4.3% vs. 5.1%) and
China (3.8% vs. 4.6%) has reduced slightly between
FY15 and FY04, while that of Saudi Arabia (3.7% vs.
1.7%) has risen considerably. As far as exports
momentum is concerned, we note that exports to
China have slowed the most in FY15 (-19.8%yoy),
followed by Saudi Arabia (-6.8%yoy), while exports to
USA (8.4%yoy), UAE (8.1%yoy) and Hong Kong
(5.6%yoy) have remained strong.
Exports to key destinations (% of total exports)
20
FY04
FY11
FY15
Export share with EU and US has reduced in the

last decade, with both the regions now constituting
15-16% of Indias total exports;
While Indias exports share to

steadily, exports share with US
post FY11, which is reflective
divergence between US and EU
years;
Indias export share to Asia has increased to 49.6%

in FY15, from 46.4% in FY04, but this is slightly
lower than the FY11 outturn 50.4%, which can
largely be attributed to the slowdown of Indian
exports to China (Indias exports share to China
reduced to 3.8% in FY15 from 6.8% in FY11);
EU have fallen
have recovered
of the growth
in the last few
Indias exports share with ASEAN and GCC countries

have improved over the decade, though the growth
momentum of exports to these regions have slowed
post FY11.
Indian exports by region (% of total exports)
16
60
12
FY04
FY11
FY15
50
40
30
20
USA
UAE
Hong
Kong
China
Saudi
Arabia
10
EU
USA
Asia
ASEAN
GCC
Exports to key destinations (% yoy)

80 %yoy
60
USA
Hong Kong
Saudi Arabia
Indian exports by region (% yoy)

UAE
China
%yoy
50
EU
Asia
GCC
USA
ASEAN
40
40
30
20
20
10
-20
-10
-40
-20
FY05
FY07
FY09
Page 38
FY11
FY13
FY15
FY05
FY07
FY09
FY11
FY13
FY15
8 October 2015
Exports performance in key destinations
Destination wise exports of key items
In the table below, we show Indias export

performance according to key destinations in the first
eight months of 2015 (Jan-August). The seven
destinations shown in the table below account for
almost 60% of Indias total exports and are responsible
for about 50% of the decline in Indian exports during
the first eight months of 2015. Between Jan-Aug 2015,
Indian exports have declined by 15.9%yoy. The
sharpest decline of Indias exports in % yoy terms has
been recorded in Saudi Arabia, followed by Singapore,
China + Hong Kong, EU and UAE. In terms of
contribution to growth, Saudi Arabia has subtracted
the most from growth, followed by EU and China
(Hong Kong included).
After having identified the key destinations responsible

for Indias weak exports performance, we now focus
on the performance of the key items that are exported
to these destinations. We divide our analysis in two
parts i) the first part analyzes the slowdown in
exports of petroleum products to key destinations; and
ii) the second part analyzes the slowdown in exports of
other key non-oil export items which constitute a major
share for the countries considered in our analysis.
Export performance according to key destinations (%

yoy and % contribution)
Key export
% share in Indias
Jan-Aug
Jan-Aug 2015, %
total exports
2015, % yoy
contribution to
EU
16.9
-11.8
-1.9
USA
15.2
-3.2
-0.4
UAE
11.6
-6.2
-0.6
China + Hong Kong
8.2
-16.6
-1.4
Saudi Arabia
2.6
-51.0
-2.3
Singapore
2.7
-25.2
-0.8
destinations
growth
Total exports
-15.9
It is clear from the table above that exports to USA

have fared relatively better in the Jan-Aug of 2015,
contributing only 0.4% to the overall exports decline of
15.9%. Exports to all other key destinations have
faltered, reflective of i) growth slowdown in those
countries and ii) the price effect of the ongoing sharp
correction in global commodity prices. What is
interesting to note is that China (including Hong Kong)
is not the main source of slowdown for Indian exports;
Saudi Arabia and EU are a bigger drag on Indian
exports at this juncture.
That is not to say that China does not matter for India.
If Chinas growth momentum slows down further, it
can impact inter-regional and global trade and Indian
exports could suffer as an indirect consequence. The
saving grace for India is that the US economy, which
constitutes 15% of total Indian exports seem to be
showing signs of economic recovery, which ought to
provide some offset against the drag from other
destinations such as EU and China.
Five countries UAE, Singapore, USA, Saudi Arabia

and China constitute about 34% of Indias total
petroleum exports (which constitute 18% of Indias
total exports). As can be seen from the table below, all
the countries have seen a sharp yoy decline in AprilAug of 2015, with Saudi Arabia being the worst
affected. Indias total petroleum exports have declined
by 47.7%yoy in April-August of 2015, and these five
countries can explain 25% of such decline (see the
contribution calculation below). Saudi Arabia, has
contributed the most to the decline in petroleum
products exports (-9.4%), followed by UAE, which
constitutes 12.3% of Indias total petroleum exports,
contributing 5.1% to the decline, USA and Singapore
have contributed 4.8% and 4.2% decline respectively,
with China only subtracting 1.2% from overall
petroleum exports growth in April-august of 2015.
Destination wise decline in Indias petroleum exports (%
yoy, % contribution)
% of total
Apr-Aug
petroleum exports 2015, % yoy
% contribution
to growth
UAE
12.3
-44.4
-5.1
Singapore
8.9
-47.5
-4.2
USA
6.7
-57.5
-4.8
Saudi Arabia
4.7
-79.4
-9.4
China
1.8
-55.9
-1.2
Total petroleum
products exports
-47.7
We calculate that out of the 15.9%yoy decline in

overall exports between April-August of 2015, about
9.9% decline can be explained by petroleum products
and 0.3% decline by gold/ jewelry/pearls/precious
stones combined. Excluding petroleum products and
precious commodities, the other notable slowdown in
exports is visible in iron & steel (contributed to 0.8%
decline in April-Aug15) and basmati rice (-0.4%
contribution). Below, we present the exports
performance of top 5 items in 5 important destinations
of Indian exports. Slow-down in iron & steel exports is
notable in case of US, Basmati rice in case of Saudi
Arabia, and pearls/ precious stones/metal jewelry in
case of UAE and Hong Kong.
Page 39
8 October 2015
Commodity/destination wise Indian exports

% share of country in
Apr-Aug
total export commodity 2015, % yoy

Saudi Arabia
1. Rice -Basmati
26.3
-24.8
2. Buffalo meat
6.1
-15.5
3. Organic chemicals
8.0
66.9
4. Rice other than basmati
3.8
0.2
5. Products of iron & steel
4.5
-35.4
1. Gold
99.9
109.9
2. Gold/other precious metal

jewellery
43.9
-21.7
3. RMG of other textile material
33.6
62.6
4. RMG manmade fibres
30.4
88.0
5. Aircraft, airspace & crafts
28.8
144.9
1. Drugs
42.0
31.0
2. Cotton fabrics
37.8
2.1
3. Marine products
32.8
-10.4
4. Pearl/precious stones
31.5
9.6
5. Products of iron & steel
20.4
-16.1
UAE
USA
China
1. Cotton yarn
47.9
52.9
2. Copper/products
35.2
-42.2
3. Organic chemicals
11.0
6.9
4. Other commodities
2.6
-54.5
5. Iron & steel
2.2
2.5
1.Pearl/precious stones
33.6
-13.8
2. Gold/other precious metal

jewellery
27.9
29.8
3. Cotton yarn
1.6
-10.2
4. Marine products
1.5
-14.6
5. Electric machinery /
equipment
0.9
-19.0
Hong Kong
It is clear from the above analysis that Indias growth

recovery is unlikely to be supported by a vigorous
rebound in the external sector anytime soon. Therefore,
it is evident that domestic demand would have to play
a bigger role in supporting Indias growth recovery in
this cycle, mainly though a meaningful turnaround in
capex and investment. With a number of structural
impediments still in place, it is reasonable to expect
only a slow and gradual recovery in the growth and
investment cycle, in our view. We expect investment
recovery to gain traction from FY17 onward, as NPA in
the banking system recede and the impact of the
ongoing government and RBI policy measures start
filtering into the real economy in a meaningful way.
Taimur Baig, Singapore (65) 6423 8681
Kaushik Das, Mumbai (91) 22 7180 4909
Page 40
8 October 2015
Ukraine: Pricing GDP Warrants, Part II - Discounting the

Cash Flows
This is a follow-up note to our report published last

month: Ukraine Pricing GDP Warrants.
The Exchange Offer Memorandum provides more

details on the debt exchanges as well as the terms
of the GDP Warrants. The latter is especially
important, as it further enhances the value of
Warrants by adding explicit cross-default clauses
and a put option for holders to recoup par value of
the Warrants during the first few years under a
bond default. With these details, we introduce our
revised discounting scheme in this note.
The explicit cross-default languages justify the use

of the same default probability structure as bonds
(but still with a zero recovery), while the Holder Put
adds value in the form of a fraction of bond
recovery, contingent on default during the EFF
period.
Absent an observable market curve, we derive a

term
structure
of
default
probabilities
corresponding to a spread of 800-900bp at the long
end of the curve (as a base case), but with a steep
curve during the first few years to reflect the
liquidity relief from the debt exchange. Our base
case model results suggest that the Warrants are
worth 15.6pts per 100 notional of the new bonds,
of which 2.4pts is contributed by the Holder Put.
However, we note that this is without any

additional risk premium to account for the general
complexity of the instrument, narrower investor
base (many real money accounts may be restricted
from holding it), and other risks associated with it.
It is also important to note that the value of the

Warrants in our report is expressed as points per
100 notional of the new bonds. Once they start to
trade, the price quote could based on the amount
of Warrant notional defined in the documents,
which are 20% of the notional of the existing bond,
corresponding to a 4x our value scale. However,
economically, they are the same.
Introduction
In our recent report Ukraine - Pricing the GDP Warrants
Ukraine - Pricing the GDP Warrants , we presented our
fair value model in order to price Ukraines GDP
Warrants based on Monte Carlo simulations for the
paths of real GDP growth, inflation, and the real
exchange rate. For discounting simulated cash flows,
we used a +200bps additional premium to what we
believe should be the exit yield of the exchange in the
absence of an observable term structure in the bond
markets, because of a) longer maturity of the Warrants
than bonds; b) potential ambiguity in terms of crossDeutsche Bank Securities Inc.
default; c) the zero-recovery nature of the Warrants;

and d) other complexities of the instruments. At the
same time, we suggested future work to improve the
discounting scheme once detailed terms of the
Warrants are released.
Ukraine released the Exchange Offer Memorandum on
23-September-15, which provides more details on the
debt exchanges as well as the terms of the GDP
Warrants. The latter is especially important as it further
enhances the value of Warrants by adding explicit
cross-default clauses and a put option to recoup par
value during the first four years. We highlight these
important points in our note from 24-September-15
(see Ukraine: Important details in Exchange Offer
Memorandum. With these details, a more sophisticated
discounting scheme should be employed, and the
overall effective discount rate should be somewhat
lower than we originally assumed. In this note, we
introduce our improved discounting scheme, and
present mode values under the new discounting
scheme.
Creditor protection mechanism improves

the value of the warrants
The most important details in the Memorandum are the
parts concerning GDP Warrants, which in our view,
enhance the value of the Warrants, as they put in some
specific creditor protection mechanisms that were
absent (or more ambiguous) in some comparable
securities, such as the Argentina GDP warrants.
Cross-default from Warrants to bonds
There is clean cross-default language under the Events
of Default clauses to ensure that a default on the
Warrants will trigger a default on the bonds (Clause 8.i
under the The New Notes section in the
Memorandum). This should justify the use of the same
term structure of default probabilities calibrated from
bond prices. However, it is important to note that the
Warrants still have no principal defined on which to
accelerate, with the exception of the first few years
through the Holder Put option described below. This
implies zero-recovery after December 2018, when the
term structure of default probabilities is used to
discount the cash flows.
Note that in similar instruments issued in the past, such
as Argentina GDP Warrants, there is no clear language
Page 41
8 October 2015
to ensure cross-default. In fact, it remains an open

debate whether a default on Argentina GDP Warrants
payments will cross-default to global bonds6.
spread curve is likely to flatten out toward the long end

(30-year sector), following a typical pattern in high yield
curves.
The Holder Put option

The Holder Put option, which enables Warrants
holders to claim par in the event of Ukraine defaults
within the EFF program, is a pure innovation in the
design of Ukraine GDP Warrants. Specifically, by
omitting many nuances in the documents, this option
enables the Warrant holders to claim their par value
(which is 20% of the notional of the existing bonds) if
a Moratorium occurs prior to the EFF Expiry Date.
This is akin to acceleration of a bond obligation, with
an explicit principal.
Such a term structure of default probabilities is actually

quite similar to what the Ukraine CDS curve used to
trade a few years ago. In the chart below, we show the
CDS curve spread of Ukraine on 22-August-11. The
curve appears a perfect starting point for our analysis,
except that the credit spread at that time was in a
much tighter regime. Therefore, we need to shift the
curve up by a certain amount to reflect our view of exit
yields at the exchange. Specifically, we shift the curve
up by 300bps on the 5-year sector and shift the other
sectors of the curve by the same percentage
(essentially a log shift of spread at each tenor). The
shifted curve has an average par yield around 10%
after the first few years - see the chart below for the
resulting spread and yield curves, as well as implied
probability of defaults. Again, there is some
arbitrariness in the amount of shift assumed, but
absent an observable bonds market prices this is
perhaps the best we could do.
This means the Warrants should have the same

recovery rate as bonds during the first few years of its
life (from settlement to 31-December-18) even though
there are not yet any coupon payments during this
period of time. For example, if a debt moratorium event
occurs prior to the EFF Expiry Date (31-December-18),
and if we assume bonds recovery at 40%, then the
current bondholders will have a legal claim of 20% of
40 points per 100 notional of the existing bonds, which
is 8pts. Normally, Warrants do not have a principal
claim to be accelerated on in an event of default (this
remains the case in these Warrants), but this option
offer some additional value (contingent on default)
during the first few years.
Therefore, we see enhanced value in the Warrants by a).
using the same default probability term structure
corresponding to the bond curve; and b). assuming the
same recovery value contingent on default until
December 2018 (still a zero recovery rate thereafter).
Deriving a term structure of default

probabilities
Base case discount curve

Yield (%)
12%
11%
10%
9%
8%
7%
6%
Yield curve
5%
Spread curve
4%
Tenor (years)
We expect the default probability to be relatively low

for the first four years (until October 2019), as there is
no scheduled principal repayment. The default
probability should be significantly higher once the EFF
expires and Ukraine starts to repay their external debt
starting October 2019. This implies a spread curve
which should start with a low level but quickly increase
after 3-4 years in order to capture the higher likelihood
of a default toward the end of 2019. The slope of the
While we cannot render an opinion on this matter as it is legal in nature,

our study of the 2005 Indenture suggests that the holders of the Pars and
Discounts may have a case to pursue in an attempt to accelerate the
payment of the bonds, which could eventually trigger Argentina CDS.
However, this is far from straightforward; even if the bond holders
succeed, the process would be lengthy at best. There are, however, a
number of places in the document where the language is ambiguous and
potentially conflicts with the main body of the Indenture regarding the
underlying argument; such ambiguity could potentially be used to argue
the case in either direction.
Page 42
We also examine two alternative scenarios by shifting

the baseline curve up by 100bps and down 100bps (log
shift), and use these curves to implement a sensitivity
analysis.
The Value of Holder Put

Using the term structure of default probabilities derived
above, the Holder Put is worth about 2.4pts under 40%
bond recovery. It is simply calculated as the value of
contingent claim, conational on default from now until
the end of 2018. The following table shows the
estimated Holder Put value under varying recovery
assumptions and under varying exit yields assumptions.
8 October 2015
Model value of Holder Put option under varying bond

recovery assumptions and average yields
Value of Holder put

Recovery
Spread
Warrant values under varying bond recoveries/yield

assumptions (with baseline growth scenarios)
Warrant total value
30%
40%
Recovery
50%
Spread
30%
40%
50%
-100bp
1.6
2.1
2.6
-100bp
18.1
18.6
19.1
base case
1.8
2.4
3.0
base case
15.0
15.6
16.2
+100bp
2.0
2.7
3.3
+100bp
12.7
13.3
14.0
Model results
Caveats
Overall, with the new discounting scheme discussed

above, the fair value of the Warrants in our base case
scenario increases to 15.6pts per 100 notional of the
new bonds (a significant increase from our previous
estimate of 12.3pts, but these two numbers are
actually not comparable given the very different
discount method employed). The NPV of the Warrants
cash flows represents 13.2pts and the Holder Put adds
2.4pts. The results remain sensitive to assumptions on
GDP growth and volatility, as shown in the table below.
There are a couple of caveats to the discounting

scheme described above.
Warrant model value (per 100 notional of new notes)

under our baseline discount yields
Vol
Trend
2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
-0.5%
2.6
3.0
3.7
4.6
5.6
6.8
8.1
9.5
10.9
0.0%
2.8
3.4
4.4
5.5
6.8
8.3
9.8
11.3
13.0
0.5%
3.1
4.1
5.3
6.8
8.3
10.0
11.8
13.6
15.4
1.0%
3.8
5.1
6.7
8.4
10.3
12.2
14.2
16.2
18.3
1.5%
4.8
6.5
8.5
10.5
12.7
14.9
17.1
19.3
21.6
2.0%
6.3
8.5
10.8
13.2
15.6
18.1
20.5
23.0
25.4
2.5%
8.6
11.2
13.9
16.5
19.2
21.8
24.5
27.1
29.8
3.0%
11.7
14.7
17.6
20.5
23.4
26.3
29.1
32.0
34.8
3.5%
16.0
19.2
22.3
25.4
28.4
31.5
34.5
37.5
40.5
4.0%
21.5
24.8
28.0
31.2
34.3
37.5
40.7
43.8
47.0
4.5%
28.4
31.6
34.7
37.9
41.1
44.4
47.7
51.0
54.4
First, a main difficulty remains in how to model the

interaction between the default process and the growth
process. This interaction was not very important
previously, but given the Holder Put, it has now
become somewhat more important. There is a positive
correlation between growth risk and credit risk higher
credit risk is typically associated with an anemic
growth dynamic. During the next few years, even a
bond moratorium will likely be a result of significant
escalation of the geopolitical confrontations (larger loss
or de-facto loss of territories etc.) that result in the need
of a second round of restructuring. This could be more
precisely modeled via introducing a stochastic default
process, including it in the Monte Carlo simulations.
However, our experience with modeling the Argentina
Warrants tells us the importance of this is of second
order only. In other words, it would likely be overkill.
Second, the Holder Put option is broader than we
interpreted above. Apart from the ability of holders to
claim par value on the Warrants during the EFF period,
there are other Covenants, the breaking of which
would trigger Holder Put during the life of the Warrants,
such as Membership of the IMF and Calculation of
Payment Amount; Dispute Resolution, etc. All these
offer positive value, but only marginally so, in our view.
The model value is also sensitive to the assumptions of

recovery value and implied yield, but the impact is less
significant than GDP growth and volatilities. See the
table below.
Conclusions
Even with the caveats above, we estimate that both the
explicit cross-default languages and the Holder Put
option enhance the Warrant value. Our new baseline
estimate is now about 15.6pts (per 100 notional of the
new bonds), of which the Holder Put contribute 2.4pts.
However, it is worth noting that we have not added any
risk premium to account for the general complexity of
the instrument, narrower investor base (many real
money accounts may be restricted from holding it), and
other risks associated with it. One can add an arbitrary
spread to the discount rate to compensate these risks
(such as 100bps), but we opt to leave it out of the
Page 43
8 October 2015
model. We understand that the market will likely trade

with a large discount from fair. In the case of Argentina
Warrants, the market to fair price discount has been
ranging from 20% to 40%. However, in this case, we
believe such a price discount will likely be smaller.
Finally, we offer an important note on the price quote.
In this note, we have expressed the value of Warrants
in terms of per 100 notional of the new bonds. In the
Memorandum, however, it is defined that the
Warrants notional would be 20% of the existing bonds,
or of the notional of the new bonds (the idea is
obviously that bondholders exchange 1 notional of
existing bonds to 0.8 notional of new bonds and 0.2
notional of Warrants). This is quite counter-intuitive but
we believe the purpose is for the ease of defining a
principal for the Warrants in relation to Holder Put.
The market will likely quote the Warrants prices as per
100 notional of the Warrants, so the price will likely be
4x our value given above.
However, that is only for how it was quoted;
economically, it is all the same. We favor our current
notional because it illustrates that the new bonds and
the Warrants add to a high value. Ironically, with the
Warrants (supposedly just a sweetener), where are the
haircuts?
Hongtao Jiang, New York, +1 212 250 2524
Winnie Kong, London, +44 20 7545 1382
Page 44
8 October 2015
Asia Strategy
The markets traded Q3 with a bearish consensus on

China, and positioning long USD in anticipation of
Fed lift-off. Both core assumptions have been
tested lately. After the weak non-farm payroll, the
market is pricing further delay to Fed action.
Meanwhile, Chinese policymakers appear to have
stabilized FX markets with a smaller drawdown in
reserves in September. With Asia having been at
the centre of the summers bearish construct, the
regional relief rally has been sharp, namely in the
most punished markets Malaysia and Indonesia.
Recent moves, we feel, were a result of steep

positioning pullbacks and illiquid market conditions.
The broad USD could be more range-bound till we
get clarity on the Fed, but cleaner positioning and
cheaper levels offer opportunities to scale into USD
longs in select pairs. In Indonesia and Malaysia, we
retain underweights on duration, and would use the
retracement lower in USD/MYR to scale into long
USD positions. BNM and BI are likely to use FX
strength to rebuild reserves. In North Asia, recovery
in equities could support inflows, but with spot
trading near key support levels we retain a long
USD bent, with tight stop losses. In TWD, further
rate cuts are still likely, and politics could be a
concern. We continue to find the India story
compelling, with RBIs surprise 50bps rate cut
validating our bias. We remain overweight duration
and long INR/TWD. We like to receive the front-end
of the Thai and Sing swap curves, anticipating more
retracement in their SOR fixings. We have turned
tactically neutral on USD/SGD ahead of MAS, and
on USD/THB as the focus shifts from monetary to
fiscal policy. We continue to expect PBOC to lean
against FX volatility and outflows, at least until the
SDR decision next month. We thus stay on the
sidelines in CNY, but are still received in rates.
In external markets, light client positioning is

driving positive spread performance. The bulk of
investors are flat-to-underweight risk assets like
Indo and Malay and have not positioned to fully
benefit from the rally that is currently taking place.
We have had a combination of three factors that
pre-determined such a rally: (1) poor NFP last Fri;
(2) stable oil prices; (3) stable China equity markets.
What could shorten the legs of this rally are EM
investor concerns that seem to be moving from the
outflow of cheap money to growth tantrum.
Although we remain cautious on the fundamental
outlook for many Asian sovereign credits, we
believe that cash would outperform CDS in the
immediate future. We recommend select extension
of duration in Indo complex; play Phili and Korea
quasis vs. sov spread compression in 10Y space;
and remain Long Mongolia risk.
Local Markets
CHINA
FX: Neutral
Rates: Receive 5Y ND-IRS, target 2.25%
Capital outflows slowing for now. The recent shift in FX

policy by Chinese authorities, and the subsequent
dynamics of reserve drawdown and macro-prudential
regulations, has once again put the focus on: (1)
deciphering possible USD buying/selling activities by
the authorities, and (2) capital flow trends in China.
With China now subscribing to the IMFs Special Data
Dissemination Standard (SDDS), the timely release of
monthly data on FX reserves (on the seventh of every
subsequent month) should enable the market to better
study the authorities USD buying/selling activities and
capital flow trends. To isolate FX intervention from this
reserve data, it is important to first adjust for the impact
of changes in non-USD currencies versus the USD in
Chinas reserves. We use an error minimisation exercise
to determine the weights of the currency composition
in Chinas FX reserves. This exercise leaves us with the
following estimated currency weights: USD 67.9%, EUR
18.9%, GBP 9.7% and AUD 3.4%. Interestingly, the JPY
has a negligible weight in this exercise. Our estimated
intervention trends after adjusting for valuations
based on the above weights are very similar to (1) the
reserve assets in the BoP and (2) net FX purchases by
financial institutions. Using our estimated weights, and
given the movements in these G10 currencies in
September, we estimate the Chinese authorities sold
about $37bn, in September to (1) keep USD/CNY stable
and (2) narrow the CNY-CNH basis. This, however,
amounts to only one-third of the August intervention
level. To gauge the scale of potential capital outflows
from China, we compare our estimate of official USD
selling onshore in September (which we estimate is half
of September intervention) to fundamental trade and
FDI flows into China. We use Bloomberg consensus
forecasts for the China trade surplus for September and
the YTD average for net FDI, taking only the portion
likely to have been settled in foreign currencies. This
suggests that China might have seen $46bn of FX
outflows in September. This is a third of the size of
Augusts outflows ($136bn), and below the monthly
average outflow of $56bn year to date. The slowdown
in capital outflows suggests the recent intervention and
introduction of macro-prudential measures are working,
and it looks like the authorities in China have both the
intent and capability to lean against volatility in the
currency markets. We continue to believe, however,
that RMB needs to become cheaper in the medium
term, given the (1) under-hedged nature of corporate FX
liabilities, (2) pressure for residual carry trades to
Page 45
8 October 2015
unwind, as monetary policy in China diverges from that

in the US, and (3) pressure on the growth cycle.
HONG KONG
FX: Neutral
Rates: Neutral
USD/HKDs lift-off delayed. The recent poor US data,

which has been interpreted by the market as possible
delay in the Feds lift-off, and the strong capital inflow
into Hong Kong have kept USD/HKD on the strong side
of the convertibility band. As a result, the HKMA has
been intervening at the lower end of the band to defend
the peg. Since September, the HKMA has sold about
HKD75.8bn to limit the HKD strength. Despite the need
for the HKMA to again step into the market to defend
the band and the ongoing increasing unpredictability in
the global monetary policy, we remain of the view that
the peg is here to stay and is still the best option for
Hong Kong. Why? First, there is no suitable alternative.
One of the long-held arguments in favour of depegging
HKD is that Hong Kongs economy is becoming
increasingly correlated with Chinas economy. This is
evident by the rising cross-border flows between the
two economies. In 2014, cross-border trade accounted
for just over 50% of Hong Kongs total merchandise
trade. However, RMB is still not a viable alternative until
it becomes fully convertible. In addition, if HKD were repegged to RMB, Hong Kong would be importing
Chinas monetary policy, and this could significantly
disrupt Hong Kongs economy, which is holding up well
as of now. Second, FX reserves accumulation has been
gradual in Hong Kong and is not a matter of concern.
INDIA
FX: Short TWD/INR (Target: 1.90)
Rates: Modest overweight; Long 5Y IGBs

(Target: 7.5%)
Taking stock of stocks. It has now been two years since

the turnaround in the India story began, and it remains
one of our favorite EM longs. The rupee's correlation to
Indian stocks has reasserted itself this year. With stocks
back to being an important driver for INR, there have
been two key domestic drivers of importance. First, RBI
monetary policy. Second, the upcoming state elections
in Bihar. Both are significant in signalling policy support
for growth, and by extension for equities and the rupee.
India is one place where monetary easing should be
good for the currency. First, the negative of carry
compression, should be overwhelmed by the positive
for growth, particularly since the absolute level of rates
in India remains high. Second, easing in India is seen as
occurring for the right reasons, namely progress in the
long-standing battle against inflation which has created
the space to do more for growth. We would therefore
read RBIs surprise 50bps rate cut as being constructive
for rupee longs. Beyond the rate decision itself, RBI
Page 46
delivered on expectations of opening up FII limits to

buy government bonds, which will rise by roughly
USD2bn per quarter till March 2018. The second key
driver for equities to watch is the political calendar. The
state elections in Bihar (October 12th-November 5th)
could be the most important political event since the
2014 General election. Performance in Bihar is seen as
setting an important precedent for state elections in
West Bengal, Assam, Kerala and Tamil Nadu, due in the
following six months. These elections are important, as
together the five states allocate roughly 30% of seats to
the Upper House, where the BJP-alliance does not yet
hold a majority and has faced opposition to its reform
proposals. Beyond these equity drivers, India's balance
of payments position remains comfortable. The
improvement has not simply been a result of current
account deficit compression and portfolio inflows, but
importantly also of a brightening in FDI trends. The
four-quarter sum of net FDI has risen by an astounding
50% over the last two years, pushing India into narrow
basic balance surplus, and essentially capital flow
neutrality. Speculative long INR positioning has also
lightened up significantly by our simple metrics (Chart
6). We remain long INR/TWD.
INDONESIA
FX: Modestly bearish
Rates: Modest underweight
Positioning pullback and policy activism. IDR, along

with Indonesian assets, has surged this week as the
market has priced in a much longer delay to Fed lift-off
after the disappointing non-farm payroll. Indeed, the
currency has been the best global performer since the
NFP. A large part of the move we feel has been
positioning driven, with consensus bearishness, long
USD positioning and asset hedges being unwound in
illiquid market conditions. The highest carry in the
region has likely made dipping back into bonds
attractive, with the presumption of a longer window of
benign global monetary conditions. Higher policy
activism by the central bank may also have played
some role, with BI having announced a series of policy
packages and measures in recent weeks to support the
IDR. Admittedly though, these measures yielded little
observable benefit in the midst of bearish EM
conditions. Bank Indonesia has been attempting to
engineer an increase in domestic money market rates
by tightening IDR liquidity, absorbing more IDR through
open market operations at higher rates. There have also
been a swathe of measures announced to adjust USD
demand and supply, from: reducing spot USD demand
from state oil and electricity companies, lowering the
monthly individual conversion limit into foreign
currencies, incentivizing exporters to deposit USD in
onshore banks by lowering tax on interest, and
attempting to make SBIs more appealing for foreigners
by increasing tenors and reducing holding periods,
amongst many others. Bank Indonesia has also made
8 October 2015
more active use of their balance sheet. They have been

more vocal about their presence in the FX market,
potentially supplying $10bn+ over the months of
August and September, based on our estimates. An
important part of the strategy has been to increase the
USD deposit mobilization efforts, with banks placing
more USD via term deposit auctions at the central bank.
Our estimate of net reserves adjusting spot reserves
for the short USD forward book (for which data is only
known till August), and our estimate of outstanding
USD term deposits suggests that reserves in
Indonesia are now potentially below taper tantrum
trough levels (Chart 3). The ammunition to defend the
currency against subsequent episodes of weakness will
thus be weaker, unless BI opts to use current strength
to rebuild reserves. The revealed bias of authorities
appears to be to let spot to reset lower towards fair
value levels, from what may have been considered
overshoot or undervalued levels. This could help
moderate pressure on corporates who may have been
facing balance sheet strains from the sharply weaker
currency. However, if BI is committed to shoring up
external defences, we suspect official support for
USD/IDR will emerge soon.
MALAYSIA
FX: Long 1M USD/MYR, target 4.50 (spot)
Rates: Underweight duration
Use pull-backs as an opportunity to pay ND-IRS. We

took profit on our pay 5Y ND-IRS recommendation last
month after it traded above our 4.50% target level
(entry 3.84). We are staying on the sidelines for now,
given still relatively stretched valuations in swaps space,
but will use pull-backs as an opportunity to re-enter
short position, as Malaysia unfortunately remains at the
intersection of various bearish constructs. Our main
concern has been the translation of currency weakness
into rates markets, which compounded by the risk of air
pockets on liquidity, could force the latter to trade more
as risky assets rather than risk free. Indeed, we
witnessed this playing out over the last month or two,
as 10Y MGS traded to 4.45 levels twice. What is also
concerning is the volatility in the rates market, as recent
moves have been significant on both the sides. Unlike
in the past, MGS is longer a low vol market in the
region at this point. The 3m normalised vol is now near
the highest point of the last 5year range (and at similar
levels to what we witnessed during taper tantrums).
Meanwhile, MGS valuations are appearing a tad
expensive on our models, and they look particularly
expensive relative to swaps. We thus maintain an
underweight duration exposure at these levels, and will
look for pull-backs to re-enter short ND-IRS position.
For the currency, we took advantage of the post-Fed
retracement lower in USD/MYR and discount in frontend forwards to re-enter USD/MYR longs. We think
official participation skews the risk-reward, with BNM
keen to rebuild reserves and lightening defense of the
currency. We remain concerned about outflows given

large foreign holdings. Chinese growth and commodity
exposure are likely to remain factors of concern. Fourth,
politics remains noisy. The main policy risk could,
however, come from repatriation of government linked
overseas assets.
PHILIPPINES
FX: Neutral
Rates: Marketweight
A calmer ride. The PHP has had a lower beta to global

market trends, depreciating by less over August and
September and equally participating less in the recent
rally back in EM. External fundamentals remain fairly
sound. The current account surplus is still comfortable,
reserves adequacy is high, growth rates can be
supported by greater fiscal space, and foreign
ownership of local currency debt is less of an issue than
her ASEAN peers. Our concerns on the PHP have been
long-standing, namely REER overvaluation and
continued easy monetary policy. The more idiosyncratic
risks include the approaching Presidential Election
which will bring leadership change given a
constitutional one-term limit.
And separately, the
Philippines exposure to El Nino, with the risk of higher
food prices driving inflation next year.
SINGAPORE
FX: Neutral
Rates: Receive 2Y SGD vs USD IRS, target

+70bp
Going into the MAS policy meeting. MAS will review its
monetary policy on 14th October. Recall that MAS
caught the market off-guard by keeping the policy
unchanged in its last policy review in April, following an
off-schedule easing in January this year. For the
upcoming review, we think that band-widening remains
the most likely policy decision (40%). The next most
likely policy choice is for MAS to keep policy
unchanged (25%). We see a 20% likelihood of a shift to
neutral and assign 10% probability for re-centering of
the midpoint lower. We continue to believe a multiple
parameter easing is unlikely (5%). The more evenly
distributed probabilities over the range of outcomes are
a reflection of the high degree of uncertainty going into
this meeting. Tactically, we thus recommend reducing
USD/SGD cash longs. Our updated probability-weighted
average move in SGD NEER on the day of the policy
review is now less than -10bps. This assumes SGD
NEER is trading at the bottom band, and accounts for
the slightly higher chance of easing. The position of
SGD NEER at the bottom band, stretched long USD
positioning, and a more mixed USD signal after the
September Fed hold and weak NFP all favor lightening
up. The risk of an April de ja vu, when USD/SGD
Page 47
8 October 2015
dropped sharply after MAS left policy unchanged, and a

delayed Fed weighed on the dollar, is non-negligible.
For the more medium-term community, we would
recommend retaining core USD longs, with SGD
remaining one of the more conclusively overvalued
currencies, and a proxy for anticipated return in stress
to the region (China, ASEAN). For the rates market, we
had recommended playing for a spread compression
between SGD versus USD rates last month. Over the
past two weeks, not only Sing rates rallied sharply, but
also outperformed the US rates both in cash bonds
and swaps space. We think there is scope for further
outperformance in the near term, especially if the MAS
maintains status quo next week.
Korean won and vice versa for the latter. Therefore, the
development of the Fed outlook has put mixed impacts
on USD/KRW. While the risk sentiment represented by
the KOSPI VIX index will likely hold sway USD/KRW in
the short term, we believe the medium-term story of
recycling CA surplus will likely play out. As we have
discussed in earlier notes, the divergence between the
BOK and the US Fed can temporarily discourage
onshore investors outbound investment due to the risk
of negative FX swap points. However, domestic
institutional investors such as pension and lifers will
likely develop a FX un-hedged outbound investment
scheme from the beginning of next year, which may
put upward pressure on the USD/KRW pair in the
medium term.
SOUTH KOREA
TAIWAN
FX: Long 6M USD/KRW, target 1250 (spot),

Long 6M JPY/KRW, target 10.70 (spot)
FX: Long 6M USD/TWD, target 33.50 (spot)
Rates: Shift to neutral on the slope
Rates: Shift to neutral on duration
Take a profit on flattener. We believe risk-reward of

maintaining flattener at this stage is not favorable
anymore. We reiterate our stance that we will take a
profit on our flattener KRW 1Y/5Y trade when the target
of +15bp is achieved. The fear about the US Feds
immediate hike, likely subsequent global risk-off mode
and growing concerns about China slowdown have
underpinned the recent bull flattening rally in Korea.
However, the possibility of a delay in the Feds hike has
increased with the disappointing NFP. In line with
eased concerns about the Feds hike, Koreas equity
market recently stabilized. Our China economist has
also pointed out that the fear of a China hard landing is
exaggerated with the evidence of leading indicators
picking up. Lastly, we remain of the view that the BOK
is unlikely to cut the policy rate this year. Nearly all
external and domestic factors point to a moderate
reversal in the current bullish flattening bias going
forward, in our view. Meanwhile, USD/KRW has
experienced a sizable retracement from the recent
bullish bias. The slope of the Korean yield curve has
closely correlated with the prospect of the Fed hike. In
the past six months, both a decrease in the scale of a
rate hike and the prospect of a delay in the hike timing,
which are interpreted as signs of fragile global
economic growth, have pressed the overall yield levels
lower and in turn flattened the Korean curves. The
implied FDR in the December US Fed futures at 0.185%,
which is close to the Federal fund rates mid-point of
0.125%, shows very low probability of a rate hike this
year. Hence, we believe the marginal scale of an
additional adjustment on the Fed hike outlook is
unlikely to sustain the current flattening bias.
Meanwhile, the correlation between USD/KRW and the
Fed outlook seems to have broken down in the past
two months. This suggests the FX market tends to
reflect two interpretations of a delayed Fed hike: 1)
weaker US and global growth; 2) eased concerns about
capital outflows. The former should lead to a weaker
Page 48
Bond swap spread to tighten. We believe the odds for

another rate cut at the December MPC are high,
although the rates and FX market reaction to another
cut would be differentiated. Inside the rates market, we
expect swaps to outperform equivalent bonds too. The
contrasting measures of another CBC rate cut and a
proposal of capping bond ownership will likely
differentiate performance in the swaps and bonds.
Henceforth, 5Y-10Y bond swap tightening positions
look attractive to us. Unlike bond swap widener,
shorting TGB bonds to establish bond swap tightening
positions (i.e., receive swap and sell bonds) would be
very difficult for offshore investors. Therefore, it would
not be a practical trading idea, although we expect 10Y
bond swap spreads at the current +13.8bp to decrease
to 0bp by year-end. While the prospect of the US Feds
liftoff is still open, the CBC is likely to deliver another
rate cut at the December MPC. The main motivation for
another rate cut appears FX rather than rates, given
that the impact of change in rates on the economy
would be marginal due to already very low interest
rates. Meanwhile, the Taipei Exchanges proposal of
expanding a single-buyer cap has already erased all
gains earned in the TGBs post the September CBC cut.
The plan is to ban single companies from owning more
than a third of 5Y or 10Y TGBs for six months. Despite
our expectations of another rate cut at the December
MPC, therefore, we believe the rates market reaction
will likely be muted. The cap now applies to all
sovereign notes but only in the when-issued market
and at the auctions. Therefore, it can temporarily
reduce demand for the belly and long end of the TGB
curve, which could steepen the curve. The next 5Y and
10Y TGB auctions will take place on 12 October (5Y
new issue) and 10 November (10Y re-open),
respectively. We expect investors to be cautious about
participating in those auctions. The current policy rate
at 1.75% is 50bp higher than the historical trough of
1.25% during the global financial crisis from February
8 October 2015
2009 to March 2010. Meanwhile, 10Y TGB yields at

1.18% are close to the historical low of 1.06%. 10Y TGB
yields may find a strong supporting line at 1.0% as we
believe the scale of a further rally anticipating another
CBC rate cut would be shallower than that in August.
THAILAND
FX: Neutral
Rates: Receive 3Y ND-IRS, target 1.60%
Passing the baton. The stimulatory baton appears to be

passing from monetary to fiscal policy now. The
government has unveiled two fiscal stimulus packages
last month, targeting rural consumption and small and
medium enterprises, with another package for private
investment expected to follow. Fiscal stimulus
represents the main source of solace for the growth
picture, with other drivers continuing to appear bleak.
The central bank appears inclined to take the back-seat
for now, and await the results of recent fiscal efforts.
THB weakness is seen as having helped ease monetary
conditions and improve exporter margins, but
authorities are more circumspect about the benefit to
exports growth, with competitiveness reliant on
structural change to export product offerings. Given the
greater focus on fiscal policy, we now believe that the
better parts of alpha returns on our long-standing Thai
trades are likely behind us. Issuance for FY-16 will kickoff from 21st of October. Issuance numbers for Q1 are
broadly in line with the last few quarters, and we think
supply will be comfortably absorbed on back of strong
domestic support, even though the offshore demand is
expected to remain muted. We are marketweight on
ThaiGBs at current levels, but will look for opportunities
to go overweight into a sell-off again. In swaps space,
we stay with our 3Y receive ND-IRS recommendation,
to play for an eventual normalisation of 6m THB-SOR
fixing towards the policy rate. For FX, after holding a
clearly bearish view on the THB since April, we have
recently turned more neutral near-term, with a large
part of the alpha drivers for the THB trade having
played out. The THB has now caught down to
weakness in the rest of Asian FX, the REER has
corrected to account for poor export trends, valuations
appear fairer, and depreciation has overshot rate
differentials. While the domestic picture remain poor,
Thailands external fundamentals are better than her
neighbours: reserves adequacy is comfortable, the
current account is in surplus, and offshore ownership is
lighter. We thus think USD/THB should trade with more
of a beta to the region for now, unless and until the
baton passes back to the monetary policy again.
Sameer Goel, Singapore, +65 6423 6973
Swapnil Kalbande, Singapore, +65 6423 5925
Perry Kojodjojo, Hong Kong, +852 2203 6153
Linan Liu, Hong Kong, +852 2203 8709
Mallika Sachdeva, Singapore, +65 6423 8947
Kiyong Seong, Hong Kong, +852 2203 5932
Credit
INDONESIA
Neutral;
Cash would keep outperforming CDS for now;
Concerns over fuel price policy are overblown;
It must be said that the price moves observed during

the past week or so did manifest that such Asian curves
as Malay and Indo have stopped trading based on their
idiosyncratic fundamentals and the pattern became
purely driven by the headwinds from wider EM in
particular Brazil. The spreads of Indonesia sovereign
and quasis bonds seem to be benefitting the most at
this stage as by now they have widened to 5Y highs,
while quasis 10Y30Y slopes are the steepest in history.
In our view, fundamentally, Indo has much stronger
govt in place to turn economy around and recently it
started to make steps in the right direction. The
government has already announced two sets of
economic stimulus packages with the third one to be
announced later this month. Looking at the nature of
the decisions made by the Presidential office, we are
more inclined to call them structural reforms. They do
not actually envision any material physical cash
injections by the state into any specific sector of the
economy, but are focused on stimulating private
investment and consumption, creating more jobs, and,
ultimately, stabilise the currency and contain inflation.
Indo, Malay and Phili sovereign index comparison vs.
DB EMSI-IG index, bp
100
Libor Spd, bp
50
-50
-100
-150
Apr-15
ID-EMSI IG
MY-EMSI-IG
May-15
Jun-15
PH-EMSI IG
Jul-15
Aug-15
Sep-15
Oct-15
Amongst tradable IG sovereign bonds in Asia,

Indonesia has underperformed the most. As can be
seen from the chart above, on an index level, Indonesia
is trading considerably wider vs. DB EMSI-IG index vs.
six months ago, while Malaysia and Philippines are
trading roughly flat. We believe that in the current
environment of a fragile investor sentiment towards
Page 49
8 October 2015
wider EM, political worries in Brazil and Malaysia,

concerns over growth and inflation trajectory in
Indonesia itself, the CDS levels for the latter would
remain volatile while cash spreads would have better
ground to outperform in the near future.
We also note that despite a visible rally in sovereign
cash and a technical bounce in wider EM risk, the
spread differentials for the bonds of quasi-sovereign
issuers in Indo vs. the sovereign continue to lag. This is
most pertinent to Pertaminas curve, which has lagged
in spread compression trend vs. INDON across all
duration buckets compared to peers. In our view this
has been driven by two main reasons: (1) expectation of
new USD bond supply; (2) persistent news flow in the
local press suggesting an impending reduction of fuel
prices imposed by the government.
Our recent conversations with both companies indicate
that the pressure to borrow in the public market is not
acute as both have an alternative to deploy bilateral
loan agreements with global multilateral institutions.
Besides, the government is also in the process of
disbursing annual capital injections into the key SOEs
and, according to Bloomberg, PLN would receive
IDR10trn by the end of this year. In our view, should the
market conditions turn conducive of new issuance from
Indonesia, investors are likely to opt for a shorter
duration deals (i.e. 10-15y) with low likelihood of a
supply in the 30y space.
The news of Indonesias government looking for ways
to boost domestic consumption and revive economic
growth has been hitting the wires for several months
already. We note that lately investors concerns shifted
towards the possibility for the government to reduce
prices for both natural gas and petroleum products,
which could negatively impact the financial
performance of such credits as Pertamina and PGN. We
managed to confirm with both companies that the
government is only at the early stages of finding the
opportunity to indeed lower prices for (i) regulated
products (e.g. diesel and lower octane petrol), (ii)
certain categories of users i.e. public service
departments, education and healthcare institutions. The
intention of the government is quite clear to us;
however what remains yet to be seen is how the state
would manage such a reduction in prices without
increasing the pressure on margins for its SOEs.
We understand that the government fully recognises
that it is the one which would ultimately take up the bill
for any fuel/gas price reductions. Hence, several
options are currently being considered, such as: 1) offer
SOEs tax rebates/credits; 2) reduce annual dividend
payments by SOEs; 3) lower the margin for the
governments portion in the profit-sharing agreements
with upstream producers. All of the above measure
could offset the lowering of the prices on regulated part
of energy products, while preserving SOEs bottomPage 50
lines. The decision should be made in the next couple

of months.
Indonesias oil price dynamics in IDR terms: the budget
has a considerable scope to lower prices
450
Jan 2005 = 100

International price
Local price/liter
400
350
300
250
200
150
100
The above chart shows that the government does have

scope to reduce domestic petroleum product prices as
since the removal of fuel subsidies in Jan-15 the
downward revision of prices has materially decoupled
from the actual drop in global oil price. Furthermore,
the government is about to approve the new
mechanism allowing Pertamina to benchmark local fuel
prices to the global oil price moves on a quarterly basis.
This would bring more certainly in the pricing
mechanism for Pertamina and, most importantly, gives
an opportunity to capture the upside move of the global
oil price that should ensure from here.
We recommend investors extend duration in the quasisovereign space as the 10Y30Y slopes still look
excessively steep and the long end has materially
underperformed vs. the sovereign too. For example,
PERTIJ 43 vs. INDON 43 is trading at ~170bp the
widest differential since it was issued in May-13 and
~70bp wider vs. end-Jan-15. At the same time,
PERTIJ 23 are trading only ~25bp wider INDON 23
over the same period of time. We also highlight
PLBIIJ 25 as the most underperforming 10Y bond and
reiterate our Buy call on it.
We recommend the following trades in Indonesia: Buy
PLBIIJ 25; Buy PGASIJ 24; Sell PLNIJ 21 vs. Buy
PLNIJ 42; Sell PERTIJ 22 & 23 vs. Buy PERTIJ 44
& 43; Sell INDON 23 & 24 vs. Buy INDON 43, 44
& 45.
Risks to our recommendations: Upside sovereign
ratings upgrade, appreciation of IDR, material
improvement in GDP and inflation data, worsening
geopolitics in wider EM. Downside further drop in
commodity prices, aggressive new supply by quasis,
8 October 2015
Fed-related sentiment deterioration, abuse of energy

sectors budget for the benefit of the sovereign.
PHILIPPINES
Underweight;
SOUTH KOREA
Neutral;
10Y policy bank bonds lag the sovereign;
In relative terms, Korea sovereign and quasis complex

spreads have been amongst the worst hit in Asia IG
over the past 2-4 months. The fact that S&P upgraded
the countrys credit rating to AA- on 15-Sep did not
help the sentiment much as investors were too
preoccupied with figuring out the next move by the FED
and an implication on the wider EM. In turn, in our view
the bonds of Korea sovereign and its main quasis are
now lagging the rally that is in the full swing in Asia.
Taking a closer look at the spread trends (see chart
below) we note that most of the underperformance can
be observed in 10Y bucket of the curves where bonds
of such policy banks as KDB and Eximbank are lagging.
Their spreads are now trading flat to Korea 10Y CDS
whereas the differential was as wide (i.e. bank bonds
traded tighter) as ~15bp in Jun-15 and ~30bp in Mar-15.
We consider current valuations for EIBKOR 25 and
KDB 25 presenting a good entry point to play spread
compression vs. the sovereign allowing investors to go
up the credit spectrum too. We recommend Buying
these bonds. Risks to our recommendations: double-dip
in corporate sector restructuring, further slump in
consumer demand, aggressive new issuance.
KDB and EIBKOR 10Y bond comparison vs. Korea
Z-sprd, bp
140
EIBKOR 25
KDB 25
KOREA 25
KOREA 10Y CDS
120
Sovereign curve steepener via 31S/40S;
Tactical Buy on PSALM 24 as it lags the sov;
Philippines sovereign risk assets have fared relatively

well vs. other Asia IG curves throughout the recent
spike in the markets volatility. PHILIP CDS has held up
particularly well, having underperformed China only by
a small margin. Throughout the year Philippines
fundamentals remained relatively resilient to the
headwinds from Chinas slow-down and it has been
benefitting from the lower commodity prices. The slight
disappointment YTD came in the form of the
government spending falling behind the schedule (41%
utilisation as of 1H15), but our economics team
believes that the expenditures will be fully utilised by
the end of the year. The team fine-tuned its FY15 GDP
growth forecast by lowering it to 6.3% (from 6.5%), but
kept its original growth forecast for FY16 at 6.5% intact.
We note that PSALM 24s have been lagging
PHILIP 24s in their performance with the differential in
yield increasing from ~35bp in Jun-15 to ~70bp
currently. This compares to the levels previously
observed at the start of 2015. In our view, this presents
a rare opportunity to play spread compression vs. the
sovereign and we recommend Buying PSALM 24. We
also reiterate our PHILIP curve steepener trade idea:
Sell PHIIP 40s vs. Buy PHILIP 31s as the latter has
underperformed during the sell-off in the past two
weeks while the curve remained relatively flat. Risks:
material strengthening of UST yields, continuous
outperformance of Asia IG vs. EM, material weakness in
oil price, sovereign ratings upgrade.
PSALM 24 lags the sov; Recent u/p of PHILIP 31s vs.
40s warrants a steepener trade
100
5
Mid-yield, %
Mid-yield, %
80
0.7
4.5
60
0.6
4
0.5
40
3.5
0.4
20
0.3
PHILIP 4.2 24
PSALM 24
0.8
0.2
PHILIP 31
2.5
PHILIP 40
0.1
PSALM 24 vs PHILIP 24 (RHS)

Oct-15
Sep-15
Jul-15
Aug-15
Jun-15
Apr-15
May-15
Mar-15
Jan-15
Feb-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Mar-14
Jan-14
Feb-14
Viacheslav Shilin, Singapore, +65 6423 5726

Page 51
8 October 2015
EMEA Strategy
One month ago external factors were weighing heavily
on EM: the start of Fed normalization seemed
imminent, fears about a China hard landing and further
yuan devaluation were elevated, and also related to
China worries the outlook for commodities was bleak.
Since then some of these external concerns have
eased. We had a relatively dovish Fed at the September
FOMC and the NFP number was very low, both of
which served to further push out the start of Fed
normalization. Some decent activity data out of China
and the PBoCs success in stabilizing the currency have
also allayed China fears to a certain extent; this in turn
has been partly responsible for the commodities rally.
The allaying of these external concerns has led to a
risk-on sentiment which has driven a rally across most
EM risk assets.
In EMEA FX, the recent risk rally has in particular
favoured the high-betas TRY, RUB and ZAR. However,
the easing of external pressures only papers over some
core concerns for EM, which will persist in the medium
term. Firstly, growth in EM is anemic and the outlook
for the coming years is not very encouraging: while an
EM hard landing is unlikely, equally unlikely is a return
to the pre-crisis golden years of EM growth.
Demographics will be a drag on growth, capital
accumulation is likely to slow as China moves towards
a more consumption-driven economic model and
export-driven growth will be harder to achieve (global
GDP growth is now generating much less trade growth
than in previous periods). In other words, the lowhanging fruit that has driven EM growth in years past is
diminishing. Secondly, key concerns about China
growth are unlikely to clear in the near-term, as this
would require positive data out of the country over a
sustained period. Lastly, a Fed that delays hikes
because of slower growth in the US and/or China is not
ultimately a positive for EM.
Therefore, we expect the broad EM FX rally to be shortlived and in the near-term we expect the environment
to remain a difficult one for EM FX in general. We are
particularly bearish on economies that suffer from poor
domestic growth, are exposed to commodities
weakness and have significant direct trade links with
China South Africa ticks all three boxes, along with
having limited fx reserves to defend the currency, and
therefore a Fed delaying hikes due to growth concerns
should not lead to a structural shift in the long-term
uptrend in USDZAR. However, we acknowledge that
the current rand rally could still have legs as positions
are squared; therefore, we recommend waiting for
evidence that the rally is subsiding before reloading
USDZAR longs. For the moment we like to sell 3m
USDZAR puts (strike 12.75) to fund 3m USDTRY puts
(strike 2.86) as we do not expect the ZAR rally to be
sustained, TRY should eventually benefit from lower
commodity prices, and there is a divergence in
domestic growth and basic balance dynamics. CEE FX
Page 52
performance has decoupled from the rest of EM FX and

the region remains a safe haven it is one of the few
destinations within EM where growth is above the 5year trend. We expect robust fundamentals to drive
CEE FX strength over the medium-term and in
particular like to be long PLN and HUF vs. EUR.
Meanwhile, we recommend staying short MYRRUB as
the trade is somewhat oil-hedged and has substantial
positive carry, while MYR remains exposed given the
countrys low fx reserves and high foreign ownership of
local currency debt. Lastly, we like buying 3m USDILS
calls on the expectation that the BoI will be forced to
ease policy in the coming months either via rate cuts
or fx interventions and because the skew is
favourable
In EMEA local rates the short-end among the low
yielders
does
not
provide
attractive
further
opportunities for receivers unless expecting aggressive
further rate cuts. While we remain skeptical on more
easing than currently priced we keep our view of
markets pricing low rates for longer and limited
external risk for a sudden selloff and favour short-end
flatteners in Czech, Israel and Poland while outright
receivers somewhat further out the curve in Hungary
(2Y2Y). Among the high yielders we also remain bullish
on short-end rates and see further room for markets to
price out the still hawkish hiking cycle priced in South
Africa (1Y1Y receiver), markets pricing rather more than
less near-term easing in Russia (9m FX implied receiver
or 1s3s XCCY steepener) and some additional room for
short-end rates in Turkey to reduce the noticeable riskpremia priced in (1Y XCCY receiver).
EMEA local bonds benefitted hugely from the recent
risk-on mood with bonds rallying across the curves.
Interestingly EMEA significantly outperformed Asia and
LatAm with the best performance in Russia, South
Africa and Hungary. Despite the strong performance
our fundamental view has not changed and we remain
constructive on bonds in CEE (except Czech)/Israel and
keep our flattener bias. We justify this with a) the yieldpickup vs Euro-area peripherals, b) pricing ECB QE
beyond Sep-16 on the back is beneficial for EMEA, c)
robust but not extraordinarily strong growth rates are
most favorable for delaying the repricing of bond riskpremia, d) current Brent price implies flatter local
curves and e) a higher chance of additional monetary
easing on the back of weaker than expected domestic
inflation prints which should in general be positive for
expressing a bullish view on rates in those countries.
On the other hand we turn more cautious on the highyielders where we think markets have overshot
somewhat in the last two weeks. The sticky domestic
inflation pressure, the sluggish growth outlook,
geopolitical tension and bearish market sentiment
should in our view limit another rally in long-end bonds
in Turkey, Russia or South Africa in the near-term.
8 October 2015
In credit, we increase South Africa from Underweight

to Neutral on improvement in risk sentiment under
extended accommodation. We stay Neutral on
Turkey as we believe the cheap valuations could help
alleviate pressure from geo/political risks. We maintain
Neutral on Russia as we see its credit spreads are
consistent with its credit fundamentals at the moment.
We stay Neutral on Poland and see limited downside
due to fiscal expansion after the election in October.
We keep Overweight on Hungary as a defensive
position in the high-volatility environment. While we
see upside potential in GDP Warrants, we stay Neutral
on Ukraine given lingering uncertainty on the debt
exchanges. On relative value, we recommend
switching to Hungary 24s from Romanian 24s, 10s30s
flatteners in Hungary, Russia and South Africa, and
short 5-year basis in Russia.
Local Markets
Czech Republic
FX: Long HUFCZK, target 8.90, stop 8.53.
Rates: In the short-end keep FRA payers if trading
below 3m Pribor fixing (best 12x15 FRAs target: 35bp /
stop 5bp or 1Y IRS) or favour 1Y-2Y2Y IRS flatteners
(new target: 15bp / stop: 50bp). On local bonds switch
the country view from neutral to modest
underweight given rich valuation and position for a
flatter curve (target in 2s10s IRS: 40bp). As crosscountry trade play ranges in long-end Czech vs
Germany with current tight levels favoring shorts in
Czech vs Bunds (target 30bp). As RV trade position for
swap-spread wideners in 10Y with still 30bp of
expected upside. Cheap bonds: Aug-18, May-24, Sep25 / Rich bonds: Apr-17, Sep-21, Sep-22 and Aug-28
Rationale: Encouraging economic momentum has
continued after the stellar Q2 GDP print (4.6% YoY).
Retail sales and industrial production continue to grow
at a reasonable pace, while PMI remains above 55.
There is no change in our view that the economic
picture is a largely positive one for the Czech Republic,
which stands to further benefit from the euro area
recovery. It is much the same story across the Central
European region, where growth is above the 5-year
trend, a rarity in the current climate of anemic EM
growth. One source of risk to this rosy picture is the
VW scandal Czech Republic and Hungary are
particularly exposed given the large VW production
operations in both countries. However, there is still
substantial uncertainty on this front and it remains to
be seen what the eventual impact will be on VW
production in these countries. Inflation in August was
lower than expected at 0.3% YoY, while the CNBs
preferred measure (monetary policy relevant inflation)
was at 0.1% (the lowest level since Q1). We expect
inflation to pick up meaningfully around year-end on
base effects, but only reach the CNBs 2% target well
into next year.
Monetary policy: There has been no change in the base

rate or the CNBs commitment to the fx floor (EURCZK
27). The current guidance is for the floor to remain in
place until at least H2 2016. If anything, the CNBs
recent rhetoric has a dovish tone, with CNB Governor
Singer noting that a potential extension of the
timeframe of the exchange rate commitment was
discussed at the latest MPC meeting. The possibility of
negative interest rates was also discussed, as inflation
is expected to remain below the CNBs 2% target for
most of 2016; further, the CNB considers the risks to its
forecast as anti-inflationary due to lower food and
fuel prices. We do not expect any move to negative
interest rates as activity remains robust, but we also
believe the fx floor will remain in place until at least H2
2016, in line with CNB guidance. The CNB have plenty
of room to credibly defend the floor as fx reserves
remain relatively low (30% of GDP), intervention since
the introduction of the floor two years ago has been
limited, sterilization costs are minimal and the potential
loss from CZK appreciation when the floor is eliminated
is not an issue for the CNB, which has run losses is in
the past and does not redistribute profits to regional
governments (as was the case in Switzerland).
On FX: Pressure on the fx floor has eased somewhat
over the past month, and we expect the floor to be in
place until at least mid-2016. However, given that
EURCZK is still trading close to the floor, we see scope
for some, albeit limited, move higher in EURCZK. This,
combined with the negative CZK funding cost (-0.7% in
3m annualized terms), implies that we like to fund
longs elsewhere in CEE with CZK. In particular, we are
bullish HUF on fundamentals and like being long
HUFCZK as an intra-region trade that would abstract
from some of the external factors that are currently
impacting EM FX.
Short-end rates: The market continues to price further
easing over the next few months with the trough at 0.15% by end-16 and rates not back in positive territory
before Q4-17. Given DB Economics view of no further
cuts in the near-term and rates unchanged until at least
end-16 current market pricing looks too dovish. Hence
we continue to favour short-end payers. Last month we
also recommended short-end flatteners to position for
low rate for longer given our view that markets would
remain skeptical on the pace of the medium term
hiking cycle as long as spot inflation remains well
below the inflation target. On the back of some
softness in European activity data, markets pricing
further QE by the ECB and markets pushing the start of
the Fed hiking cycle further out the flattener reached
our initial target. However, although the current spread
looks tight we dont expect market expectations to
change in the near-term. We keep this trade for now
and highlight that while the spot move is most likely
limited the position still provides with 8bp carry/roll
over 3m, a relatively attractive roll with low vol.
Page 53
8 October 2015
Government bonds: Despite already rich valuation local

bonds bull-flattened further over recent months with
10Y bonds now trading close to 60bp. In recent months
we have highlighted that in this environment we see
limited risks for a sudden selloff given our view that
Czech assets should remain well supported by nondomestic flows due to their safe haven status within
EMEA and QE by the ECB. On the other hand yield
levels close to record low levels do not necessarily look
attractive to enter new long positions. Hence we were
neutral in our EMEA portfolio. Our fundamental view
has not changed since then. However, on the back of
the recent rally we now move back to underweight in
our portfolio. We see valuation as stretched and the
fact that the spread in 10Y bonds vs bunds narrowed
further and is now close to flat the tightest level in
over 8 years does not speak in favour of another rally in
bonds. On the domestic front we still expect the curve
to flatten further (best expressed via swaps as the
receiver leg in the long-end) while as RV trade we
expect an underperformance vs bunds over the next
few weeks.
Hungary
FX: Short EURHUF, target 300, stop 320; long PLN and
HUF (equally weighted) vs. EUR; spot 97.6, target
102.8, stop 95.6; long HUFCZK target 8.90, stop 8.53.
Rates: In short end rates enter 2Y2Y IRS receiver
(target: 1.60% / stop: 2.10%). On the local bonds front
switch the country view strong overweight to
overweight but remain positioned for a flatter curve
best expressed in govvies rather than swaps by
entering longs in Nov-23 while shorts in Nov-17 (target:
175bp / stop: 250bp). As cross-country trader remain
long vs European peripherals (best Italy). Cheap bonds:
Jun-18 and Nov-23 / Rich bonds: Nov-17, Nov-20 and
Jun-25
Rationale: The encouraging economic trend seen over
the summer months continued in recent weeks. While
activity data remain mixed a sharp pickup in the PMI
was offset by somewhat below expectations IP and
retail sales the economic recovery remains well on
track and the softness in some domestic data points to
growth remaining robust but not extraordinarily strong.
DB Economics continues to expect GDP at 2.7% in
2015 and at 2.4% in 2016, above levels in the Euroarea.
Monetary policy: Interest rate meetings over the last
couple months have been non-events. Since the rate
cut to 1.35% in July and clear rhetoric that the easing
cycle was over with rates expected to be on hold for a
very long time, not much could have been expected
by the NBH. However, the low inflation pressure
remains a concern. In particular the September CPI
reading which came in at -0.4% vs 0.0% in Aug was a
real surprise to markets and fueled once again
expectations of the start of another easing cycle. DB
Page 54
Economics still expects no further easing and rates on

hold until end-16 given the view that base effects
should push up headline CPI by year-end while the
NBHs inflation target band should be reached by mid16. Nevertheless the in general dovish bias of the NBH,
another couple low inflation prints and last but not least
some softer domestic data would significantly increase
the risk of further easing in the near-term.
Short-end rates The market turned once again more
dovish on the NBH now pricing rates on-hold until end16 and only 15bp of hikes to 1.50% over the course of
2017. We have received short-end rates for quite some
time but with 12x15 FRAs and 1Y/2Y/1Y1Y IRS all
trading below current 3m fixing (1.35%) short-end rates
dont provide any further value for receiver unless
expecting aggressive further monetary stimulus in the
near-term. While this can without a doubt not be
completely rule out we see from risk-reward receivers
somewhat further out the curve as more attractive than
to position for any receivers in the very short-end.
Despite also rich valuation in the belly of the curve we
prefer 2Y2Y IRS receiver given the a) attractive
carry/roll, b) a rally in case of further easing while in
addition in case of no further easing the market should
remain skeptical on the medium-term hiking cycle as
long as spot inflation well below the target. This should
lead to a flatter curve.
On FX: We retain our bullish view on HUF. Central
Europe has certainly been one of the bright spots
within EM and has been unaffected by the general selloff in EM FX since the yuan devaluation. The CEE
currencies (and ILS) are trading like safe-havens. We
expect
this
differentiation
within
EM
and
outperformance of CEE FX to continue, and believe that
the region is in a prime position to benefit as a safe
haven in the current environment of uncertainty
regarding the Fed/China/commodities. Our forecast is
for HUF to strengthen gradually, but meaningfully, over
the medium term. We therefore see a grind lower in
EURHUF over the coming months, and recommend
going short the pair. We also like being long HUFCZK
and long HUF and PLN (equally weighted) vs. EUR.
One source of risk is the NBHs self-financing plan,
whose main aim is to drive local banks to finance the
government rather than the NBH. The argument is that
through this greater demand, yields on local currency
government debt will be compressed which will likely
reduce non-resident holdings and could lead to HUF
weakness as non-domestic investors exit the country.
However, in anticipation of this and because the first
phase of the self-financing plan was implemented last
year, this has largely already taken place nondomestic holdings of local currency debt have been
declining for some time now, and are currently at their
lowest level since 2011. We therefore see limited scope
for further exiting of non-domestics and therefore
limited risk to the currency. Further, the currency
impact of the self-financing plan has thus far been
8 October 2015
limited as the decline in non-domestic holdings has

been somewhat gradual; for example, moves in PLN
and HUF have been virtually identical over the past
year. Another goal of the plan is to use the increased
demand for local currency debt to reduce fx
denominated government debt by allowing the
government to repay forthcoming fx redemptions with
local issuance. However, the NBH will provide the
required fx for these redemptions. Finally, lower fx debt
and foreign ownership of government paper should
also leave HUF less vulnerable to external shocks such
as the start of Fed normalization.
Hungarian government bonds have been our favorite
position within EMEA over the last few months. And
indeed, Hungary has been one of the best performing
countries within EM since the start of the year, only
outperformed by Russia. The development has not
changed in recent weeks and 10Y bonds are now
trading at 3.20% - 40bp lower than 1-month ago, 100bp
below the peak in mid-Jun and only 40bp above the all
time lows observed in late January. Once again despite
this impressive rally our constructive view on
Hungarian bonds has not changed and we see limited
near-term risks for an aggressive selloff. Long-end
bonds still provide an attractive yield-pickup relative to
Euro-area peripherals while in addition the curve is still
steep compared to peers. In addition, we argue that a)
robust but not extraordinarily strong growth rates are
most favorable for pushing the repricing of the bond
risk-premia further out, b) the changes in the monetary
policy framework should further support the local bond
markets, c) the decline in non-domestic holdings over
the past few years (currently lowest level in over 4
years) makes the bond market less sensitive to sudden
outflows due to external shocks, d) pricing ECB QE
beyond Sep-16 should be beneficial for EMEA while
last but not least also e) current Brent prices imply a
flatter local curve. Last but not least our constructive
view on FX and the possibility of further easing by the
NBH should add upside risks to our bullish rates view.
Nevertheless, we now see room for another big rally as
limited and switch within from strong overweight to
overweight within our EMEA portfolio with 10Y bond
target at 2.75%.
Poland
FX: Long PLN and HUF (equally weighted) vs. EUR;
spot 97.6, target 102.8, stop 95.6.
Rates: Enter 3x6 FRA receivers (target: 1.50% / stop:
1.80%) and position for a flatter curve in the short-end
best expressed by being long in Polg Oct-19 while pay
12x15 FRAs (target: 25bp / stop: 75bp). In cash be
modest overweight and as cross-country trade keep
a long vs. Euro-area peripherals. Cheap bonds: Oct-19,
Oct-20 and Apr-29 / Rich bonds: Oct-17 and Jul-25
Rationale: Fundamentals in Poland, as in the rest of

CEE, remain relatively robust. Wages and employment
continue to grow, boosting consumption, while
construction and industrial production are also growing
in YoY terms. The recent high frequency data therefore
point to continued steady economic expansion. Polish
growth should also benefit from the expected
acceleration in the euro area recovery (given the strong
inter-linkage into the German supply chain). Inflation
remains negative, but is in line with NBP expectations.
Base effects should provide a boost to headline CPI
later in the year and we see inflation turning positive
around year-end.
Monetary policy: Recent MPC meetings have been
virtual non-events, with rates remaining firmly on hold
at 1.5% and NBP guidance suggesting that rates will
remain on hold in the near future. Although DB
Economics expect rates to be on hold through the next
several quarters with the first hike to 1.75% penciled in
for Q4-16, they acknowledge the recent moderately
dovish tone increasing somewhat the chance of
additional monetary stimulus but this is not yet the
base scenario.
Short-end rates: On the back of another weaker-thanexpected inflation print, some softer activity data,
uncertainty around the impact of the VW crisis on
Eastern European economies and concerns around the
growth dynamics in China, the US, and core-Europe,
markets turned once again more dovish on the
NBP. While the market does not expect further easing
in 2015 another 25bp of cuts to 1.25% are priced by
mid-16. In fact rates back at current levels are not
priced until early 2018 - the most dovish pricing YTD.
Comparing current market pricing with DB Economics
we see that DB Economics is more hawkish than
market pricing. This speaks clearly in favour of shortend payers. However, a) further rate cuts cannot be
entirely ruled out and/or b) the timing of markets
pricing a more aggressive hiking cycle remains tricky in
particular as long as spot inflation disappoints to the
downside and the global growth outlook weakens. Our
1Y-2Y2Y flattener recommendation to position for
markets pricing a delay at the start of the hiking cycle
has reached our target. While the spread of short-end
flatteners is now at historically tight levels, we highlight
the still attractive carry/roll in this position. While we
still like short-end flatteners we optimized the flattening
view and now see more room for this trade via being
long in bonds while paying long-end FRAs. In addition
in the very short-end we like receivers (3x6 FRAs) given
attractive risk-reward in this trade. While this trade
benefits from the dovish market sentiment and the 5bp
of positive roll our models show that in case of another
25bp of easing over the next 6 months this contract
should rally 18bp, in case of 50bp of easing even 30bp.
Nevertheless in case of no rate cut 3x6 FRAs should
only be trading around 2bp higher.
Page 55
8 October 2015
On FX: We remain bullish on PLN as fundamentals are

robust, the easing cycle has come to an end and
external balances are in reasonably good shape.
Further, PLN remains cheap on both our long-term
fundamental fair value metric (BEER) and on our shortterm financial fair value metric. Lastly, Central Europe is
relatively insulated from potentially slower growth in
China. Direct trade links with China are limited and as a
commodity importer the region should benefit from
lower crude prices. We continue to believe that CEE
falls within the good EM camp. We therefore remain
long PLN and HUF (equally weighted) vs. EUR. Nearterm however the October general elections do pose a
risk, but we believe this could only be short lived as
even a victory for the interventionist PiS party should
not eventually lead to policies that would impede the
economic recovery or threaten the fiscal outlook.
Local bonds remain well supported. Over the last 30days 10Y bonds rallied another 30bp now trading at
2.65% compared to 3.30% in late June. In particular
the higher likelihood of QE extension by the ECB gave
Polish bonds another boost. Despite the recent rally our
fundamental view on Polish bonds has not changed
and we remain constructive on duration. We once
again justify this with a) the attractive yield-pickup vs
Euro-area peripherals, b) pricing ECB QE beyond Sep16 on the back of lower commodity prices is beneficial
for EMEA, c) robust but not extraordinary strong
growth rates are most favorable for pricing delay in
repricing bond risk-premia, d) current Brent price
implies flatter local curves and now even e) additional
easing by the NBP is a possible scenario further
supporting a bullish view on Polish rates. Nevertheless
the potential for another aggressive rally in long-end
bonds is now rather limited and we only see room for
another 25bp in 10Y bonds. Hence contrary to Hungary
we are only modest overweight Poland within our
EMEA portfolio. In addition we see Polish bonds as
somewhat less attractive than Hungarian bonds due to
a) volatility around the general election, b) the share of
non-domestic holdings remains close to the peak
which could lead to increased outflow in case of shift
in market sentiment and c) Polish long-end bonds are
trading around 70bp tighter than Hungarian local
bonds.
South Africa
FX: Sell 3m USDZAR put (strike 12.75) to fund a 3m
USDTRY put (strike 2.86), zero cost structure.
Rates: In money markets, keep long end FRA receivers
best in 12x15 FRAs (target: 6.70% / stop: 7.35%) or
15x18 FRAs (target: 6.80% / stop: 7.50%) while in IRS
keep receiving 1Y1Y IRS (target 6.90% / stop: 8.00%).
In cash be modest underweight and position for a
steeper curve best expressed in bonds rather than
swaps by being long Jan-20 while short Dec-26 (target:
-125bp / stop: -50bp). Cheap bonds: Jan-20, Mar-21
Feb-23 / Rich bonds: Dec-26 and Mar-36
Page 56
Rationale: The fundamental picture in South Africa

remains a bleak one. GDP is growing at its slowest
pace since 2009, PMI remains in contractionary
territory and business confidence is low. Neither the
business cycle nor structural factors are likely to
provide much support to growth in the coming
quarters: DB economics estimates that the country is
already 6-12 months into a business cycle downswing,
which raises concerns over a looming recession, while
structural issues (electricity shortages and potential
labour strikes) persist. DB Economics also expects
growth to be just above 1% in both 2015 and 2016. A
resolution has been reached in gold sector wage
negotiations but coal unions have now called a strike
over a wage dispute this is a major cause for concern
if it proves to be a protracted strike, as coal is an
important input in Eskoms power generation process.
Inflation meanwhile remains contained. CPI dropped to
4.6% YoY in August (from 5% in July), lower than
market expectations and well within the SARBs 3-6%
target band. Core inflation also ticked lower to 5.3%.
The data suggest that FX pass-through to inflation
remains low, while weakness in fuel prices and
consumer demand are weighing on inflation.
Monetary policy: SARB kept the repo rate unchanged at
6% last month (after Julys pre-emptive hike) due to
domestic economy weakness and contained inflation.
However, the statement and press conference were
somewhat hawkish, and there is a possibility of a hike
in the coming months if inflation picks up (for example
on rand weakness). However, we do not expect this to
be delivered given the deteriorating growth outlook and
likely delay in the start of Fed normalization. DB
economics base case is for rates on hold this year and
only one 25bps hike in each of the next two years.
On FX: The rand is currently benefitting from the
expected delay in Fed hikes, commodities rebound and
general risk-on sentiment. But we maintain our bearish
medium-term view on the rand on the weak
fundamental picture and the lack of SARB room to
defend the currency either via rate hikes or via fx
interventions (as fx reserves levels remain low). As was
the case post the dovish Fed (September FOMC
meeting), we expect the post-NFP ZAR rally to be shortlived, as a Fed that abstains from hikes due to domestic
and/or global growth concerns is not necessarily a
positive that will sustain ZAR appreciation. In particular,
potentially weak growth in China is negative for ZAR.
South Africa has the largest trade exposure to China
within EMEA nearly 16% of its exports are directed to
China. Further, given South Africas dependence on
commodity exports, ZAR is vulnerable to weak global
growth and its bearish implications for commodity
prices. Positioning in ZAR is also now cleaner as
bearish positions have been squared post payrolls,
while our stretchometer shows that price action is no
longer overly stretched. However, the current risk-on
sentiment implies that the ZAR rally could still have legs
in the near term, and so we prefer to go long USDZAR
8 October 2015
when the price action suggests the rally is waning.

Given that we dont expect the ZAR rally to be
sustained, we like to sell 3m USDZAR puts to fund 3m
USDTRY puts. Further supporting factors for this trade
are the eventual benefit to TRY from lower commodity
prices and divergence in domestic growth and basic
balance dynamics.
Short-end rates: Given the relatively hawkish hiking
cycle priced South Africa benefitted from the recent
risk-on environment. Our 1Y1Y IRS receiver rallied from
7.85% in early September to currently 7.30%. However,
despite the rally the market remains cautious on
monetary policy over the next couple years and is still
pricing 90bp of hikes to 6.90% by end-16 and another
50bp over the course of 2017. Comparing this with DB
forecast (25bp of hikes expected by end-16 followed by
another 25bp in 2017) market pricing remains clearly
on the hawkish side. Hence despite the already strong
rally we keep our bullish view on short-end rates. While
short-end contracts continue to provide an attractive
carry/roll we also justify our bullish view with the
sluggish growth outlook, the low spot inflation and on
the external front DB Economics view of a delay in the
start of the US hiking cycle.
Since the start of October local bonds rallied strongly
following a few weeks in which bonds remained under
pressure. In a bull-flattening move 10Y bonds rallied
from the YTD peak at 8.60% in late September to now
8.17% still around 17bp higher than at the start of the
year. However, positioning in bonds remains tricky in
South Africa. On the one hand side we expect further
risk-premia on the back of markets shifting the hiking
cycle further out, and in addition the recent FX
weakness should translate into higher medium-term
inflation expectations also leading to a steeper curve. In
addition, downgrade risks could further weigh on
market sentiment in particular for non-domestic
investors. On the other hand the local investor base
remains strong and a spread of >200bp vs short-end
funding while limited near-term external risk-factors
and low spot inflation should provide some support.
Nevertheless from risk-reward we see the bonds in the
short-end of the curve as more attractive (near-term
target in Jan-20 at 7.25%) and remain positioned for a
steeper curve. In our portfolio we are modest
underweight and short duration. For 10Y bonds we
see levels at around 8.70% (previously 9.00%) as
attractive to be long.
Israel
FX: Buy USDILS 3m call with strike 3.95, indicative
price 95bps.
Rates: In short-end rates switch from a 1Y-2Y fwd 1y
rate to a 1Y 2Y fwd 2Y rate given more room to
flatten (target: 75bp / stop: 125bp) while as a slope
trade remain positioned in 2s10s flatteners (target:
150bp / stop: 225bp). In cash keep the view modest
overweight. Cheap bonds: Jan-22, Mar-24 / Rich

bonds: Feb-19 and Oct-26
Rationale: The growth outlook for the near-term has
deteriorated. GDP stagnated in Q2 and PMI is in
contractionary territory. The main culprits of this
slowdown have been shekel strength and weak global
trade growth. Exports proved to be a major drag on
growth in Q2, declining by 10.6% in QoQ annualized
terms; the trade deficit has doubled since February.
Meanwhile, price growth remains entrenched in
deflationary territory. CPI in August declined slightly to
a below-expected -0.4% YoY, mainly due to low oil
prices and utility price cuts (implemented in Jan). 12m
ahead inflation expectations have also declined sharply
to 0.4% from 0.7% earlier, well below the BoIs 1-3%
CPI target range.
Monetary policy: Steady, if not spectacular, growth and
well-anchored inflation expectations were two key
reasons why the BoI had opted to look through the spot
deflation and not undertake further monetary policy
easing in earlier months. However, both the growth and
inflation outlook have deteriorated. While the BoI kept
rates on hold last month, rhetoric remains dovish,
keeping open the option of further easing. Shekel
strength is a major cause for concern for the BoI, and is
clearly weighing on export performance, which is
normally an important driver of growth but is now
contributing negatively. Therefore, we expect the BoI to
act in some way to weaken the shekel in the coming
months. The easing could either be delivered in the
form of rate cuts or via increased fx interventions
(which have thus far been relatively limited vs last
year). While also a possibility, QE is not very likely in
our view, as it would not directly address the core of
the issue (shekel strength) and would have potential
adverse side effects on household debt and house
prices in an already overheated housing market; yields
are also much lower than in 2009, when the BoI last
undertook QE.
On FX: No matter which path the BoI chooses, the end
result is likely to be a weaker shekel in the near term. In
our view, the only reason the BoI would not undertake
any of the easing steps noted above is if the shekel
were weaker due to other, possibly global, factors
(such as broad dollar strength, for example on a more
hawkish Fed). With Fed hikes being pushed further out,
it is increasingly likely that the BoI will have to act.
However, in either case the fx implication is the same
a weaker shekel in the near term. A suitable way to
express this view is via a 3m USDILS call option that
would cover the next 3 BoI meetings, which offers
greater possibility of BoI action. Further, risk reversals
are currently near year lows and the favourable skew
provides cheap upside optionality in USDILS. Note that
USDILS moved higher to 4.05 levels when the BoI last
cut rates in February, and we expect at least a similar
move if the BoI does decide to act, or if speculation
regarding BoI action builds.
Page 57
8 October 2015
In short-end rates: While pricing in the very short-end

remained more or less unchanged markets pushed the
start of the normalization cycle even further out. As of
now another 5bp of cuts to 0.05% are priced by end-15
followed by a very moderate hiking cycle thereafter with
rates at 0.20% by end-16 and at 0.70% by end-17. This is
the most dovish pricing YTD. Although DB Economics
scaled noticeably back on expectations for rate hikes in
2016 the team remains with the view of rates on-hold
until Q3-15 followed by a 15bp hike to 0.25% in Q4-15,
still somewhat above current market pricing.
Nevertheless further rate cuts cannot entirely be ruled
and current risk-reward in short-end payers does in our
view not justify expressing a more hawkish stance on
the BoI compared to market pricing. In the previous
monthly we had positioned into short-end flatteners
given our view of markets pricing low rates for longer
and the attractive carry/roll opportunities with low vol.
Similar to Czech and Poland the trade is well in the
money but contrary to the other two countries the trade
has not yet reached the target. We expect the curve to
flatten further given our view that markets should remain
skeptical on the medium term hiking cycle as long as
spot inflation remains well below the inflation target
which reduces the risk of any aggressive selloff in fwd
start IRS contracts in the near-term. Hence given the still
attractive carry/roll in the short-end of the curve we
favour 2Y2Y IRS receivers outright or for more cautious
investors 1Y-2Y2Y IRS flatteners. Given no negative
carry/roll in 1Y IRS payers both contracts provides the
same attractive 15bp carry/roll over 3m.
Government bonds in Israel remain a low risk
investment. While they noticeably outperform EMEA
peer markets during risk-off periods they still provide a
steady positive total return during risk-on periods.
During the most recent EMEA bond rally Israeli bonds
underperformed their peers but nevertheless long-end
bonds still rallied ~15bp over the months with 10Y
bonds now trading at 2.15%. In fact, we highlight that
Israel remains next to Russia the only country within EM
with a positive total return in the EMLIN index currency
hedged and even currency unhedged. Our constructive
fundamental view on bonds in Israel has not changed
and we remain modest overweight but scale
somewhat back on the weighting within our portfolio
given the low yield levels relative to peers. Nevertheless
similar to previous months we still like flatteners in Israel
given that a) compared to peers the domestic curve is
still steep, b) current soft commodity prices imply a
flatter curve, c) the associated potential for markets to
price ECB QE beyond September 2016, d) the start of
the US rate normalization cycle has been pushed out
once again and e) in addition the possibility of QE which
should in particular support the long-end of the curve.
Although the likelihood of the latter remains small we
highlight that the recent growth weakness in
combination with another few soft inflation readings
further increased the chance of unconventional
monetary policy responses. We see room for 10Y bonds
to rally to 1.75% over the next couple of months
Page 58
Russia:
FX: Short MYRRUB, target 14.30, stop 15.15
Rates: In XCCY swaps enter receivers in 9m FX implied
yields (target: 10.75% / stop: 12.0%) or keep 1s3s bullsteepeners (target: 0 / stop: -150bp). In cash switch
from neutral to underweight on the back of the
recent significant rally. To express a bullish view on
Russian rates we favour XCCY rather than bonds given
historically tight swap-spreads. Cheap bonds: Feb-19,
May-20 and Jan-28 / Rich bonds: Jan-18, Jul-22 and
Aug-23
Rationale: Nothing has changed on the domestic front.
Russia is facing another year of recession although the
pace of the contraction appears to be slowing. Activity
data seems to have bottomed although at very low
levels with retail sales and IP deep in negative territory
while PMIs also remain below 50. On the other hand
inflation pressure remains high. Despite CBRs upward
revision to its end-15 inflation forecasts (12%-13%), it
expects a sharp drop to 7% over the course of 2016
and inflation back to the target (4%) by 2017; these
forecasts still look too optimistic.
Monetary Policy Sticky spot inflation and increased
expectations for medium term price pressure should
limit room for the CBR to continue its easing cycle
(650bp of easing since the emergency hike in
December). DB Economics now expects rates on hold
until mid-16 followed by another 150bp of easing by
end-16. This is somewhat more aggressive than current
market expectations with no further rate cuts priced by
end-15 followed by 100bp of easing by end-16.
Short-end rates: Our view on the monetary policy
outlook has not changed and we expect further easing
to depend on the inflation outlook and market
conditions. While the CBR does not like sharp FX
depreciation from current levels given the negative
impact on medium-term inflation expectations we
expect a fine balance between increasing FX reserves,
FX weakeness and further easing. Nevertheless a lot
depends on developments in oil prices with the recent
stabilization leading to a further rally in local rates
across the curve. Overall, we expect the CBR to keep its
easing bias and see additional cuts as likely as soon as
there is some room to implement these. We keep our
short-end receivers in FX implied yields and remain
positioned for a reinversion of the XCCY curve (1s3s
flattener).
On FX: RUB has tracked crude prices in the recent past
and we expect this, more so than the Fed, to continue
to drive RUB price action. The pickup in crude over the
past week has led to a strong rally in RUB. While RUB
offers substantial carry, crude price action is volatile
and we look to go long RUB vs. other EM currencies
which are also linked to oil prices. Our preferred trade
is to be short MYRRUB. 1) The trade is somewhat oilDeutsche Bank Securities Inc.
8 October 2015
hedged, given the strong correlation between the price

of natural gas (a major export for Malaysia) and that of
crude; 2) High foreign ownership of local currency debt
is a pressure point for MYR foreigners hold nearly
50% of Malaysian Government Bonds and the currency
is therefore susceptible to related capital outflows
(which have already picked up pace); 3) Malaysia has
greater direct trade links with China and hence is more
exposed to a potential China slowdown; 4) Malaysias
level of fx reserves is low and the central bank has
recently stepped away from its defence of the currency;
5) Carry is substantial (9.3% 3m annualized) and
positioning is a lot cleaner since the recent squaring of
bearish positions. Risks: The CBR retains its easing bias
and the risk of a rate cut persists, but inflation is
elevated and DB economics expects rates to remain on
hold until mid-16. In Malaysia, while scope to defend
the currency remains limited via rate hikes (due to weak
growth) and reserves (due to relatively low fx reserves
levels), a repatriation of government-linked overseas
assets in Malaysia is possible. Our LatAm strategists
also like going long RUBCOP as carry is high and RUB
has more favourable external fundamentals, while
exposure to commodities is quite similar.
Government bonds Volatility in local bonds has been
remarkably high in recent weeks. While bonds came
under severe pressure following the sharp drop in the
oil price and pricing high inflation prints for longer in
Q3, Russian bonds were the main outperformer over
the last few trading days. In fact, bonds across the
curve rallied by around 110-130bp over the last five
days with 5Y bonds currently at 10.60% and 10Y at
10.50% - the lowest level since Jul-15. While we were
positioned for the rally in short-end XCCY we clearly
missed out on the rally in bonds in the belly and longend of the curve. Where to go from here? Positioning in
local bonds continues to remains tricky in our view and
high volatility should continue to weigh on market
sentiment. We recommend waiting for short-term
overshooting to express an either bullish or bearish
view on Russian rates. As for now we see price action
as stretched given high inflation expectations, the
renewed conflicts in the Ukraine and no sign that
sanctions will be lifted anytime soon. Hence we turn
bearish on local government bonds and underweight
Russia in our portfolio. Enter longs on spikes if 5Y
trading above 11.25% and 10Y above 11.50%.
Nevertheless, in our view the outlook for local bonds
depends to a large extent on the development in
commodities and FX stabilization while the sensitivity
to US rates is at the moment rather limited. However,
even with a constructive view on FX we favour
expressing a bullish view on rates rather through XCCY
swaps receivers than buying local bonds.
Turkey:
FX: Sell 3m USDZAR put (strike 12.75) to fund a 3m
USDTRY put (strike 2.86), zero cost structure.
Rates: In rates, we see some further room for our 1Y

XCCY receiver to perform (target: 10.75% / stop
11.50%). In cash be underweight and short duration.
Reenter I/L-bonds in 10Y best in Apr-25 (B/E target:
7.50%) while only be long 5Y I/L-bonds if trading below
7.25% (target: 7.75%). Cheap bonds: Jun-17, Feb-18,
Jul-24 / Rich bonds Feb-20 and Jan-22
Rationale: The outlook for the Turkish economy remains
mixed. While sentiment surveys and PMIs continue to
deteriorate, and the unemployment rate increased more
than expected, the most recent IP data surprised
noticeably to the upside while also a stronger-thanexpected Q2 GDP print (3.8% YoY vs 2.9% expected)
brightens the mood. DB Economics continues to be
bearish on the near-term outlook and expects 3%
growth this year and next year, still well above growth
forecasts in South Africa and Russia but well below
trend. The main concern, however, remains the sticky
underlying price pressure. While Turkey should be one
of the main beneficiaries from the low commodity
prices the Sept inflation print disappointed once again
to the upside. While headline CPI came in at 8.0% YoY
vs 7.7% expected core CPI spiked to 8.2% vs 7.7% in
Aug and 7.9% expected. The main reason remains the
high food prices (10.7% YoY) while also price pressure
in the service sector is above the long-term average
(Restaurants and Hotels 14% YoY).
Monetary Policy Given sticky underlying inflation
pressure, geopolitical risks, a sluggish growth outlook
and uncertainly around the outcome of the election we
see a lot of risk factors for the CBRT. Hence we expect
the CBRT to keep liquidity tight by providing a
significantly share of funding at the upper-bound
(10.75%) keeping the effective funding rate for local
banks well above the 1w repo rate (7.50%). On the
other hand the low commodity prices and in particular
the delay in the US hiking cycle should give the CBT
some time to breathe, hence any near-term rate hikes
either for the 1w repo rate or the upper-bound seem
rather unlikely at the moment.
Short-end rates Despite our already bearish view on
rates in Turkey market sentiment worsened even more
than we expected a few weeks back. FX-implied yields
as well as short-end XCCY swaps moved well above
the upper-bound with 1s5s XCCY inverted to >-80bp price action last seen during the emergency hike period
in 2014. We highlighted that looking at non-domestic
funding across EMEA we did not see another market
providing
similar
risk
premia.
In
a
trade
recommendation we highlighted that risk-premia was
too excessively priced and recommended short-end
receivers. Since then 1Y XCCY rallied back from levels
close to 12.00% to now 11.20%. While we see a lot of
risk-factors to remain for local rates in Turkey and dont
expect the 1s5s XCCY to reinvert anytime soon, we
nevertheless still see some further room for additional
risk-premia to be priced out and expect short-end rates
Page 59
8 October 2015
to trade close to the upper-bound the marginal

funding costs for local banks.
On FX: Despite the post-NFP TRY rally on expectations
of a more accommodative Fed, general risk-on
sentiment and position squaring, we believe that the
elevated political risk clouds the outlook for the
currency in the near term. However, valuations are
attractive, TRY should eventually benefit from lower
crude and a large amount of political uncertainty has
already been priced in. We therefore see scope for an
upside surprise in TRY and like buying 3m USDTRY
puts financed by selling USDZAR puts, as we expect
the recent rally in ZAR to be short-lived while we see
upside potential in TRY. Additional factors support the
divergence in performance of TRY (upside) and ZAR
(downside): 1) As a commodity exporter with strong
direct trade links to China, South Africa is vulnerable to
weak growth in China and its bearish implications for
commodities; 2) GDP growth in Turkey remains
relatively robust (3.8% YoY). While we remain skeptical
on the quality of the growth (it is significantly creditdriven) and its sustainability, the growth outlook is still
better than for South Africa; 3) Turkeys basic balance
deficit (2% of GDP) is much smaller than that of South
Africa (8% of GDP); 4) Our new CORAX positioning
index shows that TRY positioning is much more
stretched than that for ZAR after the latest relief rally.
The main risk to TRY is from negative political news
around the elections, and therefore the abovementioned options structure provides a way to limit
loss from major TRY depreciation on a political fallout.
Local government bonds: Across EM Turkish bonds
remain the main underperformer (within EMLIN) since
the start of the year. Although the recent strong
performance could not change this the rally was
nevertheless a surprise to us. Despite high negative
carry in particular for non-domestic investors over the
last week bonds across the curve rallied by 50-60bps
with 5Y bonds now trading at 10.30% and 10Y even
lower at 10.15%. In our view support for local bonds
depends on funding opportunities for local as well as
non-domestic investors. As highlighted in previous
weeks while non-domestics already refrained from
positioning into local government bonds given the high
negative carry, locals were the main supporter with
more attractive funding opportunities. However, on the
back of the increased volatility in the lira and some
higher than expected inflation prints the CBT tightened
liquidity conditions and forced local banks to get a
significant higher share of their funding at the upperbound rates of 10.75%. Hence support for bonds
diminished further and 10Y bonds sold off by 150bp
over the last two months to levels close to 10.75% - the
highest level since the emergency hike in Q1-14
(11.20%). While we saw valuation stretched to the
upside when trading at 11.10% in 5Y and 10.75% in
10Y we now see valuation as too rich. Price action does
not justify above mentioned risks and the fact that
funding for investors remains well above yield levels.
We now turn bearish on local bonds and underweight
Page 60
Turkey within our portfolio. To express any bullish view

on rates we prefer bonds in the short-end (best Feb-18)
rather than further out.
On linkers, while we close our recent long linker
position given stretched valuation the recent FX
appreciation has led to lower B/Es. Hence we once
again see entrance level in particular in the 5Y sector as
attractive given high correlation to FX weakness, sticky
underlying inflation pressure and the positive inflation
premium (inflation starting level below B/Es levels in
the belly and long-end of the curve. We target B/Es
>7.75%.
Gautam Kalani, London, +44 20 754-57066
Christian Wietoska, +44 20 754-52424
Credit
HUNGARY
Remain Overweight.
Recommend Hungary 41s vs. 21s and continue to

hold Hungary 24s vs. Romania 24s.
Hungarian credit spreads have remained remarkably

stable during the recent volatility. We believe that the
uncertainties of Fed rate decisions, together with
concerns on China growth and the commodity prices,
will keep the market in a high volatility regime. In this
environment, Hungary appears more resilient than its
EM peers to external shocks, as a result of the
countrys strong external balance, low direct trading
activities with China and benefits from a potential
economic recovery in Europe. The defensive nature of
the credit is attractive and should continue to support
the curve in the next couple of months.
We continue to favor Hungary 24s vs. Romania 24s.
The trade has moved by 15bp since the peak level in
September, and we see further upside. One of the nearterm catalysts is the possible issuance in Romania.
According to news from EM Bond Radar, Romania is
planning to issue a 10-year bond of up to EUR2bn. The
supply would likely put pressure on the Romania curve
and bode for further underperformance relative to
Hungary.
Our recommendation of the 10s30s curve steepeners
has moved by 25bp in our favor through September.
The curve slope is close to the upper end of the past
one-year range. The lower range of US treasury yields
will likely boost appetite for duration and support a
reversal of the previous move. Therefore, we
recommend long Hungary 41s vs. 21s (entry 72bp,
target 50bp, stop 85bp).
8 October 2015
Hungary 10s30s curve is steep and we recommend

flattener
Hungary 41s vs 21s
100
Following the recent rally, the credit is still 20bp wider

than similar rated EM names, offering further space to
catch up. However, the deterioration in fundamentals
and supply pressure will likely cap the upside, in our
view.
Our economists point out that the economy may have
been in a recession for six to twelve months and further
downswings are likely to continue, as shown in several
economic indicators, such as economic growth,
domestic income and employment rate. As a result, the
GDP forecast is revised down from 1.5% to 1.2% for
2015 and from 2.1% to 1.1% for 2016.
90
80
70
60
50
40
30
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
POLAND
Stay Neutral.
Favor the 10-year sector
Election outcomes on October 25 will likely be the key

focus for Poland in the near term. We continue to
expect an outright PiS win (see the special report in this
Monthly EM Election Preview). If it materializes, it
could increase fiscal risks due to the partys plan of
child subsidies, lowering the retirement age and raising
the tax free allowance. Nevertheless, we expect the
fiscal easing to remain on a limited scale and see the
fiscal deficit staying under 3%. Therefore, we see little
negative impact on credit and remain Neutral.
We expect South Africa to issue USD1.5bn this year,

and the country has not yet come to the market. The
activities in the primary market are likely to pick up as
the result of the low US treasury yield. Poland has just
issued EUR1.75bn this week, and South Africa could
follow suit.
The 10s30s curve steepened by 30bps in September,
helping our steepener trade move closer to target. We
recommend taking profits and entering a reverse trade
via long 41s vs. 22s (entry 52bp, target 32bp, stop
65bp). The long end of the curve will likely be better
supported by the current lower range of UST yields.
South Africa 10s30s has steepened sharply in
September and we expect it to retrace
South Africa 41s vs 22s (Treasury spread)
70
65
60
55
50
45
On the curve, we see better value in the 10-year sector.

The curve has sharply steepened in September and
retraced moderately since October. The flattening is
likely to continue should the US treasury yield stay in
the currently low range, and help the 10-year sector to
outperform the shorter end.
40
35
30
25
20
Oct-14
SOUTH AFRICA
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Increase to Neutral
Recommend long 41s vs. 22s
South Africa credit was one of the key beneficiaries

during the risk-on episodes over the past few days. The
sub-country index outperformed the EM IG average by
about 15bp since October and retraced half of its
relative loss in September. We believe that the further
delay of the Fed rates hike (Deutsche Bank forecasts
that the Fed hiking cycle will start in March 2016) will
offer some breathing room for the credit, and
recommend tactically increasing South Africa to
Neutral.
TURKEY
Remain Neutral.
Favor bonds vs CDS
Turkey has been lagging the high-beta names during

the recent rebound in EM credit market. The credit
underperformed South Africa by about 15bp in the past
week and is about 50bp wider than similar rated EM
names. We believe that the cheap valuation is likely to
support the curve, and we see a good chance for
Turkey to catch up. Nevertheless, the uncertainties in
the November election and the geo-political risks may
prevent an outright rally.
Page 61
8 October 2015
We believe that the improvement in risk appetite will

help cash bonds outperform CDS, as the latter may
continue to face widening pressure due to hedging
demands against political/geo-political risks. The 5-year
basis in Turkey is almost the tightest among EM liquid
names and is close to the lowest level in the past half a
year.
Turkey 5Y basis is tight and we favor bonds vs CDS
The direction of the above factors is not quite clear at

the moment, but on balance, we believe Russias credit
spreads are consistent with its fundamentals. We
remain Neutral on Russia for now.
We continue to favor 10s30s curve flatteners via long
22s vs. 42s, as we discussed in our last EM Sovereign
Credit Weekly - 2 October. The curve has flattened by
15bp since then and we expect another 15bp move.
We also hold short basis (sell 5Y CDS vs. 19s). If the
unwinding of FX repo positions starts, it will likely put
pressure on the cash curve relative to CDS and see a
dramatic correction on the basis.
UKRAINE
RUSSIA
Remain Neutral.
Continue to favor 42s vs. 22s and sell 5-year CDS

vs. Russia 19s
Four factors are likely to drive the performance of

Russian credit in the following month, in our view.
First, the budget plan for next year. It is likely to be
announced by the end of October. The budget
discussion should have important implications on ruble,
FX reserves and fiscal balance. We will discuss details
once the plan is out.
Second, oil price. The correlation between Russian
credit market and oil prices has been extremely high,
more than 0.8 in recent weeks. Our commodities
research team expects oil prices to stay at the current
level (WTI to be USD48 and Brent to be USD53 in Q4
2015), which should help Russian credit to hold well.
Third, geopolitical risks. Russias stand on Ukraine and
Syria will likely continue to be a key focus. An
escalation of the confrontation or signs of extension of
sanctions could trigger a selloff in Russia.
Fourth, the unwinding of FX repo positions. CBR
started the one-year FX repo auction in late October
last year. The repo positions will begin to expire later
this month. It remains a question of whether the central
bank will roll over the FX positions and continue to
provide FX liquidity. If not, the unwinding may force
local banks to sell Eurobonds and put pressure on the
curve.
Page 62
Remain Neutral.
See upside in GDP Warrants
The past couple of weeks saw two milestones in

Ukraine restructuring process. One is the release of the
Exchange Offer Memorandum on September 23, which
provides more details on the debt exchanges, as well
as the terms of the GDP Warrants. We highlight the
important details in our recent note.
We believe the most important details in the
Memorandum are the explicit cross-default clauses and
an option for holders to recoup the par value of the
Warrants during the first few years under a bond
default. These terms offer creditor protection and
should enhance the value of the Warrants. With these
details, we introduced our revised discounting scheme
in the latest EM Sovereign Credit Weekly - 2 October
and in a special report in this Monthly (see Ukraine:
Pricing GDP Warrants, Part II Discounting the Cash
Flows). Our base case model results suggest that the
Warrants are worth 15.6pts per 100 notional of the new
bonds, a significant increase from our previous
estimate (12.3pts).
Another important event is the CDS auction results on
October 6, which fixed at 80.625 according to Markit
and Credit Fixings. The auction is expected to settle on
October 13. It is good that the auction settles before
the exchange of the new bonds (expected on October
27), which could avoid complications on deliverable
obligations.
The next important date will be October 12, the
deadline for creditors to vote on the exchange offer.
We see a good chance for the deal to go through, given
the favorable offers and upside of the GDP Warrants.
Nevertheless, there are still lingering uncertainties. Also,
negotiation results on Russia USD3bn debt are not
clear yet and it remains a question of whether it will
affect IMF bailout. We believe it is best to stay market
weight for now.
Winnie Kong, London, (44) 20 7545 1382
8 October 2015
LatAm Strategy
LatAm FX: Long MXN/CLP (target 43); Long

RUB/COP (target 50) ; Finance a 3M USD/BRL call
@4.00 with KO @4.75 by selling a 3M USD/COP
put @2800; Finance a 3M USD/COP call @3000
with KO @3330 by selling a 3M USD/BRL put
@3.60
Rates: Stay neutral Brazil. In Chile keep 1s3s

flatteners (target 20 bp), receive 10Y CLP/CAM vs
US (target 220 bp), underweight cash (Jan22) vs
swaps in the 5Y sector (target 20bp). In Colombia
pay IBR2s, buy COLTES 19s (target 110 bp). In
Mexico receive 5s10s TIIE vs US (target 10 bp),
favor long end linkers in UDIs40s vs TIPs42s (target
200 bp), underweight cash vs swaps in the 2Y
sector (target 10 bp). Peru buy the 42s vs US
(target 500 bp)
Credit: Stay Underweight Brazil, where we favor the

10Y sector and short 5y basis. Remain Neutral on
Mexico (where we favor 10s30s flatteners) but stay
Underweight on Pemex on the persistent oil shock
and recent outperformance vs. other quasisovereigns in the region. We are relatively more
constructive on Peru (Neutral) and re-enter
switching from Mexico 25s to Peru 25s. We also
stay Neutral on Colombia, but we believe the
market is somewhat complacent on its mediumterm outlook. In Argentina, valuation seems more
balanced after the recent correction. We take profit
in Pars vs. Discounts and now favor EUR Pars vs.
USD Pars. We remain defensively positioned in
long-end, low-priced bonds in Venezuela.
Local Markets
buying USD/BRL calls. Consider two zero cost

structures: Finance a 3M USD/BRL call @4.00 with KO
@4.75 by selling a 3M USD/COP put @2800; or, finance
a 3M USD/COP call @3000 with KO @3330 by selling a
3M USD/BRL put @3.60 (ref spots 3.87 and 2899).
Rates: Despite the activity slump the front end is pricing
another 150bp + worth of hikes priced in the next
couple of months as monetary policy in Brazil continues
to be subordinated to fiscal/credit/political risks as well
as of the unraveling of inflation expectations. On the
latter, non-tradable inflation continues to range above
the 8% y.o.y mark in Brazil, attesting to the strength of
the inertial component present in the spot process. And
while spot inflation seems to have stabilized a bit, the
depreciation of the currency continues to pose further
pressure on inflation and inflation expectations (through
the tradable channel). Accordingly, the latest FOCUS
survey suggests an uptick of 15 bp for 2015's inflation
(9.46%) and of almost 20 bp for the 2016's median
(5.87%). Meanwhile, inflation premium has been in
multi-year highs with inflation breakevens at the top of
the range printing whooping 8.5% for 10Y breakevens.
With real rates inching below 8% above the 3Y maturity,
valuation is supportive of overweighting nominals
outright or versus real rates but the risks of unraveling
of term premium persists. Such premium continues to
drive the "wedge" between valuation and rates
specially in the belly - and while risk on/FX intervention
might temporarily mitigate some of volatility and favor
receivers, we believe that only the improvement of the
debt dynamics will materially reduce the probability of a
sovereign downgrade and insure that asset prices
converge to fundaments. Until then, we believe that
volatility will be prohibitive for receivers in spite of the
valuation.
BRAZIL
FX: Finance a 3M USD/BRL call @4.00 with KO

@4.75 by selling a 3M USD/COP put @2800;
Rates: Neutral
FX: Following about a month of intense depreciation,

the BRL has been retracing along with most risky assets
in the past 1-2 weeks. The outlook remains very cloudy,
however, with external and internal headwinds
weighing heavily on the currency, including low
commodity prices, looming Fed tightening and the
surrounding uncertainty, the intensifying local recession
and challenges in the fiscal adjustment process. Tail
scenarios of significant political/policy unraveling have
significantly increased in likelihood, and despite the
BCBs strong reserves position, risks of further
overshooting of the BRL are material. Retracement
towards 3.50 would require a combination of a benign
external environment and significant process on fiscal
adjustment, which is unlikely in our view. Given our
bearish outlook, we like selling USD/BRL puts and
CHILE
FX: Long MXN/CLP (target 43);
Rates: Keep 1s3s flatteners (target 20 bp),

receive 10Y CLP/CAM vs US (target 220 bp),
underweight cash (Jan22) vs swaps in the 5Y
sector (target 20bp).
FX: Copper prices continue to be depressed, keeping

USD/CLP close to historical highs .While DB views
China pessimism as excessive, copper oversupply
means that prices might stay low for a while. Despite
favorable external accounts and low foreign
participation in local markets, which reduce
vulnerability to Fed tightening, it seems that without a
strong rally in copper / a pickup in local sentiment and
activity, CLP will continue trading weak. The currency
also appears slightly overvalued on our financial fairvalue metric (regressed vs. its financial drivers). We
turn bearish, going long MXN/CLP (targeting 43). We
Page 63
8 October 2015
note that, while CLP is more exposed to commodities

and less so to other external factors, the aggregate
exposure of these currencies to external factors is
similar, and to the extent that factors continue to move
together, this cross is roughly neutral to them.
Rates: : The BCCh communication has been clear with
respect to prospective hikes: the CB intends to deliver a
relatively mild tightening cycle (up to 4%) with
envisioning to mitigate the rise of spot inflation (which
has been hovering around the top of the band), and
hoping also to bring down inflation expectations
(breakevens) back to the 3% level. As a result, some of
the monetary policy premium in the front end has
finally priced out (1s3s flattened almost 20 bp in the
month), a trend we believe will continue as the curve
continues to price a too back-loaded of a cycle in our
view. Down the curve the flattening continue but the
spread vs the US continues to be excessively wide in
our view, trading more in line with CDS. Given the
benign fiscal backdrop we continue to recommend
spread compression trades (vs the US in the 10Y sector).
Finally in cash we see a few RV trade opportunities: we
recommend switching from Mar18 to Jan18 in the
short end, while in belly we prefer switching from 26s
to 22s/34s (10-15 bps pick-up). Comparing against
swap curve, we still find some value left in receiving 5Y
CLP/CAM vs Jan19s/20s where bond- swap spread has
tightened ~15 bps from the lows. In linkers we expect
that an actual hike by the BCCh could accelerate the
reversion of spot inflation to the middle of the band
leading us to believe that linkers be underweighted vs
nominals in the 2Y sector and beyond.
COLOMBIA
FX: Long RUB/COP (target 50). Finance a 3M

USD/COP call @3000 with KO @3330 by
selling a 3M USD/BRL put @3.60
Rates: Pay IBR2s, buy COLTES 19s (target 110

bp)
FX: COP has been faring very well in the recent rally,
and is up more than 7% vs. USD in the past 10 days
and back to its early August (pre-China devaluation)
levels. This move has been roughly in line with the
modest recovery in oil, which has been by far the main
determinant of the currency. Following months of
inaction and repeated expression of satisfaction with
the weak COP, the persistence of above-target inflation
finally forced BanReps hand into a hike, providing
further support. Fundamentals remain poor, however,
with oil likely to remain depressed and the current
account failing to improve on COP weakness, as the CA
deficit for Q2 recently printed at 6% of GDP (4Q sum)
while FDI and portfolio flows have not increased.
Ultimately, we believe that the risks for COP remain
heavily skewed to the downside, with a significant rally
in oil the only scenario in which the currency would
retrace meaningfully. We are therefore comfortable
Page 64
selling 3M USD/COP puts at 2800 in order to finance

3M USD/BRL calls @4.00 with KO @4.75. Alternatively,
sell 3M USD/BRL puts @3.60 to finance 3M USD/COP
calls @3000 with KO @3330 (see also BRL section). We
also like shorting COP vs. RUB, as their exposure to
commodities and other external factors is quite similar.
The cross is therefore roughly hedged against an
improvement in the external backdrop (in particular, a
rally in oil), while also enjoying high carry and RUBs
favorable external fundamentals (target 50).
Rates: After the surprise hike in the end of September,
another surprise - inflation - triggered further bearflattening in the front end of IBR. Despite the breather
given by COP (and tradable inflation), weather related
events led to a jump in headline CPI leading markets to
demand an even more upfront cycle then the one
implied by IBR. And we believe that further flattening
could indeed ensue especially if the risk-on rally runs
out of steam (and COP depreciates) and continue to
favor front end flatteners (paying up to 9M/1Y and
receiving 2Y/3Y) or just outright payers (say 6M3M
FRAs) exposing the investor to a pure monetary policy
play. Further down the curve we see both IBR and
COLTES trading as a function of CDS. Tighter fiscal
policy (yet to be announced) and risk on should
continue to result in flattening of both IBR and COLTES
curves and compression of swap spreads. On the latter
it is interesting to notice that the 5Y sector of TES (19s20s) have lagged both IBR and CDS significantly and
given the widening of the basis we would recommend
a hybrid flattener paying IBR2s and buying T19s. Finally
breakevens in the19s are 75bp beyond the band which
in our view seem high - we would underweight the
UVRs vs TES (the 19s again) liquidity allowing
MEXICO
FX: See CLP
Rates: In Mexico receive 5s10s TIIE vs US

(target 10 bp), favor long end linkers UDIs40s
vs TIPs42s (target 200 bp), underweight M17s
vs swaps in the 2Y sector (target 10 bp).
FX: MXN continues to move with external factors, with

about 75% of its recent variation attributable to US
equities and to commodity prices, and it remains very
weak on a historical basis. This despite continued
intervention (with the current mechanism recently
extended until November 30) and the possibility of a
pre-Fed hike. MXN weakness also seems excessive
versus its relatively low commodity exposure and
relatively strong fundamentals (reserves have been
declining but are still adequate when taking into
account the $70bn IMF credit line). Dependence on
external factors should continue, however, at least as
long as local activity remains sluggish, and these
factors should continue to imply a weak MXN. We are
still bullish but prefer to minimize exposure to external
factors. Although CLP, which we are bearish on (see
8 October 2015
respective section), is more exposed to commodities

and less so to other external factors, the aggregate
exposure of the two currencies to external factors is
similar and to the extent that these factors continue to
move together, the cross is roughly neutral to them. We
therefore go long MXN/CLP, targeting 43.
Rates: Despite elusive pass-through Mexico continues
to price significant premium in the front end, implying a
cycle that is at least 2 times as intense as the US. And
while optically stretched (especially given the relatively
benign
inflation
backdrop)
the
last
Banxico
communiqu suggested that an early hike (in line with
the rest of LatAm) would be considered if FX indeed
unravels even if growth remains low. If that is indeed
the case we see the curve bear flattening. Alternatively
if Banxico chooses to follow the Fed path, we believe
that the odds of further steepening are low which
altogether should bode well for flatteners. Moreover,
further down the curve TIIE has been resisting the rally
in the US mostly due to CDS - if the latter rallies we
could see a significant bull-flattening in TIIE vs US.
Altogether we like flatteners TIIE vs US (5s10s).
Nominal bonds are trading rich vs swaps in the front
end while the belly continues to underperform the
wings. We favor the M22s/23s/24s versus the
M21s/M27s in the belly, while further down the curve
we like long M42s against M34s (~8 bps pickup for
these trades). Regarding swap spreads, we continue to
find 2Y basis (bond- swap) low (~-20 bps) and favor
overweighting TIIE2Y vs the 2Y buckets in MBONOs. In
linkers space, breakevens continue to be on the top of
the range (given the search for carry in the front end of
UDIs) but the curve could see some normalization if
Banxico chooses a more hawkish stance regarding
monetary policy going forward. We find the real rate
curve steep and recommend overweighting linkers in
the back end (vs the US) and the belly of the UDI curve
(22s-25s) vs the front .
PERU
FX: Neutral
Rates: Buy the SOB 42s vs US (target 500 bp)
FX: Short positioning in PEN has cleared up in the past

few weeks, as implied yields have come down to
around 8% annualized. The currency has recovered
much of its China deval-related losses, and it still looks
quite overvalued when compared to EMFX peers that
have suffered similar blows to terms of trade, especially
considering its high CA deficit. We remain bearish,
expecting the BCRP to allow a quicker depreciation
pace vs. USD going forward than the pre-August pace,
especially if EMFX headwinds persist, but remain on
the sidelines as carry is still too high. Stay neutral for
now.
Rates: The Soberanos curve has lagged the recent rally

in the region and is now trading at record highs versus
the US counterpart. Despite the commodity slump,
stabilization of the PEN and a signal that hikes could be
over for now (plus a better debt dynamics than the
neighboring Colombia) favors in, our view, receiving the
long end (Sob42s) vs US swaps (25Y sector).
Guilherme Marone, New York, (212) 250-8640
Assaf Shtauber, New York, (212) 250-5932
Credit
ARGENTINA
Neutral.
Warrants remain more attractive than bonds; favor

EUR Pars vs.USD Pars.
Following the recent market volatility, we have seen a

fair amount of profit taking in Argentina bonds, as the
yield for the USD Discounts widened by 75bp and Pars
by 50bp since mid-September. The market seems to be
gradually pricing a central scenario of a Scioli
Presidency, hence more gradual changes in policy,
conflicting with a very tight BoP situation requiring a
more rapid pace of policy change. After the repayment
of Boden 15s and other obligations, our economists
estimate that the net reserve will fall to USD8bn at the
end of the year, leaving a very tight margin for error for
the new administration. In addition, the expected
supplies from the distressed investors taking profit and
from issuances to settle with holdout investors
(including the me too cases) also loom heavily in
many investors minds. With these dynamics, we
believe that the correction was justified. Valuation has
clearly improved over the past month, but the yields are
still below the average level of the past year. We
maintain Neutral at this point.
Investors have been taking profit during the past two
to three weeks
YTM (assuming end of 2016 repayment)
12%
USD Disc
USD Par
11%
10%
9%
8%
7%
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Page 65
8 October 2015
During the past month, the weakening market caused

the Pars to outperform Discounts. Our Discounts to
Pars switch reached its target, and in our view, these
two bonds are currently fair to each other. Warrants
outperformed the bonds but remain relatively cheap to
the bonds. We continue to see GDP Warrants as a more
attractive exposure to potential future upside.
having tightened back to the low 400s, we believe that

the risk/reward has once again become skewed to
widening of spreads. A key near-term risk is whether
Finance Minister Levy will resign and who will replace
him. Finally, Brazil losing investment grade within the
next six months (together with some large banks)
remains our base case scenario.
We also note the significant underperformance of EURdenominated bonds in comparison to their USD
counterparts, especially the EUR Pars (see graph below).
On yield basis, the EUR Pars used to track the USD Pars
in yields, but higher EUR rates vs. US since April have
caused a sharp rise in EUR Pars yields, while the
spreads of the bonds have failed to adjust. The price
differential (all in) is now 8pts, by far the largest, at
least since the default. Strategically, the EUR Pars offer
superior relative value than the USD Pars, in our view.
Sharp widening and subsequent squeeze in Brazil

spreads
EUR Pars are cheap to USD Pars

YTM assuming end of 2016 repayment
9.5%
EUR Par vs USD Par (RHS)

EUR Par
USD Par
100
80
9.0%
60
40
8.5%
20
8.0%
0
-20
7.5%
-40
On the bond curve, there has been a sharp flattening of

the 10s30s. The Brazil cash curve is no longer steep in a
cross-sectional context, so we favor the 10Y sector of
the curve. CDS/bond basis, especially at the 5Y sector,
remains very wide. We favor selling 5Y CDS vs. 21s at
the current spread differential of 90bp, the widest level
historically (target: 50bp; stop: 105bp). There remains
significant demand for 5Y CDS, but we believe that the
level of basis (and positive carry it provides) is attractive
enough for entering this position.
Brazil: 5Y basis vs. 21s looks attractive
BRAZIL
CDS Spread - Bond Libor Spread (bps)
Underweight.
Favor 10Y sector of the curve and enter short 5y
basis vs. 21s
Improved news flows and better market tone had

caused a sharp squeeze in Brazils credit spreads from
arguably overshot levels. The cabinet reshuffle
apparently brought some political compromises in order
to reduce the risk of impeachment and increase the
chance of upholding the presidential vetos. This was
accompanied by fuel price hikes and a reduction of
capex by Petrobras, which helped alleviate the
companys
financing
stress.
Last
week,
we
recommended reducing underweight and moving
closer to the benchmark, but maintaining an
Underweight position and being ready to sell on
strength. The market rally was finally halted on
Wednesday as the government failed to put vetoes to a
vote, signifying the fragility of new political structure
and continued political uncertainty. With 5Y CDS
Page 66
100
5Y CDs - BR '21s
80
60
40
20
0
-20
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Finally, on Petrobras, our corporate analysts believe

that the capex and opex cuts, as well as domestic price
increases, are positive, but not enough to significantly
mitigate the large funding gap. The revised guidance is
poor on disclosure; divestments might prove
8 October 2015
challenging and not so impactful for deleveraging if

majority stakes are sold. That said, they upgrade the
17s to Buy. They also initiate the following pair trades:
out of 7.875 19s and into 5.75 20s, out of 24s and
into 3.0 19s and out of 24s and into 44s7.
COLOMBIA
Neutral.
Maintain curve flattener / basis widener in 41s vs.

5Y CDS
Colombias credit spreads have moved in line with the

EM investment grade average over the past month,
which in our view, seems to suggest that the market is
quite complacent about the challenges that Colombia is
facing. Currently, at +30bp vs. the EM investment
grade average, there is perhaps not enough risk
premium for the vulnerability Colombia has to the
reality of a prolonged period of low oil prices. Lower
growth and the weakening of its external accounts are
the main fundamentals weaknesses for Colombia, while
a notable deterioration in the fiscal account in the next
two years is also expected. The increase in deficit will
likely be financed by an increase in debt issuance,
which is reflected in the recent print of USD1.5bn of the
new 10Y bonds (partially for 2016 pre-funding), the
third time Colombia has tapped the market this year.
On the other hand, given that this is (most likely) the
last issuance for the year by Colombia, technicals has
improved on the curve as the issuance overhang has
been removed.
Curve flattener/basis widener in Colombia 41s vs. 5Y
CDS has moved, but we keep it for further gain
CDS Spread - Bond Libor Spread (bps)
-60
5Y CDs - CO '41s
-70
-80
-90
-100
-110
-120
-130
-140
-150
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
See Petroleo Brasileiro S.A. - Buy the '17s; Rest of Curve Is Neither Steep
Nor Low-priced Enough, 7 October, 2015.
While we remain bearish on Colombias fundamentals

over the medium term, there are much worse situations
elsewhere in EM at the moment. We maintain a Neutral
position for that reason, but continue to favor the long
end of the curve. Colombia 10s30s has flattened but
remains one of the steepest in EM. We maintain our
recommendation of long Colombia 41s vs. 5Y CDS for
further expected gain (current: 110bp; keep target at
100bp; tighten stop to 120bp)
MEXICO
Stay Neutral on Mexico and stay Underweight on

Pemex.
Favor cash curve flatteners in Mexico
Mexicos credit spread saw a sharp widening during

the second half of September before it quickly
recovered almost all of its losses. Overall, Mexico
remains very tight, given its growth and fiscal
challenges. While it still has a Stable outlook from all
the ratings agencies, we see a slow negative drift in its
credit rating, and we believe that Mexico will likely lose
its A3 credit rating within the next couple of years,
given the current state of the fundamentals trend. Over
the near term, however, Mexico remains more of a
defensive play among LatAm credits, given that it is not
a commodity-oriented economy.
Pemex sharply underperformed over the past month as
a result of the oil outlook and previous outperformance
within the EM quasi-sovereign space. However, after
the recent recovery, the 10Y bonds spread retreated to
the 300bp area, still very tight in comparison with other
quasi-sovereign bonds (for example, Coldelco, which is
rated A/A+, is only 25bp tighter than Pemex in the 10Y
sector). Therefore, we remain Underweight on Pemex.
A sustained phase of low oil prices and increasing
borrowing needs in a context of falling production has
created credit rating downgrade pressure (Moodys has
recently placed Pemexs A3 credit rating under review
for downgrade, while S&P affirming its bonds credit
rating downgraded its standalone profile to BB+), and
are challenging the role of Pemex as a source of
revenue for the Federal Government, which has
happened at the expense of increasingly negative aftertax cash flows that pushed leverage over the years. In
addition, subordination risk is also on the rise, given
tighter financing conditions potentially in the form of
limited master partnerships that can sell asset-backed
debt. After having sold almost USD9bn of debt this year,
Pemex is current on a road show for a CHF placement.
The Mexico and Pemex curves are among the steepest
in EM, but we see a better opportunity to position for
some flattening in the Mexico curve via long 45s vs.
25s (current: 85bp; target: 65bp; stop: 95bp). We
believe that the current US rate dynamics as a result of
extended accommodation is supportive of the long
end of the curves.
Page 67
8 October 2015
Position for flattening of the Mexico curve
differential). We note that we recommended this trade

on 17 September, 2015, and it reached the target on 28
September, 2015. Once again, the recent relative
performance of these two credits has created this
opportunity.
Finally, our curve flattener / basis widener
recommendation of Peru 37s vs. 5Y CDS have moved
very close to our target; we take profit in this position.
Peru 25s have substantially cheapened to Mexico 25s,
again
Treasury Spread difference (bps)

100
MX '45s - MX '25s
60
90
Par equivalent spread difference
50
PE 25s - MX 25s
40
80
30
20
70
10
60
0
-10
50
-20
40
Dec-14
-30
Feb-15
Apr-15
Jun-15
-40
Dec-14
Aug-15
Feb-15
Apr-15
Jun-15
Aug-15

PERU
VENEZUELA
Neutral.
Take profit in 37s vs. 5Y CDS; Re-enter switching

from Mexico 25s to Peru 25s
On relative basis, Perus economy has adjusted more

smoothly than most of its regional peers, partly as a
result of previous fiscal and monetary stimulus as well
as investment in the mining sectors during the previous
years. Nevertheless, while the commodities shock has
caused a sharp deterioration in the governments fiscal
balance (on current trends, we project this years deficit
to reach 2.4% of GDP and to remain in the 3% area for
the next few years), Perus balance sheet remains very
strong with debt/GDP stable at a little above 20% over
the next couple of years, and it features one of the
strongest reserve adequacy ratios in EM. However,
while it participated in the sharp selloff during the
second half of September, it lagged the recovery in
October. This leaves Perus credit spreads in a more
favorable light to its peers, especially Mexico and
Colombia.
Peru 25s have once again underperformed over the
past month, and now stand cheap to both the long end
and the 19s and the 27s, according to our term
structure model. We see it attractive to re-enter a
switch from Mexico 25s which remain rich to the
UMS curve to Peru 25s (current spreads differential:
30bp; target: 0bp; stop: 45bp in par-equivalent spread
Page 68
Neutral.
Continue to be defensively positioned in the long

end, low-priced bonds. Maintain switching from
PDV 22s to 26s while favoring PDV 17Ns over 17s.
Bond prices rose by about 15% over the past month on

better risk sentiment, higher oil prices, and revelations
that the government and related entities are holding a
fair amount of sovereign and PDVSA bonds. The
government recently suggested that they own 20-25%
of the bonds. However, this is not a surprise to us. It is
common knowledge that the public sector held a
certain amount of old bonds (e.g. Venezuela 27s), that
some of the newer bonds issued by PDVSA were
placed with the Central Bank and that they have
recently acquired some bonds with near-term maturity
as a liability management maneuver, although we have
no way of verifying exactly how much they own. One of
the main reasons the government suggested this to the
investment community is to show willingness to pay a
default would cause damage to its own public sector.
However, willingness to pay has never been the main
question (if anything, they have too much willingness to
pay in the face of a balance of payment crisis, in our
view).
8 October 2015
The real question is whether this fundamentally alters

their financing picture. The answer is no the only way
for Venezuela to avoid a liquidity crisis within the next
couple of years is through oil prices rising dramatically
and/or through it receiving a substantial amount of
external financial support beyond the rolling over of a
USD5-6bn loan with China annually. Without that, our
projection remains that the country will completely
exhaust its public resources, including onshore gold
reserves by the first quarter of 2017. The recently
reported USD5bn loan to PDVSA from China in order to
increase oil production is not yet confirmed or
disbursed, and it will likely be explicitly tied to oil
projects and managed by China. While it helps improve
oil production in the future (at least two to three years
down the road), it will likely not improve the
governments near-term liquidity.
two bonds are even if a default occurs before

November 2016, that the 17Ns are much more
attractive if it occurs between November 2016 and April
2017 (when the 17s mature). The 17s would be better
off under the scenario of survival beyond April 2017,
the chance of which is rather small, in our view.
Hongtao Jiang, New York, (212) 250-2524
Meanwhile, the country is entering a phase of even

greater macro distortion, political uncertainty and social
tension. The projected victory by the opposition in
Decembers National Assembly elections will most
likely bring more political turmoil and social tension,
rather than political and policy change, as the
government remains in control of the military, the
police, the judiciary and the electoral council. It will
likely try to move even more power to the executive
branch. While some devaluation in 2016 is possible, it
would not bring immediate help to the liquidity problem.
We maintain a more defensively-oriented, recoveryfocused position toward the long end, low-priced bonds,
rather than the front end or high-priced bonds, which
would result in higher MTM returns under a benign
scenario, but with very high volatility. To that end, we
continue to favor Venezuela 26s vs. 31s and expect
further reduction in the level of price dispersion on the
curves.
Default break-even prices for PDVSA 17s and 17Ns
Break-even price at default
Difference
P'17
P'17N
80
60
40
20
0
-20
-40
-60
-80
Oct-15
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
In addition, we see a more attractive risk/reward profile

in PDVSA 17Ns in comparison with the 17s. The breakeven prices at default shown below suggest that the
Page 69
8 October 2015
China
Aa3/AA-/A+
Moodys/S&P/Fitch
However, we believe these concerns are exaggerated.

On the first issue of growth outlook, latest
developments reinforce our view that growth may
rebound in Q4.
PMIs. The official manufacturing PMI for September is
49.8, slightly higher than the market expectation and
previous level in August, both at 49.7. Most notably,
the index for large enterprises returned to the
expansionary territory, rising 1.2 point to reach 51.1. As
we emphasized before, large enterprises are in a better
position than SMEs to benefit from fiscal stimulus. In
addition, the index of new orders rose 0.5 point to 50.2,
suggesting that market demand is improving. Also
worth mentioning is that the September Caixin PMI for
manufacturing is 47.2, higher than both the market
expectation and the flash estimate (both 47.0). This is
another indication that investors are currently too
pessimistic.
Page 70
Sep-15
Jul-15
Aug-15
-60
Jun-15
Apr-15
-40
May-15
90
Mar-15
-20
Jan-15
180
Feb-15
Dec-14
China might devalue the RMB again this year,

which would trigger more volatility in the global
financial market.
270
Oct-14
20
Nov-14
Potential policy mistakes could exacerbate the

situation.
Investors
confidence
in
the
government's capacity seemed to have weakened
due to what happened in the onshore equity
market in the summer.
40
360
Sep-14
Land sales, value, 3mma, yoy%, rhs
Jul-14
Growth may slow further in foreseeable future as

the PMIs kept dropping.
Land sales, value
Aug-14
CNY bn
450
Jun-14
The market is currently bearish on China, due to three

popular concerns:
Land sales, value
Apr-14
Where the market is wrong about China
May-14
Main risk: The Communist Party Plenum will take

place in October. Given structural challenges ahead,
it is interesting to see what growth target will be
set by the senior leadership in the next five-year
plan for 201620.
Mar-14
Land sales. Preliminary data suggest that the rebound

in land sales gathered momentum in September. The
yoy growth (3mma in value terms) first turned positive
in July (2%) and then picked up to 18% in August. The
preliminary data for September suggests a growth of
34%, which could be even higher due to the lag in land
sales reporting. The implication of land sales
improvement is twofold: (i) Along with strong property
sales, it indicates a recovery of property investment is
likely to happen soon; (ii) government revenues will
improve, which will in turn help to boost government
spending.
Jan-14
Economic outlook: The market is pessimistic about

China. However latest developments, including a
rebound of the official PMI, continued rise of land
sales in September, and the announcement of
cutting property down payment ratio to 25%,
indicate these concerns are exaggerated. We
reiterate our view that growth will rebound in Q4 to
7.2% yoy from 7% in Q3 and Q2.
Feb-14

Property market policy. The PBoC announced on

September 30 that, in cities where house purchase
restriction (HPR) is not implemented, minimum down
payment on first home mortgages provided by
commercial banks will be lowered to 25%. Note that
currently outside Beijing, Shanghai, Guangzhou, and
Shenzhen, most cities are not implementing HPR. This
new policy will help the property market, which has
been strong in recent months, to sustain its momentum.
On the second concern of policy mistakes, we believe
the government is on track delivering policies to
support growth. Arguably the Chinese government
made a policy mistake in how it handles the equity
market. Handling margin financing is something new
to the government. But this does not mean the
government is losing control on economic policies.
Handling economic cycles is not a new task for the
government. They have demonstrated in the past 7
years they can deploy policies to contain hardlanding
risks. The policy tools they relied on in the past are still
available to them, and they have been actively
loosening policies since March.
8 October 2015
Why the market is so worried about government losing

control? We think this is partly because the
government has not been vocally telling the market
about the policy easing. Investors frequently ask us if
the government will launch another round of fiscal
stimulus. Our answer is: the fiscal stimulus is well
underway. The government loosened control on the
local government financing vehicles in mid May (see
our note on May 19: China: The most significant policy
easing so far in 2015). Government spending rose
sharply since then. Policies in the property market are
also loosened, including the latest move to cut down
payment ratio. Somehow the market has discounted
these policies, but we believe they are working through
the transmission channels to boost growth.
Government spending growth
%
Government spending, yoy%
32
China: Deutsche Bank forecasts

2013
National income
Nominal GDP (USD bn)
Population (m)
GDP per capita (USD)
8
0
-8
2015Q3
2015Q2
2015Q1
2014Q4
2014Q3
2014Q2
2014Q1
2013Q4
-16

Note: Government spending covers both the budget and government funds. 2015Q3 spending is
extrapolated based on July and August data.
On the third concern about RMB depreciation, we

continue to believe the government is unlikely to
depreciate the currency in the rest of this year. Under
the current market condition, a stable currency serves
the interests of China as well as the rest of the world.
We believe the Chinese government is aware of this.
We also believe the government has the capacity to
keep the currency stable (See report: Evaluate the risk
of capital outflows in China, September 4)
We reiterate our view that GDP growth will rebound to
7.2% yoy in Q4 from 7% in Q3 and Q2. We expect one
RRR in each quarter from Q4 2015 to at least Q4 2016.
We do not expect more interest rate cut in 2015 and
2016.
Zhiwei Zhang, Hong Kong, +852 2203 8308
Li Zeng, Hong Kong, +852 2203 6139
2016F
9,484 10,366 11,031 11,461

1,361 1,366 1,373 1,380
6,970 7,586 8,073 8,853
7.7
7.2
7.5
8.9
6.7
7.3
7.3
8.2
5.1
7.6
5.6
4.6
7.0
7.6
7.2
6.3
5.4
3.9
6.7
7.4
7.2
6.0
4.5
3.0
Prices, Money and Banking

CPI (YoY%) eop
CPI (YoY%) ann avg
Broad money (M2) eop
Bank credit (YoY%) eop
2.5
2.6
13.6
14.1
1.5
2.0
12.3
13.4
2.5
1.7
14.0
13.8
2.5
2.7
14.0
13.5
-1.9
-2.1
-3.7
-3.0
22.7
22.0
21.3
22.0
Government expenditure
Primary surplus
24.6
-1.4
24.1
-1.6
24.3
-2.5
25.0
-2.5
External Accounts (USD

bn)
Merchandise exports
Merchandise imports
Trade balance
% of GDP
Current account balance
% of GDP
FDI (net)
FX reserves (eop)
FX rate (eop) USD/CNY
2,209
1,950
259
2.7
182.8
2.0
117.6
3,821
6.1
2,342
1,959
383
3.7
321.3
3.1
160.0
3,906
6.2
2,305
1,697
609
5.5
376.9
3.4
150.0
3,470
6.4
2,394
1,833
561
4.9
403.2
3.3
150.0
3,500
6.7
15.3
15.1
0.2
9.4
863
78.4
17.4
17.2
0.2
10.0
1,037
75.0
20.4
20.2
0.2
10.5
1,164
75.0
23.4
23.2
0.2
11.0
1,344
75.0
Government revenue
16
2015F
Real GDP (YoY%)1

Private consumption
Government consumption
Gross capital formation
Export of goods & services
Import of goods & services
Fiscal Accounts (% of GDP)

Budget surplus
24
2014F
Debt Indicators (% of GDP)

Government Debt2
Domestic
External
Total external debt
in USD bn
Short-term (% of total)
General (YoY%)
Fixed asset inv't (nominal)
19.6
15.7
11.0
10.8
Retail sales (nominal)
13.1
12.0
12.8
12.5
Industrial production (real)
9.7
8.2
6.4
6.2
Merch exports (USD nominal)
7.8
6.0
-1.6
3.8
Merch imports (USD
7.2
0.5
-13.4
8.0
nominal)
Financial Markets (eop)
Current 15Q4F 16Q1F 16Q3F
1-year deposit rate
1.75
1.75
1.75
1.75
10-year yield (%)
3.24
3.20
3.20
3.20
USD/CNY
6.36
6.40
6.40
6.60
Source: CEIC, DB Global Markets Research, National Sources
Note: (1) Growth rates of GDP components may not match overall GDP growth rates due to
inconsistency between historical data calculated from expenditure and product method. (2)
Including bank recapitalization and AMC bonds issue
Page 71
8 October 2015
Hong Kong
Aa1/AAA/AA+
Moodys/S&P/Fitch
Economic outlook: Export growth has disappointed

recently but retail sales growth has surprised to the
upside. While the composition of growth may turn
out different from what we forecast, for the time
being we leave our forecast of a modest pickup in
growth unchanged. In line with our Fed call, we
have lowered our interest rate forecasts.
Risk: Sentiment in the property market has turned

quite negative, which could impart a significant
downward shock to consumption if property prices
fall.
High inflation to persist
Housing inflation lags market rents
Hong Kong has one of the highest rates of inflation in

Asia at 2.5% in August. Contrast that with Singapore,
where inflation has been negative this year where
formerly the two cities had very similar inflation rates.
And Hong Kongs currency has been significantly
stronger than Singapores. Housing is part of the story,
with property prices rising in Hong Kong but falling in
Singapore, but Hong Kongs inflation rate excluding
housing is still significantly higher than Singapores.
This month, we explain why we think inflation will
remain relatively high in the year ahead at least.
Inflation in Hong Kong and Singapore
10
%yoy
Housing costs follow the rental index with a sixteenmonth lag. But the housing index in the CPI has been
highly volatile since 2007 as the governments support
schemes rental subsidies for public housing tenants
and rates (quarterly property tax) rebates are reflected
in the CPI measure of housing costs. This makes
headline inflation very volatile, especially if these relief
measures are implemented at different times from one
year to the next. In the chart below the headline
housing index is shown in grey, the index excluding
relief measures is in dark blue and the 16-month lagged
rental index is in light blue.
SG CPI
190
1999=100
170
160
Rental index (-16)
150
CPI housing ex-measures (rhs)
140
CPI housing (rhs)
150
130
130
120
110
110
100
90
90
70
80
95
HK
97
99
01
03
05
07
09
11
13
15
Sources: CEIC and Deutsche Bank Research
Since housing inflation is such a long lag of the rental

index, we can confidently forecast that housing
inflation will average about 6% next year down only
slightly from about 7% over the past year. So thats a
nearly 2% contribution to inflation just from past
housing inflation.
6
4
2
0
-2
-4
05
06
07
08
09
10
11
12
13
14
15
Housing is the largest component of the CPI in Hong

Kong, with a 31.7% weight. Approximately half of
Hong Kongs population lives in subsidized public
housing, the other half pay some of the highest
property prices in the world. We wrote in this space
last month that we dont expect property prices to
plunge but even if they did, it would take much more
than a year for this to be reflected in inflation.
Page 72
There is some uncertainty about this because we dont

know whether property rates rebates and rental
subsidies will be repeated in the next budget. We
assume the latter will be because it has been provided
every year since 2007. The rates rebates have not been
a permanent feature, so until it is confirmed we assume
it will not be repeated. .
Food is the second largest component of the CPI with a
weight of 27.5%, slightly more highly weighted
towards meals out of the home (17.1%) than food
eaten in home. Virtually all of Hong Kongs food is
imported and most of that from China. So, not
surprisingly, food inflation in Hong Kong can be well
explained as a three-month lag of Chinese food
inflation converted to HKD. However, this relationship
8 October 2015
has been less close over the past two years. We

expect Chinese food price inflation, which has been
rising in recent months and has averaged about 3.6%
over the past three years will continue to contribute at
least 1ppt to Hong Kong inflation in the years ahead.
Food inflation in Hong Kong
35
%yoy
CH food in HKD
30
HK fresh food
25
HK meals out
20
15
10
5
0
-5
06
07
08
09
10
11
12
13
14
15
Transportation is the third largest component of the CPI

with an 8.4% weight, half of which is accounted for by
public transport fares. Motor fuel, with a 0.6% weight
follows world oil prices with about a three-month lag,
but given the high taxes on fuel here, fuel prices are
down only 11% over the past year. Household fuels
and electricity also follow crude oil prices with a lag but
are much more impacted by fiscal policies like
electricity subsidies and rebates, for example, which
like housing relief measures can cause considerable
volatility in headline inflation.
Consumer durables and clothing prices (combined
8.8% weight) have been falling for 18 years but have
been falling a little faster over the past year and will
likely continue to do so.
Putting all these pieces together, we see inflation
gently rising over the next six months, possibly jumping
up above 5% in the second half of next year and only
then starting to trend downwards through 2017.
Michael Spencer, Hong Kong, +852 2203 8305
Hong Kong: Deutsche Bank Forecasts

2013
2014
2015F
2016F
274.7
7.2
38035
289.7
7.3
39882
306.7
7.3
41969
327.0
7.4
44481
3.1
4.6
3.0
2.6
6.2
6.6
2.5
3.2
3.0
-0.2
0.8
1.0
2.5
4.3
3.4
7.1
-0.4
0.2
3.0
2.6
5.0
4.9
2.0
2.2

CPI (YoY%) eop
CPI (YoY%) ann avg
Broad money (M3, eop)
HKD Bank credit (YoY%, eop)
4.3
4.3
12.4
8.2
4.8
4.4
9.6
10.9
2.5
3.0
11.4
9.8
3.6
3.8
6.5
5.1
Fiscal Accounts (% of GDP)1

Fiscal balance
Government revenue
Primary surplus
1.0
21.0
20.0
1.0
3.6
20.9
17.3
3.6
2.4
20.6
18.2
2.4
2.3
21.0
18.7
2.3
External Accounts (USD bn)

Merchandise exports
Merchandise imports
Trade balance
% of GDP
% of GDP
FDI (net)
FX reserves (USD bn)
FX rate (eop) HKD/USD
506.2
534.1
-27.9
-10.1
4.2
1.5
-6.5
311.2
7.75
519.3
549.4
-30.1
-10.4
5.4
1.9
-39.4
328.5
7.76
521.2
548.8
-27.6
-9.0
7.4
2.4
14.4
358.3
7.75
536.6
566.5
-29.9
-9.1
8.5
2.6
-12.0
387.1
7.75
National Income
Population (mn)
Real GDP (YoY%)
Private consumption
Gross fixed investment
Exports
Imports

Government debt1
Domestic
External
Total external debt
in USD bn
General
Unemployment (ann. avg, %)
Financial Markets
Discount base rate
3-month interbank rate
10-year yield (%)
HKD/USD
8.4
7.1
7.5
7.9
7.9
7.1
7.4
7.8
0.5
0.1
0.1
0.1
422.6 445.4 460.0 450.0
1160.7 1290.4 1410.8 1471.5
74.2
72.3
72.0
70.0
3.4
3.2
3.2
3.3

0.50
0.50
0.75
1.00
0.40
0.40
0.65
0.95
1.67
1.70
1.76
1.80
7.75
7.75
7.75
7.75

Note: (1) Fiscal year ending March of the following year. Debt includes government loans,
government bond fund, retail inflation linked bonds, and debt guarantees.
Page 73
8 October 2015
India
Baa2/BBB-/BBBMoodys/S&P/Fitch
Economic outlook: The economy continues to tread

sideways, which may be the best one can expect
given the slowing pace of reforms, a fledgling
investment recovery, weak exports, and fragile
global markets.
Main risks: The RBI has expressed considerable
comfort with the inflation outlook and cut rates in a
front-loaded manner. Any surprise on the inflation
front will complicate future rates guidance and
challenge the 2017 target. Indias banks and
corporates continue to struggle with bad debt,
adding to the risk of economic stagnation.
RBI cuts by 50bps; done for now

The Reserve Bank of India surprised us with a 50bps
rate cut last month, reflecting its comfort with the path
of inflation in the next 12-15 months, while recognizing
the need to support the economy in an increasingly
challenging global backdrop. Other notable measures
announced in the meeting included a time-bound path
to ease the statutory liquidity ratio (SLR), reducing the
amount of hold-to-maturity (HTM) securities by banks
(again, on a time-bound path), a reduction in risk
weights to housing loans for low income households,
and easing of foreign investors access to the
government bond market (over the next two years).
central bank is expecting growth to pick up toward 8%

in the coming year, how further disinflation takes place
at the same time remains to be seen.
Still, with ongoing global market developments
(reflected in subdued external demand and sharply
correcting commodity prices) and a fledgling domestic
recovery (as seen in uneven industrial production, weak
rural demand, some rise in consumption, and soft loans
growth) clouding the outlook, the RBI may well have to
cut again next year. We think that the period after the
FY16/17 budget would be an opportune moment to
take stock of the outlook for growth, inflation, fiscal
policy, and structural reforms. If growth and inflation
both remain subdued then, at least another 25bps rate
cut and continued efforts to ease liquidity will be on the
cards, in our view.
Indias currency and bond markets have been a relative
outperformer in the global markets this year, with its
fundamentals (easing inflation, declining current
account deficit, sustained fiscal discipline, and
confidence about the reform pipeline) supporting
investor interest. Going forward, India will not be
isolated from global market volatility, but one can take
comfort from the fact that a credible RBI is at the helm.
Analyzing the RBIs motivation

The policy statement noted that there are ample
unfavorable developments taking place worldwide,
including slowing trade, faltering investment, subdued
consumer and business confidence, and a highly
disruptive selloff around the commodity complex.
While the resulting decline in energy prices reduces
Indias inflation risks, it also casts doubts on external
demand and raises the risk of financial market volatility.
Is there room for further monetary policy easing? Given
the way the RBI has defined its target real interest rate
of 1.5-2% (1-yr Treasury-bill rate minus the one year
ahead inflation expectation), it would seem the room is
rather limited. If one assumes average inflation will
hover around 5% in the coming year, then the central
bank is close to reaching the terminal rate given that
the present repo rate is 6.75% and 1-yr t-bill is below
7.5%. Also, given the central banks stated shift to
now focus on policy transmission with the government
(e.g. reviewing small savings rates), we dont think
further monetary accommodation is in store this year.
Furthermore, assigning a high degree of confidence to
a sub-5% inflation forecast for January 2017 is difficult,
considering the numerous idiosyncratic shocks that
tend to affect Indias price dynamics. Finally, if the
Page 74
We highlight a few factors that probably influenced

RBIs decision.
Subdued inflation
CPI inflation was 3.8% and 3.7% in July and August
respectively, which was lower than what RBI had
projected earlier (4% CPI in August). Meanwhile WPI is
currently at a record low of -4.9% and production side
GDP deflator is also close to zero. Apart from the
uncertainty related to the food price dynamic,
underlying inflation pressure remains subdued and
given the sharp correction in global commodity prices,
upside risks to pipeline inflation also remains limited,
which probably provided RBI the comfort to go for a
50bps rate cut. CPI inflation will start rising from
September onward, due to an adverse base effect but
is likely to remain comfortably below the 6% mark by
January 2016. While RBI has reduced its inflation
forecast to 5.8% for Jan 2016 (from 6.0% earlier), we
think the risks to this baseline forecast are to the
downside.
8 October 2015
One more rate cut could be in store next year

CPI
Forecast
% yoy, %
12
Repo
Forecast
10
8
6
4
2
2012
2013
2014
2015
2016
to growth by easing monetary policy. We think the

current growth-inflation dynamic provided enough
comfort to RBI to front-load the rate cut.
Deteriorating credit growth
Credit growth is at a multi-decade low. Nominal credit
growth slowed to 9%yoy in August (from 12%yoy in
the same period last year), with loans to the industrial
sector falling to as low as 5%yoy. While we
acknowledge that cutting interest rates is not the
panacea for propping up credit growth, given that the
slowdown in credit growth is reflective of several
structural problems in the economy and the banking
sector, it could however help on the margin to generate
a positive demand shock, in our view.
Credit growth is at a multi-decade low

Growth momentum remains weak
z-score, 3mma
% yoy,
3mma
30
IMMI
-0.4
25
-0.6
20
-0.8
15
-1.0
10
-1.2
May-13
Feb-14
Nov-14
Aug-15
Deposits
Credit
M3
5
2008 2009 2010 2011 2012 2013 2014 2015
Source: CEIC, Deutsche Bank. Note: India macroeconomic momentum indicator (IMMI) is a
composite index which attempts to capture the underlying momentum in the economy by tracking
the movement of five growth relevant variables: industrial production, exports, non-oil imports, bank
credit to commercial sector, and auto sales. A lower z-core indicates a slowdown in economic
momentum and vice versa.
Sluggish economy
Economic recovery has been sluggish and uneven for a
long time and this probably prompted RBI to finally go
for a bigger rate cut. Indeed, the April-June GDP
growth moderated to 7.0%, from 7.5% in the previous
quarter, with net exports subtracting from growth and
private consumption slowing somewhat. Excluding
discrepancies, GDP growth was much lower at 6.1%,
albeit being slightly higher than the previous quarters
5.7% outturn. Irrespective of the headline 7% GDP print,
it is clear from various high frequency indicators (PMI,
credit growth, non-oil-non-gold imports, capacity
utilization) that economic momentum remains weak.
The government on its part is trying its best to front
load public investment (as is evident from recent fiscal
data), but the magnitude of such spending is clearly
not sufficient to lend support to growth meaningfully,
as is reflected from the latest GDP growth trend. The
room to provide substantial fiscal stimulus remains
limited, given the constraint on the fiscal deficit front,
which then leaves it upon RBI to provide some support
Real interest rates higher than other EM peers

Indias real interest rate (Policy rate CPI inflation) is
currently higher than other EM peers such as China
and Indonesia. As a result, from a cost-benefit
perspective, India likely stands to gain more from a rate
cut at this stage. With reserves adequacy strength
having improved materially, an incremental rate cut of
50bps is unlikely to pose any significant threat to
Indias broader financial market and exchange rate
stability, in our view.
Monetary transmission
Lastly, weak and delayed monetary transmission has
been frustrating RBI for some time and probably the
50bps rate cut is to nudge commercial banks into
cutting their lending rates substantively and
expeditiously, which is critical to support a robust
investment led economic recovery.
Page 75
8 October 2015
Monetary transmission taking time

11
Fiscal position of the government April-August

Items
Repo rate
Base rate
Revenue Receipts (2+3)
30.3
24.6
24.9
Tax Revenue (Net)
22.8
20.5
22.5
Non-Tax Revenue
61.2
43.2
34.5
Non-Debt Capital Receipts

(5+6)
21.6
10.0
14.5
Recovery of Loans
42.4
31.3
35.0
Other Receipts
18.4
0.4
5.2
Total Receipts (1+4)
29.7
24.0
24.5
Non-Plan Expenditure
41.6
41.6
43.2
On Revenue Account
42.0
41.4
42.5
(i) of which Interest

Payments
35.8
38.1
34.0
10 On Capital Account
37.0
43.3
51.2
11 Plan Expenditure
40.1
39.2
40.4
12 On Revenue Account
40.6
39.0
42.3
13 On Capital Account
38.9
39.6
33.7
14 Total Expenditure (8+11)
41.2
40.9
42.4
43.0
41.8
45.1
66.5
79.3
79.6
5
2010
2011
2012
2014
2015
Source: RBI , Deutsche Bank
Fiscal update: April-August15

Recently, the government released the fiscal data for
the month of August. Below we compare the fiscal
position of the government in April-August of 2015
versus the corresponding period last year. For the
current fiscal, we calculate the data as a % of budget
estimate, while for the previous year, we use actual
fiscal outturn to make the comparisons more relevant.
Key findings:
Fiscal deficit has touched 66.5% of the FY16
budget estimate, which is lower compared to the
outturn of the previous year (fiscal deficit was
79.3% of actual in April-Aug14);
Net tax revenue collection is higher (22.8% of

budget estimate vs. 20.5% last year);
Non-tax revenue collection was particularly strong

(61.2% of FY16 budget estimate vs. 43.2% in the
corresponding period of the previous year);
Total receipts were 29.7% of FY16 budget estimate,

higher than the previous years outturn in April-Aug
(24.0%);
% of FY14
budget
% of FY15
budget
10
% of FY16
budget
Total expenditure was 41.2% of FY16 budget

estimate, higher than the previous years outturn in
April-Aug (40.9%);
Plan expenditure was 40.1% of FY16 budget
estimate, higher than last years trend (39.2%);
non-plan expenditure was unchanged at 41.6% ;
Page 76
of which: Primary
Expenditure
15 Fiscal Deficit (14-7)
16 Revenue Deficit (9+12-1)
74.7
90.6
92.1
17 Primary Deficit {15-9(i)}
206.9
249.4
211.6
Source: Controller General of Accounts, Deutsche Bank
Subsidies
Expenditure on oil subsidies have been lower
(-75.6%yoy) in April-August of 2015 compared to the
corresponding period of the last year, while
expenditure related to the other two key subsidies
fertilizer (12.3%yoy) and food (11.4%yoy) have been
higher.
Expenditure on subsidies
FY16 (Apr-Aug),
INR bn
FY15 (AprAug), INR bn
% yoy
% of
FY16BE
% of
FY15
actual
Fuel
92.1
376.9
-75.6
31
39
Fertilizer
430.9
383.9
12.3
59
28
Food
687.8
617.5
11.4
55
42
Subsidies
We see some scope of savings on the oil subsidies

front. Assuming Brent crude oil prices average
USD55/barrel through FY16, then gross under-recovery
should be about INR181bn, as per our calculation
(vs. INR723bn in FY15). Based on the subsidy sharing
formula, we estimate the government to pay about
INR147bn for oil subsidies in FY16. The FY16 budget
had projected INR300bn for oil subsidies; so essentially,
if oil prices remain subdued, there is scope for savings
worth INR150bn, in our view.
8 October 2015
excise and customs tax collection to be faring

better than the corresponding period of the last
year. Service tax collection growth has also picked
up in April-Aug15 (20.3%yoy) from 14.5% growth
in the same period of the previous year, yet
remains below the FY16 budget estimate
(24.9%yoy)
Oil under-recovery and subsidy sharing

FY15
FY16E
FY17E
FY18E
Brent Price
85.7
55.0
59.0
64.8
USD/INR
61.2
65.0
66.0
66.0
Gross under-recoveries INR bn

Domestic LPG
365.8
48.4
110.3
199.3
PDS Kerosene
248.0
132.6
146.0
157.6
Diesel
109.4
Total gross under-recovery
723.1
181.0
256.3
356.9
Upstream
59.2%
18.5%
19.5%
18.6%
Government
37.8%
81.5%
80.5%
81.4%
Upstream
428.2
33.5
50.0
66.3
Government
273.1
147.5
206.4
290.6
Keeping in line with past months trend, direct tax

collection continues to be weaker in AprilAugust15 compared to the corresponding period
of the last year (20.7% of FY16 budget estimate vs.
22.1% of FY15 actual). While corporate tax (17.3%
vs. 17.2%) has been almost stable, income tax
(25.5% vs. 30.4%) collection have been lower in the
first five months of this fiscal compared to the
corresponding period of the previous year;
We also note that the transfer of central taxes to

states is running at a slower pace thus far
compared to last year, both as a % of budget
estimate (35.7% vs. 40.7%) as well as compared to
the FY16 yoy increase that has been budgeted
(35.6%yoy actual in April-Aug15 vs. 54.6%yoy
according to budget projection); this is important to
track as lower tax mobilization to states may result
in states spending less on capital expenditure,
which could then adversely impact growth.
Subsidy sharing
Subsidy sharing
Source: Deutsche Bank estimates
But spending on fertilizer (INR730bn or 0.5% of GDP)

and food (INR1.2trn or 0.9% of GDP) could exceed
budget targets if weather affects food supply and farm
level income. Note that summer monsoon rains were
13-14% below normal in the June-September period of
2015 and this could put pressure on the government to
provide higher food subsidies than what has been
budgeted. In the previous fiscal year, which was
characterized by a severe drought, food subsidies
overshot the budget target by INR77bn or 0.1% of GDP
- a repeat of the same is probable this year. This is a
risk which should be monitored closely especially given
that spending on fertilizer and food subsidies is already
running at a higher rate currently compared to the
corresponding period of the last year.
Tax collection trend April-August

Items
Gross Tax Revenue
A detailed analysis of the tax collection trend reveals

the following:
Gross tax revenue collection in April-August of

2015, has been slightly higher than the previous
year (27.5% of budget estimate vs. 26.1% of
actual);
Within taxes, indirect tax collection remains robust
(35.3% of budget estimate vs. 30.8% of actual in
the corresponding period of the last year),
particularly on the excise and customs front. Excise
tax collection growth (34.9%yoy in April-August15)
is exceptionally strong, partly due to statistical
reasons. This to a large extent reflects the
difference in excise duties of petroleum products
between this and last year in April-August (excise
duty hikes on petroleum products happened only in
the latter end of the last fiscal year; hence, yoy
numbers will continue to get exaggerated on the
higher side till such normalization is achieved).
However, even after excluding this effect, we find
% of
FY16
budget
% of
FY15
actual
16.4
22.8
5.1
27.5
26.1
16.1
8.5
6.8
20.7
22.1
Corporate Tax
9.7
11.0
1.3
17.3
17.2
Income Tax
26.7
6.1
12.6
25.5
30.4
18.9
36.2
3.0
35.3
30.8
Customs
10.8
22.1
0.0
40.9
37.1
Excise
21.6
76.5
-3.6
34.9
24.0
Services
24.9
20.3
14.5
30.3
31.4
-71.8
8.0
33.3
142.7
37.3
54.6
35.6
11.3
35.7
40.7
Direct Taxes
Indirect Taxes
Tax collection
FY16BE Apr-Aug Apr-Aug

target
15
14
(%yoy) (%yoy) (%yoy)
Others
Memo item
Transfer to states
There are some aspects of the fiscal which are positive

but there are plenty of challenges as well. Fiscal deficit
is lower in April-August of 2015 (66.5% of budget
estimate) versus the corresponding period of last year
(79.3%),
which
indicate
greater
room
for
maneuverability to meet the fiscal deficit target.
Disinvestment proceeds collected in April-August of
2015 is also significantly higher than the corresponding
period of last year (INR128bn vs. INR1bn), though far
from the annual target (INR695bn). Non-tax and
indirect tax revenue collection remains strong thus far,
while spending on oil subsidies are significantly lower
compared to the corresponding period of last year,
indicating scope of savings on this front.
Page 77
8 October 2015
Yet, there are a number of uncertainties. Income tax

collection remains weak, while disinvestment target of
INR695bn looks too ambitious, given that the
government has raised only INR128bn in the first five
months of the current fiscal year. Some slippages on
the revenue front seem inevitable, which need to be
matched by expenditure compression to meet the fiscal
deficit target of 3.9% of GDP. As we have mentioned
before, some savings is likely from oil subsidies, but
such savings could get offset by higher spending on
food and fertilizer subsidies.
Given the constraints, expenditure compression may
have to be taken on the capital expenditure front,
though it is not a desirable strategy at this stage, given
the fledgling growth recovery that India is experiencing
at this stage. While capital expenditure is running at a
higher rate thus far compared to the corresponding
period of the last year, we note that the pace of such
spending
is
slowing
down.
Take
road/transport/highways sector as an example. In AprilJuly period, the government had spent 63% of the
budgeted allocation but in April-August, the spending
has come down to 49% of the budget estimate, which
is slightly higher than the outturn in the corresponding
period of the last year (45%).
CMIE Capex update: July-Sep15

The CMIE survey of Indian firms investment trend now
extends through September 2015. It appears that the
investment environment improved somewhat in JulyAugust, in line with recent trend. Still, several aspects
of investment remain weak.
Cost of stalled/shelved projects moderated to

INR785bn in July-Aug15 (from INR1.7trn in JulyAug14), constituting a 55%yoy decline. Stalled
projects in terms of absolute units have also
decreased considerably in July-Sep15 (to 93), from
the previous two quarters (157 in April-June and
168 in Jan-March).
Cost of stalled/shelved projects continue to ease

INR bn
Stalled/shelved (cost)
2500
2000
1500
1000
500
Key ministries where bulk of capital exp is allocated

Ministries
April-Aug, % April-Aug, % April-Aug, %

of FY16
of FY15
of FY14
budget
actual
actual
Agriculture
36
42
41
Civil Aviation
88
58
87
Commerce & Industry
35
33
33
Communications & IT
18
13
31
Environment & forests
43
28
31
Finance
18
24
22
Health & welfare
43
27
35
Road, transport & highways
49
45
43
Rural development
63
48
42
Women & child development
52
33
61
Source: CMIE, Deutsche Bank
Private sector stalled project costs (-53%yoy)

including number of stalled projects (62 in July-Sep
vs. 85 in April-June) declined in July-Sep15; similar
trend was recorded for the government sector
where stalled project costs (-59%yoy) and absolute
number of stalled projects decreased to 31, from
72 in the previous quarter. This is one of the
sharpest reductions in stalled projects (both in
terms of costs and units) in several quarters and it
is encouraging to note that such improvement is
broad based.
Value of projects completed was down -21%yoy in

July-Aug15, reversing the improvement of the
previous quarter (+32%yoy). Number of stalled
projects and projects completed both reduced in
July-Sep versus the previous quarter, but overall
the stalled/completion ratio reduced to 38.1, from
44.5 in April-June. However, there was a
divergence between the private and public sector.
Private sector stalled/completion ratio increased to
41.9 in July-Sep (from 37.1 in April-June), but was
more than offset by a sharp decline in the public
sector stalled/completion ratio (32.3 vs. 58.1).
Earlier this week the government announced the

2HFY16 market borrowing program, which was in line
with the budget estimate. This indicates that the
authorities are committed to meet the 3.9% of GDP
fiscal deficit target, even with the likely revenue
slippages. It is too early to say how much slippage will
occur this year, but it is clear even at this stage that
ultimately the government would have to resort to
cutting expenditure by an offsetting amount to meet
the headline deficit. Or yet another option would be to
reduce the transfer to states to increase the net tax
revenue and offset some of the slippages.
Page 78
8 October 2015
Stalled/ completion ratio has increased for pvt. sector

500
No. of
projects
Projects completed (private), lhs

Stalled/completed ratio, rhs
100
400
80
300
60
200
40
100
20
India: Deutsche Bank Forecasts

2013
2014
2015F
2016F
1,866
1,236
1,510
1,988
1,253
1,586
2,133
1,271
1,679
2,296
1,288
1,782
6.9
6.2
8.2
3.0
7.3
-8.4
7.1
6.1
6.5
3.1
4.9
-1.8
7.5
7.8
3.7
5.2
-1.5
-1.2
7.5
8.0
5.8
8.7
6.5
7.5
6.9
7.3
7.5
7.5

CPI (YoY%) eop
CPI (YoY%) avg
Broad money (M3) eop
10.3
10.7
13.6
14.2
4.3
6.7
10.8
9.9
5.0
4.8
12.0
12.0
5.2
5.1
16.0
16.0
Fiscal Accounts (% of GDP) 1

Central government balance
Government revenue
Central primary balance
Consolidated deficit
-4.5
9.3
13.8
-1.2
-7.0
-4.0
9.0
13.0
-0.8
-6.5
-3.9
8.6
12.5
-0.6
-6.0
-3.8
8.7
12.5
-0.5
-5.8
319.7 329.6
466.2 472.8
-146.5 -143.1
-7.8
-7.1
-49.2
-27.5
-2.6
-1.4
26.3
25.0
293.9 332.3
61.9
63.3
322.5
475.2
-152.8
-7.3
-29.2
-1.5
30.0
374.3
66.0
344.7
522.4
-177.7
-7.6
-44.1
-1.9
35.0
409.7
67.0
National Income
Population (mn)
Real GDP (YoY %)
Private consumption
Exports
Imports
Real GDP (FY YoY %)
Source: CMIE, Deutsche Bank
The latest CMIE data indicates that improvement in

stalled projects is gaining pace across the board, but
activity on the ground is still weak, reflected in the
moderation in project completion rate. Indian private
sector companies are characterized by weak sales
growth, anemic net profit growth, declining interest
cover, rising leverage and are unwilling to take
additional risks in stepping up the investment envelope.
Unsupportive and uncertain global environment is
adding further to risk aversion.
To improve the investment outlook and support growth,
the Reserve Bank of India has cut interest rates by
125bps in 2015, which has so far led banks to cut their
lending rates by about 70bps, but investment on the
ground continues to be weak. We suspect that it will
take several more quarters for the private corporate
sector in India to gain confidence in putting fresh
capital into play, given the bitter experience of the past.
If global conditions do not deteriorate further (a big if)
and if the government manages to continue with the
reforms momentum, then a meaningful investment
recovery can be expected to gain traction from late
next year, but the jury is still out on this.
However, the medium term growth outlook ought to be
positive, given that investment intentions have picked
up strongly since Sep of last year. The latest CMIE data
show that new investment intentions (448 projects)
worth INR3.5trn were announced in the quarter ended
September 2015, constituting 23%yoy growth.
Previously, investment in new projects proposed
amounted to INR2.9trn in July-Sep14, INR4.1trn in
Oct-Dec14, INR2.5trn in Jan-March15 and INR1.2trn
in April-June15 quarter. True, the number of new
investment proposals has reduced sequentially in the
last few quarters, but July-Sep15 marks the fifth
consecutive quarter that witnessed strong yoy growth
in announcement of new project proposals.

Merchandise exports
Merchandise imports
Trade balance
% of GDP
% of GDP
FDI (net)
FX rate (eop) INR/USD
Government debt
Domestic
External
Total external debt
in USD bn
General
Industrial production (YoY %)
Financial Markets
Repo rate
3-month treasury bill
10-year yield (%)
INR/USD
66.9
63.6
3.3
22.7
427.6
21.7
65.1
61.9
3.1
23.6
469.6
22.7
63.9
61.0
3.0
24.7
526.0
23.3
63.5
60.7
2.8
25.7
589.1
23.9
0.1
3.6
3.8
5.2
Current
6.75
7.03
7.51
65.3
15Q4
6.75
7.00
7.40
66.0
16Q1
6.50
6.90
7.30
66.5
16Q3
6.50
6.70
7.25
67.0
Source: CEIC, Deutsche Bank. Forecasts (1) Fiscal year ending March of following year.
Taimur Baig, Singapore, +65 6423 8681

Kaushik Das, Mumbai, +91 22 7180 4909
Page 79
8 October 2015
Indonesia
Baa3/BB+/BBBMoodys/S&P/Fitch
Economic outlook: Growth momentum continues

to falter, although trade figures suggest hints of a
trough. Inflation has begun to ease, which may
release some pressure on Bank Indonesia,
beleaguered by a rapidly weakening currency.
Main risks: Indonesias economy and markets

remain hostage, to some extent, by the global
commodity price correction and ongoing market
volatility. Even if domestic policy becomes investor
friendly, it will be difficult for the Indonesia to find
insulation from capital flow volatility.
Firefighting on multiple fronts

While the rhetoric of the Indonesian officials do not
betray grave concerns about the outlook, the totality of
policy measures taken in recent days suggest that the
authorities are in crisis management mode. We are not
sure if the various measures add up to a cohesive
response to the ongoing commodity bust and EMrelated disenchantment among investors, although
some of the measures could well support domestic
spending and rupiah stabilization.
Politics
The slide of the exchange rate this year has caught
Indonesians by surprise, and is becoming a political
liability for President Jokowi. Although the slide has
been mostly against the USD (-20%yoy), with little
movement in real or nominal effective terms, the
visuals of the currency trading at over 14,000 against
the USD is an unmitigated negative. For an economy
that had undergone a painful currency crisis in 1997/98
which entailed considerable instability and required
many years of difficult consolidation and restructuring,
currency volatility is a particularly sensitive issue.
Already opposition leaders are drawing headlines over
the economys weakness in general and the rupiah
slide in particular. While the government has been
correctly pointing out that the ongoing developments
reflect mostly external factors, clearly the defense has
not assuaged public concerns. The authorities have not
yet suffered any political setback owing to the
economic situation, but opposition voices will grow
louder if the rupiah slide is not arrested expeditiously.
Announcements of several stimulus packages
(covering areas such as investment promotion, jobs
support, and export financing) have been broadly seen
as regulatory liberalization steps with limited impact in
the near term, but at least from a political perspective
the government can come across as energetically
fighting the currencys weakness.
Page 80
Budget
Weak economy tends to lead to weak revenue growth,
and Indonesia is no exception. Oil and gas related
income taxes are down 54%ytd, while import VAT
collection is down 10.7%. Indeed, the authorities have
conceded the possibility that total revenues would be
more than 20% lower than budgeted. With three
months remaining in the year while revenues are barely
at 50% of the years target, this seems highly likely.
That does not necessarily mean major budget slippage
risks, however. Budget execution lacked considerably
at the beginning of the year, and although
infrastructure spending has picked up in recent months,
we dont think the budget spending targets will be
achieved. Couple the lagging trend of public
infrastructure spending with the fact that subsides and
transfers will be lower than projected (as already noted
by the government), the budget deficit will likely be
contained around 2% of GDP, in our view. As for
funding the budget, there is little risk of local
government issuance to overshoot as the authorities
have a well defined borrowing program with nearly a
quarter of the deficit being financed by inexpensive
multilateral external loans.
Rupiah stabilization
Responding to heightened concerns about the slide of
the IDR vis--vis the USD, Bank Indonesia has moved
beyond the past strategy of allowing the rupiah to slide
along with global EM. Last week a rupiah stabilization
package was announced, leading with the guidance
that the central bank will intervene in the forward
market (while continuing with spot market intervention)
to prevent the forward premium from spiking.
Additionally, minimum holding period of Bank
Indonesia certificated was reduced to 1-month from 3months, Bank Indonesia deposit instruments were
introduced to draw in dollar liquidity, and tax incentives
toward holding rupiah were enhanced.
In addition to such easing of macro-prudential
measures, the authorities have carried out money
market operations to reduce on-shore rupiah liquidity.
Although the resulting spike in overnight rates was
short-lived, this could be a tool to use again by the
authorities to make taking short positions on the
currency more expensive. Short of hiking the policy
rate, the authorities could use this sort of back door
tightening measures if the currency faces renewed
pressure, in our view.
8 October 2015
Pledging to intervene in the bond market and making

short term liquidity more costly (even if temporarily)
show that the authorities have turned less laissez-faire
than earlier on their currency strategy. With the trade
balance in surplus territory and the economy revival
measures likely to renew some investor interest, it is
conceivable that an emboldened Bank Indonesia may
well have prepared the grounds for new found and
much awaited currency stability.
Note however that global market turmoil can readily
overwhelm the stabilization measures taken by the
authorities. Export earnings remain very weak, and the
risk of capital outflow (both by local and foreigners,
from the fixed income and equity markets) remains
high. The best the authorities can do at this juncture is
to reduce anxiety about the lack of ample reserve
covers (we estimate the 2016 gross external financing
needs taking up nearly 100% of net reserves).
One approach could be to replicate the Reserve Bank
of Indias introduction of a 3-year foreign currency
swap facility for non-residents. Another option could be
to draw on the various bilateral swap lines (USD15bn
with China, USD12bn with Japan, and USD10bn with
South Korea) that have been set up in recent years.
Using concessional loans from the World Bank and
ADB in lieu of private sector funding can also bring
some respite the currency and bond yields. We highly
doubt the authorities would consider going to the IMF
for a program even if currency stress were to rise
considerably more.
Macro developments
As currency concerns remain elevated, at least so far
there havent been any major cases of default or
restructuring due to balance-sheet mismatch,
especially outside of the commodity sector. Also, there
has been no sign of inflation pass-through from the
weak rupiah yet. Indeed, with the economy slowing,
input prices collapsing, and domestic food prices stable,
the risk of substantial pass-through is small, in our
view.
We continue to see scope for substantial disinflation in
the pipeline. With September inflation falling below 7%
for the first time since December, there is a good
chance that inflation heads toward 4% by the end of
the year. For an economy so devoid of sliver-linings,
the disinflation dynamic will be welcome, offering
much needed respite to the fixed income market
outlook, in our view.
Indonesia: Deutsche Bank forecasts

2013
2014F
2015F
2016F
901.7
248.8
3,624
887.1
252.2
3,518
862.8
256.6
3,363
929.6
261.1
3,561
Real GDP (YoY%)

Private consumption
Exports
Imports
5.6
5.4
6.9
5.3
4.2
1.9
5.0
5.1
2.0
4.1
1.0
2.2
4.5
5.0
4.9
4.3
0.8
-2.3
4.5
5.5
4.0
6.5
3.6
5.8

CPI (YoY%) eop
CPI (YoY%) ann avg
Core CPI (YoY%)
Broad money (M2)
Bank credit (YoY%)
8.1
6.4
5.0
12.8
20.1
8.4
6.4
4.5
11.9
15.8
3.7
6.5
4.5
12.0
14.0
4.6
4.7
4.0
13.0
15.0

Budget surplus
Government revenue
Primary surplus
-2.2
15.1
17.3
-1.0
-2.0
14.7
16.8
-0.8
-2.3
14.1
16.4
-0.3
-2.3
14.3
16.6
-0.3

Merchandise exports
Merchandise imports
Trade balance
% of GDP
% of GDP
FDI (net)
FX rate (eop) IDR/USD
182.1
176.3
5.8
0.6
- 29.1
- 3.2
12.3
99.4
175
168
7.0
0.8
-25.4
-2.9
15.5
112.0
12270
180
192
161
167
12.0
17.8
1.3
1.8
-17.7
-15.3
-2.0
-1.6
15.0
18.0
114.0 118.0
12440 14,000 13,500

Government debt
Domestic
External
Total external debt
in USD bn
Short term (% of total)
22.4
11.4
11.0
30.5
265.0
18.9
25.9
14.9
11.0
34.1
293.0
18.8
27.0
15.5
11.5
33.3
311.0
18.3
28.0
15.5
12.5
32.4
331.0
18.1
6.0
6.5
4.0
6.0
5.0
6.0
6.0
5.9
National Income
Population (mn)
General
Industrial production (YoY%)
Unemployment (%)
Financial Markets
BI rate
10-year yield (%)
IDR/USD
Current 15Q4 16Q1 16Q3

7.50
7.50
7.25
7.00
9.14
9.00
9.50
9.50
14,050 14,000 13,850 13,550
Page 81
8 October 2015
Malaysia
A3/A-/A-(Neg)
Moodys/S&P/Fitch
Economic outlook: Despite the financial market

turmoil this year, Malaysias macro fundamentals
remain intact. The current account continues to be
in surplus and could even improve slightly going
into year-end, supporting the build-up in reserves.
Growth may be slowing but it is likely to settle
within a 4.5-5% range this year, decent by EM
standards, while inflation could ease through Q4.
We are more concerned of Malaysias economic
prospects going into 2016, as the sharply weaker
MYR feeds deeper into the real economy.
Main risks: Early signs of balance sheet stress may

be evident in the recent uptrend in the number of
bankruptcies, which had been on a declining
trajectory from 2014Q2 through early this year.
View from KL: Mind the fundamentals

Following the heavy selldown in Malaysias financial
markets, we were reminded in our trip to Kuala Lumpur
last week that the economy continues to be on a
relatively sound footing. The current account balance
remains on a comfortable surplus and sizeable
overseas assets can be tapped should domestic
liquidity run dry. Growth may be slowing but it is still
likely to settle within a decent 4.5-5% range this year
and next, in line with Indonesias outlook and better
than many other EM Asian economies such as Hong
Kong, Singapore, South Korea, and Thailand. Despite
multiple
headwinds, the
government
remains
committed to reduce the fiscal deficit, likely aiming for
a slightly lower fiscal deficit target of 3.0%-to-GDP for
2016. And while fiscal space may be limited, with
prudent spending in other areas the government can
still afford to roll out modest measures to protect some
segments of the economy from tighter financial
conditions. That is, Malaysia, is seen by observers on
the ground to weather this period of heightened
volatility, at least in the near term.
Asset prices are also seen to normalize in due time to
reflect the economys sound fundamentals. Bank
Negara reminded us of the experience during the taper
tantrum when foreign outflows in the bond market
(amounting to USD13.7bn) within May-August 2013
were succeeded by greater foreign inflows (worth
USD17bn) in the following 12 months. This experience
makes BNM representatives we saw optimistic that the
net outflows which have persisted in the bond and
equity markets since September 2014 could reverse as
valuations get attractive and unfavorable news flow
wanes. And aside from these potential inflows, the
central banks reserves could also be augmented by
the repatriation of overseas assets by governmentPage 82
linked corporations, as already encouraged by the

government. Moreover, Malaysia could draw from its
existing bilateral currency swap agreements (it has
renewed its MYR90bn swap agreement with China this
year) and could further expand its swap lines (BNM has
signed in August an MoU with the BoT for a potential
currency swap agreement). Again, Bank Negara has
reiterated that imposing capital controls and hiking
rates are not necessary to defend the currency and that
these measures could do more harm than good to
Malaysias economic and financial standing.
Observers we saw also expressed some comfort that
the severe depreciation in the MYR has so far not
materially dampened domestic financial conditions and
economic activity. Despite net capital outflows since
the start of the year, domestic liquiditymeasured by
M3continues to grow, albeit at a record low of less
than 5%yoy (3mma), and that the government can
count on its more liquid overseas assets to shore this
up. Credit growth has also been broadly stable at
around 9%yoy since the start of the year and is in fact
still more than twice nominal GDP growth, while nonperforming loans have been stable this year. Shortterm interbank rates have seen an uptick since late
August but that may be attributed to the market pricing
in a rate hike amid the MYRs sharp depreciation rather
than a reflection of tight domestic liquidity. On a side
note, interbank rates could trend higher going into
year-end as banks fulfill their regulatory requirements.
Meanwhile, consumer spending growth may have
eased in the second quarter as the GST came into
effect, but the improvement in imports growth more
recently (2.2%yoy ave in June-July from -7.0%yoy in
April-May) seems to suggest that consumers are
gradually adjusting to the new tax and have been fairly
unfazed by the sharp fall in the value of the MYR, as
noted in our meetings. Indeed, demand for imported
consumer, capital, and intermediate goods all
accelerated in July. Likewise, industrial production and
motor vehicle sales improved per latest print in the
same month. However, we see these indicators at odds
with the deeper contraction in manufacturing activity
recorded in August, with the headline PMI dropping
50bps to 47.2 from the previous month. While this
outturn may be more of a reflection of weak external
than domestic demand, it may also indicate rising cost
pressures on Malaysian manufacturers amid the
weaker MYR, in our view.
The fact that Malaysia saw continued growth in
approved direct investments in the first half of the year
reflects the sustained interest to invest in the country,
as also pointed out in our meetings. These investment
8 October 2015
projects have amounted to MYR113.5bn, or 20% of

GDP, and are 1.3% higher than the previous year. Most
of the projects are also broadly split between the
service (54% of total value) and manufacturing sectors
(44%). But whereas Malaysia has achieved a decent
77% implementation rate in manufacturing projects
approved within 2010-14, it is worth watching how
implementation would fare going forward amid a more
challenging global environment, in our view. Thus far,
FDI in the first half of 2015 was robust, posting a
19%yoy increase.
While these indicators suggest at least some
stabilization in economic activity despite the weak FX,
it is a common view among those we saw, and to us,
that the balance of risks to Malaysias outlook is still
tilted to the downside. Weak export earnings will likely
continue to weigh on the economy and could have
negative spillovers on consumer incomes. We
specifically note that employment in the manufacturing
sector continued to fall on a year-on-year basis for the
third consecutive month in July while wages in real
terms decelerated to 0.2%yoy from 3.2% in June.
Early signs of balance sheet stress may also be evident
in the recent uptrend in the number of bankruptcies,
which had been on a declining trajectory from 2014Q2
through February of this year. We remain convinced
that growth would still hold up within the 4.5-5% range
this year; a greater concern to us is Malaysias
economic prospects going into 2016, as the sharply
weaker MYR feeds deeper into the real economy.
An upside from El Nio

But amid the protracted slump in commodity prices
and barring further uncertainty in the domestic political
situation, the strengthening El Nio phenomenon could
bring markets attention back to fundamentals, in our
view. Crude palm oil futures prices in Malaysia have
climbed at least 20% from the previous month as of
this writing on the view that the dry weather conditions
associated with El Nio could cut down palm oil output
from top-producing countries of Indonesia and
Malaysia. Moreover, Indonesias push for the use of
palm-based biodiesel domestically and the sharper
depreciation of the MYR against the IDR to date stand
favorable to Malaysian palm oil exports. With palm oil
accounting for 8-9% of Malaysias total exports, the
surge in prices could boost the trade balance especially
in Q4 as imports also soften from weaker growth. Note
that the trade surplus has surged by MYR7.8bn in
August as imports dropped by 6%yoy.
Diana del Rosario, Singapore, +65 6423 5261
Malaysia: Deutsche Bank forecasts

2013
National Income
Population (mn)
2014
2015F
2016F
323.5 338.3
29.9
30.6
10,803 11,055
295.3
31.2
9,437
286.6
31.8
8,954
4.7
7.2
5.9
8.2
0.3
1.7
6.0
7.0
4.4
4.8
5.1
4.2
4.6
5.2
7.9
0.2
1.1
0.5
4.2
3.6
5.1
3.5
4.3
3.4
Prices, Money and Banking (YoY%)

3.2
CPI (eop)
2.1
CPI (ann avg)
7.3
Broad money (eop)
9.7
Private credit (eop)
2.7
3.1
7.0
9.0
2.4
2.0
3.8
6.7
2.2
2.6
8.0
8.0
Real GDP (YoY%)

Private consumption
Exports
Imports

Central government surplus
Government revenue
Primary balance
-3.8
20.9
24.7
-1.7
-3.4
19.9
23.3
-1.3
-3.2
19.0
22.2
-1.2
-3.0
18.6
21.5
-1.0

Goods exports
Goods imports
Trade balance
% of GDP
% of GDP
FDI (net)
FX reserves (eop)
MYR/USD (eop)
202.5
171.8
30.7
9.5
11.3
3.5
-2.0
134.9
3.3
207.8
173.2
34.7
10.2
14.5
4.3
-5.6
115.9
3.5
175.2
148.7
26.5
9.0
6.4
2.2
-1.3
113.4
4.2
172.5
147.7
24.8
8.7
6.0
2.1
-1.1
105.8
4.3

Government debt1
Domestic
External
Total external debt
in USD bn
68.4
66.7
1.6
68.4
212.3
48.6
68.2
66.7
1.5
63.2
213.9
32.5
68.1
66.5
1.6
72.3
213.1
37.1
65.5
65.5
1.6
74.7
213.5
38.4
3.4
3.1
5.1
3.0
2.9
3.1
0.7
3.0
Current
3.25
3.70
4.12
4.40
15Q4
3.25
3.73
4.15
4.16
16Q1
3.25
3.73
4.30
4.11
16Q3
3.25
3.73
4.40
4.31
General (ann. avg)

Unemployment (%)
Financial Markets (%, eop)
Overnight call rate
10-year yield
MYR/USD
(1) Includes government guarantees

Page 83
8 October 2015
Philippines
Baa3(Pos)/BBB-/BBBMoodys/S&P/Fitch
Economic outlook: A favourable base in

government spending, along with some modest
pick-up, will drive the move higher in Q3 growth
despite the drag from weak exports, in our view.
Main risks: Remittances slowed in July (0.5%yoy)

while government spending fell on a month-onmonth basis for two consecutive months (-11% in
July and -23% in August), leading us to question
the durability of our 6.0% growth forecast.
Trip notes: Steady as she goes

Our conversations with business groups and
government authorities in Metro Manila last week
mostly centered around the durability of economic
growth amid a forthcoming change in leadership and
the ability of the government to mobilize spending.
view). The proposed budget for 2016 is also 15%

higher than this year, suggesting sustained momentum
in spending through next year.
Meanwhile, although long-delayed and with 24 more
projects in the current administrations pipeline, the
PPP (public-private partnership) scheme is gradually
gaining traction. Ten projects have already been
awarded to bidders, of which five are currently under
construction, while 17 more are currently at the
bidding stage. From the PPP scheme alone, the
economy should absorb at least PHP543bn or 4%-ofGDP worth of capex in the next 2-3 years, supporting
annual growth of at least 7% in the early years of the
next administration. Moreover, the robust growth in
consumer spending has more room to grow given the
countrys low household leverage (7% of GDP).
Ongoing and pending infrastructure projects
Govt spending tends to accelerate towards elections
Infrastructure works (PHP bn)
Cost estimate
PPP projects
Real government expenditures (%yoy)
598.7
Awarded
35.0
187
Ongoing construction
30.0
55.4
Pending construction
25.0
131.6
Bidding stage
20.0
411.71
Other awarded government project (non-PPP)
15.0
Ongoing construction
10.0
Pending construction
5.0
Total
0.0
95.9
26.6
69.3
694.6 (5.2% of GDP*)
*DBs forecast for nominal GDP in 2015.

Source: PPP Center and Deutsche Bank
-5.0
-10.0
q-3
q-2
q-1
q+1
q+2
q+3
Note: Presidential election periods (Q2 of 1992, 1998, 2004, 2010). Bands are 1 std deviation.
Source: CEIC and Deutsche Bank
There are currently three candidates for the presidential

race in May 2016, but regardless of who wins as they
are more or less advancing the same economic agenda
of attracting investments, increasing employment, and
reducing poverty it is a widely held view that the
economy should continue to grow at a robust pace at
least in the next 2-3 years. This is because, despite the
bottlenecks in the execution of the annual budget (lack
of absorptive capacity among government offices, legal
issues facing some public projects, tight enforcement,
to name some) and given the common observation that
elections in the Philippines usually involve increased
spending among incumbents at the local government
units to gain greater visibility among the electorate,
actual government spending has improved recently,
posting double-digit growth from June through August
to average 19%yoy (albeit inflated by a low base, in our
Page 84
Amid Metro Manilas heavy traffic congestion, our

discussions moved towards the lack of infrastructure
services in the country and measures to promote
investment in general. Business groups we met with
have been advocating economic reforms such as
intensifying the anti-corruption campaign, improving
bureaucracy, reducing individual and corporate tax
rates, accelerating infrastructure spending, boosting
power-generation capacity, relaxing investmentrestrictive provisions in the constitution, and
institutionalizing PPP standards and procedures by
amending the Build-Operate-Transfer (BOT) Law. The
tax reform and amendment to the BOT Law are
currently under review in the legislature but business
groups recognize the uncertainty associated with
passage of these bills. Passing the amended BOT Law
is crucial to ensure continuity of the PPP scheme
beyond the current administration.
To be fair, the current administration has already made
progress in fighting corruption (installing a new
Ombudsman and Chief Justice of reputable standing,
8 October 2015
filing charges against high-ranking officials), increasing

transparency in government operations (procurement
activities/project status available online), shoring up the
share of infrastructure spending to GDP, promoting
competition (recently enacting the anti-trust law, and
amending the Cabotage law that could lower domestic
shipping costs), and increasing revenue collection
(passing the sin tax bill, improving efficiency of tax
collection). Committed power plant projects are also
likely to be completed within end-2015 through 2017,
which could help eliminate power outages around the
country. And yet, there is more to be done to address
bottlenecks. The 40% cap on foreign equity, for
instance, is seen as hindering the Philippines from
participating
in
the
Trans-Pacific
Partnership
Agreement and could limit domestic absorption of the
robust line-up of PPP projects. However, amending the
Constitution for this 40% limit on foreign participation
is a sensitive issue as it would open the possibility of
extending the term limit of the President.
Despite the shortcomings of the current administration
and the political uncertainty ahead, favorable domestic
conditions are widely seen to be in place for the next
administration to hit the ground running and sustain
the economys growth momentum. Aside from the
potential boost from investments, tourism offers
significant upside potential given the low base. The
countrys ~450,000 monthly tourist arrivals pale in
comparison with Thailands at least 2.2 million or
Vietnams about 630,000 monthly records. Tourism
revenues amount to less than 2% of GDP.
In the near term, the country faces downside risks from
Chinas slowdown and the impact of this on the rest of
Asia. The Philippines derives 13% of its export earnings
from China and 20% from ASEAN. Weak export returns
from Asia may be partially offset by rising demand
from the US, where exports account for 14% of total.
But lower agricultural and fishery output due to
strengthening El Nio conditions could also be drag on
exports. Unless government spending materially
improves, this weak exports growth stands to pare our
growth outlook. But we do not think this downside is
significant enough to push for changes in our rates call.
Despite the decline in headline inflation, the BSP is
unlikely to cut rates in the coming months, in our view,
with a likely uptrend in food inflation and the recent
move higher in crude oil prices. As for the currency, the
recent rally in Asian FX may prove temporary and
currencies could again succumb to depreciation
pressures amid concerns about the timing of Fed lift-off.
We think the BSP would intervene but only to contain
fluctuations in the PHP/USD relative to the rest of
ASEAN FX.
Philippines: Deutsche Bank Forecasts

2013
2014
2015F
2016F
271.9
97.5
2,769
284.8
99.9
2,851
302.5
101.6
2,977
315.4
103.3
3,052
7.1
5.6
5.0
12.2
-1.0
4.4
6.1
5.4
1.7
6.8
11.3
8.7
6.0
6.2
11.1
9.0
4.5
8.5
6.5
5.4
11.6
9.2
7.9
6.2

CPI (eop)
4.1
CPI (ann avg)
2.9
Broad money (M3, eop)
31.8
Private credit (eop)
16.5
2.7
4.2
11.2
19.9
1.5
1.5
12.4
12.4
3.5
3.0
12.2
13.2
Fiscal Accounts (% of GDP)1

Fiscal balance
Government revenue
Primary surplus
-1.4
14.9
16.3
1.4
-0.6
15.1
15.7
2.0
-2.2
15.3
17.5
0.6
-2.4
15.2
17.6
0.3

Goods exports
Goods imports
Trade balance
% of GDP
% of GDP
FDI (net)
FX reserves (eop)
PHP/USD (eop)
44.5
62.2
-17.7
-6.5
11.4
4.2
0.1
83.2
44.4
47.8
63.6
-15.9
-5.6
12.7
4.4
-0.8
79.5
44.6
46.1
64.9
-18.8
-6.2
11.5
3.8
-0.4
81.6
46.5
52.3
74.7
-22.4
-7.1
11.0
3.5
-0.5
87.4
45.8

General government debt2
Domestic
External
External debt
in USD bn
53.3
33.5
19.8
28.9
78.5
21.5
49.7
31.5
18.1
27.3
77.7
20.9
51.2
33.4
17.9
26.0
78.6
21.0
51.7
34.9
16.8
25.1
79.2
20.9
General (ann. Avg)

13.9
7.4
8.3
5.6
7.1
6.8
6.5
6.5
Current
6.00
4.00
1.49
3.78
46.8
15Q4F
6.00
4.00
1.76
3.75
46.5
16Q1F
6.00
4.00
2.06
3.90
47.3
16Q3F
6.50
4.50
2.66
4.00
46.4
National Income
Population (mn)
Real GDP (YoY%)
Private consumption
Exports
Imports
Unemployment (%)
Policy rate (BSP o/n repo)
Policy rate (BSP o/n rev repo)
3-month T-bill rate
10-year yield (%)
PHP/USD
(1) Refers to general government. (2) Includes guarantees on SOE debt.

Source: CEIC, Deutsche Bank Forecasts, National Sources
Diana del Rosario, Singapore, +65 6423 5261
Page 85
8 October 2015
Singapore
Aaa/AAA/AAA
Moodys/S&P/Fitch
Economic outlook: Growth has been softening due

to weakening of external demand and ongoing
commodity market correction. Global financial
market stress has affected local intermediation and
fund raising.
Main risks: Growth risks are tilted to the downside
as there are no signs of exports to recover in the
near term. Without policy support, the property
market would remain under stress, hurting
household balance-sheets and putting banks at risk.
A potential window of respite

Singapores currency and rates markets have seen
plenty of pressure in recent months, but with US Fed
liftoff expectations being pushed into 2016, perhaps
the time has come for some respite. Indeed, the closely
followed 3-month SIBOR, having risen by 30bps
between late-July and mid-September, has been stable
over the past few weeks. This will be a welcome relief
for Singapores households with large mortgages and
corporate with substantial debt exposure. We have
repeatedly argued in recent months that given
Singaporean households (75% of GDP) and firms
(81% of GDP) high debt burden, the rise in interest
rates would be a key risk going forward. For precisely
this reason, we believe that the authorities could
exercise caution in letting the Singapore dollar weaken
substantially, even if inflation pressure is negligible.
Regardless of the respite that may come by way of
financial markets, the overall economy is on a very
slow growth path, which may well be the best
Singapore can manage with the turbulence taking
place in the global economy and markets. Excluding
autos, real retail sales have been on a downtrend this
year. Manufacturing is decidedly weak, down 7%yoy
through August (down 8.1%yoy, excluding biomedical
output), with output from electronics, precision
engineering, and transportation related engineering
particularly weak. Until there is a major turnaround in
regional demand and easing of sentiments affected by
global uncertainty, production will remain under
pressure, in our view.
Exports losing steam again

%yoy, 3mma
NODX
Imports
40
30
20
10
0
-10
-20
-30
2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: CEIC, Deutsche Bank. NODX is non-oil domestic exports.
Exports were showing signs of a recovery early this

year but have been losing steam lately. Other than the
notable exception of the US (+8.8%yoy), non-oil
domestic exports to most major trading destinations
(Taiwan: -22.4%yoy, S Korea: -28.6%, EU: -9%, China: 8.2%, Japan: -8.1%, Indonesia: -7.1%, Malaysia: -4.7%)
contracted in August. While the weakness vis--vis the
Euro-zone is not surprising, the depth of the weakness
of demand in Asia is striking, posing significant
downside risk to the regions outlook in general and
Singapores in particular. We are still looking at 2.5%
growth this year and 3% next, based on expectations
of a global demand recovery. Short of that, growth may
well be 1.5% or even lower, in our view.
With the exception of the US, NODX growth rates to
key trading partners have begun weakening again
%yoy, 3mma
Japan
China
EU
S Korea
US
40%
30%
20%
10%
0%
Trade, Singapores mainstay is following the regional

trend, with total trade down 9%yoy in August. Indeed,
with an exception of one month, total trade has been
contracting since the middle of 2014. Some of the
weakness in the trade figures is related to the collapse
of commodity prices, but even after controlling for oilrelated data, the trade picture is rather poor.
Page 86
-10%
-20%
-30%
-40%
2011
2012
2013
2014
2015
8 October 2015
Reflecting the weakness of demand, price pressure has

all but evaporated. CPI inflation is now running at
minus 0.8%yoy, and even if base effect pushes up the
yoy figure up shortly, we cant see it moving into
positive territory this year. The data show that
transportation, fuel, energy, and food prices are
continuing to correct. Taking out food and fuel, core
inflation is barely different from zero (0.2%yoy through
August). A key contributor to past inflation was
accommodation, which has been falling this year due
to soft demand and ample supply (see chart below).
One risk to food inflation worldwide is El Nino related
weather disruptions, but substantial impact on food
prices is unlikely in our view, as weak demand will
likely moderate pass-through.
Housing and transport inflation rates have eased
considerably in recent years
sa, %yoy
Housing
Transport
20%
15%
Singapore: Deutsche Bank Forecasts

2013
National Income
Population (mn)
2014
2015F 2016F
302.3 307.9 286.7 307.2

5.4
5.5
5.6
5.7
55,794 55,984 51,192 53,898
4.4
3.6
11.5
1.1
4.5
3.8
2.9
2.5
0.1
-1.9
2.1
1.4
2.5
3.9
2.4
0.8
2.3
0.7
3.0
3.5
1.5
1.0
3.9
3.8
1.5
2.4
7.9
13.6
-0.1
1.0
2.5
11.3
0.0
-0.4
3.5
9.0
1.7
1.2
4.0
10.0

Fiscal balance
Government revenue
7.1
21.9
14.8
6.9
22.1
15.2
6.8
22.3
15.5
6.6
22.3
15.7

Merchandise exports
Merchandise imports
Trade balance
% of GDP
% of GDP
FDI (net)
FX rate (eop) SGD/USD
437.6
369.8
67.8
22.9
54.5
18.4
36.9
273.1
1.27
450.7
373.5
77.2
25.8
56.4
18.9
20.0
316.5
1.32
468.7
384.7
84.0
27.9
59.0
19.6
25.0
350.4
1.45
482.8
396.2
86.5
27.0
58.4
18.2
30.0
384.4
1.35
110.9
109.9
1.0
410
1208
68.8
118.4
117.4
1.0
407
1214
69.0
121.8
120.8
1.0
392
1220
70.0
123.9
122.9
1.0
383
1226
69.5
2.4
2.8
0.7
2.6
3.0
2.5
4.0
2.5
Current
1.14
2.34
1.43
15Q4
1.15
2.40
1.45
16Q1
1.20
2.60
1.42
16Q3
1.40
2.90
1.36
Real GDP (YoY%)

Private consumption
Exports
Imports
CPI (YoY%) eop
CPI (YoY%) ann avg
Broad money (M2)
Bank credit (YoY%)
10%
5%
0%
-5%
-10%
2011
2012
2013
2014
2015
Going into the fourth quarter of the year, Singapores

policy makers have to choose between letting
international economic and financial shocks pass
through to the economy entirely or offer some offset
through supporting measures. Letting the currency
weaken has been the standard policy prescription in
the past when growth risks rose and inflations risks
abated, but financial stability considerations will play a
complicating role this time as a downward move of
NEER tends to go hand in hand with an upward move
of interest rates, and the latter is not welcome given
the debt overhang in the economy.
Perhaps the authorities can relax some macroprudential measures imposed previously to stem
property market froth, ease labor market restrictions, or
reinforce productivity enhancing measures. Such steps
may provide some cushioning, although given its open
nature, it would be next to impossible to insulate this
island from the haze of global markets.

Government debt
Domestic
External
Total external debt
in USD bn
General
Unemployment (%) (eop)
Financial Markets
10-year yield (%)
SGD/USD

Note: includes external liabilities of ACU banks.
Page 87
8 October 2015
South Korea
Aa3/A+/AA\Moodys/S&P/Fitch
Economic outlook: While the economy continues

its recovery from MERS, the authorities are
pursuing reform amid limited conventional stimulus.
Main risks: The worsening EM outlook poses

downside risks to Koreas growth and rates.
Aiming the third arrow

Sustained recovery from MERS. Both production and
demand data continued to improve as MERS effects
dropped out of the data. Overall production rose
0.5%mom sa in August, led by a 3.9% rise in
construction, followed by 0.5% and 0.4% rises in
services and manufacturing production, respectively.
Demand also pointed to sustained strong recovery
from MERS. Retail sales rose 1.9%mom sa and the
number of tourists surged 69.8%mom nsa in August,
followed by another 12.1% rise in September. Better
yet, data for the three weeks before the Chuseok
holiday reported an even stronger rebound in demand.
Department and discount sales rose 10.9% and
6.7%yoy, respectively, only to be outpaced by 14.2%
and 13.8% rises in online shopping and outlet sales,
respectively. Meanwhile, auto sales surged, rising
15.7%yoy in September, leaving the Q3 average at
11.9% vs. a 4.7% rise in Q2. Meanwhile, the pace of
contraction in exports slowed, to 8.4%yoy in
September, from 14.9% in August, albeit the quarterly
average stood at -9.4% in Q3 vs. -7.2% in Q2. Despite
this, however, investment growth held up, rising 12.1%
in July/August vs. 5.2% growth in Q2.
Sustained recovery from MERS
Visitors
Index
250
230
210
190
170
150
130
110
90
70
50
2012
Retail sales (rhs)
115
110
105
With the Korean authorities reiterating their view that

the economy remains on the path of recovery, we
maintain our view that the Bank of Korea (BoK) will
keep its policy rates unchanged next week. However,
if Koreas recovery is either stumped by sharply weaker
China growth and/or overvaluation of the won, we see
rate cuts to be placed back on the table, despite the
BoKs preference for alternative means to support
SMEs, as the government exerts its efforts in reform.
Labour market reform gains strong traction. The
governments three-year plan (announced last year)
first aimed at reforming the public sector. Indeed, it
brought about positive results Koreas sovereign debt
rating was revised up by credit rating agencies, despite
ongoing concerns about the private sector amid weak
growth. Although politics and other emergencies (like
MERS and North Korea) have sidetracked its attention
for the better part of the year, the government has
refocused its attention to pursue its broader economic
reform agenda its most aggressive plan since the
1997/98 IMF crisis including labour market reform8.
The IMF saw improvement in the labour markets
flexibility boosting Koreas growth by 1.2ppts over 10
years9.
The fact of the matter is that Korea ranked 26th out of
144 economies in the WEF Global Competitiveness
Index, behind peers in Asia like Singapore (2), Japan (6),
Hong Kong (7) and Taiwan (14). According to the WEF
Global Competitiveness Report, restrictive labour
regulations were among the top five most problematic
factors for doing business. At the same time, the high
level of protection for regular workers has resulted in a
labour market dualism in Korea.
While Korea has an impressively low unemployment
rate of 3.6% as of 2014, vs. the OECD average of 7.3%,
this masks the fact that Korea has a relatively large
share of non-regular and self-employed workers, of
53%. Koreas self employed workers make up 27% of
total employment, vs. the OECD average of 16%,
whose wage gap with regular workers stood at 73% in
2014. Meanwhile, the non-regular (temporary and
daily) worker share of employed workers (excluding the
self-employed) stood high at 35% in 2014, much higher
than the OECD average of 20%.
100
2013
2014
2015
Sources: CEIC, Deutsche Bank
Juliana Lee, South Koreas Big Bang challenged by political paralysis, 14

May 2015, Deutsche Bank.
9
Jain-Chandra, Sonali and Longmei Zhang, How can Korea boost

potential output to ensure continued income convergence, IMF,
WP/14/54, April 3, 2014.
Page 88
8 October 2015
Koreas reliance on self-employment

% of total employment
40
35
30
25
20
15
10
0
US
Norway
Canada
Denm
Austr
Switz
Sweden
Germ
Japan
Iceland
Finland
UK
Ireland
Spain
Portu
Poland
Italy
Korea
Mexico
Turkey
Greece
Sources: OECD, Deutsche Bank
The good news is that, late last month, the Tripartite

Commission, composed of the government (MoSF),
Korea Employers Federation (KEF) and labour (the
Federation of Korean Trade Unions, FKTU) reached a
historic agreement to ease labour market regulations,
allowing companies to fire underperforming workers
and change the rules of employment. With this
agreement, the government seeks to foster a rise in
regular employment, which would in turn foster better
training and thereby higher productivity. At the
moment, employers have to get workers consent to
change any rules of employment, including adoption of
the peak wage system. The latter would allow
employers to avoid the problem of seniority-based
wages and instead reduce older (55-60 years)
employees salary according to their deterioration in
productivity. Such a peak wage system may not only
reduce forced early retirement on older workers, who
often turn to non-regular work, but also generate jobs
for the young by using saved costs. Koreas youth
employment rate stood at 26.3% in 2013, vs. the
OECDs average of 39.7.10 Demonstrating its focus on
improving youth employment, the government created
a youth employment fund to help create jobs for young
people last month. The government has also targeted
educational policies and retraining programs to bridge
the youth skills gap.
Although the Korean Confederation of Trade Unions
(KCTU), Koreas second large umbrella union, staged a
massive rally to protest against the tripartite agreement,
the FKTUs support has broadened the political support
for the tripartite agreement to ease labour market
regulations.
Juliana Lee, Hong Kong, +852 2203 8312
South Korea: Deutsche Bank forecasts

2013
2014
2015F
2016F
1305
50.2
25980
1411
50.4
27981
1356
50.6
26786
1314
50.8
25863
Real GDP (yoy %)

Private consumption
Exports
Imports
2.9
1.9
3.3
3.3
4.3
1.7
3.3
1.8
2.8
3.1
2.8
2.1
2.4
1.6
3.3
3.7
0.6
2.3
2.9
2.3
3.0
3.3
3.0
2.9
Prices, money and banking

CPI (yoy %) eop
CPI (yoy %) ann avg
Broad money (Lf)
Bank credit (yoy %)
1.1
1.3
7.4
4.1
0.8
1.3
7.7
6.3
1.1
0.7
9.0
8.0
1.9
1.6
8.0
7.5
Fiscal accounts (% of GDP)

Government revenue
Primary surplus
1.0
22.0
21.0
1.9
0.6
21.6
21.0
1.6
-0.3
21.7
22.0
0.9
-0.1
21.7
21.8
1.1
External accounts (USDbn)

Merchandise exports
Merchandise imports
Trade balance
% of GDP
% of GDP
FDI (net)
FX reserves (USDbn) 1
FX rate (eop) KRW/USD
617.1
536.6
80.6
6.2
79.9
6.1
-15.6
346.5
1056
621.3
528.6
92.7
6.6
89.1
6.3
-20.7
363.6
1099
545.3
433.0
112.3
8.3
101.7
7.5
-20.0
363.5
1185
556.2
445.5
110.8
8.4
91.2
6.9
-18.0
361.8
1250
Debt indicators (% of GDP)

Government debt2
Domestic
External
Total external debt
in USDbn
34.8
34.3
0.5
32.5
423.5
26.4
35.8
35.4
0.5
30.2
425.4
27.1
38.9
38.6
0.3
29.5
400.0
27.5
40.8
40.7
0.1
28.9
380.0
26.3
0.2
3.1
0.0
3.6
0.0
3.9
1.5
3.9
Current
15Q4
16Q1
16Q3
1.50
1.60
2.04
1166
1.50
1.60
2.00
1185
1.50
1.65
2.30
1210
1.50
1.70
2.60
1240
National income
Nominal GDP (USDbn)
Population (m)
General
Industrial production (yoy %)
Unemployment (%)
Financial markets
BoK base rate
91-day CD
10-year yield (%)
KRW/USD
10
MaiMai Dao, Davide Furceri, Jisoo Hwang, Meeyeon Kim, and TaeJeong Kim, Strategies for Reforming Koreas Labor Market to Foster
Growth, IMF, 2014, WP/14/137
Source: CEIC, Deutsche Bank estimates, Global Markets Research, National Sources
Note: (1) FX swap funds unaccounted for (2) Includes government guarantees
Page 89
8 October 2015
Sri Lanka
B1(stable)/B+/BBMoodys/S&P/Fitch
Economic outlook: Real GDP grew by 6.7%yoy in

2Q, resulting in a 1H2015 average growth of 5.6%
(vs. 1.3% in 1H2014); we expect real GDP growth
to average 5.5% in 2015 and rising thereafter to
6.0% in 2016, which will still be below potential.
Main risks: Getting growth back on track is critical,
failing which it will be extremely difficult to achieve
the much needed fiscal consolidation, which is
imperative for reducing Sri Lankas vulnerability
from external shocks.
Time to focus on growth-critical reforms

In early September, the Central Bank of Sri Lanka
announced its decision to let the exchange rate float
freely, which resulted in the rupee depreciating against
the USD by 5% last month. Thus far in 2015, the Sri
Lankan rupee has depreciated by 7.6% against the
USD, which is broadly in line with the trend seen in
Asian FX. The CBSL governor has stated that the
rupees competitiveness has improved post last
months move, but we think there is scope for the
rupee to depreciate further in the next 12 months,
especially in the backdrop of a strong Dollar cycle.
Consequently, we are revising our LKR/USD forecast to
142 and 145 for end-Dec 2015 and 2016 respectively.
FX performance versus USD
FX performance vs. USD (1 Jan - 30 Sep 2015)
% -25
-20
-15
-10
-5
CNY
HKD
PHP
THB
TWD
IDR
MYR
SGD
KRW
INR
LKR
Source: Bloomberg Finance LP, Deutsche Bank
Exports have declined across Asian countries in 2015,

but Sri Lanka has fared relatively better in Jan-July
ytd. %yoy
-2%
-6%
-10%
-14%
-18%
CPI and core CPI inflation. Sri Lankas CPI inflation was
negative, yet once again in September (-0.3%yoy), with
the 12-month moving average nudging lower to a
record low of 0.7% (from 1.0% in August). The lower
than anticipated CPI print (consensus expectation was
+0.1%yoy) was due to a 0.6%mom decline in food
prices, and lower increase in non-food prices. We think
that CPI inflation has bottomed and from October
onward should be nudging higher to end the year at
around 2.6%yoy. On an annual average basis, CPI
inflation should be 0.9% in 2015 and about 4.0% in
2016. Core inflation, which is hovering around 4.0%
currently, is also expected to nudge higher to 4.5-5.0%
in the months ahead, along with improvement in
domestic demand, as per our forecast.
CPI and core CPI inflation
% yoy
12
CPI
Core CPI
10
8
6
4
While a weaker rupee will help on the margin, it is

unlikely to result in a strong exports recovery, unless
global demand improves. This is not only true for Sri
Lanka but the same argument can be made for
countries across Asia, which have seen dismal exports
performance in 2015, despite a weakening of their
currencies. However, we note that Sri Lankas exports
performance (-0.9% between Jan-July) has been
relatively better than other EM peers so far this year.
Page 90
2
0
-2
2009
2010
2011
2012
2013
2014
2015
8 October 2015
Money supply and credit growth. Sri Lankas monetary

policy stance will be influenced more by credit and
broad money supply (M2b) growth rather than the
inflation trajectory, in our view. Private sector credit
growth has already touched 21%yoy by July and M2b
growth is above 16%yoy, as per recent data. While the
CBSL has already imposed a maximum LTV ratio of
70% in respect of loans and advances granted for
motor vehicles (which is primarily responsible for the
surge in credit growth), more tightening may be needed,
if credit growth momentum does not subside in the
coming months. Given the credit growth and inflation
dynamic, we think the CBSL will look to hike the policy
rate by 50bps in March/April of next year.
Sri Lanka: Deutsche Bank Forecasts

2013
2014
2015F
2016F
National Income
Population (mn)
74.3
20.5
3627
78.8
20.6
3815
81.6
20.8
3920
84.2
21.0
4013
Real GDP (YoY %)

Total consumption
Total investment
Private
Government
Exports
Imports
3.4
3.2
9.1
8.6
11.0
5.9
-0.3
4.5
7.6
2.2
3.4
-2.2
4.9
9.5
5.5
7.5
2.2
3.2
-1.5
5.0
3.9
6.0
7.5
1.4
2.0
-1.0
7.0
5.3

CPI (YoY%) eop
CPI (YoY%) avg
Broad money (M2b) eop
4.7
6.9
16.7
7.5
2.1
3.3
13.4
8.8
2.6
0.9
15.8
19.5
4.0
4.2
16.0
18.0

Central government balance
Government revenue
Primary balance
-5.4
12.0
17.4
-0.8
-5.7
11.7
17.4
-1.5
-6.0
11.5
17.5
-1.8
-5.5
11.7
17.2
-1.5

Merchandise exports
Merchandise imports
Trade balance
% of GDP
% of GDP
FDI (net)
FX rate (eop) LKR/USD
10.4
18.0
-7.6
-10.3
-2.5
-3.4
0.9
7.2
130.8
11.1
19.4
-8.3
-10.5
-2.0
-2.6
0.9
8.2
131.3
11.9
20.4
-8.5
-10.4
-1.3
-1.6
1.0
8.0
142.0
12.9
21.8
-9.0
-9.6
-1.2
-1.4
1.0
9.0
145.0

Government debt
Domestic
External
Total external debt
in USD bn
70.8
40.0
30.9
53.9
39.9
13.4
71.8
41.6
30.2
54.6
43.0
12.7
71.1
41.3
29.9
57.0
47.3
12.5
70.0
39.2
30.8
55.8
52.0
12.2
9.9
4.4
11.4
4.3
7.6
4.5
7.0
4.5
Current
7.50
15Q4
7.50
16Q1
7.50
16Q3
8.00
141.3
142.0
143.0
144.7
CPI inflation remains low; but credit growth has surged

Credit growth, lhs
CPI, rhs
% yoy, 3mma
40
% yoy
10
8
30
20
4
10
-10
2009
-2
2010
2011
2012
2013
2014
2015
Growth and fiscal consolidation. Growth seems to have

bottomed, with real GDP growing by 6.7%yoy in 2Q,
resulting in a 1H2015 average growth of 5.6% (vs.
1.3% in 1H2014). We expect real GDP growth to
average 5.5% in 2015 and rising thereafter to 6.0% in
2016, which will still be below potential. Getting
growth back on track is critical, failing which it will be
extremely difficult to achieve the much needed fiscal
consolidation, which is imperative for reducing Sri
Lankas vulnerability from external shocks. In 2015, Sri
Lankas fiscal deficit is likely to rise to 6.0% of GDP
(from 5.7% and 5.4% in the previous two years) and it
is essential that next year the deficit is brought down to
at least 5.5% of GDP, through prudent tax reforms and
expenditure management.
With election uncertainty gone, it is time for the Sri
Lankan authorities to focus back on growth-critical
reforms without any further delay. The global
environment has become extremely uncertain and
unsupportive and unless Sri Lanka manages to
differentiate itself through the right policy choices and
reforms, its aspiration to push the economy in a higher
growth trajectory of 7-8% on a sustained basis may
remain unfulfilled.
General
Industrial production (YoY %)
Unemployment (%)
Financial Markets
Reverse Repo rate
LKR/USD
Kaushik Das, Mumbai, +91 22 7180 4909

Page 91
8 October 2015
Taiwan
Aa3/AA-/A+
Moodys/S&P/Fitch
Economic outlook: Weak growth points to further

stimulus measures ahead.
Main risks: China remains the key risk to Taiwan

growth and the TWD.
Policy support
asset prices, we see another 12.5bps rate cut by the

CBC in Q4, guiding USD/TWD slightly higher to 33. We
see the latter heading higher still to 35 in 2016, amid
rising USD/CNY and rate hikes by the Fed.
Weak exports and TWD
Further stimulus measures ahead, to support growth

As we expected, disappointing economic data
prompted the Central Bank of China (CBC) to deliver its
first rate cut since 2009 at the end of September. More
importantly, during the press conference, the CBC
governor noted that the CBC does not have to follow
the Fed, dismissing concerns about capital outflows.
Indeed, Taiwan has less to fear than most of its EM
peers, given negligible foreign ownership of its local
bonds and its strong external balance, as a net creditor
to the world.
Exports
%yoy
USD/TWD (rhs)
60
25
40
20
30
0
-20
35
-40
-60
1995
40
2000
2005
2010
2015
Weakening growth momentum

% 3m/3m saar
30
Leading Composite Index

Coincident Composite Index
20
10
The CBC governor saw rate cuts as an important

means to support domestic demand as they would
lower real rates, which he believed to be standing at
relatively high levels. Indeed, negative inflation left
real rates sharply higher, before the September rate cut.
Room to cut, as real rates remain relatively high
%
-10
2010
2011
2012
2013
2014
2015
Policy rate - CPI inflation
Sept
rate cut
3
Indeed, data have disappointed this quarter.

Commerce sales fell further in July/August, by 3.7%yoy,
vs. the 3.1% fall reported in Q2, while exports fell
13.8% in Q3, vs. the 9.8% fall in Q2 as weak as
during the Asian financial crisis in 1998. Worse still,
this cannot be attributed only to USD strength. By
volume, exports fell 9.1% in July/August, vs. the 5.1%
fall in Q2, also marking their lowest quarterly growth
since Q2 2009 when the policy rate stood at 1.25%. In
fact, the CBC suggested that Q3 GDP growth may be
even lower than the 0.5%yoy growth reported in Q2. If
confirmed, it would at take at least 0.2ppts off our
growth forecast of 1.5% for this year.
The CBC governor went further, noting that Taiwans
monetary policy would be determined by local
conditions, leaving the door open for further rate cuts.
Amid sustained weakness in economic data and falling
Page 92
2
1
0
-1
-2
-3
2013
2014
2015
Although the CPI rose relatively sharply in September,

by 0.7%mom, we see this reversing as bad weather
and holiday effects drop out of the data. Moreover, we
see any rise in inflation to be limited to 0.9% next year,
leaving ample room for further rate cuts, amid a
negative output gap and low commodity prices. As far
as the impact of oil prices is concerned, in its latest
8 October 2015
report, the CBC noted that a 10% decline in oil prices

resulting in a 0.2-0.3% fall in Taiwans CPI inflation.
and reduce pressure on Taiwans financial health.
Given the relatively high debt servicing burden, which
was at 44% at end-2014 vs. Koreas 37.7%, the rate cut
by the CBC would indeed help Taiwanese households.
To further support domestic demand, the CBC may not
only lower its policy rates further but also reverse some
of its macro prudential measures on real estate loans.
For its part, the government is considering tax
(corporate exemption) incentives to boost investment
in Taiwan.
Weaker loan growth, following eco slowdown
Coincident composite index
%yoy 3mma
Loans (rhs)
40
12
30
10
20
8
6
10
-10
-20
-2
-30
2001
-4
2003
2005
2007
2009
2011
2013
2015
Although sustained weak growth points to a moderate

rise in NPLs, we do not see local factors posing
systemic risks to Taiwans financial system. In fact, the
financial health of domestic borrowers remains
relatively sound. The NPL ratio of Taiwanese
households stood low at 0.2% in 2014 vs. Koreas 0.5%.
Although Taiwanese households debt-to-disposable
income and GDP stood at 1.32 and 83% in 2014,
respectively, not so far from Koreas 1.38 and 87%,
they held far more financial assets than liabilities when
compared to their Korean counterparts. Taiwanese
households asset-to-liabilities ratio stood at 5.5 in 2013,
vs. Koreas 2.2, with their financial asset share of total
assets at 58% vs. Koreas 25%. As far as the credit
quality of corporate loans is concerned, their NPL ratio
also stood also low at 0.4% in 2014, vs. Koreas 0.8%.
Meanwhile, not surprisingly, weak economic growth
has led to weaker growth in loans, which fell further to
2.9%yoy 3mma in August, from 2.8% in Q2. On the
other hand, we remain concerned about the asset
quality of RMB loans, as China slows further and
USD/CNY rises higher next year.
Taiwan: Deutsche Bank forecasts

2013
2014
2015E
2016E
513.0
23.4
21949
530.8
23.4
22666
520.4
23.4
22226
510.9
23.5
21748
Real GDP (yoy %)

Private consumption
Exports
Imports
2.2
2.4
-1.2
5.0
3.5
3.3
3.8
3.0
3.7
1.8
5.9
5.7
1.5
2.8
-0.9
1.1
1.2
1.6
2.6
2.5
0.7
1.5
3.2
2.2

CPI (yoy %) eop
CPI (yoy %) annual average
Broad money (M2)
Bank credit1 (yoy %)
0.3
0.8
4.3
2.7
0.6
1.2
5.8
4.3
0.3
-0.3
6.2
3.5
0.9
0.9
6.0
4.0

Budget surplus
Government revenue
Primary surplus
-1.4
16.1
17.5
-0.4
-0.8
15.6
16.4
0.2
-1.6
15.3
16.9
-0.5
-1.6
15.3
16.9
-0.5

Merchandise exports
Merchandise imports
Trade balance
% of GDP
% of GDP
FDI (net)
FX reserves (USDbn)
FX rate (eop) TWD/USD
303.2
267.8
35.5
6.9
55.3
10.8
-10.7
416.8
29.8
311.6
270.1
41.5
7.8
65.3
12.3
-9.8
419.0
31.7
285.4
233.6
51.7
9.9
76.7
14.7
-14.0
419.6
33.0
294.3
250.2
44.1
8.6
62.8
12.3
-14.0
417.2
35.0

Government debt2
Domestic
External
Total external debt
in USDbn
39.6
39.1
0.5
33.1
170.1
91.5
38.6
38.2
0.4
33.5
177.9
91.8
39.3
38.9
0.4
35.9
186.8
91.8
39.9
39.5
0.4
38.4
196.2
91.8
0.8
4.2
6.2
4.0
4.3
3.9
5.5
3.9
Current
1.75
0.73
1.18
32.7
15Q4
1.63
0.63
1.25
33.0
16Q1
1.63
0.63
1.45
34.0
16Q3
1.63
0.63
1.70
35.0
National income
Nominal GDP (USDbn)
Population (m)
General
Industrial production (yoy%)
Unemployment (%)
Financial markets
Discount rate
90-day CP
10-year yield (%)
TWD/USD
Source: CEIC, Deutsche Bank Global Markets Research, National Sources

Note: (1) Credit to private sector. (2) Including guarantees on SOE debt
Page 93
8 October 2015
Thailand
Baa1/BBB+/BBB+
Moodys/S&P/Fitch
Economic outlook: Weak trade, tourism, income,

consumption, and investment continue to
characterize the economy, with some effort by the
government to boost public spending continuing in
fits and starts.
Main risks: Key risk is the political situation, with

little progress made in the roadmap for elections
and constitutional reforms. The longer political
uncertainties linger, the investment malaise
becomes more entrenched.
The Thai economys doldrums continue. Latest data on

consumption offer the same bleak picture of the past
couple of years. Both farm and non-farm household
incomes have been stagnant in recent years, denting
consumer confidence. Banks have also become more
cautious with lending, which has further hurt
consumption momentum. As the chart below shows,
both overall spending and spending on durables remain
in negative territory.
Indicators of consumption remain weak
Private consumption index (sa), left
Durables consumption (sa), right
15
%yoy,
3mma
100
75
10
50
5
25
-5
-25
2011
2012
2013
2014
%yoy,
3mma
Rice
Rubber
200
150
100
50
Recovery remains elusive
%yoy,
3mma
Price of key export items have been declining for over

two years
2015
0
-50
2007 2008 2009 2010 2011 2012 2013 2014 2015
Beyond the weakness across products, Thailand has

also seen negative demand in many of its trading
partners. Indeed, exports growth to the EU and China
turned positive only very recently. As noted earlier, Thai
exports to Asean have been suffering, reflecting a
generalized weakening of regional demand. Some Thai
products, including cars and parts for new generation
mobile phones and tablets, are enjoying rising demand,
although we dont believe total Thai exports will see
major upside before the price and demand of rice and
rubber bottom. Contribution from net exports has been
fine lately as imports have kept contracting, but overall
trade developments are unambiguously negative
Exports growth to key trading partners has finally
turned positive
%yoy,
3mma
China
EU
US
40%
30%
Exports drag continues. Excluding gold, August

merchandise exports were down 9.5%yoy. Exports of
petroleum, chemical, and petro-chemical products
continue to weaken due to decline price (global factor)
and demand (China and Asean countries). Rubber, a
key export item, has also gone through sharp price and
demand decline lately. Weak rice prices have pushed
down agriculture exports substantially (which in turn
also hurts rural income). Electronics exports have been
on a long declining trend as some Thai manufacturers
continue to produce products (hard drives, for instance)
that consumers are demanding less and less.
Page 94
20%
10%
0%
-10%
-20%
2011
2012
2013
2014
2015
8 October 2015
One silver lining in the first half of the year was tourism,
which recovered markedly from the contraction of
2013-14. But lately even that trend has reversed,
reflecting adverse reaction to the August bombing
incident in Bangkok. Neighboring Malaysia has been
undergoing a sharp slide in its currency and political
turmoil, hurting tourist flows from there. The
authorities think tourism will recover in time for the
December/January holiday season, but even if that
were to transpire, tourism related revenues are likely to
fall short of expectations this year.
Tourism arrival may have peaked; hotel occupancy has
slipped somewhat
3mma
Tourist arrival. Yoy%
Hotel occupancy tate
60
50
40
30
20
10
0
-10
-20
-30
80
70
60
50
40
30
2010
2011
2012
2013
2014
2015
With hardly any sector contributing robustly to growth,

and deflation continuing, we are worried that economic
fragility will continue to rise. The authorities are trying
to ramp up infrastructure spending, but so far the
impact on the overall investment environment or
income has been negligible. Our growth forecasts for
both this and next year appear to be characterized by
rising downside risks, especially since Bank of Thailand
looks unwilling to ease policy further despite high real
interest rates and faltering growth.
Recently announced measures to revive investment
include developing 5 special economic zones, tax
benefits for FDI, and support for the digital and IT
industry. It is high time for Thailand to concede its
labor intensive industries to neighboring economies
and embrace higher value added manufacturing and
services. Promoting FDI may not help the short-term
outlook, but it will certainly improve the prospects of
enhancing the economys productivity and potential.
Thailand: Deutsche Bank Forecasts

2013
2014
399.1
64.8
6,161
399.8
65.1
6,141
371.2
65.4
5,673
365.6
65.8
5,560
Real GDP (yoy %)

Private consumption
Exports
Imports
2.8
0.8
4.7
-0.8
2.8
1.4
0.9
0.6
1.7
-2.6
0.0
-5.4
2.5
1.5
4.1
3.6
-0.8
1.0
3.0
3.0
6.5
4.5
3.0
3.4

CPI (yoy %) eop
CPI (yoy %) ann avg
Core CPI (yoy %) ann avg
Broad money
Bank credit1 (yoy %)
1.7
2.2
1.0
7.3
9.4
0.6
1.9
1.6
4.6
4.3
-0.3
-0.8
1.0
5.0
4.5
1.4
1.1
1.2
6.0
6.0
Fiscal Accounts2 (% of GDP)

Government revenue
Primary surplus
-2.0
19.0
21.0
-0.7
-1.9
18.5
20.4
-0.6
-2.0
18.0
20.0
-0.7
-2.8
19.2
22.0
-1.5
External Accounts (USDbn)

Merchandise exports
Merchandise imports
Trade balance
% of GDP
% of GDP
FDI (net)
FX reserves (USDbn)
FX rate (eop) THB/USD
225.4
218.7
6.7
1.7
-3.9
-1.0
14.4
167.3
32.9
224.8
200.2
24.6
6.1
13.4
3.4
12.8
157.1
32.9
225.9
198.2
27.7
7.2
14.0
3.7
12.0
165.0
36.0
232.7
208.1
24.6
6.2
10.0
2.5
14.0
175.0
37.5

Government debt2,3
Domestic
External
Total external debt
in USDbn
45.3
43.4
1.9
36.7
135.0
45.0
46.6
45.6
1.0
38.3
140.0
45.0
46.7
45.7
1.0
40.2
145.0
45.5
46.7
45.8
0.9
41.0
150
45.8
2.6
0.8
1.0
0.9
5.0
1.0
5.0
1.1
Current
1.50
1.64
2.72
36.2
15Q4
1.50
1.75
2.80
36.0
16Q1
1.50
1.85
3.00
36.6
16Q3
1.50
1.95
3.20
37.5
National Income
Nominal GDP (USDbn)
Population (m)
General
Unemployment (%)
Financial Markets
BoT o/n repo rate
3-month Bibor
10-year yield (%)
THB/USD (onshore)
2015F 2016F

Note: (1) Credit to the private sector & SOEs. (2) Consolidated central government accounts; fiscal
year ending September. (3) excludes unguaranteed SOE debt
Page 95
8 October 2015
Vietnam
B2/BB-/B+
Moodys/S&P/Fitch
Economic outlook. GDP growth accelerates to

6.5% in Q3, amid sustained recovery in domestic
demand.
Main risks. While weak EM growth poses down

risks to Vietnam growth and the dong in the near
term, the TPP poses strong long-term upside risks.
Strong growth amid turbulence

GDP growth accelerates in Q3... GDP rose 6.5%yoy ytd
in Q3, as we expected, vs. 6.3% in Q2. By sector,
construction led this acceleration, with its growth rising
relatively sharply to 9.0% in Q3, from 6.6% in Q2.
Services followed, with growth rising to 6.2% in Q3
from 5.9% in Q2, amid a limited rebound in tourism.
Accommodation and food services grew 3.8% in Q3,
up from 2.9% in Q2. Financial and transportation
services also reported meaningful improvements in
their growth, to 6.7% and 5.3% in Q3, respectively,
from 5.9% and 4.5% in Q2. Meanwhile, manufacturing
growth was stable and strong at 10.2% in Q3 vs. 10.0%
in Q2, as export growth moved sideways. In contrast,
agricultural growth slowed to 2.1% in Q3 from 2.4% in
Q2, due to bad weather conditions
Stronger growth momentum
%yoy
7.5
quarterly
annual
7.0
6.5
6.0
Govt
target
5.0
4.5
2011
2012
2013
2014
2015
as domestic demand strengthens As far as demand

data were concerned, state investment experienced a
relatively strong acceleration in growth, to 4.1% in Q3
from 2.6% in Q2, while FDI growth moderated to a still
robust 8.4%, vs. 9.6% in Q2. Meanwhile, although retail
sales growth moved sideways from Q2 to 9.8% in Q3,
in nominal terms, when discounted by CPI inflation, it
was significantly higher at 9.8% in Q3 vs. 8.9% in Q2.
Growth in domestic demand for imports, although
slowing to 15.9% in Q3 from 17.7% in Q2, outpaced
Page 96
Looking ahead, we continue to see GDP growth

accelerating to 6.8% in Q4, leaving this years growth
at 6.5%, with USD/VND remaining stable at around. To
support the dong, the State Bank of Vietnam (SBV) cut
deposit rates for USD (by 50bps), while the government
is considering measures to limit imports, including
import duty hikes on trucks and special vehicles. It has
also tightened its prudential regulations and
surveillance of FX activities, warning against
speculation. Further ahead, with the TPP posing as an
upside risk, we continue to expect a robust GDP
growth of 6.5% in 2016, with USD/VND rising to 23500
by end-2016. There are a few significant risks to our
outlook on the VND next year, including renewed
global financial market turbulence provoked by rate
hikes by the Fed and/or a rising USD/CNY.
TPP member share of Vietnams exports is high
% of total exports
45
40
35
30
25
20
15
10
5
0
TPP-12
2000
EU
2013
ASEAN
China/HK
5.5
4.0
2010
growth in exports. The latter rose 9.6% in Q3, vs. 9.4%

in Q2, depressed by low commodity prices.
while its long-term growth prospects improve, with

the TPP. Further ahead, the governments five-year
(2016-2020) socio-economic plan seeks stronger GDP
growth of 6.5-7%, vs. 5.8% (average) in 2011-2015,
with per capita income doubling to USD3350 from
USD1700 (average) in the past five years and the
investment share of GDP rising to 33% from 30%
during the same period. This may indeed be possible
with the help of the TPP. Not only would Vietnam
(especially its apparel and footwear manufacturers) be
the largest beneficiary of the agreement, but it would
also strengthen Vietnams resolve in economic policy
reform, with the country adopting global standards.
The latter is critical for Vietnam to realize its potential
gains from the TPP, which could be as high as 11-14%
by 2025. Please see our report Toward free trade across
the Pacific, published on 4 October 2013, and Vietnams
pragmatic Doi Moi, published on 13 September 2013,
for further details.
8 October 2015
The governments 2016-2020 target for fiscal deficit

stood <4% of GDP, vs. 5.5% of GDP over the past five
years, pointing to fiscal consolidation and greater
private sector (including foreign) participation in the
economy. In this regard, we expect more meaningful
progress in SOE equitization after the election next year,
pressed further by the TPP obligations.
The government has already begun its work in
improving Vietnams business environment for the
private sector. At the moment, Vietnam ranks 78th out
of 189 in the World Banks Ease of Doing Business
index (World Bank. Doing Business 2015: Going
Beyond Efficiency. Washington, DC), but the
government aims to raise Vietnams rank above the
average (30 by our calculation) of the top four ASEAN
economies (Singapore, Malaysia, Thailand and the
Philippines) in 2016. This means a sharp reduction in
the time needed for customs clearance, tax filing,
starting up businesses, bankruptcy procedures and
dispute settlements, among other things.
Looking to improve business environment
Vietnam
Thailand
Starting a Business
Resolving 200
Dealing with
Insolvency 150
Construction
100
Enforcing
Contracts
Getting Electricity
50
0
Trading Across
Borders
Registering
Property
Paying Taxes
Getting Credit
Protecting Minority
Investors
Sources: World Bank, Deutsche Bank
Although the target looks rather ambitious, even if only

half of this is achieved it would point to a significant
improvement in Vietnams growth potential as it would
require a reduction in regulations and corruption. To
facilitate foreign investment, the government made
related investment procedures simpler and more
transparent. For example, the finance ministry has
detailed the procedure for the extension of foreign
ownership in public companies and granted trading
registration online, eliminating the requirement for
consular authentication, etc.
Vietnam: Deutsche Bank forecasts

2013
2014
2015F
2016F
171.3
89.7
1905
186.2
90.7
2052
193.6
91.7
2112
206.9
92.6
2235
Real GDP (yoy %)

Private consumption
Exports
Imports
5.4
5.2
7.3
5.3
11.5
10.5
6.0
5.6
7.3
6.7
12.0
12.0
6.5
5.9
7.0
7.5
13.0
14.1
6.5
6.3
7.0
7.5
14.0
15.4

CPI (yoy %) eop
CPI (yoy %) ann avg
Broad money (yoy %)
Bank credit (yoy %)
6.0
6.6
16.0
12.4
1.8
4.1
16.5
12.0
1.7
0.8
18.0
17.0
5.1
4.6
19.0
17.0
Fiscal accounts1 (% of GDP)

Federal government surplus
Government revenue
Primary fed. govt. surplus
-5.6
22.9
28.5
-4.3
-5.8
21.1
26.9
-4.3
-5.5
20.8
26.3
-4.0
-5.3
21.0
26.3
-3.7
External accounts (USD bn)

Merchandise exports
Merchandise imports
Trade balance
% of GDP
% of GDP
FDI (net)
FX rate (eop) VND/USD
132.0
124.0
8.0
4.7
10.0
5.8
9.0
26.3
21095
150.0
141.0
9.0
4.8
11.0
5.9
9.0
34.6
21335
160.0
165.0
-5.0
-2.6
-3.0
-1.5
9.5
35
22450
178.0
186.0
-8.0
-3.9
-6.0
-2.9
10.0
30
23500
52.0
23.0
29.0
39.1
67.0
17.9
59.5
29.5
30.0
37.9
70.5
18.4
62.0
31.0
31.0
38.9
77.1
18.2
64.0
32.0
32.0
37.7
82.2
18.2
7.9
2.2
7.8
2.1
10.0
2.1
9.5
2.1
Current
6.50
22443
15Q4
6.50
22450
16Q1
6.50
22800
16Q3
6.50
23300
National income
Population (m)

Government debt2
Domestic
External
Total external debt
in USD bn
General
Unemployment (%)
Financial markets
Refinancing rate
VND/USD

Note: (1) Fiscal balance includes off-budget expenditure, while revenue and expenditure include
only budget items. (2) Taken from the government estimate.
.
Page 97
8 October 2015
Czech Republic
A1(stable)/AA-(stable)/A+(stable)
Moodys/S&P/Fitch
Economic outlook: We continue to expect a >4%

GDP growth outturn for 2015 but with H2 slowing
versus the extraordinary H1. The PMI has declined
in recent months but still remains firmly in
expansionary territory while other monthly macro
data have also moderated slightly.
Main risks: The VW emissions scandal has the

potential to hit growth. VW-owned Skoda auto
accounts for almost 60% of car production in the
Czech Republic and has said that it used the
problem engines in 1.2mn older models (equivalent
to 1 year of entire auto production). Production
shutdowns on the back of weaker demand would
very quickly impact on growth.
Skoda accounts for almost 60% of total car production

in Czech Republic
HYUNDA
25.33%
TOYOTA,
PEUGEOT,
CITREN
17.28%
Economy holding up well for now

Barring concerns over the fallout from the VW scandal
on Czech Republics largest car maker Skoda Auto
(owned by VW since 1991) the macro outlook remains
fairly robust. Recent real economy momentum has
been strong, fiscal policy is expansionary compared
with recent years, the labour market dynamics are
positive and the non-inflationary nature of the recovery
continues to justify very loose monetary conditions.
The pressure on the CNBs 27/EUR fx cap seen in
August and September has also dropped back and the
currency is no longer a downside risk to the CNB
inflation forecasts. We maintain our 2015 and 2016
GDP growth forecasts at a very robust 4.2% and 3.0%
and see only moderate downside risks from the
external environment.
VW scandal leaves risks to the growth outlook. Czech
carmaker Skoda Auto has confirmed that it used the
diesel engines at the centre of the VW emissions
scandal in some of its older models (Fabia, Rapid and
Octavia are some of the models affected). According to
Skoda the engines were used in 1.2mn cars sold
worldwide which accounts for an entire year of
production (2014 production reached an all-time high
of 1.25mn, of which 60% was Skoda). The company
has said that it is in the process of identifying the exact
vehicles in order to contact the owners and will then
advise where the vehicles can be taken to be fixed. The
cost of the repairs is to be borne by Volkswagen. If the
emissions scandal ends here this should be easily
managed by Skoda and have a limited impact on the
Czech economy. However, should the situation
deteriorate further and we see a protracted slump in
demand for VW brands, production shutdowns at
Skoda factories in Czech Republic or any of the
countrys other car makers the effect could be larger.
Page 98
KODA
57.39%
Source: Automotive Industry Association CR (share of production through August 2015, YTD)
As we show in the table below exports of road vehicles

account for 16.1% of GDP exports in the Czech
Republic, and therefore higher than in Hungary or
Poland, while the share of motor vehicles in IP
accounts for around 15-16% according to CSZO. In
addition, the Czech Republics exposure to Germany is
also higher than for both Hungary and Poland leaving
greater risks from any of any wider reputational
damage on corporate Germany.
With no current
information suggesting a scenario of production
shutdowns we do not revise down our GDP growth
projections but note that each 1pp drop in car
production would cut around 0.04pp from headline
GDP growth. For the VW scandal to cut 1pp from GDP
this would require a 25% annual fall in car production.
There would also likely be spillover from the wider auto
distribution
network
and
associated
services
magnifying the growth impact further. This is not an
impossible scenario but not where we are as of now.
Both Czech Republic and Hungary have significant
exposure to the auto industry
Exports of Share of car Exports to
road vehicles production Germany
(% GDP)
in IP (%) (% GDP)
Czech
16.1
15.6
27.1
Hungary
12.9
30.4
22.7
Poland
3.5
11.5
10.3
Main car
manufacturers
Skoda / Hyundai /
Toyota-PCA
Audi / Mercedes /
Suzuki
Fiat / Opel /
Volkswagen
Source: Haver Analytics, DB Global Markets Research
8 October 2015
The very strong H1 performance insulates the Czech

economy to some extent. The exceptionally strong
starting point insulates the Czech economy to some
extent from the VW scandal. The second revision to Q2
GDP saw the QoQ rate revised up to 1.1%, from 1.0%
previously and 0.9% in the flash estimate, with the YoY
revised up to 4.6% (sa-wda basis). This compared to
our own 0.7% forecast and a consensus estimate of 0.2%. This leaves cumulative growth through H1 at a
whopping 3.4%. The composition of growth was also
strong and led by domestic demand. In Q2 this was
primarily fixed investment, contributing a significant
1.2pp to headline QoQ GDP growth, and in Q1
inventories (relating to the changes in excise taxes on
tobacco) and consumer spending. The net export
contribution in Q2 was negative at -0.2pp versus a
positive 0.4pp in Q1. In YoY terms the 4.6% expansion
in Q2 was also led by domestic demand with 1.9pp
from fixed investment, 1.5pp from household spending,
0.5pp from government spending and 0.6pp from
inventories (versus the 2.1pp in Q1).
The CNB had expected a negative QoQ reading in Q2
on the assumption of a sizeable inventory correction.
The CNB comment on the GDP release (which relates
to the first breakdown of the components)
acknowledged that the 1.1pp forecast miss on a QoQ
basis was due to higher-than-expected investment,
including inventories, while household consumption
growth was slightly lower than expected. At 0.7% QoQ
household consumption has nevertheless recorded
three consecutive quarters of robust growth leaving the
3.1% YoY rate for Q2 (sa-wda basis) the fastest in the
post-crisis period. With a 0.7pp carryover to this years
growth combined with the strong performance in H1
there is space for an inventory correction in H2 while
still allowing the economy to record a >4% GDP
reading for the year. As such we expect the CNB will
nudge up its forecast from the current 3.8% 2015 GDP
projection in the November inflation report.
Data available for Q3 mostly point to a softer dynamic

versus H1. The Czech PMI has declined for the past
two months although at 55.5 remains comfortably in
expansionary territory and leaves the Q3 average still
0.8 points higher than in Q2. IP data have also softened
with August at 0.2% on a 3m/3m sa basis versus the
0.8% reported through Q2. Retail sales have dropped
back on a YoY basis but the 3m/3m momentum is
currently better than in Q2 although the series is
somewhat volatile. Sentiment has dropped back
slightly versus the summer highs with the ESI at 103.9,
versus 104.5 in August (long-term average = 100). The
composite sentiment indicator published by the Czech
statistics office also stands lower than the summer
highs but with the September reading actually up
slightly versus August.
Labour market dynamics are increasingly robust. The
CNB acknowledged in the latest Board minutes that the
strong domestic growth dynamics were increasingly
reflected in an improved labour market. The minutes
note that the number of vacancies reached a six-year
high, that both economy-wide wage growth and
business sector wage growth were 0.9% higher than
the CNB expected in Q2 (reported at 3.4% YoY and
2.5% YoY respectively) and that the unemployment
rate was continuing to edge downwards in line with
CNB projections. It is also striking that on an EU-wide
basis unemployment in the Czech Republic is the
lowest in the EU after Germany (at 5.0% in August) and
that the Q2 employment growth was the fastest in the
post-crisis period at 1.7% YoY.
Unemployment in the Czech Republic is the second
lowest in the EU
30
Unemployment rate (%)
25
20
H1 GDP growth was extraordinarily high

65
Czech PMI (pavg)
15
15
10
10
55
45
-5
DE
CZ
MT
UK
AT
EE
LU
DK
RO
NL
HU
SE
PL
BE
SI
IE
LT
FI
BG
LV
FR
SK
IT
PT
CY
HR
ES
EL
GDP, % qoq annualised (rhs)
Source: Eurostat (August 2015)
35
-10
25
Sep-07
Sep-09
Sep-11
Sep-13
-15
Sep-15
The potential inflationary push from the robust growth

and labour market dynamics discussed above are
nevertheless continuing to be offset by renewed
downward external pressures. Following several
months of higher-than-expected inflation the CNB
revised its 2015 CPI projection higher by 0.5pp in the
August Inflation report - but since then inflation has
Page 99
8 October 2015
come in lower than expected with the August 0.3%

YoY reading 0.4pp below the Banks projection and
down sharply versus the 0.8% in June. The recent
forecast miss was largely due to lower food prices
which subtracted a total of 0.4pp from MoM CPI during
July and August. Fuel prices also subtracted from
headline CPI in August after several months of modest
gains but this was marginal and the CNB measure of
adjusted inflation ex fuels has remained unchanged at
1.1% YoY for the past 3 months and in-line with the
CNB projection. Monetary-policy relevant inflation has
however edged down and at 0.1% YoY in August is the
lowest since March. Given the gap in actual versus
projected inflation the CNBs November forecast
update will see the near-term inflation path
downgraded and inflations return to target potentially
push out past the current Q1 2017. This will make it
easy for the CNB to continue to justify the need to use
the exchange rate as additional monetary policy tool.
The CNBs 27/EUR fx cap is no longer under pressure
29
EURCZK
28
27
26
25
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Source: Haver Analytics
Pressure on the fx cap has ended. Given the renewed

drop back in inflation the CNB comments from the
September 24th meeting were dovish. The minutes
confirmed that the Bank had again discussed the
introduction of negative rates and also the possibility of
moving the exit from the exchange-rate commitment
later than the current at least mid 2016. The Board
opted instead for a wait-and-see approach on the basis
that the current commitment is already sufficiently long
and we expect that the recent weakening of CZK also
reduced the need to extend the commitment. The
currency traded over 27.2/EUR in late September which
was the weakest level since early July. Moreover, the
amounts allotted in the 2-week liquidity operations
have stopped rising and we do not think the CNB has
had to defend the 27/EUR target for the past several
weeks.
Caroline Grady, London, +44(20)754-59913
Page 100
Czech Republic: Deutsche Bank Forecasts

2013
2014
2015F
2016F
208.3
10.6
19701
205.3
10.6
19377
178.1
10.6
16779
163.3
10.6
15408
-0.5
0.7
2.3
-5.1
0.0
0.0
2.0
1.5
1.8
4.4
8.9
9.9
4.2
3.2
2.5
4.4
6.7
6.5
3.0
2.8
2.4
3.7
6.4
5.6

(YoY%)
CPI (eop)
CPI (period avg)
Broad money (eop)
1.4
1.4
4.8
0.1
0.4
4.7
0.9
0.5
5.0
1.5
1.5
5.3

Overall balance
Revenue
Expenditure
Primary Balance
-1.1
40.8
41.9
0.2
-1.9
40.1
42.0
-0.6
-1.8
40.4
42.2
-0.5
-1.6
41.0
42.6
-0.3

Goods Exports
Goods Imports
Trade Balance
% of GDP
Current Account Balance
% of GDP
FDI (net)
FX Reserves (eop)
USD/FX (eop)
EUR/FX (eop)
135.4
126.9
8.5
4.1
-1.1
-0.5
-0.4
48.5
19.8
27.3
146.7
135.2
11.5
5.6
1.3
0.6
6.5
49.7
22.9
27.7
130.5
121.9
8.6
4.8
0.5
0.3
4.4
50.2
27.2
27.2
122.0
115.0
7.1
4.3
0.0
0.0
3.3
50.7
30.2
27.2

Government Debt
Domestic
External
External debt
in USD bn
45.0
30.6
14.4
65.8
137.4
35.7
42.6
29.3
13.3
60.9
125.1
40.1
42.9
29.1
13.8
66.7
119.5
36.5
43.0
29.1
13.8
68.5
114.0
36.9
0.1
7.7
5.0
7.7
5.8
7.2
4.6
6.8
Current
15Q4F
16Q1F
16Q3F
0.05
24.2
27.1
0.05
25.9
27.2
0.05
27.8
27.2
0.05
29.4
27.2
National Income
Nominal GDP (USDbn)
Population (mn)
Real GDP (YoY%)
Private Consumption
Government
consumption
Exports
Imports
General (ann. avg)

Industrial Production
(YoY%)
Unemployment (%)
Financial Markets
Key official interest rate
(eop)
USD/CZK (eop)
EUR/CZK (eop)
Source: Haver Analytics, CEIC, DB Global Markets Research
8 October 2015
Hungary
Ba1(stable)/BB+(stable)/BB+(positive)
Moodys/S&P/Fitch
Economic outlook: The earlier upside risks to our

growth forecasts have disappeared due to the VW
scandal, the immigration crisis and ongoing
concerns about weak growth in EM. But with our
Euro Area growth forecast broadly unchanged and
our GDP projection for Hungary still below
consensus we retain these unchanged.
Main risks: The NBH signaled at the September
policy meeting that loose monetary conditions will
remain in place over an even longer period. Since
then the Bank has cut the o/n deposit and lending
rates while the new (variable) 2-week rate has also
dropped. We do not rule out a cut in the base rate
in 2017 should inflation and growth disappoint but
the already low level plus a reluctance to hike
further down the line limits the potential for easing.
Downside risks are mounting

A combination of domestic and external factors have
dominated headlines during the past month or so with
the immigration crisis, the fallout from the VW
emissions scandal, ongoing concerns about weak
growth in EM and the introduction of the SelfFinancing Plan. As things stand none of the above
events have caused any significant disruption to the
economy or to Hungarian asset markets but there are
undoubtedly downside risks going forward. With no
change to our Euro Area GDP growth projections and
no clear shift in the macro dynamics we retain our
2.7% and 2.4% GDP projections for 2015 and 2016.
The fairly solid starting point on growth momentum
plus the headwind to consumers from the earlier
refunds on fx mortgages and now absence of balance
sheet mismatches should also provide a cushion to
domestic demand. During the coming month we
expect the VW scandal will continue to dominate
headlines while the November 6th Moodys review will
be in focus for the long-awaited upgrade.
around 2mn of the 11mn engines involved in the

emissions scandal were manufactured by Audi
Hungary but no official statement has been made to
our knowledge.
The economy ministry initially estimated a potential
0.3-0.6% hit on GDP growth in Hungary from declining
car sales in Europe but has since said the impact
should be limited. Minister Varga has highlighted that
the government was already trying to diversify into
industries such as pharmaceuticals, IT and other
manufacturing to reduce to overall dependence on the
car industry but there is no obvious evidence of that in
the data as yet. Detailed IP data are available only
through July and therefore do not capture any VWrelated issues. The data show production of transport
equipment up 15.2% YoY and therefore contributing
the entire 3.4% IP gain with mining subtracting from IP
and the electricity, gas, water sector flat on the month.
During the past 18 month the auto industry has
accounted for around 90% of the gain in headline IP. In
terms of exports, the 15.7% share of total in 2015 is the
fifth consecutive year of increase is almost double the
share a decade ago. As we show in the chart below
auto exports have outpaced total exports for more than
two years now with July at 23.7% YoY versus a 6.4%
YoY gain in total exports.
Car exports have outpaced total exports for more than
two years
80
Exports (% YoY, EUR)
60
40
20
0
-20
Total exports
Auto exports
-40
Downside risks to growth are mounting VW scandal,

migrant crisis, China / EM slowdown. We had
discussed the importance of Hungarys auto industry in
our July EM Monthly noting that a combination of extra
shifts and the addition of new models had provided a
significant boost to the manufacturing sector in H2
2014 and Q1 2015. The auto industry accounts for
31.7% of manufacturing production and 30.4% of total
IP in Hungary and the countrys main producers, Audi,
Mercedes and Suzuki are sizeable employers. As a
share of exports the auto sector is also sizeable at
12.9% of GDP last year (or 15.7% of total exports).
According to comments by Economy Minister Varga
-60
Jul-07
Jul-09
Jul-11
Jul-13
Jul-15
The VW news came on the back of the migrant crisis

that saw around 140,000 migrants / refugees cross into
Hungary in September alone (compared with 11,000 in
May) with as many as 10,000 people on a single day.
The sudden inflow of people triggered border closures
and disruptions to transport networks via road and rail
closures. Although the majority of the refugees simply
transited through Hungary on their way to Germany
Page 101
8 October 2015
and other Western European countries, migrationrelated expenditures prompted a moderate budget
amendment although with this years 2.4% of GDP
target remaining intact. Local media reported some
disruption to distribution networks at smaller suppliers,
in particular for the imported components of
manufacturing exports, but with the large companies
reportedly relatively insulated via dedicated rail links.
Varga has also mentioned potential downside risks
from a slowdown in growth in China. As we show in
the chart below Hungary exports more to China than
elsewhere in CEE but at 1.2% of GDP this is tiny and
swamped by the 4.7% of GDP in imports. A cheaper
yuan (combined with lower commodity prices) should
therefore provide a net benefit to the Hungarian
economy. In Its September Inflation Report the NBH
looks more broadly at the countrys exposure to EM
and notes that a combined Brazil, South Africa, India,
China, Russia and Turkey account for 7-8% of
Hungarys exports while the most important trading
partners (i.e Germany) also have exposure to EM
leaving potential for further spillover.
to be back at target only in H2 2017 (from an earlier

H1) with the downgrade largely on the back of lower
fuel prices (the oil price assumption was lowered by
12.6% and 21.2% to USD53.9/barrel and USD
53.6/barrel for 2015 and 2016 respectively). The Banks
latest monthly projections see inflation dipping back
briefly into negative territory before rebounding
strongly at year end once last years sharp MoM
declines in oil prices drop out of annual comparisons.
Despite the forecast downgrades the NBH language on
inflation in the September policy statement was not too
different from before with the statement noting that
the underlying trends were in line overall with the
projection in the June issue of the Inflation Report
given that the forecast miss largely due to lower fuel
prices. We have also downgraded our inflation
projection and now see a flatter inflation profile
through next year with inflation not back at target
during our forecast horizon.
The NBH revised its inflation projections lower in the
September Inflation Report
Inflation forecasts (% YoY)
Hungary (and the rest of CEE) are net importers from

China
2
Total trade with China (2014, % GDP)
1.2
0.4
-1.5
-4.6
-3
Imports from China
-4
Exports to China
-5
Hungary
Czech
Poland
Romania
The NBH downgraded its 2015 GDP growth projection

very slightly in its September Inflation Report on the
back of the weak-than-expected Q2 GDP reading with
their latest forecast now at 3.2% for 2015 and 2.5% for
2016. With our Euro Area growth forecasts remaining
unchanged during the past several months at 1.5% and
1.6% for 2015 and 2016 respectively and the fallout
from the VW scandal probably contained our forecasts
for Hungary also remain unchanged at 2.7% and 2.4%.
We acknowledge the downside risks but with our 2.7%
already below consensus we are comfortable for now.
Inflation dips again. The revisions to the NBH inflation
projections were more substantial than for growth with
2015 CPI cut by 0.3pp (reversing the upward revision in
June) and next years projection lowered by 0.5pp. The
downgrades mean that the NBH now expects inflation
Page 102
2014
-0.2
3.6
2015
0.3
0.0
-0.3
3.3
3.2
-0.1
2016
2.4
1.9
-0.5
2.5
2.5
0.0
0.4
-2.5
-4.7
GDP forecasts (%)

Previous Latest Change
1.0
-1
-2
Previous Latest Change
Self-Financing Plan gets underway. Hungarys SelfFinancing Plan became effective on September 23rd
which saw the base rate switch from a 2-week deposit
rate to a 3-month deposit rate, and the 2-week deposit
facility switch to floating rate and become restricted in
quantity. This was the second recent restructuring of
Hungarys monetary policy instruments with the base
rate changing in 2014 from an earlier 2-week MNB bill
to a (non-tradeable) 2-week deposit. The main aim of
the changes is to create a situation where banks
finance the government rather than the central bank
which should then allow the government to repay
forthcoming fx redemptions (totaling EUR5.5bn) with
local issuance and therefore reduce the share of fxdenominated government debt (currently 39.4% of total
or 45.9% of GDP). This in turn will allow the NBH to
reduce the size of its balance sheet while maintaining
reserves adequacy ratios as external debt and fx
reserves drop in tandem.
We expect that the impact on government securities
will be significant as the outstanding amount of 2-week
deposits as of end August (and therefore before the
changes came into effect) was equivalent to around
40% of the total government bond stock at
~HUF4400bn. Some of the earlier liquidity tied up in
the 2-week facility will switch into the new 3-month
facility and probably the o/n facility but the expected
8 October 2015
HUF1000bn shift from the 2-week deposit into

government securities still corresponds to around 10%
of the outstanding stock of forint-denominated
government bonds. The results of the first few auctions
pointed to a smooth start to the Self-Financing Plan
with no disruption to money markets and limited use of
the o/n facility. Assuming the Self-Financing plan is
successful the expected reduction in external debt,
lower non-resident holdings and a lower interest bill
will be evident in the coming quarters.
As of end August the 2-week deposit stock was
equivalent to ~40% of the government bond stock
HUFbn
12000
10000
8000
6000
4000
2000
0
2-week
deposits
T-Bonds
T-bills
Retail
FX
securities
Source: AKK, NBH
NBH undertakes some fine tuning. The NBH

announced a surprise 25bps cut to o/n deposit and
lending rate two days after the September MPC
meeting leaving the rates at 0.1% and 2.1%
respectively. With the policy rate unchanged at 1.35%
this leaves an asymmetric corridor of -125bps / +75bps
versus the earlier -100bps / +100bps. The NBH said
that the move was intended to improve the efficiency
of the Self-Financing plan and was promoted by the
recent drop in 3-month T-bill yields below the policy
rate. The NBH has since announced a switch to a flat
2% reserve requirement, versus the earlier 2-5% rate,
which will further free up liquidity and provide yet
another boost to the demand for government securities.
Moodys upgrade unlikely on November 6th. The
November 6th Moodys review is likely to be in focus
given the decision by the agency not to announce
anything at the earlier scheduled reviews this year.
Moodys published a credit analysis in September and
noted that the main credit challenge is high
government debt and reiterated the criteria for an
upgrade as i) signs of sustained growth prospects
supported by greater policy stability and ii) evidence of
a downward trend on debt. Given the current downside
risks to growth and the fact that the rating remains on
stable outlook we do not expect a move to IG, or even
positive outlook, at this review.
Hungary: Deutsche Bank Forecasts

2013
2014
2015F
2016F
133.0
9.9
13381
136.7
9.9
13777
116.1
9.9
11724
103.9
10.0
10387
Real GDP (YoY%)

Private Consumption
Gross Fixed Investment
Exports
Imports
1.5
0.2
3.3
5.2
5.9
5.9
3.6
1.6
2.5
11.7
10.0
8.7
2.7
3.4
2.0
4.5
7.5
6.7
2.4
2.7
0.6
3.8
4.9
5.2

(YoY%)
CPI (eop)
CPI (period avg)
Broad money (eop)
0.4
1.7
5.5
-0.9
-0.2
5.8
1.7
0.1
5.0
2.6
2.2
5.5

Overall balance
Revenue
Expenditure
Primary Balance
-2.4
47.2
49.6
2.2
-2.6
47.6
50.2
1.5
-2.7
47.0
49.7
1.1
-2.4
46.5
48.9
1.4

Goods Exports
Goods Imports
Trade Balance
% of GDP
% of GDP
FDI (net)
FX Reserves (eop)
USD/HUF (eop)
EUR/HUF (eop)
95.7
91.1
4.7
3.5
5.4
3.9
1.2
43.0
215.6
297.2
100.0
96.4
3.6
2.6
5.4
4.0
0.8
40.7
261.4
316.3
88.2
85.4
2.8
2.4
3.6
3.1
0.5
31.5
300.0
315.0
82.6
80.0
2.6
2.5
3.5
3.3
1.0
25.2
355.6
320.0

Government Debt
Domestic
External
External debt
in USD bn
77.3
44.8
32.5
119.0
158.3
14.0
77.0
43.3
33.7
114.6
156.6
13.3
76.7
43.0
33.7
112.0
136.3
12.6
76.6
42.0
34.6
110.0
140.6
12.1
1.1
10.3
7.6
7.9
7.0
7.6
6.0
7.2
Current
15Q4F
16Q1F
16Q3F
1.35
277.4
311.9
1.35
300.0
315.0
1.35
322.7
316.3
1.35
344.6
318.8
National Income
Population (mn)
General (ann. avg)

Industrial Production (YoY%)
Unemployment (%)
Financial Markets
Key official interest rate
(eop)
USD/HUF (eop)
EUR/HUF (eop)
Source: NBH, Haver Analytics, DB Global Markets Research
Caroline Grady, London, +44 207 545 9913

Page 103
8 October 2015
Nigeria
Ba3(stable)/B+(stable)/BB-(negative)
Moodys/S&P/Fitch
Economic outlook: More than four months after

taking office President Buhari announced the
formation of a cabinet. The new government faces
immense economic challenges as lower oil prices
have led to a sharp reduction in fiscal and FX
revenues and growth is heading towards a multiyear low. With FX reserves down by 20% yoy and
the Excess Crude Account largely depleted, Nigeria
has only limited buffers left to finance the revenue
shortfall. Absent quick progress in plugging oil
sector leakages or a strong rebound in oil prices we
think a further depreciation of the naira will be
needed to avoid continuous FX reserve losses and
to mitigate the forced spending compression.
Main risks: The absence of prudent policy
responses to lower oil prices would amplify
pressure on the exchange rate and FX reserves.
The authorities might only be able to prevent a
disorderly depreciation by a further tightening of FX
controls but this would fuel inflation and further
hurt the growth outlook.
New cabinet faces multiple challenges

Economic policy will focus on oil sector reform and
revenue collection.
More than four months after taking office President
Buhari submitted a cabinet list to the Senate for
approval on September 30, the last day of his self
imposed deadline. The list contains 21 names,
including four former state governors, but doesnt
specify which ministries the nominees are intended to
head. It was announced that Buhari is going to keep
the oil portfolio for himself and will head the petroleum
ministry for an initial 18 months. This signals that
reforming the oil and gas sector will be a key priority of
Buharis first term. The willingness to reform the
hydrocarbon sector has been further underlined by the
replacement of the head of the Nigerian National
Petroleum Corporation (NNPC). Its new CEO Emmanuel
Kachikwu, a former Exxon-Mobile executive and also
nominee for the new cabinet, has sacked the firms
senior management and started a broader restructuring
of the national oil company. To enhance transparency
and plug leakages the government ordered the NNPC
to transfer oil receipts directly to a Treasury Single
Account with the central bank and to review crude oil
swaps and production sharing agreements.
The second economic policy priority of the new
government will be revenue collection. Buhari replaced
the head of customs and appointed a senior Lagos
government official as the head of the Federal Inland
Page 104
Revenue Service (FIRS), suggesting that the

administration wants to scale up the successful Lagos
model for revenue collection. Over the past years
Lagos has been the only of Nigerias 36 states
generating more tax revenues than receiving oilallocations from the federal government.
Index exclusion might raise debt service costs
On September 8 JP Morgan announced the exclusion
of Nigeria from its local currency government bond
index (GBI-EM). The first phase of the delisting already
took place at the end of September, with the second
and final phase scheduled for end-October. The
exclusion did not come as a big surprise, as JP Morgan
placed Nigeria on index watch already in January, but
its timing was earlier than anticipated. It is the
consequence of several foreign exchange restrictions
implemented by the Central Bank of Nigeria (CBN)
since end-2014 in order to cushion the pressure on the
naira stemming from falling oil prices. Nigeria is not
eligible for re-inclusion in the index for at least 12
months. To get back in, it would have to establish a
consistent track record of satisfying the index inclusion
criteria, such as a liquid currency market.
Figure 1: Rising yields
%
18
10
17
16
15
14
13
12
11
10
14
15
10-year LC bond
10-year FC bond, rhs
Sources: Bloomberg Finance LP, Deutsche Bank
The exclusion from the GBI-EM index is a big blow for

the Buhari administration and especially for the CBN,
which repeatedly stated its intention to keep Nigeria in
the index. The removal means that foreign investors
will further reduce their holding of Nigerian local
currency government bonds. Nigeria had a weight of
1.5% in the index, which is tracked by around USD
200-300bn. This would imply an automatic outflow of
about USD 3.0-4.5bn. However the reality is likely to be
smaller, as most real money investors lightened their
8 October 2015
investment when the oil price started falling and many

had left the market altogether before the March
presidential election. However, recent events should
accelerate this trend and a further diminished
international investor base might put upwards pressure
on yields.
Yields on local and foreign currency government bonds
have already increased sharply since oil prices started
to drop last summer. The yield on the 10-year local
currency bond increased to 15.1% by end-September
compared to 12.2% as of last July. Similarly the yield
on Nigerias 2023 Eurobond is up by 3pp over the same
period. The elevated yields mean that it is more
expensive for the Treasury to roll over the existing debt
stock and to finance the widening fiscal gap. Until last
year the annual debt service costs remained modest at
roughly 1% of GDP, mainly thanks to Nigerias low
domestic and external debt levels. Thanks to a debt
relief in 2005 and last years GDP rebasing the overall
government debt to GDP ratio stood at a low 11.2% at
end 2014. The debt composition is favorable as public
debt consists to 80% of domestic debt held mainly by
Nigerian banks and pension funds. Public external debt
is low at only around USD 10bn, or roughly 2% of GDP.
The bulk of the external debt stock, 85%, is owed to
official creditors, mostly on concessional terms, with
the World Banks IDA being the largest single creditor.
Figure 2: Modest, but rising debt level
Federal government debt, % of GDP
16
14
12
Rising debt level and elevated yields imply that debt

service cost will rise over the next years. The 2015
supplementary budget increased allocations for debt
service expenditures by one third to NGN 954 bn. This
means that debt service payments will consume nearly
one quarter of total federal expenditures, more than
doubling its share since 2010, and further limit the
fiscal space for capital expenditures.
Naira: Politics versus economics
The index exclusion also further damages Nigerias
reputation among global investors and will negatively
affect portfolio inflows. Reduced portfolio inflows will
aggravate FX shortages and put additional pressure on
the BoP, which is already under serious strains as
plunging oil exports are pushing the current account
into deficit for the first time since 1998. Despite a 20%
yoy drop in FX reserves the central bank remains
reluctant to ease the BoP pressures by allowing the
naira to depreciate. The naira has been devalued twice
by a total of 18% since last summer, but since February
2015 the central bank has kept the official exchange
rate fixed at NGN/USD 197. Although the naira is still
significantly overvalued based on its historic relation
with oil prices the authorities officially reiterated their
intention to defend the current level of the naira at the
September MPC meeting. Importantly, in his first public
comment on the exchange rate since taking office
President Buhari endorsed the CBN policies in midSeptember by stating that he didnt think a further
weakening of the naira would be healthy. Hence, at
least in the short-term the CBN is likely to continue its
policy of strict FX demand management. This will lead
to a continued compression of imports. In the first
seven months of 2015 imports were roughly one fifth
lower than over the same period last year.
10
Figure 3: Heavy import compression
8
6
5.2
100%
4
2
4.8
80%
60%
2010
2011
2012
Domestic
2013
2014
40%
2015F 2016F
External
Sources: Debt Management Office, Deutsche Bank
4.6
20%
0%
4.4
-20%
4.2
As a widening fiscal shortfall stemming from the drop

in oil revenues has to be financed, the debt levels are
set to increase. By end-June 2015 domestic and
external debt levels had already increased by 13% yoy
and 10% yoy, respectively. With oil prices remaining
below the budget benchmark oil price of USD 53/bbl
and the federal government pressured to bail out local
and state governments we think that this trend is set to
continue and expect the public debt level to increase to
around 15% of GDP by 2016.
-40%
4
Jan13
-60%
Jul13
Jan14
Jul14
Jan15
Imports, USD bn (12-m mavg)
Jul15
% YoY, rhs
Sources: Central Bank of Nigeria, Deutsche Bank
The CBNs decision from late June to restrict import

finance for 41 additional items ranging from rice to
cement, food items and textiles accentuates the import
compression. This mitigates the deterioration of the
Page 105
8 October 2015
trade balance stemming from the drop in oil exports

and reduces the magnitude of the required FX
intervention and hence has slowed the fall in reserves.
However, the CBN policies come at economic costs.
Many items on the restricted import list are not
available in sufficient quantities in Nigeria and
producing them domestically, as it is the official goal of
the CBN policies, if possible at all, takes time. Hence,
the prices for those items are likely to increase and this
will further push up inflation. Inflation increased
already by 0.8pp yoy to 9.4% in August and is outside
the CBNs target range of 6-9%. Restricting access to
foreign exchange at the official interbank market is
further pushing demand towards the black market and
has led to a depreciation of the black market exchange
rate to around NGN/USD 225. Additionally, the import
restrictions make it difficult and costly for firms to
obtain needed intermediary inputs. We think that this
will continue to weigh on growth and contribute to the
anticipated deceleration of real GDP growth to only
3.9% in 2015, the lowest growth rate in 15 years.
We further expect that the current policies of restricting
imports and impeding FX trading will be ultimately
insufficient to restore BoP equilibrium. Any
economically and socially feasible compression in
imports will turn out to be insufficient to close the BoP
shortfall stemming from persistently lower oil exports
and subdued capital inflows. Hence, FX reserves are
set to continue declining. This should eventually force
the CBN to loosen FX regulations and devalue the naira.
Given the political resistance it is difficult to predict the
timing of such a move, but we still think that if oil
prices remain below USD 50/bbl the mounting pressure
will force the CBN to act by the end of the year. Our
end-2015 FX forecast thus remains unchanged at
NGN/USD 220. However, the longer the adjustment is
kicked down the road the higher are the risks of a
disorderly devaluation and the higher the required
adjustment.
Oliver Masetti, Frankfurt, +49 69 910 41643
Page 106
Nigeria: Deutsche Bank Forecasts

2013 2014 2015F 2016F
National Income
Since
the (USD
election
of 510.0 537.0 491.6 490.0
Nominal
GDP
bn)
President
PopulationAbdel
(mn) Fattah el-Sisi 170.0 173.0 177.0 180.0
in
authorities 3,020 3,104 2,777 2,722
GDPlate
per May
capitathe
(USD)
have announced a series of
concrete
Real
GDP measures
(YoY %) to reduce
5.5
6.2
3.9
5.0
Egypts
large fiscal deficit
Priv. Consumption
11.0
6.7
5.7
6.0
from
current level of 12%
Govt its
consumption
1.4
5.0
-3.0
0.0
of GDP. El-Sisi rejected an
Investment
10.5
8.0
2.0
4.5
initial budget draft and
Exports
-8.5
2.0
-4.0
1.0
demanded
a
stronger
Imports
2.0
5.0
-1.0
3.0
reduction of the deficit. The
most important measures
Prices, Money and Banking (YoY %)
taken are:
CPI (eop)
8.0
8.0
10.0
10.0
CPI (ann. avg)
8.5
8.1
10.0
10.0
Broad money (eop)
12.0
5.0
8.0
8.0
Bank credit (eop)
7.8
12.1
8.0
10.0
Fiscal Accounts* (% of GDP)
Following the election of
Overall balance
President Abdel Fattah el-Sisi
in Revenue
late May the authorities
Expenditure
have
shifted their focus on
Primary
balance
fiscal consolidation.
El-Sisi
-2.6
11.6
14.1
-1.5
-1.9
11.2
13.1
-0.9
-2.8
7.9
10.7
-1.8
-2.4
8.4
10.8
-1.2
rejected an initial budget draft

External
Accounts a(USD
bn)
and demanded
stronger
Goods
Exports
reduction
of the fiscal deficit,
Goods
which Imports
is estimated to have
Trade
balance
reached
12% of GDP at the
end
ofGDP
FY 2013/14 (ending
% of
June). account
The balance
announced
Current
measures
% of GDP aim at cutting
expenditures
by reducing
FDI
(net)
subsidies
as(USD
well as
FX
reserves
bn)at raising
revenues
increasing taxes.
NGN/USDby
(eop)
The most important measures
taken
are:
Debt Indicators
(% of GDP)
95.1
51.4
43.8
8.6
20.1
4.0
4.4
42.9
160.0
82.6
61.6
21.0
3.9
1.3
0.2
3.1
34.5
183.0
49.6
50.1
-0.5
-0.1
-12.4
-2.5
3.0
27.0
220.0
52.5
51.7
0.8
0.2
-8.7
-1.8
5.0
31.0
235.0
Government debt
Domestic
External
fuel
TotalReduction
external debt in
subsidies
in USD bn
Short-term
(% offor
total)
The prices
gasoline
10.6
8.9
1.7
2.2
11.1
2.7
11.2
9.2
2.0
2.3
12.5
4.0
13.0
10.8
2.2
2.9
14.5
4.0
14.8
12.2
2.6
3.4
16.5
4.0
and diesel have been

General
(ann. avg)
increased
by 40%-78%,
whileproduction
the price(YoY
of %)
less
Industrial
0.8
2.5
2.0
4.0
widely used
Unemployment
(%)natural gas
24.0
24.0
23.0
22.0
for vehicles was raised
by Markets
175%. (eop)
However, current 15Q4 16Q1 16Q3
Financial
despite
Policy
Rate these fuel price
13
13.5
13.5
13.5
hikes,(eop)
retail prices still
NGN/USD
198
220
220
235
remain well
below world
* Consolidated
Government
Sources:averages.
IMF, Central BankDiesel
of Nigeria, National
Bureau of Statistics, Haver Analytics, Deutsche
prices
Bank
for example increased by
64% to USD 0.25 a litre,
but still amount to only
about one-fifth of the
world average pump
price for diesel of USD Deutsche Bank Securities Inc.
1.42 per litre.
Reduction in electricity
8 October 2015
Russia
Ba1(neg)/BB+(neg)/BBB-(neg)
Moodys/S&P/Fitch
Economic outlook: another year of recession ahead

although the pace of contraction appears to be
slowing.
Main risks: even lower oil prices and a further

escalation of sanctions on the back of renewed
conflict in Ukraine would result in a deeper and
longer recession. Equally, good news on either of
these fronts would support an earlier recovery.
No easy options
Russia is now entering its second year of recession. In
the absence of a meaningful recovery in oil prices and
an end to economic sanctions, neither of which seem
on the cards any time soon, policy will need to adjust.
Government spending has been maintained this year
despite sharply lower revenues. The resulting deficit is
unsustainable and fiscal policy will need to be
tightened. How, and by how much, is still being
debated. The central bank continues to tread a fine line
between providing what support it can to the economy
and keeping monetary conditions tight enough to keep
inflation (and the rouble) under control. Given the
backdrop, we think it will be unable to resume easing
until we are well into the new year.
Growth: pace of contraction may be slowing
The economy has entered a deep recession. Output
began declining in the middle of last year and the pace
of contraction accelerated in the first half of this year
when GDP fell at an annualized rate of 5.7% in
Real wages are falling at close to double-digit rates
wages declining at close to double-digit rates. Tighter

domestic liquidity conditions, reduced confidence, and
forced deleveraging due to economic sanctions have
weighed even more heavily on investment.
Recent activity data suggest that growth continues to
decline although the pace may be slowing. While the
manufacturing PMI survey continues to hover a little
below 50, for example, the services survey has
rebounded since the start of the year and the overall
composite measure has been in expansionary territory
on average for the past couple of quarters.
In sequential terms, we think the pace of contraction
could slow to around 3.3% (annualized) over the
second half of the year. Given base effects, however,
the year-on-year growth rates are going to look worse
than this with GDP declining by around 4.5% on this
basis over the second half of the year. Preliminary
monthly estimates from the Ministry of Economy seem
to bear this out with GDP contracting by 4.7% (YoY) in
August (chart).
Year-on-year growth set to remain around 4% in H2
YoY%
8
6
4
2
0
-2
Real wages (YoY%, 3mma)

15
-4
-6
10
Official GDP
-8
11Q3
12Q3
Monthly GDP
13Q3
Output in five basic sectors
14Q3
15Q3
-5
-10
11
12
13
14
15
seasonally-adjusted terms. Domestic demand fell even

more sharply. Household consumption has been
squeezed hard by higher inflation, which has seen real
Overall, we have revised our growth forecast for this

year downwards a little further to 4.0%. We expect
the economy to emerge from recession at some point
towards the middle of next year, although the annual
growth rate for 2016 as a whole is still likely to be
negative at around 1.2%. Thereafter, we expect only a
very weak recovery as demographic challenges, the
recent lack of investment, and the reversal of any
progress on structural reforms look set to limit the
potential growth rate in Russia to around 1% (see
The Limits to EM growth in our June 2015 EM
Monthly).
Page 107
8 October 2015
Rouble weakness to limit pace of disinflation

Headline inflation has been running at around
15.715.8% over the last couple of months. While this
is down a little on the peak of 16.9% in March, for the
next few months at least, the pace of further
disinflation is likely to be quite modest as the impact of
the recent depreciation in the rouble continues to feed
through to prices (chart). The Central Bank of Russia
(CBR) thus revised up its end-year inflation forecast to
12-13% in its latest September monetary policy report
from 10-11% in June. We think the risks to its forecast
are still to the upside.
Rouble weakness will limit the pace of disinflation
YoY%
16
YoY%
80
Non-food goods inflation (lhs)

RUB basket, lagged 3 monts (rhs)
14
60
The second episode was around the middle of this

year, when oil prices stabilized and the Minsk
peace agreement resulted in a period of relative
calm in eastern Ukraine. This resulted in a strong
rebound in the rouble, which the CBR sought to
temper by buying dollars.
Where are we now? The recent depreciation of the

rouble is partly justified given the further downward leg
in oil prices in recent months. It may also partly reflect
a correction of earlier overvaluation. But the extent of
the move looks excessive to us. Given our forecast for
oil prices, with Brent recovering to USD 59bbl by the
end of next year, we thus anticipate a modest
appreciation in the real value of the rouble but with the
bulk of the correction taking place through higher
inflation in Russia rather than a stronger nominal
exchange rate. On the latter, weve revised our
forecasts for USDRUB slightly to 65.7 by the end of this
year and 65.1 by end-2016.
12
40
Rouble overshooting
10
20
8
Real oil price (2010=100)

180
REER (2010=100)
120
160
110
140
4
2007
-20
2009
2011
2013
2015
100
120
100
90
80
The CBR has also paused its easing cycle. Having

already scaled back the pace of easing in July when it
cut rates by only 50bps, the CBR kept its key rate on
hold at 11% last month. The CBR has signalled that it
intends to gradually reduce rates as inflation begins to
decelerate more meaningfully next year. Given the risk
that inflation surprises to the upside, however, we think
it unlikely that the CBR will be able to resume its easing
cycle before the middle of next year. Overall, we
anticipate a modest 150bps of easing between June
and December next year.
Rouble overshooting
The rouble has been highly volatile this year, much
more so than can be reasonably explained by the
volatility in international oil prices. On a couple of
occasions over the past 12 months, the rouble appears
to have overshot levels that could be justified by
fundamentals.
The first episode was around the turn of the year,

immediately following the CBR decision to float the
rouble, and when there were genuine fears that
Russia might need to resort to capital controls in
response to economic sanctions.
Page 108
80
60
70
40
Real oil price (lhs)
20
2004
Real effective exchange rate (rhs)
60
2006
2008
2010
2012
2014
Budget discussions: time to tighten

While the CBRs decision to allow the rouble to weaken
in line with oil prices has been helpful in preserving the
local currency value of oil and gas revenues, the latter
have nevertheless still declined by about 19% (YoY) in
rouble terms so far this year. At the same time,
spending has grown by some 18%, implying a small
increase even in real terms. The federal government
budget deficit has accordingly widened and, by our
estimates, was already about 1.4% of full year GDP by
August. Given the further weakness in oil prices in
recent months and the typical late year surge in
spending, the deficit is well on track to reach or breach
our full year forecast of 3.4% of GDP (chart).
8 October 2015
Heading for a large budget deficit
2013
2014
2015F
2016F
Current year **
National Income
Nominal GDP (USDbn)
2 079
1 861
1 212
1 242
Avgerage 2012-14
Population (m)
143.7
146.3
146.3
146.3
14 468
12 718
8 286
8 487
Federal budget surplus (% GDP)

1.5
1.0
Russia: Deutsche Bank forecasts
0.5
Real GDP (YoY %)
0.0
-0.5
-1.0
1.3
0.6
- 4.0
- 1.2
Private Consumption
5.0
1.3
- 8.5
- 2.0
1.1
- 0.1
- 0.1
- 0.5
Gross Fixed Investment
0.9
-2.0
-7.7
-2.5
Exports
4.6
-0.1
1.4
1.0
Imports
3.8
-7.9
-22.0
1.5
CPI (eop)
6.5
11.4
13.6
8.7
CPI (annual avg)
6.8
7.8
15.6
9.1
Broad money (eop)
14.0
10.3
4.9
4.2
Credit Growth (eop)
17.1
15.6
5.1
11.2
Prices, Money and Banking (yoy%)
-1.5
Jan Feb Mar Apr May Jun
Jul Aug Sep Oct Nov Dec
The government is in the process of putting together its

budget for next year, which will bring little respite as
growth and oil prices are set to remain low. It has
(sensibly) already decided to suspend (for now at least)
the fiscal rule under which spending was partly
determined by a backward-looking moving average of
oil prices, which would have implied basing the budget
on an assumption of around USD 85bbl, i.e. well above
current spot prices and our forecast for next year of
USD 57bbl. The budget proposals reportedly on the
table include higher taxes on the oil and gas sector,
lower pension indexation, raising the pension age, a
freeze in public sector salaries, and other cuts in public
spending.
The spending envelope will need to be a very tight one
if the government is to avoid rapidly draining its oil
savings, which stood at 13% of GDP last month. In the
absence of any clarity on the budget discussions,
however, well reserve judgment on these issues for
now and will provide a more detailed assessment of
the fiscal outlook once the budget for next year has
been tabled. The rating agencies may elect to do
likewise. Standard and Poors and Fitch are both
scheduled to review the sovereign next week. The
latter is the only agency that still views the sovereign
as investment grade. While the outlook for the
sovereign has not deteriorated all that dramatically
since the last Fitch review in July, the latter was based
on an oil price assumption of USD 75bbl for next year,
which now looks optimistic and could provide the basis
for a downgrade. Nevertheless, like us, Fitch may want
to see the details of the budget for next year before
making its assessment.

Fiscal balance *
- 0.4
- 0.5
- 3.4
- 1.9
Revenue
19.3
20.0
16.3
18.0
Expenditure
19.7
20.5
19.7
19.9
Primary Balance
0.1
0.1
- 2.6
- 1.1
Goods Exports
523.3
500.8
373.8
378.4
Goods Imports
343.0
307.8
209.3
218.8
Trade Balance
180.3
193.0
164.5
159.6
9.2
9.8
12.4
11.5
34.1
61.4
76.4
69.1
1.7
3.1
5.8
5.0
FDI (net)
- 15.6
- 35.4
- 27.2
- 9.8
FX Reserves (eop)
510.0
385.0
361.6
350.7
32.9
55.4
65.7
65.1
% of GDP
% of GDP
USD/FX (eop)
Government Debt**
11.7
13.0
14.5
15.6
Domestic
8.1
9.6
10.9
11.6
External
3.6
3.4
3.6
4.0
External debt
32.9
32.4
32.8
29.4
732
650
590
570
Industrial Production (yoy%)
0.4
1.7
- 4.0
- 1.4
Unemployment (%)
5.5
5.2
5.7
6.0
in USDbn
General (ann. avg)
Financial Markets
Current
15Q4F
16Q1F
16Q3F
Policy rate (Key rate)
11.0
11.0
11.0
10.0
10Y yield (eop)
10.5
10.7
10.5
9.8
USD/RUB (eop)
65.5
65.7
63.9
64.0
* central government, ** general government

Source: Official statistics, Deutsche Bank Global Markets Research
Robert Burgess, London, 44 20 7547 1930
Page 109
8 October 2015
South Africa
Baa2 (stable)/BBB- (stable)/BBB (negative)

Moodys/S&P/Fitch
Economic outlook: In this note, we update our

forecasts given DBs global house view and our
thesis that the economy has entered a downswing
phase. We cut GDP growth to 1.2% and 1.1% in
2015 and 2016, while household demand should
slow to 0.4% next year from 2.2% in 2015. Capex
cuts should reduce import volumes, but the impact
of lumpy renewable energy investment and
expansion in transport and logistics capacity
complicates the outlook for the current account
deficit. We nevertheless expect a narrowing to -3.3%
(from -3.8%) in 2016.
Main risks: While we dont expect SA to lose its

investment grade status, due to credit uplift from
qualitative strengths, weaker growth will significantly
lower the room for slippage elsewhere.
Adjusting to demand
Domestic and global landscape less rosy than before
In our recent thematic piece11 where we explored the
phases of the business cycle, and concluded that the
economy has already entered a mild contraction phase.
Since this publication just a month ago, the business
cycle indicators we track have mostly deteriorated, or
rebounded slightly from cyclical lows. The leading
indicator declined further to -3.6% yoy while real-time
activity indicators stalled relative to last year (see
below). In addition, our global team has also revised
the outlook lower for the US (growth and Fed lift off)
and several emerging market economies. In this note
Real time activity stalling, while outlook deteriorating
25
yoy %
15
5
-5
-3.6
we update our forecasts and also incorporate our

teams latest downward revisions to commodity price
forecasts. Growth is now seen falling to 1.2% and 1.1%
in 2016, which is well below consensus of c 1.4%-1.6%.
Taking stock of our forecasts.
The large negative revision to growth next year mostly
stems from a marked slowdown in household demand
and an envisaged contraction in fixed investment
spending. As a result, we no longer see the SARB
hiking twice next year. Weve pared back our rate
expectations to one 25bps hike in 2016 and 2017,
respectively. Fixed investment prospects by private
sector business enterprises have deteriorated on
account of falling capacity utilization, weaker corporate
profits, the lack of domestic demand and a negative
political climate. The onslaught from more commodity
price declines on capital expansion plans in the mining,
manufacturing and transport pose further risks to the
forecast. Weaker private consumption demand should
weigh negatively on import volumes, which have been
surprisingly robust year-to-date.
Summary of forecast changes
2013
G D P (yoy%)
2 .2
change from previous
Household
2.9
Government
3.3
Fixed investment
7.6
Exports
4.5
Imports
1.8
Cu rre n t accou n t bal an ce
% of GDP
-5.8
Pol cy rate
5
2014
2015F
2016F
1 .5
1 .2
-0.3
2.2
0.3
0.2
-0.5
0.3
-0.8
9.6
3.8
5.3
1.2
1 .1
-1.0
0.4
-0.8
0.5
-0.6
-1.6
-3.4
2.6
0.0
-1
-2.1
-3.8
0.3
6
0.0
-3.3
1.3
6.25
-0.3
1.4
1.9
-0.3
2.6
-0.4
-5.4
5.75
Source: Deutsche Bank, SARB
-15
2000
2003
2006
Leading indicator
2009
2012
2015
Coincident indicator
11
See Special Report: South Africas Nutcracker Moment. 6 September
Page 110
Growth in household demand the weakest since 2009.

The plunge in consumer confidence to -15 in Q2, the
lowest level in 15 years summarized the state of the
consumer pretty well in our view. While confidence
since rebounded to -5 in Q3, the index is still
significantly below the long-term average level of 4
points. Most of the deterioration this year is attributed
to deteriorating assessment of economic prospects
over the coming year. These assessments are worse
8 October 2015
than levels recorded in the 2009 recession and dates

back to the rand crisis in 2000/2001 for high income
earners and further back for the vast majority of
consumers especially low income earners.
The forecast slowdown in household demand to 0.4%

yoy from an upwardly revised 2.2% in 2015 still looks
conservative against what appears to be increasing
financial vulnerability next year.
Consumer confidence at cycle lows despite Q3 bounce
Based on the details of this index, the deterioration in

Q2 was predominantly driven by a rebound in inflation,
as fuel price cuts were reversed and a slump in
consumer confidence (possibly related to tax
announcements in the Budget). Importantly, growth in
household debt overtook growth in assets (eg, property
and shares) for the first time in three years in Q2. This
is a negative development for households in higher
income brackets.
Index
50
40
30
20
10
0
-10
Vulnerability heatmap: deteriorating income, rising
-20
short-term debt and deteriorating wealth effects

Time line
2013
2016
4Q16
2010
3Q16
2007
2Q16
2004
1Q16
2001
Financial indicators
4Q15
1998
Forecast
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
-30
1995
House price growth
Wealth
Consumer confidence
Economic position 12 months ahead
Equity market growth

Debt growth vs asset growth gap
Employment (formal non-farm)
Inflation
Purchasing power Gross domestic income*

Real disposable income growth
Source: BER
Consumer confidence
Debt instalment vs income growth gap
Short-term debt % of total debt
Debt affordability Debt service cost to income ratio
Household financial vulnerability index deteriorating

Household demand is a function of income, inflation,
debt affordability, employment, and overall wealth
effects. These drivers are captured in our Household
Financial Vulnerability Index (HFVI), which leads
household demand growth by a quarter. In Q2 this
index rose to 58 the worst level since 2010 after
being stuck in the 52 55 range for more than three
years. Over this period, household consumption growth
averaged 2.6% per annum. Our sensitivity analysis
shows that consumption demand growth runs into
significant headwinds when the index rises above 55index points levels last seen in 2002 and 2008.
Household financial vulnerability expected to increase
12
% yoy
Index
30
8
6
40
4
50
2
0
60
-2
-4
2002
Savings-to-income ratio
43 49 52 55 52 52 52 54 55 54 55 54 54 52 55 58 57 60 65 66 66 65
Household Financial vulnerability index
The HFVI is forecast to increase to 65.4 in 2016; this is

4 points below the peak in 2009. However, the
important difference this time is that this deterioration
has been slow and broader based (i.e. larger number of
indicators deteriorating at the same time), rather than
the significant boom/bust conditions that existed in
2009 led by a shock in the equities, inflation, interest
rates, and the number of insolvencies.
Macro inputs and forecasts
H i stori cal 2 0 0 9 -2 0 1 4
20
DBe
10
Insolvencies
* GDP augmented by terms-of-trade, which is a more comprehensive indicator of the strength of the business cycle
Av e .
Max
Mi n
2014
House price growth (yoy %)
4.5
9.1
-5.7
8.1
Equity market growth (yoy%)
12.6
28.7
-27.5
Debt - asset growth gap (ppts)
-3.3
4.2
Employment (formal non-farm yoy%)
0.1
Inflation (yoy %)
L ate st
F ore cast
2015
2016
5.6
5.6
3.9
17.0
1.5
4.2
3.5
-15.0
-7.1
0.1
-0.7
2.1
2.6
-4.2
0.3
-1.8
-0.8
-0.8
5.7
8.4
3.5
6.1
4.8
4.7
5.9
Gross domestic income
2.2
6.8
-0.8
1.4
4.3
4.2
0.2
Real disposable income growth (yoy %)
2.5
10.2
-1.7
1.3
1.6
0.9
0.3
Consumer confidence index
15
-9
-5
-7
-8
Debt instalment vs income growth gap (ppts)
-7.5
8.1
-26.0
4.1
4.6
3.9
0.9
Short-term debt % of total debt
35.0
40.3
31.0
39.6
40.3
40.5
42.0
Debt service cost to income ratio (%)
9.4
13.5
8.5
9.1
9.4
9.5
7.1
Insolvencies (yoy %)
-1.3
28.0
-27.5
-2.3
-7.8
-11.6
20.0
Savings-to-income ratio (%)
-1.5
0.1
-2.8
-2.4
-2.2
-2.6
-2.7
70
2004 2006 2008 2010 2012 2014 2016
Household consumption expenditure
Household financial vulnerability index (RHS - inverse)
Source: Deutsche Bank, SARB, StatsSA
The heatmap highlights two important trends:
In the face of increased market volatility and high

stock valuations, high income earners will feel a
Page 111
8 October 2015
disproportionate brunt this time. Both property and

equity price growth rates are expected to slow
relative to recent years. Negative commodity price
pressures amid declining real earnings of listed
companies
mean
dividend
payouts
could
deteriorate. Dividend receipts account for up to
14% of high income earners disposable income.
tougher, we think companies will continue to cut jobs,

reduce work hours, limit wage growth or a
combination of these. So far, employment has fallen
1.1% yoy in 1H15, but job shedding could continue at a
similar rate next year, which is equivalent to nearly
100k job losses.
Household savings are negative and under

increasing pressure. Consumers have been
increasing their use of short-term credit to fund
spending this is not only relatively easily
obtainable but this also comes at much higher
interest rates. Growth in total monthly installment
payments has also exceeded disposable income
growth. We believe this trend should slow given
the cutback in credit uptake and terming out of
loan repayments.
Weak business confidence translating into job losses
In sum, all income groups are facing increasing

headwinds. While balance sheets are probably stronger
in high-income groups, the willingness to spend has
been impeded by market events, tax and rate hikes,
and evidence of slowing asset market growth. In turn,
there are signs that consumers are increasingly relying
on short-term credit for spending purposes. This could
be early signs of rising financial distress.
Credit card lending has increased, now comprising

its largest share in total bank credit stock (i.e. 7%)
dating back to 2002. But credit card utilization
rates have also risen, which are usually early signs
of increasing financial strain. Typical rates on these
balances are north of 20% but capped at 22%.
Personal loans could be even more expensive as

rates could vary between 30% and up to 60% per
annum. The share of these loans in total credit has
more than doubled between 2009 and now
(c.14.7% of total outstanding bank credit balances).
Our calculations show that the share of non-bank

credit (i.e. micro loan providers) to total
outstanding household debt has risen more slowly
from 16% in 2009 to 17%. This is still below the
peak near 22% in 2007.
Debt distress usually manifests around nine to twelve

months after the upturn in the rate cycle. While interest
rate hikes have been gradual, other factors such as job
cuts may have worsened financial conditions for some
households.
80
% net balance hiring workers
60
40
20
0
-20
-40
-60
-80
2001
Page 112
2007
2010
2013
Retail employment
Manufacturing employment
Civil engineering employment
2016
Source: BER
Fixed investment intentions have declined.

We expect a relatively sizeable cutback in private
sector investment given the deterioration in business
confidence, a decline in capacity utilization and
moderating domestic demand growth. The BER reports
that all fixed investment expectations are substantially
below the long-term average levels. In Q3, a net
majority of 33% of manufacturers expected expansion
in land, building and construction to decline over the
next year. This is up from 19% in Q1. Even
replacements,
or
maintenance
capex,
which
constituted the bulk of investment spending up to now
have deteriorated significantly in Q3.
Investment intentions deteriorated notably
Total
Long-term average
2015Q3
Machinery & Equipment

Replacements
Inventories
Private sector job cuts well underway

The private sector has been quietly cutting jobs for five
consecutive quarters, practically offsetting new jobs
created by government. Although the manufacturing
sector has been trimming headcount for some time
now, an increasing share of retailers and civil engineers
have been reducing jobs of late. Deteriorating
profitability and increasing slack in demand explain
some of these cutbacks. As economic conditions get
2004
Additions
Land, building & construction

-40
-30
-20
-10
0
10
% net balance
20
Source: BER
8 October 2015
In many instances, weak demand, output below

capacity and cost of credit have been cited for weaker
capital plans. However, survey data from the BER
points to the largest constraint emanating from the
political climate. This seriousness of this constraint is
the most intense since 1993. Worryingly, industries in
the manufacturing sector, namely transport, basic
metals, and fabricated metals where political
constraints are at their highest account for the largest
shares in investment within the manufacturing sector.
Sectors where the largest deviation in operating levels
from full capacity has been reported include food,
furniture, non-metal minerals, basic metals, electrical
machinery and transport producers.
Current account deficit to narrow given weak demand
We have revised the current account deficit down from
4.1% and -4.6% to -3.8% and -3.3% in 2015 and 2016
respectively. We believe the bulk of this narrowing
should come from an improvement in the net income,
services and transfers account to -2.6% in 2016 from 3.5% in 2015. Net income payments abroad should
wane given the reduction in dividend payments, and
foreign holdings of domestic bonds. In turn, increased
offshore asset exposure by domestic fund managers
should see similar, if not stronger, receipts from abroad.
Implications of the new visa regulations on tourist
receipts are likely to be negative for the current
account.
We now expect the net service balance to contribute
around -0.2% to the deficit in 2015 and 2016 (from
small surplus position before). Though the risk of
declining foreign tourist arrivals is skewed to the
upside, especially since world income growth is
growing at a slower pace, we are inclined to think that
domestic tourists are also less likely to travel abroad
given difficult domestic circumstances and the weak
exchange rate. Finally, we expect the trade deficit to
more than halve in its contribution to the overall
current account deficit. After contributing -1.8% in
2014, we believe the deficit will shrink to -0.3% in 2015,
before rising modestly to 0.6% next year. The bulk of
this narrowing has been attributed to a decline in
imports, mostly thanks to lower oil prices. While we
believe that next years import volumes should
moderate in reflection of domestic demand cutbacks,
lumpy renewable energy imports, somewhat higher oil
imports and capacity expansion in public sectors
mainly transport could counteract weakness
elsewhere. Negative terms of trade growth (DBe -3%
yoy in 2016 vs 3.5% in 2015) and slowing global
demand should also weigh somewhat on exports next
year.
South Africa: Deutsche Bank Forecasts

2013
2014
2015F
2016F
364
53.0
6 878
351
53.5
6 681
328.1
54.0
6 076
322.9
54.6
5 915
2.2
2.9
3.3
7.6
4.5
1.8
1.5
1.4
1.9
- 0.3
2.6
- 0.4
1.2
2.2
0.2
0.3
9.6
5.3
1.1
0.4
1.6
1.6
2.6
-1.0
5.4
5.8
5.3
6.1
4.7
5.8
5.9
6.0
- 4.1
29.0
33.2
- 1.0
- 3.5
28.4
32.0
- 0.7
- 3.9
29.0
32.9
-0.7
- -2.7
30.0
32.7
0.7

Goods exports
Goods imports
Trade balance
% of GDP
% of GDP
FDI (net)
ZAR/USD (eop)
ZAR/EUR (eop)
96.2
103.2
-7.0
-1.9
-21.0
-5.8
1.6
49.0
10.1
13.2
92.8
99.1
-6.3
-1.8
-19.1
-5.4
-0.7
48
11.0
13.9
86.4
87.4
- 1.0
- 0.3
- 12.5
- 3.8
84.7
86.7
- 2.0
- 0.6
- 10.5
- 3.3
1.5
49
13.0
13.65
1.5
51
13.5
12.2

Government debt 1
Domestic
External
Total external debt
in USD bn
43.9
39.9
4.0
37.5
137
45.7
41.7
4.0
40.5
142
46.3
42.3
3.9
37.5
140
46.0
45.5
3.5
33.9
145
Current
15Q4
16Q1
National Income
Population (mn)
Real GDP (%)
Priv. consumption
Govt consumption
Exports
Imports
CPI (YoY%, eop)
CPI (YoY %, pavg)
Overall balance
Revenue
Expenditure
Primary balance

Policy rate
3-month Jibar
10-year bond yield
ZAR/USD
ZAR/EUR
1, 2
5.75 6.0
6.30 6.30
8.21 8.4
13.49 13.0
15.08 13.65
6.0
6.40
8.6
13.15
12.80
16Q3
6.25
6.60
9.0
13.40
12.40
(1) Fiscal years starting 1 April.

(2) Starting with the November2013 EM Monthly, numbers are presented using National Treasurys
new format for the consolidated government account.
Source: Deutsche Bank, National Sources.
Danelee Masia, South Africa, 27 11 775-7267
Page 113
8 October 2015
Turkey
Baa3 (negative)/BB+ (negative)/BBB- (stable)

Moodys / S&P / Fitch
Economic outlook: Growth is losing steam. CPI is

headed higher due to accelerated FX pass-through
and unsupportive base. The CBT will keep liquidity
tight, and raise rates gradually as part of
framework simplification and in tandem with the
Fed steps.
High frequency data insinuate slower consumption

70
<100 = pessimism
YoY%, 3mma
80
50
40
75
30
Main risks: Structural deficiencies, i.e. low FX

reserves, large external financing requirements,
etc., remain intact. Absence of political stability
into next year and an ensuing fiscal slippage could
exert downward pressure on credit ratings.
20
70
10
0
-20
Global markets displayed another regime shift. From

intensified market expectations for a Fed lift-off in
September, we have now moved to steady rates for
longer. Our US Economics team back-loaded and
trimmed their envisaged rate hikes by the Fed, and
now expect only 2x25bps in H1 2016 without any
change later in the year. Turkish markets embraced the
news in some fashion with the lira having firmed well
below 3.0 against the USD in early October. Despite
the initial hype, two factors matter now. First, marginal
impact of continued monetary stimulus is lower as the
law of diminishing returns is at play. Second, as this is
policy reaction to slowing global growth, and also US
economy, the fledgling cycle hitherto stoked solely
through expectations channel could easily display a
reversion once and if trade and financing channels
dominate. Turkish economy endures stock problems, in
the form of low FX reserves, high external financing
requirements, and real corporates net open FX
position, which will not go away overnight.
Escalated volatility in local rates and FX is a malign
sign that the Turkish markets remaining off their saddle
path with external shocks inducing oscillation from one
extreme to another. Also, it remains to be seen
whether the repeat November election will bring some
political clarity as a repeat result seems likely according
to the latest opinion polls12.
Three macro signals have become more prominent
since our September update: slowing growth, rising
inflation and CBTs depleting FX reserves.
-40
Jan-12
For an extensive analysis of the November general election, please see

our piece titled EM Election Preview: Argentina, Poland and Turkey in
October EM Monthly.
Page 114
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
60
55
Jan-15
Jul-15
Source: Haver Analytics, TurkStat, CBT, and Deutsche Bank
Private consumption gets softer

There was a puzzling divergence between consumer
confidence and actual sales for some time. The former
has been heading south since H2 2014, and reached its
lowest levels since the 2009 recession in September
this year. Durable goods and house sales, however,
were resilient, particularly in the preceding quarter.
Continued access to consumer loans from non-bank
sources (i.e. financing companies), bumper harvest
year-to-date supporting farmers income, softer albeit
still rising employment, positive wealth effects
emanating from long FX positions of the HHs, and
front-loaded purchases before the recent sharp lira
weakness takes its toll on retail prices were among the
potential reasons. Such chasm is now finally
dissipating with the actual data in Q3 converging to
lower levels as signaled by dented confidence.
Residents are long in FX
170
USDbn
160
150
Basket/TRY
3.4
3.2
Resident FX deposits
Basket/TRY (rhs)
3.0
140
2.8
130
2.6
120
2.4
110
2.2
100
2.0
90
Jan 11
12
65
Vehicle sales
White goods sales
House sales
Core imports
Consumer confidence (rhs)
-10
-30
Off the saddle path
85
60
1.8
Jan 12
Jan 13
Jan 14
Jan 15
Source: Haver Analytics, CBT, and Deutsche Bank
8 October 2015
Loan growth and capital inflows also slowed down

70
External balances are likely to improve in H2 2015

120
WoW%, 13ma, annualized
USDbn
60
40
USDbn, 12m rolling
2010=100
100
20
50
105
80
40
60
30
20
40
10
20
0
Total credit growth (FX adjusted, lhs)
Consumer credit growth (lhs)
Commercial credit growth (FX adjusted, lhs)
Gross financing flows (12m rolling, t-6, rhs)
-10
-20
-30
2007
110
2009
2010
2011
2012
2013
2014
-20
95
-40
Loan growth has also been decelerating rapidly from

over 25% in mid-June to below 15% in mid-September.
Slowing capital inflows hinted this could be related to
banks inclination to cut down supply. However,
sapping confidence and higher loan rates hinted that
lack of demand is probably the binding factor.
Corporates appetite for borrowing was also lower with
commercial credit having slowed to ~17% from +30%
just 3 months ago.
The third signal about a slowdown in economic activity
arrived from external balances. The July trade deficit
was already compressed due to a transitory resilience
in exports but more so on the back of shrinking core
(i.e. excluding energy and gold) imports (-13.5%YoY).
The preliminary data for September pointed to an even
bleaker outlook for domestic demand as the decline in
(core) imports deepened below to -20%. All these
portend possibility of a hard landing in H2, pointing to
rising downside risks on our call for a full-year real GDP
growth at 3%YoY in 2015.
One consolation is a slightly better outlook for the
current account deficit in H2 2015. The marked
squeeze in goods deficit seen in August and September
combined with seasonally higher surpluses in services thanks to rising tourism revenues - could well mean
that the monthly external gap could turn temporarily
positive in the final months of Q3, taking the full-year
deficit slightly down to below USD34bn and 5% of GDP
by end-year - barring any retrospective upward
revisions. While markets would welcome such
improvement, in our view it once again exposes the
ugly truth about Turkeys growth model: the external
gap shrinks only after softer demand conditions. Yearto-date worsening in core deficit - to the tune of
USD10bn - despite a marked positive terms-of-trade
shock also serves as another evident for such
fundamental fragility.
90
Current account (C/A)

C/A w/o energy and gold
Terms of trade (SA, rhs)
-60
-80
2015
100
-20
-40
2008
85
07
08
09
10
11
12
13
14
15
Inflation is heading north

Annual inflation accelerated by 0.8pp to 7.95% in
September. While September is normally a mediuminflation month in seasonal terms, 2015 was a slight
exception with the monthly headline having transpired
0.2pp above its historical average due to acceleration in
FX pass-through and low base.
Impact of the former was evident across the board.
Home furniture was up 1.2%. Medical products
almost fully imported - displayed a 2.5% rise while
vehicle prices rose by an eye-popping 3.9%. Other FXrelated items, such as telephone equipment (1.5%),
entertainment and culture (+1.2%), and hotel charge
(+1.1%) were also higher. Despite lack of a major
change in global oil prices, local pump prices also
edged up by 0.8%MoM, reflecting further scars of a
weaker lira.
Inflation heading north, yet again
12
YoY%
(t-3)
YoY%
10
40
30
20
10
6
0
4
-10
-20
Core CPI: I index (lhs)
0
2010
Basket/TRY
-30
2011
2012
2013
2014
2015
Page 115
8 October 2015
All core indicators were also up. H and I indices, CBTs

favorites, accelerated to 8.3%YoY and 8.2% from 7.8%
and 7.7% a month ago. More worryingly, they also
sped up momentum-wise (i.e. seasonally adjusted,
three-month moving average, and annualized), and
reached 10.3% and 10.7%, respectively (versus 8.8%
and 8.7% in August) the highest levels seen since
April 2014.
Base effects will become more negative in Q4,
insinuating that headline CPI could end the year at
~8.6%, i.e. well above the CBTs current estimate at
6.9%. Though the latter will likely be revised up in Q4
Inflation Report due end-October. Given that inflation
expectations display high inertia on the actual headline,
further de-anchoring is also in the cards in the October
CBT Survey.
though CBT will not be fazed as yet
Despite the ongoing worsening in headline CPI and
rising inflation expectations, we still do not think the
Bank will be in a hurry to make a move (on rates). If
anything, the latest turn of events in global backdrop
and the fledgling turnaround in TRY would provide
some breathing space. Policy-makers already increased
the funding from cheaper one-week repo rate, paving
for a slight decline in the effective rate (to 8.8% from
9%) in end-September. As the Committee has tied its
monetary framework simplification (i.e. narrower and
symmetric corridor probably around a higher one-week
repo rate) to the pace of rate normalization by the Fed,
we are also likely to see the first upward move in rates
now in 2016, barring any significant down leg in the
lira between now and end-2015. The MPC will note
down the deterioration in inflation dynamics, and
probably tweak the rhetoric in their policy statements
accordingly. However, they would still argue ex-post
real marginal funding rate standing at ~2.6% is high
enough to cap upside risks on inflation going forward,
and also given the slowdown in domestic (and global)
economy and subdued global commodity prices.
Hence, current monetary policy mix will be maintained
in the near term, particularly before the November
repeat elections, pointing to relatively tight liquidity
conditions with stable policy rates ahead. Framework
simplification will be also fairly gradual from here.
One thing, however, the Bank would need to address
soon is the ongoing depletion of its FX reserves. Turkey
already ranks poorly within EM for her low reserve
coverage (~60% of external financing needs). While the
CBTs macro-prudential steps introduced earlier in the
year (i.e. higher [lower] FX reserve requirement ratios
(RRRs) for non-core ST [LT] FX liabilities) will provide
some improvement in the denominator in the coming
period, gross FX reserves (the numerator) has remained
on a declining trend, and dropped below USD100bn in
September for the first time since 2012.
Page 116
CBTs FX reserves are shrinking

150
USDbn
USDbn
150
125
125
100
100
75
75
50
50
25
25
0
Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14 Oct 14 Apr 15
Gold: ROM/CBT/Other [USD18.3bn]

Other FX Deposits [USD2.4bn]
Banks' FX Deposits: ROM/RRs [USD68.6bn]
CBT: Net usable FX reserves - with public FX deposits [USD28.9bn]
CBT: Net usable FX reserves - in purest form [USD26.1bn]
CBT: Gross FX reserves [USD99.6bn]
Note: As of end-September 2015. CBT's net usable FX reserves are calculated by subtracting
'Banks' FX deposits' (either in the form of ROM or FX required reserves) and 'Other FX deposits'
from the CBT's gross FX reserves. The dotted line [CBT's net usable FX reserves - in purest from (i.e.
directly available for FX sales)] is achieved by further subtracting 'Public FX deposits' (i.e. held by the
Treasury and other state entities). Figures in parenthesis refer to latest readings. CBT's official midrate for USDTRY is used for conversion purposes.
More worryingly, the Banks net usable FX reserves

receded to USD28.9bn, its lowest level since the
inception of reserve option mechanism (ROM) in late
2011. Main culprits are the CBTs ongoing sales to the
market through daily FX auctions and FX sales to state
energy importer BOTAS. The latter scheme started
back in December 2014, and reached a cumulative of
USD10.2bn by September. Export credits contributed
by USD12.6bn during the same period. Since the start
of Fed taper tantrum (i.e. May 2013), the CBT lost
~USD15.2bn as outflows consistently outweighed
inflows.
due to ongoing sales to BOTAS and markets
3 USDbn
USDbn
-1
-3
-2
-6
-3
-9
-4
-12
-5
-15
-6
Jun 13
-18
Nov 13
Apr 14
Sep 14
Feb 15
Jul 15
Contribution by X credits (lhs)

FX sales to BOTAS (lhs)
FX sales to market (auction & intervention, lhs)
Cumulative impact of FX sales and X credits since May '13
Cumulative change in CBT's net usable FX reserves since May '13
8 October 2015
Contribution from export credits will see a seasonal

uptick during the remainder of the year, yet as will the
FX sales to BOTAS which also display a seasonal rise
during winter months due to higher demand. The CBT
also confirmed continuation of these sales despite
recent claims highlighted by the financial news portal
BloombergHT that the officials had asked state banks
to work on a platform to handle such payments. CBT
Governor already underlined more than once that the
Bank desires to offload these payments gradually to
state banks. Whether such shift will take place remains
to be seen. In the meantime, the reserves are set to
remain on a declining trend in absence of a meaningful
turnaround in capital inflows.
The policy-makers could easily opt for tinkering with
reserve options coefficients and FX RRRs to increase
gross FX reserves. The fact that the CBT will now also
accept FX deposits as collateral for TRY liquidity (i.e. in
its open market operations or OMOs) - as part of its
framework simplification - could also pave the way for
a small rise in reserves with banks inclined to replace
some of their offshore TRY funding (via FX swaps) with
the (cheaper) CBT financing. Yet, these will not change
overall picture for the net figure.
CBT funding at all-time high
90
80
14
12
70
10
60
50
40
30
Turkey: Deutsche Bank Forecasts

2013
National Income
Population (mn)
2014
2015F
2016F
823
796
75.8
76.8
10 853 10 365
692
77.8
8 899
654
78.7
8 301
4.2
5.1
6.5
4.4
- 0.2
9.0
2.9
1.4
4.7
- 1.3
6.8
- 0.2
3.0
3.7
7.0
4.2
- 1.6
1.5
3.0
3.4
3.7
1.9
2.9
4.4

7.4
CPI (eop)
7.5
CPI (period avg)
22.2
Broad money (eop)
33.3
Bank credit (eop)
8.2
8.9
11.9
19.3
8.6
7.7
10.7
19.1
8.2
8.0
11.1
16.8
Real GDP (YoY%)

Private consumption
Exports
Imports

Overall balance 1
Revenue
Expenditure
Primary balance
bn)
Goods Exports
Goods Imports
Trade balance
% of GDP
% of GDP
FDI (net)
FX reserves (eop)
TRY/USD (eop)
- 1.2
24.8
26.0
2.0
- 1.3
24.4
25.7
1.6
- 1.6
23.7
25.3
1.3
- 2.3
22.8
25.1
0.5
161.8
241.7
- 79.9
- 9.7
- 64.7
- 7.9
8.8
110.9
2.14
168.9
232.5
- 63.6
- 8.0
- 46.5
- 5.8
5.5
106.9
2.32
155.3
202.9
- 47.6
- 6.9
- 33.7
- 4.9
8.0
98.0
3.14
167.7
217.3
- 49.5
- 7.6
- 35.7
- 5.5
7.1
95.5
3.39
37.4
25.7
11.7
47.3
389
33.5
35.0
23.7
11.3
50.6
402
33.0
36.5
22.7
13.8
59.4
411
30.0
36.2
22.7
13.4
64.3
420
27.5
3.5
9.1
3.5
10.0
2.9
11.0
2.9
11.2
20
2
10
0
2010
OMOs as % of CBT reserve money (lhs)

Effective funding rate (rhs)
1w repo rate (rhs)
2011
2012
2013
2014
2015
More importantly, the CBT financing through net OMOs

already reached an all-time high of TRY95bn in late
October and easier collateral conditions just hint that
the Bank gets ready to accommodate the banks
funding gap further in the upcoming period rather
than delivering policy moves (i.e. rate hikes) that would
not only dampen the need for it (via slower velocity of
money) and but could also lead to a subsequent
increase in FX reserves by improving prospects for
capital inflows via a more competitive yield support.
Kubilay M. ztrk, London, +44 20 7545 8774
Government debt 1
Domestic
External
Total external debt
in USD bn
General (ann. avg)
Industrial production (YoY)
Unemployment (%)
Policy rate (repo)
Overnight lending rate
Effective funding rate
10-year bond yield
TRY/USD
7.50
10.75
8.77
10.28
2.94
7.50
10.75
9.10
10.00
3.14
8.50
10.75
9.30
10.20
3.25
M
9.00
10.75
9.85
10.50
3.29
(1) Central government

Source: Deutsche Bank, National Sources.
Page 117
8 October 2015
Argentina
Ca (stable)/SDu (stable)/RD (stable)

Moodys /S&P /Fitch
Economic outlook: Undecided voters exceeding

15% prevent a definite October election call,
keeping an uncertain outlook for a possible run-off
in November. Meanwhile, further policy relaxation
exacerbates existing macro-disequilibria. It would
be up to the new administration to negotiate with
holdouts and introduce stabilizing policies.
Main risks: Despite tight restrictions on capital and

trade flows, controlling inflation amid rising Central
Bank financing will likely remain a challenge. The
immediateness of the election has been a major
stabilizing factor, buying the necessary time until
October. However, such precarious stability might
be at risk if the outlook for policy changes begins
to be undermined before or right after the election.
Election hope and post-election challenge
Major flooding in the Province of Buenos Aires during

the days surrounding the PASO elections did not help
Scioli either. This contrasted with a more normal
situation in the City of Buenos Aires, despite also
suffering heavy rains during the same week,
suggesting the importance of effective infrastructure
investment and administration. Furthermore, fraud
allegations in the elections for governor in the Province
of Tucuman also exacted a heavy political toll for Scioli,
as the province has been ruled by Peronist
governments since the return to democracy more than
three decades ago. In addition, Scioli was the only
candidate to refuse to participate in the first debate
between all candidates last weekend, which could have
also negatively affected his support, with all candidates
criticizing Sciolis policies and lack of conviction in
outlining his prospective governmental agenda.
Argentina: Opinion polls as of September second half
Undecided voters are still blurring the election picture

Recent opinion polls have not helped clarify the next
October 25 election picture. According to the
Observatory of Electoral Surveys of the online
newspaper, La Politica Online, which incorporate the
most important polls available by the end of
September, suggest that there is a decent chance that
Argentineans will need to go for a run-off election in
November. The chart below pictures the average voter
support and its 95% confidence range emerging from
all the surveys analyzed by the Observatory. All
candidates seem to have been facing difficulties in
improving their PASO (universal open primaries)
performance, while undecided voters have doubled
since then.
The official candidate, Daniel Scioli, Governor of
Buenos Aires Province, remains the leading presidential
candidate, but has failed to increase the 38.7% of the
votes collected in the PASO last August. More
importantly, it is unclear whether Scioli will achieve the
minimum 40% of votes that could trigger a first round
victory if the second-most-voted formula remains
10ppt behind. Governor Sciolis main challenge is to
increase his electoral support while maintaining
President Cristina Fernandez de Kirchners (CFK)
blessing. CFKs backing gave Scioli a solid floor of
some 30% of votes, but at the same time marred
Sciolis implicit image of a moderate advocating for
gradual policy renovation and change. This could
embody a major handicap for Scioli, as 60% of the
population (according to existing opinion polls) is
demanding improved policies on a number of issues,
particularly the economy and personal security.
Page 118
Source: Observatorio de Encuestas, La Politica Online
The economy and the exchange rate market, in

particular, denote another potential risk for the Sciolis
candidacy in the weeks to come. As analyzed below,
the government has continued with expansionary
policies, despite running out of international reserves.
A major stress situation has been contained by
rationing hard currency, but also by the election that
could mean corrections in existing macro imbalances.
The government has also been using its holdings of
dollar debt to provide some additional supply to the
market, while the Central Bank has been selling
increasingly forward FX contracts. Notwithstanding,
peso rigidity in recent weeks has been surrounded by
sell-offs in regional currencies, exacerbating ARS peso
misalignment, almost guaranteeing a significant
correction in the exchange rate market early next year
independently of the winning presidential candidate.
8 October 2015
Mauricio Macri, Mayor of Buenos Aires City,

representing the opposition alliance CAMBIEMOS,
remains the second most supported candidate. Yet, Mr.
Macri has also failed to increase the 30.1% of the votes
collected during the PASO. The disappointing PASO
results in those districts where Macris party is stronger
remains a puzzle. Likewise, the lack of a strong party
machinery to audit the elections has become another
heavy burden, given the numerous irregularities
reported in the PASO as well as in the provincial
elections. Similarly, a recent allegation of irregular
campaign financing resulted in the resignation of his
main candidate for the Congress of the Province of
Buenos Aires, Fernando Niembro, after denting Macris
anti-corruption credentials. Finally, Macri still seems to
carry a right-wing business candidate stigma that
might prevent him from being a natural choice for a
broad spectrum of the population, which is now
particularly bombarded by the official electoral
campaign.
Coming in a distant third in the PASO election, former
Chief of Cabinet Sergio Massa has been the only
candidate gaining some voter support in last few
weeks. Massa, who is leading the dissident Peronist
alliance UNA, with 20.6% of the votes in the PASO, has
not only managed to prevent polarization, but has also
succeeded in taking voters from Scioli and Macri. This
notwithstanding, Massa has not yet reached the point
of becoming a likely contender in a possible run-off
election. Opinion polls and focus group evidence have
highlighted a higher degree of volatility in Massas
voters than in those of the other candidates, partly
reflecting the unstable position of remaining the thirdmost-voted formula competing.
A similarly tight scenario seems likely in the Province of
Buenos Aires, with the difference simply being that the
most-voted candidate will win the election. Chief of
Cabinet Anibal Fernandez, the winner of the official
ticket for the Frente Para La Victoria (FPV) in the
province, has been struggling to gather all the votes
that went to his opposition in the primaries. Thus, in
current projections, as also reported by La Politica
Online, Mr. Fernandez is barely ahead of CAMBIEMOS
candidate for Governor of the Buenos Aires Province
Maria Eugenia Vidal, who was the most-voted single
candidate in the PASO with 32% of the votes. The third
candidate in the province is former Governor Felipe
Sola, from UNA, with 19.3% of the votes in the PASO
but unchanged support since then. In the Province of
Buenos Aires, however, there could be as much as
25% of undecided voters turning the balance in favor of
any candidate, but most likely Fernandez or Vidal.
Indeed, the high rejection rate that Mr. Fernandez faces
is making the provincial election very competitive.
Election records, however, suggest that historically, the
presidential candidate drives the provincial candidate,
but Fernandezs low popularity might end up being a
stress test to that scenario.
Although there have not been updates on voter

preference for the Congressional election, extrapolating
the PASO results implies that the official party could
lose its majority in the Lower House, going from 54%
of the seats currently to 44% in 2015-2017, while it
could maintain the majority in the Senate, likely
increasing it from 56% of the seats to 58%.
Contingent post-election scenarios
As discussed before, in our view, policy changes will
likely be imposed sooner or later by the economic
reality, independent of the winner of the coming
elections. The extreme path of policy continuity would
likely require increasing limits to economic freedom
beyond what Argentinas society seems willing to
accept, with a large and educated middle class
weighing on that decision. This notwithstanding, the
path toward change might not be free of market and
economic volatility and stress. An official government
led by Governor Scioli might avoid leading through a
difficult transition if Scioli were to separate from the
policies followed by the Kirchner administration of the
last 12 years: state capitalism with increasing
economic restrictions. Indeed, this would be consistent
with Sciolis track record of a businessman turned
moderate politician.
The strong presidential system of Argentina certainly
provides the political framework for an elected
president to execute his/her own agenda, with some
degree of independence from his/her party backing.
Ironically, Scioli could also have a good deal of support
from
opposition
forces
favoring
improving
macroeconomic policies. Nevertheless, whether Scioli
would decide to set the stage for changes from the
very beginning, or confront the Kirchnerist leg of his
government only after macroeconomic imbalances are
exacerbated, possibly triggering a financial crisis,
remains a question mark.
The political backing of President CFK is also imposing
a somewhat constrained electoral mandate on Scioli,
as he is implicitly calling for some degree of continuity.
However,
understanding
that
this
has
also
handicapped him from attracting more independent
voters, Scioli has tried to be vague regarding economic
policies. This notwithstanding, Scioli has re-confirmed
that the leading role economist, Miguel Bein, would be
part of his eventual government. Economic Minister
Kicillof had openly and repeatedly criticized Bein for his
past policy decisions during the De La Rua
government, as well as his more contemporaneous
ideas. In contrast, Mr. Bein has been direct, signaling
that economic policy must be changed.
In an effort to bridge the need for change with the idea
of political continuity, Scioli and his economic advisors
have explicitly been favoring gradualism. This
particularly relates to the exchange rate market, stating
the need to establish priorities to allocate scarce
Page 119
8 October 2015
international reserves. This policy recipe includes a

negotiation with holdouts seeking normalization of
financial markets as well. The gradual approach would
demand the maintenance of capital controls as well as
heavy intervention in the exchange rate market. A
gradual exchange rate adjustment is favored in order
to minimize the income cost that a large devaluation
could represent for the society. However, gradualism
also involves economic costs, in particular, the difficult
task of supporting a currency that is projected to
continue depreciating in real terms. The latter delays
most of the benefits of a weaker currency, while
complicating exchange rate dynamics. Similarly,
gradualism on the fiscal front demands great credibility
in order to reap the benefits at the early stages of the
adjustment process, something that the Sciolis
administration is unlikely to enjoy, conditioned by key
officials of the CFK government in Congress.
In the opposition camp, a government of Mauricio
Macri would likely have a well-defined mandate to
undo part of the policies of the Kirchnerist
governments. In particular, Macri has already promised
to remove all restrictions during the first day of his
government, although not all of his advisors agree.
Most local economists are concerned about the
challenging task of seeking a new equilibrium for the
ARS parity with few international reserves while
adjusting other nominal prices, like utilities and some
exportable food items. Such a challenge seems
exacerbated by the accumulation of corporate profits
and debt services retained in the last four years and the
apparent financing constraint facing Argentina, as
international debt issuance appears to be blocked,
excluding a definite resolution of the holdout legal
claim. That is why getting hard currency financing as
soon as possible would likely be key for a Macri
government, creating the incentive for a rapid
resolution of the holdout issue. A potential US Court
decision to not affect local law bonds in the pari passu
claim might be a stroke of luck for any future
government in Argentina, adding a degree of freedom
for the new administration, which would otherwise be
forced to seek an immediate holdout agreement.
Macris preference for a quick removal of all controls is
a response to economic and political factors. As a
businessman, he is fond of swift and clear changes.
Politically, Macri might fear confronting a divided
Congress, understanding that he might need to
generate economic benefits as soon as possible to
extend his political mandate. Such difficulties with
Congress might be less an issue for Scioli, who is more
experienced in negotiating with the traditional Peronist
party on the official lines and who, paradoxically, could
enjoy a more collaborationist opposition as well.
Scioli and Macris potential economic goals also seem
different from a more fundamental perspective,
including the role of the government and its size, the
Page 120
institutional strength of the Judiciary and the need for

structural reforms, with Macri holding a more
mainstream position than Scioli.
The economy is losing temporary steam
If anything, expansionist policies have been mostly
exacerbated in recent months. The fiscal situation is
the best manifestation of that policy bias, with the
accumulated fiscal deficit up to July exceeding even
the most pessimistic expectations. According to cash
basis data provided by the Secretary of Treasury, the
fiscal deficit in the first seven months of 2015 was
ARS108.1bn, up from ARS38.5bn in 2014. The
worsening is more acute if interest payments are
excluded, with a primary deficit of ARS45.8bn this year
compared to a surplus of ARS2.9bn last year. Current
revenues (excluding rents from property) have been
growing at 33.0% YoY, while primary current
expenditures (excluding interest payments) have been
advancing at 38.3% YoY, without showing any sign of
slowing in the last few months. On current basis, this
years fiscal deficit is likely to exceed 7.5% of GDP
without Central Bank and Social Security rents or
interest payments, up from 5.3% of GDP last year.
Consistently, monetary aggregates keep growing at a
fast pace, with money base advancing by 37.6% YoY in
September, while reference rates (98ds Lebacs) have
remained stable at around 26.0%, or equivalent to
annualized inflation prints in recent months. Meanwhile,
credit to the private sector has also been recently
accelerating, advancing at 30.7%, fueled by a number
of financing plans and credit facilities sponsored by
new regulatory limits and official lines.
Relaxed policies, and mid-year increases in salaries
have fostered a temporary economic recovery in
2Q2015. The general level of salaries estimated by the
official Institute of Statistics INDEC was up by an
average of 3.3% a month between May and August,
well above private estimates of inflation. In response,
economic activity strengthened further in July, but this
seems to have been fading recently. The INDEC
reported that its monthly activity indicator increased by
2.7% YoY during July, but advancing just 0.1% MoM
on a seasonally-adjusted basis. The pick of the short
rebound was probably 2Q2015, when GDP growth
reached 2.3% YoY led by a 10.3% YoY increase in
government expenses. INDEC also reported that
industrial production expanded by 0.5% YoY during
August, but contracting by 0.1% MoM seasonallyadjusted. Year-to-date industrial growth remains in
negative territory (-0.8%), as reported by INDEC.
Retail and shopping market sales also maintained an
important pace in August, advancing 27.9% YoY and
36.6% YoY in nominal terms, respectively. However,
consumer confidence stopped its recent improvement
in September, with the indicator calculated by the
Universidad Torcuato Di Tella down 2.2% on the month.
8 October 2015
Not surprisingly, inflation has also accelerated in recent

months, after reaching bottom in June. Indeed,
members of the opposition parties in Congress
reported that the average private sector estimate for
inflation in August reached 2.17%, above the 1.92%
recorded in July. August inflation brings the YoY
inflation rate to 26.6%. As was customary in the last
few years, this indicator has remained significantly
higher than the inflation reported by the official INDEC:
1.1% MoM during August, or 14.5% YoY.
while balance of payment stress keeps mounting
This recent push in economic activity is not free of
long-term consequences. Apart from the fiscal and
inflationary erosion already discussed, the most notable
deviation is in the exchange rate. Used to contain
inflation, the ARS has depreciated by 10.35% so far this
year (13.9% annualized), significantly below inflation
estimates, accumulating 21% in the same period
(26.6% annualized). In the last 12 months, the
multilateral real exchange rate appreciated by 25%, or
by 35% when looking at the bilateral with Brazil. This,
together with the ongoing contraction in the Brazilian
economy and the overall regional weakness does
suggest an important adjustment of the ARS in the
months ahead. That partly explains why the non-official
exchange rate is moving further away from the official
exchange rate, trading at 65% gap.
In September alone, the Central Bank sold USD1.8bn
as exports are contracting while tourist and saving
demand keep rising. This trend is not reflected in the
overall number of gross reserves, as the Central Bank
has been able to get additional financing, in particular
from the Chinese currency swap, currently exceeding
USD10.0bn. The monetary authority has also increased
its selling in the forward market, totaling approximately
USD7.5bn in open contracts for the next 12 months,
while public agencies have been selling an estimate of
USD500mn of their holdings of USD bonds. As of
October 5 (or after Boden 15 payment), gross reserves
were reported at USD27.7bn, equivalent to our
estimate of net reserves below USD10.0bn, after shortterm financing, non-paid coupons of sovereign debt,
and bank deposits in the Central Bank are excluded.
These net reserves are likely to fall below USD8.0bn by
the time the new administration takes office in
December 2010. Between now and November, the
Central Bank will face federal and provincial external
debt amortizations of USD2.8bn, Furthermore, in
November, USD814mn of the Chinese swap will be
coming due. Likewise, the non-financial private sector
has USD24bn in past due obligations, and another
USD8.7bn are coming due before year-end.
Gustavo Caonero, New York, (212) 250 7530
Argentina: Deutsche Bank forecasts

2013 2014E 2015F 2016F
National Income
Nominal GDP (USDbn)
Population (m)
GDP per capita (USD thousand)
510
41.5
12.3
465
41.9
11.1
518
42.4
12.2
471
42.9
11.0
2.9
4.6
5.1
1.2
1.7
9.3
-1.5
-1.3
2.7
-8.1
-9.3
-11.2
0.3
0.0
6.1
-2.3
-6.1
-3.7
0.1
-0.7
-3.0
2.5
1.0
-3.5

CPI (YoY%, eop) (*)
CPI (YoY%, avg) (*)
Broad money (M2, YoY%)
Bank credit (YoY%)
27.9
25.3
24.0
31.3
38.5
38.6
22.0
22.0
26.9
28.1
20.0
23.4
29.2
32.1
12.0
17.5
Fiscal Accounts (% of GDP)(**)

Budget surplus
Gov't spending
Gov't revenue
Primary surplus
-3.8
33.4
29.6
-2.1
-5.3
33.5
28.2
-3.4
-7.6
36.6
29.0
-5.8
-5.6
35.6
30.0
-3.7

Merchandise exports
Merchandise imports
Trade balance
% of GDP
% of GDP
FDI (net, cash basis)
FX reserves (USDbn)
FX rate (eop) ARS/USD
81.7
73.7
8.0
1.6
-7.1
-1.4
2.4
30.6
6.52
71.9
65.2
6.7
1.4
-7.8
-1.7
3.5
31.4
8.47
59.4
57.4
2.0
0.4
-12.0
-2.3
2.5
23.8
9.75
61.2
57.6
3.6
0.8
-8.6
-1.8
4.0
35.8
15.75

Government debt
Domestic
External
Total external debt
in USDbn
16.0
3.1
12.9
27.7
141.1
36.9
17.5
3.4
14.1
31.0
144.3
36.0
16.2
1.4
14.3
28.6
148.0
35.1
22.5
1.8
20.7
37.0
174.2
29.9
General
Industrial production (YoY)
(nominal)
Unemployment (%)
0.6
7.1
-4.7
7.5
-2.7
9.6
3.5
8.5
Current
26.1
20.8
9.44
15Q4
30.0
33.0
9.75
16Q1
33.0
35.0
13.04
16Q3
37.0
35.0
14.79
Real GDP (YoY%)

Priv. consumption
Gov't consumption
Exports
Imports
Financial Markets (EOP)

98ds Lebac rate
1-month Badlar
ARS/USD
Source: DB Global Markets Research forecasts, National Sources
Page 121
8 October 2015
Brazil
Baa3(stable)/BB+(negative)/BBB(negative)
Moodys/S&P/Fitch
Economic outlook: We project negative GDP

growth for 2015 and 2016, as a political stalemate
prevents the government from stabilizing fiscal
policy and restoring market confidence. A
persistently large fiscal deficit is keeping the public
debt on an unsustainable path, which does not
bode well for Brazils credit ratings.
Main risks: Failure to shore up the fiscal accounts

could prompt more agencies to downgrade Brazil
below investment grade. A deep recession, rising
unemployment and high inflation could produce
social unrest and further impair governability,
paving the way for the presidents impeachment.
Struggling to muddle through

The market remains mainly focused on politics. At the
same time that President Dilma Rousseff tries to thwart
the oppositions movement for her impeachment, she
is struggling to obtain political support for an unpopular
fiscal stabilization that could prevent further rating
downgrades and appease financial markets. The
presidents latest move has been a wide cabinet
reshuffle that included three main changes: 1) reducing
the number of ministries by eight to 31 (the ministries
of fishery, human rights, women, presidencys general
secretariat, institutional relations, racial equality,
strategic affairs, social security and small companies
are gone) and cutting the ministers salaries by 10%
(which are essentially symbolic moves, as actual
savings from these measures will be quite limited); 2)
awarding the PMDB party seven ministries (up from six,
and including the coveted health care ministry), while
the number of ministries controlled by the Workers
Party (PT) fell to nine from 13; and 3) replacing Chief of
Staff Aloizio Mercadante a close ally of Rousseffs
with former president Lulas protge Jacques Wagner.
The changes aimed to appease the different factions of
the highly fragmented PMDB, including Vice President
Michel Temers allies, the PMDB Senate bloc and the
partys Lower House deputies, to secure enough votes
in Congress against a potential impeachment process.
Mercadantes substitution was important because the
chief of staff plays a vital role in negotiations with
Congress, an area where the Rousseff administration
has clearly underperformed so far, with deleterious
consequences for economic policy.
However, we remain skeptical about the governments
ability to pass the full fiscal package in Congress. All in
all, we believe that, by relinquishing power to Lula and
the PMDB, Rousseff has been able to buy some time.
However, it remains to be seen whether the new
political arrangement will be long-lasting and allow the
government to pass the fiscal measures especially the
Page 122
controversial CPMF tax in Congress. Several PMDB

members had stated that the party was planning to
leave the alliance with the PT ahead of the 2018
elections, and it is far from clear whether the positions
that it has recently gained in the government will be
enough to make the party change its mind. We believe
the PMDBs decision will ultimately depend on
calculations about the odds of staying in power. Should
the PMDB come to the conclusion that the Rousseff
administration could recover in time to boost (or at
least cease to be a drag on) former president Lulas
2018 presidential candidacy, the party might decide to
maintain its alliance with the PT. However, it is not
clear at all whether the PT will be in a much more
comfortable position in 2018, given the severity and
length of the ongoing recession and the negative
reputational consequences of the Car Wash
investigation. Furthermore, the PMDB would also have
to weigh the pros and cons of spending another term
as mere accessories to Lula and the PT. Thus, the
PMDB might prefer to stick to its original plan and go
solo in 2018, in which case it would not have much
incentive to help the Rousseff administration overcome
the present obstacles beyond what would be absolutely
necessary to prevent a major economic meltdown. In
summary, while we believe the cabinet reshuffle was
an important move by Rousseff to thwart an
impeachment process, it is premature to conclude that
the political crisis has ended, as the economy has not
reached rock bottom yet (unemployment appears
poised to rise further, for example), and it remains to be
seen how long the Car Wash investigation will last and
what its full political implications will be. Consequently,
we remain skeptical about the governments ability to
pass in Congress the full package of fiscal measures
announced in September, and we believe the
authorities will have to work on a Plan B that relies
much less on Congress to ensure at least a balanced
primary budget in 2016.
The latest fiscal numbers highlight Brazils fiscal
fragility and reinforce our view that the government will
not be able to meet its revised fiscal targets in 2015
and 2016. The public sector posted a consolidated
primary fiscal deficit of BRL7.3bn in August, its fourth
consecutive monthly deficit. The consolidated primary
deficit totaled BRL1.1bn in 8M15, compared to a
surplus of BRL10.2bn in 8M14. The federal government
alone posted a primary deficit of BRL14.9bn in 8M15,
as revenues fell 4.8% when adjusted for inflation,
reflecting mainly the economic recession and a 69%
drop in revenues from dividends (mainly due to a
reduction in BNDES dividends) and a 35% decline in oil
royalties. Federal spending fell only 2.1% in real terms,
led by energy subsidies (-81%) and investment (-37%),
8 October 2015
which offset a 196% surge in other subsidies and a

0.9% increase in social security benefits. Although the
federal government is making a strong effort to rein in
discretionary spending, the inertia of mandatory
spending and adverse effect of the economic recession
on tax revenues are severely impairing the fiscal
adjustment. We now forecast a consolidated primary
deficit of 0.3% of GDP for 2015. The combination of a
primary deficit, high interest rates and towering cost of
FX intervention caused the public sectors nominal
deficit to swell to 9.21% of GDP in the year to August.
The nominal deficit totaled BRL339.4bn in 8M15,
including a loss of BRL74.3bn on the FX swaps due to
FX depreciation. While the net public debt remains
subdued (33.7% of GDP in August) due to the effect of
the BRL depreciation on international reserves, the
gross public debt grew to 65.3% of GDP in August and
is poised to surpass 70% of GDP during 2016,
according to our estimates.
Brazil: Consolidated fiscal deficits (% of GDP)
%
6.0% % of GDP
primary target
4.0%
2.0%
0.0%
primary surplus
-2.0%
-4.0%
-6.0%
nominal deficit
-8.0%
-10.0%
14.25%, FX at BRL3.90/USD and a primary fiscal

surplus of 0.7% of GDP for 2016. A weaker FX or a
lower primary surplus (as in our baseline scenario)
would lead to even higher inflation forecasts. Despite
the deterioration in the inflation outlook, however, the
Inflation Report repeated the statement published in
the September COPOM minutes: the remaining risks
for the COPOM projections to safely reach the 4.5%
target at the end of 2016 are consistent with the lagged
and cumulative effect of monetary policy on inflation.
On the other hand, recent increases in the risk premium,
reflected in asset prices [i.e., the exchange rate],
require that monetary policy remain vigilant in case of
significant deviations of the inflation forecasts from the
target. Furthermore, the BCBs passive forecast put
inflation at 4.0% in 3Q17, below the 4.5% target. Thus,
in our opinion, the BCB will eventually accommodate
the effect of the FX shock on 2016 inflation and
postpone the convergence to the 4.5% target until
2017. As the Inflation Report was published, BCB
President Alexandro Tombini stressed that the policy
is one of stability of interest rates for a prolonged
period. Moreover, Tombini later suggested that the
BCB could use its international reserves to defend the
BRL, also indicating that the authorities are not inclined
to raise rates further. We expect the BCB to maintain
the SELIC rate at 14.25% for several months and
initiate an easing cycle in October 2016. We expect the
SELIC rate to fall to 13.25% by the end of 2016.
Brazil: Unemployment rate (PME)
10
Unemployment
Seasonally-adjusted
Source: BCB
Although the FX depreciation is affecting inflation and

further delaying convergence to the target, we do not
expect the BCB to raise interest rates further. The IPCA
consumer price index rose 9.5% YoY in August, led by
a 15.8% surge in administered prices (as electricity
prices jumped 49%). The increase in fuel prices (6% for
gasoline and 4% for diesel) recently announced by oil
company Petrobras (which remains under intense
financial pressure due to its hefty dollar-denominated
debt) led us to raise our 2015 IPCA forecast further, to
9.8% from 9.5% (assuming no additional fuel price
hikes this year). For 2016, we are keeping our IPCA
forecast unchanged at 6.4%, as we believe that a
smaller adjustment in regulated prices and lower
pressure on non-tradable goods due to the ongoing
recession will lower inflation. That said, Brazils high
inflation inertia and pass-through from the FX
depreciation will make it very difficult for inflation to
reach the 4.5% target next year, in our view. Even so,
we still expect the next BCB move to be a rate cut. In
the Inflation Report published at the end of September,
the BCB revised its passive inflation forecast for 2016,
to 5.3% from 4.8%, assuming a SELIC rate stable at
7
6
5
4
Source: IBGE, DB Research seasonal adjustment
We expect GDP to contract by 2.9% in 2015 and 1.1%

in 2016. We have adjusted our forecasts slightly, from
2.8% and 0.9%, respectively, due to the latest
economic data, which have been even weaker than we
had expected. Industrial production, retail sales,
services and construction activity continue on a free fall,
while business and consumer confidence apparently
have not reached a bottom yet. Credit origination
remains sluggish, delinquency is rising steadily and
unemployment looks poised to increase even more.
Thus, the data available so far indicate that even after
plunging 1.9% QoQ in 2Q15, GDP should decline by
approximately 1.0% QoQ in 3Q15 and fall further in
Page 123
8 October 2015
4Q15. We expect fixed-asset investment to plummet

11% this year and project a 3% decline in household
consumption. For 2016, we now estimate a large
negative statistical carryover of -1.3%, which would
make it very hard for GDP growth to become positive
again.
The BCB has stepped up its intervention in the FX
market. As the BRL depreciated sharply in September
in response to political instability, increasing concerns
about fiscal sustainability and anxiety about Chinas
economic deceleration, the BCB resumed placing FX
swaps in addition to the usual rollover of the upcoming
maturities. In September, the BCB placed USD4.1bn in
net FX swaps (increasing the total outstanding amount
to approximately USD108bn), as well as USD6.8bn in
dollar repo lines. Likely due to his concerns about the
potential effects of a disorderly depreciation on dollardenominated corporate debt and inflation, BCB
President Tombini suggested that he might use the
banks international reserves to support the BRL,
saying that they are insurance that can and should be
used to ensure proper functioning of the FX market.
Despite Tombinis words, we expect the BCB to be very
cautious and to refrain from intervening in the spot
market as long as possible. Although Brazil has a
comfortable USD370bn in reserves, they are the BCBs
last line of defense, and depleting them could send a
negative signal to the market. The demand for USD
could be sizeable, as Brazils short-term external debt
by residual maturity, for example, amounts to
USD119bn, according to BCB data. Furthermore,
foreign investors currently hold approximately 20% of
the Treasurys domestic debt (roughly BRL500bn or
USD125bn at the current FX rate) and around
USD110bn in stocks. Unless Brazil manages to restore
its fiscal anchor, markets will remain vulnerable, and
intervention in the FX market (or in the Treasury bond
market, for that matter) could buy the authorities some
time but ultimately would not be able to reverse the
negative trend. The good news is that the weaker BRL
and domestic recession are producing a significant
adjustment in the external accounts. The trade balance
posted a surplus of USD10.2bn in 9M15, compared to
a deficit of USD0.7bn in 9M14, as exports fell 16.3%
(mainly due to lower commodity prices) but imports
plunged 22.6%. For 2015, we now forecast a trade
surplus of USD15bn (compared to a USD6.1bn deficit
in 2014) and a current account deficit of USD64bn
(compared to USD104bn in 2014). We expect the
current account deficit to decline further to USD42bn
(2.8% of GDP) in 2016. We are keeping our year-end FX
forecasts unchanged at BRL4.10/USD and BRL4.0/USD
for 2015 and 2016, respectively.
Jos Carlos de Faria, So Paulo, (+55) 11 2113-5185
Brazil: Deutsche Bank forecasts

2013
National Income
Nominal GDP (USDbn)
Population (m)
2014
2015F
2016F
2,388 2,345
201
203
11,878 11,567
1,743
204
8,526
1,507
206
7,316
Real GDP (YoY%)

Private consumption
Exports
Imports
2.7
2.9
2.2
6.1
2.1
7.6
0.1
0.9
1.3
-4.4
-1.1
-1.0
-2.9
-3.0
-1.2
-11.1
6.0
-9.0
-1.1
-0.9
-0.6
-4.3
5.0
2.0

CPI (YoY%, eop)
CPI (YoY%, avg)
Money base (YoY%)
Broad money (YoY%)
5.9
6.2
7.6
11.2
6.4
6.3
7.3
5.0
9.8
8.9
5.0
2.0
6.4
7.6
5.0
2.0

Consolidated budget
balance
Interest payments
Primary balance
-3.1
-4.8
1.8
-6.2
-5.6
-0.6
-8.5
-8.2
-0.3
-7.0
-7.0
0.0

Merchandise exports
Merchandise imports
Trade balance
% of GDP
% of GDP
FDI (net)
FX reserves (USDbn)
FX rate (eop) BRL/USD
242.0 224.6
239.6 230.6
2.4
-6.1
0.1
-0.3
-81.1 -103.6
-3.4
-4.4
64.0
62.5
375.8 374.1
2.34
2.66
192.0
177.0
15.0
0.9
-64.0
-3.7
55.0
374.1
4.10
208.0
178.0
30.0
2.0
-42.0
-2.8
45.0
374.1
4.00

Government debt (gross)*
Domestic
External
Total external debt
in USDbn
53.3
50.4
2.9
20.2
482.8
6.7
58.9
55.5
3.4
23.7
554.7
6.5
66.9
61.8
5.1
33.1
576.7
6.5
71.5
66.8
4.7
38.7
582.7
6.5
2.1
5.4
-3.2
4.8
-7.0
7.1
1.0
9.0
Current
14.25
15.3
3.80
15Q4
14.25
15.0
4.10
16Q1
14.25
15.0
4.20
16Q3
14.25
13.0
4.05
General
Unemployment (%)
Financial Markets (EOP)
Selic overnight rate (%)
10-year Pr-CDI rate (%)
BRL/USD
(*) Includes central government, states, municipalities and some SOEs.

Source: National Statistics, Deutsche Bank forecasts
Page 124
8 October 2015
8 October 2015
EM Monthly: Broken Tran
Chile
Aa3 (stable)/AA- (stable)/A+ (positive)

Moodys /S&P/ /Fitch
Economic outlook: Economic activity continues to

disappoint despite a sizeable fiscal effort, moving
market players as well as the government to lower
their 2015 growth projections again. Meanwhile,
the risk of subdued investment appetite remains.
Inflation has continued to surprise on the upside,
implying a slower convergence to the inflation
target, imposing a critical dilemma for the Central
Bank, which might need to hike rates nonetheless.
Main risks: Economic confidence remains weak,

waiting for the government to moderate its reform
stance.
Meanwhile,
feeble
demand
for
commodities and declining labor force growth will
likely remain medium-term burdens for growth.
Nevertheless, business pessimism continues to
embody the main threat to a potential gradual
recovery, and a more pragmatic policy agenda is
the main reason for hope.
Low growth, high inflation, and rate hikes

Activity data keep surprising on the downside...
The last monthly proxy of economic activity, IMACEC,
confirmed a low pace of recovery during August,
advancing by a modest 1.1%, or below market
expectations, which pointed to 2.0% growth.
Furthermore, activity in August contracted by 1.0%
MoM seasonally adjusted. Such performance was
driven by declining production in mining and
manufacturing, partially moderated by growth in
services.
Despite poor economic growth, unemployment has

remained relatively stable, although it has been helped
by public sector hiring. The unemployment rate was
6.5% during the June-August moving quarter, or 0.1pp
lower than the previous period. In quarterly terms, the
small improvement was explained by a higher increase
in employment (+0.2%) than in labor supply (+0.1%).
The sectors that reported the main increase in
employment were education (+3.1%), agriculture
(+1.4%), social and health services (+2.0%), as well as
transport and communications (+1.3%). Conversely,
negative figures were reported in commerce (-1.2%)
and mining (-4.0%).
while inflation remains uncomfortably high
After surprising on the upside in August, inflation is
projected to have remained elevated during the month
of September. Actually, according to the latest traders
survey published by the Central Bank of Chile (BCCh),
those surveyed expect inflation to continue rising at a
0.7% MoM pace during September, or at an annual
rate of approximately 5.0%. It is worth noting that high
inflation is finally affecting inflation expectations,
currently at 3.4% in twelve months ahead and 3.2% in
twenty-four ahead. The latter being an explicit concern
for the monetary authority. On a more positive tone,
nominal wages were flat in August, slowing its annual
increase to 5.8% from 7.10% earlier in the year, or
6.4% in August last year.
Chile: Challenging stagflation
10%
The industrial output fell by 5.2% YoY during August,

dragged down by negative numbers reported in mining
and manufacturing. The mining production index
declined by 9.3% YoY as the result of lower copper
production, which was explained by maintenance work
in some plants as well as labor protests. The
manufacturing production index contracted by 1.4%
YoY due to lower activity reported in seven of the
thirteen categories measured by the index, while
utilities advanced by 2.2% YoY due to higher electricity
generation. Retail sales remained weak during August,
increasing by a timid 1.9% YoY, leaving behind more
optimistic numbers reported months ago.
Reacting to recent evidence, Finance Minister Rodrigo
Valds reported a new downward revision in official
growth projections for this year, to 2.25% from 2.5% in
July. Minister Valds also acknowledged a lower new
growth forecast for next year, now at 2.75%. These are
relatively close to the latest growth forecasts by private
sector analysts, as reported by the surveys of the
Central Bank.
8%
CPI (YoY)
IMACEC (3 MMA, YoY)
Monetary Policy Rate
Hourly Real Remuneration (YoY)
6%
4%
2%
0%
-2%
Source: Central Bank of Chile
Pushing the CB to consider a rate hike

The minutes of the latest monetary policy meeting
revealed that the decision of maintaining the policy rate
unchanged at 3.0% was not unanimous. All board
members agreed that inflation data have been the most
important topic since Septembers monetary policy
report (IPOM), although some of them highlighted that
the inflation surprise in August was the result of price
Page 125
8 October 2015
shocks in fruits and vegetables, which is the most

volatile component of CPI. The research division of the
Central Bank offered the alternatives of maintaining the
policy rate at current levels or increasing it by 25bps,
and all board members agreed both were valid options.
One member highlighted the high impact of CLP
depreciation on prices in a context of an important
deceleration in activity and demand, without major
gaps that could lead to disinflationary pressures. In
addition, other members added that the convergence
to 3% required an increase of the policy rate, in order
to reinforce the commitment of the monetary authority
to control the inflation, which has been particularly
tested by rising inflation expectations in the most
recent surveys.
In the end, the balance of the decision was moved to
policy inaction based on the argument that a rate hike
in the current economic conjunction could be
misleading, if interpreted as rejecting the neutrality
conclusions exposed in the last Monetary Policy Report.
Furthermore, board members were concerned that a
rate hike could be incorrectly read as the beginning of a
tightening cycle. Thus, the decision to keep the rate
unchanged was supported by three out of four board
members.
In our view, the weak economic numbers in August
together with the expected high inflation in September
only worsens the Central Banks dilemma, probably
demanding at least a symbolic rate hike before the year
end. Next years policy path will mostly depend on
inflation and activity performance, with a bias to
require a gradual and moderate tightening cycle.
Chile: Deutsche Bank forecasts

2013
Nominal GDP (USDbn)
Population (m)
GDP per capita (USD 1000)
Page 126
2016F
258.0
236.6
17.6
17.8
18.0
247.4
18.2
15,695 14,483 13,144
13,600
4.3
1.9
2.1
2.8
Priv. consumption
5.9
2.2
2.2
4.6
Gov't consumption
3.4
4.6
4.3
4.1
-0.7
-10.9
-10.0
-2.8
Investment
Exports
3.6
0.3
-1.7
-1.4
Imports
2.1
-7.0
-5.3
-0.9
CPI (YoY%, eop)
2.8
4.6
4.5
2.7
CPI (YoY%, avg)
1.9
4.4
4.6
3.1
Broad money (YoY%, eop)
9.9
10.4
10.3
8.6
10.5
10.0
9.8
8.6
Credit (YoY%, eop)

Consolidated budget balance
-0.5
-1.6
-2.6
-2.7
Revenues
21.0
20.7
21.0
20.4
Expenditures
21.5
22.2
23.6
24.1
Exports
76.5
75.7
66.3
65.8
Imports
74.7
67.9
58.7
56.6
Trade balance
1.8
7.8
7.6
9.2
% of GDP
-0.6
1.5
1.4
2.1
-10.1
-3.0
-1.3
-3.0
-1.2
-3.7
-1.2
-0.7
FDI (gross)
4.8
5.5
4.4
5.1
FX reserves
41.1
40.4
34.9
31.9
523.8
607.4
683.5
650.2
12.8
15.1
17.7
19.1
11.2
12.7
13.7
15.6
1.7
2.4
4.0
4.0
50.0
60.4
63.5
67.5
130.7
146.4
146.0
165.7
15.7
13.7
13.7
13.7
Industrial production (%)
3.9
0.4
-0.6
1.9
Unemployment (%)
6.0
6.3
6.4
6.6
FX rate (eop) USD/CLP

Government debt
Domestic
External
Total external debt
in USDbn
General (avg)
Financial markets (eop)
Current
15Q4
16Q1
16Q3
Overnight rate (%)
3.00
3.25
3.50
3.50
3-month rate (%)
3.30
3.50
3.60
3.60
679.4
683.5
680.0
660.0
USD/CLP
2015F
276.7
Real GDP (YoY%)
% of GDP
The 2016 budget and the fiscal outlook ahead

The 2016 budget anticipates a continued expansionary
stance from the public sector, but by a smaller
magnitude than this year. Specifically, next years
budget envisages a 4.4% increase, in real terms, for
public spending, considering the expanded 2015
budget as the base. This would compare with a fiscal
expansion of approximately 8% this year. There is a risk
of some under-execution in the remainder of the year
that would help balance the fiscal impulse between
2015 and 2016, but the latter could further imply
weaker than initially expected overall economic growth
during this year. Nevertheless, as projected by the
budget draft, next years economic growth will likely
receive a fiscal impulse of at least half a point of GDP
smaller than the execution this year. This will be
particularly important for public investment projected
to fall in 2016 after advancing by an estimated 14% in
real terms in 2015. The latter would demand an
important pick up in private sector investment, which
has remained relatively subdued in recent data.
2014E
National income
Source: Deutsche Bank Forecasts and National Statistics
8 October 2015
Colombia
Baa2 (stable)/BBB (stable)/BBB (stable)

Moodys / S&P / Fit
Economic outlook: Economic growth has been

relatively resilient to the commodity shock, but
widening external and fiscal deficits should
condition
policy
making
and
economic
performance ahead. FX pass-through to inflation
remains a major threat, already pushing the Central
Bank to a more preventive stance. On the positive
side, a peace deal seems closer than ever, yet
challenging.
Main risks: External and fiscal vulnerabilities
continue to loom as the main risks in the coming
months. A change in external financial conditions
could trigger a steep correction in asset prices.
Recent progress in the peace process might
temporarily overshadow worsening economic
fundamentals due to the commodity shock.
Peace overshadows economic shock for now

A peace accord is progressing beyond expectations
On September 23, President Santos announced an
accord reached with the guerrilla group FARC on issues
related to transitional justice, believed to be a major
impediment for any agreement. Indeed, President
Santos went as far as promising that a final peace
agreement was going to be signed on March 23, 2016.
Discussions on transitional justice had been extended
over 14 months, proving to be the most delicate item
on the peace agenda, with FARC leaders even stating
that they were not going to spend a day in jail, as they
had not been defeated. The most important aspects of
President Santos announcement are the following: 1)
the creation of a special tribunal to judge authors of
serious crimes, allowing those who willingly accept
their crimes to face five to eight years of restricted
freedom and community service but not jail; 2) the
granting of amnesty for political crimes and other
minor crimes related to the conflict; and 3) the
concession of access to the Special Jurisdiction for
Peace restricted to: perpetrators hat are committed to
say the truth about their participation.
Despite remaining criticism from opposition forces,
President Santos has insisted that Colombians will
have the opportunity to approve or disapprove the
agreement, although he publically ruled out the call of
a referendum. Thus, a period of judicial uncertainly
might still lie ahead, but a peace agreement is closer
than ever. This is estimated to demand some 0.5% of
GDP in additional public spending for a few years,
adding pressure to already weak fiscal finances. 13

However it could represent a great opportunity for a
major much needed tax reform in Colombia. On the
positive side, a peace agreement could finally mean the
end of bombings on pipelines, and the possibility of
soaring agriculture production in the country.
Economic activity has remained relatively resilient
Although the economic outlook remains conditioned by
weak oil prices and vulnerabilities in external and fiscal
accounts, activity has continued to grow at a good
pace. According to the National Department of
Statistics (DANE), July monthly GDP proxy surprised on
the upside, advancing by 3.7% YoY, after 3.1% in June.
This brought accumulated growth so far this year to
3% compared to 5% in 2014, maintaining the growth
pace reached during 2Q15 GDP, but hinting a mildly
accelerating trend. An important recovery in
construction, social services, and the financial sector
were the main drivers of economic growth so far this
year, while transportation and agriculture reported
contraction.
Colombia: A lasting terms of trade shock
25%
10%
20%
8%
15%
6%
10%
4%
5%
2%
0%
0%
-5%
-2%
-10%
CPI tradable (YoY), RHS
-4%
-15%
Terms of trade (YoY)
-6%
-20%
Economic activity (YoY), RHS
-8%
-25%
-10%
Source: Deutsche Bank and DANE
Similarly, industrial production advanced by 0.3% YoY

during July against a small expected contraction, while
sales in the sector were up by 3.0% YoY. Retail sales
also came out above market expectations, growing by
4.5% YoY compared to expectations of +3.0% YoY.
Likewise, employment in the retail sector advanced by
4.0% YoY, and 0.8% YoY in manufacturing.
Despite recent resilience in domestic demand,
economic growth is unlikely to accelerate in the
months ahead, affected by lower commodity exports
and a partial fiscal response. The mining sector is
13
Refer to our EM debt sustainability note in this EM Monthly, for a

discussion on Colombias worsening fiscal and public debt outlook.
Page 127
8 October 2015
projected to be a protracted drag for the time being.

The Central Bank has cut its projection once again to
2.8% from 3.0% a month ago. The economy might
recover in 2016, with manufacturing benefiting from
the Cartagena Refinery and non-traditional exports
from a weaker currency. Nonetheless, growth should
remain constrained by weak commodity prices and
slow investment pick up.
Colombia: Deutsche Bank forecasts

2013
Nominal GDP (USDbn)
Population (m)
2015F
2016F
271.5
48.0
5,656
264.3
53.3
4,958
4.9
3.8
9.2
5.7
5.3
6.4
4.6
4.4
6.2
11.7
-1.7
9.2
3.0
4.2
4.8
5.2
-5.0
4.0
3.2
4.3
1.5
5.2
-1.0
4.0
1.9
2.0
14.9
14.2
3.7
2.9
9.3
12.5
4.8
4.6
14.0
12.0
3.2
3.8
13.0
10.0
-2.4
16.9
19.3
-0.2
-1.8
17.3
19.1
0.2
-2.6
16.5
19.1
-0.2
-3.0
15.8
18.8
-0.1
58.8
59.4
-0.6
-0.2
-12.3
-3.2
16.2
43.6
1870
54.8
64.0
-9.2
-2.4
-19.7
-5.2
16.1
47.3
2001
47.0
50.8
-3.8
-1.4
-15.8
-5.8
12.0
48.0
3000
46.0
45.0
1.0
0.4
-11.0
-4.2
12.0
46.0
3300
in USDbn
34.5
20.7
13.8
24.2
92.0
38.3
27.0
11.3
26.8
101.2
46.6
32.1
14.5
43.1
117.0
50.9
35.4
15.5
48.4
128.0
13.0
14.2
13.0
14.2
-1.3
1.5
3.0
3.5
9.7
9.1
9.3
8.9
Real GDP (YoY%)

Private consumption
Exchange rate weakness conditions the Central Bank

Inflation accelerated again in September, reaching
0.72% MoM and 5.35% YoY. Core inflation followed
the trend reaching 0.46% MoM and 4.6% YoY. The
main drivers of consumer price inflation were once
again food, entertainment, and transportation, but all
groups of goods showed significant price increases,
with the exception of communications. Inflation this
year up to September is 4.76% compared with 3.08%
in 2014, and tradable goods inflation continues to
accelerate (to 5.90% YoY in September or 5.14% so far
this year, compared with 4.27% and 3.52%,
respectively, for non-tradable goods).
2014
380.3 378.5
47.0
47.0
8090.8 8054.1
Exports
Imports

(YoY%)
CPI (eop)
CPI (annual average)
Broad money (eop)
Private Credit (eop)
Fiscal accounts (% of GDP)*
As discussed, the external shock has been meaningful.

Oil accounts for 43% of total exports. Likewise, oilrelated revenues (income tax and dividend payments)
represent 20% of total Central Government revenues.
Thus, the countrys current account deficit is now
projected to reach 5.8% of GDP in 2015, and foreign
direct investment is expected to slow down further to
some USD12.0bn, or 70% of the current account
deficit. Eventually, a weaker currency could help on the
recovery of non-traditional exports and import
substitution, but this will likely take some time.
Similarly, the fiscal deficit is now estimated at 2.6% of
GDP this year, but trending is expected to exceed 3.0%
in 2016. The government has acknowledged the need
to introduce some fiscal adjustment in order to comply
with the fiscal rule. However, there is still uncertainty
regarding the time and form of such an adjustment.
Overall balance
The increasing FX pass-through risk finally moved the

Central Bank to hike its reference rate by 25bps to
4.75% on September 25. The monetary authority
acknowledged that inflation has remained high mainly
due to the depreciation of the local currency as well as
temporary supply shocks, mostly steaming from the
weather phenomenon known as El Nio. The Central
Bank stated that recent data showed an accelerating
inflation pace, and inflation expectations, putting at risk
a rapid inflation convergence to the official target. In
addition, the international price of oil and other basic
products exported by Colombia have remained low,
explaining the weakening of the local currency. This
notwithstanding, the monetary authority expects the
impact of deceleration in demand as well as the fading
of supply shocks and FX pass-through to cause
inflation to gradually converge to its long-term target.
Government debt
Revenue
Expenditure
Primary balance

Goods Exports
Goods Imports
Trade balance
% of GDP
% of GDP
FDI (net)
FX reserves (eop)
COP/USD (eop)
Debt Indicators (% of GDP) (*)

Domestic
External
External debt (**)
General (annual average)

Unemployment (%)
Financial Markets (end
period)
Policy rate (overnight rate)
3-month rate (DTF Rate)
COP/USD (eop)
Current 15Q4
16Q1
16Q3
4.75
4.75
5.00
5.25
4.80
5.10
5.45
5.70
2914
3000
3100
3300
Source: DB Global Markets Research, National Sources

Page 128
8 October 2015
Mexico
A3 (stable)/BBB+ (stable)/BBB+ (stable)

Moodys/S&P/Fitch
Trade (Jan11=100)
155
135
115
95
Jul-15
Jan-15
Apr-15
Jul-14
Oct-14
Jan-14
Apr-14
Jul-13
Oct-13
Jan-13
Apr-13
35
Jul-12
55
Oct-12
Oil exports
Manufacturing (total)
Autos
Manufacturing (excl autos)
Intermediate imports
75
Jan-12
Increased downside risks for activity

Overall economic activity grew merely 0.1%MoM and
2.0%YoY in July, somewhat below expectations. The
weakest link of activity remains industrial production,
as manufacturing dropped 0.5%MoM in July and
construction is on a volatile flat path. Manufacturing is
still heavily biased to motor vehicles, as products other
than autos continued to expand but significantly more
slowly. In this regard, it is worth pointing out that
numbers for July from the National Automotive
Association showed that the total number of units
produced in that month stood at 254.3k, down
2.0%YoY, the first negative annual pace since
December 2013. In our view, the drop in manufacturing
does not anticipate a sustained decline but weakness is
likely to persist in the coming months due to the nonautos component. The most worrying aspect of Julys
activity is that services dropped 0.2%MoM, thus
yielding somewhat on the resilience that has anchored
growth in the last month. Chances are that services
lose steam ahead and continued weakness of industrial
production delivers a deceleration of overall activity in
2H15.
Apr-12
Weak external demand drags growth
Jul-11
Growth prospects have deteriorated following a

bleaker outlook for external demand. Moreover,
services may keep losing resilience and deliver a
weaker growth in 2H15. We do not see significant
risks on the policy front as the 2016 Economic
Program, which aims at a significant fiscal
adjustment starting in 2016, is likely to be passed
in Congress without major modifications.
Oct-11
The Mexican economy has expanded 2.2%YoY in the

first seven months of the year, so it seems on track to
meet our expected 2015 GDP growth forecast of
2.1%YoY. External demand indicators strongly suggest
that the economy will decelerate slightly in 3Q15 with
respect to the second quarter. Total exports fell
6.8%YoY in August and 2.8%YoY in the first eight
months of the year. The drop in August is explained by
drops of 48.3%YoY in oil exports and a decline in nonoil exports of 1.6%YoY. It is worth stressing that oil
exports in August reflect a large drop in oil prices with
respect to July, but the subsequent recovery of prices
in September may help numbers ahead. Apart from oil
exports, the following shows that external demand
keeps dragging growth: First, exports of autos dropped
3.2%YoY in August, way down from a growth of
6.6%YoY in the first seven months of the year. We
reiterate that this may be explained by a base effect,
now that exports of autos have been growing very fast
for more than a year. Second, non-autos exports of
manufactures also dropped 1.7%YoY in August and
have grown merely 0.5%YoY in the first eight months
of the year. Non-oil exports to the US grew 0.3%YoY in
August and 7.9%YoY in January-August, pushed by the
depreciation of the MXN with respect to the USD.
However, total exports were dragged by falling sales to
the rest of the world caused by the appreciation of the
MXN with respect to other currencies (and weak
demand in the Euro area), so exports to the rest of the
world fell 10.3%YoY in August and 4.6%YoY YTD.
Leading foreign trade indicators point towards a
continued weakness of exports ahead. Intermediate
non-oil imports fell 4.7%YoY in August, anticipating
that exports are likely to remain weak in the coming
months.
Jan-11
Economic outlook: Weak external demand

continues to drag growth and anticipates that a
slight deceleration of economic activity happened
in 3Q15. Slow exports keep manufacturing
underperforming and services continue to anchor
overall activity. Private consumption has grown
strongly but it is not likely to pull overall activity up
if exports fail to accelerate significantly. Banxico
kept the policy rate unchanged following the Feds
decision and a more complex scenario for
monetary policy has emerged. We see Banxico
waiting for the Fed to hike the policy rate but a
preemptive move is highly possible if the Central
Bank grows uncomfortable with the current FX
intervention mechanisms and scraps them. The
positive outcome of the second tranche of Round
One shows that the energy reform is moving
forward, thus helping markets to maintain a
positive view on Mexico.
Apr-11
Source: INEGI
Page 129
8 October 2015
Weak exports have led to a widening of the trade

deficit. The accumulated trade balance in the first eight
months of the year is a deficit of USD$9.1bn, almost
three times the deficit seen in the first eight months of
2014. Excluding petroleum exports, the accumulated
trade deficit in the first eight months of the year is
USD$26bn, 20% larger than in the same period of 2014.
Thus, the widening in the trade deficit is not explained
solely by shrinking oil exports but by a deceleration of
non-oil exports, particularly of manufactured goods.
The market of motor vehicles lost traction in
September as the total of units exported dropped
1.7%YoY, affected mainly by Volkswagens sales
abroad, which fell 31%YoY in units. This negative effect
adds to the ongoing deceleration of auto exports seen
in the last few months and could eventually lead to a
drop of overall production. In this regard, production
grew 4.1%YoY in September, below the average pace
seen throughout the year and was supported mainly by
the domestic market, in which sales grew at a healthy
24.9%YoY. However, in our view, the significant
acceleration of domestic sales may be short lived as
the FX depreciation may have prompted consumers to
purchase more cars before prices go up (which has not
happened so far since dealers have maintained prices
mostly unchanged and some aggressive specials and
discounts are in place).
Retail sales and consumer confidence
110
105
100
95
Retail sales (SA, Jan11=100)

Consumer confidence (SA, Jan11=100)
Jan-15
Apr-15
Jul-14
Oct-14
Jan-14
Apr-14
Jul-13
Oct-13
Jan-13
Apr-13
Jul-12
Oct-12
Jan-12
Apr-12
Jul-11
Oct-11
Jan-11
Apr-11
90
Source: INEGI
With respect to domestic demand, retail sales continue

to grow well above expectations and expanded
0.5%MoM and 5.8%YoY in July. We expected this clip
since ANTAD's retail sales numbers continued to
outperform expectations in July and August. In fact,
looking at some sub-indexes of consumer confidence
that are not included in the overall index, those
elements related to durable goods have grown faster in
the last months, suggesting that the recovery of private
consumption may be more vigorous and sustained
than anticipated. This is also in line with a modest
acceleration in bank loans for consumption (credit
cards) seen in the last months. Once we know that
industrial activity continued to perform poorly in July,
Page 130
the last retail sales numbers suggest that the resilience

of services that have anchored growth is likely to
continue. However, overall consumer confidence
continues to challenge the sustained recovery of
private consumption. The consumer confidence index
for September 2015 came out below expectations and
dropped 0.4%MoM and 1.4%YoY. In our view,
consumer confidence may have started to show some
negative effects from the MXN depreciation, as the
drop in the index was concentrated in those subjective
sub-indexes capturing the state of the national
economy and the households standing.
Against this backdrop of subpar growth labor markets
continue to outperform overall activity. The
unemployment rate came out slightly below
expectations at 4.7% in August, down from 5.2% a
year ago. The unemployment rate typically peaks
between July and August, so this number compares
even more favorably with peak rates of 5.3% and 5.5%
seen in 2013 and 2014, respectively. It is worth
mentioning that the participation rate increased
marginally to 60.3% but has remained fairly stable this
year. On the other hand, the rate of underemployment
(surveyed workers that claimed willingness to work
more hours per month but were unable to do so) stood
at 8.37%, below last months (8.48%) but way up from
a year ago (7.64%). Moreover, the seasonally-adjusted
rate of unemployment went up but slightly, from 4.31%
to 4.32%, suggesting that labor market conditions
remained relatively good in August. Taking together the
drop in the NSA unemployment rate and the large
monthly fall in the underemployment rate, we see the
overall picture for labor markets as positive. However,
in our view, the downward trend in unemployment has
lasted long already and is at odds with weak economic
activity, so we expect that idleness rates will stop
falling in the coming months and the trend may flatten.
INEGI released the bi-weekly CPI inflation for the first
half of September, coming in at 0.32%, above market
expectations but below the average for that period of
the year in the last 10 years. The low bi-weekly inflation
led the annual rate to drop to an all-time low of
2.53%YoY. On the other hand, the bi-weekly core
inflation rate came out slightly above expectations at
0.27%, putting the annual rate at 2.34%YoY. The passthrough effect of the exchange rate continued to be
small in early September as the non-food merchandise
sub-index grew at a similar pace than in the same
period of 2013 and 2014. Also on the core side,
services such as education, air transportation and
mobile telephony, among others, reduced pressure on
the CPI. On the non-core side, moderate increases in
the prices of fruits and vegetables and a slower
increase in government-controlled energy prices helped
to keep CPI inflation contained.
8 October 2015
reiterate our view that Banxico will try to wait for the
Fed and hike in tandem. However, if high volatility
persists and pressures on the MXN continue, Banxico
may be prompted to increase the policy rate ahead of
the Fed. This scenario is even more likely if Banxico
grows uncomfortable with the relatively fast pace of
international reserves reductions due to the FX
interventions and decides to withdraw or downplay the
mechanisms in place. This is not our central scenario
now, but its likelihood is relatively high.
CPI inflation (%YoY)

5.0
4.5
4.0
3.5
3.0
Headline
2.5
Core
120
110
100
90
80
70
60
50
40
Jul-15
Sep-15
May-15
Jan-15
Mar-15
Nov-14
Jul-14
Sep-14
May-14
Jan-14
Mar-14
Nov-13
Jul-13
30
Sep-13
Regarding the possibility of a hike ahead of the Fed, we

see Banxico emphasizing that by keeping monetary
policy unchanged, the FOMC extended conditions of
volatility and uncertainty that affect EMs currencies
and rates. Even though Banxico highlights that the
MXN has outperformed other EM currencies and FX
volatility even has cushioned the impact on Mexican
rates, it shows concerns that a slowly tightening Fed
may threat financial stability in Mexico. In this context,
the most important message we see in the minutes is
the explicit assertion that there could be a preemptive
hike even under low inflation if there are disorderly FX
and rates adjustments that threaten financial stability (a
comment not attributed to the Boards majority
nonetheless). Banxico highlights that monetary policy
condition in the US have already tightened, hinting
further in our view that the conditions for a preemptive
hike may be there soon. Taking the latest
communications from Banxico into consideration, we
Mexican crude oil price (USD$bl)
May-13
On September 21, the Central Bank left the policy rate

unchanged at 3%, following the FOMCs decision to
keep the monetary stance unmodified. In our view, the
communiqu following the decision was essentially flat
and did not add much information to assess the
different scenarios for monetary policy in 2015 and
2016. As a more complicated scenario for monetary
and exchange rate policy in Mexico emerged following
the Feds decision, the minutes are particularly relevant
this time. In general terms, the minutes show a dovish
tone from the Board, from which we perceive growing
concerns about activity. In particular, as exports have
underperformed expectations, some serious doubts
about the medium-term prospects for external demand
are cast in the minutes, thus implying that the current
low-growth stage may last longer than expected. On
the other hand, while the minutes keep a positive tone
on inflation and the small FX pass-through effect seen
so far, we read more emphasis on the role of transitory
factors helping the CPI inflation to remain low. We see
Banxico increasingly voicing concerns about inflation,
in spite of low CPI and growth, as a way to open the
door for an eventual preemptive hike.
Jan-13
Source: INEGI
The energy reform moves forward

The National Hydrocarbons Commission awarded three
of 5 offshore (shallow waters) contracts as part of the
second phase of Round One. This came as a positive
surprise considering that the official expected success
ratio was 40% and contrasts with the pale results of
the first phase back in July, in which only two
contracts out of 14 were awarded. The winning
companies were Italys ENI (three fields off the coast of
Tabasco), a partnership of the Argentinean companies
Pan American Energy and E&P Hidrocarburos y
Servicios (another block off the Tabasco coast) and the
Mexican-US consortium formed by Petrobal and
Fieldwood energy. The other two areas received no
bids at all.
Mar-13
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Jan-14
Apr-14
Jul-13
Oct-13
Jan-13
Apr-13
Jul-12
Oct-12
Jan-12
Apr-12
2.0
Source: PEMEX
This result contrasts with phase one not only in the

success ratio but in two other important aspects:
The bidding was relatively aggressive as the

auctions drew more money than expected. Nine
out of 14 participants were present in the auction
of the second phase, while only nine out of 24
were present in the auction of the first phase. This
anticipated a competitive process from the outset.
The contracts were awarded to three different

consortiums, two of which are international players,
signaling that terms and conditions may have been
clearer now. In contrast, the two fields awarded in
phase one went to only one consortium and no big
international players finished the process.
Page 131
8 October 2015
We anticipated that the second phase of Round One

was going to be successful in absolute terms and
relatively to the first phase for three reasons:
Following the disappointment in the first phase,

Mexican authorities adjusted the format of the bid
round to encourage participation. In particular, the
minimum financial requirements to participate
were lowered and, unlike in the phase one, the
required royalty payments to win contracts were
announced in advance to the auction. The Ministry
of Finance (MoF) set minimum required royalty
payments between 30 and 36% to win rights, while
in the first phase the minimum was set at 40%,
thus reducing the cost of entry. We expected the
MoF to reduce the minimums not only as a
strategy to encourage participation but because the
main threat to this phase were lower crude prices
with respect to July.
Fields in phase two were in the production stage,
while most in phase one were in exploration stage,
so the former were less risky and had a larger
expected return, In fact. PEMEX has previously
produced oil in the areas in which phase two
contracts were awarded and some of them enjoyed
existing infrastructure. In our view, this explains
why, on average, the bids largely exceeded the
government minimum take this time.
We see an enhanced communication effort on the
government side to make rules clearer in phase
two. In our view, increased and diversified
participation and awarding of contracts reflects not
only more attractive conditions but better
understood terms, as relatively more companies
fulfilled more stages in this phase than in the last.
Mexico: Deutsche Bank Forecasts

2014
2015F
2016F
2017F
1315
121
10871
1382
124
11144
1470
126
11669
1575
128
12305
2.1
2.6
2.5
1.9
3.7
4.1
2.1
2.5
0.5
1.5
3.0
3.3
2.9
2.3
0.5
2.5
4.0
4.2
3.5
3.0
1.0
3.0
4.5
4.8

CPI (Dec YoY%)
CPI (avg %)
Broad Money
Credit
4.1
4.0
11.0
16.0
2.9
2.8
12.0
18.0
3.3
3.1
12.5
20.0
3.5
3.4
13.0
22.0

Consolidated budget
balance*
Revenue
Expenditure
Primary Balance
-4.2
17.6
21.8
-1.5
-3.8
17.2
21.0
-1.6
-3.3
17.0
20.1
-1.3
-3.0
17.5
20.5
-1.5

Exports
Imports
Trade Balance
% of GDP
% of GDP
FDI
FX Reserves
MXN/USD (eop)
388.0
394.1
-6.1
-0.6
-30.3
-2.3
22.0
210.0
14.8
391.2
407.2
-16.0
-1.2
-34.5
-2.5
25.0
180.0
16.7
398.7
424.7
-25.9
-1.8
-39.7
-2.7
30.0
190.0
16.3
408.2
445.0
-36.9
-2.3
-45.7
-2.9
35.0
200.0
15.8

Government debt**
Domestic
External
Total External Debt
in USD
43.6
26.6
17.0
21.5
283.7
17.0
47.8
27.3
17.3
22.7
313.1
19.0
49.3
28.7
18.3
24.1
354.5
21.0
49.1
29.9
19.1
25.8
406.8
22.0
1.8
4.3
1.0
4.2
2.1
4.1
3.0
4.0
Spot
15Q3
15Q4
16Q2
3.00
3.30
16.70
3.00
3.30
16.60
3.25
3.50
16.70
3.50
3.80
16.40
National income
ional Income
Nominal
GDP (USD bn)
Population (m)
Real GDP (YoY%)
Priv. consumption
Gov't consumption
Investment
Exports
Imports
Alexis Milo, Mexico City, (52 55) 5201-8534
General (ann. avg)

Industrial Production
Unemployment
Overnight rate (%)
3-month rate (%)
MXN/USD
*Corresponds to PSBR
**Corresponds to PSBR accumulated balance
Source: DB Global Markets Research, National Sour
Page 132
8 October 2015
Peru
A3 (stable)/BBB+ (stable)/BBB+(stable)
Moodys /S&P/ /Fitch
Economic outlook: Activity advanced 3.3% in July

but low investment demand is likely to maintain a
lackluster growth ahead. Inflation has continued
above the target range, triggering a surprising rate
hike in September. The Central Bank, nonetheless,
seems willing to wait for economic data before
acting again, while intervening in the FX market.
Declining fiscal revenues are pushing the fiscal
deficit to exceed 2% of GDP this year and even
above that in 2016, but sovereign debt will likely
remain low.
Main risks: The slowdown in Chinas economic

activity and the possible negative effect on copper
prices and further foreign direct investment should
continue as the most pressing risks for the rest of
the year. Further delays in mining activity could
derail the expected economic recovery and
necessary adjustment of the external accounts.
Only gradual economic improvement

Low investment demand conditions the recovery
Economic activity advanced by 3.3% YoY in July, but
contracted by 0.1% MoM on a seasonally-adjusted
basis. Negative growth was reported in both primary
and non primary sectors of production, with fishing
manufacturing, and construction leading the weak
performance. Aggregate national account data up to
Q2 provides some guidance, highlighting the recovery
of primary activities, up 7.2% YoY, as well as an
important decline in private and public sector
investment. Total fixed investment in the first half of
this year fell by 8.3% YoY, only partly compensated by
inventories accumulation.
On current basis, we expect a mild improvement in
economic growth during the remainder of the year,
helped by more infrastructure construction and subnational government investment. This notwithstanding,
investment might decline this year overall, placing a
ceiling on total growth. We are currently projecting
growth this year to reach 2.8%, and to accelerate to
about 3.7% in 2016. Next year should have the bonus
of the Las Bambas mining mega project coming online,
and the full year of production at full capacity of the
Constancia and Toromocho mines. The El Nio weather
phenomenon could add some risks to this scenario,
beyond the negative effect already expected in
agriculture production and fishing activities. Other
major risks to this view are new delays in mining
activities fueled by a further weakening of copper
prices, while private sector confidence on an economic
rebound remains relatively low.
Inflation pressures push for a rate hike

Consumer price inflation slowed somehow in
September, rising only 0.03% on the month, but
remaining at 3.90% YoY, or well above the target range
of the Central Bank. September inflation was helped by
stable prices in food and beverage items, but clothing,
housing, and healthcare continue to add pressure to
overall inflation. As of September, prices of food and
beverage have accumulated a 4.5% YoY inflation,
compared to 8.2% for housing, 4.3% for healthcare,
and 4.25% for education.
The stubborn participation of services (non-tradable) in
the recent inflation pickup, together with increasing
inflation expectations and some evidence of economic
recovery, convinced the monetary authorities of the
need to hike its reference rate by 25 bps on September
10. According to the Central Bank, the new policy rate
level of 3.50% is compatible with a real interest rate of
0.5% and still reflects an expansionary policy stance.
Furthermore, the Central Bank Board stated that it will
remain alert to make further adjustments in its
monetary policy rate in order to lead inflation to the
target range if deemed necessary. Nevertheless, the
Central Bank also clarified that the recent decision does
not represent the beginning of a sequence of hikes in
its policy rate.
Further confirming the exceptional nature of the last
rate hike, Central Bank President Velarde noted that
Peru still had room for counter-cyclical policies if
needed. Mr. Velarde presented the September inflation
report of the Central Bank, projecting that growth in
the next three years will be lower than initially
estimated, estimating 3.1% for 2015, 4.2% for 2016,
and 5.0% for 2017. In the report published in May,
these projections were 3.9%, 5.3%, and 5.8%,
respectively. Likewise, the new report projects slightly
lower current account deficits than expected in May, at
least for this year and next, but a higher fiscal deficit
reaching 2.6% of GDP in 2017, or with a widening
imbalance of around 1 point of GDP than was initially
anticipated. Furthermore, the report indicated that
inflation could be 3.4-3.5% this year, mostly moved by
supply side factors, but converging to target in 2016,
as FX passthrough is also expected to fade away in the
months to come.
Exchange rate, inflation, and external accounts
The slowdown in domestic economic activity, the fall in
commodity prices, and their effect on fiscal and
external imbalances have fueled growing pressure on
the exchange rate. Since January 2014, the PEN has
depreciated by 13.6%, compared with 22.1% for the
MXN and 30% on average for the other big currencies
Page 133
8 October 2015
in the region. Central bank intervention in the spot

market, amounting to around USD 7.0bn year to date
(or through FX swaps, close to USD 9bn net
outstanding) have been influential in stemming down
the pressure on the exchange rate. The degree of
dollarization of credit of the banking sector has
decreased markedly; corporate credit in dollars is at
43% of total credit, down from 54% in 2012, while for
individuals, it is at 18.5%, down from 24% in 2012.
However, monetary authorities still believe that cutting
large swings in the nominal exchange rate remains
warranted, but that allowing the depreciation to
continue will help in the de-dollarization process.
Current account deficit composition and performance
CA deficit
Goods Balance
Income Balance
% of GDP
10%
5%
Peru: Deutsche Bank forecasts

2013
2014
2015F
2016F
National Income
Nominal GDP (USDbn)
Population (mn)
206.6
30.5
6,774
205.4
31.0
6,626
198.0
31.5
6,287
201.0
32.5
6,186
Real GDP (YoY%)

Private consumption
Exports
Imports
5.8
5.3
6.7
12.1
-2.3
3.6
2.4
4.1
6.4
-3.9
-0.3
-1.4
2.8
3.9
5.6
-1.0
1.5
2.5
3.7
3.7
4.0
3.0
3.5
3.0

(YoY%)
CPI (eop)
CPI (ann. avg)
Broad money (eop)
3.1
2.8
16.5
19.7
3.2
3.4
4.5
14.4
3.6
3.3
15.0
16.0
2.9
3.2
14.4
17.0
Fiscal accounts, % of GDP (*)

Overall balance
Revenue
Expenditure
Primary balance
1.60
20.9
19.3
0.83
-0.35
19.8
20.2
-0.12
-2.40
18.3
20.7
-1.40
-3.10
18.0
21.1
-2.10

Goods Exports
Goods Imports
Trade balance
% of GDP
% of GDP
FDI (net)
FX reserves (eop)
PEN/USD (eop)
42.9
42.2
0.65
0.31
-8.8
-4.3
9.3
65.7
2.80
39.5
40.8
-1.3
-0.6
-8.2
-4.0
7.6
62.4
2.98
36.3
38.0
-1.7
-0.9
-7.0
-3.5
4.5
59.4
3.29
40.1
40.6
-0.5
-0.2
-6.3
-3.1
5.2
60.3
3.46

Government debt (*)
Domestic
External
External debt
in USD bn
19.6
10.8
8.8
29.4
60.8
10.6
20.5
11.1
9.4
31.4
66.9
10.9
22.8
12.4
10.5
33.8
66.9
15.0
24.5
13.2
11.3
35.4
71.2
17.0
General (ann. avg)

Unemployment (%)
5.0
5.9
-3.3
5.9
-1.8
6.4
3.9
6.2
Current
3.50
4.27
3.23
15Q4
3.75
4.00
3.29
16Q1
4.00
4.50
3.35
16Q3
4.50
5.00
3.40
0%
-5%
-10%
Source: Deutsche Bank and Banco Central de Peru
Further PEN depreciation might not be necessary,

given different indicators of misalignment. However,
the current account adjustment is happening gradually,
and is mostly driven by imports contraction and lower
repatriation of profits from primary sources, but the
flow of foreign direct investment has yet to find a new
equilibrium. Therefore, we project this years current
account deficit to be 3.5% of GDP from the 4.0%
estimated in 2014. The external deficit is expected to
contract further in 2016 to 3.1% of GDP, but partly
helped by potential below trend growth continuing in
the coming two years.
Meanwhile, lower commodity revenues and fiscal
impulses are demanding more than a full point of GDP
from fiscal resources, meaningfully affecting fiscal
accounts. On current trends we project this years
deficit to reach 2.4% of GDP and to remain in the 3%
area for the next few years. This would increase public
debt levels to 25% of GDP by 2016, but remaining low
by emerging markets standards. This, together with the
strongest reserve adequacy ratio in EM, with net
international reserves representing 30% of GDP or 18
months of imports, greatly moderates Perus economic
and financial vulnerabilities. Unfortunately, this does
not guarantee that the PEN will remain vulnerable to
global developments or that the local macroeconomic
balance will remain sensitive to it.
Gustavo Caonero, New York, 212-250-7530
Page 134

Policy rate
3-month rate
PEN/USD (eop)
(*) General Government
Source: DB Global Markets Research, National Sources
8 October 2015
Venezuela
Caa1 (negative)/B (negative)/B+ (negative)

Moodys/S&P/Fitch
Economic outlook: The December parliamentary

election might stabilize the political situation for the
time being, but the economy is set to worsen
further ahead. On current trends, international
reserves might be depleted at some point during
2016, triggering a necessary fiscal and external
adjustment that could well include public sector
debt re-profiling. Only a significant oil price
increase or an unlikely proactive adjustment would
prevent that scenario.
Main risks: The deterioration in economic

conditions coupled with triple-digit inflation and
fraud allegations during the parliamentary election
could trigger social unrest, creating a power
vacuum that could open a Pandoras Box regarding
the countrys future economic and political path.
Election and post-election worries

Opposition leads, but the outlook remains vague
President Maduro re-confirmed a few days ago that the
parliamentary elections will take place as scheduled on
December 6 no matter what. This probably aimed at
mitigating remaining uncertainty about the election, as
the government continues to lose voter support. This
helped maintain the prospect of political changes,
lifting some of the growing social tension. The question
remains whether these elections could take place
without the perception of electoral fraud or unfair
blocking of opposition candidates. The decision of the
local court to sentence opposition leader Leopoldo
Lopez to prison for 13 years and 9 months was not an
encouraging sign to start with. Meanwhile, unrelenting
use of the state political machinery to bias the election
result continues.
In the last few weeks, the government was not able to
recover popular support, even after allowing more
imports of basic goods, as evidenced by trade flows.
The most conservative opinion poll (the latest
Datanalisis survey, September 2015) gives the
government only 21% of voter support, against 44% for
the opposition reunited in the Roundtable of
Democratic Unity (MUD). This poll, however,
acknowledges that 35% of the voters still remain
undecided. In any other opinion poll by Hercon,
Delphos, Keller or Datincorp, the difference between
the opposition and the government exceeds the 23point gap in Datanalisis survey, but with an average of
10% undecided.
Therefore, based on existing polls, the opposition could
actually gain ample majority in the National Assembly
and possibly reach a recall referendum in 2016. The
government, nonetheless, continues to be in control.

The electoral authorities, the judiciary and the army and
police remain loyal and responsive to the official
government line. In addition, due to the countrys
voting system and electoral district design, there is a
risk that the government could still hang on to a
parliamentary advantage, controlled evenly by
President Maduro and Speaker of the Assembly
Diosdado Cabello. Thus, the opposition really needs a
landslide victory to win a proper balance of power.
In preparation for the election, the government strategy
has been focused on eroding opposition support while
preparing to govern without the National Assembly.
The state of emergency at the border of Colombia
seems like one way to achieve that; by granting special
powers to the President while bringing the military
forces to the front road again.
Post-election scenarios
In the likely scenario where the government loses its
majority at the National Assembly, we see the
increasing possibility of the government attempting to
ignore Congress, while expanding the role of the army
in domestic affairs. Such a path would simply represent
the full continuity of President Maduros government,
with a further worsening of the economic situation and
strict use of scarce resources in order to minimally
please the government constituency. A devaluation of
the currency and some further deepening of imports
rationing will likely be inevitable even in this case, but
not enough nor accompanied by necessary policy
reforms to correct the existing fiscal and external
imbalances.
Such a timid economic correction together with higher
repression could eventually give the opposition the
ground to foster a more radical change. The pollster
Keller and Asociados reports that 59% of survey
respondents want President Maduros term to end
early, while 35% want him to finish his term. The first
group includes some 20 points of openly Chavista
voters, while the former includes a similar
representation of opposition voters. The same survey
indicates that 65% believe that social policies should be
replaced, while 22% think they should remain in place.
All potential constitutional road maps for satisfying the
demand for change might require difficult conditions,
not all feasible. This includes the recall referendum that
could be requested after the first two years of a
presidency (after April 2016). To hold such a
referendum, 20% of registered voters must sign a
petition, representing roughly three million people.
Furthermore, to be binding, favorable votes in such a
Page 135
8 October 2015
referendum must exceed the votes won by the president

when elected. President Maduro won by a narrow
margin, but obtained 6.6 million votes. In the event that
the president is expelled before the end of his fourth
year, elections must be held 30 days after a recall
referendum. Any other constitutional route requires even
larger majorities, like 2/3 of the National Assembly.
Economic deterioration to continue
The recent IMF world economic outlook painted
Venezuelas prospect bluntly. The economy is projected
to contract by 10% this year and to continue next year,
while inflation is expected to reach 160% this year and
to keep accelerating as well. As noted, the fall in
exports and the reluctance to adjust domestic and
external imbalances using price mechanisms, as well
as the impossibility to obtain external financing, has
simply made the current economic situation
unsustainable.
The basic fundamental economic problem is
straightforward: at current oil prices, Venezuela is living
beyond their capabilities and resources. Thus, the
external imbalances warrant a much weaker currency,
while the size of the public sector deficit also demands
an important adjustment. None of this is expected
before the election, and political weakness could make
such a task almost impossible after December without
a major political inflexion point.
According with our own estimates, the consolidated
public sector deficit this year could reach almost 20%
of GDP. Without enough external financing, such a
situation will likely only produce further inflation
acceleration. Given that most of the fiscal revenues are
in hard currency, VEF depreciation could be a natural
fixing tool, although direct expending cuts will likely be
necessary to facilitate the adjustment without risking a
hyperinflationary episode. Unfortunately, current
rigidities in the exchange rate market amid high
inflation are already constantly pushing the necessary
devaluation higher and higher.
On the external front, the same exchange rate rigidities
have been compensated by an estimated fall of 38% in
total imports this year, on top of an almost 20%
contraction last year. This notwithstanding, next years
external financing gap should reach USD20.0bn even if
imports continue to adjust. Foreign reserves at the
Central Bank near USD15.0bn, plus other resources
that could (at most) double that amount, only anticipate
financing stress in the months ahead. Therefore,
despite the willingness of the government and some
active buying of short-term debt by the economic
authorities, a credit event (outright default or proposals
for partial re-structuring) continue to be our baseline
scenario within the next 18 months.
Venezuela: Deutsche Bank forecasts

2013
National Income
Nominal GDP (USDbn)
Population (m)
2014 2015F 2016F
308
257
340
288
30.5
31.0
31.0
32.0
10,096 8,278 10,969 8,997
Real GDP (YoY%)

Private consumption
Exports
Imports
1.7
4.7
3.3
-7.4
-6.1
-9.0
-3.4
-4.0
4.5
-7.0
-5.0
-5.5
-9.7
-11.5
-6.5
-10.0
-12.0
-15.0
-7.6
-10.3
-7.0
-9.4
1.0
-4.5
Prices, Money and Banking (YoY

%)
CPI (eop)
CPI (ann. avg)
Broad money (eop)
56.5
40.0
69.0
62.4
70.0 150.0 200.0

62.0 120.0 175.0
63.6
90.0 180.0
80.0
90.0 190.0
Fiscal accounts (% of GDP) (*)

Overall balance
Revenue
Expenditure
Primary balance
-9.50 -13.00 -19.52 -15.80

41.00 42.00 34.48 34.20
50.50 55.00 54.00 50.00
-6.44 -9.96 -16.50 -12.71

Goods Exports
Goods Imports
Trade balance
% of GDP
% of GDP
FDI (net)
FX reserves (eop)
VEF/USD (weighed avg, eop)
90.0
80.1
55.0
45.2
35.0
34.9
11.4
13.6
5.0
11.9
1.6
4.6
0.0
1.0
21.7
21.0
10.65 20.00
Debt Indicators (% of GDP) (*)

Government debt
Domestic
External
External debt
in USDbn
General (ann. avg)
Unemployment (%)
Financial Markets (end period)

Lending Rate
VEF/USD (eop)
44.1
28.1
16.0
4.7
-1.0
-0.3
1.0
17.0
30.0
38.8
26.5
12.3
4.3
-2.7
-0.9
1.0
12.0
90.0
45.2
21.5
23.7
24.0
73.9
13.5
45.4
17.9
27.5
28.0
49.0
20.4
40.8
17.8
23.0
24.0
63.2
15.0
47.9
20.7
27.2
28.0
68.1
20.0
1.0
8.3
-1.0
8.5
-5.0
9.0
-4.3
11.0
Current 15Q4
25.0
25.0
6.3
6.3
16Q1
30.0
20.0
16Q3
30.0
20.0
(*) Non-Financial General Public

Sector
Source: Deutsche Bank Global Markets Research, National Sources
Gustavo Caonero, New York, (212) 250-7530
Page 136
8 October 2015
Theme Pieces
September 2015
Evaluating the China Risk

Ukraine Pricing the GDP Warrants
Indonesia, Malaysia, and Thailands many headwinds
Nowcasting LatAms GDP
El Nio in the Philippines, and Asia
Czech Republic: A Comparison with the SNBs
Exchange Rate Cap
July 2015
Meanwhile in China.(Updated)
Transmission of China Slowdown to the Rest of Asia
EM Vulnerability Monitor
Trading Distressed Curves in EM Sovereigns
June 2015
The Limits to EM Growth

Fed & Asia
LatAm Inflation Linked Bonds Update
Malaysia: The Next Five Years
Poland: The implications of a Duda Presidency
May 2015
Adjusting to Lower Oil Prices: Budget Breakeven

Thresholds
Macro Drivers of EM Sovereign Credit
Ukraine Debt Talks: Trying to Close the Gap
RBI's Reserves Accumulation Strategy
South Korea's Big Bang Challenged by Political
Paralysis
Turkish Corporates' Net FX Position
April 2015
Brazil: Entitlements Make Fiscal Adjustment More
Difficult
China - RMB May Become Convertible in 2015
African Revival Shifts East
March 2015
Elixir of Growth: Measuring Structural Performance

in EM
Ukraine: Pricing PSI Scenarios
India FY16 Budget Review Now the Hard Work
Begins
Argentina: Assessing Valuation Contingent on Timing
of Settlement
Russia Trip Notes: in Need of Anchors
January 2015
Sovereign Credit: Stress Testing the Weakest Links
China's Unexpected Fiscal Slide
December 2014
Stress Testing the EM Outlook

FX in 2015: Shock Absorber
Rates in 2015: Diminishing Returns
Sovereign Credit in 2015: Divergent Performances
EM Performance: The Role of Technicals, External
and Domestic Factors
Asia's Frontier Economies: Outperformance in a
slowing world
November 2014
Commodities and EM Once Again

Brazil: Taking Stock after the Election
Slowing China, Slowing Asia
EM Oil Producers: Breakeven Pain Thresholds
Turkey Trip Notes: In Search of a Story to Present
October 2014
Assessing EM Vulnerabilities
Venezuela: To Pay or Not to Pay, is that the
Question?
Remember, Not All EM Currencies Are Equal
EU Structural Funds and Their Impact: 10 Questions
Answered
Analyzing Relative Value Using Snapshot
September 2014
Brazil: Marina Silva Changes Election Dynamics

What Explains Disappointing Asian Exports?
Diminishing Expectations in Latin America
Mexico: Undertaking Pemex and CFE Pension
Liabilities
A Growth and Investment Model for India: 2014-2020
Will the Russia Crisis Derail Recovery in Central
Europe?
February 2015
Brazil: A Recession is Looming

Does India Need a Fiscal Stimulus?
Turkey Trip Notes: Is Heightened Volatility the New
Normal?
South Africa Trip Notes: Cheap Oil But Not Enough
Energy
Page 137
8 October 2015
Contacts
Name
Title
Telephone
Email
Location
EMERGING MARKETS
Burgess, Robert
Regional Head, EMEA
44 20 754 71930
robert.burgess@db.com
London
Caonero, Gustavo
Regional Head, LatAm
1 212 250 7530
gustavo.canonero@db.com
Buenos Aires
Evans, Jed
Head of EM Analytics
1 212 250 8605
jerrold.evans@db.com
New York
Giacomelli, Drausio
Head of EM Research
1 212 250 7355
drausio.giacomelli@db.com
New York
Head of EM Sovereign Credit
1 212 250 2524
hongtao.jiang@db.com
New York
Regional Head, Asia
852 2203 8305
michael.spencer@db.com
Hong Kong
Global Research
1 212 250 5851
nellie.ortiz@db.com
New York
Jiang, Hongtao
Spencer, Michael
Ortiz, Nellie
LATIN AMERICA
Faria, Jose Carlos
Senior Economist, Brazil
5511 2113 5185
jose.faria@db.com
Sao Paulo
EM Derivatives and Quant Strategist
1 212 250 8640
guilherme.marone@db.com
New York
Senior Economist, Mexico
5255 5201 8534
alexis.milo@db.com
Mexico
Shtauber, Assaf
EM Strategist
1 212 250 5932
assaf.shtauber@db.com
New York
Vieira, Eduardo
Head of EM Corportates
1 212 250 7568
eduardo.vieira@db.com
New York
Marone, Guilherme
Milo, Alexis
EMERGING EUROPE, MIDDLE EAST, AFRICA

Brehon, Daniel
FX Strategist
44 20 754 50946
daniel.brehon@db.com
London
Grady, Caroline
Senior Economist, Central Europe
44 20 754 59913
caroline.grady@db.com
London
Kalani, Gautam
Economist, Central Europe
44 20 754 57066
gautam.kalani@db.com
London
EMEA Sovereign Credit Strategist
44 20 754 51382
winnie.kong@db.com
London
Economist, Egypt
49 69 910 41643
oliver.masetti@db.com
Frankfurt
Kong, Winnie
Masetti, Oliver
Masia, Danelee
Melhem, Melhem
Ozturk, Kubilay
Porwal, Himanshu
Wietoska, Christian
Senior Economist, South Africa
27 11 775 7267
danelee.masia@db.com Johannesburg
Chief Economist, Saudi Arabia
966 11 273 9624
melhem.melhem@db.com
Senior Economist, Turkey
44 20 754 58774
kubilay.ozturk@db.com
Saudi Arabia
London
EM Corporate Credit
44 121 615 7073
himanshu.porwal@db.com
Birmingham
Rates Strategist
44 20 754 52424
christian.wietoska@db.com
London
ASIA
Agarwal, Harsh
Head of Asia Credit Research
65 6423 6967
harsh.agarwal@db.com
Singapore
Baig, Taimur
Head of Economics, Asia
65 6423 8681
taimur.baig@db.com
Singapore
Das, Kaushik
Economist, India, Pakistan, Sri Lanka
91 22 71584909
kaushik.das@db.com
Mumbai
Economist, Malaysia,Philippines
65 6423 5261
diana.del-rosario@db.com
Singapore
Head of Asia Rates & FX Research
65 6423 6973
sameer.goel@db.com
Singapore
Rates Strategist
65 6423 5925
swapnil.kalbande@db.com
Singapore
FX Strategist
852 2203 6153
perry.kojodjojo@db.com
Hong Kong
Senior Economist, South Korea, Taiwan, Vietnam
852 2203 8312
juliana.lee@db.com
Hong Kong
Rates Strategist
852 2203 8709
linan.liu@db.com
Hong Kong
FX Strategist
65 6423 8947
mallika.sachdeva@db.com
Singapore
Rates Strategist
852 2203 5932
kiyong.seong@db.com
Hong Kong
Credit Analyst, Banks & Sovereigns
65 6423 5726
viacheslav.shilin@db.com
Singapore
Credit Analyst, IG Corporates
852 2203 5720
colin.tan@db.com
Hong Kong
Chief Economist, China
852 2203 8308
zhiwei.zhang@db.com
Hong Kong
Del-Rosario, Diana
Goel, Sameer
Kalbande, Swapnil
Kojodjojo, Perry
Lee, Juliana
Liu, Linan
Sachdeva, Mallika
Seong, Ki Yong
Shilin, Viacheslav
Tan, Colin
Zhang, Zhiwei
Page 138
8 October 2015
Policy Rate Forecast

Projected Policy Rates in Emerging Markets
Policy Rate Forecasts
-
Current policy rate
Q4-2015
Q1-2016
Q2-2016
Q3-2016
Q4-2016
Czech
0.05
0.05
0.05
0.05
0.05
0.05
Hungary
1.35
1.35
1.35
1.35
1.35
1.35
Israel
0.10
Kazakhstan
5.50
Poland
1.50
1.50
1.50
1.50
1.50
1.75
Romania
1.75
1.75
1.75
1.75
2.00
2.25
11.00
11.00
11.00
10.50
10.00
South Africa
6.00
6.00
6.00
6.25
6.25
Turkey
7.50
7.50
8.50
9.00
9.00
Emerging Europe, Middle East & Africa
Russia
Ukraine
22.00
0.10
16.00
17.00
0.10
16.00
14.00
0.10
0.10
0.25
14.00
10.00
10.00
14.00
12.00
9.50
6.25
9.50
12.00
Asia (ex-Japan)
China
1.75
1.75
1.75
1.75
1.75
1.75
India
6.75
6.75
6.50
6.50
6.50
6.50
Indonesia
7.50
7.50
7.25
7.00
7.00
7.00
Korea
1.50
1.50
1.50
1.50
1.50
1.50
Malaysia
3.25
3.25
3.25
3.25
3.25
3.25
Philippines
Taiwan
4.00
1.750
4.00
1.625
4.00
1.625
4.25
1.625
4.50
1.625
4.50
1.625
Thailand
1.50
1.50
1.50
1.50
1.50
1.50
Vietnam
6.50
6.50
6.50
6.50
6.50
6.50
Brazil
14.25
14.25
14.25
14.25
14.25
13.25
Chile
3.00
3.25
3.50
3.50
3.75
4.00
Colombia
4.75
4.75
5.00
5.00
5.25
5.25
Mexico
3.00
3.25
3.50
3.50
3.50
3.75
Peru
3.50
3.75
4.00
4.25
4.25
4.50
Latin America
/ Indicates increase/decrease in level compared to previous EM Monthly publication; a blank indicates no change
Page 139
8 October 2015
The authors of this report wish to acknowledge the contributions made by

Ramiro Lucas and Gerald Leon, employees of Evalueserve. Evalueserve is a
third party provider to Deutsche Bank of offshore research support services.
Page 140
8 October 2015
Appendix 1
Important Disclosures
Additional information available upon request
*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from
local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank,
subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on
securities other than the primary subject of this research, please see the most recently published company report or
visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition,
the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation
or view in this report. Drausio Giacomelli/Robert Burgess/Jed Evans/Hongtao Jiang
Deutsche Bank debt rating key
CreditBuy (C-B): The total return of the Reference
Credit Instrument (bond or CDS) is expected to
outperform the credit spread of bonds / CDS of other
issuers operating in similar sectors or rating categories
over the next six months.
CreditHold (C-H): The credit spread of the
Reference Credit Instrument (bond or CDS) is expected
to perform in line with the credit spread of bonds / CDS
of other issuers operating in similar sectors or rating
categories over the next six months.
CreditSell (C-S): The credit spread of the Reference
Credit Instrument (bond or CDS) is expected to
underperform the credit spread of bonds / CDS of other
issuers operating in similar sectors or rating categories
over the next six months.
CreditNoRec (C-NR): We have not assigned a
recommendation to this issuer. Any references to
valuation are based on an issuers credit rating.
Reference Credit Instrument (RCI): The Reference
Credit Instrument for each issuer is selected by the
analyst as the most appropriate valuation benchmark
(whether bonds or Credit Default Swaps) and is detailed
in this report. Recommendations on other credit
instruments of an issuer may differ from the
recommendation on the Reference Credit Instrument
based on an assessment of value relative to the
Reference Credit Instrument which might take into
account other factors such as differing covenant
language, coupon steps, liquidity and maturity. The
Reference Credit Instrument is subject to change, at the
discretion of the analyst.
Page 141
8 October 2015
(a) Regulatory Disclosures

(b) 1.Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
(c) 2.Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are
consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the
SOLAR link at http://gm.db.com.
Hypothetical Disclaimer
Backtested, hypothetical or simulated performance results have inherent limitations. Unlike an actual performance
record based on trading actual client portfolios, simulated results are achieved by means of the retroactive application of
a backtested model itself designed with the benefit of hindsight. Taking into account historical events the backtesting of
performance also differs from actual account performance because an actual investment strategy may be adjusted any
time, for any reason, including a response to material, economic or market factors. The backtested performance
includes hypothetical results that do not reflect the reinvestment of dividends and other earnings or the deduction of
advisory fees, brokerage or other commissions, and any other expenses that a client would have paid or actually paid.
No representation is made that any trading strategy or account will or is likely to achieve profits or losses similar to
those shown. Alternative modeling techniques or assumptions might produce significantly different results and prove to
be more appropriate. Past hypothetical backtest results are neither an indicator nor guarantee of future returns. Actual
results will vary, perhaps materially, from the analysis.
Page 142
8 October 2015
(d) Additional Information

The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively
"Deutsche Bank"). Though the information herein is believed to be reliable and has been obtained from public sources
believed to be reliable, Deutsche Bank makes no representation as to its accuracy or completeness.
Deutsche Bank may consider this report in deciding to trade as principal. It may also engage in transactions, for its own
account or with customers, in a manner inconsistent with the views taken in this research report. Others within
Deutsche Bank, including strategists, sales staff and other analysts, may take views that are inconsistent with those
taken in this research report. Deutsche Bank issues a variety of research products, including fundamental analysis,
equity-linked analysis, quantitative analysis and trade ideas. Recommendations contained in one type of communication
may differ from recommendations contained in others, whether as a result of differing time horizons, methodologies or
otherwise. Deutsche Bank and/or its affiliates may also be holding debt securities of the issuers it writes on.
Analysts are paid in part based on the profitability of Deutsche Bank AG and its affiliates, which includes investment
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Opinions, estimates and projections constitute the current judgment of the author as of the date of this report. They do
not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no
obligation to update, modify or amend this report or to otherwise notify a recipient thereof if any opinion, forecast or
estimate contained herein changes or subsequently becomes inaccurate. This report is provided for informational
purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any
particular trading strategy. Target prices are inherently imprecise and a product of the analysts judgment. The financial
instruments discussed in this report may not be suitable for all investors and investors must make their own informed
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investment transactions can lead to losses as a result of price fluctuations and other factors. If a financial instrument is
denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the
investment. Past performance is not necessarily indicative of future results. Unless otherwise indicated, prices are
current as of the end of the previous trading session, and are sourced from local exchanges via Reuters, Bloomberg and
other vendors. Data is sourced from Deutsche Bank, subject companies, and in some cases, other parties.
Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise
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loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse
macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation
(including changes in assets holding limits for different types of investors), changes in tax policies, currency
convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and
settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed
income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to
FX depreciation, or to specified interest rates these are common in emerging markets. It is important to note that the
index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended
to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon
rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is
also important to acknowledge that funding in a currency that differs from the currency in which coupons are
denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to
the
risks
related
to
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movements.
Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk.
The appropriateness or otherwise of these products for use by investors is dependent on the investors' own
circumstances including their tax position, their regulatory environment and the nature of their other assets and
liabilities, and as such, investors should take expert legal and financial advice before entering into any transaction similar
Page 143
8 October 2015
to or inspired by the contents of this publication. The risk of loss in futures trading and options, foreign or domestic, can
be substantial. As a result of the high degree of leverage obtainable in futures and options trading, losses may be
incurred that are greater than the amount of funds initially deposited. Trading in options involves risk and is not suitable
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Options, at http://www.optionsclearing.com/about/publications/character-risks.jsp. If you are unable to access the
website please contact your Deutsche Bank representative for a copy of this important document.
Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i)
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numerous market factors, including world and national economic, political and regulatory events, events in equity and
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exchange controls which could affect the value of the currency. Investors in securities such as ADRs, whose values are
affected by the currency of an underlying security, effectively assume currency risk.
Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the
investor's
home
jurisdiction.
United States: Approved and/or distributed by Deutsche Bank Securities Incorporated, a member of FINRA, NFA and
SIPC. Non-U.S. analysts may not be associated persons of Deutsche Bank Securities Incorporated and therefore may not
be subject to FINRA regulations concerning communications with subject company, public appearances and securities
held by the analysts.
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Hong
Korea:
Kong:
Distributed
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Deutsche
Deutsche
Bank
AG,
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Page 144
8 October 2015
relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in
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Copyright 2015 Deutsche Bank AG
Page 145
David Folkerts-Landau
Group Chief Economist
Member of the Group Executive Committee
Raj Hindocha
Global Chief Operating Officer
Research
Marcel Cassard
Global Head
FICC Research & Global Macro Economics
Steve Pollard
Global Head
Equity Research
Michael Spencer
Regional Head
Asia Pacific Research
Ralf Hoffmann
Regional Head
Deutsche Bank Research, Germany
Andreas Neubauer
Regional Head
Equity Research, Germany
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DB EMMonthly 2015-10-08 0900b8c08a44f18d

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Deutsche Bank

Emerging Markets Monthly

(+1) 212 250-7530

(+1) 212 250-7355

Deutsche Bank Securities Inc.

Key Economic Forecasts

Consumer prices (% pavg)

Current account (% GDP)

Fiscal balance (% GDP)

Other Industrial Countries

Emerging Europe, Middle East & Africa

Deutsche Bank Securities Inc.

This Months Special Reports

Theme Pieces ................................................................................................................................................... 137

Emerging Markets and the Global Economy in the Month Ahead

Whereas the Feds decision to keep rates on hold

Investors have once more begun to focus on the

Past experience, however, suggests that such

EM remains an unappealing destination for capital

We maintain receivers where credit and FX risks

On duration, stay overweight India, (modestly)

On persistent outflows, we are most bearish

On the low yielders, we remain constructive PLN

In credit, mixed technicals, low premium (after

In relative value, we favor 10s30s cash curve

The limits to accommodation

reduction in growth forecasts (from 3.0% to 1.7% and

Altogether, this points to some QE extension. As it is

Part-time employed still a high share

Credit impulse - 3m rolling, lhs

Source: Deutsche Bank, Eurostat, ECB

Source: BLS, Haver Analytics & DB Global Markets Research

EM: Little relief

China: recovery in land sales bodes well for investment

Land sales, value, 3mma, yoy

FAI, 3mma, yoy, rhs

anticipating a recession in South Africa, despite the fall

Source: WIND, CREIS, Deutsche Bank

Beyond that, the outlook for growth in China is more

In Latin America, investors remain focused on Brazil

Simulated changes in government debt by 2020

short ends of South Africa, Turkey, and Russia, we are

Returns of various asset classes

Source: Deutsche Bank

Finally, we also have a number of important elections

Source: Deutsche Bank, Bloomberg Finance LP

Argentina (October 25): a tight race might require a

Poland (October 25): polls point to a win for the

Turkey (November 1): polls suggest that the

Strategy: From critical to chronic

On persistent outflows, we are most bearish currencies

EMFX: Tracking growth proxies

Extended accommodation has not boosted EMFX

EMFX Spot Index

exporters they have accounted for over 80% of recent

Source: DB Global Markets Research; Bloomberg.Finance LP

We see two important and related questions in

We favor selling USD downside where CA imbalances

growth revisions; CA deficit (%GDP)

In gauging how beneficial a more aggressive response

2015 growth fcast: revision since 7/14

REER change since 7/14 (lhs)

Since EM growth is now weaker (thus attracting less